Investors have started to take the safe ride of mutual fund of late with the Asset Under Management of the industry ballooning to Rs. 15.80 lakh crore in Sep, 2016 from Rs. 11.87 lakh crore a year ago, as the latest data of Association of Mutual Funds in India, the mutual body body. The portfolio of equity fund, ELSS fund, balanced fund, liquid/money market fund, gilt fund, income fund, infrastructure debt fund, fund of funds & overseas funds, gold ETFs and other ETFs stood at Rs. 4.17 lakh crore, Rs. 0.50 lakh crore, Rs. 0.56 lakh crore, Rs. 3.08 lakh crore, Rs. 0.015 lakh crore, 6.98 lakh crore, Rs. 0.0018 lakh crore, Rs. 0.006 lakh crore and Rs. 0.022 lakh crore, respectively, as on Sep 30, 2016.
With such growing adoption, you would be anxious to taste the spice of mutual fund investment, aren’t you. But, as a beginner, you must carefully plan your mutual fund portfolio so that your investment objectives can be met with ease. In this article, we will put a detail on the funds that you can look upon to kick off and bolster your mutual fund journey.
As an beginner, it is natural you will look for both returns as well as the diversification of risk. So, in a bid to achieve the same, you can invest in balanced funds that invest in both equity and debt. In addition to generating returns, these funds diversify the funds in such a manner that risks get minimised. Equity oriented balanced funds invest a significant portion say 65% of the corpus in equities, while parking the rest in debt instruments to avoid volatility and ensure stable return to the investors in the form of interest payment. Staying immune from volatility risk is a pre-requisite for a beginner in mutual fund investment.
Redeeming the equity balanced funds after a year or more will not be taxable as it will be considered as long-term capital gain, which is tax-free in case of equity funds. Moreover, the dividends from equity funds also gain tax exemption. However, if you redeem the investments before a year, you will be taxed at 15%. Tax rate, however, on long-term capital gain arising from the sale of debt funds is kept at 10% without indexation and 20% with indexation. Indexation is a tool that adjusts the purchase price in accordance with the prevailing inflation. Short-term capital gain of the funds will be taxable as per the tax slab of a particular individual.
Index funds constitute stocks in the proportion same to their weight in the index. As these funds are passively managed, there is no possibility of rise and fall in the holdings. It also means that you are immune from the mistakes of a fund manager. Most of the index funds keep a track of Sensex and Nifty, and are classified under large cap, diversified funds. As far as taxation is concerned, both interest and dividends are taxed in the case of index funds. Profit arising from the sale of investments after a year is considered long-term capital gain and get taxed at a lower rate compared to short-term capital gain that arises from selling investments before a year.
Large cap funds are ideally suited for first time investors as they invest 80% or more of the corpus in large companies whose stocks are less volatile compared to that of small and mid cap companies. Since large cap funds form a part of equity funds, the tax implication is the same to that of equity balanced funds as stated above.
Monthly Income Plans (MIPs)
Don’t get disappointed if you did not start your mutual fund journey during your employment days. You can start investing in mutual funds post retirement and create a sustainable wealth to feed on. You can do this by investing in Monthly Income Plans (MIPs), which are known as hybrid schemes. MIPs park 80-85% of the investment in debt and the rest in equity. These plans offer regular returns by offsetting the risk of volatility that comes with a large volume of equity investments. You can receive dividends and interest payment on monthly, quarterly or annual basis. As these funds are the part of debt funds, any short and long-term capital gain will be taxed like the way it happens in debt funds. The taxation of debt funds has been stated earlier in the article.
Equity-linked saving schemes (ELSS) is becoming the preferred choice of retail investors as the investment qualifies for tax exemption under Section 80C of the Income Tax Act. One more good thing is the lock-in period of just 3 years. However, make sure your investments are not exposed much to small and mid caps, which can be the case when the lock-in period of an investment is as short as 3 years.
From the taxation point of view, balanced funds, large cap funds and ELSS are best bet for investors. However, MIPs would best serve your financial needs post-retirement. So, choose from the list based on investment taste to enjoy a fruitful mutual fund journey.