How to invest in equity mutual funds without risking your capital

Nikhil Walavalkar Moneycontrol News

Search for high returns make individuals consider investments in stocks. But they bring in ‘high risk’ to the table. Many senior citizens and low risk investors are looking to invest in stocks and equity mutual funds for high returns given low returns offered by traditional fixed income options such as bonds and fixed deposits. But the thought of losing one’s capital is a big deterrent. Here is how you can invest in equity funds without losing your capital.

You are just going to use an existing facility offered by many mutual fund houses – dividend transfer plan. The facility allows you to invest the dividends declared by one mutual fund scheme into another scheme. What you just have to do is to invest your money in an arbitrage fund’s dividend option and opt for a dividend transfer plan. The transferee scheme should be a diversified equity fund. “This arrangement of transferring dividends to an equity mutual fund scheme allows you to invest in equity mutual funds without risking your capital. Even if stock markets tumble your capital remains safe. You may take a hit only on the dividends invested in equity mutual fund,” says Suresh Sadagopan, founder of Mumbai based Ladder7 Financial Advisories.

Let’s us look into the details of this arrangement to understand how it works in your favour.

For the beginners, arbitrage fund manager buys a share in cash market and simultaneously sells equal number of shares in futures. The fund manager does not take any risk pertaining to stock markets. The aim is to lock in the price deferential to generate returns for the investor without risking capital. The returns generated are in line with money market returns. Though the scheme generates returns like a bond fund, the scheme is treated as an equity mutual fund for the purpose of taxation.
“Arbitrage funds make good source scheme for dividend transfer plan as they distribute most of their profits by way of dividends as there is no tax on dividend,” says Abhinav Angirish, managing director of Mumbai based Investonline.in, an online mutual fund distribution entity.