Big Questions

Should you consider tax while choosing a mutual fund?

Read on to know the parameters to consider while choosing a mutual fund

Taxes are only incidental and should not be a basis for anyone to choose a fund category. The most important factor while choosing a mutual fund is that whether the category or type of fund you are investing in is suitable for you or not. It should be carefully chosen after considering your risk appetite, investment horizon and the financial goal.

If you are investing for a long-term goal, say eight to 10 years away, we believe the major portion of your investment should be in equities. Earlier, gains on selling your equity investments after a year were tax-free but now the gains beyond Rs 1 lakh are taxed at 10 per cent. But that should not deter you from investing in them for your long-term goals. They are still a suitable and the best investment avenue for your long-term money. If you have the required skills to invest in stocks directly, you can gain equity exposure through them. Otherwise, investing through a equity mutual fund is recommended.

If you are not investing for such a long period and have a medium-term horizon, you can go for a mix of equity and fixed income. The ratio between the both would depend on several factors - whether the goal is negotiable, how much risk are you ready to take and so on. If the goal is negotiable, you can have higher allocation to equities, otherwise have a larger share of fixed income. For this purpose, one can also consider a hybrid fund.

If you are investing for a near-term goal, say less than three years away, the investment should be completely in fixed income. You may consider a high-quality debt fund, for such cases. Gains on selling your investment in a non-equity fund after three years are taxed at 20 per cent after providing the benefit of indexation. If they are sold within three years, the gains are added to your income and taxed as per the applicable slab.

But as mentioned in the beginning, taxability should not be an important input for anyone while choosing the type of fund to invest in.

Suggested read: How to choose a mutual fund


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