Hold debt funds for three years to get indexation benefit

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Published: October 23, 2019 1:39:46 AM

Continue your SIP as reducing it would deprive your portfolio of buying units at lower prices.

The switch would be regarded as a redemption requiring capital gains taxes, if any, to be paid.

Is there any time limit to stay invested in debt funds as I plan to shift my savings bank deposits to debt funds?
– Sudip Gupta

Factors determining minimum holding period for debt funds are liquidity, exit load period and tax treatment.

Exit load: Typically, debt funds are subject to exit loads (penalty on redemption as a % of fund NAV) for varying periods of up to one year, except for liquid/overnight schemes and few other schemes which do not impose any such exit charge. Liquidity: Money in a savings account can be withdrawn instantaneously. For debt funds, investment proceeds on redemption are credited to investor’s account on a T+1 working day basis for liquid and money market funds, and on a T+2 working days basis for other debt funds. (T – redemption date).
Taxation: Gains from debt funds are taxed depending on the holding period. If held for up to three years, the gains are added to investor’s income and taxed according to the applicable slab rate. If held for more than three years, capital gains are taxed at 20.8% (including cess) with indexation benefit. Shift the corpus based on your suitability in light of above factors discussed.

I have invested in a equity scheme SIP through a bank. Is that a direct plan? If not, how can I switch it a direct plan?
—Suresh Kapil

Investing though a bank would be under the regular plan route, as your application form would have the banks ARN number (Amfi Registration Number) implying the bank is the distributor for the particular transaction. You may register yourself for online access on AMC websites or through any of the mutual fund aggregator portals and switch to a direct plan. The switch may be subject to exit load though you are just switching to a different plan under the same scheme, although this may differ across AMCs. The switch would be regarded as a redemption requiring capital gains taxes, if any, to be paid.

 Should I lower my SIP amount due to poor returns?
—S Rao

The main benefit of SIP is rupee cost averaging. As the amount is fixed and regular, more units are bought when market price of shares is low and lesser units are bought when the price is high. This is advantageous in volatile markets. Continue your SIP as reducing it would deprive your portfolio of buying units at lower prices.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to
fepersonalfinance@expressindia.com

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