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Ask Mint Money | Fund of funds are treated as debt funds for tax purposes

Ask Mint Money | Fund of funds are treated as debt funds for tax purposes
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First Published: Sun, May 15 2011. 08 31 PM IST
Updated: Sun, May 15 2011. 08 31 PM IST
I am 26 years old and want to invest Rs 10,000 through a systematic investment plan (SIP) for at least 10 years. Suggest some funds and sectors I can invest in and the amount for each fund.
-Manisha Jain
The design of a good SIP portfolio should start with deciding the pattern of assets held. In other words, deciding what percentage of the portfolio will be invested in what category of assets (funds). Different categories have different risk profiles, so a balanced portfolio will have a risk pattern that fits with the investor’s time frame and risk appetite.
I would recommend you to invest 50% in large-cap-oriented funds (moderately aggressive), 20% in small/mid-cap-oriented funds (aggressive), 20% equity-oriented balanced funds (conservative giving some debt/bond exposure) and 10% in gold funds (to add stability and hedge the portfolio). That would work out to Rs 5,000, Rs 2,000, Rs 2,000 and Rs 1,000, respectively.
We will go with top-rated schemes that have consistently performed well over the past. HDFC Top 200 and Fidelity Equity for large-cap-oriented funds; ICICI Prudential Discovery for small/mid-cap-oriented funds; HDFC Prudence for equity-oriented balanced funds and Reliance Gold fund for gold funds. This portfolio, if reviewed at least once a year, has a high potential for handsome returns over the medium to long term.
I want to invest Rs 50,000 in equity mutual funds and was told about systematic transfer plans (STPs). Is it a good way to enter the market through lump sum?
-Chikita Rastogi
STPs are a good way to enter the markets rather than by making a lump sum investments. Lump sum investments mean that the investor is depending on the current market valuations, which could turn out to be a bad idea. It would be a better idea to spread out your risk across a period of time. Just as diversification across various stocks reduces the risk in a portfolio, systematic investing also reduces risk. So in a way, systematic investing can be seen as diversification across time.
You can invest Rs 50,000 in a liquid fund and set up an STP of Rs 4,000 per month in a fund of your choice from the same fund house as the liquid fund.
I had bought around 6,500 units of DSP BlackRock World Mining Fund at Rs 10.20 per unit in January 2010. What will be the tax implications if I sell it before a year apart from the 1% exit load? What is the capital gains tax structure for such a fund?
-Pranay Kumar
This scheme is a fund of funds (FoFs) investing in international funds, specifically the BlackRock Global Funds’ World Mining Fund. FoFs are treated as debt funds for tax purposes.
In your case, short-term gains (with a holding period of less than a year) will be taxed as per your marginal tax rate. Long-term gains will be taxed at 10% without indexation and 20% with indexation.
Queries and views at mintmoney@livemint.com
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First Published: Sun, May 15 2011. 08 31 PM IST