Mutual fund investments can help you to earn extra income. In these investment plans, asset management companies or AMCs collect money from a group of investors and deposit it in a fund. Once enough money is collected in the fund, the AMC uses it to invest in financial securities such as gold, bonds, stocks, and money market instruments. After the mutual fund scheme generates returns, it is divided proportionately amongst the different investors. But, just signing up for a mutual fund scheme is not enough. It is imperative for you to sign up for a mutual fund scheme that suits your investment objectives.
Furthermore, mutual fund schemes are not a monolith. You will need to select one from the different variants of mutual fund schemes. Before selecting a scheme, you need to determine your investment objective and risk appetite. Each of these investment schemes is known for catering to different investment objectives and risk appetites. Investment schemes such as equity funds and debt funds are prominent examples of different types of mutual funds.
Equity mutual funds:
As the name suggests, this variant of mutual funds deals with equities. Equity funds are known for allocating funds to financial securities such as stocks so that shares of companies could be purchased. Hence, it is important to make note of the fact that the performance of the company is known for playing a vital role in deciding the returns you will get. However, it is also imperative to remember that These investment schemes also fetch high returns. The high returns are a reward for taking the higher risks associated with equity funds thanks to market volatility. Equity funds are suitable for investors who are seeking a long-term investment option. That’s because they are known for fetching favourable returns when held over a prolonged period. Also, there is no maturity period for most types of equity mutual funds (except for ELSS). Therefore, you can redeem your investments whenever you want, making these investment options highly liquid.
How are equity mutual funds taxed?
Here are the ways in which equity funds are taxed:
- Long-term capital gain tax (LTCG):
Equity funds that are held for over a year are taxed under long-term capital gain (LTCG). Currently, 10% without indexation is charged as LTCG. Gains of up to ₹ 1,00000 are exempted from taxes. Indexation can be defined as a process in which you adjust the purchase cost of investments for inflation.
- Short-term capital gain tax (STCG):
Equity mutual funds which are held for less than a year are taxed under short-term capital gain. Currently, charges for STCG are taxed at 15%.
Debt funds:
Unlike equity funds, debt funds or fixed-income funds, are known for investing capital in securities like debentures, government securities, corporate bonds, and other such financial securities. By allocating funds to such financial securities, debt funds are known for lowering investment risks. That’s because the returns in these schemes are not dependent on the volatility of the stock market as is the case of equity funds. This variant of mutual fund investment is suitable for investors who are seeking moderate to low-risk options that are not affected by market volatility. Debt funds are also fit for investors who want to invest in financial instruments for a short or medium-term period.
How are debt funds taxed?
Just like in the case of equity funds, debt funds are also taxed as LTCG and STCG. Please read below to know more:
- Long-term capital gain tax (LTCG):
Debt funds of more than three years are taxed as a long-term capital gain. The LTCG is 20% with indexation.
- Short-term capital gain tax (STCG):
If you are holding on to debt funds for less than three years, it is taxed as a short-term capital gain. STCG for these mutual funds is taxed as per the individual’s tax slab. Hence, if the income tax slab applicable for you is 20%, then that is the tax which will be applicable to you.