Your Fund Portfolio

A mutual fund distributor advised me to invest superannuation benefits in mutual funds because dividends received are not taxable, whereas interest received on fixed deposit is taxable if it exceeds ₹10,000 per year. Kindly enlighten me on the suitability and taxability of these options.

Mridul K

Dividends received from equity mutual funds are tax-free. Dividends from debt funds are subject to dividend distribution tax (DDT) in the hands of the asset management company. Hence, though tax-fee in your hands, the dividend you receive from debt funds will be after deduction towards the DDT. Interest received on fixed deposits is fully taxable at your slab rates of 10, 20 or 30 per cent and not only in situations where it exceeds ₹10,000. The limit of ₹10,000 has relevance only for TDS deduction. So, if FD interest exceeds ₹10,000 in a year, it will then be paid after a TDS cut of 10 per cent. You will be required to pay more taxes, though, if your total income is taxable in the 20 per cent or 30 per cent slab rate.

It is undesirable to hold the taxability or otherwise of dividends and interest alone as the deciding factor between choosing to invest in a mutual fund over a fixed deposit. Since you mention that you will be investing your superannuation benefits, it will not be a great idea to invest in mutual funds if you are seeking regular income post retirement or if you can’t take risks with your investments.

Fund houses are under no obligation to pay dividends regularly and payouts often depend upon the market situation and fund performance. This is true even if you specifically invest in monthly income plans of mutual funds. Secondly, equity mutual fund investments move up and down with the market. Debt mutual funds too face risks from interest rate movements and exposure to corporate bonds. In contrast, fixed deposits are a relatively safer bet with assured income if you have a low risk appetite and are seeking regular cash flows.

I am 30 and have just started SIPs in three funds for ₹1,500 each — Franklin Smaller Companies, Franklin High Growth and Mirae Emerging Bluechip. Can I continue these investments? Should I change to HDFC Midcap Opportunities instead of Franklin High Growth? Will I be able to save ₹50 lakh after 25 years from now with these investments?

Arun Prem Kumar

All the funds you have chosen have track records of good performance. But you have two small- and mid-cap-focused funds in Franklin Smaller Companies and Mirae Emerging Bluechip and a multi-cap fund in Franklin High Growth, suggesting a high risk appetite. Considering that you are just 30 and have a long-term horizon in mind, there is no harm in taking high risks. But if you feel that you are not cut for that, you may want to do a rethink on the choices. If you have an appetite for only low to moderate risk, you can replace Franklin Smaller Companies with a large-cap-oriented fund such as Birla Sun Life Frontline Equity or Kotak Select Focus. That way, you will have also have diversified your investments across three different fund houses instead of holding two out of three funds from the same fund house (Franklin Templeton).

The answer to the question on whether you can replace Franklin High Growth with HDFC Midcap Opportunities also depends on your risk appetite. While HDFC Mid-cap Opportunities too is a good fund and will give the necessary diversification across fund houses, you will end up with three mid- and small-cap-oriented funds in your portfolio if you do go ahead with the replacement. Hence, your choices ultimately have to depend on what risk-return profile you are comfortable with.

As regards your last question, if you invest ₹4,500 a month for 25 years and your fund earns a compounded annual return of 12 per cent in this period, you will end up with a corpus of ₹85 lakh. While this is higher than the ₹50 lakh corpus you are expecting, you must remember that the value of ₹50 lakh then may not be the same as it is today and that your requirement may increase. To fund this possible increase as well as to save towards additional goals that may come up a few years later, invest more as and when your monthly surplus moves up.

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