Mutual funds also offer many types of tax savings benefits

I am 27 and started investing in mutual funds 1 month ago. I have started a systematic investment plan (SIP) in DSP BR Tax Saver for Rs3,000. I am looking to investing in Axis Long-term Equity (Rs3,000) and Principal Balanced (Rs3,000). My horizon is about 5 years, risk appetite is moderate and goals are high returns and tax saving. Please suggest if these two funds are appropriate?

—Name withheld on request

There are three types of tax savings one can have with investing in mutual funds: tax deductions, tax exemptions, and indexation benefits. The first one, tax deduction, applies only to equity-linked saving scheme (ELSS), which are tagged as tax-saving schemes. Using these funds, the money invested in them would be subtracted (deducted) from the taxable income of an investor, thereby reducing the tax outgo. Investments in these funds are locked for 3 years but any gains after this period would be tax exempt. There is a limit of Rs1.5 lakh on this annually. The second type—tax exemption—would apply to domestic equity-oriented funds. Many equity funds such as large-cap funds, diversified funds, and balanced funds would fall in this category. In this case, the profits made after at least 1 year of holding will be considered ‘long-term gains’ and be exempt from tax. However, the money invested in the fund itself would have to be after payment of tax. The third type, indexation benefit, applies to all other types of mutual funds, specifically debt funds, and provides the benefit of reducing the tax outgo by reducing the reportable gains from an investment. You are investing in two tax deductible funds (for a total of Rs72,000 per year), and in a balanced fund (for Rs36,000 a year). You will get the benefit of reducing your taxable income with the first fund, and exemption from taxability of long-term gains from your balanced fund. The category of funds that you have chosen fit your timeline, risk tolerance, and objective. In terms of fund selection, you are doing fine with your tax-saving funds. For the balanced fund, please go with ICICI Prudential Balanced fund.

I am 47 and I need money for marriage of my children in around 8 to 10 years and pension after 13 years. What funds can I invest to get maximum returns. Also, how can I switch to funds from unit-linked insurance plans (Ulips). I have them since 2008 but am not satisfied by the returns. I can invest Rs5,000 a month and I am paying premiums of 2 Ulips for Rs20,000 and Rs36,000 every year. One is a pension plan of Rs15,000 and one a guaranteed plan of Rs34,000.

—Sunita Singh

The best way to go about your investment planning is to have clear goal-oriented portfolios for each of the financial goals that you are seeking to achieve. Both the goals are relatively long term (one is 10 years, another is 13), so you can plan your portfolio with some freedom and take some risk in your investment choices. However, saving Rs5,000 a month might not be quite sufficient at this stage for your retirement goal.

Over the coming years, as your earnings and savings increase, you may want to increase your investment amount as well. You can have equity-heavy portfolios at this stage given, the long-term investments horizon.

Regarding your Ulip investments, it is hard to give advice without knowing the specifics of your plan and fund choices in them. However, considering that you started your investments in 2008, before the Ulip reforms were instituted in 2010, it is likely that the right thing to do with them is to terminate them or at the least, stop further investments in them. Please talk to your insurance company, and if the accrued money can be taken out with paying any penalty at this stage, please do so and invest in your mutual fund portfolio.

At the least, given that you are investing Rs56,000 a year in them, diverting them to funds will help you fund one of the two investment portfolios for you.

I recently started investing in three mutual fund schemes. I got the scheme information document (SID) but it appears very verbose in nature. Can you tell me what all information I should look for? Kindly advise what is relevant and how I should read it.

—Deep Majumdar

The SIDs of mutual fund schemes do tend to be verbose. That is because of all the regulatory disclosures and statutory topics that need to be covered in there. Also, many mutual fund companies issue SID documents that cover multiple schemes and it would be hard to filter out information specific to one particular scheme that one is interested in. A better option would be to look at another document called the key information memorandum (KIM), which is an abridged version of the SID, and runs only a few pages.

The key things to note in either of these documents would be the investment criteria and the mandate of the scheme. The investment criteria would include things such as the minimum investment amounts, the exit load criteria (the periods and percentages), and the expense ratio. The investment mandate would make clear where the fund manager intends to invest (which segment of the market) and how the portfolio would likely be structured across different asset classes.

The KIM would also contain details about past performance, risk factors, and recent portfolios, all of which would make interesting reading for an informed investor.

Srikanth Meenakshi is co-founder and COO,

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First Published: Wed, Aug 09 2017. 05 22 PM IST

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