Section I: Income Tax and Your Investments

• Ques: Who should Invest in Mutual Funds
• Ans: Key points:
  • Those who want to invest in equity market but do not feel competent to understand it should invest in mutual funds.
  • Mutual funds are being managed by professionals who select the investment on the basis of researched information which is the basis of finding the right opportunities.
  • Mutual funds offer diversification hence minimizes the risk of any sector specific while it helps in maximizing returns.
  • One who wants to invest a small amount regularly for long period without much paper work.
  • If you are new in mutual fund, you can start investing in ETFs exchange traded funds. Funds are invested in the same ratio as they are in the index thereby offers diversification. The charges and risk are comparatively low in these funds.
  • One who needs tax free return from the investment.
  • One who is looking for investment for long term goals like child education or retirement but high liquidity is required. Daily NAV is declared and one can sell units to generate cash /fund within 3 days.
  • One who has already filled the 80C investments of Rs. 1 lakh, otherwise ELSS is better choice. Or ULIP if one needs insurance too.
  • One who need flexibility in regular investment, or withdrawal through SIP/SWP/STP.
  • SIP - Systematic investment plan is for one who wants to invest fix amount at fixed interval for example Rs. 1000/ pm for 10 years. This is the most popular and safe way of investing in equity market now a days.
  • SWP - Systematic withdrawal plan is for those who want to invest in lump sum and withdraw for monthly expenses / requirements. For example after retirement monthly expense requirements can be met through SWP.
  • STP - Systematic transfer plan is for one who has received lump sum amount and want to invest in equity market within some short period for long term goal.
  • Do not invest in NFO because of Rs. 10 NAV. There are high charges payable and the past performance of the fund should be compared with peers along with the objects of mutual fund scheme.
  • The performance of all the mutual schemes can be tracked down from www.amfiindia.com. The NAV is also available for all schemes.
  • Mutual fund is for those who want their financial future in their own hands and to be with time.
  • In case you switch over from growth option to dividend option the tax liability arises there. So do not switch over in first year to avoid short term capital gain tax.
  • Short term capital gain from equity oriented funds on which STT has been paid are charged @15% and other than equity fund (Debt fund) STCG are taxable at normal rates.
  • Long term capital gains from mutual fund units sale/redemption i.e. sold after 12 months, are tax free if in equity oriented fund (minimum 65% invested in equity). In case of non equity oriented funds, 10% tax is payable without indexation or 20% tax is payable with indexation, whichever is lower. Surcharge @10% also payable if income exceed Rs. 10,00,000.
  • No TDS is payable for residents Indians.