After demonetization, cash from all over the country flowed into savings bank accounts and current accounts. Banks were flush with cash. So, banks slashed interest offered on savings bank accounts and Fixed Deposits (FD).
Next, small saving schemes like PPF, NSC, etc. cut down rates too. The AMFI promoted investments in mutual funds extensively through its campaign ‘Mutual Funds Sahi Hai’. Investors responded by investing in mutual funds to enjoy higher returns.
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Keeping this in mind, we discuss types of mutual funds for a good investment based on your risk profile.
Risk-averse investors settle for lesser returns at lower risk, following their low risk-appetite. If you are such an investor, you could invest in FMP and liquid funds:
Liquid Funds are also called money market funds. These are highly liquid. Liquid funds are debt funds that invest in money market instruments like Commercial Papers, Treasury Bills, Certificate of Deposits, and so on with a maturity of up to 91 days. These yield higher returns compared to Savings Bank accounts of around 6-7% a year.
Based on how long you stay invested in liquid funds, you will be taxed on the returns you get. Short-term capital gains are taxed according to your tax bracket. Long-term capital gains (3 years or more) are taxed at 20% with the indexation benefit.
FMPs are closed-ended debt mutual funds. They only invest in financial instruments whose maturity term aligns with their own. For example, a 365 Day FMP, invests in instruments that mature in 365 days or a little before that. The maturity terms are synchronized to eliminate the risk of interest rate fluctuations faced by debt funds. These are ideal for capital protection.
A risk-curious investor is the one who is willing to take some risk and expects slightly higher returns for the same. A risk-curious investor can consider investing in balanced funds.
Balanced funds are also known as hybrid funds. Balanced funds which have 65% or more invested in equity are called equity hybrid funds. The equity portion yields higher returns and the debt portion cushions the investment, in case the market crashes. The debt hybrid fund invests 75% or more in debt.
Staying invested in balanced funds for a year or more gives you long-term capital gains, where capital gains up to a lakh are tax-free. Some equity hybrid funds invested through SIPs for at least 3-5 years have given 14-16% annualized returns in the past.
A risk-aggressive investor accepts higher risk for higher returns. If you are one, you may consider investing in:
These funds are invested in a diversified portfolio across different sectors like financial services, pharma, automobiles and so on. Staying invested in diversified equity funds for more than a year gives you tax-free long-term capital gains up to a Lakh.
These funds can give 15-20% annualized returns if well diversified. These can also give negative returns if stock markets crash.
ELSS stands for Equity Linked Savings Schemes. ELSS comes with the dual-benefits of higher returns and tax benefits. The returns from ELSS were not taxable until 31st March 2018, after which returns greater than Rs 1 Lakh are taxed at 10%.
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