Unfortunately it’s taken me nearly 15 years to realize that investing in Bank or Company **fixed deposits (FDs) is a terrible investment choice**. If you have a long term horizon you should definitely choose investing in Equity Mutual Funds via SIPs or Lumpsum.

The BSE Sensex has given an average year on year return of approx 16% over a 38 year period. The same is true even if you exited in 2008 (which was a terrible year for the stock market). Now let’s assume you manage to get a FD interest rate of 8%. This assumed interest rate of 8% is higher than any current bank FD rate at the time of publishing this post. In order to truly understand the real cost of investing in FDs let’s assume you invest 5 lakhs in a Bank FD and another 5 lakhs in a BSE Sensex Index Fund. Lets see what you could get if you withdraw after 40 years.

## 5 Lakhs deposited in a bank FD at 8% compounding (0% tax)

Now lets say you deposit you 5 lakhs in a Bank FD which promises you a 8% interest rateYears | Interest Rate | Tax Rate | Amount | Amount in words (Rounded) |
---|---|---|---|---|

0 | 8 | 0% | 5,00,000 | 5 Lakhs |

5 | 8 | 0% | 7,34,664 | 7 Lakhs |

10 | 8 | 0% | 10,79,462 | 11 Lakhs |

20 | 8 | 0% | 23,30,478 | 23 Lakhs |

30 | 8 | 0% | 50,31,328 | 50 Lakhs |

40 | 8 | 0% | 1,08,62,260 | 1 Crore 9 lakhs |

## 5 Lakhs deposited in a bank FD at 8% compounding (20% tax)

Now lets say you deposit you 5 lakhs in a Bank FD which promises you a 8% interest rateYears | Interest Rate | Tax Rate | Amount | Amount in words (Rounded) |
---|---|---|---|---|

0 | 8 | 20% | 5,00,000 | 5 Lakhs |

5 | 8 | 20% | 6,80,378 | 7 Lakhs |

10 | 8 | 20% | 925,830 | 9 Lakhs |

20 | 8 | 20% | 17,14,322 | 17 Lakhs |

30 | 8 | 20% | 31,74,343 | 32 Lakhs |

40 | 8 | 20% | 58,77,806 | 58 Lakhs |

## 5 Lakhs deposited in a bank FD at 8% compounding (30% tax)

Now lets say you deposit you 5 lakhs in a Bank FD which promises you a 8% interest rate. The Income tax rate assumed here is 30%Years | Interest Rate | Tax Rate | Amount | Amount in words (Rounded) |
---|---|---|---|---|

0 | 8 | 30 | 5,00,000 | 5 Lakhs |

5 | 8 | 30 | 6,54,735 | 7 Lakhs |

10 | 8 | 30 | 8,57,355 | 9 Lakhs |

20 | 8 | 30 | 14,70,118 | 15 Lakhs |

30 | 8 | 30 | 25,20,829 | 25 Lakhs |

40 | 8 | 30 | 43,22,497 | 43 Lakhs |

## 5 Lakhs at 16% Compounding - 10% Long Term Tax

The BSE Sensex has managed to give a 16% CAGR over the last 38 yearsYears | Interest Rate | Long Term Capital Gains Tax | Amount | Amount in words (Rounded) |
---|---|---|---|---|

0 | 16 | 0 | 5,00,000 | 5 Lakhs |

5 | 16 | 0 | 10,50,170 | 10 Lakhs |

10 | 16 | 0 | 22,05,717 | 22 Lakhs |

20 | 16 | 0 | 97,30,379 | 97 Lakhs |

30 | 16 | 0 | 4,29,24,938 | 4 Crores 29 Lakhs |

40 | 16 | 10 | 17,04,24,521 | 17 Crores (After Tax) |

So you can see that if you fall in the 20% Tax slab you would make 58 Lakhs after 40 years of investing in a Bank FDs instead of making 17 Crores with the BSE Sensex.** Is the difference of 16.5 Crores worth that false sense of mental safety that you get with a FD?** I personally have stopped investing money in FDs and focus more on equity returns keeping a 20 year horizon in mind. I would not recommend you invest your money in equity mutual funds if you have a short term 1-3 years horizon in mind. I would also not recommend Equity mutual funds if you are trying to save the money for a House, marriage, education etc.

well thanks your article of index funds is outstanding.kindly guide who had started late but now like to invest for 5 years with risk.thanks .regards