SIPs help avoid timing

I have Rs 40,000 which I want to invest in mutual funds. Please suggest the best fund to invest in.

-Razak Rehman

If you are investing for the long-term, then for a new investor like you, the advice would be to so through systematic investment plans (SIP) than lumpsum investments. By investing a fixed amount at pre-determined intervals, the trouble of figuring the best time to invest is eliminated, which offers an efficient way to ride market volatility. Start investing in a balanced fund such as HDFC Prudence or Reliance Regular Savings Balanced fund. Track the progress on your investments, evaluate its performance at least once a year and alter the fund selection if need be.

I am 67 and a pensioner, looking for mutual fund investments for the next three to five years. What is the best option for me?

-Kumar Gautam

We are suggesting a portfolio of four funds that collectively has 60 per cent equity exposure, which can take care of growth, with the balance in debt to check on volatility and maintain portfolio stability. All the four funds have a proven performance history and track record managed across market cycles. You should initiate equal SIP investments across all these funds and evaluate the portfolio's progress over the three- to five-year time-frame.

Has Sebi directed AMC’s to pay out less dividend in the dividend option of mutual funds? I am a retired person; should I switch my investments to growth?

-K Kannan

For retirees, the dividend option of mutual funds is a boon, as it provides regular tax-free income. That Sebi has directed mutual funds to calculate dividends from realised gains and not at pre-defined times each year is correct. It will definitely reduce the dividend payout. The troubles do not end here; once the direct tax code (DTC) comes into effect from April 1, 2012, you will not only receive less dividend, but it will also attract a five per cent tax. To counter this development, it is advisable for you to move to the growth option and redeem your holding units to meet your income needs. As these will be long-term capital gains, you would at least not pay tax on the gains. However, make sure you are not redeeming too much too soon, eroding your capital.

I have been investing in monthly SIPs of a few funds for the past three years. Two months earlier, I stopped these SIPs. If I now redeem all units or switch to another fund, am I liable for taxes?

-Bhalachandra Wagh

Investing through SIPs is a disciplined approach to regular investing. However, every SIP investment is treated as fresh investment. So, holding of each SIP unit will be treated differently and depending on the type of fund that you have investments in, long-term or short-term capital gains tax (LTCG/STCG) will apply.

LTCG on holdings of over one year from sale of equity-oriented mutual funds are tax-free. However, LTCG tax on debt-based funds are taxable at 20 per cent on indexed capital gains or at 10 per cent on profit, whichever is lower. If the SIP holdings are redeemed before completion of one year, then equity funds attract a 15 per cent STCG tax rate, excluding surcharge and cess. In case of debt funds, the STCG are added to your income and taxed according to the tax slab you fall under.

It is generally said that when interest rates are moving up, it is better to invest in short-term debt funds. Is the time right to invest in these?

-Rakesh Raman

Timing the market is neither an art nor science. It is, at best, a guess which may not click. Buying any fund should be driven by the need for it in your portfolio and not based on market sentiments. You can definitely apply the concept of buy (when the interest rates are at peak) and sell (when the interest rates bottom out) by timing the interest rates, only if you have the expertise and can read the interest rate movements and scenario well in time.

Value Research