Ask our experts – December 2022

Investment queries

My daughter is 13 years old. I am saving Rs 25,000 each month for her higher education in five years’ time. I have Rs 4 lakh in my bank account. Where should I invest this money – equity mutual funds, debt mutual funds or FD? – Raman Swamy

You will require this amount after five years, when she is 18 years old. This period is considered as a short period for investments, so I suggest you continue investing in debt mutual funds and fixed deposits.

I have invested in the closed-ended fund maturing on 15 January 2023. I have around Rs 10 lakh in this fund. Please advise if after maturity, I can continue the fund without redemption (or) transfer to another fund? Please let me know about the tax implications and how I can minimize my tax. – Nathan Joseph

You won’t be able to continue the investment in closed-ended funds. The normal equity or debt taxation is applicable for this investment. There is no way to minimize the tax burden in this case.

Given the current market volatility and fears of recession, do you think it is the right time to invest in the stock market? Please suggest where I can invest a lump sum of Rs 50 lakh? I have a horizon of over 10 years or more. Or should I spread the investment over the next 12 months? – Ravi Mohan

Since valuations are high and there are possibilities of correction, it is not advisable to invest in bulk now. You may spread your investment over the next 10 months. A systematic transfer plan through mutual funds would be a good idea. You can do SIPs in select stocks too.

Does the magic of compounding really apply to Equity MF? Or is it just the change in NAV over time, the only contribution for its growth? Do dividends issued play a role in Equity MF? – Raghav N
Compounding is basically a multiplier, i.e., your gain from the initial investment keeps earning gains and so on, as time goes by. Compounding effect works best for SIP investments into Mutual Funds for the long term. The value of these compounded returns is reflected in the NAV of the funds. So, when we say that your MF is earning 12%, it is the Compounded Annual Growth Rate (CAGR), and the value is represented by the NAV. Growth happens only when the underlying securities in the Mutual Fund grow. Dividends will have an impact on the NAV of a fund since it’s meant to be paid out of the profits of the fund. In the current budget tax proposal, dividends are not attractive since they will be taxed in the hands of the investor and will depend on the tax slab of the investor. Systematic Withdrawal Plans are a more tax effective option in current scenario.

If I buy stocks through my wife’s demat account (who is not making any earnings now through any means) and I had a short-term capital gain while selling them, will the profit I earned be taxable? – Renjith Paramban

Money transferred to your wife’s account can be considered as a gift and is tax free at the time of receipt. But any income generated from this must ideally be combined with your income. In this case, please note that short-term gain is taxed at 15%, irrespective of whether you have earnings or not.

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