Liquid funds are great. They are safe, secure and provide liquidity to the portfolio. However, they get taxed as debt schemes. This makes the post tax-return low for investors, especially for those in the 30% tax bracket. That's one of the reasons for the popularity of arbitrage funds that give returns similar returns to Liquid schemes but are completely tax-free after the one-year holding period.
What are they? These are funds that invest in equities and take offsetting positions through derivatives like futures. As such, there is no exposure to market movements and investments are relatively safe.
USP? Get returns similar to liquid funds with the tax benefit of equity funds (tax-free after one year).
Where do they invest? These funds invest in cash market (stocks) and hedge them using derivatives (futures etc.) The returns they make are the difference in the pricing between the cash market and futures market....
You have decided to start investing in mutual funds, and you are researching the best-rated funds at all the various sites. Kudos to you, but that’s just the part of the whole process. Tax planning is an integral step in your entire allocation strategy and can make a whole lot of difference to your returns. Tax planning makes sure that money actually stays in your bank account, and is not paid as tax to the government (We are not saying paying taxes is bad, but let’s try not to pay more than what we owe to the government)
Let me start by introducing you to few basic terminologies –
Capital Gain Tax – Any returns from your investment, be it Fixed Deposits, Stocks, Mutual Funds etc., are all subject to tax laws. The returns you make from these investments are termed as capital gains. You are liable to pay your marginal tax rate (your highest tax bracket based on your total income) on these returns as well. This tax, for obvious reasons, is...