Are liquid-plus funds as safe as bank savings accounts?
-K. K. Subramanian
Liquid-plus funds are not as safe as bank savings accounts. In case of liquid plus funds, neither the principal is protected nor there is a fixed return. These are short-term debt funds that invest their corpus in treasury bills, money market instruments, certificate of deposits, commercial papers, corporate bonds and debentures. These instruments are traded in the market and hence, their prices fluctuate. This makes them risky. But they offer higher returns than a bank savings account.
I invested in ICICI Prudential’s gilt fund, since it was doing rather well. Recently, the fund’s returns turned negative. Will it be a good idea if I switch from this gilt fund and invest in an income fund? Please consider the exit load as well.
-Rajesh Gandhi
In the mutual fund industry, past performance is not a guarantee that the fund will continue to deliver in the future too. The fixed income market is not operating normally and is very volatile. But the outlook for ICICI Prudential's gilt fund remains good. But it will continue to remain volatile for some more time.
An investor should always be prepared for volatility as the underlying assets of these funds are highly volatile because of interest rate movements.
However, an income fund will be a better way to take advantage of the softening interest rates. This category has the flexibility to switch between corporate bonds and gilts. As a result, not only would they benefit from benign interest rates, but also gain from the shrinking spread between corporate bonds and gilts.
What is the income tax on a systematic withdrawal plan (SWP) of debt funds? Is it worth investing around Rs 6 lakh in a debt fund and then starting a SWP of Rs 20,000 per month? I belong to the highest tax slab.
-Purushottam Pandit
In an SWP, withdrawals will be taxed according to the holding period. If the investment was made in a lumpsum and then you go for an SWP, then the period of holding will be calculated from the date of investment of the lumpsum amount.In case of an SIP, the first-in first-out principle will apply.
If the period of holding is less than a year, then it will qualify for short-term capital gain tax. If it exceeds one year, you have to pay long-term capital gain tax. For a debt fund, long-term capital gain tax is 11.33 per cent without indexation and 22.66 per cent with indexation. In case of short-term capital gain tax, the returns will be added to your income and taxed as per the applicable tax slab.
If you invest Rs 6 lakh (lumpsum) in a debt fund and then start an SWP of Rs 20,000 per month, you will have to pay a short-term capital gains tax on the profits made within one year. It will be added to your income and taxed at 30 per cent, since you are in the highest tax bracket. The amount withdrawn through SWP after one year will qualify for long-term capital gains tax. If your objective is to save taxes, then you must start the SWP after a holding period of one year. The short-term capital gains tax will be higher in your case as compared to long-term capital gains tax.
I had invested in Birla Sun Life Income (growth option) early January. However, I find that this month my NAV has eroded by 8 per cent. Can you explain this fall in returns?
-Nagu P
The fund rating is a measure of a fund’s risk-adjusted return. This is done on a scale of 1-star to 5-stars, with the 5-star rating being the best. The rating summarises how a fund has performed historically, relative to the other funds in its category, for the risks it has taken. So rating measures the past performance. It is not necessary that the fund will continue to perform exactly the way it has performed in the past. Rankings should not be the sole basis of selecting a fund.
Birla Sun Life Income fund has around 50 per cent of its assets in government securities (G-Sec), which are very volatile. The price of government bonds are inversely related to their yields. Recently, the yield of government bonds has gone up, which has resulted in a fall in their prices. That’s why the returns of the fund have come down.
The holding period of your fund has been just over a month. You must not judge a fund by its performance in such a short time. The fund you hold is a good fund. Its historical performance has been impressive. So you can hold the fund and not bother about short-term gyrations.
Are index funds or exchange-traded funds (ETFs) eligible for deduction under section 80C?
-Rajneesh Tyagi
Under section 80C of the Income Tax Act, only the investment in equity- linked savings scheme are eligible for deduction.
