Safer money, lesser taxes…

Most people whom I have met, fall into one of the categories when it comes to investment. Ask them thier risk appetite and strangely it’s either zero risk or full risk with high returns.

A government based security like NSC, FD is the answer to first class of people and equities are the answers to the other set of people. The theme and concern of this post is however the first class of people who get interests but woudnt want to part it as taxes to government.

If one were to invest in any avenue, capital gains come into picture and the only exception is equity mutual funds where there is no taxation of long term capital gains. All other investments are added to your income and taxed at brackets accordingly.

If one were in the highest tax bracket, 33%, any investment into safe avenues like FD, NSC would mean paying taxes at 33% – if there is one avenue by which this can be reduced to 10% of capital gains – there is an instrument – the debt oriented mutual funds.

The medium term debt oriented mutual funds generate returns in the range of 4.5% to 8.5% per annum based on AMC and maturity period of the instruments held. In other words, following are the advantages and disadvantages:

Merits

  • No entry load. Exit loads normally if redeemd before 15-30 days otherwise that is not there too
  • You pay tax at 10% of capital gains instead of 30%
  • Highly liquid, redemptions take 2 to 4 working days only

Demerits

  • Long maturity periods of paper holdings and low rated commercial papers are risky.
  • Scheme choosing should be done with care – Interest rate flactuations are a cause of concern.
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6 Responses to Safer money, lesser taxes…

  1. Ankur says:

    i am sorry to say, but sometimes u give some wrong financial advice…
    in case of rising interest rate… the debt funds can give negative rate of returns…

    the only interest free safe investment is in PPF fund… which is 100% tax free 8.5% rate of return

  2. Veena says:

    Mohan, These MF’s I feel has a long period of locking and also need to invest quite regularly(SIP).. Well I need to still get used to the way they work…
    and now fill ITR2 for the capital gains, instead why can’t they do TDS (infrastructure bonds has this option)..

    Ankur, PPF.. I think the first 5 years we can neither withdraw nor take loans nothing.. of course if one quits his company and declare that he is not working anymore for atleast next 60 days. and ya, it used to be a big savings for our previous generation.. Atleast my dad used to rely on this quite a few times! Do these guys have any website of their own to check our balance etc., ?

  3. M O H A N says:

    Ankur,
    Please feel free to correct me when wrong – of course am not a financial adviser charging money if ANY such wrong advice is given. Then coming back to your comment of negetive return, pls read the demerits – thats what the root cause of your negetive returns are all about.

    PPF is no doubt a safe avenue – if you read the previous posts but this is termed as one of the ‘ponzie schemes’ touted by GOI. For more info on demerits you are free to google for ponzie schemes and you would get abundent data as to why PPF is not sound too 🙂

    Veena,
    The lock in period of debt funds is 15 days max and 7 days in liquid schemes! SIP works in general but fails badly in constant bull runs! Your idea of TDS for MF’s is a great thought. You have listed a couple of sore points too but however the aim of PPF is NOT for withdrawal at all however bad the case may be – the original idea of GOI was that you have a fat buffer at end of active life as we do not have social security in India atleast.

  4. Ankur says:

    @veena…
    1) You are confusing between EPF and PPF…… PPF has no bearing on who ur employer is.
    2) about not being able to withdraw… u should always open an PPF account very early (say college first year) and deposit the min 100/- (i think it is 500/-now) p.a. in it… and when u start earning… max it by putting 60-70k p.a. in it.

    3) TDS…. its only 10% for bonds… if u actually declare it as an income.. u will have to pay the balance 22.4%

    @mohan….
    ya i remember postal savings scheme post. and I agree SIP often does not make sense.. because u might end up buying stocks when the market is at its peak

  5. Mohan,
    Need to check out on Debt funds.. even with all these, why do our hoardings talk so much about SIP then.? every finanacial advisor talks about SIP (and trap us?)
    Ankur’s point is right about buying stocks when the market is peak..

    Ankur,
    College and money Transaction ? I don’t think I ever even knew about it. 🙂
    and for bonds, it depends on how do you opt to get back the interest and if you get it all at once and if it exceeds 10K, I thought its the way you said if you get it yearly then its 10%.. May be I am wrong too.

  6. Veena,
    SIP is a great way of investing except when the market is allways going up! SIP for the financial adviser ensures regular income too 🙂

    But take note of what ankur was pointing out, wrong selection of debt funds can wipe out your capital too…check out the track record and then invest.

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