2012 Tax Facts on Investments

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Without a doubt, a savings account is by far the best option for emergency funds.

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As the name suggests, a savings account is a savings option. It offers the highest liquidity since you can access your balance at any moment directly through the bank or through ATM machines. But if you are left with funds that are in excess of emergency funds, then Liquid Funds are good options. They endeavor to give you your money back the very next working day, subject to the receipt of a valid redemption request.

Tax returns and compliance

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In fact, Liquid Funds can be used for investments ranging from a day up to a month or even two. As the name suggests, Hybrid Funds are a combination of asset classes, such as debt and equity in their portfolio. That is, they invest in a blend of debt, money market instruments and equity. Breaking it down even further, depending on the mix of equity and debt, there could be various types of Hybrid Funds as well. Most people have differing patterns of earning and spending, which is why investments need to be flexible so as to allow you to invest as per your situation.

Minimum amounts of investment range from as low as Rs. In the case of open ended funds, daily investment and withdrawal is possible.

1 Introduction

Invested funds can be received within 1 to 5 working days. There is no maintenance charge on portfolios. You can invest either directly with the Asset Management Company or through a Financial Intermediary. Solid liquidity gives you the advantage of getting your money when you need it the most.

In open ended funds, where you can buy and sell on any business day, you can get your money back generally within 3 working days. It is natural to have a feeling of uncertainty and you are cautious when you hand over your savings to somebody. You obviously need to be able to trust the person, and you definitely want to know what is happening to your money, at all times.

In the case of Mutual Funds, your money is handed over to a professional, whose entire job is to keep track of markets and look out for the best opportunities for you.

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By spreading out your money across different types of investments, investing it by in multiple companies, and investing in more than one sector, you ensure that you always have a back-up plan intact. So when you look to invest, always consider a wide range of options. Thus, as an investor, you will be able to have a diversified investment basket. The power of bargaining lies in buying anything wholesale.

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The rate of buying in wholesale will obviously be much lesser compared to the retail rates. Now apply the same principal to Mutual Funds and what do you get?

Why is it a big deal?

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With many people pooling in their savings, you get the advantage of the power of bargaining which reduces the overall transaction cost. Fact: Part of the fear of Mutual Funds is that everything will go above your head and that only experts in finance can understand how they work.

go to site This is not true at all! It is his job to track various sectors and companies. He will help you decide where to invest your money. In fact, there are various short-term schemes where you can invest from a day to a few weeks. Mutual Funds invest in a variety of instruments ranging from equity to debt.

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Within debt they may invest in debt instruments that mature in a day also known as Money Market Instruments to those that mature in 1 or even 10 years. Fact: This simply comes down to a subconscious movement towards what seems to be cheaper.

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But the fact is that what matters is the percentage return on invested funds. The reality is, due to an already demonstrated performance, the chance of the Rs. Fact: This is one of the most long standing myths which today has absolutely no truth whatsoever. Most funds today allow investments as low as Rs. In fact, even for Equity linked savings schemes the amount is as low as Rs.

Mutual Funds also offer the SIP facility in many of their schemes, which allows you to invest small amounts of your choice regularly. Fact: This is not true. There are multiple ways in which you can buy Mutual Funds, some of which are:. Offline: By filling up a form through financial intermediaries, like independent financial advisors, banks and financial distribution houses.

Introduction

If you have a Demat account, you can even consolidate the Mutual Fund holdings along with other holdings in the Demat account. You can also buy Mutual Funds through the same intermediary who helps you buy and sell shares on exchanges. Fact: This is a very common misconception because of the general association of Mutual Funds with shares. But you must remember that Mutual Funds invest in shares, so they can get in and out whenever the Fund Manager deems appropriate. If the Fund Manager feels that a stock has peaked, he can choose to sell it. To understand the reality of this myth better you need to understand that the NAV is nothing but a reflection of the market value of the shares held by the fund on any day.

In all probability the NAV is high on account of a good performance over the years. Imagine two schemes.

Literature Review

Investments of any form - shares, debentures, deposits etc. There are broadly two types of risks: i. We are more bothered with the latter one as it is influenced by various uncontrollable factors, like monetary policies, fiscal policies, tax structure, political factors and other economic factors.

An important point to be borne in mind is that risk cannot be eliminated but it can be mitigated through proper risk management. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales help them to build a diversified portfolio that minimizes risk and maximizes returns.

If you thought mutual funds were primarily about investing in shares or the equity market, think again. Mutual funds extend beyond the limits of equity. They also invest in Debt Instruments. The same principle of higher the risk, the higher the returns applies here. Debt products are lower in risk as compared to equity funds. Debt funds are also known as Fixed Income Funds or Bond Funds and they invest only in debt securities.

Some examples of debt securities are as follows:. But on the upside, an investor is a lot more aware of the key variables involved, such as:. So the great thing about debt funds is that they are designed primarily to protect your capital and provide stable returns by investing in debt securities. Similarly, when a debt fund invests in various debt securities the issuers of these securities offer a rate of interest and the principal on maturity. The debt fund would earn Rs 8.

Consequently, what the debt fund does is that it spreads the Rs 8. Similar to interest rates on Bank Fixed Deposits, the interest rates on debt securities also change. In fact, you could say that interest rates and debt security prices are on either end of a seesaw. Prices fall when interest rates rise, and rise when interest rates fall. For example, if the interest rates were to decline, then the newer bonds would be issued at a lower interest rate than the existing bonds. Consequently, the value of the older bonds will increase, leading to a rise in their price.

In the same way, if the interest rates were to increase then the value of the old bonds would fall and the newer bonds would bear higher interest rates. If interest rates decline and the GoI issues new 5 year bonds at an interest rate of 7. The price of older bonds will increase from Rs. If the old bonds are now sold, the buyer will now receive Rs 8. The investor, therefore, earns Rs. On the day the old bond price is marked up to Rs. Fixed Maturity Plans are closed ended debt mutual fund schemes. Simply put, a closed ended scheme is one where you can invest only during the new fund offer period, post which it is shut for new subscriptions.

As the name suggests, it has a fixed time horizon and the money is given back to you upon the expiry of this period. The time horizon can range anywhere from as low as 30 days to even 5 years. Since the maturity and the money are known beforehand, the fund manager can invest with reasonable confidence in securities that have a similar maturity as that of the scheme.

Thus, if the tenure of the scheme is 1 year then the fund manager will invest in debt securities that mature just before 1 year. What also helps is the fact that there can be no redemptions in these schemes, unlike in other open ended funds, where one can buy and sell units from the asset management company. At most, you can sell units to other investors over the stock exchange, but the overall quantum of money that is collected during the NFO remains the same. One important thing to remember is that here too the returns are neither indicated nor guaranteed. Is average maturity and how is it useful?

Debt funds invest in a number of debt instruments, all of them having a varying maturity. As the name suggests, it basically indicates the average maturity of all the securities in a portfolio, giving you the freedom to compare.

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Average maturity thus gives you a quick glimpse into the sensitivity of the bond to interest rates. Funds with higher average maturities tend to be more volatile in the short term since their objective is to deliver higher returns over the long term. Simply put, a fund with an average maturity of 5 years is definitely more volatile in the short term than a fund with an average maturity of say 9 months.

So matching your investment horizon with the average maturity is always a good idea. But it definitely indicates is that you can expect to get optimal returns, given the interest rate environment, over 4 years.