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:
- 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
- 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.