A fund for every need

For the sake of convenience,we have divided goals into three categories: short-,medium- and long-term investments.

Short-term goals

For financial goals that are to be taken care of within the next 18 months,you can look at liquid and liquid plus funds offered by mutual fund houses. These funds invest in debt instruments that have a very short maturity. Liquid plus funds are a variation of the liquid fund theme and invest in instruments that have a longer tenure compared with liquid funds. These funds offer slightly higher returns and are subject to lower taxation than liquid funds.

Dividend distributed by liquid plus funds is subject to a tax rate of 14.1625 per cent while plain liquid funds dividends are taxed at 28.325 per cent. Some liquid plus funds charge an exit load while liquid funds dont. All debt funds NAVs are affected by changes in interest rates. Since liquid funds use short-term debt paper,they are comparatively safer than their long-term counterparts, says Veer Sardesai,a Pune-based financial planner.

Medium-term goals

For medium-term goals,where the time horizon is one-and-a-half to four years,you can consider investing in instruments like debt funds,arbitrage funds and FMPs. For medium-term goals,it is worth considering a debt fund that invests in longer-term paper. Such funds usually offer higher interest rates, says Sardesai.

With increased volatility in the equity markets,arbitrage funds are a good investment choice. A pure arbitrage fund is a good investment for the medium term. For the last one year,such funds have given at least 7 per cent return, says Surya Bhatia,a Delhi-based financial planner.

Besides,you can also look at fixed maturity plans FMPs. These plans offer higher interest rates compared with bank fixed deposits. Investment before March 31 can give you double indexation benefit. However,a premature exit from these plans might not be a good idea. Invest in FMPs only if there is no pressure to withdraw, says Prasunjit Mukherjee,a Kolkata-based mutual fund analyst.

Taxation. If a mutual fund is held for less than one year,it classifies as a short-term capital asset. Investments held for more than one year qualify as long-term assets. The short-term capital gain on debt funds is added to the taxable income and is taxed as per the applicable tax slab. Long-term capital gain is taxed at 11.33 per cent without indexation or 22.66 per cent with indexation. Returns from equities and equity mutual funds,on the other hand,are tax free.

Long-term goals

Equities are by far the best asset class available for long-term investments. If you lack the acumen to invest directly in equities,ride on mutual fund schemes. For long-term wealth building,one must consider investing in equity mutual funds. Equities provide better post-tax returns than any other asset class such as fixed-income securities,bonds or gold, says Sardesai.

According to Mukherjee,Over a three-year cycle from now,equities offer the possibility of providing substantial over-performance over other asset classes. Over longer durations,equities and some commodity funds could do very well.

In the equities space,you may also look at index funds.

However,always maintain a mix of equity and debt in the portfolio. In India,a lot of investors prefer to invest the debt portion of their portfolio in Post Office Small Saving Instruments like PPF,instead of in debt funds. At 8 per cent return compounded annually which are tax free,PPF is among the best options. For a person in the highest tax bracket,the pre-tax yield is 12.12 per cent. However,there is a lock-in of 15 years,though partial withdrawal is allowed after five years.

If,on the other hand,you decide to invest the debt part of your portfolio in debt funds,the returns are variable unlike in the case of small-saving instruments where they are assured. But here there is no lock-in,so you enjoy the benefit of liquidity. If you are in a higher tax bracket,debt funds offer tax advantage on capital gains.

Lastly,do your asset allocation. A proper alignment of your investments with your financial goals is the mantra for a wealthier future. u

suneeti.ahujaexpressindia.com

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