Invest in mutual funds via SIP in current market scenario

By: | Published: October 3, 2017 1:55 AM

Given the strong performance of the equity markets over the last couple of years and the resulting rise in valuations, prospective returns seem to be slighter lower than previous years. In such a scenario, it might be advisable to invest through Systematic Investment Plans (SIPs) vis-à-vis lumpsum.

mutual funds, mutual funds investments, mutual funds investment through SIP, investment in mutual funds, capital gains tax, Systematic Investment Plans, net asset value, debt portion, long term capital gains, equity fundsFor taxation purposes, mutual funds are classified into equity and non-equity based on their allocation to equity.

In the current market scenario, should I look at investing lumpsum or do a SIP?
– Ashutosh Sarin

Given the strong performance of the equity markets over the last couple of years and the resulting rise in valuations, prospective returns seem to be slighter lower than previous years. In such a scenario, it might be advisable to invest through Systematic Investment Plans (SIPs) vis-à-vis lumpsum. In fact, SIPs allow an investor to deploy the principle of rupee cost averaging to take advantage of market volatility. When the net asset value (NAV) of a fund is high (typically when markets have risen) fewer units of a fund would be purchased from the investment amount and when the NAV is lower more units of a fund would be purchased with the same investment amount. Thereby, reducing the average cost of units purchased over a period of time.

Do I have to pay any long term capital gains tax on the returns from the debt portion of the fund?
—Manoj Kumar

For taxation purposes, mutual funds are classified into equity and non-equity based on their allocation to equity. Funds that invest atleast 65% in Indian equities are categorised as equity funds and others as non-equity funds. For taxation purposes, ‘equity funds’ include large cap, mid & small cap, diversified equity funds, equity-linked savings scheme, balanced funds, arbitrage funds, etc. subject to the minimum equity allocation mentioned above. For investments in funds classified as ‘equity funds’, any capital gains and dividends generated are subject to equity taxation irrespective of the portion invested in debt.

For funds classified as non-equity for taxation purposes including pure debt funds, certain hybrid categories like Monthly Income Plans, fund of funds and international funds, any capital gains and dividends generated are subject to debt taxation. It is advisable to consult your tax advisor for further information and applicability of tax laws based on your tax situation.

Can I do a monthly SIP of Rs 5,000 in ELSS to save tax?
—Gopal Kumar

Investments in ELSS can be made in lumpsum or SIP mode .Tax benefits would be available only in the financial year in which the investment is made and only on amount invested in that financial year. Since ELSS investments are locked-in for 3 years, investments made through the SIP would result in each SIP getting locked in for a 3-year period

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

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