In an SIP, the investment tenure in a fund begins each time units are bought and not from the date of purchase of the first SIP. How do I redeem to save on the long-term capital gains tax?
-Poonam Shinde
There is no restriction on redemption of units bought through an SIP. The only exception is equity-linked savings scheme (ELSS), which has a 3-year, lock-in period from the date of investment. Among other charges, a mutual fund can charge an exit load for early redemption on the SIP investment. For calculating capital gains and load, a principle call FIFO (First-In-First-Out) is used. This means when you sell your units, you sell your oldest units first.
Currently, my investments in different mutual fund schemes do not exceed Rs 50,000. If I am investing through a systematic investment plan (SIP) and the amount at one go is less than Rs 50,000, do I need a know-your-customer (KYC) certificate?
-Asim Kumar
You can make the investment without KYC. The Securities and Exchange Board of India's (Sebi) guidelines state that all investors who want to make a one-time investment exceeding Rs 50,000 in a mutual fund scheme will be required to complete the KYC. This would also apply to the SIP investment, but only if each SIP instalment is greater than or equal to Rs 50,000. It is the amount invested at a single time that is taken up for consideration rather than the total amount invested over a period.
Is it true that there is a high risk of default in Fixed Maturity Plans (FMPs)? I heard that to offer high returns, many FMPs are putting money in real estate papers and are buying instruments that have different maturity dates than the FMP.
-Himanshu Nayak
FMPs are attractive investment instruments that offer predictable return and are tax-efficient. However, they carry a set of risks, which is listed in your question. FMPs are exposed to the credit risk. A company that has issued bonds to FMPs can default, impacting the returns. FMPs also invest in bonds of real estate companies. But this is a very small part of their overall portfolio.
So far, there has been no reported case of default. Normally, FMPs do not buy bonds or debentures with longer maturity than the term of the fund. There could be some exceptions. FMPs can buy bond or debenture of a company that has a strong credit quality and selling this paper is easy. These schemes may not be able to deliver the indicated returns if many investors pull out of the fund ahead of its term. Investors should be aware of these risks and take a call.
I am investing in DSPML World Gold Fund through an SIP. Its net asset value (NAV) has drastically reduced by 50 per cent in the last five months. Should I continue my investments?
-Manoj Kumar Sant
Being a thematic fund, DSPML World Gold Fund could be a risky bet. The fund has exposure to companies in gold mining and related business through overseas funds. The fund had a good run initially. From August 2007 to March 2008, it delivered a 63 per cent return. It has lost all its gains in the recent global market meltdown and is lingering in the negative zone. As on October 20, 2008, its NAV (Rs 8.01) was below its face value. If it is the only fund you own, then it would be better to replace it with a diversified equity or a balanced fund. Theme-based funds should not be a core holding in one’s portfolio. If this fund is a small part of your total investment, you can continue it for diversification of your fund portfolio. I am saving around Rs 8,000 every month for my marriage. I am planning to wed two years later and have targeted an amount of Rs 1.2 lakh. Does it make sense to invest in an arbitrage fund for my short-term goal.
-Abhijit J
Arbitrage funds aim to capitalise on the opportunities arising from the mispricing between the spot and the futures/options market. These funds give similar returns as debt funds, but the tax treatment is at par with equity funds. In the last six months, the returns of arbitrage funds have not been as impressive as their past performance. For short-term, consider investing in bank recurring deposit. Currently, some banks are offering around 10 per cent annual returns.
I have invested in Lotus India Agile Fund (Rs 15,000) and JP Morgan Smaller Companies Fund (Rs 20,000) in January 2008. But after the markets crashed, these funds are not performing as per expectations. Should I add some amount (Rs 15,000) in these MFs to average the investments or will it be better to invest in other good performing funds for better returns?
-Suhas Isore
Since both your funds are relatively new, it’s too early to comment on their future performance, though in the declining market, it has not been very impressive as they have fallen more than their category (equity diversified) between January and August 2008.
While Lotus India Agile Fund is a large-cap-oriented fund, JP Morgan Smaller Companies Fund invests in small companies. Funds that invest in smaller companies tend to perform better than large-cap funds in a rising market, but also have large downside risk in a bearish market.
You may hold on to these funds, but further investments would not be advisable in them. You may also consider investing the additional amount in a top-rated diversified equity fund like Birla Sun Life Frontline Equity, HSBC Equity and Kotak 30.
