There is a common misconception about mutual funds. Many believe that they invest in only equity related assets (share markets) and are very risky. However, this is very far from truth. Each Mutual Fund scheme invests as per the investment objective of the scheme and the same is clearly specified in the Offer Document. Mutual Fund schemes could be investing in a portfolio of equities/shares, or in gold or investing in fixed income instruments like bonds or debentures or in a combination of these as per its Investment Objective. Hence, the riskiness of each type of Mutual Fund scheme depends on the portfolio of the scheme which is as per the investment objective. Most of us (Resident & NRI’s) invest in Bank Fixed Deposits or Savings Account. The ease and convenience of investing makes them very attractive. However, please note the money taken by banks are then onward invested into instruments like government securities, corporate bonds, loans etc. The bank after keeping their margins passes on the returns to the depositors. The returns to the depositors would then be subjected to TDS or income taxes. Similarly, debt/conservative mutual funds invest predominantly in safer and less volatile financial instruments. The returns from a debt/conservative mutual funds are also extremely tax efficient compared to an equivalent banking product for investors in the higher tax brackets. This is because long term gains (either after 1 or 3 years) in these types of funds are taxed at concessional tax rates whereas bank deposits (Resident and NRO) are taxed at marginal tax rates. It could also be noted that only realized gains are taxable in these mutual funds whereas even non realized gains (Resident /NRO) are taxed in case of banking products. Some of the other salient features/uses are: • NRIs can invest on a fully repatriable basis from NRE account. • NRIs can also invest the balances of NRO accounts on non repatriable basis. • One can invest anytime including additional purchases. Full and partial exits could be done at any time. • The transactions could be done either online or offline. • No TDS for residents on the withdrawals. No tax implication on growth. • No entry loads. Exit loads depend on the type of the schemes. • Much safer than equity scheme in the short term. Returns do not fully depend on the equity markets. • Fully regulated by SEBI under the Ministry of Finance. • Returning NRI’s can plan to invest quite early to reduce the taxable income once the Residency changes and Indian tax laws apply. • Excellent tax efficient products for regular income requirements of retirees. • A must for conservative allocations of higher tax bracket investors. The broad categories of these schemes are: 1. Short /Medium Term Debt Funds: Investors looking at parking funds from short to medium term perspective can invest in these debt funds. Suggested with 1-3 years plus time frame. 2. Arbitrage Funds: If you are looking at tax efficient ways to park money for the shorter time frame (6 months plus), we would suggest these schemes. These work like conservative debt funds but taxed at a concessional rate (even for less than 1 year) as they are considered equity funds for tax purposes. 3. Conservative Hybrid Fund/Equity Savings Fund: These types of funds invest small portion in equity markets based on relative valuation or as per the scheme’s objective. While these are more aggressive than pure debt funds but these suit very well for 3 years plus time frame for conservative allocations. We hope that this article would have given a brief introduction on the importance of debt/conservative mutual funds for your financial allocations. We request you to get in touch with us at 98455 57582 or naveen@naveenrego.com, for any further clarifications on the above suggestions. Wishing you all a safe and exciting investment experience. Stay safe!! Naveen Julian Rego - CFPCM SEBI Registered Investment Adviser INA200004250 Important Note: 1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing. 2. Past performance of any asset class is not an indicator of future performance. 3. The above financial products should be made part of one’s financial portfolio taking into consideration various factors like risk profile, age, regular income requirements, taxation bracket, residency status etc. Hence, invest in a professional financial planner before initiating the above investments. 4. The above are mere suggestions and not Investment Advice as individual cases might differ. 5. More details about the above-mentioned respective products are available online and not produced here for simplicity
