1. Mutual funds: Moderate risk appetite needed while considering ELSS investments

Mutual funds: Moderate risk appetite needed while considering ELSS investments

Besides tax planning, the other important aspects about investing in equity linked savings scheme, or ELSS, that you should consider are your risk appetite and secondly, investment horizon.

By: | Published: December 8, 2015 12:06 AM

In the current tax structure, does it make sense to invest in fixed maturity plans?
— Arup Kumar

Fixed maturity plans (or FMPs) typically invest in good rated (AAA & AA rated) corporate debt instruments with tenors matching that of the fund. Depending on the credit quality, the gross yields (pre-expenses and pre-tax) of corporate debt instruments would tend to be either close to that of bank fixed deposits (or FDs) or marginally higher. From a taxation perspective, short-term capital gains from debt funds (on units held for 36 months or less) are taxed based on the investor’s income tax bracket whereas dividends are taxed at 28.84%. Interest from FDs would be also be taxable based on the depositor’s income tax bracket. Hence, FMPs would be attractive in a scenario wherein annualised yields on good rated corporate debt instruments are atleast 0.5% to 1% higher than prevailing FD rates, to make-up for the expenses charged by AMCs for managing debt funds including FMPs. However, long-term capital gains (on units held for more than 36 months) from debt funds including FMPs are taxed at 20% with indexation benefit (which would further reduce the effective tax rate).

As I have to make some tax planning, can I invest in ELSS and do I have to invest in the scheme every year?
Ashutosh Singh

Besides tax planning, the other important aspects about investing in equity linked savings scheme, or ELSS,  that you should consider are your risk appetite and secondly, investment horizon. ELSS funds invest in equities, which tend to generate attractive returns over the longer term (3 to 5 years and above) but these returns can fluctuate over the short-term. For example, ELSS funds have generated annualised returns of 17% and 10% over the last 3 years and 5 years respectively, on an average. But this has been accompanied by a few periods of negative returns. Historically, the probability of generating negative returns from ELSS funds has been 6.2%, 0.83% and 0% over 3-year, 5-year and 7-year holding periods respectively over the last 15 years. In other words, out of a total of 145 periods of 3 years each, over the last 15 years there were 9 periods in which the category on an average generated a negative return. One should have at least a moderate risk appetite while considering investments into any equity fund including ELSS funds.

Is it mandatory to have a demat account to invest in mutual funds and what is the cost involved for operating a demat account only for making investment in mutual fund?                     — P Naval Kishore

No, it is not mandatory to have a demat account to invest in mutual funds, whether it’s through SIP or lumpsum mode, unless you wish to hold the units in demat form. Demat account for MFs is the same as the one used for investing in shares and as such most banks and broking firms should be able to help you to open one. The charges might vary across providers, but are usually nominal.

I am losing money in gold ETF. Should I exit gold ETF and invest the money in a diversified equity fund?                      — A K Murthy

Historically, gold has acted as a good hedge against inflation and financial market volatility. In other words, during periods of economic or financial market crisis, gold tends to perform well and is considered a safe haven vis-à-vis other asset classes such as equity and fixed income. Between early 2008 and 2011 when equity markets witnessed significant volatility, gold generated an annualised return of 26.8% (3-year). But unlike equity and debt which typically pay out either interest or dividends, gold isn’t an income generating asset.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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Tags: Mutual Funds
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