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1 Diversified equity fund
If mutual funds are the best vehicle for small investors to invest in stocks, diversified equity schemes are, by far, the most cost-efficient. A large-cap fund with a good track record should be part of every investor’s core portfolio. If you want to be more aggressive, opt for a mid-cap fund, though these can be riskier than the large-cap ones. You could also go for multi-cap schemes, which invest in a mix of small-, mid- and large-cap stocks. For those with a lower risk appetite, an index fund is a better option. Such funds invest in stocks of the index they track and, hence, their returns are not very different from those of the index. However, these are not as spectacular as those churned out by diversified schemes. In the past five years, the average diversified equity fund has outperformed the broader market by 4-5%. But this is the average return, and some funds have also underperformed. This is why choosing a good equity fund is important.
2 ELSS
An ELSS fund serves many purposes in your portfolio. It saves tax under Section 80C, offers exposure to equities and can provide regular income by way of dividends. The ELSS category is the tax-saving option with the shortest lock-in period of three years. If you choose the dividend option, you could get a part of your investment back even before this period. The lock-in period is what differentiates these funds from normal diversified equity funds. It also allows the fund manager to line the portfolio with stocks that may not reap immediate results, but could be rewarding if held for a longer period. Perhaps this is why ELSS funds have outperformed the diversified equity fund category in the past few years. Before you take the plunge, remember that you will not be able to withdraw your investment before three years. This can be a blessing for investors who tend to withdraw too soon or get jumpy when the markets turn volatile.
3 Gold fund
Physical gold offers an advantage to the buyer because he can use it even as its value appreciates. If the purpose is purely investment, gold ETFs are a better option. There are no making charges, liquidity is high, and one doesn’t have to bother about purity or storage. These funds also allow investors to accumulate gold in small quantities. Importantly, these don’t invite sales tax, VAT or securities transaction tax. As units of such funds are traded like stocks on the exchange, they are eligible for long-term capital gains after a year. For physical gold, long-term capital gains are applicable after three years. Besides, unlike physical gold, investors don’t have to pay wealth tax. Remember that gold should account for 5-15% of your total investment portfolio.
4 Short-term income fund
Short-term income funds are a good way to save for short- and medium-term goals. They are liquid—the money reaches your bank account within a day. Unlike a fixed or recurring deposit, you can make partial withdrawals from the debt fund without breaking the entire investment. Debt funds are far more tax-efficient than fixed deposits. After one year of investment, the income from a debt fund is treated as a long-term capital gain and is taxed at either 10% or at 20% after indexation. There is also no TDS in debt funds. In fixed deposits, if your interest income exceeds 10,000 a year, the bank will deduct 10.3% from this income.
5 Fixed maturity plan
A fixed maturity plan (FMP) is a closed-ended debt scheme that invests in bonds and deposits matching the tenure of the scheme. It is a tax-efficient replacement for FDs. Like debt funds, the profit is treated as long-term gain after a year and taxed at a lower rate of flat 10% or 20% after indexation. Right now, the post-tax yield of FMPs is close to 9.5%, much higher than that of tax-free bonds. Investors can claim indexation benefit if the holding period is across two or more financial years. If a 375-day FMP was bought in March 2014, it would mature in April 2015. Since it is spread over three financial years, the investor will get indexation benefit for two years. This can reduce the tax to almost nil.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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