Do I have to pay tax on the maturity amount of short-term debt funds?
— Arvind Kumar
You need to pay short-term capital gains tax if you choose to redeem your fund units before completion of 12 months of the investment period. Any short-term capital gain earned on a debt fund would be added to your taxable income and, at the end of financial year, you would have to pay tax as per your tax bracket. However, if you belong to the 30% bracket, you would be better off opting for the dividend option, which is subject to a dividend distribution tax. Although Budget 2013 increased the DDT to 28.33% — from 14.16% a year ago— it is still lower than the marginal tax rate of 30.90% for the highest tax bracket.
How should I look at an SIP for 10 years and get a monthly payout later?
— Yogesh Bhatt
A systematic investment plan (SIP) is a simple and proven investment strategy that can help investors accumulate wealth in a disciplined manner over a longer time-frame. Under the SIP mode, instead of investing a lump sum, a fixed amount (which can be as small as R100) is invested at regular intervals in mutual funds. Thus, you should look at an SIP for a 10-year period as a strategic investment, coming with benefits such as: No need to time the stock market; simple but effective way of building a corpus to meet future goals; and, most importantly, benefiting by averaging out your investment cost as capital markets are subject to volatility.
After accumulating a huge corpus as a result of regular SIP over 10 years, you can opt for regular monthly payouts in form of systematic withdrawal plans (SWP). Through a SWP facility, the investor redeems a fixed amount from his investment on a predetermined date every month. This option is especially useful for retirees who are looking for a fixed stream of income.
What are the various charges that a fund house levies on equity and debt products and how do I know what the industry benchmark is?
— Deepak Sharma
It is important to know about the expenses that fund houses charge as they can substantially reduce your earnings. To start off, AMCs charge investors for the fund management activity and regular operational costs incurred by them, which include sales/agent commissions, AMCs administrative costs, registrar and transfer agent fees and marketing expenses. All these expenses are charged under one head called the total expense ratio (TER); an annual charge on AUM in percentage terms. Capital market regulator Sebi has capped this expense ratio at 2.5% and it comes down as the AUM increases. Thus, it is beneficial to invest in funds having higher corpus. MF investments are also subject to a one-time charge in form of loads. Though entry loads are banned by Sebi, investors should take note of exit loads as certain funds come with heavy exit loads for early redemption.
To know about the industry benchmark, you can look at the average expense ratio charged by funds. Funds with expense ratios lower than the industry average should be considered. However, different categories of funds have different expense ratios. For example, passively managed funds like index funds or ETFs have lower expense ratio than actively managed funds.
Are returns from gold exchange-traded funds tax-exempt?
— Suryadhar Rao
Returns from gold ETFs are not tax-exempt. Gains from gold ETFs will have tax treatment similar to debt MFs. Thus, when an investor redeems units of gold ETFs held for more than a year, he is subject to long-term capital gains tax of 10% without indexation or 20% with indexation, whichever is lower. If the period of holding is less than a year, the short-term capital gains will be clubbed with the income of the investor, to be taxed as per the applicable tax slab.
The writer is senior investment analyst, Morningstar India
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