RD vs SIP in debt for school fees

POSTED BY vikram kumar ON May 20, 2013 12:09 pm COMMENTS (7)

For my sons school annual fees i need to save every month. Would it be good idea to save in RD or a monthly SIP in debt fund “Templeton India Income Builder”. Requirement is investment should be safe, tax free and better returns than RD. After initial two years, i will redeem the money every year.

7 replies on this article “RD vs SIP in debt for school fees”

  1. Dear Vikram, what’s your take on the suggestion by dear Pattu above? I’m asking here for Arbitrage funds.



  2. For an important expense like this safety is far more important than tax or returns. Returns are not not of great consequence for such short durations.

    A liquid fund like Quantum Liquid should do well in all aspects. About 6% return. Minimum (not zero) risk. Lower tax outgo than RD if in 30% slab. The difference is small for those in 20% slab and is insignificant for those in 10%

    The fund you selected has an average maturity period of 11 years!! Completely unsuitable for a 1 year goal.

    Keep it simple. Opening a RD these days is easier than investing in MFs (debt or otherwise).

    Just for the record: Arbitrage mutual funds have theoretically zero risk, and zero tax after 1 year and can be used for less important goals

    1. vikram kumar says:

      Thanks for the reply. I fall in the 20% category, so it makes sense to go for Quantumn liquid fund. Just one doubt, do you mean that funds in Templeton India Income builder will be locked in for 11 years.

      Will check on the arbitrage funds.

      1. for 20% slab, tax superiority of liquid fund vs RD for durations of 1-2 years depends on

        1. RD interest rates (guaranteed) vs typical 6% liquid fund return (expected)
        2. cost inflation index.

        The answer is not straightforward.

        Templeton India Income Builder is open ended fund. However the average maturity period of underlying investment is 11 years. The investment tenure in a debt fund should either match or be much greater than the maturity period of the debt investment.

        Arbitage funds have returns similar to liquid funds. However they have higher expense ratio. UTI spread is one good fund.

        1. Ramesh says:

          Regarding average maturity of a debt fund: Why do you think the maturity period should be related to the average investment tenure?
          In my opinion, it will not matter at all, since there is constant (more or less, does not matter) churning of the individual securities of the fund.
          The important point is what the exit load period, which should be less than the overall expected time frame.

          1. If I am not wrong constant churning occurs only for short term funds. For others like the one mentioned here maturity periods can be long. Assuming a bond is held until maturity and if there is a default, say due to fall in credit ratings there will be negative returns.

            Perhaps there are other reasons for negative returns in income funds and the like. Its unfamiliar territory for me.

            Constant churning is the only reason why liquid and ultra-short term funds have low risk. Therefore I would like to assume the lack of (constant) churning is the reason for increase in risk in other types of debt funds.

          2. Wrt short term funds, by constant churning I refer to short term bonds/certificates. That is a liquid funds portfolio can change every 90 days.

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