Where To Invest – Part-2


Indian stock market indices have managed to post decent gains in the last couple of months. If you have missed this rally, and still wondering where to put in the money for getting decent returns, here are some of the investment options:

Debt funds

Debt funds make a better investment alternative over the fixed deposits. They are not only more tax-efficient but also offer higher post-tax gains. Though the returns from debt funds do not differ significantly from the interest earned on Fixed Deposits, the tax benefit implies that the actual gain from debt funds is more if investors hold them for over three years. In a debt fund, the short-term capital gains gets added to income and thus taxed at the normal rate. However, long-term capital returns are taxable 20% after indexation. It makes a big difference for investors who fall in the 30% tax bracket. Instead of giving 30% tax on the FD interest, the tax rate is 20%, and can see a further decline following the indexation benefit. Additionally, there are numerous ways using which the capital returns can be set off if investors put money in a debt fund. Such alternatives are not there for interest earned from FDs. Debt funds facilitate in deferring the tax.

NPS account

The opening of an NPS account is a must investment for people who are looking to save increased tax this year. As per the Section 80CCD (1b), up to Rs 50,000 invested in this plan gets increased tax deduction, above the investment limit of Rs 1.5 lakh allowed under Section 80C. For investors in the 30% tax bracket, they can remove Rs 15,000 from tax liability, which means the effective investment would come down to just Rs 35,000. If the NPS account earns 8% compounded gains for more than fifteen years, the effective gains will come to 10%. Some experts are of the view that NPS investment is not a good option as equity SIPs can provide better returns over NPS, especially when there is a 50% limit on equity exposure. Even though equity funds investment does not make for the tax deduction, the potential to deliver superior returns compensates for it.

The major issue with NPS investment is the rigid guideline for investing the amount on maturity. As per the laid guidelines, after 60, the investor has to put minimum 40% of the total corpus in an annuity for the pension. This monthly pension from the annuity, which is a mix of interest and principal, is taxable.

Direct mutual funds

Investors stand to benefit from direct mutual funds as lower charges lead to higher returns. This difference in returns becomes prominent in the case of equity funds. However, in debt funds, the difference is lower due to low expense ratio of normal plans. In the case of liquid funds, investors will find the expense ratio very low, and therefore the difference is very thin. The average direct plan has delivered annual returns of more than 16% in last three years, whereas the average large-cap diversified mutual fund has offered 15.39% annualized returns. Even a difference of 60 basis points can result in a big variation in returns. In balanced and equity funds, investors can shift after a year or the tax on returns will erode the gain. In the case of debt funds, gold funds and debt-oriented hybrid funds, investors should wait for minimum three years or the returns will be added back to income and though marginally, will be applicable for taxation.safeinvestpart2.1

Gold investments

The government has provided investors with a solid reason to not purchase gold this year. Introduced in last November, gold bonds are related to the gold price and give 2.75% interest. In the case, gold prices jump 5%, the bonds will give an annualized return of over 7, which is more than that return earned in a gold deposit scheme. Gold bonds provide several benefits. Firstly, investors don't have to bother about the purity of the yellow metal. Secondly, the return is 2.75% more than the gold price at the time of investment resulting in compounding gains. Lastly, investors can stay assured about its safety. Having said that, in the case of gold ETFs, investors can convert gold ETFs on which they earn 1% and get over 2% return on gold bonds. However, they should consider the tax implications and remember that ETFs are more liquid than gold bonds. Gold ETFs are a better alternative to god bonds if they want to stagger investments.

Low-cost ULIP

More than 75% of the financial planners surveyed some time ago stated that investing in ULIP was not a wise plan. However, it's a time when investors should shed the past baggage and look at ULIPs investment from a fresh outlook. IRDAI had restricted ULIP costs in 2010 by limiting the annualized costs at 2.25% for the first ten years of holding. And now the latest online ULIPs have sugared this deal and reduced costs to such an extent that a few ULIP plans have become cheaper than the direct mutual fund plans.

Also, some e-ULIPs do not charge policy administration fees or premium allocation costs. The best example is of Click2Invest plan of HDFC Life. It only charges a yearly fund management cost of 1.35% of the total corpus value. The mortality cost is charged for the life cover given to the policyholder. This low cost turns the Click2Invest scheme cheaper compared to the direct diversified equity fund plan, which has an expense ratio of 1.5% annually. ULIP is the tax-free switching alternative between equity and debt. One can easily switch funds from equity to debt and, vice versa, without attracting any tax liability. If investors follow the same approach with mutual funds, they need to pay tax on the long-term and short-term capital gains. As ULIP is an insurance scheme, the maturity proceeds and returns are tax-free as per Section 10(10d). This advantage of switching is overshadowed by the peril of being stuck with a single fund for a long period.


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