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Mutual Fund

Money Market Funds: Features, Benefits, & More

Money market funds are a type of open-ended debt funds with high liquidity and short-term investment horizon. These funds invest in debt securities with high credit ratings, bringing stability and diversification to your portfolio.

In this article, we will highlight the features and advantages of money market mutual funds.

Money markets are the financial markets that deal with short-term lending and borrowing with up to one year of maturity period.

Treasury Bills (T-Bills): The RBI issues T-bills to raise money for a duration of up to 365 days.
Certificate of Deposits (CDs): Scheduled commercial banks offer CDs for a specific tenure in a dematerialized form. CDs are similar to FDs with a lock-in, i.e. you cannot withdraw CD before the maturity.
Commercial Papers (CPs): Companies and financial institutions release commercial papers to raise money for a short duration. CPs have high credit ratings and are usually available at discounted prices.
Repurchase Agreements (Repos): RBI lends money to commercial banks in the form of repos.

Money market funds invest in low-risk short-term debt instruments such as treasury bills, commercial papers, repos, etc. The maturity period of the underlying assets ranges from one day to one year. These funds are suitable to introduce stability to your portfolio while generating a source of income through interest.

Money market funds are highly liquid with underlying assets maturing within a year. These funds are better suited for 6 months to 1 year of investment horizon.

Debt funds are prone to interest rate risk as when the interest rate goes up, bond prices go down. Therefore, the longer the maturity of a debt fund, the higher the interest rate risk. As money market funds have a short maturity period of up to one year, the interest rate risk is low.

Short-duration debt instruments are known for low volatility. That is, the value of these funds does not fluctuate drastically. These funds are stable and ideal for investors seeking principal protection.

These funds tend to deliver superior returns than bank FD or savings accounts for a similar duration. However, the returns are lower than long-term debt funds.

Though money market funds carry relatively lower risk, these funds are prone to interest rate risk and market fluctuations. These funds may also carry reinvestment risk. As the funds invest in new securities as and when the old ones mature, the reinvestment may happen at a lower interest rate.

Money market funds are only suitable for 3 months to a year of investment. If you are planning for a longer investment horizon, you can explore other debt fund categories such as dynamic bond funds, medium to large-duration debt funds, etc.

Always ensure the exit load and the expense ratio associated with any mutual fund. Read the fund-related documents carefully before investing.

Capital gains earned from these funds attract tax. The payable tax depends upon the investment duration. Short-term capital gains tax will be applicable for investments redeemed before 36 months. Otherwise, you’ll have to pay long-term capital gains for investments held for more than 36 months.

In the case of debt funds, both STCG and LTCG are taxed at your tax slab.

Money market funds are ideal for investors seeking liquidity and short-term investment avenues. These funds are ideal to park your surplus funds instead of keeping them in a bank account. You can leverage these funds to build an emergency fund of up to one year. Investors with low to moderate risk appetite can consider these funds to mitigate equity investments.

Take a quiz to understand your risk profile.

Money market funds are a perfect fit for investors seeking liquidity, low risk, and stable returns. These funds can be a part of your emergency funds or a short-term financial goal. Rather than keeping your funds in a savings account, you can utilize these funds to earn superior returns.

It is important to note that, while these funds are safe, they’re not entirely risk-free. Make sure you evaluate your financial goals and risk appetite while investing. If you’re unsure whether to invest in debt funds or not, get in touch with us. Our experts will review your portfolio and help you realign it with your financial goals.

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Mutual Fund

ELSS Mutual Funds: Features, Benefits, Taxation and More

What if you could save tax and earn reasonable returns on your investment?

Say hello to the Equity Linked Saving Scheme (ELSS). ELSS mutual funds offer tax exemption of up to INR. 1,50,000 under the section 80C of the IT Act. So while equity instruments encourage your wealth creation, you can also lower your overall tax liability.

Let’s get to know these funds better…

ELSS mutual funds are open-ended equity funds with 3 years of lock-in period. The scheme invests at least 80% of the assets in equity or equity-related instruments. 

The underlying stocks in these funds range across market capitalization (Small-cap, Mid-cap, large-cap) and different sectors. These funds aim to maximize your return on investment while providing tax exemption.

Among all the instruments eligible under section 80C of the IT Act, ELSS funds have the shortest lock-in period.

Investment Instruments Eligible for Tax deduction under 80C of the IT ActLock-in PeriodRisk LevelExpected Returns
ELSS3 yearsHighDepends upon market performance
Tax Saver Fixed Deposit5 yearsLowBetween 6%-8% p.a
National Savings Certificate (NSC)5 yearsLow7.7% p.a. (may change every financial year)
Public Provident Fund (PPF)15 yearsLow7.1% p.a. (may change every financial year)
National Pension System (NPS)Till retirementModerately highDepends upon market performance

ELSS mutual funds are ideal for you if you don’t want to lock your money for a longer horizon. 

Equity-linked savings schemes invest the majority of their assets in equity or equity-related instruments. Therefore, these funds have the potential to deliver superior returns compared to other 80C instruments. Over the long term, these funds can help you build significant wealth. 

By investing at least INR. 1,50,000 in ELSS mutual funds in a financial year, you can claim tax deduction under section 80C of the IT Act. 

ELSS mutual fund managers distribute the fund assets across market capitalization, sectors, and themes. This diverse investment strategy lowers the concentration risks. 

Before you choose the ELSS fund, you must compare its performance against the peers and the benchmark. While a fund’s past performance can give you an idea of how it performed during various economic conditions, it’s not the only measure to judge any fund. Therefore, it is crucial to analyze the rolling returns for accurate performance analysis.

Explore the types of returns on mutual funds

Ensuring the mutual fund aligns with your risk profile and fits in with your financial goals is important. Being an equity-heavy scheme, ELSS funds hold higher risk. 

The fund performance may fluctuate with market movements. Staying invested for a longer horizon, even after the lock-in period is over, can mitigate the risk.

Determine your Risk Profile by taking our risk profiling quiz

The mutual fund factsheet holds all the financial parameters such as the fund’s standard deviation, alpha, beta, Sharpe ratio, etc. These parameters may sound complex, but they make comparing two funds quite easy. 

You can learn how to read a fund factsheet here.

Apart from the fund parameters, the factsheet also contains the investment cost of a fund such as expense ratio, exit load, etc.

You can invest in ELSS mutual funds either via lump sum or SIP. The lump sum amount will be eligible for redemption after 3 years of the lock-in period. However, SIP redemption is different. 

If you start an SIP of ELSS fund, the three-year lock-in period applies to each installment. Let’s take an example of investing INR. 1,50,000 in a financial year in an ELSS fund via monthly SIP of INR. 12,500. 

Each SIP installment will have its own lock-in period of 3 years. 

-The first installment on 1st Jan 2024 will mature on 1st Jan 2027. 

-The second installment on 1st Feb 2024 will mature on 1st Feb 2027. 

-The third installment on 1st Mar 2024 will mature on 1st Mar 2027. 

-And so on…

Therefore, your entire investment will not be eligible for redemption at once. You can redeem eligible installments by raising a request to the mutual fund house. 

Equity-linked Savings Schemes attract equity tax implications after redeeming funds. As the fund has a 3-year lock-in period (more than 12 months), there won’t be any short-term capital gain taxation. 

You will have to pay a 10% long-term capital gain tax on profit exceeding 1 lakhs in a financial year of withdrawal. You don’t have to pay any tax if your profit on ELSS funds is less than 1 lakhs.

ELSS mutual funds are ideal for professionals seeking tax deduction options. By investing INR. 1,50,000 in ELSS funds, you can claim tax deductions under section 80C of the Income Tax Act. 

While PPF, EPF, NPS, and tax-saver FD offer similar tax benefits, the returns could be lower and the lock-in period is higher. ELSS demands only 3 years of commitment in exchange for superior returns and tax exemption. 

Not only will the ELSS fund provide tax benefits but also offers instant diversification across equity markets. You can easily invest a lump sum amount or start a SIP with VNN Wealth. Be sure to evaluate your risk profile by taking our risk profiling quiz.

Equity-Linked Saving Scheme is a popular tax saving instrument. ELSS promotes wealth creation by delivering superior returns compared to other tax-saving schemes and lowering tax liability.

Investors can invest INR. 1,50,000 in an ELSS scheme via lumpsum or via SIP, as per convenience.

Explore various categories of mutual fund schemes here and effortlessly start investing

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Mutual Fund

54EC Capital Gain Bonds: Features and Benefits

Get an exemption on long-term capital gain tax through 54EC Capital Gain Bonds. Here’s everything you need to know! Selling immovable property such as land or a house brings generous profit; especially after a long duration. However, that profit soon attracts capital gain tax.

Thankfully, there’s an easy way to avoid or lower capital gain tax by investing in 54EC bonds. Let’s find out how.

Section 54EC of the IT Act allows taxpayers to avail exemption on the long-term capital gain tax (asset sold after 24 months of purchase). This benefit is only applicable to the capital gains earned through the sale of an immovable property such as land/house/shop. Upon selling the property, taxpayers can reinvest the profit in bonds that fall under section 54EC.

1. Rural Electrification Corporation Limited or REC bonds,
2. National Highway Authority of India or NHAI bonds,
3. Power Finance Corporation Limited or PFC bonds,
4. Indian Railway Finance Corporation Limited or IRFC bonds.

1. Capital Gain bonds are backed by the government under the Income Tax Act 1961. These bonds are AAA-rated and, hence, are safe to invest in.
2. 54EC bonds come with INR, 10,000 face value. Investors can invest a minimum of INR. 20,000 (2 bonds) and a maximum of INR. 50,00,000 (500 bonds) in a financial year.
3. With a 5-year lock-in period, these bonds offer a 5.25% interest rate.
4. There is no TDS on the interest earned on capital gain bonds. However, the interest is taxable as per your tax slab.

Let’s take an example to understand how to avail exemption on LTCG after selling an immovable property. You are selling your house at 1 crore after 4 years of purchase. You will have to pay long-term capital gain tax on the profit, unless, you buy a 54EC bond within 6 months.

The sale price of the property: 1,00,00,000
Indexed Cost of Acquisition: 70,00,000
Indexed Cost of Improvement: 2,00,000
Capital Gains: 28,00,000

Since the max limit is 50 lakhs, you can invest the entire 28 lakhs of capital gains in 54EC bonds. That will remove your LTCG tax liability. However, if you invest only, say 20 lakhs, you will have to pay LTCG tax on the remaining 8 lakhs.

54EC bonds are available to invest for any individuals, Hindu Undivided Families (HUFs), Companies, LLPs, Firms, etc.
How to Invest in 54EC Bonds?
Capital gain bonds are not available on the stock exchange. If you’re interested in purchasing 54EC bonds, please contact us. You can choose to buy these bonds in either demat or physical certificate format, depending on your preference. However, the demat format is easier to track. Simply fill out a form, and experts from our team will reach out to assist you with the process.

The 54EC bonds offer a great opportunity to lower your capital gain tax liability. After selling your immovable asset, you can re-invest the capital gains in the 54EC bond within 6 months to benefit from the tax exemption. These bonds are safe and offer a decent 5.25% interest rate.

If you wish to buy bonds, contact VNN Wealth to simplify the purchase procedure.

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