A Mutual Fund Investor’s (5-minute) Guide to Budget 2020

mutual fund investor guidelines

Many different types of mutual funds are available in the market today. However, due to lack of awareness, most investors still believe that investing in mutual funds is a risky bet. This belief is far from wrong and done right, mutual fund can help you achieve both your short- and long-term goals.

As an investor, if you choose to invest in mutual funds after the introduction of Budget 2020, you should follow the guidelines mentioned below:

1. Do the math

The first and the most crucial step is to do the math before you select between the traditional income tax regime and the new one. Calculate your tax liability after considering your exempt investments under Section 80 of the Income Tax Act, 1961, and compare it with your tax liability under the new regime, which does not offer as many deductions.

This calculation will allow you to figure out which tax regime, whether old or new, is more suitable to you.

2. Have the right savings vs. investment ratio

Financial experts fear that millennials will choose the new regime as it provides a significant opportunity to have more cash-on-hand. However, a prudent investor should remember to maintain the right balance between their savings and investments. While it is advisable to save at least 1/3rd of your salary in liquid cash, having investments aligned to your future goals is equally important. While you can invest in debt mutual funds to meet your short-term goals, you can choose equity mutual fund investments for your long-term goals.

3. Go for multi-cap mutual fund investment

Multi-cap mutual fund schemes diversify their equity investment strategy (65% of the total fund value) across small-, mid-, and large-cap assets. This diversification allows you to benefit from the volatility of the equity markets, thus enabling you to accumulate a vast corpus for any long-term goal, such as retirement, child’s education, etc.

5. Consider growth over dividend

Dividends received from mutual fund investments are considered as taxable income under the Income Tax Act, 1961. Hence, it would be wiser to go with growth funds as they reinvest your profits into the scheme, which then tend to earn more profits. Choosing this option is lucrative both in the short- and long-term, respectively, as: (a.) You would not have to pay tax on dividend income, and (b.) the reinvested dividend will result in greater wealth creation.

6. Evaluate capital gains tax

When you decide to liquidate your debt mutual fund investments before three years, short-term capital gains (STCG) tax is levied on your pay-out. On the contrary, if you liquidate these investments after three years, it’ll only incur long-term capital gains (LTCG) tax.

You can look at the following table to understand more about the different holding periods:

FundsShort-termLong-term
Debt fundsLess than 3 years3 years & over
Equity fundsLess than 1 year1 year & over
Balanced funds (debt)Less than 3 years3 years & over
Balanced funds (equity)Less than 1 year1 year & over

In a nutshell, investing in mutual funds requires research on your part. So compare the different options in the market and cross-reference them against your requirements. Consult a professional to ensure you walk down the investment road with the help of an expert. Once all is said and done, you can invest in mutual funds online to make it less of a chore.

Happy investing!

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About Deepti Verma 292 Articles
Deepti Verma is a Political/Social Writer with an opinion on almost everything! Follow @universal_rover