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Rebalance your portfolio annually

Rebalance your portfolio annually
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First Published: Sun, Apr 13 2008. 10 18 PM IST

(IllustrationJayachandran / Mint)
(IllustrationJayachandran / Mint)
Updated: Sun, Apr 13 2008. 10 18 PM IST
Mutual funds
I have 15 years left for retirement. How can I use MFs for post-retirement expenses?
It is difficult to suggest a mutual fund (MF) portfolio without understanding your circumstances and risk profile. Broadly, you should try to build a corpus in equity and balanced funds considering that your retirement is 15 years away. Use systematic investment plans (SIPs) to benefit from rupee cost averaging. Select schemes from the OLM 50 basket that suit your risk profile. Choose 5-6 schemes from the equity and balanced categories to form the core of your portfolio, with a small exposure to thematic schemes to take advantage of current market momentum. Rebalance your portfolio at least annually to maintain the asset allocation between equity and debt.
I made a lump sum investment in January in a debt fund and opted for monthly STPs to transfer most of the investments I will make to an equity fund by December 2008. However, I plan to retain around Rs10,000 of the profit that it makes in the period, in the debt fund. My agent says that the amounts being transferred to the equity fund will not be subject to any capital gains tax at the time of transfer, and that if I redeem my equity fund investments one year after the last transfer, there won’t be any tax at the time of redemption. Is this correct?
Systematic transfer plan (STP) is a redemption and purchase transaction rolled into one. As such, capital gains tax applicable to debt funds will apply to transfers made from the debt fund to the equity fund. Any redemption made from the equity fund one year after the investment is made will not attract capital gains tax. MFs would redeem units on a first-in-first-out basis. So, the units allotted first, which have already completed one year, will be redeemed first and will be exempt from capital gains tax. One year after the last transfer, all your units will be exempt from capital gains tax.
If I use my ICICIdirect demat account to invest online in an MF, either through SIPs or a lump sum payment, will I have to pay the entry load of 2.25%? I want to invest Rs50,000 each in two MFs. Keeping in mind the depressed markets that have made many MFs available at low NAVs, should I go for SIPs or lump sum payments? Please suggest a few diversified MFs that are likely to give good returns over the next two/three years and some good ELSS schemes. Can I buy these online through my demat account? How will I get my receipt/documents required for tax exemption for an online purchase?
(IllustrationJayachandran / Mint)
The exemption of entry load is applicable only for investments made directly with the MF, including investments made online on the asset management company’s (AMC) website.
Please note that ICICIdirect is an online broking company and is a distributor of MFs. Therefore, entry load will be applicable to investments made through them. Online investing is just one of the methods of applying and all further processes are similar to investing through a distributor. However, payments may be possible only through designated banks.
You do not need a demat account for making investments online. As it is not possible to perfectly time your entry into markets that continue to be volatile, a systematic transfer plan is always advisable.
In January, I started an SIP of Rs1,000 per month in Sundaram BNP Paribas CAPEX Opportunities Fund (Growth) and of Rs5,000 in Sundaram BNP Paribas Energy Opportunities Fund (Growth). I want to remain invested for the next three years. How is the value of my investment calculated?
Units are allotted to you every month depending upon the net asset value (NAV) on the day of allotment. Therefore, the value of your investment on any given day is the product of the units that you hold and the NAV of the scheme on the day of valuation.
What deductions are allowed from the cost to company (CTC)?
Income tax depends on the break-up of the CTC. Contributions to gratuity, pension and PF, which are generally included in the CTC, are not taxable in the hands of an employee. For a salaried person, the basic pay and most allowances, including the dearness and city compensatory allowances, are taxable. Among the exemptions are: conveyance allowance up to Rs9,600 per annum, a part or whole of the HRA subject to certain conditions, LTA twice in a block of four years, children education allowance up to Rs1,200 per annum for each child (maximum two kids) and medical reimbursements up to Rs15,000 per annum. Perks are generally taxable.
Tax outgo also depends on the amount one invests in tax-saving section 80C instruments, and the premiums one pays for medical covers for self and family, which qualify for deduction under section 80D.
There may be other deductions for which a person may qualify.
My wife, a homemaker, earns Rs30,000 per year through her investments. Should she pay tax or will her income be clubbed with mine? If so, which ITR form will have to be filled to pay tax?
The taxability of your wife’s income will depend on the source of her investments. If the investments made by her are from income earned by you and gifted to her, income from them will be clubbed with your income and be taxable in your hands. However, if she got the amount through a will or as a gift from her parents or relatives or at the time of her marriage, income from it will be taxable in her hands. Income up to Rs1.45 lakh for financial year 2007-08, and up to Rs1.85 lakh for financial year 2008-09, is exempt in the hands of women assessees.
So, if the income stated by you belongs to your wife, it is well below the minimum exemption limit. When her income becomes taxable, she will have to file her tax return in ITR No. 1.
I bought a house in September 2004 for Rs2.64 lakh and sold it in January this year for Rs4.94 lakh. My income is Rs1.90 lakh per year. Will I have to include the house sale income in my tax calculation? How much capital gains tax will I have to pay?
Yes, profit from sale or transfer of a property is taxable as capital gains. Your gain will be classified as long-term capital gain as you held the house for more than three years. Long-term gain is the difference between the sale consideration and the indexed cost of a property. Indexed cost can be obtained by multiplying the cost of property with the cost inflation indices of the year of sale and dividing the resulting figure by the cost inflation indices of the year of purchase. In your case, the indexed cost works out to Rs3.3 lakh (Rs2.64 lakh x 551/480). Long-term gain works out to Rs1.91 lakh (Rs4.94 lakh minus Rs3.03 lakh). The amount of gain will be taxed at a flat rate of 20%. The tax payable, thus, is Rs38,190. You can avoid this tax by using the amount of gain to purchase a new house within two years of the date of transfer of the old property.
The exemption is also available if you construct a new residential property within three years from the date of transfer.
In this case, the entire amount of capital gain shall be exempt from income tax under section 54 of the Income-tax Act. The rest of your income will be taxed as per the normal rates of tax applicable to your income. Alternatively, you can invest your capital gain amount in REC or NHAI bonds to save taxes.
(Please send your questions and comments to moneymatters@livemint.com)
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First Published: Sun, Apr 13 2008. 10 18 PM IST