I want to invest Rs 4,000 every month in two equity diversified schemes for a 5-year time horizon. I have selected DSPBR Top 100 Equity and Reliance Growth. Have I made the correct choice?
-Bhavesh Anand
To select a mutual fund, the key is to look at past performance and consistency. Although the past is no guarantee of future performance, it is a useful way of assessing how well, or badly, a fund has performed in comparison to its mandate and peer group.
Your choices are good. But note that Reliance Growth is a mid-cap fund and such funds are volatile. The decision to invest or not in this fund must be in conjunction with your overall portfolio. Mid-cap funds should form a small part of the overall portfolio. And in such turbulent times, an investor should be in large-cap funds.
If you want to change the choice of fund, choose four-star or five-star rated funds with a proven track record. Some equity diversified funds you can look at are Birla Sun Life Frontline Equity, DSPBR Top 100 Equity, HSBC Equity and HDFC Top 200.
Could you suggest some tax-saving mutual funds, in which I can invest for the long term?
-Sharad Goel
You may look at are Magnum Taxgain, Sundaram BNP Paribas Taxsaver and Franklin India Taxshield.
What are gilt funds and how are they affected by interest rate movements? Are they as safe as fixed deposits (FD)? Is there a guarantee of principal protection like in bank FDs?
-Anji
Gilt funds are mutual funds that predominantly invest in government securities (G-Secs). Let us first understand the relationship between the price of G-Sec and the interest rates. The two are inversely related. A fall in interest rates leads to a rise in G-Sec prices and vice-versa.
In recent times, the Reserve Bank of India has undertaken a series of policy rate cuts to infuse liquidity into the financial system. The fall in interest rates resulted in the price appreciation of G-Secs. Hence, gilt funds have benefited.
Regarding the safety of gilt funds, these are neither risk-free nor do they give an assured return like bank FDs. Instead, they are very volatile, as they are very sensitive to policy rate changes.
The performance of gilt funds depends on the yield of G-Secs. The yield of gilts consists of lot of crest and troughs. So, your principal is not protected when you invest in a gilt fund. They can give negative returns as well.
I have short-term capital gains of around Rs 5,000 by trading in Gold Exchange-Traded Funds (ETFs). How will I be taxed?
-Roseita D’Souza
For income tax purposes, gold ETFs are treated as debt funds. On redemption, the units of gold ETFs held for more than a year qualify for a long-term capital gains tax of 11.33 per cent without indexation, or 22.66 per cent with indexation. If the period of holding is less than a year, the short-term capital gains will be clubbed with the income of the individual investor. It will be taxed as per the applicable tax-slab of the investor.
In your case, the short-term capital gain of Rs 5,000 from gold ETFs will be added to your income and taxed as per your tax bracket.
Can you explain the capital gains tax on debt, equity and other funds? Please specify the tax for holding period of more and less than one year.
-Mohit Verma
When an investor sells a capital asset and makes a profit, it is termed as capital gains. When he makes a loss, it is a capital loss. Depending on the period of holding of the capital asset, the gains are classified in two parts for taxation purpose--long-term capital gains and short-term capital gains. The tax levied on this profit is called capital gains tax.
In case of mutual funds, long-term capital gains tax (LTCG) is applicable if you sell your units after 12 months of holding. But, if you sell them within a year of buying, then short-term capital gains (STCG) tax is levied. This rule holds true for debt as well as equity mutual funds.
For equity funds, the tax treatment is the same for individual as well as corporate investors. The LTCG of equity funds are exempted from tax. The STCG are taxed at 16.99 per cent. This includes the capital gains tax rate as well as the surcharge and cess (15%+10%+3%). Mutual funds also levy a securities transaction tax (STT) of 0.25 per cent on redemption or on switching from one equity fund to another.
For debt funds, LTCG are identical for individual and corporate investors and are taxed at 11.33 per cent without indexation or 22.66 per cent with indexation. Indexation is the process by which inflation is taken into account when doing the tax calculation. This is excellent because it reduces the amount of capital gains and consequently the amount you end up paying as tax.
Where STCG of debt funds is concerned, the tax treatment is different for an individual and for corporate investors. For individual investors, capital gain is added to his income and is taxed depending on the income slab of the investor. For corporate investors, the rate of tax is 33.99 per cent, which includes the tax rate, surcharge and cess. STT is not applicable for debt funds.
Value Research
