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How my father can earn better than FD returns

My father accumulated wealth of around 60 lakh all these years in the form of bank FDs with his salary. Now he wanted to invest in mutual fund due decline of interest on FDs. So he wants to invest the interest earned every year on those FDs to the mutual fund keeping principal amount as it is in FDs. So wanted to know is it a good idea? From FDs currently getting approximately 4 lakhs / year as interest. Kindly give suggestions to how to proceed. He is average risk taker?

Apr 24, 2017 by Ravi B, Kolhapur  |   Retirement Planning

Fixed deposit is the safest option for retirees but the way interest rates are coming down, fixed deposits will not generate more than 1-2% inflation adjusted returns.

Even though mutual funds generate better inflation adjusted returns, the same may not be suitable for risk averse investors. Investors who can take some risk should only invest in mutual funds. For earning regular return from mutual funds, the retirees can invest in hybrid mutual funds, also known as MIPs or balanced funds. There are two kinds of hybrid funds

1) Hybrid debt oriented funds, which are popularly known as MIPs as well. These funds invest 5-35% in equities and rest in debts. The taxation for these funds is like debt funds. Short term capital gain is taxed according to the tax slab of the investors and long term capital gain is taxed @20% after indexation. Dividend received from these funds is tax free in the hands of the investors but the scheme has to pay 28.84% dividend distribution tax.

Some of the top performing funds in this category are – ICICI Prudential MIP 25 Plan, Birla Sun Life MIP II Wealth 25 Plan, UTI MIS Advantage Growth. Please check a comprehensive list here https://www.advisorkhoj.com/mutual-funds...

2) Hybrid equity oriented funds - Hybrid equity oriented funds are also known as balanced funds and is one of the most popular category of funds. These funds invest upto 65% in equities and rest in debts. The taxation for these funds is like equity funds. Short term capital gain is taxed according to the tax slab of the investors and long term capital gain is completely tax free. Dividends received from these funds are tax free in the hands of the investors and the scheme need not pay any dividend distribution tax.

Some of the top performing balanced funds are – ICICI Prudential Balanced Fund, HDFC Balanced Fund, SBI Magnum Balanced Fund and DSP BlackRock Balanced Fund. See a comprehensive list here https://www.advisorkhoj.com/mutual-funds...

If your father can take some amount of risk and if he has at least 5 years of investment horizon then he can invest in MIPs and Balanced Funds. He can opt for monthly or quarterly dividends or withdraw a fixed amount monthly through SWP. Please read the following articles to understand it better.

https://www.advisorkhoj.com/articles/Mutual-Funds/Mutual-Fund-Systematic-Withdrawal-Plans-are-smart-option-for-income-needs

https://www.advisorkhoj.com/articles/Mutual-Funds/A-smart-option-for-getting-regular-income-from-your-Balanced-Fund-investments-over-a-long-period

We feel that he can earn at least annual 10% on his total accumulated corpus of Rs 60 Lakhs by investing in the MIPs and Balanced Funds, albeit with some risk.

Please check the historical dividend pay outs of these funds from here -

https://www.advisorkhoj.com/mutual-funds-research/categorywise-dividends

Hope the above helps. Thanks for writing to Advisorkhoj.

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