Category Archive : Mutual Fund Concepts

Mutual Funds Taxation

Taxation of Equity Mutual Funds

How Equity Funds Are Taxed?

The basic goal of any investment is to make money out of it. Mutual funds are taxed when they are sold. The profit/Gain portion of the sales is considered as capital gain. Thus, Investing in mutual funds generates capital gains. Tax is calculated on these Capital Gains only. In this article, we will explore the taxation of equity mutual funds.

Taxation of Equity Mutual Funds

Taxation of Equity Mutual Funds
Taxation of Equity Mutual Funds
  • Equity mutual funds are mutual funds, which primarily invest in stocks to get the benefit from rising stock prices in the capital market.
  • Funds where equity holding is more than 65% of the total portfolio are classified as equity funds for taxation.
  • The returns on equity mutual funds are in the form of dividends as well as capital gains.
  • Capital gains are of 2 types :
  1. Short-Term Capital Gain (STCG)
  2. Long-Term Capital Gains (LTCG)

Short-Term Capital Gain

When the equity oriented mutual funds are sold within 12 months from the date of purchase, it results into the Short Term Capital Gain/ Loss. Short term capital gain is taxed @ of 15%.

  • For Example:
  • Mr. A has purchased 100 units of IDFC value fund, for Rs. 400 per unit, in January 2018. He sold these 100 units on August 2018. What will be the tax implication of capital gains in such case? NAV on date of sale was Rs. 450
Calculation of Short-Term Capital Gain
Calculation of Short-Term Capital Gain
  • Solution-
  • Mr.A has held the Mutual fund units for a limited period of 8 months, thus he will be liable for payment of STCG (Short-Term Capital Gain) on sale of such listed shares (the capital asset in this question).

Long-Term Capital Gains

  • Till FY 2017-18 Equity-oriented funds had no tax on long-term capital gains; But things have changed after budget of 2018.
  • Finance minister introduced the long-term capital gains tax (LTCG) of 10 % on Equity MF on gains of over ₹1 lakh per annum without allowing the benefit of indexation.
  • If you have long term gains/profits before 31st Jan 2018, then you don’t have to pay taxes on them.
  • Example1
  • Ms. Harsha has sold the units of MF and has earned the LTCG of Rs. 1,10,000. In such case the LTCG shall be liable to tax at the rate of 10% (without indexation benefit).
  • Now, LTCG Tax is applicable on the amount exceeding Rs. 1,00,000. Hence, LTCG Tax is to be paid on Rs. 10,000 and NOT Rs. 1,10,000)
  • Example2: Computation of LTCG
  • Mr. Janak has purchased the units of ABC Equity Fund for Rs. 10,000 and sold for Rs. 12,000. The FMV as on 31st January 2018 is Rs. 11,000. Determine the taxability of Long Term Capital Gain under different scenarios.
Computation of Long-Term Capital Gain under Different Scenarios
Computation of Long-Term Capital Gain under Different Scenarios

Dividend distribution Tax

From FY 2018-19, AMC will have to pay 11.64% tax on dividends from an equity-oriented MF on investors behalf. Earlier, there was no DDT on Equity MF. This DDT is from the profits made by Equity Funds in other words which means it is reduced from the ‘in hand’ returns of the investor.

ELSS or Tax Savings Mutual Funds

ELSS is a type of diversified equity mutual fund. Person can claim 80C deduction of amount invested in ELSS (but maximum upto Rs1.5 lakhs). But this mutual fund has a 3yrs lock-in period. Earlier there was no tax on sale of ELSS but after the introduction of LTCG tax in budget 2018, LTCG will be taxed @ of 10 % if gain exceeds Rs.1 lakh

STT- Securities Transaction Tax (STT) is a type of direct tax. It is governed by STT Act. It is payable on the value of transactions transacted on NSE or BSE.

RELEVANT TERMS

Let us understand the basic terms used in computation of Capital Gain. For more details Referhttps://taxyadnya.in/

i) Cost of Acquisition (COA) (For calculation of LTCG on sale of mutual funds):

  • If equity mutual fund held for less than 12 months (short term assets) – Actual purchase price
  • If equity mutual fund held for 12 months or more (long term assets)-
  • Here, we need to follow a Two Step process-
  • Step 1 – Find Lower of Fair Market Value (FMV as on 31st January 2018) and SALE PRICE
  • Step 2 – Higher of the actual COA and Answer in Step 1

ii) Sale Price / Redemption amount:It is the price at which mutual fund units are sold.

iii) Computation of Capital Gains in such case: LTCG = Sale price – COA


which is better

Equity Mutual Funds vs Individual Stocks

Comparative Analysis : Equity Mutual Funds & Stocks

introduction

One of the most important and difficult task as a new investor is to make choice between Equity Mutual Funds vs Individual Stocks. Whether we should invest in equity funds or individual stocks?

Everyone knows there are two distinct ways of investing in equity. One is to choose individual stocks and buy and sell them yourself. The other is to invest through equity mutual funds. The final goal is the same: to benefit from the superior returns that equity investing offers. Choosing between the two kinds of investments depends on a person’s risk taking ability, and returns expectations. It also depends on how much time you have to research your investments, what type of fees and expenses you are willing to withstand.

Equity Mutual Funds vs Individual Stocks : Which is Better?

When you buy a stock, you are owning a share of the corporation. You make money in two ways- Appreciation in Share Price and Dividends offered by those stocks. While, Mutual Fund is an investment led by professional managers who invest a pool of money collected from various investors in diversified securities.

Let us discuss the comparative analysis of investments in equity mutual funds and in individual stocks.

Risk

  • Stocks are riskier than mutual funds. Individual Stocks are vulnerable to the market conditions and volatility. The performance of one stock can’t compensate for the other.
  • A major advantage of investing in equity through equity mutual funds is disciplined diversification. The risk gets reduced by diversifying a portfolio by investing in a large number of stocks.

Professional Fund Management

  • Picking individual stocks means it is your responsibility to build a portfolio. You’ll need to do a lot of research to build your own diversified portfolio. You’ll need to pick companies with different sizes, strategies, and industries, explore the annual reports. You should be keep yourself up to date with what is happening at each of the companies in which you maintain an investment.
  • With an investment in equity mutual funds, you have the benefit of a fund manager who has extensive expertise and experience in the field. Whether it is picking the stocks or monitoring them and making allocations, you do not have to worry about any of it.

Affordability

  • Generally, to have a well balanced portfolio, you would need to have about 25-30 stocks in your portfolio. This can lead to a good mix of performance and stability. Such an approach can be achieved if you have a large enough corpus. As an individual, you may not have enough funds to create a adequately diversified portfolio of stocks. Thus, Stocks is an expensive investment.
  • On the other hand, Equity Mutual funds provide instant diversification. You receive diversification benefit without investing a huge corpus when you buy units of the mutual funds that are spread across several stocks. One can have a diversified portfolio by investing in small and flexible chunks (beginning with an amount as low as Rs. 100). So, it is comparatively an affordable investment.

DEMAT Account

With stocks, you have to open a DEMAT and a share trading account.
It is very convenient to invest in mutual funds, no need of DEMAT account. Everything gets done for you for a very small management fee. Online platforms make it even easier to invest in mutual funds. They do fund selection, annual portfolio review, automated investments and more, completely online.

cost of investing

  • Brokers charge you when you buy or sell the stock. Those fees can vary depending on the services you receive. If you select your own stocks, you will pay less. If you want advice so you can outperform the market, you will need a full-service broker, incurring an additional costs.
  • Equity Mutual funds charge annual management fees. You need to pay fund management charges, a front-end load upon initial purchase, back-end load upon sale, early redemption charges, etc. No-load funds charge no fees. Due to the economies of scale, a very small management fee is charged.

Control on picking and holding of stocks

  • An investor has more control over the stocks while picking, holding and selling them in his/her portfolio. Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate in value. That’s attractive to both day traders and buy-and-hold investors. Day traders group hopes to take advantage of short-term trends, while the buy-and-hold investors expect to see the company’s earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. 
  • In the case of mutual funds, the decision pertaining to the choice of stocks and their trading is solely in the hands of the funds manager. You do not have control over which stock is to be picked and for what duration. As an investor, if you invest in mutual funds you do not have the option to exit from some stocks that are in your portfolio. The decisions pertaining to the fate of the stocks rest in the hands of the fund manager. we should check the mutual fund annual report each year. It is to ensure the management company is sticking to the financial philosophy in which we believe that we are comfortable with the holdings.

summary

  1. Both Mutual fund and share market can fetch you profit but it matters how much of time and effort you are able to put on it.
  2. Above all, the capability of taking risks also plays a vital role in earning a profit.  Taken together, this is a persuasive list of reasons to choose mutual funds over equity.
  3. The recent years have seen a lot of investors move from direct stocks. An increasing percentage of the average Indian population is turning towards mutual funds.
Advantages & Disadvantages of Equity funds

7 Advantages & Disadvantages of Equity Mutual Funds

Should I Invest in Equity Mutual Funds?

introduction

Equity mutual funds primarily invest in stocks to get the benefit from rising stock prices in the capital market. No other investment vehicle offers scope of such high returns as Equity Mutual Fund. In this article, we are going to see 7 advantages and disadvantages of equity mutual funds. How can an equity fund be an ideal investment vehicle for the investors?

SHOULD I INVEST IN EQUITY MUTUAL FUNDS?

YES, you should invest in Equity Mutual Funds for all your long term financial goal. It may include Retirement, Child’s education, Child’s Marriage or any other goal which is atleast 5 years away. Following are advantages and disadvantages of investing in Equity Mutual Funds.

Advantages & Disadvantages of Equity Funds
Advantages & Disadvantages of Equity Funds
1. Diversification

ADVANTAGES OF EQUITY MUTUAL FUNDS

2. Liquidity
  • Diversification in the portfolio of fund helps in mitigating the risk. This attribute makes the equity funds most suitable for small individual investors.
  • Risk mitigation ensures that many equity mutual funds are well diversified across stocks and sectors. So that they are not over-exposed to any particular stock or sector.
  • Equity Mutual Funds give you an automatic diversification in many different stocks. For Example, HDFC Equity fund has 50 stocks in its portfolio.
  • Equity Funds are reasonably liquid with money back in your bank account after 3 working days of redemption. They offer you an opportunity to redeem your investments at any time. (Except for Equity Linked Saving Schemes-‘ELSS’ which has a lock in period of 3 years).
  • You can redeem all your investments in the time of need or when a Net Asset Value (NAV) higher than NAV at the time of purchase.
  • Few funds charge an exit load, of as high as 2% if you redeem investment before a stipulated period (mostly 1year). For Example – HDFC Equity charge an exit load of 1% if investment is redeemed in first 365 days.
3. Professional Fund Management
  • An Asset Management Company (AMC) works in a professional set-up with individual functions of research, analysis and trading being carried out by experts. AMC will have a more comprehensive industry perspective and outlook than an individual.
  • Money invested in equity markets is managed professionally by fund managers.
  • Mutual fund experts visit conferences and interact with companies in which they invest. Besides, a mutual fund also continuously monitors economic, geo-political, sector, asset class and stock level developments at a micro level to gauge possible opportunities going forward.
  • Thus, Most of the fund managers regularly beat their fund’s benchmarks.
4. Small Ticket size (you can start small)
  • If you try to build a diversified portfolio with all types of stocks by buying them directly, you would need relatively large amount of funds.
  • In equity fund, you can start off by owning a well-diversified portfolio for as less as Rs.500 (through a monthly Systematic Investment Plan). You can start your investment with as low as Rs. 5000 as lumpsum and Rs. 500 as SIP and can own big basket of stocks.
5. Systematic / Regular Investments
  • Equity mutual fund schemes offer you a facility to invest small sums at regular intervals through systematic investment plans (SIP). SIP makes it simpler for the beginners to invest in equity mutual fund schemes.
  • These small sums that you invest regularly are invested to buy stocks. This also develops a regular habit of investing which is useful in long term wealth creation
6. Tax Benefits
  • If the holding period of the investments in equity mutual funds is more than 1 year, the capital gain is exempted from tax liabilities.
  • Government of India also provides tax rebate for equity linked saving schemes (ELSS) u/s 80C of Income Tax Act 1961.
  • You can invest into ELSS and deduct upto Rs. 1,50,000/- from your taxable income to effectively reduce your tax liability.
7. Exceptional past returns
  • Equity funds are known to provide higher returns as compared to other funds, such as Debt funds. The returns on equity fund are in the form of dividends as well as capital gains.
  • In last 5 years, diversified Equity Funds have given an average (ie. Multi Cap Funds Category Average Return) of close to 17% per annum returns (as on Feb 28, 2019) For detailed Analysis of Multi Cap Funds, Refer https://mfyadnya.in/

disADVANTAGES of EQUITY MUTUAL FUNDS

  1. Not for Short term: Equity fund can’t be an investment option for short term. Since the returns are very volatile for short period.
  2. No Control: Investor has no control over his/her investments as all the decisions are taken by the fund manager.
  3. Higher Costs: Since the funds are professionally managed they entail higher costs. There are fees associated with investment in mutual funds. For Example- HDFC Equity Fund has an expense ratio of 2.04% per annum.
  4. Choice Overload: There are over 500 schemes of Equity Mutual Funds to choose from, with many different objectives. You should always talk to your advisor before finalizing the scheme.
Features of Equity Mutual Funds

What are Equity Mutual Funds?

5 Key Features of Equity Mutual Funds

introduction

The horizon of Equity Investments is rising progressively. They are becoming more and more popular day by day. No other investment vehicle offers scope of such high returns as Equity Mutual Funds. In this article, we will discuss what are equity mutual funds, What are the key features equity mutual funds?

What are Equity mutual funds?

  • Equity mutual funds primarily invest in stocks to get the benefit from rising stock prices in the capital market. The returns on equity mutual funds are in the form of dividends as well as capital gains. Equity funds give an investor an indirect ownership in the company, whereas in debentures one gets just a fixed interest.
  • Investments in Equity funds should be done for long term goals. For eaxmple, for retirement, child education etc. as mostly these funds are highly volatile in short duration.
  • Equity Mutual Funds (Including ELSS category) have about 1/3rd of the total Asset under management in Indian Mutual Fund market. There are wide choices before investors, with about 500 schemes to choose from.
  • Example of Equity Mutual Fund:HDFC Equity Fund (A Multi Cap Fund) is currently the biggest Equity Fund with asset under management of close to Rs. 21k Crores in Indian market and has given approximately 18.6% returns per annum since launch in 1995. (as of February 28, 2019). For the detalied analysis of the fund, Refer https://mfyadnya.in/

key features of EQUITY MUTUAL FUNDS

5 Key Features of Equity Mutual Funds
5 Key Features of Equity Mutual Funds
1. professional Management
  • Money invested in equity markets is managed professionally by fund managers. Most of them regularly beat their fund’s benchmarks.
  • The credit for outperformance or underperformance of a mutual fund scheme lies with the fund manager (and his research team).
2. Cost of investment
  • The frequent buying and selling of equity shares often impacts the expense ratio of equity funds. Expense ratio states how much you pay a fund in percentage terms every year to manage your money.
  • Currently, SEBI has fixed the upper limit of expense ratio at 2.5% for equity funds. It is also planning to reduce it further. A lower expense ratio, of course, translates into higher returns for investors.
  • Most of the established fund schemes will have lower expense ratio. Average Expense ratio of Equity funds (based on type) is between 1.8-2.2%
  • An equity mutual fund has the highest charges as it requires most research. The index mutual fund has the lowest charge as it simply follows the index.
3. Holding Period
  • When you redeem units of equity funds, you earn capital gains. These capital gains are taxable in your hands.
  • The rate of taxation depends on how long you stayed invested in equity funds; such a period is called the holding period.
4. 80C Tax Exemption
  • ELSS enables investor to enjoy benefits of capital appreciation as well as tax benefits. ELSS is the only tax-saving investment under Section 80C of the Income Tax Act that gives you equity exposure (other than NPS).
  • With its shortest lock-in period of 3 years and high return potential, ELSS has a good track record . You can invest in small but regular installments or a lumpsum as per your affordability.
5. cost efficiency and diversification
  • One of the primary goals of investment must be diversification of risk and Mutual Funds accomplish this goal well.
  • By investing in equity funds you can get exposure to a number of stocks by investing a nominal amount.
  • With a single fund, you invest into various assets and many corporations. If one stock or asset goes down, there are others that may compensate for it.
Taxation of STP and SWP

Tax Implications of STP and SWP

How Are STPs And SWPs Taxed?

Introduction

In our earlier articles, we have seen what is SIP, STP and SWP in detail. In SIPs, there is no tax applicable generally as there is no transfer or withdrawal of funds. Instead funds are invested in SIP. However, in case of STP and SWP, there is taxation involved. In this article, we are going to see the Tax implications of STP and SWP.

In case of STP, capital gains tax is applicable as the money transferred from one fund to other fund, is considered as a redemption. Similarly in case of SWP, each withdrawal is treated as a redemption and thus attracts capital gain tax.

Tax Implications of STP & SWP
Tax Implications of STP & SWP

A. Tax Implications of STP

1. transfer of money [STP] from debt to equity fund

  • This mode of transfer is suitable for the investors who are not confident to invest a lumpsum amount into equity funds due to market volatility. As a result, through STP, these investors first invest the money in debt funds and then transfer it to equity funds of their choice.
  • When you transfer funds out of a debt fund or equity fund, it will be treated as a sale and taxed accordingly. Thus, capital gains tax is applicable on the transferred funds, since it is considered as a redemption.
Tax Implications on STP from Debt Fund to Equity Fund –
  1. Any transfer before 3 years will be Principal + Short-Term Capital Gains (STCG) and in that STCG will be taxed as per your slab rate.
  2. Any transfer after 3 years will be Principal + Long-Term Capital Gains (LTCG) and LTCG part will attract tax at 20% after indexation.

2. TRANSFER OF MONEY [stp] FROM equity TO debt FUND

This mode of transfer is suitable for the investors who are going to achieve their long-term financial goal within 3 years or simply who are approaching their retirement. Thus the STP from equity to debt fund would protect their corpus from possible market fluctuation.

TAX IMPLICATIONS ON STP FROM equity FUND TO debt FUND –
  1. Any transfer before 1 year will be Short-Term Capital Gains (STCG) and it will be taxed at 15%.
  2. Any transfer after 1 year will be Long-Term Capital Gains (LTCG) and it will be tax-free up to Rs. 1 Lakh per annum. Beyond that, it will attract a flat tax of 10%.

B. Tax Implications of SWP

Mutual fund withdrawals are subject to tax depending on the category of the funds you own. Debt funds and equity funds are taxed differently. Systematic Withdrawal Plans (SWP) redemption is as per first in first out (FIFO) method wherein units first bought are assumed to be redeemed first. Hence your costs for the purpose of taxation will be considered as per FIFO method.

In case of SWP, each withdrawal will be treated as a mix of principal and capital gains withdrawal and only the capital gains portion will be taxed. That makes an SWP a lot more tax efficient.

1. SWP FROM Debt funds

SWPs are normally done on debt funds or hybrid funds as they are more predictable compared to equity funds.

TAX IMPLICATIONS ON SWP in DEBT FUND –
  1. If investments are held for 3 years or more, it will be Long-Term Capital Gains (LTCG). LTCG tax on debt funds is 20% with the inflation indexation benefit on the original investments.
  2. If debt mutual fund investments are sold before 3 years, it will be the Short-Term Capital Gains (STCG). And STCG is taxed as per your slab rate.
  3. Example – Suppose, you invested ₹6 Lakhs in Reliance Short Term Fund on 1st Apr, 2015 and started SWP of Rs. 10,000/month from it immediately from 10th Apr, 2015. So, this is how your taxation (Assuming you are in 30% tax bracket) will be –
STCG Tax Implication of SWP on Debt Fund
STCG Tax Implication of SWP on Debt Fund

2. swp FROM equity funds

TAX IMPLICATIONS ON SWP IN Equity FUND –
  1. If you redeem/withdraw your investments in equity mutual funds after 12 months, your investments would qualify for Long-Term Capital Gains tax. LTCG in excess of Rs. 1 lakh are taxed at 10% currently. 
  2. If you sell your equity mutual fund investments before 12 months, you will have to pay a short-term capital gains tax at a rate of 15%.

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