• Is it safe to invest in debt funds maturing in 90 days and what happens after the fund matures?
– Samir Aich
Debt funds with fixed maturity dates are typically referred to as Fixed Maturity Plans (or FMPs). Such funds invest in debt instruments which have the same maturity dates as that of the fund. FMPs are launched with varying maturity dates including 90 days, 1 year, 2 years, 3 years, etc. Since the underlying debt securities are held to maturity, the impact of fluctuations in the price of a debt instrument due to a change in market interest rates is eliminated. Another key risk associated with debt instruments, credit risk or the risk of default on repayment of principal or interest by the issuer, can be reduced by investing in FMPs that invest in securities with high credit ratings (AA+ and above). FMPs are suitable for investors who want to invest in low risk debt instruments and require liquidity after a pre-determined period of time. On maturity of the fund, AMCs typically offer an option to either exit the investment or roll it over for another period.
• Is there a lock-in period in gold ETFs? Does redemption before one year attract tax?
Gold ETFs are listed on stock exchange, can be traded like stocks (subject to liquidity) and don’t carry any exit loads. From a taxation perspective, Gold ETFs are treated as non-equity and carry debt taxation. Short term capital gains (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%. Long term capital gains (on units held for more than 36 months) are taxed at 10% or 20% with indexation benefit (which would further reduce the effective tax rate).
• I am planning to invest in a sectoral fund because of the volatility in the markets. Is it wise to do it?
Sectoral funds focus investments in a single sector, thereby making it critical for the investor to have a view on the sector. Such funds would tend to be more volatile since performance is determined by the underly-ing factors driving that sector. Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years. Overall, sectoral funds should be considered only if one has a specific view on the sector and can tole-rate higher volatility. Else it is advisable to stick to diversified equity funds.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance @expressindia.com