Mutual Funds

Fund Query: How a 54-year-old can invest a lump sum of ₹30 lakh in mutual funds

Aarati Krishnan | Updated on September 18, 2021

I have invested in multiple equity, hybrid and debt mutual funds and accumulated over ₹50 lakh in the last few years to meet my daughter’s expenses towards higher studies in the US. I may liquidate a portion of this (say, about ₹40 lakh) by March 2022. As most of my funds have completed three years, I hope to be saved the short-term capital gains tax burden of a 30 per cent tax rate. However, please guide me on how to calculate long-term capital gains on my sale proceeds with a 20 per cent indexation benefit. Will my bank help me with a capital gains statement?

This month I am getting a lump sum bonus amount of around ₹30 lakh. I am now 54 years old and would like to lock this in a good investment until I turn 58, for my post-retirement needs. Please suggest good funds for this sum. I was thinking of a mix of retirement funds, equal weight Nifty funds and fund of funds. With the interest rate cycle flat, do suggest funds that are somewhat aggressive with a proven track record.

RJ

If you believe you will need the money for your daughter’s education in a year’s time and have invested in equity or hybrid funds towards this goal, it would be wise to liquidate your holdings now instead of waiting until March 2022.

Given the stock market’s rather high valuation levels and unfolding risks such as global normalisation of interest rates and QE, a correction in stock prices cannot be ruled out. Should such a correction materialise within a year, you can lose a good portion of your paper profits on your portfolio. You would not have enough time to recoup the losses either, as you have limited time to meet your goal. If you have made good gains, it would therefore be wise to book profits at this juncture on your equity and hybrid funds and move the proceeds to safe avenues such as bank FDs.

How your proceeds will be taxed will depend on the category of funds you have invested in. If you have equity oriented funds, your gains on holdings for over one year are considered long term and taxed at a flat 10 per cent (plus cess and surcharge) without indexation benefit. You are, however, allowed to claim exemption on gains of up to ₹1 lakh a year which you can deduct from your LTCG.

On debt funds, gains made on holdings beyond 36 months or three years are considered long term. These gains are taxed at 20 per cent (plus cess and surcharge) after allowing for indexation benefits on your cost of acquisition.

On hybrid funds, if the equity exposure exceeds 65 per cent the gains are treated as equity gains. If not, gains are treated as debt gains. If you invest through a broker or through a distributor or platform, the capital gains statement is available on demand from the intermediary.

However, you may need to double-check the results. If you are invested through multiple avenues you may need to compile the statement on your own. Your bank is unlikely to be of help in this.

If you are investing this ₹30 lakh with the intent of withdrawing it in four years’ time or generating regular income from it, retirement funds, Nifty Equal Weight Funds et al would be quite a poor choice. Retirement funds are meant for younger folks to accumulate significant sums towards retirement through equity-heavy portfolios. They are not a good vehicle for preserving capital that you plan to draw on shortly on retiring.

Nifty funds in whatever form are again unsuitable for any four-year goal as any correction can significantly dent your principal and give you limited time to recoup before you retire. This sum is best parked in safe bank FDs (diversifying across multiple banks) or safer categories of debt funds such as PSU & Banking Debt funds or Corporate Bond funds. One category of debt funds you can explore are 5-year target maturity funds that invest mainly in government securities. They would offer safety of capital with tax efficiency on capital gains, as you can avail of indexation benefits.

Send your queries to mf@thehindu.co.in

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Published on September 18, 2021

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