The Hindu Business Line : Fund Talk

I would like to invest in mutual funds. In new fund offers, investors get many tax benefits, such as no tax on dividend, investment benefit under Section 80 C, capital gains tax, no wealth tax, etc. Are the same benefits are applicable even after the offer closes? If I invest in Franklin Bluechip or in HDFC TaxSaver, what tax benefits will I get?

A.V. Rao

Bangalore

The tax exemptions you have mentioned are not limited to new fund offers alone. During the holding period of your investment in an equity fund, any dividend received will be exempt from tax. Redemption of investments in equity-oriented funds (defined as those that invest at least 65 per cent in equity) held for less than a year will attract short-term capital gains tax of 10 per cent. Gains from selling units held for longer than a year are exempt from tax.

These are the standard taxation rules applicable to any investment in equity-oriented mutual funds, such as Franklin Bluechip.

HDFC TaxSaver belongs to a separate category of funds classified as equity-linked savings scheme or ELSS. These funds qualify for tax benefits under Section 80 C and target investors looking for equity tax-saving options. Investments up to Rs 1 lakh in these funds, either at the time of the new fund offer or subsequently, are allowed as deduction from your total income in the year of investment. They are, however, subject to a lock-in period of three years.

ELSS funds compete with conventional small savings schemes such as PPF. A shorter lock-in period and the potential higher returns from equity make them an attractive option for tax-savings purposes.

However, invest in tax-saving funds only after first exhausting traditional fixed-income, small savings options, as they have a higher risk profile with no guarantee of capital or returns.

I want to invest Rs 3 lakh and have short-listed Magnum Contra-Dividend Option and Birla Basic Industries-Dividend Option. My parameters are moderate risk; dividend expectation and a time horizon of 2-3 years. Kindly advise.

S.P. Gupta

Delhi

We presume you have other funds in your portfolio and are only looking for diversification options. The funds you have short-listed have a good track record. However, we would recommend Birla Basic for an investor with a more aggressive risk appetite, as theme funds tend to have higher risk profiles.

Magnum Contra has built a strong record with its contrarian investing style. With fewer unexplored themes in the market, the portfolio has lost a bit of its offbeat appeal and has begun to resemble that of other diversified funds. However, it remains a good choice as a diversification option. You will have to stay with the fund over a long horizon to reap the benefits of the strategy.

While it is fine to choose the dividend option, do not do so with the expectation of an assured dividend income. Funds declare dividends only when they book profits on a part of the portfolio. They may be a year in which they do not declare any dividend. Even the quantum of dividend is not assured. However, by choosing the dividend option you can cash in on market gains and re-balance your portfolio.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Shanthi Venkataraman

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