MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

Should I invest in bank fixed deposits or ultra-short duration debt funds?
- Ronak Karwa

If the interest that you earn on bank fixed deposits (FDs) is more than `10,000 then you are liable for 10% TDS. If you fall in the 20% or 30% tax bracket then you are liable for taxation accordingly. So, the thing here to note is that `10,000 is not an exemption, but a limit. Thus, if your interest income stands at `10,001 then you are liable for taxation on the whole amount. Assuming the bank FDs interest rate is around 6.5%, an investment of `1.5 lakhs won’t attract any taxation

However, if you have investments more than that it is better to consider ultra-short duration funds. From a taxation point of view ultra-short duration would be much more tax-efficient than bank FDs post three years of investment as ultra-short duration funds would enjoy the indexation benefit. So, it is anytime better to invest in ultra-short duration funds as you get much more flexibility to move your funds. While in the case of fixed deposits you have to bear penalty if you move the funds. Even the rate of return provided by the ultra-short duration funds is in line with those of bank FDs.

I wish to invest for my retirement. Which is better, NPS or PPF?
- Karan Panwal

The National Pension System or NPS, as it is popularly known as, is something like a mutual fund wherein you invest some money and also have the liberty to choose asset allocation. However, PPF (Public Provident Fund) is something that yields fixed returns. So, technically both are not comparable. Nevertheless, both enjoy the EEE (exempt exempt exempt) status. This means that you can avail tax benefit under Section 80C for PPF and section 80CCD for NPS. The gains made under NPS and interest earned through PPF are also tax-free and at the time of maturity even the withdrawal is tax-free. However, let us get back to your query as to whether you should go for PPF or NPS for your retirement. Here, NPS would score over PPF for the fact that in NPS you can have equity exposure of as high as 75% which helps you to accumulate more than that of PPF. Even having 25% exposure to equity via NPS would score over PPF. In case of NPS the investment is locked till retirement whereas in PPF investments are locked in till 15 years and then you have to renew it every five years to continue parking money in PPF. Currently the interest rate on PPF is 7.9% and in case of NPS for Tier 1 account five-year average returns on equity works out to 7.43%

For government bonds the five-year average returns is 10.66% and corporate debt five-year average returns is 9.95%. So, if you have 75% in equity, 15% in corporate debt and 10% in government bonds then your weighted average returns are 8.13%. Here, you may think that equity yields less than PPF. However, as the returns mentioned are trailing, it is accounting for the performance of the year 2018 also, which was not good for equity.

In long-term, equity has the potential to provide higher returns. Nevertheless, the weighted average performance of NPS is marginally better than PPF even though equity hasn’t performed well. However, mutual funds prove to be way more flexible than that of NPS and PPF. The only thing it requires is discipline and patience while investing. Mutual funds have the potential to provide even higher returns than that of NPS and PPF. Therefore, it would be better if you hold NPS and alongside create a mutual fund portfolio to get better results.

The automotive industry in witnessing a good amount of correction; therefore, would it be right to do bottom fishing in UTI Transportation and Logistics Fund?
- Pranav Gulati



Yes, the automotive industry is going through a major correction. But firstly, it is to be noted that there is only one fund that is strictly dedicated to the automotive sector and it is the one you have mentioned i.e. UTI Transportation and Logistics Fund. However, there are many diversified equity funds that own automotive stocks. So, if you invest in such funds, you will not only have exposure to automotive stocks but also would get the benefit of diversification. Hence, when the automotive sector turns around, even these funds would be benefited from them.

However, if you have an in-depth understanding of the automotive sector, then why don’t you directly buy automotive stocks? You may consider investing in some leading automotive OEMs and automotive ancillary companies that you feel can turn around in the future. Though, this would be your individual decision. However, if you are someone who doesn’t have a particular sector’s understanding then it is better to invest in a diversified equity fund rather than betting on sectors. Just ensure that you are regularly investing in the decided fund and maintain proper asset allocation with periodic rebalancing to get the best results. Work out a financial plan which will help you to have an overall financial picture and also help you to plan your investments.