READER’S CORNER ASHWANI BHATIA

What is mutual fund cut-off time? And how does it impact my returns?

The cut-off time decides at what net asset value (NAV) you get to buy or sell units of your mutual fund scheme. It depends on the time you submit your application and money with the fund house. There are different cut-off timings for liquid, debt and equity schemes. For a long-term investor, say, in an equity fund, things like cut-off time should not make much of a difference, provided he invests regularly and in a disciplined manner.

I am 22. I can invest ~25,000 a month for 10 years. Which funds should I invest in?

Before starting any investment plan, you should first take into consideration your risktaking ability, your financial goal, and the time within which you plan to reach that goal. Given your age, you could consider allocating a significant portion of your investment amount to equity mutual fund schemes as your risk-taking ability at this stage of life is much higher. Also, equity mutual funds have delivered better inflation-adjusted returns than other asset classes.

In addition, when investing for the longterm, it is essential to review your investment regularly. Check your asset allocation also every few years. This ensures that you keep track of your financial goals and make changes to your investments if required.

I have heard about accrual funds. Is this a good time to buy such funds?

Accrual funds are debt mutual fund schemes that earn income from the coupons of the securities they invest in. These schemes aim to generate comparatively higher yields by investing in securities that have higher coupon rates. This means these funds could also invest in papers with relatively lower credit rating. The securities these schemes invest in could range from short-term to medium-term maturity. They follow a buy-and-hold strategy. The securities are held until maturity.

The decision to invest depends on your financial goals and time horizon. Investors, however, do need to keep in mind that these schemes could carry some amount of risk as they are allowed to invest in papers with lower credit ratings.

Is there a mid-cap index fund? Is indexing in mid and small caps the right thing to do?

Mid-cap index funds are available in the market that mimic the index they are benchmarked against. The decision to invest passively in index funds depends on your comfort—whether you would prefer tracking the index vis-à-vis taking slightly more risk in active funds, which endeavour to beat the benchmark index to generate higher returns.

Which is the better option—swp or dividend?

Systematic Withdrawal Plans (SWP) allow you to generate regular cash flows for your needs from your existing mutual fund investments. Your withdrawal from SWP includes your principal investment and capital gains, if any. You pay taxes only on the capital gains (the rate depending on whether it is equity or debt). The dividend option in mutual fund schemes gives dividends only when there is a distributable surplus in the scheme, and the fund house declares a dividend.

According to the current Budget notifications, SWP stands out for its tax-efficiency. In case of withdrawals from debt funds, shortterm gains (less than three years) are taxed according to your tax bracket while long-term gains are taxed at 20 per cent with the benefit of indexation. Capital gains on equity funds are taxed at 15 per cent for withdrawals within 12 months. Withdrawals after 12 months are taxed at 10 per cent if it crosses ~1 lakh in a financial year.