[sreerknair]

Hi all, need some suggestions. I am planning to buy a new car with full cash. This means I have to dip my hands on my savings. I have money invested in FD as well as in MFs. I could withdraw the cost of car from either of these savings. FD are all on average 6% interest rate at the moment, where as the MF on average is at 15%. This is the max net average I have seen in 6 plus years. Both instruments are purposed for any long term requirements. Considering this market rally, which will be the wise option? Redeem the MF units and buy the car? Or break few FDs and buy the car? Or take portion of money from MF and other from FD? My car budget is around 15 to 17 L.

[ABHI_1512]

Originally Posted by sreerknair

Hi all, need some suggestions. I am planning to buy a new car with full cash. This means I have to dip my hands on my savings.

Why buy a depreciating asset by paying in cash at the first place ? Let the part of money remain invested and you can take part loan to buy instead.

[SmartCat]

Originally Posted by sreerknair

Considering this market rally, which will be the wise option? Redeem the MF units and buy the car? Or break few FDs and buy the car? Or take portion of money from MF and other from FD? My car budget is around 15 to 17 L.

If you break the FD to buy the car and markets crash big-time, you will regret it. If you redeem your equity MF units to buy the car and markets shoot up further, you will regret the decision too.

So the most logical decision would be to utilize funds in both fixed deposits and equity mutual funds to make the car purchase. If 33% of your funds are in FDs and 66% of funds are in equity MFs, pull out Rs.5L from FDs and 10L from equity MFs.

Originally Posted by ABHI_1512

Why buy a depreciating asset by paying in cash at the first place ? Let the part of money remain invested and you can take part loan to buy instead.

Personally, I prefer paying with own funds instead of taking a loan. Over a period of 5 years, you cannot be sure of investment returns. It can even be negative. But 8% pa interest on car loan is a guaranteed expense.

[ABHI_1512]

Originally Posted by SmartCat

Personally, I prefer paying with own funds instead of taking a loan. Over a period of 5 years, you cannot be sure of investment returns. It can even be negative. But 8% pa interest on car loan is a guaranteed expense.

Well, I would pay off the loan in three years flat and utilise the money saved to work for itself. Of course, one can never be sure of returns but remaining invested for long will certainly help. Also, foreclosure option of loan amount is always there but that’s my view entirely.

[Fx14]

Originally Posted by sreerknair

FD are all on average 6% interest rate at the moment,
Or break few FDs and buy the car? Or take portion of money from MF and other from FD?

Do keep in mind that premature closure of FDs normally attracts penalties - by way of reduced rate applicable for the actual tenure completed, besides any penal interest charge.

So you may end up with an effective rate much less than 6%, with a proportionate claw back from the interest already paid, if any.

[sreerknair]

Originally Posted by ABHI_1512

Why buy a depreciating asset by paying in cash at the first place ? Let the part of money remain invested and you can take part loan to buy instead.

I too thought about it. But felt that investing the EMI in other avenues will give better returns than using a loan and remain invested. Moreover I am not too comfortable with the burden of an EMI running back of my mind.

Originally Posted by SmartCat

If you break the FD to buy the car and markets crash big-time, you will regret it. If you redeem your equity MF units to buy the car and markets shoot up further, you will regret the decision too.

Thank you SmartCat, precisely the dilemma I have. To top it up, many fund houses are talking about nifty touching 16-18k in near term. I think part withdrawal from both will be the less regretful decision.

Originally Posted by Fx14

So you may end up with an effective rate much less than 6%, with a proportionate claw back from the interest already paid, if any.

Thanks Fx, yes I am aware of the penalty.

[shivshanker]

Originally Posted by sreerknair

Hi all, need some suggestions. I am planning to buy a new car with full cash. This means I have to dip my hands on my savings. I have money invested in FD as well as in MFs. I could withdraw the cost of car from either of these savings. FD are all on average 6% interest rate at the moment, where as the MF on average is at 15%. This is the max net average I have seen in 6 plus years. Both instruments are purposed for any long term requirements. Considering this market rally, which will be the wise option? Redeem the MF units and buy the car? Or break few FDs and buy the car? Or take portion of money from MF and other from FD? My car budget is around 15 to 17 L.

First consideration to be evaluated is if you can gain any benefits from Income tax.

Have you considered taking a loan or an Over Draft (OD) on your FD's, you can repay the principal amount in monthly installments, while you still continue to earn interest.

The Interest burden on the OD is hardly 2% or even lesser than that.

With regards to Mutual Funds, consider the Income Tax angle again, short term v/s long term capital gains. As you will have to pay this tax money.

If I were you, If Mutual funds are around the 3 year mark, I would book 50-75% profits now, depending on the quantum of investment.

Wait for Budget session to reenter again.

[sreerknair]

Originally Posted by shivshanker

First consideration to be evaluated is if you can gain any benefits from Income tax.

Have you considered taking a loan or an Over Draft (OD) on your FD's, you can repay the principal amount in monthly installments, while you still continue to earn interest.

The Interest burden on the OD is hardly 2% or even lesser than that.

Thank you Shivshankar, I haven't got the use of OD. Only use I saw with OD is SBI gives loan with interest 1% above FD interest. If FD is 6 %, then loan will be 7%. And normal car loan now is 7.75%. Also I have to pay tax for interest on FD even if I have OD isn't it?

[SmartCat]

Gents, in case you are interested in this topic (loan vs outright car purchase):

https://www.team-bhp.com/forum/india...-outright.html (Salaried Professionals - Buy on finance or outright?)

https://www.team-bhp.com/forum/india...-outright.html (Self-employed Professionals / Businessmen - Buy on finance or outright?)

[kshastry]

@SmartCat and other experts,

What is your view on "Retirement Savings Funds"? These have a lock-in period of 5 years and are of multi-cap type. The fund manager seem to have much freedom to balance his portfolio without getting into redemption pressures when markets are bearish.

Looking at the past history of many such funds, most of them seem to have given decent to average returns.

I have a choice to make with fund house where the scheme (small cap fund) I have invested has severly underperformed and not recovered much in the recent bull run. I can redeem them at a loss OR I can make a switch to above type of fund in the same house (which seem to be doing decently). I don't have urgent need of funds now.

Do you recommed this type of fund?

[SmartCat]

Originally Posted by kshastry

What is your view on "Retirement Savings Funds"? These have a lock-in period of 5 years and are of multi-cap type. The fund manager seem to have much freedom to balance his portfolio without getting into redemption pressures when markets are bearish.

Personally, I'm not a fan of funds with a lock-in period. Incidentally, in March 2020, mutual funds did not see any redemption pressure

Looking at the past history of many such funds, most of them seem to have given decent to average returns.

You can achieve the same results (reasonable returns, low volatility) with a portfolio of equity MFs/gilt MFs.

Do you recommend this type of fund?

You could consider other balanced/hybrid funds without lock-in period instead.

[Old_Salt]

Quick query from Seniors,

I have started investing in MF a couple of years ago, prior that it was all FDs. Since I already had a good allocation in Debt(FD), I went ahead with 100 percent allocation to equity. Past one year almost all funds have done well, and my exposure currently 30:70 (MF:FD). I still try to buy on every dip, however with IDFC bank giving me a 7% tax free interest in savings account (NRE), I wish to use this as my debt instrument. As my FDs mature in HDFC , I plan to transfer funds to IDFC and get that 7percent tax free.

Is this inference correct, to use savings account as a debt instrument, given that there is no taxation involved and it’s a clear 7% return?

Rgds

[Simhi]

Originally Posted by Old_Salt

Is this inference correct, to use savings account as a debt instrument, given that there is no taxation involved and it’s a clear 7% return?

Saving account interest is taxable at your slab rate. Interest earned up to Rs 10,000 is exempted from tax under Section 80TTA.

[SmartCat]

Originally Posted by Old_Salt

however with IDFC bank giving me a 7% tax free interest in savings account (NRE), I wish to use this as my debt instrument. As my FDs mature in HDFC , I plan to transfer funds to IDFC and get that 7percent tax free. Is this inference correct, to use savings account as a debt instrument, given that there is no taxation involved and it’s a clear 7% return?

Talking about tax here is missing the wood for the trees. The bigger question is should you trust a bank just because it is offering 7%pa on savings account and Amitabh Bachchan is the brand ambassador.

1) IDFC First Bank is not in a good shape -> Rs. 2,000 cr loss in FY19 and Rs. 3,000 cr loss in FY20. To attract depositors, they are offering such huge interest rates. It is very likely that they are lending to customers who are sub-prime.

2) Once upon a time, Yes Bank too used to offer 7% pa on savings account.



Like Yes Bank, RBI will not allow depositors to lose money even if IDFC First Bank goes down. But you are likely to face lot of anxiety if your capital is locked in for a long time, and there is uncertainty in the air.

[Old_Salt]

Originally Posted by Simhi

Saving account interest is taxable at your slab rate. Interest earned up to Rs 10,000 is exempted from tax under Section 80TTA.

Thank you, I have been maintaining my NRE status for some years now. Interest earned on a NRE Savings/FD is tax free for that financial year as long as the account status is maintained, that is if you are out of the country for more that 182 days. So technically the interest from IDFC would stand at a clear 7%.

Originally Posted by SmartCat

Talking about tax here is missing the wood for the trees. The bigger question is should you trust a bank just because it is offering 7%pa on savings account and Amitabh Bachchan is the brand ambassador.

1) IDFC First Bank is not in a good shape -> Rs. 2,000 cr loss in FY19 and Rs. 3,000 cr loss in FY20. To attract depositors, they are offering such huge interest rates. It is very likely that they are lending to customers who are sub-prime.

2) Once upon a time, Yes Bank too used to offer 7% pa on savings account.

Like Yes Bank, RBI will not allow depositors to lose money even if IDFC First Bank goes down. But you are likely to face lot of anxiety if your capital is locked in for a long time, and there is uncertainty in the air.

Thanks SmartCat, much appreciated and now I see both the wood and the trees.
Should have been more diligent with the banks financials.