I am 28 years single and residing in Badravati. I had invested INR 2 Lakhs in liquid funds. My friend has told me to shift this money into equity diversified mutual funds where I will get better returns. But if I move from liquid funds to equity funds, it will attract short-term capital gain tax. How does it benefit me after paying this tax?
You have money in liquid funds and you can transfer it to equity diversified mutual funds using the Systematic transfer plan (STP). STP is essentially transferring investment from one asset or asset type into another asset or asset type. The transfer happens gradually over a period. If you sell your liquid funds before three years (36 months), you will have to pay short-term capital gains tax. Short-term capital gains are added to your income and taxed as per the income tax slab applicable to you. Yes, every time money is switched out of liquid fund, there will be a small tax (short-term capital gain) if the liquid fund is under growth option. Since it is a liquid fund, the gain will not be high. You are young and it is good to bear risk at this age. Equity diversified funds give good returns over the long term, so stay invested in them for at least 5 years. As your gains from liquid funds are less say around 7% a year, the tax incidence is not likely to be high either. If you get high returns from the equity funds, losing a small amount in tax as you shift from liquid funds to equity diversified fund is worth it.