MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved

Currently I have some funds available which I want to invest for three years as I will need this corpus to utilise over some commitments. So, instead of keeping these funds idle I want to invest and earn some returns out of it. Where should I park my funds?

- Bhumi Verma

As you have a short-term commitment you can invest in short-term investment instruments available in the market. As you haven’t specified about your risk appetite, we can’t recommend a specific investment option. However, investors with lower risk appetite can invest in debt or fixed income instruments like debt mutual fund, bank fixed deposit, recurring deposit, etc. whereas an investor with higher risk capacity can invest in equity-oriented mutual funds or direct equity. But it’s generally recommended to invest in equity-oriented mutual funds rather than investing directly in equity as it might prove to be riskier since you won’t get the diversification that mutual funds offer.

If you have a lower risk appetite then short-term debt funds are the best option to invest as they deliver higher returns than bank fixed deposits, recurring deposits or post office time deposits. These funds are tax-efficient as compared to bank fixed deposits or recurring deposits as taxation on these deposits is higher. If you have a higher risk appetite then equity-oriented large-cap funds are the best option to invest in as they have lower risk as compared to other schemes within this category. In the shorter term it’s better to invest in safe instruments as the equity market can be volatile and you might end up losing all your funds.

I have invested some of my funds in a hybrid mutual fund and want to know the tax implications of the same.

- Saurabh Singh

The taxation of hybrid funds is dependent upon the exposure of equity in the scheme. If equity exposure exceeds 65 per cent, then it will be taxed as per the equity-oriented scheme but if its equity exposure does not exceed 65 per cent, then it will be taxed as per the debt-oriented scheme. For hybrid equity-oriented schemes, capital gain arising within 12 months is termed short-term capital gain and is taxed at the rate of 15 per cent. Capital gains arising after 12 months are termed as long-term capital gains and are exempted up to Rs1 lakh. Gains in excess of Rs1 lakh are taxed at the rate of 10 per cent without indexation. For hybrid debt-oriented schemes, capital gains arising within 36 months are termed as short-term capital gains and are taxed as per the investors’ slab rate and capital gains arising after 36 months are termed as long-term capital gains and taxed at the rate of 20 per cent with indexation benefit.