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
- We chose 10 year period for our analysis ( I chose 2007-2017).
- 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.
- 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
- 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
- We chose 5 years as the time period of comparison as 5 years is what I believe you should
- Average FD rates during the FY year was chosen for the comparison
Below is how the analysis looked like
- Yellow boxes signify value of SBI mutual fund over different 5 year period
- Light Grey column gives CAGR Returns on lump sum SBI Mutual fund investment
- Difference in returns is captured in the last column
- For all time periods but for 1 lumpsum mutual fund investments outperformed FD investments
- The period when SBI Bluechip mutual underperformed FDs was 2007-2012. which included one of the biggest crashes of 2008.
- In last 5 years, SBI Bluechip has outperformed Fixed deposits by a whopping 12.53 %
- If you make your investment horizon 10 years even for 2017 investment SBI Bluechip would have outperformed Fixed deposit.
- 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
- If you are investing for more than 5 years it should be ok to invest in lump sum mutual fund versus fixed deposit.
- Post taxes fixed deposit returns can be significantly lower
- In general, fixed deposit investments over long periods suck
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