Young people should invest in a mutual fund SIP

Young people should invest in a mutual fund SIP


Are DSP Tiger and ICICI Dynamic Plan good funds? Should I consider index funds? Are exchange traded funds (ETFs) a more efficient way to invest in the index stocks?


Exchange traded funds can be bought and sold like shares on the stock exchange. ICICI Pru Dynamic Fund is an opportunity fund that invests across market capitalizations and has the flexibility to move into cash depending on market conditions. If the fund manager’s call is wrong, it may limit the fund’s returns during a bull run. The fund has managed this to its advantage in the past and the performance has been excellent. The Tiger fund is a thematic fund that invests in the infrastructure and associated sectors. This segment has been performing very well, and so has the fund. The extent of diversification across sectors and companies gives it a greater degree of safety than other thematic funds.

How can one become a mutual fund distributor?


It is mandatory for any distributor of mutual fund products to clear the certification exam of the Association of Mutual Funds in India (Amfi). The examination is meant for mutual fund distributors. Once this is done, an application has to be made to Amfi for the Amfi Registration Number (ARN). After obtaining it, one can enter into agreements with asset management companies to distribute their products.

I am a UAE national and would like to invest in the Indian stockmarket. Is this possible? If yes, then how should I go about it?


You can invest through India-specific funds floated abroad. There are funds from Fidelity and HSBC, among others, in this category.

I own a number of units in some mutual funds with a dividend reinvestment option. Is an entry load applied to the dividend that is reinvested? Is the growth option better?


Mutual funds usually do not charge an entry load on reinvestment of dividend. However, please check if your mutual fund does so. Whether you should go in for the growth or the reinvestment option, other things being the same, depends upon the tax implication of the option selected. This, in turn, depends on the type of fund and the investment horizon.

I want to invest Rs1 lakh. Should I go for index funds or diversified equity funds? Please name the best performers in the two categories.


Diversified equity funds are a better option for an investor with a long-term investment horizon. Depending on your risk-taking ability, look for funds that have been consistent performers over a period of time. Funds such as HDFC Equity, Birla Sun Life Equity, DSPML Equity and SBI Magnum Contra have all performed well in the long term. However, if you want the safety of investing in the market index, choose ETFs over an index fund because it is a more efficient way of investing in index stocks. ETFs, like index funds, invest in index stocks. They score over index funds on expenses that are much lower and the fact that they can be bought and sold on the stock exchange at any time at the prevailing market price. This way, the net asset value (NAV) price can be closely tracked unlike in index funds, where the end-of-the-day NAV is taken. The tracking error—the extent to which the returns from a fund tracking an index fund varies from the index returns—is also lower in case of ETFs.

We are a newly married couple and would like to plan our finances. We are paying a car equated monthly instalment (EMI) and are looking at buying a house in the near future. Which funds should we invest in for good returns? We are looking for a small lock-in period, higher liquidity and a monthly plan.


The benefit of liquidity is available in all open-ended schemes, except equity-linked saving schemes (ELSS), which have a lock-in of three years. You can choose to invest using the systematic investment plan (SIP) offered by all mutual funds. This allows you to invest small amounts periodically and also gives you the advantage of rupee-cost averaging. The type of schemes you select will depend upon your ability to take risks and your investment horizon. Invest in equity funds only if you have a reasonably long-term investment horizon.


I am a 62-year-old retired teacher. After my husband’s death, I let out the first floor of my house to six paying guests (PGs), all of them women. I provide many facilities along with food and charge them a lump sum. My other sources of income are pension and fixed deposits. Under what head will this income be shown? Can I deduct the expenses incurred on maintenance and repairs of the rooms in which the PGs stay and on provision of various facilities from the income received from them for tax purposes? Will my tax liability be different if I rent out the first floor to a family?


Income from PG establishments is business income. Hence, the net profit from your PG set-up will be taxed under the head ‘Income from business and profession.’ You can deduct actual expenses incurred on maintenance, repair and under other heads from the gross receipts. As you have given the first floor of your house on rent, the income earned shall be taxed as ‘Income from house property.’ A flat 30% deduction is allowed from rental income for repair and maintenance work carried out by the owner of the house irrespective of actual expenditure. Your total income from all sources shall be taxable at the rates applicable to an individual (basic exemption limit for women is Rs1.45 lakh for 2007-08).

How is the income of resident Indians and non-resident Indians taxed?


Residential status significantly impacts the scope of taxability of total income of any person, irrespective of one’s citizenship. For example, a person resident in India (Indian or foreigner) is liable to pay tax on his total income earned anywhere in the world. On the other hand, a non-resident Indian or foreigner is liable to pay tax only on income earned and accrued in India. His foreign income is not taxable in India but in the country of his residence. So a person earning income in various countries has to pay tax on his total income in his country of residence. He also has to pay tax on his foreign income in the country where he earned it. Many nations have entered into treaties to avoid this double taxation of income.

If I sell shares gifted by my parents to me, will I have to pay capital gains tax? The shares were bought more than 20 years ago. I sold some of the shares less than a year after I received them. Will capital gains be calculated on the original price of the shares or on their value after they were transferred to me?


As per the Income Tax Act, transfer of shares as a gift is not regarded as a transfer. No capital gain arose at the time these shares were transferred to you. But the profit made by you from the sale of these gifted shares shall be treated as long-term capital gain (LTCG) because the shares were originally bought 20 years back. For calculation of capital gain, the price the previous owner of the shares paid to buy them will be taken as the cost of their acquisition and the period for which the previous owner held them shall be taken into account along with the period for which they were with you. LTCG is taxable at the rate of 10% plus education cess in case the shares are not sold through a recognized stock exchange. LTCG is exempt from tax if shares are sold through a recognized stock exchange where share transactions are subject to STT (securities transaction tax).

I have spent around Rs2 lakh on my wife’s illness in the last four months. She is a housewife and dependent on me. My insurance claim is pending and I do not hope to get it as the insurer says that the illness is not covered because it is a pre-existing one. Can I get tax benefit on the money spent on my wife’s treatment?


Yes, you can claim deduction under Section 80 DDB in respect of the expenditure incurred for the medical treatment of your wife provided the ailment is specified in the income-tax rules. The maximum deduction allowed from the gross total income is Rs40,000. Any amount received from an insurance company for the medical treatment has to be first deducted from Rs40,000. To claim this deduction in your return, a specialist doctor working in a government hospital in India will have to confirm the treatment of the disease in Form 10-I and also that the expenditure incurred on the treatment of the disease is eligible for deduction. Form 10-I does not require the doctor to certify the amount spent on the medical treatment.

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