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April 13, 2024

Understanding Recurring Deposits: A Smart Way to Save!

what is recurring-deposit

Understanding Recurring Deposits: A Smart Way to Save

Most of us have heard of FDs and RDs growing up! But do you know how an RD or Recurring Deposit works? What is the procedure to start an RD, what are the benefits of investing in Recurring Deposits, and is it a good investment tool for the long run? Can it help you save for your child’s education or your dream home?

Find out in this article what a Recurring Deposit is, is financial planning with RDs is effective, its interest rates, and much more! 

Introduction to Recurring Deposits 

A recurring deposit (RD) is a popular savings option in India that allows individuals to systematically deposit a fixed sum of money into their account at regular intervals, typically monthly.

This financial instrument is offered by banks and financial institutions, catering to individuals who aim to cultivate a disciplined savings habit while earning a modest interest on their deposits. 

The basic concept of a recurring deposit revolves around the idea of regular and predetermined contributions. Individuals commit to depositing a fixed amount, known as the installment, into their RD account every month for a predetermined period, often ranging from six months to ten years.

The interest rates offered on recurring deposits are generally higher than regular savings accounts, making it an attractive option for risk-averse investors seeking stable returns. 

Not just an App, but a way to save for your child’s education!

The Mechanics of Recurring Deposits 

Recurring deposits work on the principle of regular, fixed contributions over a specified period, allowing individuals to build savings systematically. Here’s how they operate: 

Opening an RD Account: 

Individuals can open a recurring deposit account with a bank or financial institution of their choice. They need to provide the necessary identification documents and details. 

Determining Installments: 

The account holder decides the amount they want to deposit each month, known as the installment. This can be a fixed sum, and the depositor commits to making these contributions regularly. 

Deposit Intervals: 

Deposits are made at regular intervals, usually monthly, although some institutions may offer flexibility with quarterly or other periodic contributions. The fixed amount is deducted from the depositor’s savings or current account and transferred to the RD account. 

Tenure and Maturity: 

Recurring deposits have a predetermined tenure, ranging from a few months to several years. The depositor selects the duration based on their financial goals. At the end of this tenure, the recurring deposit matures. 

Interest Rates: 

The interest rate for recurring deposits is set by the bank or financial institution at the time of opening the account. It’s important to note that interest rates can vary among institutions. Typically, the rates are higher than those offered on regular savings accounts. 

Interest Calculation: 

Interest is compounded at regular intervals, usually quarterly, and is added to the principal amount. The compounding frequency contributes to the overall interest earned. The formula for interest calculation in a recurring deposit involves the principal, interest rate, and tenure. 

M=P(1+nr )nt  


M is the maturity amount. 

P is the monthly installment. 

r is the annual interest rate (expressed as a decimal). 

n is the number of times interest is compounded per year. 

t is the tenure in years. 

Maturity Payout: 

At maturity, the depositor receives the total amount, which includes the principal and the accumulated interest. 

Recurring deposits provide a structured approach to savings, making them an attractive option for those looking to cultivate a disciplined savings habit with the added benefit of earning interest on their contributions. 

Interest Rates and Compounding 

The interest is compounded on a quarterly basis, meaning that at the end of each quarter, interest is added to the principal amount. This results in the next quarter’s interest being calculated on the updated principal (original principal plus interest accrued). This compounding process continues throughout the tenure of the recurring deposit. 

It’s important to note that the interest rate is a crucial factor in determining the overall returns. Higher interest rates or more frequent compounding can lead to increased returns on the recurring deposit. 

Upon maturity, the account holder receives the total amount, which includes the principal and the accumulated interest based on the compounded interest formula. This structured approach to interest calculation ensures that the depositor earns interest not only on the initial principal but also on the interest that has been added to the account over time. 

Minimum and Maximum Investment Terms 

In India, recurring deposits offer investors a range of investment terms, catering to various financial goals and preferences. Here’s an outline of the typical range of investment terms for recurring deposits, spanning from short-term to long-term options: 

1. Short-Term Recurring Deposits: 

Tenure: 6 months to 1 year 

Purpose: Short-term recurring deposits are suitable for individuals with immediate financial goals or those who prefer liquidity in the near future. They may be used for purposes such as funding a vacation, buying a consumer durable, or handling short-term financial commitments. 

2. Medium-Term Recurring Deposits: 

Tenure: 2 to 5 years 

Purpose: Medium-term recurring deposits are often chosen by individuals with mid-range financial goals. This can include saving for a down payment on a home, financing a child’s education, or planning for a major purchase in the medium term. 

3. Long-Term Recurring Deposits: 

Tenure: 5 years and above 

Purpose: Long-term recurring deposits are suitable for individuals looking to achieve long-term financial objectives. Examples include building a retirement corpus, creating a substantial education fund for children, or accumulating savings for a distant financial milestone. 

4. Customizable Tenure: 

Tenure: Flexible 

Purpose: Some financial institutions offer flexibility in choosing the tenure of recurring deposits, allowing investors to align the investment period with specific financial goals. This customization can be beneficial for those with unique or personalized requirements. 

5. Special Purpose Recurring Deposits: 

Tenure: Varied 

Purpose: Some banks may introduce special recurring deposit schemes tied to specific purposes, such as tax-saving recurring deposits with a lock-in period to avail tax benefits under Section 80C of the Income Tax Act. 

Investors can select the tenure that aligns with their financial objectives, risk tolerance, and liquidity needs. Short-term options provide quick access to funds, while long-term options facilitate the accumulation of significant savings over time.

It’s essential for investors to consider their financial goals and time horizons when choosing the tenure of their recurring deposit to maximize returns and meet their specific needs. 

Benefits of Choosing Recurring Deposits 

Opting for a recurring deposit (RD) in India offers several advantages compared to other savings schemes. Here are some key benefits that make RDs an attractive choice: 

1. Disciplined Savings: 

RDs encourage a disciplined savings habit as individuals commit to making regular monthly contributions. This helps inculcate a sense of financial discipline, making it easier for people to set aside a fixed amount for savings. 

2. Accessible for Small Investors: 

RDs are accessible to individuals with modest income levels as they allow for smaller monthly contributions. This makes it an inclusive savings option for those who may not have a lump sum to invest initially. 

3. Fixed Returns: 

Unlike some other investment options, RDs provide fixed returns. The interest rate is predetermined at the time of opening the account, offering stability and predictability in returns over the investment period. 

4. Low Risk: 

Recurring deposits are considered low-risk investments as the principal amount is secure, and the returns are not subject to market fluctuations. This makes RDs suitable for risk-averse investors who prioritize capital protection. 

5. Flexible Tenure Options: 

RDs offer flexibility in choosing tenure based on individual financial goals. Whether someone is saving for a short-term goal or a long-term objective, RDs provide varying tenures to align with specific needs. 

6. No Market Dependency: 

Unlike mutual funds or stocks, the performance of an RD is not dependent on market conditions. This makes RDs a stable option for those who want to avoid the volatility associated with market-linked investments. 

7. Loan Facility: 

Some banks provide the option to take a loan against the recurring deposit. This can be beneficial in times of financial need, offering a source of liquidity without breaking the RD prematurely. 

8. Tax Benefits (in certain cases): 

Tax-saving recurring deposit schemes are available, providing investors with the opportunity to save on income tax under Section 80C of the Income Tax Act. However, it’s important to note that interest earned on RDs is taxable. 

9 .Easy to Open and Manage: 

Opening an RD account is a straightforward process, requiring minimal documentation. The management of the account is also user-friendly, making it suitable for a wide range of investors. 

10. No Market Timing Concerns: 

RDs eliminate the need for investors to time the market. Since the returns are pre-determined, there is no reliance on market movements, making it a hassle-free option for those who prefer a more straightforward approach to savings. 

While recurring deposits offer these advantages, it’s essential for investors to assess their individual financial goals, risk tolerance, and liquidity needs to determine the most suitable savings option for their specific circumstances. 

11. Building a Savings Habit with RDs 

Recurring deposits foster regular saving habits by requiring individuals to commit to fixed monthly contributions. This disciplined approach helps cultivate a consistent savings routine, instilling financial discipline and responsibility.

By making saving a routine part of their financial behavior, individuals can steadily build wealth over time, achieving their financial goals through systematic and sustained contributions.  

12. Flexibility and Convenience 

Recurring deposits (RDs) in India exhibit a flexible nature, allowing investors to tailor their savings to specific needs. The flexibility lies in choosing the monthly installment amount and the tenure, accommodating diverse financial goals.

RDs offer the convenience of regular, automatic deductions, simplifying the saving process. This adaptability makes recurring deposits an accessible and user-friendly option, aligning with individual preferences and financial objectives. 

Comparing Recurring Deposits and Fixed Deposits 

Compare and contrast recurring deposits with fixed deposits. 

Recurring deposits (RDs) and fixed deposits (FDs) are popular savings options in India, each with its own set of characteristics. Here are some major similarities. Both RDs and FDs are risk-averse investments and are flexible enough to help Indians grow their investments.  

Interest Rates: 

Both RDs and FDs offer interest rates determined by the respective banks or financial institutions. Rates may vary based on tenure and market conditions. 


Both RDs and FDs are considered safe investment options as they are backed by the guarantee of the issuing bank or financial institution. 

Tax Implications: 

Interest earned on both RDs and FDs is taxable. However, tax-saving FDs have specific benefits under Section 80C. 

Understanding the Differences between RDs and FDs 

Let’s look at the main difference between the two popular ways of investing in India:  

1. Regular Contributions: 

RDs: Require regular monthly contributions. 

FDs: Involve a one-time lump-sum deposit. 

2. Flexible Installments: 

RDs: Allow flexibility in choosing the monthly installment amount. 

FDs: Have a fixed deposit amount at the time of investment. 

3. Tenure Flexibility: 

RDs: Offer flexibility in choosing the tenure, typically ranging from 6 months to 10 years. 

FDs: Have fixed tenures, ranging from a few months to several years. 

4. Interest Calculation: 

RDs: Interest is compounded quarterly, based on the monthly contributions. 

FDs: Interest may be compounded quarterly, half-yearly, annually, or at maturity, depending on the investor’s choice. 

5. Liquidity: 

RDs: Offer partial liquidity, allowing individuals to withdraw a portion of the accumulated amount without closing the entire deposit. 

FDs: Generally, breaking an FD before maturity incurs a penalty, impacting liquidity. 

6. Risk and Returns: 

RDs: Lower risk, suitable for risk-averse investors. Returns are predetermined and typically lower compared to FDs. 

FDs: Moderate risk, with fixed returns known at the time of investment. Returns are generally higher than RDs. 

7. Suitability: 

RDs: Ideal for individuals with a regular income looking for a systematic savings approach. 

FDs: Suited for those with a lump sum seeking stable, fixed returns over a specific period. 

8. Choosing the Right Option for You 

Both FDs and RDs are great investment options for investors. They are safe, low-risk, low-return investments that remain consistent during market ups and downs. If you have a substantial lumpsum amount for investment, then FD is a good choice but if you have  

The Process of Opening a Recurring Deposit Account 

Opening a recurring deposit (RD) account in India is a straightforward process. Here’s a step-by-step guide to help you navigate the procedure: 

Choose the Bank or Financial Institution: 

Research and select a bank or financial institution that offers recurring deposit accounts. Consider factors such as interest rates, reputation, and customer service. 

Visit the Bank Branch or Website: 

If you prefer in-person interaction, visit the nearest branch of the chosen bank. Alternatively, many banks allow you to open an RD online through their official website. 

Request Information: 

Inquire about the recurring deposit schemes available, including interest rates, tenure options, and any special features. Collect the necessary application form and details about the required documents. 

Fill out the Application Form: 

Complete the recurring deposit application form with accurate personal information. This form is usually available at the bank branch or can be downloaded from the bank’s official website. 

Provide KYC Documents: 

Submit Know Your Customer (KYC) documents, which typically include proof of identity, proof of address, and passport-sized photographs. Common documents include Aadhar card, PAN card, passport, and utility bills. 

Specify Deposit Amount and Tenure: 

Indicate the monthly deposit amount you wish to contribute and choose the tenure of the recurring deposit. Some banks may offer flexibility in these aspects. 

Nomination Details: 

Specify nomination details, if applicable. This involves providing the name, address, and relationship of the nominee who would receive the proceeds in case of the account holder’s demise. 

Review the Terms and Conditions: 

Carefully read and understand the terms and conditions associated with the recurring deposit scheme. Clarify any doubts with the bank staff before proceeding. 

Submit the Application: 

Submit the completed application form along with the KYC documents and the initial deposit amount (if required) to the bank officials. If you are applying online, follow the instructions provided on the bank’s website for document submission. 

Receive the RD Account Details: 

Once the application is processed and approved, you will receive the recurring deposit account details, including the account number, tenure, and interest rate. 

Set Up Auto-Debit (if applicable): 

If you opt for automatic monthly deductions from your savings or current account, set up the necessary standing instructions with your bank. 

Monitor Your RD Account: 

Keep track of your recurring deposit account through statements provided by the bank or online banking services. Ensure that monthly contributions are made on time. 

By following these steps, you can successfully open a recurring deposit account and begin your journey toward systematic savings and interest accumulation 

Documentation and Eligibility 

Here are the documents needed for Recurring Deposit account opening: 

  • Proof of Address:  
  • Aadhar card 
  • Passport 
  • Voter ID 
  • Utility bills (electricity, water, gas, or telephone bills) 
  • Rent agreement 
  • Passport-sized Photographs: 

Typically, 2 to 4 recent passport-sized photographs may be required. 

PAN Card: 

Permanent Account Number (PAN) card is usually mandatory for recurring deposits exceeding a certain amount. 

Filled Application Form: 

The bank-specific application form for opening an RD account, which can be obtained from the bank’s branch or website. 

Income Proof: 

Some banks may require proof of income, especially for higher deposit amounts. 

Eligibility Criteria: 


Generally, individuals of all age groups, including minors, can open an RD account. However, minors may require a guardian to operate the account on their behalf. 

Residential Status: 

Resident Indians, Non-Resident Indians (NRIs), and Hindu Undivided Families (HUFs) are usually eligible to open recurring deposit accounts. However, the specific eligibility may vary based on the bank’s policies. 

Source of Income: 

Banks may require information about the source of income, especially for larger deposit amounts. However, RDs are generally open to salaried individuals, self-employed individuals, and others. 

Nomination Details: 

While not mandatory, providing nomination details is advisable. Nomination details include the name, address, and relationship of the nominee who will receive the RD proceeds in case of the account holder’s demise. 

It’s essential to check with the specific bank or financial institution for any additional requirements or variations in eligibility criteria. Additionally, the minimum deposit amount and tenure options may differ between banks, so it’s advisable to inquire about these details beforehand. 

Risks and Considerations 

While recurring deposits offer a secure and stable savings option, potential risks include lower returns compared to market-linked investments and the impact of taxation on earned interest.

Additionally, breaking the RD prematurely may incur penalties, affecting liquidity. It’s essential for investors to weigh these factors against their financial goals and consider alternative investment options for potentially higher returns. 

Premature Withdrawal Penalties 

Withdrawing a recurring deposit before maturity often incurs penalties. The exact penalty varies among banks but typically involves a reduction in the interest rate offered.

Additionally, some banks may charge a fixed fee for premature withdrawal. Investors should carefully review the terms and conditions provided by the bank at the time of opening the recurring deposit to understand the specific penalties applicable. 

Impact of Interest Rate Fluctuations 

Changes in interest rates can impact recurring deposits. If interest rates rise, existing RD accounts may earn lower returns compared to the new, higher rates.

Conversely, falling interest rates could benefit existing RD holders, as their fixed rates remain unchanged. Choosing the right tenure and staying informed about market trends can help optimize returns in varying interest rate environments. 

Tax Implications on Recurring Deposits 

The interest earned on recurring deposits in India is taxable as per the income tax regulations. The interest is added to the depositor’s total income and taxed at their applicable income tax slab rate.

Unlike fixed deposits, there is no TDS (Tax Deducted at Source) on recurring deposits; however, the onus of reporting and paying the tax rests with the depositor. It’s important for individuals to include the interest income from recurring deposits when filing their income tax returns and adhere to the tax obligations as per the prevailing tax laws. 

TDS and its Applicability 

As of January 2022, there were no TDS (Tax Deducted at Source) provisions for interest earned on recurring deposits in India. However, tax laws are subject to change, and it’s crucial to verify the latest regulations. 

As a general rule, TDS is not applicable to the interest earned from recurring deposits. Instead, the responsibility falls on the depositor to report the interest income and pay taxes accordingly during the income tax filing process.

It’s advisable to stay updated on any amendments to tax laws and consult with a tax professional for the most accurate and current information regarding TDS on recurring deposits. 

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5 types of mutual funds

5 types of mutual funds

Investing in mutual funds for your child’s education is always advisable. First of all, it is a less stressful option than investing in direct equity stocks because that requires you to have in-depth knowledge of market trends and fluctuations. Secondly, with mutual funds, there are a variety of schemes you can opt for depending on a range of factors. These factors could include the time period for which you can invest before liquidating, the amount of money you can invest, the amount you require to secure the education fund, the level of risk you can take, and so on.  When it comes to building an education fund, here are the top 5 types of mutual funds you can choose from. 1. Large-cap mutual funds The defining characteristic of large-cap equity funds is the fact that these funds invest in the top 100 Indian companies that have the highest market value. Large-cap mutual funds can bring in impressive returns if you remain invested for a long period. If you are a person who wants to avoid taking very high risks with your investments and has decided to invest early for your child’s education, this is the way to go. The average returns rate has historically beaten that of Fixed Deposits and similar investment alternatives. SIP Mutual Fund Investment Read More 2. Mid-cap mutual funds Mid-cap funds invest in Indian companies that come in the next best 250 in terms of market value. These funds are for you if you are ready to take on a higher level of risk. Justifiably, the return rates also tend to get higher. One way to satiate the risk appetite of mid-cap equity funds is to let them season for at least 7-10 years. If your child is in primary or middle school, investing in such a scheme will generate a wholesome amount of wealth by the time they are ready to pursue a college education.   How to track Mutual Funds? Read More 3. Equity-linked saving schemes  Among the various perks of investing in mutual funds is the tax deduction benefit. Equity Linked Saving Schemes are devoted to enabling investors to save taxes, as the name also indicates.  The only catch here is that it has a compulsory lock-in period of at least 3 years. The aim here is to keep you invested longer to counter the risk level. If you can spare that amount of time, then ELSS is definitely a go-to. An added benefit is the historically high level of returns.   Mutual Funds to invest in Child Education Read More 4. Low-risk options  There is this whole myth surrounding mutual funds that they only come with a high-risk factor. On the contrary, a debt fund is also a kind of mutual fund that comes with low risk, so much so that it remains undisturbed by market fluctuations.  Debt funds are still a better option than Fixed Deposits because they can generate a higher percentage of returns. So, if you are not in favor of taking high risks, debt funds are a go-to.  5. Hybrid mutual funds  If you are confused about your investment options or even hesitant about risking too much, the answer to your problems is a hybrid mutual fund. This kind of fund is a mixture of equity as well as debt.  Hybrid mutual funds bring in the best of both worlds. They tend to generate good returns at low risk. FAQs What are the different types of mutual funds? Large-cap mutual funds Mid-cap mutual funds Equity-linked saving schemes Low-risk options Hybrid mutual funds Which type of MF is best? The best type of mutual fund is the Hybrid mutual fund. Which MF gives the highest return? Equity-linked mutual funds are considered the mutual funds with the highest returns. Conclusion There will be miscellaneous financial goals you will be required to set if you are a family person. One among these might be to straighten up the roadmap to your child’s academic and career aspirations. The first step is calculating your expected expenses with the help of an education cost calculator. The calculator will help you draw your investment map to fulfill your child's aspirations. The earlier you invest, the more prepared you will be to make critical decisions as the moment arrives. DisclaimerMutual funds are subject to market risks. The previous performance of a fund is no guarantee of future success. Please reach out to an expert to know more about the schemes before investing.
6 types of risk associated with Mutual Funds

6 types of risk associated with Mutual Funds

In the previous article, we discussed taxation in mutual funds. In this article, we will discuss the types of risks associated with mutual funds. Mutual funds are excellent investment options for both novice and seasoned investors; they are currently a very popular investment option due to their capacity to provide inflation-beating returns.   Mutual funds combine money from a range of individuals and institutions and invest in various asset classes such as shares, debt, and other money market instruments after conducting thorough research to maximize capital appreciation or income generation.  The investors are subject to risks like volatility risk, management risk, liquidity risk, interest rate risk, and inflation risk. We shall now discuss all such risks that come up with an investment in mutual fund schemes; a sound knowledge of these is helpful to an investor in making the investments.  There are two types of mutual funds: equity mutual funds and debt mutual funds. Risks associated with mutual funds There are major two types of risks associated with mutual funds that the article will discuss such as risks associated with equity mutual funds and risks associated with debt funds. 1. Management risk A company's management refers to the group steering the organization on the right path.   Changes in the management team and their activities, such as pledging shares, decreasing or increasing promoter stakes, and so on, can impact the price of a company's stock.   While principles such as solid corporate governance and high transparency benefit a company's stock, mismanagement, team conflicts, and other factors depress the stock price and thereby affect your mutual fund investments as well if that particular stock is a part of your investment.  2. Liquidity risk When it comes to equity investments, long-term investing has the best possibility of securing investment profitability.   Thus, it is difficult for equity mutual funds to quickly buy or sell stock investments to profit or minimize a loss leading to a situation where the scheme's liquidity is insufficient to meet investors' redemption requests.   A liquidity crisis like this is most prevalent when investors make a high number of redemption requests due to prolonged bad market inequities.   Many equity funds invest a small amount of their capital in debt and money market instruments to mitigate this risk and ensure more substantial returns.  3. Volatility risk An equity mutual fund invests mainly in the stocks of publicly traded corporations.   As a result, an equity fund's value is in line with the performance of the companies in whose stocks it has invested. Current macroeconomic conditions have an impact on the company's performance.   Government, Sebi, and RBI policies, consumer preferences, the economic cycle, and other macroeconomic changes are all examples of factors that directly impact the price of company stock, either positively or negatively.   The value of an equity fund is affected by this movement. Large-cap corporations, on average, are less prone to such volatility than mid-cap and small-cap market enterprises.   Similarly, when compared to thematic or sectoral equity, funds are diversified. Equity funds are less likely to be influenced by such volatility. Risks associated with debt funds 1. Inflation risk Bonds and money market instruments are fixed-rate instruments because their coupon rates are fixed. As a result, rising inflation erodes the coupon rate-based revenues that the debt fund aims to receive.   As a result, rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for the debt funds investors. On the other hand, lower inflation tends to push bond prices and debt fund investment values higher.  2. Credit risk Government securities, corporate bonds, certificates of deposits, commercial papers and other debt and money market instruments are among the items that debt funds invest in.   Credit ratings such as AAA, AA+, AA, AA- and so on are offered by credit rating agencies such as CRISIL, ICRA, and Fitch they evaluate the credit quality of these investments, which vary depending upon the issuer.   A specific risk is that the borrower fails; they do not pay the principal and/or interest on the loan.  3. Interest rate risk A risk linked with debt funds is interest rate risk. Bonds are exchanged in the same way as stocks, and their prices fluctuate.   The economies' interest rates mainly influence the movement in bond prices; the link between interest rates and bond prices is the opposite. As a result, as the economies' interest rate rises, the values of current bonds fall since they continue to offer the same interest rate.   Interest rate risk refers to price variation in bonds caused by changes in interest rates it is a market-wide element that influences bond prices and, as a result, the value of all debt mutual funds.   The degree of interest rate sensitivity varies by debt fund type and is shown by the adjusted duration of the debt fund.   In general, debt funds that invest in shorter-term assets are less vulnerable to interest rate risk than those that invest in longer-term products.  With regard to the above-mentioned risks, it is vital to note that while mutual fund performance is always subject to numerous risks, every fund house employs a variety of tactics to reduce, if not eliminate, these well-known dangers.   As a result, even if your investment gains are not guaranteed, your chances of developing your wealth are good if you invest with a well-known fund house, choose a fund with an established track record, and make the investment with a long-term horizon. FAQs What are the three main risks associated with mutual funds? The three main risks associated with mutual funds are: Management risk Liquidity risk Volatility risk Do mutual funds have high risk? All mutual funds are risky. Its terms and conditions specify that mutual funds are volatile in nature and are subject to market ups and downs. There are different levels of risk involved in mutual funds. What is the biggest risk for mutual funds? The biggest risk for mutual funds is inflation. Inflation affects different types of funds differently. Rising inflation causes bonds to trade at a lower price on the bond markets, lowering their potential returns for debt fund investors. On the other hand, lower inflation tends to push bond prices and debt fund investment values higher. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
7 amazing tips to break free from debt

7 amazing tips to break free from debt

In the previous article, the focus was on education inflation and its impact on our savings. This article will discuss how to break free from debt. Debt, this dreaded four-letter word, is a nightmare for most people. However, everyone has a debt of some kind, whether credit card debt, student debt, home mortgage, personal debt, or more.   Debt is an unavoidable part of life. Dealing with debt often leads to stress and anxiety and can impact your physical health. There are both good debts and bad debts. The debt that creates a valuable asset (tangible or intangible) for you is good debt.   Debt that keeps on exerting negative pressure to pay off is known as bad debt. You need to remove this bad debt to live a stress-free life. How do you break free from debt?  Here is a step-wise guide to help you break the vicious cycle: Assess your situation: To get out of the debt trap, you must know where you stand. Check all your accounts and add up your liabilities (all types) to know how much you owe and to whom. Calculate your net worth by subtracting your liabilities from your assets. This will help you know your worth on paper.   Know where you spent your money: It is important to categorize your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.   Improve your budget: When you don't follow the rule “Spend less than you earn” that's how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it.   Pay off your high-interest debt in full every month: Your credit card bills keep on mounting because you do not pay them in full every month. It happens because you take on more interest-bearing debt than you can manage. Paying off your credit card bills and other debts very religiously every month will do good for your credit score and will be a good step to lighten your debt burden.   Source: Pexels Some effective ways to reduce your debt  Use the snowball effect: Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.   Pay more than the minimum amount: You pay both the principal and the interest when paying down debt. So, paying more than the minimum for a particular month means cutting the principal for the next month and thus, saving money on interest payments.   Increase your income: An increase in your income will solve half your debt problems if you know how to channel your money. An increased income from the same work or a new income from a different income source will leave more money in your hands to get out of that unwanted debt you are in. You have to help yourself in this regard. FAQs What are 3 ways to eliminate debt? The 3 ways to eliminate debt are: Budgeting, increasing your income, and paying your debt on time without accruing more interest. What are the 5 ways to get out of debt? The 5 simple ways to get out of debt are: Listing your debt obligations, creating a budget for repayment, increasing your income and paying your debt on time without accruing more interest and finally reducing your daily/miscellaneous expenses to create space for savings and investing. What are the 5 golden rules for managing debt? The golden rules for managing debt are: Budgeting your expenses and debt, actively generating more income and wealth, paying your debt on time without any delays or additional interest, reviewing your spending habits, and avoiding future debt traps. How do I clean up my debt? Stepwise guide to help you break the vicious cycle:   Assess your situation   Know where you spent your money   Improve your budget   Pay off your high-interest debt in full every month   What is the best solution for debt?   Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.   How to live a debt-free life? When you don’t follow the rule “Spend less than you earn”, that’s how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it. How can I recover from debt fast? It is important to categorise your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.     Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
8 ways you can invest in mutual funds

8 ways you can invest in mutual funds

What is a mutual fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Each mutual fund portfolio is managed by a fund manager who has a great deal of experience in the industry. Their decisions are substantiated and are taken after following the thorough research done by the AMC's research analysts. As individual investors, we do not have enough time to perform such research to make a well-informed choice on “Where to invest to gain maximum returns?” or “Where to invest in the long-term?” We may also not have enough capital to make a diversified portfolio to sustain the blows of market fluctuations. Mutual funds provide a one-stop solution for both issues. Why should one invest in mutual funds? a) Money managed by experts The fund manager and his army of research analysts are experts in the field of investing. They make informed choices with respect to every penny and always aim to provide the promised objective to their pool of investors. b) Liquidity Redemption requests are handled with great ease in fund houses. The investor can also buy/sell his units in the secondary market (in an open-ended fund) for redemption (withdrawal) of the units. c) Diversification Despite having low ticket sizes for investment, an investor can receive returns that mimic or beat the market performance. He/she can own a portfolio that is diversified across market capitalization or across sectors or different companies to sustain the blows of volatility. d) Lower cost The funds charge a small % of the NAV or your gains from the fund as a management fee which is also known as the expense ratio. These are also regulated by SEBI and have an upper limit to ensure that the funds do not overcharge the investors. e) Fund switch options One can invest in a debt fund and have the plan to have a systematic transfer into equity or vice versa to match the risk appetite, financial goals, and other factors. f) Tax saving with equity linked savings scheme (ELSS) Mutual funds also allow you to save some part of your income and claim it for tax deduction under 80C. Rupee Cost Averaging: Investing in Mutual funds through SIPs averages the cost of purchase/unit. Regulation: Funds are highly regulated and are designed to ensure retail investor protection. Ways you can invest in mutual funds If you are a new investor, you will need to complete your Know Your Customer (KYC) compliances through distributors, online platforms, or mutual fund houses (KRA – KYC Registration Agencies) – SEBI registered intermediaries. This is a one-time mandated process by SEBI to prevent fraudulent transactions. 1. Through an agent An investor may contact an agent who would direct the investor to invest in different mutual funds based on risk appetite, investment horizon, goals, and other factors. There is no commission that is to be paid to the agent. The fee is paid by the fund house and is deducted from the expense ratio paid by the investor to the AMC. Login credentials are given by each fund house which enables the investor to receive real-time data on fund performance. 2. Asset Management Company (AMC) One can directly invest in the fund house through this route. However, the investor needs to perform some amount of research before choosing the fund and the fund house. He/she can walk into one of the fund houses for offline registration, post which, all the transactions can be performed online through their website. If an investor wants to invest in 5 different funds, each from a different fund house, he/she will have to visit 5 different offices. 3. Demat account The investor can directly invest in various funds of different AMCs, corporate bonds, government securities, ETFs, etc through one account. These can be managed from one single location – your Demat Account. However, one needs to pay an additional brokerage charge annually for maintaining the account in addition to the expense ratio (which is to be paid to the AMC). 4. Fintech investment platform These platforms are third-party mutual fund aggregators which aid the investor in investing the corpus after a detailed analysis of their risk profile, goals, investment horizons, and more and suggest the best funds to suit their requirements. They also offer the convenience of managing the investor’s portfolio through their user-friendly sites. Some of the popular firms are Groww, EduFund, Scripbox, FundsIndia, etc. 5. Stock exchanges One can invest through NSE or BSE, hence eliminating all the intermediaries/brokers. However, the investor needs to perform a thorough analysis before investing in any fund and ensure that the objectives of the fund match his/her financial goals, risk appetite, and other requirements. To go through this route, one needs to complete an online registration with NSE or BSE (a one-time process). 6. Registrar and Transfer Agents (RTAs) One needs to complete the application form and submit a bank draft or cheque at the branch office of the RTA post where one can visit any of the RTAs to start investing. Some of the popular RTAs are CAMS and Karvy. This route enables the investor to choose across multiple fund houses (instead of a single fund house – in the AMC route). 7. Mutual fund utilities It is a shared service platform that hosts all the fund houses (owned by several AMCs in the country) and is used for fund transactions. Investors can use this facility online or offline. 8. Investor service centers These are physical offices across the country belonging to RTAs or fund houses. They assist the investor with respect to all the steps in the investment journey – investment to redemption. FAQs What is a Mutual Fund? Mutual funds are investment vehicles that pool money from multiple investors and invest them into equity, debt, other related instruments, and asset classes after thorough research and analysis. Why Should One Invest In Mutual Funds? Mutual funds is the best way to enter the investment market. It helps you invest in multiple companies and the investment strategy is managed by experts. What are the ways to invest in mutual funds? There are many ways to invest in mutual funds: You can invest through an agent, directly with the AMC, through a Demat account, or through a third-party financial investment platform depending upon your goals and ambitions. Conclusion As an investor, you can use any of the above ways to invest in the mutual fund of your choice and enjoy the wealth generation that comes with compounding. You can start your investment journey by downloading the EduFund app and signing up. You can get started immediately and pay zero commissions.
A Guide to Taxation in Mutual Funds!

A Guide to Taxation in Mutual Funds!

In the early article, we discussed financial planning. In this article, we will try to under the taxation in the mutual fund system that applies to mutual fund investments.  Factors determining the taxation of Mutual funds  To know the taxation structure, first, you need to identify which type of mutual funds you have invested in and whether the fund you hold is an equity mutual fund or a debt-oriented mutual fund.   Along with this, the type of income that you are generating from the fund, whether a capital gain or dividend income - both these types of income are taxable in different ways.  Finally, your holding period is crucial in knowing the taxes applicable to your mutual funds' portfolio.  Earnings in mutual funds There are usually two ways in which money is earned in mutual funds: one through the selling of the mutual fund (capital gain) and the other through dividend income.   For example, if you are holding units of a mutual that you purchased at a NAV (Net Asset Value) of Rs. 100, and you sell it when its NAV of Rs. 150, you make a capital gain of Rs. 50; it is worth noting that capital gains tax accrues on the mutual funds' units only after redemption.   The tax will be payable when you file your income tax returns for the coming fiscal year.  The second way to earn from mutual funds is dividend income – the fund declares dividends for the holders based on the surplus that it has for distribution Dividends are taxable as soon as the dividend amount hits the bank accounts of the investors.   Source: Pexels Tax on capital gains  Here, there are again two parts to the story – whether the realized capital gains have come from equity mutual funds or debt mutual funds.   An equity mutual fund has an equity exposure of greater than 65%. For equity mutual funds, if the gains have been realized within 12 months of holding, then the applicable tax rate is flat at 15% on the gains (irrespective of your income tax bracket).   When the holding period exceeds 12 months, the capital gains of Rs. 1,00,000 are exempt from taxes. Any amount upwards of Rs. 1,00,000 is taxable at 10%, along with the provision of indexation benefits.  For debt mutual funds (funds with greater than 65% exposure to debt instruments) - the holding period is considered short-term if it is less than 36 months; anything more than that is long-term.  For the short term, the tax rate is in accordance with your income tax slab. On the other hand, for debt funds held for more than 36 months, the gains are taxable at a flat rate of 20% post-indexation (plus, some cess and surcharge are added).  A possible third case is hybrid funds (funds with a mix of debt and equity) it is simple, their tax treatment is supposed to be on the basis of the fund's exposure to debt and equity.  If the hybrid fund is equity-focused: LTCG is charged at 10% on capital gains exceeding Rs. 1 lakh (without indexation), and STCG is charged at 10%. If the hybrid fund is debt-focused: LTCG is charged at 20% with indexation benefits, and STCG is charged per income tax slab.  Tax on dividends  Now, when it comes to taxation of dividends paid out on mutual funds, it is done by adding the dividend to the investor's taxable income, and then the individual income tax slab rate is applicable; this is in accordance with the amendments made by the union budget of 2020.  Earlier, dividends were tax-free in the hands of investors since the companies paid the Dividend distribution tax (DDT) before sharing the profits with the investors.   Dividends (received from domestic companies) of up to Rs. 10,00,000 per year were tax-free in the hands of the investors during this period. Dividends above Rs. 10 lakhs were subject to a dividend distribution tax of 10%.  STT Aside from the dividends and capital gains taxes, there is also a securities transaction tax (STT).   When you acquire or sell mutual fund units of an equity or a hybrid mutual fund, the government charges an STT of 0.001%. It is important to note that selling units of debt funds are exempt from the STT.  Important points to note  There are tax-saving equity funds as well. Investments made under the ELSS (Equity-linked savings schemes) qualify for tax exemption under section 80C of the Income-tax Act (exemption up to Rs. 1,50,000).   Please note that ELSS schemes come with a lock-in period of 3 years – that is, investors cannot redeem the units before three years. LTCG (long-term capital gains tax) is not applicable for gains up to Rs. 1,00,000.   For LTCG more than Rs 1 lakhs, the applicable tax rate is 10% without indexation.  Taxation in the case of SIP (Systematic Investment plans)  Let us understand this with the help of an example  An investor invests Rs. 10,000 every month from April 2021, and another investor invests Rs. 60,000 lump sum at the same time.   When both of them redeem their funds simultaneously, Rs. 10,000 will qualify for tax exemption for the SIP investor because the investment made in 2021 would exceed one year as of May 2021. In contrast, the entire capital gain isn’t taxable for the lump sum. Investing in the long term can be more tax-efficient than holding the units for a short duration. FAQs How much amount is taxed in mutual funds? If the investor claims redemption in less than 1 year of investment, it would fall under the Short-term Capital Gains (STCG) category. The tax rate would be 15% on the gains earned by the investor. If the investor holds the investment for more than a year, (say April 2020 – May 2021), the gains would be taxed at long-term capital gains (LTCG) tax of 10% Is SIP in mutual funds taxable? Yes, SIP in the mutual fund is taxable. The tax amount differs based on the duration and returns generated Which mutual funds are tax-free? Profits from the sale of ELSS fund units are considered long-term capital gains and have tax exemption. Consult an expert advisor to get the right plan for you TALK TO AN EXPERT
A simplified guide to Index funds

A simplified guide to Index funds

It is becoming increasingly obvious these days that investment is the best way for most people to achieve their financial goals. Costs of education are rising and the advantages of going to study abroad are becoming more and more obvious. For many people, these rising costs of education have necessitated a changed approach to finances. A good investment strategy and portfolio are clearly the way to go. However, many beginner investors do not know enough about investments and how or where to invest.  In this guide, we cover index funds: what they are, how they work, who should invest in them, and things to consider. If you have been thinking about investing in mutual funds or ETFs, read on to know more.  What is an Index fund? Index funds are a type of passively managed, equity funds. As the name suggests, these funds have a portfolio that is made to imitate a financial index, like BSE Sensex, NSE Nifty, etc. Both ETFs and mutual funds can be index funds. Returns from an index fund, typically mirror the growth of the index that they are tracking. How does an Index fund work? An index fund works by tracking a financial index. A financial index is a measure of the stock market or a subset of the stock market. An index fund consists of the same stocks that comprise a certain index, in the same proportions. So if, for example, a particular index fund is tracking Nifty, its portfolio will have the same 50 stocks that comprise Nifty. Then, the performance of the fund will depend on the performance of Nifty.  Unlike an actively managed fund, index funds do not have a team of analysts and experts constantly researching the market and creating strategies. The fund manager only ensures that the fund tracks its respective index as closely as possible. Things to consider when investing in Index funds 1. Risks and Returns Index funds are passively managed and track a financial index. This means that they are less volatile than other equity funds that are actively managed and hence, less risky. This is because actively managed funds strive to beat their benchmark but index funds track particular financial indices and try to remain as close to the benchmark as possible. This means the returns of an index fund usually replicate the performance of the index. This makes these funds reliable and lucrative during a market rally but less so during a slump.  One thing to keep in mind, however, is the tracking error. Most index funds do not replicate their respective indices exactly. There is a small deviation which is called a tracking error. You should always choose a fund with a low tracking error to reduce risk.  2. Investment timeline and goals Since index funds are considered lower-risk funds, they are suitable for investors looking to make long-term, passive, investments. These can be investments made for the future education plans of a very young child or retirement plans. With long-term investment windows, any short-term fluctuations can be balanced out or averaged. But if your goals are less long-term, for example, education plans for an older child, you should consider investing in a more actively managed fund. A good financial advisory service can help you make these decisions. 3. Investment costs and fees Index funds are passively managed. Since these funds track indices and don’t require active management, they incur lesser fees. An actively managed fund has to pay for analysts and experts to do research and create investment strategies. A passively managed fund does not have to do that. They have lower operating and management fees, transaction charges, etc. This means that these funds have a lower expense ratio ( the percentage of your total investment that you have to pay to the fund as management fees and other charges). 4. Taxation Index funds are subject to dividends distribution tax (DDT) and capital gains tax. DDT is deducted at source when the fund pays its dividends to stakeholders. DDT is generally applied at a rate of 10%. Capital gains tax is the tax levied on the capital gains made when you redeem units of your index fund. The amount of tax depends on your holding period. If you held the units for less than a year, then you will have to pay short-term capital gains tax (STCG) which is 15%. Capital gains from a holding period of above one year are considered long-term capital gains (LTCG) and are taxed at 10%. LTCG under Rs.1 Lakh is not taxable. Who should invest in an Index fund? Index funds are ideal for investors who want to invest in the equities market but do not want to take a lot of risks. If you are open to a long-term investment with relatively low but fairly predictable results, index funds can be a good option for you.  Keep in mind that index funds will follow the index and not give you any market-beating returns. If you are looking to make investments for your child’s education plans, you may want to stick to index funds for the stability they offer. However, a much better option would be a diversified investment portfolio with index funds as one of the components.  Education plans are rather high-stakes goals and so it is understandable to want to go safe. However, education, especially if you plan to study abroad, is also expensive. Actively managed equity funds tend to have generally higher returns. Keeping both in your portfolio can help you get the best of both worlds, general stability as well as good returns. Conclusion Index funds are a good and reliable way of passive investment for people who do not have the time to constantly monitor and manage their portfolios. They are especially useful when the markets are doing well and financial indices are on a general rise. However, recession and economic instability can cause a slump and bring down the value of index funds. To offset such eventualities, it is important to diversify your portfolio.  Financial planning, after all, requires active effort and involvement. The securities and assets you invest in should be properly aligned with your financial goals. If you lack the know-how or expertise to figure these out yourself, you can always consult a financial planner or other such services. For specific goals like education plans, you can hire specialized financial planning experts like EduFund. A good investor understands his investments and takes risks in accordance with his goals and his capacity. Therefore, putting in the time to figure out what kind of investor you are and what kinds of investments are best for you, is always a worthwhile endeavor. FAQs What are some best index funds? Some of the best index funds include IDFC Nifty 50 Index Direct Plan-Growth, Nippon India Index Fund S&P BSE Sensex Plan Direct-Growth, UTI Nifty 50 Index Fund, etc. Is it good to invest in index funds? Index funds provide you with low-cost investment methods. They can bring you better gains than fund managers do. Do index funds pay dividends? Since regulations require it, Index funds do pay dividends in most cases. TALK TO AN EXPERT