Rajiv, a ICICI Bank customer, received a call from the bank executive informing him about ‘Advantage Deposit’ – a new product with dual benefits of a fixed deposit and a mutual fund. Now, Rajiv’s curiosity is roused as he has invested consistently into various fixed deposit schemes. But he is not gung ho about its ‘investing in equity funds’ part as he has lost a fortune in the recent market meltdown.

What is ICICI Bank Advantage Deposit scheme?
It is a combination of a traditional Fixed Deposit (with monthly interest payout) and Systematic Investment Plan (SIP) of a Mutual Fund. The interest payout credited into one’s savings account will be reinvested into SIP directly.

Should Rajiv give it a look?
Yes. People like Rajiv who don’t want to risk their investment, yet like to earn better returns should consider this product, for it offers an investor the safety of a fixed deposit and the returns of an equity fund. In addition, it counters equity-market fluctuations through SIPs.

What are the terms? Can it be renewed?
Firstly, an investor would need to open a savings account with ICICI Bank. As Rajiv already has an ICICI bank account, he doesn’t need extra efforts. The deposits are available from minimum of one year to a maximum of 10 years. There is an option to renew the scheme at the prevailing deposit rates after maturity.

Will it be a prudent decision to invest in it?
Under this scheme, the minimum investment in SIP is Rs 1,000 per instalment. So Rajiv has to make sure that his total investment in Advantage Deposit earns a monthly interest of Rs 1,000 or more minus TDS.

Let’s see:

The concept of ‘Advantage Deposit’ scheme is not new, in fact it is borrowed from the scheme (already present in the market for quite some time) whereby a lump sum investment is done in a mutual fund’s liquid fund or debt fund, and a fixed amount from it is transferred to an equity fund, also known as Systematic Withdrawal Plan (SWP). Thus here we will compare both these schemes for better understanding.

Case 1: Let us consider the five-year term deposit in the scheme, with 8 per cent interest rate.

Hence, to generate an SIP amount of Rs 1,000 per month net of TDS in this scheme, the investment amount should be Rs 1,67,320. Now let us assume that Rajiv’s SIP amount of Rs 1,000 was invested into ICICI Prudential Dynamic Plan (starting from Sept 2004), so at the end of 5th year (Aug 2009) his final SIP amount would have been Rs 99,088, and the total maturity amount, Rs 2,66,408. (Note: we have considered historical returns for the Plan and the past performance may not be repeated.)

Case 2: If Rajiv had made a similar investment of Rs 1,67,320 into ICICI Prudential Liquid Plan Fund (as on Sept 2004) and made a systematic transfer (also known as SWP) of Rs 1,000 into ICICI Prudential Dynamic Plan as an SIP amount, the final fund value including Liquid Fund and Dynamic Plan would have been Rs 2,57,490.

Note: ICICI Pru Liquid Plan Fund is considered as it is as safe as a bank deposit since its average maturity period is up to 91 days as per a recent SEBI regulation.

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Comparison: In Case 1, the compounded annualised return is 9.75 per cent over a period of five years while in Case 2, it is 9 per cent. Since we have already factored in the TDS effect in Case 1, 9.75 per cent is the net annualised return post tax deduction while in Case 2, the investment in Liquid Fund will also earn interest income which invites tax at the rate of 10 per cent with indexation or 20 per cent without indexation. Since we have not considered the tax aspect here, the return will further decrease.

A few things to consider:

• The minimum SIP amount of Rs 1,000 net of TDS requires an investment of Rs 1,67,320 which may not be a feasible amount for small investors. But, for an investment less than Rs 1,67,320, since the interest earned will be less than the minimum SIP amount of Rs 1,000, the shortfall in SIP amount will be covered from the balance in the savings account to which the SIP amount is debited.
• In case of premature/partial closure of the fixed deposit, the SIP will continue to be debited to the depositor’s savings account, unless the depositor informs the Mutual Fund/Registrar of withdrawal of the original mandate.

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