Mutual Funds

Systematic Investment Plans and Taxation

A number of funds invest in company stock or equity shares in order to generate returns for the people investing in them. These investments are considered to carry a much higher risk than investing in other, more secure long-term avenues. The advantage they provide is that their returns usually prove to be at a much higher rate. To alleviate this risk most funds diversify their investments in various different equities and securities. Equity Linked Saving Schemes or ELSS is an ideal example for these types of diversified funds.

One of the safest ways of investing mutual funds is through systematic investment plans. Before investing in these plans it is important to decide on which scheme you wish to invest in and the amount of money you have to invest as well as the time frame for which you can invest. Once you are clear on these points you can approach a mutual fund distributor or a fund house in order to submit your relevant documents. There is also an online application method that is quicker. Your first payment for these funds can be made on any day of the month but remaining payments for the duration of the scheme have to be made on mutually decided date.

The attraction of these SIP’s is that they follow the principle of rupee cost averaging. The way this works is that if you, for example invest Rs. 1000 in the first month, and the value for a single unit is Rs. 10 then you will receive 100 units. However in subsequent months, even if the price per unit falls, it works to your advantage because you are investing the same amount of money, therefore you will be able to purchase more units. SIP’s are also a tax saving mutual fund because as long as you keep your money invested for over a year, any gains you earn are considered to be long-term capital gains and are therefore not liable to any taxation.

Mutual fund taxes do exist but are mainly for short plans that operate on the FIFO (first-in-first-out) principle. These taxes exist because the gains made in the short plan are not considered for exemption and come with at a flat rate of 15 percent. From an SIP point of view every installment is looked at as a separate investment and must be held for a year in order to come under the non-taxable, long-term gain bracket.

Mutual funds provide people with an excellent way to generate non-taxable income that they can either re-invest or use to purchase other assets. However, before investing it is always advisable to get an expert opinion in order to ensure that you find the right plan to suit your own personal investment goals.

Related Articles

Back to top button