The type of taxes and their rates applicable on the profits earned on investments in mutual funds depends on the type of mutual fund scheme.
An equity-oriented mutual fund scheme is one where at least 65% of the assets are invested in equity shares of companies.
A debt-oriented mutual fund scheme is one which invests primarily in debt and money market instruments and the equity exposure is less than 65 %. Examples of debt-oriented mutual funds are money market mutual funds, liquid schemes, bond funds and income funds.
Mr. Rao recently invested Rs 2,00,000/- in the dividend option of a equity scheme of a leading mutual fund house on the suggestion of his financial advisor. Some days back, he got an sms from the mutual fund informing him that a 60% dividend had been declared on the mutual fund scheme and would be credited into his a/c in a few days. Mr. Rao was very happy to hear this and was glad to have made the right investment decision and receive a huge tax free dividend.
A few days later the dividend was credited to his a/c. He was shocked to see the amount. It was around Rs. 12,000/- which was hardly 6 % of his investment amount. He was unable to understand how a 60 % dividend declared could be such a small sum.
Birla Sun life Mutual Fund has launched a recurring savings/systematic investment plan which also offers an optional free life insurance cover to the investors, the amount of which is determined by their regular installment amount.
About the scheme:
One of the common strategies used by insurance agents while trying to sell a unit linked insurance plan(ULIP) is to draw a comparison between the ULIP and mutual funds and show that the ULIP would provide superior returns to mutual funds over the long term and plus an insurance cover.
Comparing a ULIP with a mutual fund would be like comparing apples and oranges as they have different investment objectives, product features, investment structure, expense structures and fund management methods.
In addition to choosing the suitable mutual fund scheme for oneself, it is also important to choose the right plan. A mutual fund offers the investors various plans which differ on the basis of how the investment is structured, profit is distributed/invested and have different tax implications. Continue reading →
Most of the personal finance investment discussions are centered around what is the right time to enter the mutual fund and choosing the right type of fund for you (Pl see earlier article “Mutual fund is not a one size fits all product”). Once the investment is done, there is seldom any talk of when to exit from the fund. If the investment is doing well, we are reluctant to exit in anticipation of a further rise and if it falls below the principal value, we do not want to book a loss and hence we keep waiting for a recovery.
Just like it is important not to churn your investment very often to avoid lower yields, high charges and tax liabilities, it is also important not to hold on to investments for too long.
You should think of exiting from a mutual fund when –
- The target is reached – Once the fund has made the target profit set by you while investing, it is time to move out of it.
- The fund isn’t performing as per expectations – If the fund is not performing well relative to others in the same category.
- Change in your personal risk profile – Different stages in a person’s life (just started working, married with children, retired etc.), or changes in his financial profile alters his basic risk profile. Accordingly necessary changes should be made in his mutual fund portfolio.
- Change in the basic attribute of the fund – Often AMCs merge Mutual Funds, change the structure or investment style which could impact the fund performance and your investment objective may not be met.
- Some negative news of the fund house – If your mutual fund house is in news for wrong reasons like fraud, not adhering to investment norms etc, it is time to say goodbye.
- Emergence of new and better investment opportunities – The market for financial products is constantly changing with new financial products being launched regularly. A new alternate investment avenue with superior features or lower expenses could be a reason for switching the fund.
If you are from a non-finance background or do not have a good understanding of the financial markets, please consult your financial advisor before makes any such changes.