Impact of GST on Mutual Fund Investment

 











Goods and Service Tax (GST), India’s biggest tax reform is going to soon turn into reality from July 1. Goods & Services Tax (GST) is an indirect tax throughout India to replace taxes levied by the central and state governments.

Under the GST regime, Asset Management Companies (AMCs) will have to pay service tax of 18 per cent on the investment management fees they earn. Until now, the rate was 15 per cent. Management fees are part of the total expense ratio charged annually by AMCs. These include marketing and selling expenses, fees paid towards registrar and transfer agents, trustees, auditors, etc. Typically, equity funds charge management fees of 1-1.5 per cent of the assets under management, while debt funds charge between 0.05 per cent and 0.5 per cent.

The impact will not be that big, but it surely will change something for the mutual fund investors. The increase in service tax from 15 per cent to 18 per cent would make mutual funds a bit expensive. The higher expense ratio will lead to lower returns in mutual fund schemes. There will always be some or the other change in the markets and policies, investors do not need to keep changing their portfolio. Equity mutual funds are a long-term investment. Policy changes will happen but investors should stick to their schemes. However, most of your funds will be able to capture these changes in the market.

SIP V/S LUMP SUM

SIP v/s Lump Sum

Is SIP a better investment option or making lump sum investment a better one? The importance of SIP has started increasing since Mutual Funds have entered Indian territory but some investors prefer lump sum investment. Here are few differences between SIP and Lump sum investment.

The full form of SIP is Systematic Investment Plan which means it is a method of investing that takes a certain amount of your cash and invests it periodically into mutual funds.A lump sum investment is of the entire amount at one go.

Lump sum investment is done to make investment for as long as for a period of 12 months and above. Most of the times lump sum investment have very low chances of negative returns. SIP is done when you don’t have excess cash and wont to enjoy compounding power. As it is rightly said that every drop of water is important to make an ocean. Making investment via SIP may not seem attractive at first sight but it enables investors to get into the habit of savings.

One can start SIP with the amount as low as Rs.100/- per month whereas for lump sum investment one need cash in bulk. While making investment it is very important to make a note that tax saving should always be incidental to your investment plan which in turn should be guided by your financial goals. Equity Linked Saving Schemes (ELSS) are one of the most popular investment that provide tax saving and capital appreciation.

When making lump sum investment it is very important to time the market. The best time for a lump sum investment in a mutual fund is when the market or the NAV is close to its year’s low and when there’s scope for the fund to start
appreciating again soon. If you are planning for any long term goals that are expected to come only after 5-6 years then this is the right time to start investing in SIP of large cap diversified equity funds.

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WAYS TO PICK GOOD MUTUAL FUND

When finally you have decided to invest in Mutual Fund the next question arises which mutual fund to choose from and will the chosen fund provide you the required return satisfying your goals.

Here are some ways to pick good mutual fund which will help to make correct decision.

1. Buying No-Load Mutual Funds.

Mutual funds make their money by charging fees to the investor. It is important to gain an understanding of the different types of fees that you may face when purchasing an investment. Some funds charge a sales fee known as a load fee, which will either be charged upon the initial investment or upon the sale of the investment. There are some fund houses which do not have load charges and it increases the profit as one would not have to pay load charges.

2. Being Careful to Expense Ratio.

Expense ratio is very important parameter to be looked at while selecting any mutual fund scheme. All fund management and distribution related expenses are borne by the scheme. This means high expense ratio will affect the fund’s returns.

3. Evaluating Past Performance and Experience of Fund Managers.

Fund manager plays a very important role in the fund’s performance. Fund manager is the ultimate decision maker and his experience and view point matters a lot. Before investing one should evaluate fund manager’s past performance and track record. If you find that due to change in the fund manager there is considerable effect on the fund’s performance which does not suit your risk appetite then you may make a decision to exit.

4. Size of Fund.

This parameter is different for debt and equity schemes. In equity the comfortable asset size is hundreds of crores, in debt it should be in thousands of crores as the investment value per investor is higher in debt funds. 90 % of total Assets Under Management (AUM) of the mutual fund industry are invested in debt funds, so your selected scheme assets should also have a considerable AUM. Less AUM in any scheme is very risky as you don’t know who the investors are and what quantum of investments they have in this particular scheme.

5. Identifying Goals and Risk Tolerance.

Before investing an investor must first identify his or her goals and desires for the money being invested. Depending on his/her goals investor must the mutual fund which meets his particular goals be it short term or long term. In addition, investors must also consider the issue of risk tolerance- Is the investor risk adverse or risk tolerant. Depending on this he /she should opt for particular Mutual fund.

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Equity Funds v/s Debt Funds

The first thing to understand is that mutual funds are investment vehicles, and that simply means that investors pool their money together and then the mutual fund invests that money on their behalf. The easiest way to understand this is to think that as an individual investor you would’ve gone to the stock market and bought a share, but now as a mutual fund investor you buy a mutual fund unit, and then the mutual fund pools together your money with money from other investors and then goes and buys shares on your behalf.

There are four main type of mutual funds based on what they invest in.

1. Equity Mutual Funds: These are mutual funds that invest in shares of other companies.

2. Debt Mutual Funds: Debt mutual funds are mutual funds that invest in debt instruments so they may buy debentures of a company or government and other such things.

3. Commodity Mutual Funds: These are mutual funds that own commodities like gold, and in reality, India only has gold based mutual funds.

4. Hybrid Mutual Funds: Hybrid mutual funds invest in a mix of the above three classes at the same time. So for example, they may invest 65% of their money in shares and 35% in debt.

The answer to which mutual fund you want to invest in depends on what you actually want to buy and your appetite for risk.

If you want to invest in shares and understand that investing in shares can sometimes mean that you even lose your capital then equity funds are for you.

If you want to be safe and protect your capital then you should only invest in debt mutual funds.

If you were interested in getting returns from gold then you should invest in a gold mutual fund. A hybrid fund is for someone who needs a balance.

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6 rules for investing in mutual funds

Money is a very strange thing-human beings make rational decisions while dealing with most aspects of life but make serious errors of judgment when it comes to dealing with money and finance including earning, protecting, budgeting, saving, spending, leveraging, investing and insuring.

Following are the 6 rules which an individual can follow while investing in mutual fund and gain the best out of their investment.

1. Asset Allocation Plan

While allocating assets, remember to allocate only that much money to equity funds which you won’t require for at least the next 5 years, and which you can afford to lose up to 50 per cent in the short term without any panic.

2. Regularly invest budget surplus in MF’s

Try to create a budget surplus by ensuring your income is more than your expenses. Then, channelize your additional income properly into investments like mutual funds.

3. Avoid over investment in Liquid Funds

Liquid Funds are only for parking “temporary surplus” and not for long term investments. If you believe that liquid funds are for long term investments then you believe in the fallacy that ‘saving is investing’ and will be in for a rude shock.

4. Should not ignore Equity Funds

One should not ignore equity funds because they are the gateway to long term wealth creation. If you ignore equity funds and only invest in debt funds then you are committing a grave mistake, which may considerably hinder your long term wealth creation potential.

5. Don’t ignore index funds

The words of the great legendary investor Warren Buffet who once said that “most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals”.

6. One should understand the fund before making any investment.

The primary purpose of MFs is to make your life simpler by investing your money on your behalf. However in reality, they have made your life difficult by making available a plethora of different categories and schemes. Hence, before biting the bullet, get acquainted with the category of fund you are investing in – Equity, Fixed Income, Balanced, and Commodity – and within them the various sub-sets like sector, theme, gilt, income, short-term, liquid etc.

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