Equity mutual fund investment offer various tax benefits

Only schemes specified as equity linked savings schemes (ELSS) come with a three-year lock-in period


I want to know whether I can get tax benefit for investing in any equity mutual fund other than equity-linked savings scheme (ELSS)?

—Shantanu Mitra

If your question is specifically about reducing your taxable income by making a tax deductible investment, then the answer is no. Only schemes specified as equity linked savings schemes (ELSS), which come with a three-year lock-in period, enjoy that benefit. However, the other equity schemes that do not allow for tax deductions, still enjoy beneficial tax treatment in the form of tax exemption for long-term gains (profits that accrue after one year of holding). This means that if an investor buys Rs.1 lakh worth of equity funds today and redeems the units more than a year later at Rs.1.2 lakh, then the profit (of Rs.20,000) is exempt from tax.

Equity mutual fund investments are among the few investment avenues that offer such a generous tax treatment for gains. Even debt funds offer a beneficial tax treatment for long-term gains (three-year holding period in these cases) in the form of lowering the taxable gain amount by applying an indexation factor on the cost of purchase.

So, every mutual fund investment offers one or another kind of tax benefit. However, tax deductibility is available only to ELSS category.

I have systematic investment plans (SIPs) in three large-cap funds, two mid-cap funds and a sector fund. My total investment per month is Rs.20,000 and I have been investing like this for the past seven years. I plan to buy units of another four funds and invest Rs.10,000 per month. Which funds would you suggest? Do I need to readjust my portfolio?

-N. Fernandes

Presently, you have six funds in your portfolio and they provide good coverage across the equity market. However, without knowing the allocation across the fund categories that you have listed and the names of the funds, it is hard to provide exact feedback on your portfolio. In general, for a long-term portfolio, an aggressive asset allocation across market segments can be 40% to large-cap funds, 40% to mid-cap funds, and the remaining to a sector fund or an international fund. More conservative investors could allocate the last 20% to debt or gold funds as well.

So, in your case, please ensure that you have a proper allocation across the funds that you are holding in your portfolio. Given that you have three large-cap and two mid-cap funds, my estimate is that you are overweight on large-cap funds. That might not be a good idea, and you might want to redistribute some of that allocation to the mid-cap space. Good mid-cap funds such as ICICI Prudential Value Discovery and HDFC Mid-cap Opportunities can be considered for this purpose.

Adding four more funds to your portfolio seems a bit much. As long as you are holding funds that are performing well, you should consider adding to your existing funds, rather than bringing in new funds.

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