This article will answer a common question from conservative investors with a low-risk appetite and a desire to get better returns than FD.
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Disclaimer: Mutual funds do not guarantee any returns or give back the invested amount. The following analysis shows the potential of mutual funds, based on historical returns, to get better than FD returns. There is no guarantee that actual returns will beat an FD.
A common question from new investors, retirees and those with a conservative risk profile is
How do I get returns that are better than FD with low risk
To answer this question, we will consider two things regarding risk to set the right expectations.
First, you need to take more risk than FD to get returns better than FD. Second, and more importantly, just by taking more risk, a higher return is not guaranteed. There could be lower than FD return as well. Since there is no standardised definition of “low” risk profile, before making any investments, investors should check their risk profile using a tool like this: Do not invest in mutual funds before doing this.
Non-bank, i.e. NBFC/Corporate FDs or NCDs, and covered bonds are not considered in this article since their risk profile is different than bank FDs. Therefore, only bank FDs are in scope, assuming that the FD is virtually risk-free like the strongest banks as per RBI (SIFI banks like HDFC/SBI/ICICI), post-office or all banks under five lakhs DICGC insurance.
For reference, the current SBI 10 year FD rate, on the date of publication, is 5.4%.
We will explore multiple options to create an investment plan that will focus on
minimal setup time
tax efficiency
low maintenance effort
income potential
risk
Debt mutual funds
A debt mutual fund can be a simple option to get better than FD return primarily because debt funds are more tax-efficient than FDs. The interest income on an FD is taxed at the highest slab rate of the investor. The tax is 20% on capital gains post indexation for a debt fund if held for three years or more. This concept is covered in more detail in this post: How is tax calculated on selling shares/MFs?.
Investors should keep in mind that the taxation on both FD and mutual funds can change anytime in the yearly Budget and the current tax benefit of debt MF over FD may reduce or disappear.
Suppose the investment horizon is less than three years, or the investor is in a 10% or lesser tax slab. In that case, it is better to invest in FD simply because the return is more predictable. However, the potential to make higher than FD returns is still present even if the tax is the same in these cases.
Since the return in a debt fund is not guaranteed, we can try to get better than FD returns at a slightly higher amount of risk by choosing the correct category of debt fund.
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For reference, post-tax return of an FD with 5.4% rate (current SBI 10Y FD) is
3.78% for 30% tax bracket
4.32% for 20% tax bracket
4.86% for 10% tax bracket
using the formula
Post Tax return = Pre tax return * (1 - Tax rate %)
Our standard recommendation for choosing a debt fund to get higher than FD returns potentially is this:
Ensure that the YTM-TER of that fund is higher than the FD rate for the holding period. This figure will be a good approximation of the post-tax return from the debt fund since the interest rate risk of the chosen categories is low
Average Maturity of the fund should be low, which means that the fund return will closely follow short term interest rates in the economy
If the investment is one-time and regular income is not needed, then target maturity debt funds can be an option if the fund matures in or around the same time as when money is required.
Investors should keep in mind that the returns from these funds will fluctuate along the way, and the projected return (YTM-TER) will vary due to changes in the bond portfolio. In addition, this option has a higher risk than the debt mutual funds recommended above due to the high-interest rate risk of the portfolio. Using Valueresearchonline data, the latest funds are:
Fund Name
TER %
YTM %
YTM-TER %
ABSL Nifty SDL Plus PSU Bond Sep 2026
0.18
5.97
5.79
Axis AAA Bond Plus SDL ETF - 2026 FoF
0.07
5.87
5.80
BHARAT Bond FOF - April 2023
0.05
4.68
4.63
BHARAT Bond FOF - April 2025
0.05
5.49
5.44
BHARAT Bond FOF - April 2030
0.05
6.75
6.70
BHARAT Bond FOF - April 2031
0.05
6.79
6.74
Edelweiss NIFTY PSU Bond Plus SDL Index Fund 2026
0.16
5.91
5.75
Edelweiss NIFTY PSU Bond Plus SDL Index Fund 2027
0.16
6.13
5.97
ICICI Prudential PSU Bond Plus SDL 40:60 Index Fund - Sep 2027
0.15
6.25
6.10
IDFC Gilt 2027 Index Fund
0.15
5.88
5.73
IDFC Gilt 2028 Index Fund
0.15
6.01
5.86
Checks:
Setup time: medium, KYC may be needed for new investors
Maintenance effort: medium since debt fund portfolios should be reviewed regularly
Income potential: none since mutual funds do not pay out interest. However, you can sell units to generate income as and when needed
Risk: depends on the type of fund chosen. The most significant risk in this category is fluctuation in interest rates over the life of the investment since an FD, by definition, offers a fixed return at the time of making the investment
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Equity and debt mutual funds
You can choose a mix of equity and debt mutual funds based on the goal horizon and risk profile as per the asset allocation. Here are some sample asset allocations depending on the risk profile and duration of the goal.
Small savings schemes include post office deposits, Monthly Income Account Scheme (MIS), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Public Provident Fund (PPF) scheme, Kisan Vikas Patra (KVP), and Sukanya Samriddhi Account (SSA) Scheme.
Employee Provident Fund (EPF), Public Provident fund (PPF) and Sukanya Samriddhi Yojana (SSY) can be used:
if the residual maturity of these schemes matches the duration of the investment. So, for example, if money is needed in 10 years and there is a PPF account available with around ten years left until maturity, you can use it
the amount being invested is less than the yearly limit of these schemes
Checks:
Setup time: low, can be done with a single branch visit or online in some cases
Tax efficiency: only PPF, EPF, and SSY are entirely tax-free. There could be taxes on either interest payments or maturity amounts for the rest
Maintenance effort: none beyond passbook updates
Income potential: varies based on the scheme. SCSS and POMIS offer interest payouts in the list above while the rest return principal and interest on maturity
Risk: low, investors need to keep in mind that rates of products like PPF, EPF and SSY are not fixed and will move up and down. If we assume that India will continue to mature as an economy then interest rates will move downwards
The RBI Retail Direct Scheme (RDS) was launched in November 2021 to allow Indian retail investors to buy and sell government bonds directly. The facility enables individuals to buy and sell Treasury Bills (T-Bills), Government Bonds (Gilt), State Government Bonds (SDL) and Sovereign Gold Bonds (SGB) from both primary (when issued) and secondary markets. RBI bonds (except T-Bills) offer an interest payment every six months and return the principal amount on maturity. The maturity amount might be lower than the invested amount since bonds are usually offered at a premium and is typical for these bonds. However, there is no loss of capital since the Yield-To-Maturity (YTM) of bonds is positive as per their pricing at the time of issue. Investors should check if the post-tax YTM is higher than FD before investing.
Checks:
Setup time: low, can be done online
Tax efficiency: low since the interest payments are taxable
Maintenance effort: none
Income potential: Coupon payments for bonds (varies) and SGB (2.5%)
This article spoke about specific investment options for conservative investors. A better approach is to decide what is the purpose of the investment and follow goal-based investing:
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This post titled Can you get higher than FD returns with low risk? first appeared on 23 Dec 2021 at https://arthgyaan.com
Fixed Deposit
