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nformation provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. , its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.
The best time to start investing is today You are different and so are your needs Why your returns are not the same as the market’s return? Understanding Taxation in Mutual Fund Investments
These days you are probably hearing a lot about mutual funds as a means for fruitful investment. You are also likely to be among the majority who probably has most of his/her money in a savings bank account and the biggest investment as your home. Also, investments are probably something about which you neither have knowledge nor time.

The mutual fund industry in India is constantly evolving. Along with it, many industry bodies are investing towards investor education. Yet, according to industry reports, less than 10% of Indian households consider mutual funds as an investment option. Mutual funds are largely viewed as high-risk financial instruments.

What is Mutual fund?
A mutual fund is not an alternative to bonds and stocks. Rather, it pools money from several investors and invests in bonds, stocks, money market and other types of securities. Simply put, investing on a mutual fund is like buying a small size from a big pizza. The buyer of a fund unit gets a proportional share of the fund?s profits, losses, expenses and income.

Features of Mutual Funds
The key features of a mutual fund are as follows.

Professional management: All mutual funds are selected and monitored by qualified professionals who use the money for building a portfolio. They are known as fund managers. The portfolio?as already said?is usually spread over a variety of financial instruments.

Fund ownership: As an investor, you own shares of the fund, but not the individual securities. A mutual fund allows you to invest small sums, as much or as little as you want. You benefit from your involvement in a large cash pool invested by other people like you. All shareholders share the fund?s profits or losses equally, according to the proportion of the money they have invested.

Diversification: Mutual fund investors can diversify their portfolio across several types of securities that minimise their risk. When you spread your money across various securities, you don?t need to worry about price fluctuation of individual securities in the fund portfolio.

Objectives
There are several types of mutual funds. Each one of them has their own sets of goals. The fund manager, while deciding on which bonds and stocks to invest, sets out the investment goals. For instance, a growth stock fund may invest mostly in equity markets with an objective to provide long-term capital gains to meet financial needs over a period of time like your children?s education or retirement benefits.

Types of Mutual Funds
Depending on the investment objectives, mutual funds can be broadly classified as under.

1. Open-ended
This scheme enables investor to buy and sell securities whenever they like. They have no fixed date of maturity.

Debt/income: The lion?s share of the investable corpus in a debt/income scheme is channelized into government securities, debentures, and other debt instruments. Though capital appreciation is lower compared to equity funds, debt/income schemes are comparatively low-risk investments. They are ideal for those seeking steady income.

Liquid/money market: These funds are best for those wanting to utilise their surplus funds in short-term schemes while waiting for better alternatives. These schemes put money in short-term debt instruments and offer reasonable returns.

Growth/equity: Equities are one of the most popular fund categories among retail investors. Equities are high risk investments in the short-term. But investors can expect long-term capital appreciation. If you are at your prime earning stage and looking to book long-term profits, growth schemes would be one of the best investments.

Index schemes: These are widely popular investments in the West and some fund houses have begun to offer them in our country as well. An index scheme follows a passive strategy where the investments follow movement of benchmark indices like Sensex, Nifty and others.

Sectoral schemes: Sectoral mutual funds are invested in specific sectors like IT, infrastructure, pharmaceuticals, and others or in segments like small cap, large cap etc. Such schemes usually provide a high return-high risk opportunity in equities.

Tax saving: Such schemes, as the name suggests, extend tax benefits to the investor. The funds are invested in equities and offer a long-term growth opportunity. More popularly known as equity linked savings schemes (ELSS), tax saving mutual funds usually has a three-year lock-in period.

Balanced: These schemes allow investors to reap both income and growth at regular intervals. The funds are invested in fixed income securities as well as equities. The proportion of investment is pre-determined and disclosed in the scheme offer document. These instruments are best for the cautiously aggressive investor.

2. Close-ended
Close-ended mutual funds have a fixed maturity period. Investors can put in their money only during the launch of the fund i.e. in the new fund offer (NFO) period.

Capital protection: The key objective of such a scheme is to protect the principal amount and at the same time, deliver reasonable returns. These funds invest in fixed income and high quality securities with a marginal investment in equities. They mature along with the scheme?s maturity period.

Fixed maturity plans (FMPs): As the name suggests, FMPs are mutual funds having a fixed maturity period. FMPs are usually made up of debt instruments that mature at the time of maturity of the scheme. They earn through the interest component?also known as coupons?of securities on the portfolio. FMPs are normally managed passively i.e. there are no active trading of debt instruments in portfolio. Expenses charged on the scheme, hence, are usually lesser than the actively managed schemes.

3. Interval
Operating as a combination of close and open ended schemes, these allow investors to trade in units at pre-defined intervals.

What is net asset value (NAV)?
The asset management company (AMC) which manages a mutual fund, calculates the NAV at the end of each business day. NAV is the total asset value, minus the expenses, per unit of fund. To calculate the NAV, take the current market value of the mutual fund?s assets, minus liabilities if any, and divide that by the number of outstanding shares. The formula to calculate NAV is given below.

For instance, if the market value of the securities in a mutual fund is Rs.500 lakh, and the fund has issued Rs.10 lakh units of Rs.10 each to its investors, then the NAV of each unit is Rs.50.

Hybrid Funds means funds made by combining two or different category of assets equity and debt. As hybrid fund invest in two asset categories investor can avail the benefit of both. Hybrid Fund offers maximum diversification and moderate returns. A hybrid fund is a combo of equity and debt. There are various types of hybrid funds available to Indian stock market investors. The decision of investing in hybrid mutual funds depends upon investors risk profile and investment objective.

How Hybrid Fund Works?
The hybrid fund works on the balanced approach of investing. The fund manager of fund invests your money in the stock market (equity) and fixed income (debt) in varying proportions based on fund investment objective. If it is equity-oriented fund exposure to equity will be more and if it is debt-oriented fund exposure to debt will be higher. The equity component of the hybrid fund includes equity shares of companies across sectors like FMCG, finance, healthcare, real estate, automobile, capital goods etc. The debt component of the hybrid fund includes fixed income instruments like fixed deposit, government securities, bonds, debentures, treasury bills etc. The fund manager takes buying and selling decision-based on the market conditions.

Types of Hybrid Funds
There are six types of hybrid funds. Details of each fund is given below.

Conservative Hybrid Fund
Conservative fund as the name indicates it is made for conservative investors with low-risk appetite. These funds invest mostly in debt instruments. Fund objective is to invest around 70-90% money in debt and remaining in equity. These funds were earlier known as MIPs.

Balanced Hybrid Fund
Balanced funds have similar attributes as its name. This fund invests in both equity and debt in nearly equal (balanced) proportion. Fund objective is to invest 40-60% in equity-related instruments and remaining in debt. These funds are suitable for investors with a moderate risk profile.

Aggressive Hybrid Fund
Aggressive Hybrid Fund has aggressive investment strategy and higher exposure to equity and equity related instrument. The objective of this fund is to invest 65-80% in equity related instrument and remaining in debt instruments. These funds are suitable for aggressive investors.

Dynamic Asset Allocation/ Balanced Advantage Fund
Dynamic Asset Allocation fund as name indicates asset allocation in this fund is dynamic. It can take extreme exposure to either equity or debt based on market condition. Asset allocation ratio in this fund is decided by formula. These funds are suitable for the investor who prefers less volatility in returns.

Multi- Asset Allocation Fund
Multi-Asset Allocation fund invests in multiple asset class or at least 3 asset class with 10% exposure to each. The asset types include equity, debt, commodity, real estate etc. These types of fund reduce the risk as portfolio is diversified.

Arbitrage Fund
Arbitrage fund is a type of mutual fund that takes advantage of the differences in the price of securities in the cash and derivatives market to generate a return. The arbitrage fund makes money from low risk buy and sell opportunities available in cash and future market. This fund is suitable for low-risk investors.

Who should Invest in Hybrid Funds?
Hybrid funds are comparatively safer bets than pure equity funds. These funds provide higher return compared to debt fund. This fund is suggested for conservative investors with moderate risk appetite looking for income generation or capital appreciation. The equity component of fund offers the probability of higher return, at the same time, the debt component offers a cushion against market conditions. As there are multiple types of hybrid funds available in the market, as an investor you must be careful in the selection of the right hybrid fund. If you are a conservative investor go for conservative hybrid funds or Arbitrage fund. If your risk-taking capacity is higher you can go for aggressive hybrid funds.

Points to consider while investing in Hybrid Funds
One should consider following points while investing in Hybrid Funds.

Risk – A Hybrid fund is not completely risk-free. It is less risky compared to equity fund as debt component is involved.

Return – Hybrid funds do not offer guaranteed returns. The returns entirely depend on market condition and performance of underlying assets.

Expense Ratio – Expense ratio is one of the important factors while making a decision of buying a mutual fund. You should select a fund with a lower expense ratio.

Investment Horizon – A Hybrid fund is ideal for medium-term investment horizon. The recommended investment horizon for a hybrid fund is 5 years. Tax on Gain – Long-term capital gain tax and short-term capital gain tax both are applicable to mutual funds.
Your investment in long term debt funds should reap you good returns on maturity, right? But what if these returns come under the axe of tax? How do you stop that from happening?

The simple answer to that is Indexation.

Indexation is a financially prudent measure to reduce your tax obligations on your returns. You get to keep the better part of your returns, as you rightfully deserve.

But how is that done?

The price at which you buy units of your debt fund is inflated or increased. This automatically implies lesser tax liability, because the gains you receive are reduced. And hence, you can enjoy more gains in your hand instead of losing it to the clutches of tax!

Indexation is applicable only in cases of Long term debt funds. Equity funds are taxed in a different manner.

What is Indexation & How it works?
How does Indexation work? It relies on the dual pillars of Inflation and Capital Gains.

Let’s understand them below:
Inflation
Inflation, as you must know, is an increase in prices of various commodities. Your favorite sneakers were priced at Rs 500 three years back, but the same sneakers now cost Rs 800. This also implies that there will also be a fall in your purchasing capacity over time. Why? Because of Inflation. 
You might be able to buy 5 units of a certain commodity at Rs. 200 today, but you might be able to buy only 3 units of the same commodity at the same price some years from now. That is the effect of inflation. It eats into the value of your money, making things expensive.
Capital Gains
Capital Gains, on the other hand, is the positive difference between the purchase and the current market price of your investment. Simply put, it’s a reward for your patience, only in monetary terms. This difference is seen over a specific time period.
So, let’s assume the NAV of a certain fund is Rs. 20 today. And a year from now, the NAV stands at Rs. 40. It can be said, then, that your investment has earned a gain of Rs. 20.  
Gains from the sale of units of your Debt Mutual Funds are classified as Capital Gains. If you have held such long term debt investments for 3 years or more, your long term debt funds are taxable at the rate of 10 % without the benefit of Indexation. Since Indexation will reduce your long term capital gain, i.e. show less profit, your tax obligations will automatically come down. Isn’t that a relief?
In order to arrive at your Indexed Cost of Acquisition (ICoA), there is a small formula you need to apply.
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
If you are wondering what CII is, it is nothing but Cost Inflation Index. The rate of inflation for indexation purposes have been specified by the Indian Government for every financial year since 2001-02. These rates can help you in easy computation.

Mutual Fund Indexation Benefit – How it helps reduce your Taxes on Debt Mutual Funds?

Example 1:
You had invested Rs. 1 lakh in a debt fund in January 2010 by purchasing 10,000 units at a NAV of Rs. 10. Say you redeemed all of it in September 2013, when the NAV was Rs. 16. The value of your investment, therefore, became 1.6 Lakhs, i.e. 10,000 units @ Rs 16 each.

However, since your investment is long term (more than 36 months) the entire gain of Rs. 60,000 could be taxed at the rate of 20%. Sigh! You stand to lose a significant chunk of your earnings in taxes. But post Indexation, your profits will rise and your taxes will fade away. With Indexation, your cost of acquisition, adjusted for inflation, will become Rs. 1 lakh X 220/148= Rs 1,48,649 Now, your long term will be calculated in the following manner-
Sale Price of Your Units
Indexed Cost of Acquisition, i.e. Rs (1,60,000- 1,48,649). This means that your long term capital gains amount to Rs 11,351. Thus, you will be taxed at the rate of 20% on this amount, which is peanuts, compared to the original taxable amount of Rs 60,000.
Example 2:
Let’s say you invested in a debt fund in May 2012. Your investment amount was ₹2,00,000 (20,000 units @ Rs 10 each). Five years later, you redeemed your investments in June 2017, at a value of ₹3,00,000 ( 20,000 units @Rs 15 each). Hence, when you sold your investments, the value of your investments was ₹3,00,000. Your investment made capital gains worth ₹1,00,000. However, you need not pay tax on this entire amount of ₹1,00,000.

All you need to do is apply the formula.
This would mean that your indexed cost price of acquisition would be – (2,00,000 * 272/200) = Rs 2,72,000. As again, your Long term capital gains would come down to Rs. 28,000 (Rs 3,00,000- Rs.2,72,000), you will be taxed 20% of this measly amount (as compared to Rs 1,00,000 without indexation) which will again, greatly reduce your tax obligations. Thus, with Indexation, you can enjoy the benefits of your own investments without losing an excessive amount of taxes. It helps build up your wealth significantly to pursue your life goals. So, the next time you decide to invest, choose a debt fund which provides you with the benefit of indexation. Invest wisely, save taxes! Start investing today.
Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. , its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.