Even now, in the post-COVID world, as the financial markets are regaining their lost lustre, mutual funds dominate in the investment segment as more and more investors divert their funds towards different types of mutual fund schemes.
The next year is around the corner, and, if you are looking for the best mutual funds to invest in 2021 look no further.
Here is a compilation of some of the best mutual funds in 2021 for your investment needs under different categories –
Let’s consider the equity mutual fund category first, which is the most popular category among investors. Equity mutual funds have a high-risk profile which they compensate with the potential of high returns.
Moreover, ELSS schemes provide tax benefits to investors and are, therefore, highly favoured.
So, let’s have a look at the different types of equity mutual funds and the best funds in each category –
Large Cap Funds
Large cap funds are those that invest in the top 100 companies of the stock market.
These funds are better placed to weather out volatile markets as the underlying assets belong to established companies that can withstand a bearish phase.
The best performing mutual funds under this category are as follows –
Equity Linked Saving Schemes are tax-saving mutual fund schemes which allow a deduction on your investments under Section 80C up to a maximum of Rs.1.5 lakhs. The scheme has a lock-in period of 3 years and offers good returns on investment.
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2) Debt Mutual Funds
Contrary to equity mutual funds, debt mutual funds invest in debt instruments, i.e. instruments that have a fixed rate of return on investment. That is why debt funds do not face volatility risks.
However, these funds are prone to credit risk and interest rate risk and so the returns from debt funds are not guaranteed. Debt mutual funds come in different categories, mainly based on the average maturity period of their underlying assets.
So, let’s have a look at which mutual funds to invest in 2021 under the debt category –
If you are planning to invest for a short period of time, liquid mutual funds are ideal.
They promise liquidity and good returns on your surplus funds over the short period for which you park your investments.
If the market becomes volatile and you want to book your profits, you can switch to liquid funds to protect the returns generated from your investments.
You can also use these funds for temporary investments and the best funds for 2021 include the following –
Gilt funds invest in Government securities and promise the highest safety in terms of credit risk. They are, usually, long term investment avenues where the underlying assets have long maturity tenures.
The best-gilt funds to invest in 2021 include the following –
Hybrid mutual funds combine equity as well as debt instruments and give you a diversified portfolio. While the equity component of the portfolio allows better returns compared to debt funds, the debt component reduces the risk compared to pure equity funds.
Thus, if you are looking for a moderate risk-return profile, hybrid mutual funds are the best mutual funds to invest in 2021.
Hybrid funds are divided into different categories depending on their asset allocation. So, let’s have a look at the best funds in popular hybrid categories –
Aggressive Hybrid Funds
Aggressive hybrid funds are those that invest primarily in equity stocks.
At least 65% of the portfolio is allocated to equity stocks and instruments while the remaining is allocated to the debt.
These funds offer equity taxation and attractive returns and some of the best aggressive hybrid funds for 2021 include the following –
Contrary to aggressive funds, conservative hybrid funds invest primarily in debt instruments and a part of the portfolio in equity. The fund is suitable for those looking for a low-risk investment with returns better than those provided by debt funds.
The top conservative hybrid funds are as follows –
International mutual funds are ideal if you want investment exposure in international markets. These funds invest in stocks of companies listed in international stock exchanges usually by investing in international funds.
Let’s check out some of the best international funds which you can choose in 2021 –
Name of the fund (all are Regular Growth funds)
PGIM India Global Equity Opportunities Fund
Franklin India Feeder – Franklin US Opportunities Fund
As the name suggests, gold funds invest in gold instruments to offer you returns linked to the price movement of gold. Gold mutual funds are, usually, fund of funds which invest in gold ETFs to generate returns.
These are some of the best mutual funds to invest in 2021. These schemes have been picked based on their returns, consistency and performance over a long term period.
You can select one or more of these funds and build up a diversified mutual fund portfolio. When investing, however, keep in mind the tax implications of your investments. Equity funds attract equity taxation wherein-
Short term capital gains, if redeemed within 12 months, are taxed at 15%
Long term capital gains, if redeemed after 12 months, are tax-free up to Rs.1 lakh. Excess returns are taxed only at 10%
Debt funds, on the other hand, have a different taxation norm. Under such funds –
Short term capital gains, if redeemed within 36 months, are taxed at your income tax slab rate
Long term capital gains, if redeemed after 36 months, are taxed at 20% with the benefit of indexation
So, understand the taxation rules and choose the best schemes for a wealth maximizing portfolio.
(Disclaimer – The funds mentioned in the article are just our recommendations based on the returns offered by them. These recommendations do not certify any fund to be the best.) (*Returns as on December 2020)
The year 2020 passed in a blur. While it started on a positive note, the Coronavirus pandemic and the subsequent lockdowns brought about an economic slowdown in the country.Even the financial markets buckled under the global effect of the pandemic. The BSE and NSE, which were at their highest values at 42,273 and 12,362 in the first month of January, fell by 38% when the pandemic struck.The tourism, hospitality and entertainment sectors also fell by more than 40% due to lockdowns and transportation restrictions. (Source: https://www.researchsquare.com/article/rs-57471/v1.pdf). Though the markets are regaining their luster slowly, investors are confused about where to invest in 2021for maximum gains. What do you think?Though 2020 was a roller-coaster, investors are eyeing the year 2021 with hope. Investment in 2021 is primarily guided by the recovery of the financial markets after the pandemic as the industry is waking up and normalcy is being restored.Certified financial planners have also pitched in their recommendations for investments in 2021. Here are, therefore, some of the lucrative investment opportunities for 2021
For most risk-loving investors, stock trading and investing into direct equity always holds attraction. Even though the equity market suffered losses in the beginning half of 2020 on the pandemic fears, the market is correcting itself and as of the market closing time on 27th November 2020, the NSE and BSE are already at their pre-COVID levels of 12,968.95 and 44,149.72 respectively. (Source: https://www.financialexpress.com/market/stock-market/).
The boost in the stock exchange was largely due to the promise of the COVID vaccine which is almost in its ready stages. This has resulted in positive market sentiments globally and so, direct equity is once again looking good.
Moreover, history has been a witness that the stock market always bounces back even after a crash, whether it was the Harshad Mehta scam or the 2008 crash. If you invest over a long term period, direct equity is known to yield exponential returns.
Have a look at how the stock market has performed over the last 30 years –
For investors who do not like direct exposure to equity but want to invest in a diversified portfolio, mutual funds are the best solutions. Mutual funds are beneficial because –
They help you own a diversified portfolio
They come in different variants and you can choose a scheme which is relevant to your investment preference and risk appetite
ELSS funds allow you the benefit of tax saving on your investments
They are professionally managed allowing you to invest in the best stocks and instruments
You can invest in mutual fund schemes with as low as Rs.500 making them ideal for small-time investors too who want market-exposure with limited savings
Given these benefits, the mutual fund market is another avenue which you can explore. In fact, equity mutual funds are less risky compared to direct equity because of the diversification that they provide.
As far as returns are concerned, some equity funds have even outperformed the stock market in several instances. For example, Invesco India’s Growth Opportunities Fund, a large and mid-cap fund, has consistently outperformed the S & P BSE Index over the years. Have a look –
So, as far as returns are concerned, you don’t have to worry. You can also choose SIPs to invest every month in a disciplined manner and build up a substantial corpus over a long term horizon.
In fact, the mutual fund industry has become so popular, that investors are increasingly investing in the avenue to bank upon its returns. The AUM of the mutual fund industry has, therefore, consistently grown over the years –
Have you invested in the National Pension System introduced by the Government? If not, you can consider it in 2021. The reasons? Let’s see –
#1 – It helps you create an earmarked corpus for retirement
#2 – The scheme is market-linked promising inflation-adjusted returns
#3 – You get lifelong incomes in the form of pension after maturity
#4 – Investments into the scheme are tax-free under Section 80CCD (1B) up to Rs.1.5 lakhs
#5 – Additional investments, up to Rs.50, 000 can be claimed as a deduction under Section 80 CCD (1B)
Moreover, if you choose the new tax regime and if your employer contributes to the NPS scheme on your behalf, such contributions would be allowed as a deduction from your taxable income for up to 10% of your basic salary and dearness allowance under Section 80CCD (2).
Besides the market-linked returns, the additional tax benefit, both under the old tax regime and the new one, tilts the scales in favour of the NPS scheme.
You can invest in the scheme for long term capital accumulation for your retirement. On maturity, you would be allowed to withdraw up to 60% of the accumulated corpus as tax-free income which would also be tax-free in your hands.
So, if tax-saving and retirement planning is your goal, you cannot go wrong with the NPS scheme.
4) Invest in Fixed Deposits (FD)
This is the avenue for traditional investors who are averse to any kind of market risk and want secured and safe returns. Fixed deposits have been an Indian favourite for a long time and this favour is not going to end anytime soon.
Even though the interest rate on fixed-income instruments, including fixed deposits, has been slashed in recent times, fixed deposits continue to find investors for the safety that they promise.
The popularity of fixed deposit schemes, especially when volatility struck during the pandemic, increased and the trend is expected to continue in 2021.
So, if you want to be safe with your investments, you can choose fixed deposit schemes. However, do not dedicate a large portion of your investment in fixed deposit schemes.
Direct about 5% to 10% of your investment in fixed deposit schemes and the rest should be invested in other market-linked avenues. If you are choosing fixed deposits, here are some tips which you can follow –
Invest in 5-year fixed deposit schemes offered by banks and post offices. These schemes allow tax-saving on investment under Section 80C
If you want higher returns, opt for fixed deposit schemes offered by NBFCs (Non-Banking Financial Companies)
Compare the rate of fixed deposit schemes across institutions and choose the scheme which has the highest rate
Do not withdraw your deposits before the completion of the tenure. It would attract a withdrawal penalty which would reduce your interest earnings.
For risk-free returns you can also choose debt mutual funds which would help you earn inflation-adjusted returns and also earn the benefit of indexation if you redeem your funds after 3 years.
5) Invest in Unit Linked Insurance Plans (ULIP)
While the primary objective of insurance plans is to offer financial protection against premature death, Unit Linked Insurance Plans (ULIPs) serve a dual purpose. Besides allowing insurance coverage, these plans also help you create wealth, a la mutual funds.
ULIPs work on the model of mutual funds. The premium that you pay is invested into different funds of your choice. Each of these funds invests in the capital market depending of the fund’s objective.
For example, equity funds invest in equity stocks while debt funds invest in debt instruments. Depending on the growth of the underlying assets, the NAV of the fund grows and you can earn returns on your investments.
In case of death during the policy tenure, you get higher of the sum assured or the fund value and on maturity, the fund value is paid. The distinct advantages of ULIPs are as follows –
Invested premiums qualify for tax deduction under Section 80C up to Rs.1.5 lakhs
A single policy gives you the option of different types of investment funds to choose from – equity, debt and hybrid. You can invest in one or more funds as you’re your investment preference. Moreover, you can switch between the chosen funds during the policy tenure depending on the market movements. This switching is completely tax-free and almost all ULIPs allow free switches up to a specific number of times
Partial withdrawals from the fund value can be made from the 6th policy year. These withdrawals are also completely tax-free in nature
The death benefit received is completely tax-free
If the premium paid is up to 10% of the sum assured, the maturity benefit received on maturity is also completely tax-free under Section 10 (10D) of the Income Tax Act, 1961
Moreover, the charges involved under ULIPs have also reduced in recent times pitching them as a favourable product against mutual funds.
6) Invest in Real Estate
This avenue is for those investors who want to bank on the growth in the real estate market. In 2019 the real estate market was valued at Rs.12, 000 crores and it is expected to reach Rs.65. 000 crores by 2040.
In 2019, real estate investments amounted to Rs.43, 780 crores and the number is expected to increase in the coming years. (Source: https://www.ibef.org/industry/real-estate-india.aspx) The introduction of RERA, reduced interest rates on home loans and the need to own a house are the major driving factors for the growth of the real estate industry.
Housing is one of the basic needs of individuals and if you want to create an asset, you can explore the real estate market as the pandemic has led to a reduction in the prices which would be good for you.
Moreover, if you avail a home loan to invest in a home, you would be able to avail tax benefits under Sections 80C, 80EEA and 24 on the principal as well as on the interest payable on the loan.
The loan would also improve your credit score and allow you to own your dream house. So, if you have considerable funds at your disposal, opt for real estate either for owning your house or for creation of an asset.
Gold is another investment avenue which you can consider if you are looking to hedge against volatility and uncertainty. Gold holds a traditional value for Indian investors as festivities, weddings and gifting is marked with physical gold ornaments and jewellery.
From an investment point of view, however, different avenues are in vogue in recent years with the availability of gold ETFs, gold mutual funds and, the all new, digital gold.
These gold investment avenues are getting much attention because of their safety, liquidity and ease of investing in small amounts.
When it comes to returns, gold is a safe haven, especially if you are looking for long-term savings. Gold gives cyclical returns and when the markets are volatile, gold is looked upon as a safe investment avenue and its prices surge.
The very recent example is the COVID pandemic wherein the prices of gold jumped in April and May when the pandemic struck India. Moreover, over the last few years, gold has outperformed the Sensex in terms of returns. Have a look –
So, you can consider gold as an investment avenue but invest in Gold ETFs or gold mutual funds for liquidity and safety of storage rather than physical gold. You can also trade in gold through these investment avenues and book returns when the price of gold climbs.
2021 is supposed to be a breath of fresh air for the Indian economy and the financial markets as the effect of the unprecedented COVID pandemic is expected to ebb.
Use the afore-mentioned 2021 investment opportunities and make wise investment choices to grow your wealth especially if the pandemic ate into your portfolio in 2020. Plan your investment strategy for 2021.
Understand the avenues before you choose them and then pick suitable options based on your investment need, financial planning in 2021 and, most importantly, risk profile. Also monitor your portfolio regularly so that you can make changes to it as per your changing financial needs and market dynamics and keep your portfolio profitable in all seasons.
Here’s a FREE financial planning tool to help you with your investments in 2021
An investor’s life is full of choices, especially when you can diversify the investment portfolio to combat any financial risk.Out of the many investment options available these days, offshore funds have become a household name as more and more investors have been considering this fund as a suitable investment option.
Offshore funds also referred to as the international funds are different mutual fund schemes that make investments in the foreign markets.
These schemes are known to invest in equities and stocks, shares, interests, partnerships, mutual fund schemes or even fixed income securities in the international market.
An international fund is an open-ended investment fund that could have its own entity, could be a corporation, a limited partnership firm with a presence abroad or a unit trust.
These funds and the Asset Management Companies (AMCs) managing these funds, have to comply with the rules and regulations devised by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) and also with the foreign country, where they have been registered.
The operating pillar behind an offshore fund entails a custodian, a fund manager, an administrator and a prime broker.
Offshore Funds in India
India has a huge variety of offshore funds in the form of thematic, country-specific and region-specific schemes.
You can choose from varied funds that consider the US or Brazil or the European market, as a safe haven for mutual fund investments.
There are sector-specific funds too that you can select from in sectors like energy, gold, real estate and consumption.
The process to invest in this fund is fairly simple, first, you have to shortlist the fund after having done thorough research on both the Indian and the international markets.
Either you can invest online or you can submit a cheque and the application form to the selected fund house.
All these transactions are essentially done in the home currency, i.e. the Indian Rupee. There are three factors like taxation, investor demand and regulation, that influences the country to choose the fund they want to incorporate in.
If you, as an Indian investor is planning to invest in a mutual fund from the US, you have to consider your need and demand for the fund, the financial market rules and regulations that you would have to abide by and the tax implications of this investment. If it proves to be beneficial and lucrative, you would certainly decide to go ahead with this investment.
Alternatively, these funds also known as a fund of funds can be invested in the international markets either directly or have the option to be invested in other funds in those markets.
The international funds are called the ‘Fund of funds’ because it invests in companies located anywhere in the world.
Usually, the accumulated money will be in stock markets of other countries like the USA, Brazil, etc., in this fund.
Since the same fund is invested in more than one foreign market, it implies more risk exposure, thereby indicating chances of higher returns too.
The second option is called the ‘Feeder route’ and is quite prevalent these days. Funds investing in international mutual funds scheme generally of the parent company and is managed by an overseas fund manager. This is the concept of a ‘Feeder Fund.’
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Scepticism Around Offshore Funds in India
Foreign regulatory authorities manage international investment influx into the Indian markets as the Indian regulatory bodies like the RBI and the SEBI do not encourage fund managers based in India to manage foreign mutual funds.
In due course of time, asset managers who were employed by these funds in India to handle their accounts, relocated to offshore sites, as they were not authorized to handle offshore funds from India. This disrupted the growth of these funds here.
Hence few activities had to be shifted to manage the mutual fund sector internally.
One way is to manage the offshore funds from India without levying any tax on them as an Indian entity.
Alternatively, the RBI approved direct investment by overseas investors in foreign mutual funds established in India in 2015.
Some remedies were devised to ease this situation with the implementation of Section 9A of the Income Tax Act 1961 that was amended in the 2015 Finance Bill.
It states that the revenue from some offshore funds could claim tax exemption if a fund manager based out of India is handling them, to rule out double taxation.
Also, SEBI-registered foreign portfolio investors (FPIs) comply with broad-based requisites of diversification when it comes to the investors’ participation, thereby rendering it eligible as a viable investment option.
This leads to many investors considering offshore funds as an attractive investment option.
Why should you invest in offshore funds?
If you are in a dilemma whether to invest in an offshore fund or not, you can rest assured that you have taken one of the best financial decisions ever. Why so?
Though the Indian stock market has a diversified set of stocks, there are still many stocks or businesses that are not listed with the Indian stock exchanges, namely few IT giants and some cold beverage companies.
But the option of investing in the offshore funds can make you an integral part of their business growth stories as you diversify across sectors and geographies.
You get an opportunity to make investments in world-renowned brands and businesses, thereby creating an outreach into several sectors.
The global financial market is very volatile and with the current pandemic, rapid currency fluctuations are indeed worrisome.
The falling rupee (INR) has been a concern for Indian investors throughout this financial year.
Diversified investments could be a means to hedge the capital from so much uncertainty.
If you have invested in a US-based offshore fund and the rupee value depreciates against the dollar, the amount of a rupee to be exchanged for one dollar increases.
This signals a market downturn and loss of capital as more amount of the Indian currency has to be paid for every unit of the dollar.
Hence, the currency-adjusted returns yield positive gains for Indian investors if they invest in offshore funds.
Additionally, when the Indian market witnessed a bearish trend, the global markets could yield a higher return.
You as an investor can expect attractive investment returns as the countries in which they are invested, offer tax rebates to foreign investors (tax havens).
These offshore funds registered as an international corporation enable an easy establishment and administration of funds due to easier and lower regulations, coupled with few investment rules.
This causes the fund to reinvest the accumulated gains as the income is tax-free as these are considered a debt.
While their management fees and operating costs are comparatively lower, these funds protect the investors’ capital from being subjected a to high tax burden, which they would have otherwise been subjected to if they would invest in their resident country.
There are few tax norms that the fund has to adhere to while trading in the financial market in accordance with the guidelines and compliance procedures mentioned under the Income Tax Rules, 1962.
International mutual funds are usually treated as a non-equity scheme for taxation, whereby they are taxed like the general debt mutual funds.
This is a major factor while you decide to invest in the offshore fund as you being the investor does not need to pay any tax on dividends declared by their schemes.
Several other factors to be satisfied by the fund, referred as eligible investment fund (EIF), would imply that the fund should be from a country with which India has a tax treaty or from a specified territory with a certain minimum number of investors.
The fund with a corpus of around 100 crores should not be involved in any kind of business operations, directly or indirectly in India.
In addition to that, the Indian investment manager or the fund manager has to be registered with the Securities and Exchange Board of India regulations and should not have any illegal connections with the eligible investment fund.
Despite getting a few advantages, there are a few limitations that these funds have, which you would like to bear in mind before making any investment.
Any kind of stock investment is risky, in addition to which international funds also have the fear of associated currency risk.
Currency risk is associated with market volatility in the value of the other currency against the Indian currency.
Since this fund is based out of a foreign country, the terms and conditions of the fund may not be well explained to the domestic investor, which might lead to unprotected and unexpected loss of capital.
Even though you invest in the international market in Indian rupee, the fund house will take into account the risks associated with the international market exposure in various currencies, tax regulations, policies and other developments in both the resident and the foreign country.
Thus, if you are an investor planning to invest in the international stock exchange, you need to be wary of the associated currency risks as any currency fluctuation will directly impact its Net Asset Value (NAV).
Any bearish movement of the stock will adversely affect its returns.
Moreover, a huge investment is required to set up an offshore fund, which is also associated with higher risks both in the resident and foreign country.
Investments in these funds are usually done for the long term to earn higher returns, so the investor suffers from some liquidity risk too.
Measures to mitigate the offshore fund investment risk
Offshore fund investment is very risky and therefore, it’s essential to keep a few points in mind before you decide to invest in foreign stock.
First and foremost, you should do a deep dive research and analyse the current economic and political conditions of the offshore country in which the selected fund house has plans to invest in.
Most of these funds offer a competitive advantage, but few non-mainstream funds could be subject to fraudulent activities due to some lenient and relaxed regulations in the offshore locations.
Initial investment should be a smaller amount to start with to understand the market sentiments.
While selecting funds, you should choose funds that give better exposure to investments for global opportunities, rather than being a country or region-specific.
Since the financial market is flooded with different types of funds, you should select those funds which are financially stable and have a transparent trading mechanism.
The current state of India focussed Offshore Funds and Exchange Traded Funds (ETFs)
Investments into India-focussed offshore funds are considered to be long term in nature vis-à-vis investments in ETFs, which are short term in nature.
India-focussed offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.
Research by Morningstar Direct, an investment analysis platform, states that India-focussed offshore funds and exchange-traded funds (ETFs) registered a whopping figure of $1.5 bn during April to June 2020. Despite the global pandemic, the offshore funds witnessed a bigger net outflow of $14.5 bn from February 2018 to June 2020, as compared to a lesser outflow of $4.2 bn from the offshore Exchange Traded Funds.
The higher net outflow from India-centric offshore funds indicates that foreign investors with long-term investment horizons have been adopting a cautious stance towards the country due to the current economic circumstances and the global crisis due to the pandemic.
To study the future trend of these offshore funds, you need to keep a track of how India would fare in its fight against the coronavirus pandemic versus its peer countries, and how successful is the government in restoring the country’s dwindling economy on track amidst a global crisis.
Though there’s a net outflow of $1.5 bn, an upsurge in the domestic equity market in large-cap, mid-cap and small-cap, impacted the asset base of the India-focussed offshore funds and ETFs category on a positive note by Q22020.
So, if you plan to invest in offshore funds, please ensure to evaluate the pros and cons of such an investment for better returns.
Who doesn’t like maximizing their wealth with market linked returns and a professionally managed portfolio?Market-linked investments hold attraction for many investors and that is why mutual fund investments are very popular.These investments give good returns, diversify the risks through asset allocation and also have tax benefits. But before jumping on the mutual fund bandwagon, you need to understand what these investment avenues are all about and how they work. So, let’s explore –
Mutual funds are investment schemes wherein money from different investors is pooled together in a fund. Thereafter, a fund manager uses the pooled money and allocates it to different types of stocks and securities. With investments in different types of assets, a portfolio is created and you are allotted units for your share of investment in the portfolio.
How do mutual funds work?
To understand the working of mutual funds, the following flowchart can be considered –
Management of mutual fund portfolio
A mutual fund scheme is expertly managed by experienced fund managers. These fund managers are hired by the mutual fund companies and one or more managers can be tasked to manage a fund. The fund managers, then, decide on –
Where to invest
When to invest
How much to invest
Fund managers make decisions in the interest of the investors so that investors can earn maximum returns on their investments.
Mutual funds invest in securities in the financial market. Returns are, therefore, market linked. If the value of the underlying assets increases, the fund grows and vice-versa. Mutual funds, therefore, are risky.
The risk profile of mutual funds depends on the fund that you choose. Equity mutual funds have a very high risk profile while debt funds have a very low risk.
Types of mutual fund schemes
Mutual funds come in different variants to suit the investment preference of different investors. There are, mainly, three types of mutual fund schemes which are –
Equity mutual funds which invest at least 65% of their portfolio in equity
Debt mutual funds which invest a majority of their portfolio in debt
Balanced mutual funds which invest in both equity and debt
Here are the characteristics of these funds –
Type of mutual fund
Equity mutual fund
· High risk high return profile
· Minimum 65% portfolio is invested in equity stocks and securities
· Investment objective is long term capital appreciation
· Further sub-divided into large cap funds, small cap funds, ELSS schemes, mid cap funds, etc.
Debt mutual funds
· Invest in fixed income instruments
· Have a low risk low return profile
· Since investment and redemption of debt instruments are done at different intervals, there is no fixed return
· Further sub-divided into liquid funds, short term debt funds, long term debt funds, dynamic bond funds, fixed maturity plans, etc.
· Have a moderate risk moderate return profile
· Invest in both equity and debt
· Funds which invest primarily in equity are called aggressive hybrid funds
ELSS mutual funds
ELSS mutual funds are one of the most popular mutual fund schemes given their tax advantage. ELSS stands for Equity Linked Saving Scheme and it is an equity mutual fund. Investments into ELSS funds qualify for deduction under Section 80C of the Income Tax Act, 1961 up to Rs.1.5 lakhs. There is a lock-in period of 3 years during which redemption and switching is not allowed.
Systematic Investment Plans (SIP)
SIP stands for Systematic Investment Plans. SIPs are not a type of mutual fund but a mode of investing in a mutual fund scheme. If you choose SIPs, you can invest regularly into a mutual fund scheme rather than in one lump sum. You can choose the amount to be invested, the frequency of investment and the investment tenure over which the SIP would continue.
SIP investments are affordable, disciplined and give you the benefit of rupee-cost averaging wherein you don’t have to time the market every time you invest.
Here is a FREE SIP Calculator tool which will help you to calculate an estimated earnings at the end of a specified tenure.
To choose a SIP, you must, first understand the type of mutual fund scheme that you want and then invest in it through SIPs. When choosing the type of mutual fund scheme, you should consider –
Your risk appetite
Past investment experience
Your disposable income
Number of dependents, etc.
Once you know which type of mutual fund scheme would be suitable, you can invest through SIPs. You should, however, compare similar mutual fund schemes of different houses on their returns and consistency and then invest. Make sure you compare similar mutual funds with each other so that you can get the best results.
Mutual funds are taxed based on the composition of their portfolio and the period for which you stay invested in the fund. If the fund invests at least 65% of its portfolio in equity, there would be equity taxation on the returns earned. If, however, the fund does not have at least 65% of its portfolio in equity, there would be debt taxation. Here’s how equity and debt taxation are applied –
If the fund is redeemed within 12 months of investment, the returns earned would be termed short term capital gains. Such gains would be taxed @15% + cess
If the fund is redeemed after 12 months of investment, the returns earned would be termed long term capital gains. Long term capital gains are tax-free up to Rs.1 lakh. Returns exceeding Rs.1 lakh are taxed @10%
Investment in equity mutual funds, except ELSS schemes, form a part of your taxable income
If the fund is redeemed within 36 months of investment, the returns earned would be termed short term capital gains. Such gains would be taxed at your income tax slab rate
If the fund is redeemed after 36 months of investment, the returns earned would be termed long term capital gains. Long term capital gains are taxed @20% with the benefit of indexation
Investment in debt mutual funds form a part of your taxable income
Balanced funds would be taxed as equity or debt depending on their asset allocation.
Why choose mutual funds?
Now that you know what mutual funds are and their various aspects, you should also know the benefits of investing in mutual fund schemes. Mutual fund schemes are ideal for investment because of the following reasons –
Professional management helps you invest in the right securities
Diversified portfolio helps in minimizing risk and maximizing returns
They are easily available
Different types of mutual fund schemes to suit your investment objective
They are liquid and tax efficient
You can invest in a disciplined manner through SIPs
Mutual fund investments are, therefore, popular and suitable for all types of investors. Before you begin your mutual fund journey you should take this FREE course on Mutual Funds and understand mutual funds in depth so that you can choose your preferred scheme and maximize your wealth.
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There is a famous saying by Aristotle that ‘’ Well begun is half done’’. This very well applies to your investments also. Your investment beginning should be right. Then with the periodic review, you can achieve your goals. Hence, to begin with mutual fund investments, it’s important to consider certain important things so that you can make rational decisions that can effectively lead you towards your financial goal.
Following are the ten important things to consider while buying mutual funds in India
Net asset value any mutual fund depicts its intrinsic value. Basically, it is a fund’s market value per unit. Based on net asset value, you will be allocated a number of fund units when buying mutual funds. However, you cannot decide investments just on the basis of net asset value as it is not an indication of future performance. Let’s say you have chosen two funds with similar kinds of portfolio, there can be NAV differences. A fund that has been around for a longer time would have higher NAV and the recent one would have lower NAV. Net asset value is an indicator of a fund’s performance on a daily basis. While buying mutual funds, you need to consider other factors like returns and scheme performance along with NAV.
2) Historic performance
You can easily get the returns of mutual funds for the last five to ten years and also since inception online. Though historical performance of the fund is not an indicator of its future performance, you can analyse how the fund has been performing in a different market scenario since its inception. You can compare two more similar funds performance for the selection of mutual funds. Basically, you should use historical performance of the fund to analyse the performance trend and consistency.
3) Fund manager’s background
When you invest in mutual funds, your hard-earned money is going to be managed by fund managers on your behalf. You must ensure you are giving your money in better and deserving hands for management. Hence, you can do some background checking of fund managers to get the confidence over their expertise.
4) Investing style of the scheme
While buying a mutual fund, it is important to know whether a fund’s objective is matching with your objective and risk profile or not. Every fund manager follows an investment style as required for the scheme’s objective. To make the right investment decision it is important to know the investing style of the scheme.
In order to limit your losses in investment as per your risk profile, it is important to follow asset allocation. Each mutual fund allocates your investment into various asset classes like equity, debt and other securities based on the objective of the fund and the asset allocation that the fund manager would want to follow. It is important for you to consider asset allocation of the scheme that you are choosing to check whether that matches with your risk profile and defined asset allocation or not.
6) Assets under management
Asset under management or AUM in a mutual fund is the total cumulative investment value of that fund. AUM is an important consideration in the mutual fund buying process. Asset under management gives you a broad picture of the success of a mutual fund. Specifically, in case of debt funds, asset under management is an important fund selection parameter. Your expense ratio in debt funds can come down when you invest in a mutual fund with larger assets under management which will also have an impact on returns.
7) Direct or Regular mutual funds
When it comes to buying mutual funds, you can choose between direct or regular variants of mutual fund schemes. Direct fund refers to directly investing through asset management companies with paying any commission or distributor charges. Regular fund option is investing through distributors and advisors, expense ratio of which can be relatively more than that of direct funds. You can choose the one suitable for you, depending on your market knowledge and how you want it to work.
8) Growth or dividend option
When you select a mutual fund for investment, the portfolio of the fund will have many securities that may pay regular dividends. When you choose a scheme with a growth option, the dividend paid by the underlying securities is reinvested by the fund manager. When you opt for a dividend payout option, the amount of dividend will be paid out to your account. You can also choose a dividend reinvestment option in which the fund manager utilises the dividend amount to buy more shares. You can select the suitable option depending on your liquidity/ regular income requirement.
Entry and exit loads are the amount charged at the time of buying and selling mutual fund units respectively. Usually, the open-ended schemes may not have entry and exit loads. If you are buying closed ended funds, this would be applicable. As entry or exit loads are a fraction of the net asset value, it will bring down your investment value. Hence, considering the entry and exit loads is an important thing while buying mutual funds.
10) Tax implication
Every mutual fund scheme can have different tax effects depending on the category it belongs to. There are also tax-saving mutual funds that allow you to avail tax benefit under Section 80C of the Income Tax Act, 1961. Tax implication will have a huge impact on a fund’s return, hence it is an important thing about buying mutual funds.
When you are investing, it is always important to consider the tax implications of the particular investment to understand how tax efficient the returns could be. Mutual funds are considered to be tax efficient investment options. Tax treatment and tax implication varies depending on the category of mutual funds you are investing into. You can take a detailed look at the taxation aspect of mutual funds below –
Equity mutual funds are the funds that invest primarily in equities of companies. Any fund that invests more than 65% into equities is considered as an equity mutual fund for taxation purposes. Tax treatment for equity oriented hybrid funds that invests more than 65% into equities would be similar to that of equity funds.
If you make profit by redeeming your equity mutual fund investments, it is referred to as capital gains which are subjected to income tax. Following is the tax treatment for capital gains from equity mutual funds –
Short-term capital gains
Gains from equity mutual funds are classified as short-term if the units sold are held for less than one year. Short term capital gains are taxed at 15% plus cess.
Long-term capital gains
Gains from equity mutual funds are classified as long-term if the units sold are held for one year or more. Long-term capital gains have been reintroduced (which were tax free till April 2018) in the unit budget 2018. Presently, long-term capital gains on equity funds are taxed at 10% without indexation, only if the annual gain from equity exceeds INR 1 lakh.
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2) Tax implications for ELSS (Equity Linked Savings Schemes)
Equity linked savings schemes (ELSS) are the type of equity mutual funds that come with taxation benefits. ELSS funds are designed to provide tax benefits as it comes with a three years lock-in period. Which means, you cannot exit from the fund within three years of investment. But, you can avail tax deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax, 1961. However, tax treatment of capital gains from ELSS schemes is similar to that of equity mutual funds.
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3) Tax implications for debt mutual funds
Debt mutual funds are funds that invest predominantly into debt securities. Debt-oriented hybrid funds that allocate significant proportion into debt securities are also treated similar to that of debt funds for the taxation purpose.
If you make profit by redeeming your debt mutual fund investments, it is referred to as capital gains which are subjected to income tax. Following is the tax treatment for capital gains from debt mutual funds –
Short-term capital gains
Gains from debt mutual funds are classified as short-term if the units sold are held for less than 36 months or three years. Short-term capital gains from debt funds are taxed as per tax slab applicable to you based on your total taxable income.
Long-term capital gains
Gains from debt mutual funds are classified as long-term if the units sold are held for three years or more. Long-term capital gains on debt mutual funds are taxed at 10% without indexation and at 20% with indexation benefit.
Fund of funds, exchange traded funds and international mutual funds are also treated similar to debt mutual funds for the purpose of taxation. Tax implications are similar to that of debt funds for all of these funds.
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4) Tax implications on mutual fund dividends
Dividends received on mutual fund investments are taxed differently depending on the type of fund. Dividends paid by the mutual funds are subjected to dividend distribution tax (DDT) which is paid by the mutual fund companies. Mutual fund companies pay DDT of 11.648% on equity funds and 29.12% on debt mutual funds. Dividends were tax free in the hands of investors.
However, there is a major change in dividend distribution tax rule as introduced in the Union Budget 2020. In the new tax regime, dividend on mutual funds will be taxed as per the tax slab applicable to you depending on your total taxable income. Dividend on mutual funds needs to be now added to taxable income under the header ‘Income from other sources’.
Taxation is an important aspect of your financial planning. Understanding the tax implication on mutual fund schemes that are planning to invest can help you make effective investment decisions. Understanding the mutual funds, its working, types, routes and process to invest in along with the tax implications on each type of mutual funds can give you a general idea about the product as a whole.
When you are making an investment decision, understanding the product helps you make an informed and rational choice that would lead you towards your financial goal.
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