You need to select the best suited option depending upon your age, investment horizon, risk appetite and enjoy the tax free income.
Tax Treatment applicable from Financial Year 2018-19
For Equity and Equity oriented funds
All Short Term Capital Gains will be taxed at a special rate @15%. All Long term Capital Gains will be taxed @10% over and above Rs 1 Lac.
For Debt and Debt oriented funds
Debt Fund held for less than 3 years is eligible for Short Term Capital Gain will be added to the annual Income and taxed as per the IT Slab of the Investor.
Debt Fund held for more than 3 years come under long term capital gain and will be taxed @20% on gain after indexed cost.
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All dividends upto Rs 10 Lacs are exempt from DDT (Dividend Distribution Tax). Dividends above 10 Lacs will attract DDT of 10%.
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Debt Mutual Funds can invest in securities with different credit ratings, as per the schemes investment strategy. ... Higher the rating, high is the creditworthiness of the borrower, although the returns may be lower as compared to a bond issued by an entity that has a lower rating.
With interest rates on savings bank deposits reduced by 50 basis points to 3.5 per cent, many financial planners are advising investors to use liquid funds ultra short-term funds as a substitute to earn higher returns.
Liquid funds are debt mutual funds that invest your money in very short-term market instruments such as treasury bills, government securities and call money.
These funds can in vest in instruments up to a maturity of 91 days liquid funds are used by investors to park their money for short periods of time typically 1 day to 3 months.
The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.
Most experts believe you should have enough money in your emergency fund to cover at least 6 to 8 months' worth of living expenses. What does that look like? Start by estimating your costs for essential expenses, such as: Housing, Food, Health care (including insurance) Utilities, Transportation, Personal expenses, Debt servicing (EMIs). You don't need to include expenses for anything you'd cut from your budget in the event of a job loss or major catastrophe. For example: Entertainment, Dining out, Nonessential shopping, Vacations, Savings for a second home or other expenses. Decide if you need to save more. Putting aside 6 to 8 months' worth of expenses is a good rule of thumb, but sometimes it's not enough. If you're able, you might want to think about expanding your emergency savings.
These mutual funds have no lock-in period.
Withdrawals from liquid funds are processed within 24 hours on business days. The cut-off time on withdrawal is generally 2 p.m. on business days. It means if you place a redemption request by 2 p.m. on a business day, then the funds will be credited to your bank account on the next business day by 10 a.m.
Liquid funds have the lowest interest rate risk among debt funds as they primarily invest in fixed income securities with short maturity.
Liquid funds have no entry load and exit loads.
There are various mutual fund schemes which gives you better than saving account returns with the liquidity of savings account and even can be used to pay to network hospitals or can be used to pay directly to the merchant having the swipe machine.
There are 5 types of equity funds which can be chosen for long term wealth creation. However, one should evaluate the basic risk involved in each of these fund categories.
Equity funds will certainly have volatility component within. However, a smart investor understands that, the Taj Mahal cannot be built in a day, that means for better wealth creation from an equity fund one should keep patience and give enough time to the fund. Generally it is advisable to stay for a minimum of 3 years in any equity fund for better result.
You can also reduce risk in equity by choosing the hybrid route – generally called as balanced funds. These are great funds for investors starting out as they get an automatic allocation to debt and equity by investing in one fund. Or, if an investor already has an equity fund and wants a meagre exposure to debt in his portfolio, he could opt for a balanced fund. The aim of such funds is not to shoot out the lights when the equity market is on a roll, but neither should it crumble like a pack of cards when the market falls.
If the investment period in equity mutual funds scheme is more than one year the capital gain is exempted from tax liabilities. Government of India also provides tax rebate for equity linked saving schemes (ELSS) u/s 80C of Income Tax Act 1961. You can invest into ELSS and deduct upto Rs. 1,50,000/- from your taxable income to effectively reduce your tax liability.
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