Disclosing LTCG from Stocks, Equity Mutual Funds Simplified
Income Tax Returns (ITR) for individual taxpayers have to be filed by 31st Dec 2020. This means that it’s time to evaluate your finances and declare all sources of income, so your taxes can be filed correctly. While the process of filing your ITR has been one which has traditionally been riddled with complicated forms and procedures, the government has taken active measures in order to make this a more streamlined activity. The Union Budget has been introducing some radical changes which have come into effect in the last few years. While these changes may at first glance look very long drawn and complicated, they have in fact reduced the pressure for the taxpayer.
If You have not filed your Income Tax Return – File Now!
One such change introduced in the last few years is a relaxation of the rules of long-term capital gains (LTCG) disclosures. Earlier, when filing your ITR, you had to declare LTCG on each equity investment individually. However, since 2019, the Central Board of Direct Taxes (CBDT) brought into effect the rule that only the net consolidated amount generated through LTCG from equity-related investments need to be declared. For those taxpayers who earn over Rs.1lakh from equity investments during the financial year, this decision brings a great sense of relief. The paperwork associated with filing LTCG on equity investments of large amounts has been reduced significantly, thus simplifying the tax filing process.
Related Article: Know the Tax Treatment for Mutual Funds
What is the LTCG on Equity?
As per the Finance Bill 2018, LTCG from listed shares or mutual funds which are equity-oriented were liable to be taxed. On April 1, 2018, it was also announced that LTCG incurred through the sale of any instrument which has been held for more than 12 months will be taxed at 10% – with the exclusion of cess and surcharge – if the LTCG amount exceeds Rs.1lakh.
It is important to note here that LTCG up to Rs.1lakh is exempted from being a taxable amount. There is also something known as the grandfathering process, according to which if you have bought equity shares or mutual funds before 31st of January, 2018, the gain which has been calculated up to that date will not be taxed. Short-term capital gains (STCG), however, will still fall under the radar of taxes at 15%, with the exclusion of cess and surcharge.
Where do I disclose LTCG?
Apart from LTCG, another important thing that needs to be reported is LTCL or a long-term capital loss. This is important because after calculation, if LTCL is seen to exceed LTCG, not only will the tax on LTCG be nullified, the remainder of the loss incurred can be used in the subsequent 8 financial years to nullify against the capital gains earned.
LTCG and LTCL both have provisions to be disclosed in ITR-2 and ITR-3 forms, as per the CBDT’s mandate. There are specific columns where the taxpayer has to mention the net amount generated. For instance, if you are filing an ITR-2 form – for those HUFs (Hindu Undivided Families) or individuals who do not earn income from profits through profession or a business – LTCG must be disclosed in Section B4. Likewise, if you are an individual or HUF who earns income from profits via a profession or business, you need to file ITR-3, where Section B5 will allow you to disclose the details of LTCG.
All in all, we can say that the new reforms introduced by the government from time to time have been made keeping the ordinary taxpayer in mind. As the new rules are implemented stringently, it’s important to keep a track of all the changes which have been introduced so you don’t end up filing the incorrect taxes!
Debt Mutual Funds – Must Know About all 16 Categories
In order to bring uniformity in mutual fund investments, the Securities and Exchange Board of India (SEBI) prescribed a uniform classification of mutual fund schemes a few years ago in October 2017. But most of the investors are still not aware of this classification. Mutual fund houses were required to align their existing and potential schemes under the prescribed categorisation. Equity mutual funds got 10 distinct categories while debt funds ended up with 16 new ones.
Are you a conservative investor? Are you not willing to take high risk?
If, yes then you should invest in Debt Mutual Funds. Debt Mutual funds are the best bet for you if you prefer small but stable returns over possibility of high returns with high risk involved. These funds will provide you with better returns than your saving bank account. So if you have surplus funds to park for a while then you should definitely check out debt mutual funds.
But Do you know the different categories of debt mutual funds?
If you are thinking of investing in debt mutual funds, you should know the different categories to understand the underlying assets of the fund. Categorization of debt mutual funds is mostly done on the maturity date of the underlying assets and the type of assets selected for investment. The underlying risk of each category, therefore, varies depending on the investment horizon of each fund.
Here are the 16 different fund categories of a debt mutual fund scheme –
Different types of Debt Mutual Funds
- Overnight funds – These funds invest in assets which mature overnight. The scheme is an open-ended scheme where the underlying assets have a maturity period of 1 day.
- Liquid funds – Under this category, the maturity period increases. The underlying assets of the fund have a maturity period of up to 91 days and include money market securities and other short-term debt instruments.
- Ultra-short duration funds – The portfolio of this debt mutual fund scheme has assets which have a maturity period of more than 91 days but less than 6 months.
- Low duration funds – These schemes invest in debt securities which have a maturity tenure ranging from six months to 12 months
- Money market funds – These debt funds invest in money market instruments which have a maturity tenure of up to one year
- Short duration funds – Assets which have a maturity duration of one to three years are selected for investment under this mutual fund scheme
- Medium duration funds – These funds invest in assets which have a maturity duration of three years to four years
- Medium to long duration funds – These funds invest in securities with a maturity period of four years to seven years
- Long duration funds – As the name suggests, long duration funds invest in long-term debt assets. The maturity of such underlying assets is greater than seven years
- Dynamic bonds – Dynamic funds do not have a particular affinity to the maturity duration of the underlying assets. These funds invest in multiple assets having different maturity tenures
- Corporate bond fund – These funds primarily select corporate bonds as their underlying assets. High rated bonds of reputed corporates are chosen for investment under these funds. At least 80% of the portfolio should be invested in corporate bonds
- Credit risk funds – These funds also invest at least 65% of their AUM in corporate bonds. However, the bonds selected for investment are rated lower than the bonds selected for corporate bond funds. So, if a corporate bond fund selects A+++ corporate bonds, credit risk funds would select corporate bonds which are below this rating.
- Banking and PSU funds – At least 80% of the assets of this fund scheme is invested in debt securities of banking institutions, public sector undertakings (PSUs) and public finance institutions.
- Gilt funds – The assets of a gilt fund are predominantly invested in Government securities. At least 85% of the fund is invested in government securities which might have varying maturity tenures
- Gilt funds with 10-year constant duration – The name of these funds denote their characteristics. The fund invests in government securities which have a maturity period of 10 years.
- Floater funds – Floater funds are named so because the assets they invest in have a floating rate of interest. At least 65% of the fund’s assets are directed towards such instruments with floating interest rates.
Tax Implication of Debt Funds
Debt Mutual funds are taxed as short term Capital Gain and Long term Capital Gain. Short term Capital Gain is the gain which you get if you redeem your fund within 3 years of investment and it is taxed as per your income tax slab rates. On the other hand, long term capital gain (LTCG) is the gain that you get if you sell your investment after completion of 3 years. LTCG is taxed at 20% with indexation benefit.
Read More :- Choosing The Best Equity Mutual Fund In Current Volatile Market
So now that you know all the 16 different types of debt mutual funds and its tax implication, you can make an informed decision. Ideally, one must select these funds based on tenure of the investment. Understand these funds before you choose to invest in any of them. You may download the Fintoo app to start investing or sign up on our website FIntoo to start investing.
Top 5 Insiders Helping You With Wealth Creation
Financial experts say that – Disciplined equity investing can change your life in a disciplined way! This means that the one who masters in equity investing can have a sound and safe financial future. Isn’t that great? With strong wealth creation strategies and practices, one can create their own strong financial base that could further prove to be a strong financial support for the family.
If you are getting worried looking at the current market situation where the market fell by approx 30% initially majorly because of the Covid-19 pandemic, then please be informed that this is not something which has happened for the first time. Even in 2008, when the markets fell drastically, soon after it recovered in 12 months time giving double digit approx 75% return the next year. So no need to worry looking at the short term volatility. Wealth creation is a long term process.
Now let us see how we can invest in equity.
Depending on your savings you can choose your investment options. In this, there are two cases-
- If your income is regular, you can invest through SIP mode
- If there is no defined pattern of your income, you can save and invest lumpsum.
It is suggested that you invest through the asset allocation process by matching your personal goals, investment objectives, risk profile as well as time horizon.
You must be thinking which option is better for investing among the above available two options, right? You can clear your doubts and queries in the below segment –
In any of the approaches that you choose, the main point of consideration is to align your asset allocation to your personal circumstances and objectives.
The SIP mode can be preferred for a regular saving that would further help in building the discipline to investing. This provides the benefit of rupee cost averaging as well as compounding in the long term. The lumpsum investment must be in line with the asset allocation that is necessary to compute the investment objective, risk profile and even time management.
This was about general investment plans of how to plan your investments and which factors to keep in mind before investing. With these investments, we can have our own wealth creation that is obviously everyone’s dream. In spite of this being a wish of everyone, not all are able to successfully do it. Apart from following the strategies of investment gurus, there are some of the really helpful practical tips that can help you with better investments.
Before we dive into these practical tips, let’s be clear that there is no full-fledged working strategy of wealth creation in equity. You need to implement ideas, develop strategies for your finances that could help you a lot in future. So, let us now have a peek at the top 5 insiders rather say key ideas for having good wealth creation in equity:
Read More :- Know How to Track the Performance of Your Mutual Funds
The prerequisite- Set your financial goals:
This is the primary requirement for your wealth creation plan. Depending on undertaking the risk, you can set up your financial goals. You need to understand your needs and wants clearly and accordingly approach it. Your hard earned money needs to be properly invested and so you must decide how and till which period you need to invest. This is called goal based investing. It is important to have a goal in place before starting the investment to achieve it. This is necessary because the investment decision should be based on the nature of the goal and tenure of the goal.
The most important thing- Research:
Research is another prime factor to consider for your investments. Generally, people say that investment in equities is nothing less than gambling. There is a term called “tip” that decides about your investment in equities which is just a mouth of victory without any backing. With strong and thorough research, equity can be a more of a knowledge based wealth creating medium. As a result, it is advisable to invest your time too in learning the basics of equity investments. You can also get in touch with investment experts online platforms like Fintoo to guide on the same and help you with the investment process.
The must-have thing: Focused Portfolio:
After thorough research, you need to have your focused portfolio for carrying out investments. Focus on a few good names that can help you out with wealth creation rather than running behind 100 present in the market. Instead of managing big portfolios, focus on the small but good ones. Investing in few quality stocks or mutual funds can help you in managing your portfolio in simplest ways.
Consider investment period- Long Term:
If you are planning to invest in equity, it is advisable to invest for a longer time. The best thing you can do is buy the right funds/stock and hold them across the market cycle. The investments that you make in equities are not just about picking up quality stocks, but it’s also about how much patience you have to see your money grow. Keep in mind that – Big money is not in buying or selling, but instead it is in waiting patiently.
The last one- Reconstruction:
In the investment process, there are chances that your risk appetite may change or you may even come across any unwanted or unexpected circumstance while you are still investing. In such time, you need to effectively revise and reconstruct your portfolio. This is necessary in order to benefit you from the risk reward equation. Churning and updating your portfolio at regular intervals is not advisable as you may miss something big at some time. So, a better option is to reconstruct the portfolio according to the risk appetite only when it is needed.
Thus, these were some of the best tips that one should keep in their mind before making investments. Just be updated with the market trends, update your knowledge and keep a strong focus on your strategies that can help you with better investment plans and of course return on investments too.
For any further guidance and to initiate your investments, download Fintoo App and get started.
Things You Should Do When Your Funds Are Underperforming!
Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to identify underperforming mutual funds. Although if you have invested for long term goals, short term volatility should not bother you. But still you should learn to identify underperforming funds and to take corrective action.
Mutual funds have been the most amazing tax saving investment instrument and simultaneously have outperformed conventional saving instruments in long term. However, even if you invest in mutual funds for long term, it is imperative to look at the performance of the funds periodically. But, the question arises, what if any of the funds underperform.
Read More :- Understanding Systematic Transfer Plans (STP)
How to take stock of the mutual fund portfolio?
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. But in order to gain the benefits, the mutual funds investments should be tracked regularly. The performance of the mutual funds has to be seen in the right way. Following are some of the measures :-
- Review the performance of all the mutual funds in your kitty periodically.
- Indicators to be checked for performance of the fund. Few of them are:-
1. AUM (Assets Under Management)
Reduction in size of AUM consistently may indicate underperformance.
2. CAGR (Compounded Annual Growth Rate)
If CAGR is less than benchmark as set by the mutual fund house, then it is not so lucrative to invest in the fund.
3. NAV (Net Asset Value)
NAV is debated to be considered as a performance measure. Since, stock markets fluctuate daily and mutual funds invest in stocks, mutual funds are subject to market momentum gains or losses. However, consistent lowest NAV in a similar fund category would be a red signal.
- You can identify the underperformer based on a combination of performance indicators. The mutual funds which lag in the category and with respect to the benchmark, in such measures, will be most probably the underperformer.
- If you are holding the funds for long like 2 or more than 2 years, and are still experiencing that the fund is not going to turn around the performance, then it’s the time to act.
- Deep analysis of the portfolio of the fund is essential. For e.g. if you are investing in blue chip funds, it is not necessary that your fund invests in large cap only. This fund may invest in large cap as well as mid cap, for a balanced exposure. Mid-cap and small cap stocks are known to be high risk- high reward, so if the market rallies, you will get superior returns, but in case of bear market, the same fund will underperform. In such a case, your investment is secure due to disciplined investment approach, but your fund may underperform a few times when the market goes down, which may not be a matter of concern.
Reasons behind underperformance of the mutual funds
- Fund investment strategy or change in existing investment strategy
If the fund is aggressive then it will fare better in bull market but will underperform in bear market. Similarly, a mutual fund with value investing approach will not be performing better in the bull market.
- Overweight on underperforming sectors or industry
Certain funds are sector specific or may follow and invest in stocks based on theme (like emerging equity or infrastructure industries). Every sector may not perform up to the standard every time.
- Higher expense ratio
The fund may have moderate to high return magnitude but may also result in reduced return due to higher expense ratio. This is because, returns are paid out only after deducting for management fees, administration fees, etc.
- Fund management approach
If there happens to be a change in fund management style or fund manager, which may result in total change in stock selection or even long-short strategy.
There may also be other reasons like merger of the fund with another fund. However, even if you could find out the reason why the fund is underperforming, you must know what to do next since you are already holding the units, so let’s see what you can do now.
What to do when the fund is underperforming?
- Hold
If you are holding any flagship scheme or core scheme of the fund house, (which is generally promoted by the fund based on its performance), then you may continue holding it for a while. However, keep a look at its alpha (capability to generate returns over and above benchmark returns).
One more notable point is that if the fund manager’s approach is disciplined like value investing, then you may continue to hold the fund, even if it underperforms. Since all funds fluctuate in short and medium term owing to stock market fluctuations, it is not rare that even a sound and stable fund may underperform.
- Buy
Some of the investors may even buy more units to achieve rupee cost averaging when the funds are underperforming. However, if the fund does not possess the capability to yield better returns in future and the investor buys the units just to reduce the loss, this step may even cause you to incur more loss in coming years.
- Switch or sell
If the fund is underperforming in its category as well as against benchmark, then it’s the time for some action. If the sectoral or thematic underperform due to cyclic changes in the sector, then you may redeem the units and may place the investment in another worthy investment, since thematic or sectoral funds are generally far too dangerous since they owe to seasonal fluctuations.
If the fund’s underperformance is due to some of the factors like merger of the fund or change in fund manager, then you may separate such funds from others in your portfolio and keep close watch for a year or so, to let the hidden potential to come up. However, quarterly reviews are must so that you may come to know whether these funds still underperform and that it is time to get out of those funds.
Lastly, it is suggested that you take assistance from your investment advisor or consultant as they can help you to make best decisions by analysing your portfolio. You may also download the Fintoo app for the same.
Understanding Systematic Transfer Plans (STP)
How many of you are familiar with STPs?
I’m sure not many of you. Now with so many investment options available, people are confused in what to invest, where to invest and how to invest. Some people do not know what are the investment options available, and how to make the best use of them.
You may have different goals and dreams in life, but to fund those goals is a big task. It is always suggested that if you don’t know your way through the market, you seek help from an advisor. They will be able to guide you in the right path and help you build a bridge between your funds and goals.
You must be aware of Systematic Investment Plan (SIP) which is one good option to invest in mutual funds. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in. Systematic Investment Plans are a disciplined way to start investing to create wealth for the longer period of term.SIPs bring about a good saving habit in one’s routine, which is necessary.
Read More :- Importance of Continuing SIPs Amid COVID-19
Another option is STP (Systematic Transfer Plans), this is good for those investors who do not want to take the risk of investing a lump sum amount in a particular fund at one go. Especially in the current scenario, where the market is volatile due to COVID-19 pandemic, it is suggested to not invest lump sum. So Systematic Transfer Plans comes to your rescue.
Under Systematic Transfer Plans, an investor can invest a lump sum amount in a fund and transfer regular amounts, which are predefined by the investor, to another fund, on a specified date. You can make these transfers on a monthly, quarterly or even weekly basis. This is a better option than directly investing the whole lumpsum amount in a risky fund.
There are 2 types of STPs:
- Fixed STP: Over here, the amount that is to be transferred from one scheme to another is fixed. For example, Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Here we can see that Rs. 5000/- is the fixed amount that is to be transferred.
- Capital appreciation STP: Under this, the amount that is to be transferred will depend on the profit earned. This means that the investors want only the profit amount to be transferred to the other fund. Let us take the same above example to get a better idea, If after investing Rs. 1 lakh in fund ABC, he gains Rs. 6000/- (after a few months or a year) on it, the same amount of 6000 will be transferred to fund XYZ.
Now lets see how STP is relevant to you.
If an investor, who has a lump sum amount to invest, doesn’t want direct exposure in the equity market, can invest his lumpsum amount in a debt fund and through STP, transfer the amount he wishes to in the equity fund.
He can make the transfers monthly, quarterly or even weekly, as he wishes. However, one must keep in mind that, whenever an amount is transferred from one fund to the other, the units of that fund, from which money is going out, becomes less and units of the fund where the money is transferred increases.
Lets say, if the funds are being transferred from debt to equity, then the units in the debt fund will reduce and the units in the equity fund will increase.
Read More :- Understanding SIP, SWP and STP
STPs from debt to equities are more effective, when markets are volatile, and an investor does not want to take a risk. STPs are a better option than one time investments, in cases when the market is down which we are experiencing right now because of global pandemic. However, if we look at it the other way round, then one time investments would be a better option, if the markets are moving upwards. Having said all this, it is very difficult to predict the market scenario for a retail investor. So it is better for them to invest through STPs and get better risk adjusted returns, over a period of time.
STPs help investors reduce their risk, if the regular transfers are maintained. Just like how the concept of Rupee Cost Averaging works for a SIP, it can be applicable to a STP also. People usually think that when the market is down, they should redeem their money, before they make a bigger loss. However, people investing through SIPs, can avail this benefit.
Let us continue with earlier example to understand above point:
Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Now let us say in the 1st month, the NAV of fund XYZ was Rs. 10/-. So the no. units added will be 500 (5000/10). After a few months, if the NAV drops to Rs. 8/-, 625 (5000/8) more units will be added to the XYZ fund compared to 500 earlier.
In this example, you can see how an investor can take the advantage of the market when it drops. This example is taken also with a few months gap. Now, imagine if an investor keeps his money for years, how much will he gain.
STP is a tool to reduce risk, like SIP. The transfers should be made in a disciplined manner to avail this benefit. Well now you’ve understood all you need to know about STPs, so you can start planning for your investments, and make use of the funds you have in a proper and ‘Systematic’ way even during the current volatile market owing to COVID-19.
You may start investing now in mutual funds through SIP/STP Online via Fintoo or download our application Fintoo