Taxation – impact on your investment
Many people underestimate the hurt that taxation causes to their investment. Let us take an example.
If you invested Rs. 100,000 in a RBI bond which pays 8% p.a. before taxes, you will get Rs. 8000 as interest and assume you pay 30% tax you will be left with Rs. 5600 at the end of the year.
Assume further this amount is re-invested and earns 8% p.a. ….and the same thing continues for 25 years. Over this period you would have paid Rs. 124,491 as income tax and your capital accumulated would be Rs. 390,000.
However if you had invested Rs. 100,000 in a mutual fund with a GROWTH OPTION and earned 8% p.a. and had not withdrawn any amount do you realise you would have Rs. 685,000.
Of the gap between 685,000 to 390,000 only Rs. 124,491 is explained by taxation – the rest is the effect of compounding. That ladies and gentlemen is greater than the tax!
Param
I believe the same argument needs to be extended to the ridiculous expense ratios of most of the MFs & ULIPs.
Assuming 10% return in equity segment, your investment of 1 lac should turn into 17.45 lac in 30 yrs. With an expense ratio of 2%, resulting in 8% return, it will turn into 10.06 lac in 30 yrs. Choose an index fund with expense ratio of 1% & you get 13.27 lac, choose an index etf with expense ratio of 0.5% & you get 15.22 lac. Or pray for Vanguard to enter india & give you an expense ratio of 0.1% & you get 16.98 lac. Until then, enjoy being screwed by the system, which takes 0 risk & gets 42% reward…