I have Rs 3 lakh which I would like to invest in a good mutual fund for about a year. I do not want to take any risk on my principal amount. Which mutual fund should I choose?
-Ashok
Since you do not want to take any risk on your principal amount, mutual funds (MFs) are not the right way to go. No MF gives a guarantee of capital preservation. Consider a bank fixed deposit, as it will give you the guarantee of safety you require, with assured returns. But do keep in mind that early withdrawal in a bank FD will result in a penalty. So, be sure of the time when you will need your money back and accordingly select the time frame for investment.
While calculating tax for debt funds, what is meant by tax with indexation and tax without indexation? How do I know whether I need to follow the indexation rate or not? Is that something to be consulted with the fund house? Which of the two is better?
-Raju M
Indexation is a benefit that allows you to remove the impact of inflation on your investments, so that you do pay tax on only the real gain. For calculating the actual gain, the government constructs an index called the cost of inflation index (CII). Its base year is 1981-82 and the value for that year is 100. For each subsequent financial year, the value of the index is declared. To determine the gains on which tax has to be paid, the ratio of the inflation index at the time of sale of the instrument to its value at the time of purchase is taken. This is multiplied by the cost of acquisition of the asset. This gives the indexed cost of acquisition. To determine the capital gain after accounting for inflation, the indexed cost of acquisition is subtracted from the sale consideration.
Based on this concept, investors have the option to pay long-term capital gains tax at the rate of 20 per cent with indexation, or 10 per cent without indexation, whichever is lower. You need not consult the fund house for this.
On your final query, neither option can be said to be beneficial for all. It will vary from case to case.
I have been investing in the mutual funds since 2006. I started with a few good funds and now I have decided to restrict the total number of these to around five. I have some funds in which I have stopped investing further, although these are rated well. Yet, the original investment is still present. I would like to withdraw from those funds and reinvest in my other funds, that are also highly rated. What is the way forward? Should I withdraw only once the market gets better and earn a better return? How do I do it?
-Bhalchandra Joshi
Having a small number of funds in your portfolio makes it easy to track and manage your funds. However, while trying to consolidate your portfolio, trying to time the market is not wise.
Do not move all your money at one go. Systematically shift the proceeds to the funds you wish to keep. Do a Systematic Transfer Plan (STP) if two funds belong to the same fund house. You could spread this process over a year or two.
