Moneycontrol
Last Updated : Aug 26, 2014 03:28 PM IST | Source: Moneycontrol.com

Ready reckoner for those who want to invest in debt MFs

The Union Budget has increased the period of holding for debt funds from the existing 12 months to 36 months, in order to classify the fund as long-term for purposes of computation of capital gains tax.


Juzer Gabajiwala
Ventura Securities


The Union Budget has increased the period of holding for debt funds from the existing 12 months to 36 months, in order to classify the fund as long-term for purposes of computation of capital gains tax. Moreover, the rate of tax on debt funds will be 20% (with indexation) while the previous concessional rate of 10% has been scrapped.
This, according to the FM, has been done predominantly to remove the tax arbitrage between debt funds and fixed deposits.


We would like to provide a Ready Reckoner for all our investors who have invested or who wish to make future investments in Debt Mutual Funds.

Tenure: 1 to 6 Months
Investment Option Category: Liquid Funds / Ultra Short Term Plans (i.e. Liquid Plus funds)


Alternate Investments: Savings Bank A/c, Short Term Bank Deposits


Strategy: No changes in this strategy as funds were always parked with a short-term objective.  Still an attractive option to park funds. No need to compare Post-tax or Pre-tax returns as returns will still be higher than savings account. Only change is that effective Dividend Distribution Tax increased from 22.07% to 28.325%. Investors in the 10% & 20% tax bracket should opt for the GROWTH Option and not dividend option. For investors in the 30% plus tax bracket, it does not make a difference but it would still be better to choose for the GROWTH Option as short-term capital gains can be offset against short-term capital losses (if any).

Tenure: 6 to 12 Months
Investment Option Category: Income Funds (Short Term)


Alternate Investments: 1 Year Bank FDs & Corporate FDs


Strategy: This category of funds is worst hit by the proposal in the Budget. For all practical purposes, this category will not be tax-efficient now. Investors in the 30% tax bracket could now look at Arbitrage funds; and should choose the DIVIDEND option. Investors in the 10% & 20% tax bracket would be better off by investing in Corporate FDs.


Tenure: 12 to 36 Months
1. Investment Option Category: Income Funds (Long Term) and GILT Funds


Alternate Investments: Bank FDs/ Corporate FDs/ Bonds/ NCDs


Strategy: This category too loses its charm for all practical purposes as it would not be tax-efficient. However, it will be a viable option only for investors desirous of taking a call on the interest rates going downwards. Arbitrage funds can be an attractive option for investors. Since this category is subject to equity taxation norms, i.e., long term tax (above 12months) will be NIL.

2. Investment Option Category: Hybrid Funds – Debt Oriented (Monthly Income Plans)
Alternate Investments: This category does not have any alternative investment Option
Strategy: This category offers an exposure of between 0% and 25% to equity. An investor can select this option only if he expects equity markets to be buoyant. This option will be efficient when interest rates go down and the equity market goes up.

Tenure:  36 Months & Above
1. Investment Option Category: Income Funds (Long Term) and GILT Funds


Alternate Investments: Bank FDs/ Corporate FDs/ Bonds/ NCDs

Strategy: This category of funds, if held for 36 months and above, still continues to be an effective option post budget. Investors should opt for the GROWTH Option and not dividend option. Even if any investor is looking at receiving a regular income, he should opt for Growth with SWP facility.

2. Investment Option Category: Hybrid Funds – Debt Oriented (Monthly Income Plans)
Alternate Investments: This category does not have any alternative investment Option
Strategy: This category offers an exposure to equity that ranges from 0% to 25%. An investor can select this option only if he expects equity markets to be buoyant. This option will be efficient when interest rates go down and the equity market goes up. Investors should opt for GROWTH Option and not dividend option. Even if an investor is looking at receiving regular income, he should opt for Growth with SWP facility.

Disclaimer: This document is solely for private/internal circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing. Investors should make independent judgment with regard suitability, profitability, and fitness of any product or service offered herein above. Ventura Securities Limited does not represent, warrant and/or guarantee that the integrity of this message has been maintained or that the communication is free of errors, virus, interception or interference.


Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.
First Published on Aug 26, 2014 03:28 pm
Loading...
Sections
Follow us on
Available On
PCI DSS Compliant