Lumpsum Mutual Fund or Fixed Deposit which is better

(Last Updated On: July 12, 2017)
Today I am going to discuss one of the tricky problems we encounter while talking to a lot of investors. The problem can be paraphrased as,” I have Rs 10 lacs should I invest in the Fixed deposit or invest Lumpsum put in mutual funds.”
I have discussed a similar problem on whether to invest your funds in Lumpsum or SIP in this popular Quora question click below to read the detailed answer
Today I am going to take a shot at trying to figure out if Lumpsum mutual fund investments are better than a fixed deposit . while a complete analysis looking at all possible scenarios and portfolio combinations  is quite a herculean task so I decided to restrict my analysis with following assumptions
  1. We chose 10 year period for our analysis ( I chose 2007-2017).
  2. We could have chosen larger period but wanted to ensure 2 things there should be as strong bull and bear period in the market and the chosen timeline had everything.
  3. We picked up a large cap fund ( which is considered safe, low risk and low return) and chose popular SBI Bluechip fund for the analysis
  4. While  we could have picked any other funds, I chose SBI Bluechip because it is quite popular and large caps have relatively stable returns over time and the fact that this has been a consistent performer over the time period considered
  5.  We chose 5 years as the time period of comparison as 5 years is what I believe you should
  6.  Average FD rates during the FY year was chosen for the comparison
READ  SBI Mutual Fund Fact Sheet

Below is how the analysis looked like

  1. Yellow boxes signify value of SBI mutual fund over different 5 year period
  2. Light Grey column gives CAGR Returns on lump sum SBI Mutual fund investment
  3. Difference in returns is captured in the last column

Observations

  1. For all time periods but for 1 lumpsum mutual fund investments outperformed FD investments
  2. The period when SBI Bluechip mutual underperformed FDs was 2007-2012. which included one of the biggest crashes of 2008.
  3. In last 5 years, SBI Bluechip has outperformed Fixed deposits by a whopping 12.53 %
  4. If you make your investment horizon 10 years even for 2017 investment SBI Bluechip would have outperformed Fixed deposit.
  5. Next step can be to look at post-tax returns which will increase the difference as capital gains after one year in SBI Bluechip are taxed

So what are the key takeaways

  1. If you are investing for more than 5 years it should be ok to invest in lump sum mutual fund versus fixed deposit.
  2. Post taxes  fixed deposit returns  can be significantly lower
  3. In general, fixed deposit investments over long periods suck

Other interesting reads

  1. ELSS versus PPF versus ULIP
  2. Mutual funds versus ETFs
  3. Benefits of Investing in mutual funds in India

1 Comment

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  • I wanted to start investing, in Mutual Funds. How should I start ? Should it be through banks like ICICI, HDFC or some demat accounts or ET SIP. Please suggest which is cheapest option.

    Regards

    abhijit roy 2 weeks ago Reply


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