Investing in liquid or accrual funds could be a source of generating extra income for investor
Most earner, salaried or businessmen, work hard to earn money for the family and the self. However, not all these people, after they have earned money, also make their money work hard to generate some extra income. There are quite a few options which people could use to earn some extra income. Two of those routes are putting a small part of your hard earned money into Liquid Funds and/or accrual funds. Investing in these funds could also help retired people to earn some extra income. And if they are already getting pension, earnings from these funds could work as a source for a second income for them.
WHAT ARE Liquid Funds AND ACCRUAL FUNDS?
Liquid Funds are those mutual fund schemes which are ideal for putting money for a very short period of time, preferably not more than three months. Since these funds invest in extremely short term Debt papers, they come with very low volatility and risks. Accrual funds are those funds which invest in Debt papers of short and medium tenures to generate interest income. These funds usually do not take any interest rate/credit risk but stick to earning interest.
INVESTING IN ACCRUAL FUNDS
According to financial planners and advisors, retired people could invest in Debt accrual funds for higher post-tax income. These funds are more useful to those retired people who are in the higher income tax bracket (20% and 30%). For those who are in the 10% tax bracket, and also those who do not have to pay any taxes, bank fixed deposits are equally good, they say.
This is how the people who are in the 20% and 30% tax bracket can generate another stream of income by investing in accrual funds: The investor will invest in the fund and subsequently should also set up a systematic withdrawal plan (SWP) for the same scheme. The SWP will be set up in such a way that only the gains from the fund are transferred to the investor's bank account, at regular intervals, while the principal remains untouched. So, in effect the investor enjoys a steady flow of regular income, but pays lower tax compared to if he had invested in bank fixed deposits. This is because as per tax rules, only the gains are taxed. While investing in accrual funds, the investment option should be growth and not dividend, financial planner and investors say.
INVESTING IN Liquid Funds
Investing in Liquid Funds could generate annual returns of nearly 7%. With banks cutting interest in savings account, Liquid Funds, which are almost a perfectly substitute product for SB accounts, could turn more attractive in terms of return.
At 6% annual rate of interest, even if the fund house has to pay a dividend distribution tax of about 28.3%, the post-tax return works out to about 4.3%. In case the fund manager can generate a bit higher return in the fund, the returns to the investors in the fund could also be proportionately higher.
Most earner, salaried or businessmen, work hard to earn money for the family and the self. However, not all these people, after they have earned money, also make their money work hard to generate some extra income. There are quite a few options which people could use to earn some extra income. Two of those routes are putting a small part of your hard earned money into Liquid Funds and/or accrual funds. Investing in these funds could also help retired people to earn some extra income. And if they are already getting pension, earnings from these funds could work as a source for a second income for them.
WHAT ARE Liquid Funds AND ACCRUAL FUNDS?
Liquid Funds are those mutual fund schemes which are ideal for putting money for a very short period of time, preferably not more than three months. Since these funds invest in extremely short term Debt papers, they come with very low volatility and risks. Accrual funds are those funds which invest in Debt papers of short and medium tenures to generate interest income. These funds usually do not take any interest rate/credit risk but stick to earning interest.
INVESTING IN ACCRUAL FUNDS
According to financial planners and advisors, retired people could invest in Debt accrual funds for higher post-tax income. These funds are more useful to those retired people who are in the higher income tax bracket (20% and 30%). For those who are in the 10% tax bracket, and also those who do not have to pay any taxes, bank fixed deposits are equally good, they say.
This is how the people who are in the 20% and 30% tax bracket can generate another stream of income by investing in accrual funds: The investor will invest in the fund and subsequently should also set up a systematic withdrawal plan (SWP) for the same scheme. The SWP will be set up in such a way that only the gains from the fund are transferred to the investor's bank account, at regular intervals, while the principal remains untouched. So, in effect the investor enjoys a steady flow of regular income, but pays lower tax compared to if he had invested in bank fixed deposits. This is because as per tax rules, only the gains are taxed. While investing in accrual funds, the investment option should be growth and not dividend, financial planner and investors say.
INVESTING IN Liquid Funds
Investing in Liquid Funds could generate annual returns of nearly 7%. With banks cutting interest in savings account, Liquid Funds, which are almost a perfectly substitute product for SB accounts, could turn more attractive in terms of return.
At 6% annual rate of interest, even if the fund house has to pay a dividend distribution tax of about 28.3%, the post-tax return works out to about 4.3%. In case the fund manager can generate a bit higher return in the fund, the returns to the investors in the fund could also be proportionately higher.
India’s mid-sized money managers are counting on rule-based mathematical models to tap a new breed of investors embracing equities.
Quant strategies, which fall somewhere in between active and passive trading, seek to reduce the role of human bias. They follow a data-driven approach to pick stocks, using pre-defined parameters such as momentum or valuation. Still, their performance globally has been mixed, and greater volatility has made it hard for them to compete with cheaper index funds.
In India, too, their success has been limited. The Nippon India Quant Fund, the nation’s oldest, has often struggled to beat its benchmark over both short- and longer-term horizons. It is now adjusting the methodology of its stock selection to bolster returns. Corporate governance failures, which machines can’t factor in, have also been responsible for the poor performance. Conflicts within founders’ families have had a more significant impact than in developed markets.
Quant strategies, which fall somewhere in between active and passive trading, seek to reduce the role of human bias. They follow a data-driven approach to pick stocks, using pre-defined parameters such as momentum or valuation. Still, their performance globally has been mixed, and greater volatility has made it hard for them to compete with cheaper index funds.
In India, too, their success has been limited. The Nippon India Quant Fund, the nation’s oldest, has often struggled to beat its benchmark over both short- and longer-term horizons. It is now adjusting the methodology of its stock selection to bolster returns. Corporate governance failures, which machines can’t factor in, have also been responsible for the poor performance. Conflicts within founders’ families have had a more significant impact than in developed markets.
CBDT has issued a clarification on that the requirement of deducting TDSA at 10% will only apply for dividend payments by mutual funds.
No tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains, clarified Central Board of Direct Taxes.
Finance Minister Nirmala Sitharaman had in Budget 2020-21 scrapped dividend distribution tax (DDT) paid by companies and mutual funds on dividend paid to shareholders or unit holders.
In place, it was proposed to levy tax deducted at source (TDS) of 10% on dividend/income paid by a company or mutual fund to its share/unit holder if the amount of such dividend/income exceeds ₹5,000 in a year.
The Finance Bill, 2020, has proposed the insertion of a new section — 194K — in the Income Tax Act, which states "any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of ten percent of such income".
It was not clear if the gains will be taxed or the entire redemption amount made by the unitholders will be taxed at source.
Industry body Amfi has also sought clarification from relevant tax authorities with regard to the government's plan to scrap DDT on mutual funds and introduction of tax deducted at source on the income distributed by such products.
In a statement, CBDT said queries have been raised if mutual fund would be required to deduct TDS also on the capital gains arising on redemption of units.
"It is hereby clarified that under the proposed section, a mutual fund shall be required to deduct TDS at 10 per cent only on dividend payment and no tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains," it said. It went on to state that necessary clarification, if required, shall be proposed in the relevant provision of the law.
No tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains, clarified Central Board of Direct Taxes.
Finance Minister Nirmala Sitharaman had in Budget 2020-21 scrapped dividend distribution tax (DDT) paid by companies and mutual funds on dividend paid to shareholders or unit holders.
In place, it was proposed to levy tax deducted at source (TDS) of 10% on dividend/income paid by a company or mutual fund to its share/unit holder if the amount of such dividend/income exceeds ₹5,000 in a year.
The Finance Bill, 2020, has proposed the insertion of a new section — 194K — in the Income Tax Act, which states "any person responsible for paying income arising from units of mutual fund or a specified company must deduct tax at the rate of ten percent of such income".
It was not clear if the gains will be taxed or the entire redemption amount made by the unitholders will be taxed at source.
Industry body Amfi has also sought clarification from relevant tax authorities with regard to the government's plan to scrap DDT on mutual funds and introduction of tax deducted at source on the income distributed by such products.
In a statement, CBDT said queries have been raised if mutual fund would be required to deduct TDS also on the capital gains arising on redemption of units.
"It is hereby clarified that under the proposed section, a mutual fund shall be required to deduct TDS at 10 per cent only on dividend payment and no tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains," it said. It went on to state that necessary clarification, if required, shall be proposed in the relevant provision of the law.
There are certain myths associated with investing in mutual funds. In this article, we would like to clarify five of the most common myths associated with investing in mutual funds.
Myth 1: You need a large sum to invest in mutual funds.
This is an erroneous perception. You need not have a lot of money to start investing in funds. You can start with a sum as low as Rs 500 when investing in equity linked saving schemes (ELSS) or Rs 1,000 every month when investing in a mutual fund through systematic investment plans (SIPs).
Myth 2: Buying a top-rated MF scheme ensures better returns.
Mutual fund ratings are dynamic and based on performance of the fund over time. So, a fund that is rated highly today, may not necessarily maintain its rating a year later. While a highly rated fund is a good first step to short list a scheme to invest in, it does not guarantee better returns eternally. Investments in mutual funds need to be tracked with respect to its benchmark to evaluate its performance to stay invested or exit.
Myth 3: Investing in mutual funds is the same as investing in stock market.
Not all mutual funds invest only in stocks. In fact, even the most diversified equity funds have a mix of equity and debt. Also, the sheer variety of mutual funds means that there is a fund for every type of investor, spanning a risk spectrum of low to high and spreading investments that are significantly high in equities to those which have no exposure to equities.
Myth 4: A fund with lower NAV is better.
This is a popular misconception. A mutual fund's NAV represents the market value of all its investments. Any capital appreciation will depend on the price movement of its underlying securities. Say, you invest Rs 10,000 each in fund A (whose NAV is Rs 20) and fund, B (whose NAV is Rs 100). You will get 500 units of fund A and 100 units of fund B. Let's assume both schemes have invested their entire corpus in exactly same stocks in same proportions. If these stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to Rs 22 and Rs 110, respectively. In both cases, the value of your investment increases to Rs 11,000.
Therefore, always remember that existing NAV of a fund does not have any impact on the returns.
Myth 5: You need a Demat account to invest in mutual funds.
You do not need a demat account when investing in mutual funds. You may just fill up an application form, attach a cheque of the desired amount and submit the form at the mutual fund office or to your financial adviser.
Now that you have more clarity on investing in mutual funds, we are sure you will make prudent investment decisions while panning your financial portfolio.
Myth 1: You need a large sum to invest in mutual funds.
This is an erroneous perception. You need not have a lot of money to start investing in funds. You can start with a sum as low as Rs 500 when investing in equity linked saving schemes (ELSS) or Rs 1,000 every month when investing in a mutual fund through systematic investment plans (SIPs).
Myth 2: Buying a top-rated MF scheme ensures better returns.
Mutual fund ratings are dynamic and based on performance of the fund over time. So, a fund that is rated highly today, may not necessarily maintain its rating a year later. While a highly rated fund is a good first step to short list a scheme to invest in, it does not guarantee better returns eternally. Investments in mutual funds need to be tracked with respect to its benchmark to evaluate its performance to stay invested or exit.
Myth 3: Investing in mutual funds is the same as investing in stock market.
Not all mutual funds invest only in stocks. In fact, even the most diversified equity funds have a mix of equity and debt. Also, the sheer variety of mutual funds means that there is a fund for every type of investor, spanning a risk spectrum of low to high and spreading investments that are significantly high in equities to those which have no exposure to equities.
Myth 4: A fund with lower NAV is better.
This is a popular misconception. A mutual fund's NAV represents the market value of all its investments. Any capital appreciation will depend on the price movement of its underlying securities. Say, you invest Rs 10,000 each in fund A (whose NAV is Rs 20) and fund, B (whose NAV is Rs 100). You will get 500 units of fund A and 100 units of fund B. Let's assume both schemes have invested their entire corpus in exactly same stocks in same proportions. If these stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to Rs 22 and Rs 110, respectively. In both cases, the value of your investment increases to Rs 11,000.
Therefore, always remember that existing NAV of a fund does not have any impact on the returns.
Myth 5: You need a Demat account to invest in mutual funds.
You do not need a demat account when investing in mutual funds. You may just fill up an application form, attach a cheque of the desired amount and submit the form at the mutual fund office or to your financial adviser.
Now that you have more clarity on investing in mutual funds, we are sure you will make prudent investment decisions while panning your financial portfolio.