PPF or Debt Funds

If you seek higher returns with liquidity, go for debt funds. For safety and tax efficiency, opt for PPF

If you seek tax efficiency with assured returns, Public Provident Fund (PPF) scores over debt mutual funds. Both investment and returns in PPF are tax free, however PPF has a lock in period of 15 years and the returns may just about match government security rates.

Debt funds should be your choice if you seek higher returns with anytime liquidity. But if held for less than three years they will attract short term capital gains tax as per your income tax slab.

Debt funds held for more than three years will qualify for long term capital gain tax of 20 percent, with indexation benefits on your costs. You need to be aware that just like in equity markets, in the debt market, the prices of different bonds can rise or fall.

Therefore returns from debt funds, even short term ones can vary from year to year. But then, PPF interest rates will now change every quarter too.

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Tax Free NRE FDs vs Debt funds for NRIs

They may be a little better than debt funds. Looking at a debt fund over a three year holding period, your tax liability will be the appreciation less indexed capital gains so your effective tax rate on the gains will be less than 10% after indexation.

Considering debt fund returns of about 8% and 10% taxation, you might be better off quantitatively with debt funds. But you don’t get guaranteed returns in a mutual fund.

So in terms of simplicity and guarantee, the differential will not be very much.

With somewhere between 7-7.5% in a mutual fund compared to 6-6.5% in a tax free deposit you have to see if the premium is worthwhile.

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Equity Linked Savings Scheme (ELSS)

ELSS Funds





ELSS Funds are tax saving mutual fund that is eligible for Section 80C benefits along with the other investments listed, for a maximum amount of `1.5 lakh a year.

ELSS is an equity portfolio that invests in a diverse set of equity shares. It can hold some cash defensively, but is primarily an equity investment.

ELSS has a lock-in period of three years (lowest among 80C investments), after which the investor can withdraw the funds for short-term goals, besides retirement.

The dividends are tax-free and redemption after three years will not attract capital gains tax, as the holding period is over 12 months.

Fund performance and portfolio are disclosed monthly and investment can be made in lump sum, through SIP or as desired into a folio.

Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds

Top 10 Tax Saver Mutual Funds for 2017 – 2018

Best 10 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. ICICI Prudential Long Term Equity Fund

5. Birla Sun Life Tax Relief 96

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Birla Sun Life Tax Plan

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Not All Equity Mutual Funds eligible for Tax Deductions

Not all mutual funds are eligible for income tax deductions.

There is a particular category of mutual funds which is eligible for tax deductions. It is called Equity Linked Savings Scheme (ELSS) which is an equity diversified fund with a 3 year lock in period. It qualifies for tax exemptions under section 80C of the Indian Income Tax Act. Your two funds do not belong to this category, and therefore, are not tax saving funds.

Best 10 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. ICICI Prudential Long Term Equity Fund

5. Birla Sun Life Tax Relief 96

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Birla Sun Life Tax Plan

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Tax on Fund of Funds

How Fund of Funds (FoF) Taxed?

Taxation for fund of funds mutual funds is similar to that of debt mutual funds

Taxation for fund of funds (FoF) is similar to that of debt mutual funds. The redemption will qualify for long-term capital gains tax if your units are held for three years (36 months) or more. The long-term capital gains tax will be 20 per cent with the inflation indexation benefit.

If your investments are redeemed before three years (36 months), the short-term gains will be taxed as per your applicable Income Tax slab.

Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds

Top 4 Tax Saver Mutual Funds for 2017 – 2018

Best 4 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. BNP Paribas Long Term Equity Fund

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Mutual Funds Dividend





Many investors opt for the dividend option in a mutual fund scheme, as it gives them intermittent cash flows, which comes handy in meeting their regular expenses.

1. How does a mutual fund declare a dividend?

A mutual fund scheme can declare dividends only from the realised profits in its portfolio.

Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (in case of debt funds) from the instruments the scheme holds.

Unrealised profits or paper profit from the in struments held cannot be used to pay dividends. These profits are added to the NAV . Some part of this can be de clared as dividend de pending on the fund manager. Alternatively , the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.

2. At what frequency can an investor expect a dividend from a mutual fund scheme?

Schemes can announce divi dend daily , monthly , quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavour to give a monthly dividend to their unit holders. However, the dividends are not certain and the amount is also not fixed. Under dividend option, the NAV (net asset value) is not allowed to grow higher and whenever it reaches a certain level, the fund house pays out dividends.Assume you have invested in a fund at the NAV of `14 and opted for dividend option. The scheme performs and after appreciation the NAV reaches `16. The fund house may decide to pay out `2 as dividend. So you receive `2 and simultaneously the NAV will fall back to Rs 14.

3. What is the tax treatment of dividends in mutual funds?

Dividends received from all mutual funds are tax free in the hands of the investors. However, in the case of debt funds the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund there is no dividend distribution tax.

4. Does dividend option work for all investors?

Financial planners recom mend dividend option for con servative investors in equity for those who are risk averse and those who need some cash flows. For those looking to build wealth over the long term through equity mutual fund systematic investment plan (SIP) it is advisable to opt for the growth option.This is because the compounding benefit is lost when dividend is paid, unless the amount is invested immediately in a higher than equity yielding asset.

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Birla Sun Life Debt Funds

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Scheme The Average Maturity Of Complete Portfolio YTM Mark to Mkt Modified Duration
(Yrs) (%) (%) (Yrs)
Birla Cash Plus CASH 0.09 6.50% 24.91% 0.09
Birla Sun Life Cash Manager BSLCM 1.08 7.17% 80.44% 0.95
Birla Sun Life Savings Fund BBP 1.52 7.36% 84.22% 1.31
Birla Sun Life Treasury Optimiser Fund BSLSTF 5.94 7.52% 91.98% 4.03
Birla Floating Rate Fund (S) BFS 0.11 6.81% 28.81% 0.11
Birla Floating Rate Fund (L) BFL 1.56 7.07% 85.31% 1.35
Birla Income Plus PLUS 14.90 7.53% 88.18% 7.97
Birla Sun Life Short Term Fund BSLIF 2.63 7.24% 90.48% 2.17
Birla Gilt Plus(PF) INV 14.07 7.23% 88.25% 7.88
Birla Sun Life Constant Maturity 10 Yr Gilt Fund LONG 8.48 6.86% 89.33% 5.94
Birla Sun Life Govt Securities Fund – Long Term BSLGSFLT 13.14 7.05% 61.08% 6.93
Birla Sun Life MIP MIP 14.27 7.93% 71.66% 5.10
Birla MIP II – Savings 5 MIP5 12.25 7.82% 94.95% 6.53
Birla MIP II-Wealth 25 MIP25 10.58 7.55% 92.27% 5.85
Birla Sun Life Monthly Income BSLMI 10.80 7.56% 96.04% 6.30
Birla Sun Life Medium Term Plan BSLMTP 5.52 8.88% 96.56% 3.67
Birla Dynamic Bond Fund BDB 17.54 7.89% 97.52% 7.67
BSL Short Term Opportunities Fund BBIF 4.15 7.58% 87.03% 3.04
Birla Sun Life 95 Fund BSL95F 10.85 7.78% 93.26% 5.95
Birla Sun Life Corporate Bond Fund BSLCBF 2.72 8.79% 88.95% 2.16
BIRLA SUN LIFE EQUITY SAVINGS FUND BSLEQSF 1.42 6.10% 14.70% 0.83

Feb 2017

Mutual Fund EXIT LOADS AND TAXES

EXIT LOADS AND TAXES





To meet one’s short term goals, one could either invest through liquid funds, ultra short term funds or accrual funds. One could also set up an SIP in these funds. Ideally, if the goal is about 6-7 months or less than a year, liquid fund are better, while for goals which are about a year from now, ultra short term funds could be preferred. And if the time left to achieve the financial goal is more than a year, say about one to two years, then one could use an SIP in an accrual fund.

In these funds one does not witness much fluctuation in the interest rate in the market, and hence the rate of return, over the short duration. Also in all these funds the chances of loss of principal amount is very less.In accrual funds the fluctuations in interest rate could be about 1-1.5% over the tenure of the investment.But it could move either ways and could even be in favour of the investor.

Investors investing in these funds, however, should keep in mind two very important things. One is the exit load. If the duration of the investment attracts exit load, that is from the time one starts the SIP to when one withdraws the corpus, then one should look for funds with no exit load for the same duration. The other thing is if there is any expected tax burden on the return that one generates during these 1-2 years of investment.

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Credit Opportunities Funds

Such funds typically invest in high yielding but lower rated corporate bonds, which have high default risk

With the Reserve Bank of India signalling a pause in rate cuts, the duration play for bond fund investors–where falling interest rates boost prices of longer tenure bonds-seems to have run its course for now. Investor interest could shift to credit opportunities schemes.

Credit Opportunities Funds generate returns from interest accrual investing in high yielding but lower rated (AA or below) corporate bonds.They also look for upgrade in credit rating of underlying bonds, which can lead to price appreciation. The segment has become popular and has assets worth `80,000 crore. IDFC Mutual Fund has just announced a new offering in this space– the IDFC Credit Opportunities Fund –which is open for subscription until February 27.

Credit opportunities funds are slowly moving from being niche to mainstream. He finds investor expectations from this space in terms of return profile are also becoming more mature. We are encouraged by the enhanced supply of paper in the mid-yield segment.This allows us to build a portfolio that closely mirrors the risk-reward offering that we intend to aim for in the credit space.

Some experts feel that the outlook for this segment is improving given that the borrowing cost for corporates is expected to come down with banks having excess liquidity post note recall.

Borrowing rates for companies have come down over the past couple of years, and the recent build-up in liquidity should help leveraged companies reduce debt. This may lead to rating upgrades, which could boost returns. Investors can consider moving partially to the credit opportunities space now that the duration play has taken a back seat. The spread in yield between AA or lower rated paper and AAA rated instruments is contracting, providing an opportunity for investors.

However, there are concerns. Although credit opportunities funds have not been affected by unfavourable yield movement, the risk of default in underlying companies remain high. There were seven credit rating downgrades last month but no major rating upgrades. So, investors should not chase yields without having safeguards in place. Avoid going for aggressive funds that chase higher yields in very low rated instruments.

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Invest in Debt Mutual Funds

Pros and Cons of Investing in Debt Mutual Funds





As interest rates on small savings and fixed deposits head downwards, investors are looking at debt funds to earn higher returns.

How does a debt mutual fund portfolio score over a single instrument?

As compared to a single instrument such as a bond, or government security or a nonconvertible debenture, debt funds help you diversify .

Any portfolio of a debt fund has 8-10 different papers, or even more, which mitigates single party risks. Debt mutual funds invest in instruments like bank CD, commercial paper, government securities, or corporate bonds.

How easy is paperwork in a mutual fund scheme?

You can get a soft copy of a mutual fund statement.Even if you lose a mutu al fund statement, it does not matter. You just need to sign on a re demption slip and sub mit it to the fund house to get your money back.

Compared to this, a bank fixed deposit re ceipt, if lost, could cre ate a lot of hurdles and paperwork.

What is the tax and liquidity advantage in a debt fund?

There is no TDS in debt mutual funds and if held for three years, one can avail indexation benefit and minimise their tax outflow. If there is a need to withdraw money ,a debt mutual fund can be broken into units of Re 1 and investors can withdraw only the required amount. In a small-saving product or a fixed deposit, you need to break the entire deposit.

What are the risks involved while investing in a debt fund?

Interest rates typically rise when the economy is growing, and fall during economic downturns. Bond prices and interest rates are inversely related. When interest rates rise, bond prices fall and vice versa. Interest rate risk is present in all debt funds but the degree could vary . Gilt funds with longer maturity carry higher interest rate while it is negligible or very low in liquid funds. A credit risk is the risk of default on a debt security that may arise from a borrower failing to make required payments. If any of the companies, whose paper the fund owns, does not pay up when it comes up for repayment, the funds’ NAV could suffer to that extent. The fund manager also has to ensure the scheme is liquid to the extent that the fund has the ability to move in and out of a scheme without impacting its value or price.