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Get all your mutual fund related queries answered by our expert, Manoj Nagpal, managing director and chief executive officer, Outlook Asia Capital, on our show Mutual Fund Corner.
Q: 50-year-old Kumar Manwani writes us from Mumbai. I always pay car loan by cash at 12 per annum bank interest plus documentation/processing charges, which the banks charge to my close friends and relatives. I usually procure postdated cheques (PDCs) from them, which fortunately till date have never bounced.
In the last seven years, at every point of time/on any single day, I have financed three cars of various loan duration's. Thereafter, I used to open a one year recurring deposit (RD) account and used to deposit the PDCs in the said RD account. After one year when RD matured, I transfer the funds to fixed deposit receipt (FDR) till the duration of loan and continued the process till the car loan was fully paid.
For each car loan, this process was followed. I went on opening multiple RD accounts and FDRs and earned returns of about 20 percent, that is, yield to maturity, till car loan was repaid. Now, I am tired of this whole game, multiple accounts, etc. Instead, I want to invest PDCs in tax saving mutual funds (read Axis), where my taxes also will be saved (on the basis of past 7 years track record of Axis Tax Savings Fund). Please suggest, what will the returns be? My average loan period of cars is four years. Will I earn more money this way or continue rogue investing as have been doing.
A: Effective compounded returns will be 12 percent rather than 20 percent. Post tax return of this strategy will be around 8 percent assuming no defaults. One default can wipe out not only gains, but also capital. Lending works on larger numbers rather than just 3-4 borrowers.
Tax savings funds (ELSS) from mutual funds are under Section 80C. So, you should limit investment to only Rs 1.5 lakh per financial year in such a fund. Prefer the Aditya Birla Tax Relief and ICICI Long Term Equity (Tax Savings) over Axis Long Term Equity.
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