“Investors eyeing tax efficiency can move a part of their debt SIPs to a mix of arbitrage and equity savings funds,” said Anup Bhaiya, MD, Money Honey Financial Services. For instance, an investor having a ₹10,000 SIP in an ultra-short-term fund could shift half of that to an equity savings fund or arbitrage fund. Equity savings funds are structured in such a way that the equity and arbitrage components comprise more than 65% of the portfolio that helps it qualify for equity taxation.
Bhaiya recommends conservative equity savings funds like ICICI Prudential Equity Savings Fund and Bandhan Equity Savings Fund, where the equity allocation will not exceed 16% and 20%.
From April 1, capital gains arising from investments in debt mutual funds, gold and international schemes will be added to taxable income and taxed in line with the income tax slab rate. The government made this unexpected decision in an amendment in the Finance Bill 2023.
The indexation benefit in these products that lowered the tax outgo for investments held for more than three years will no longer be available from tomorrow. This tax advantage made debt MFs popular with investors in the highest tax bracket.
Many investors did SIPs in debt fund categories like liquid funds and ultra short-term funds to build a corpus. Financial planners point out that high taxes can eat into returns, nullifying the effect of investing in that asset class.
Many rich investors, who buy gold funds regularly as a hedge against uncertain times, could consider an investment in sovereign gold bonds. But, the shortcoming of this product is its not quite liquid as gold ETFs. These bonds come with a tenure of 8 years, are listed on stock exchanges and the government gives a buy-back option once every six months, after the end of the fifty year. The biggest advantage is that capital gains made in these bonds are tax free if held to maturity.”Sovereign gold bonds are one of the most tax efficient options to invest in gold. It is not possible to do a SIP there, but investors can buy them as and when issues are announced or by assessing availability and making relevant calculations before buying them in the secondary markets,” says Viral Bhatt, founder, Money Mantra.
Many investors putting money in international funds for diversification of portfolios too need to re-evaluate their options. “Investors with SIPs in pure international funds can consider composite funds which invest a minimum of 65% in India equities with the balance in international equity,” says Juzer Gabajiwala, director, Ventura Securities. Gabajiwala recommends funds like Parag Parikh Flexicap Fund, Axis Growth Opportunities and Kotak Pioneer Fund.
