How to maximize Mutual Fund gains

If the investor is asked about choice for a simple and most adored investment instrument, the unanimous answer would be �Mutual Fund�. Though there are various plans and thoughts on how to maximize the gain from MF investment, here we focus more on the tax related aspects to enhance the return.

Maximizing the Gain 

The investor employs Mutual Fund as an investment instrument without thinking about its tax connections on their expected return. If the tax implication is sufficiently understood, then it can step-up the return notably, as choosing a specific option (Dividend/Growth) for mutual fund could make a considerable difference to the investor�s post-tax return.

Some investors have a delusion that income passed on by the MF is not liable to tax, but in reality, such incomes are taxed at the hands of MFs before coming to the hand of the investor. It is therefore, fundamental to visualize the income distribution tax versus the capital gain tax. This will enable the investor to decide judiciously between a dividend and growth plan

Let�s look at different funds based on the above discussion:

Equity Oriented Fund

No income distribution tax is imposed for equity oriented funds. In equity oriented funds, 65 percent of corpus are equity shares and there is no capital gain tax levied in such funds. When an equity oriented fund is redeemed, a security transaction tax (STT) is imposed on the redemption value.

Check out � Performance of Equity Oriented Funds

Apart from STT it is also liable to attract short term capital gains tax at the rate of 16.22%, if paid off in a short period. In case of the dividend option as well, the STT would be assigned but the redeemed value would be lower to a level equivalent to the distributed dividend. Hence under growth option the differential STT is paid on the value of appreciation, and it is matter of .25 Percent STT, whereas it�s not imposed on the dividend option.

Hence, for equity oriented fund, the dividend option is a better choice when compared to the growth option even when the holding is for a long term.

Liquid or money-market fund

The income distribution tax on liquid or money-market fund is 23.03%. The investor is taxed conforming to the slab rate of 10.3%, 20.6% or 30.9% as applicable on them. Since it is a short-term investment fund, there are fewer chances of a long-term capital gain, gain, but if applicable, then it is taxed at 20.6% on gain post indexation or 10.3% on gain without indexation.  Hence, the investors are advised to choose the growth option if they are classified under the lower tax slab of 10.3 or 20.6%, however, if he or she is sorted under a higher slab of 30.9%, then the dividend option could be a better option.

Check out � Performance of Liquid or Money market funds

Other Funds

For funds other than equity-oriented funds the rate of dividend distribution tax is 13.52 percent; it includes debt funds and balanced funds. In this case also the tax applicability is same; the short-term capital gain tax for individual investors is according to the slab rate in which it falls, and the long-term capital gain is 20.6 percent post indexation. If the investor aims to redeem the units before 12 months, then it is advised to opt for a growth options for investors falling under 10.3 percent slab, whereas dividend option is advised for investors falling under the higher slab of 20.6 percent or 30.9 percent. If the units are supposed to be invested for more than 12 months, then the gain would be dealt as long-term gain. The 20.6 percent of capital gain tax in this case seems higher, but the effective rate is lower due to indexation benefit. The productive rate calculated without indexation, cannot surpass 10.3 percent of capital gain tax calculated without applying indexation. Hence, for a long-term investor, the growth option is the more advantageous then dividend option for this type of funds. 

Check out - Performance of Debt Funds

Thus, to finish we can say that an investor should always glance at the type of scheme he/she is investing, the tax slab under which he falls into, period for which he is happy to invest, and accordingly, he should pick out the dividend or growth option which benefits him more. It will help an investor to maximize the gain while investing in mutual funds. If the investor is not curious in regular return through dividend option or do not want the botheration of reinvesting the income distribution realized under growth option, he/she can prefer for selecting a specific option which may not be very tax efficient. The final goal of a mutual fund investor should be to maximize the post tax-return and keep desirable liquidity.
 
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