Most MIPs charge an exit load for withdrawals before a year

Most MIPs charge an exit load for withdrawals before a year

I am a 23-year-old working girl. I have recently begun investing in a couple of mutual funds through systematic investment plans (SIPs). I selected the schemes from Mint 50. However, my agent chose the dividend reinvestment option for all of them and I realized that only some days back. I have noticed that growth options give better returns but my agent is discouraging me from changing to growth, saying there is not much difference in the returns for both the options. I do not need the money for three-five years and, therefore, want it to grow as much as possible in the interim. I am willing to take risk, so should I switch to the growth option? What would be the advantages of such a move?

—Rhea Cordeiro

It is true that there is minimal difference between the two options in terms of risk or returns; at least as of now. In the growth option, the net asset value (NAV) of the fund keeps changing as per the fund’s performance. In the dividend reinvestment option, the number of units increase as and when the fund declares dividends. However, there are two things to keep in mind—one for now, and one a year later. For now, please make sure that you are not choosing the dividend reinvestment option for an equity-linked saving scheme. In that case, any reinvested amount will be subject to a further three-year lock-in (from the date of reinvestment). A year or so from now, the new Direct Taxes Code will come into effect. As per the current text of the code, dividends from equity funds (even if reinvested) will be taxed. In that situation, the growth option would definitely be the way to go.

I have invested in a monthly income plan (MIP) and it has performed well. Should I book profits and get out since I need the money in about two months to pay my life insurance premiums? I invest in these MIPs every year for the same purpose. Is there any other option to invest for the same purpose within mutual funds? I can invest Rs10,000 per month and want the capital to be safe. The present MIP hasn’t completed a year. So, would there be any tax implications?

—Ritu Suri

MIPs should not be considered for such short-term investments. Most, if not all, MIP funds carry an exit load of 1% for withdrawals before the completion of one year. Also, any profit on redemption will be added to your income for taxation purposes, which means it will be taxed at your tax bracket rate. Also, the expense ratio on MIP funds are high compared with pure debt funds. For the purpose of short-term investment, the best option would be liquid funds or short-term bond funds. Although gains from these investments will still be taxed upon redemption, exit loads are either nil or applicable for a very short term. Also, the expense ratio on these funds are significantly lower.

Queries and views at