Equity mutual funds vs traditional investments: Where to invest for a solid return?

economictimes.indiatimes.com:

Srijith has been a regular investor in government savings schemes. He has a PPF account, in which he invests every year. He also parks funds in fixed deposits whenever he has surplus money.

He makes regular savings in recurring deposits, and also invests in RBI bonds and tax-saving infra bonds whenever a new issue is announced. He has always held the view that equity mutual funds are very risky, but has heard a lot about their wealth creation ability at investor meets and forums. Hence, he would like to know more about how they differ from the traditional investments that he is familiar with.

Srijith’s comfort with government savings schemes and fixed deposits comes from the pre-specified rate of return and guaranteed safety of principal. The rates for small savings schemes may be linked to the market rate, but these remained in a range-bound 7-7.5% through the two interest rate cycles, when rates of long-term debt instruments issued by the government swung between 5% and 9%. While this return may be efficient from the tax perspective, the returns on fixed deposits are subject to marginal rate of taxation, which may be considerably higher than the 10% for equity mutual funds.

The government has aligned the rates for all savings schemes with the market, which are announced every quarter. This has altered the return features of these instruments, while the risk remains low. Choosing equity mutual funds would mean that Srijith can look forward to a fair return as available in the market instead of settling for a lower return.

He can also hold the investments for as long as he wants. Open-ended mutual funds do not have a fixed maturity period, enabling him to save and redeem money as per his wish. Besides, the risk in his