Mutual Fund Investment: Keep the tax factor in mind
Premium- Mutual Fund investors should keep in mind tax components associated with the investment both during investing and during redemption.
Mutual Fund investments have become a hot entity among young investors who capitalise the tool as long term saving option with comparatively good returns clubbed with tax saving benefits. They don't mind the risk factor linked to the handsome returns promised by mutual funds if it comes with tax saving tools. But should you be considering the tax saving mutual funds or Equity Linked Mutual Funds (ELSS) as an investment option or keep the two separate?
Experts believe, taxes are only secondary and should not be the base criterion while you are in the market shopping for a good fund for your savings. The vital factor to pick a mutual fund is whether the category of fund is suitable to your financial goals.
ELSS or tax-saving mutual funds investment is a beneficial mode to save tax under 80C of the Income Tax Act. Over the years investment in ELSS has generated an annualised return of over 14 per cent in the last 10 years and enables you to show tax rebate for investment of up to ₹1.5 lakh. These are pure equity funds and quite similar to flexi-cap funds in their investment mandate. In ELSS, a fund manager has the flexibility to invest across companies of different sizes and sectors in any proportion. But the benefits from ELSS come with a rider.
Investment in ELSS has a mandatory lock-in period of three years. So even if you are doing a monthly systematic investment plan (SIP) or a lump sum investment for tax saving purposes, you will not be able to redeem the invested amount for the next 3 years. For example, if you had invested ₹5,000 per month through an SIP in May 2019, the three years for the first SIP instalment will complete in May 2022, for the second in June 2022, for the third in July 2022 and so on. So, if you don't want to forget about the money you save every year and go back to fetch the returns only after 8-10 years you will be a happy investor but if you are looking at redeeming the invested amount in phases to fulfil short-term goals, then ELSS is not what you should consider. In such a scenario you can opt for a flexi-cap fund that would be free to redeem your money in case of any emergency or if something goes horribly wrong with the fund.
You must also consider paying tax on your investment earnings while deciding on your mutual fund strategy. Earlier if you redeemed your mutual funds after a year, it would not have attracted any taxes, whereas now you may have to shell out 10 per cent tax on any gains beyond 1 lakh. So to avoid tax and save yourself from market volatility, long term equity mutual funds are the best bet for you.
However, for a medium-term horizon you can go for a mix of equity and fixed income where the investment ratio would depend on several factors - whether the goal is negotiable, how much risk are you ready to take and so on. If the goal is negotiable, you can have higher allocation to equities, otherwise have a larger share of fixed income. Capital Gains from a non-equity fund after three years are taxed at 20 per cent after providing the benefit of indexation. If they are sold within three years, the gains are added to your income and taxed as per the applicable slab.
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