Mutual Fund SIP vs Bank Fixed Deposit (FD): The Real Post-Tax Yield
Compare Growth Over 10 Years
Test how a 7% FD return compares against a 12% equity SIP.
Interactive Wealth Compounding Simulator
SIP Parameters
Maturity value before inflation (~₹23.23 Lakh)
Today's purchasing power (~₹12.97 Lakh)
Annual Growth Schedule & Inflation Impact
| Year | Invested Principal | Wealth Gain | Nominal Total | Real Value (6%) |
|---|---|---|---|---|
| Yr 1 | ₹1,20,000 | +₹8,093 | ₹1,28,093 | ₹1,20,843 |
| Yr 2 | ₹2,40,000 | +₹32,432 | ₹2,72,432 | ₹2,42,464 |
| Yr 3 | ₹3,60,000 | +₹75,076 | ₹4,35,076 | ₹3,65,299 |
| Yr 4 | ₹4,80,000 | +₹1,38,348 | ₹6,18,348 | ₹4,89,790 |
| Yr 5 | ₹6,00,000 | +₹2,24,864 | ₹8,24,864 | ₹6,16,386 |
| Yr 6 | ₹7,20,000 | +₹3,37,570 | ₹10,57,570 | ₹7,45,545 |
| Yr 7 | ₹8,40,000 | +₹4,79,790 | ₹13,19,790 | ₹8,77,736 |
| Yr 8 | ₹9,60,000 | +₹6,55,266 | ₹16,15,266 | ₹10,13,438 |
| Yr 9 | ₹10,80,000 | +₹8,68,215 | ₹19,48,215 | ₹11,53,145 |
| Yr 10 | ₹12,00,000 | +₹11,23,391 | ₹23,23,391 | ₹12,97,369 |
The Post-Tax Real Return Mathematics
The table below highlights the dramatic difference in post-tax real purchasing power between a commercial bank Fixed Deposit and an Equity Index SIP for an investor in the 30% tax bracket:
| Metric | Bank Fixed Deposit (1 Year+) | Equity Mutual Fund SIP (3+ Years) |
|---|---|---|
| Pre-Tax Nominal Return | 7.00% p.a. (Fixed) | 12.00% p.a. (Market-linked benchmark) |
| Applicable Tax Rate | 31.20% (Income Tax Slab + 4% Cess) | 12.50% (LTCG above ₹1.25 Lakh) |
| Post-Tax Nominal Yield | 4.82% net annual return | 10.50% net annual return |
| Structural Inflation (CPI) | 6.00% annual loss of purchasing power | 6.00% annual loss of purchasing power |
| Real Wealth Growth | -1.18% (Wealth is shrinking) | +4.50% (Real capital compounding) |
When Does a Fixed Deposit Win?
Fixed Deposits are not obsolete; they simply serve a different purpose on your balance sheet:
- Short Horizons Under 3 Years: If you need money for a house down payment or wedding within 12 to 24 months, market volatility makes equity mutual funds risky. The guaranteed nominal safety of an FD is appropriate.
- Emergency Cash Reserves: Keep a portion of your emergency fund in a sweep-in fixed deposit for instant liquidity.
- Senior Citizen Capital Preservation: Senior citizens receive an additional 0.50% interest and can claim up to ₹50,000 tax deduction on interest income under Section 80TTB.
When Does an Equity SIP Win?
- Long Horizons Over 5 to 10+ Years: Over rolling 7+ year holding periods in India, the probability of negative returns from broad market equity indices approaches zero.
- Beating Real Inflation: Equity ownership is the only accessible asset class that consistently compounds faster than domestic healthcare and education inflation.
- Superior Tax Efficiency: You only pay tax when you redeem mutual fund units, whereas bank FD interest is taxed every financial year on an accrual basis (via TDS Form 26AS), even if the deposit has not matured.
Frequently Asked Questions
Is my money 100% safe in an Indian bank fixed deposit?
Bank deposits in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, up to ₹5,00,000 per depositor per bank (including both principal and accrued interest). Deposits above ₹5 Lakh carry institutional counterparty risk with that specific bank.
Can I lose money in a mutual fund SIP?
In the short term (under 1 to 3 years), equity mutual fund values can fluctuate and may temporarily dip below your invested principal during market corrections. However, holding diversified broad index funds over 5 to 10 years has historically delivered positive, inflation-beating returns.
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