Introduction to Equities, Debt funds and Liquid Funds – For beginner investors
POSTED BY ON November 13, 2008 COMMENTS (75)
We will talk about Equity, Debt and Liquid Funds. We will also discuss dividend distribution tax is treated for all these funds.
First understand what is DDT (dividend distribution tax)
Dividend received from a mutual fund is tax free, but only at receivers hand. But mutual funds have to pay a tax on that dividend to Govt before giving it to us. So actually the tax is paid by mutual fund on behalf of us. This tax is called DDT.
Now lets go ahead and see different types on Funds.
Equity Funds
They are the funds that invest more than 65% of their corpus in equity shares of companies. The dividend distributed by such funds is exempt from the dividend distribution tax. So all the dividend which is declared comes to the unit holders, you get 100% of dividends.
But don’t think that this is some extra income .. it is just a part of your own money, after you get the dividend, NAV comes down by that much. This is difference between growth and dividend funds. You actually got some money back, nothing else.
Dividends are are totally tax free and not even DDT is applied to it.
Why to invest : You should invest in Equity mutual funds when you want to invest for long term and when you can take risk. Understand that these funds invest primarily in Equity, so there is more risk, but if you are investing for long term and want capital appreciation to happen, these are the funds for you.
Debt Funds
These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. The dividend from these Funds are subject to 12.5% Dividend distribution tax. The fund is also liable to pay a surcharge and a cess of 10% and 3%, respectively, on the tax. The effective tax rate comes to 14.16%.
Why to invest : They are debt products and offer good liquidity also. If you want to invest some money for safe returns and for short term goal, then Debt funds are something you can look at.
Liquid Funds
These invest in short-term debt securities (which have a duration of less than a year) like commercial papers, certificates of deposit and call money. The income distributed by such funds is subject to an income distribution tax of 25%. The fund is also liable to pay a surcharge and cess of 10% and 3%, respectively, on the tax.
The effective tax rate for liquid and money market funds is 28.32%.
Why to invest : The main reason for investing in Liquid funds should be Liquidity factor, these funds are most liquid and least volatile .. So if you need to have liquidity in your portfolio, always invest some money in Liquid funds, any extra money lying in your Saving Account above your 1 month requirement should be in Liquid fund.
Conclusion :
There are different type of funds and they all have different purpose, you should see which one suits you and accordingly invest in that. Dividend received from mutual funds are not any extra money like Stock dividend. It is your own money.
Hi Manish,
I want to buy some Liquid Funds in SIP format and have shortlisted following Liquid Funds based on reviews from Internet. My objective are Low Risk, Medium Term investment (2-3 years) with Less Taxes.
– HDFC Liquid Fund (G)
– UTI Liquid Fund – Cash Plan – Institutional (G)
– L&T Liquid Fund – Super Institutional Plan (G)
Please suggest If they are fine in my case or I should go with some other option.
Please also suggest if I should buy it through my ICICIdirect demat account or direct/online from HDFC/UTI fund house. As one of my friend was saying ICICIdirect has some extra charges on top of it. Kindly let me know if ICICIDirect have some extra charges for buy/sell/manage Funds or it’s same as buying direct from Fund house.
Thanks,
Arora
Yes, ICICI direct has extra charges per SIP . We use a platform for our clients who can do it without extra costs.
If you are interested, please fill in http://www.jagoinvestor.com/solutions/invest-in-mutual-funds
First can you explain me about debt fund and liquid fun. I want to invest in debt fund.
Can you suggest best performing debt funds?
Is it not already explained in the article ?
I want to save 50000 per month and want to withdraw total amount after approx. 1 years for some specific purpose. Please suggest me best suitable type of debt fund from taxation and return point of view. I am in tax bracket of 30%. Please advise.
I think arbitrage fund is the best option for you – read http://jagoinvestor.dev.diginnovators.site/2015/09/arbitrage-mutual-funds.html
Hi I have around 15 L in my NRE Bank Account & will not need that money for 14 Months at least ( May be 24 Months as well) Please suggest various Tax free Safe instruments.
In that case you can invest in Arbitrage funds , they are tax free after a year, treated exactly like a equity fund for taxation, but they are safe like equity funds.
Hi,
I have lumpsum of around 10 lacs , I don’t want to do FD as its interest is taxable & also I am investing in Equity MF through SIP, so don’t want to invest more into that. I want to invest in debt mutual fund with least risk.Kindly suggest whether gilt long term fund is better orincome funds?
Income funds are surely a very good option. You can go for them
I want to invest rs. 2000 each month for one year. after one year I want to withdraw all money alongwith return for some purpose say for visit to some tourist place. which type of mutual fund I should invest in which can give me maximum return with minimum risk?
FD is the best choice in your case !
thank you manish for such a quick advice. but I have a doubt, how can I make a FD (Fixed Deposit) of rs. 2000.00 each month.
or it should be RD (recurring deposit) of rs . 2000.00 each month. is return of RD is more than debt mutual fund.
It does not work like that, FD interest can be higher or lower than debt funds depending on the performance of debt fund. But in general debt funds offer better return because of the way its taxed
Thank you, manish. Now, I think I should bifurcate rs. 2000.00 in two instrument. one RD of rs. 1000.00 p.m. for one year. and one SIP of RS. 1000.00 p.m. for one year in debt mutual fund. and after one year I should with draw the total amount in RD and debt mutual fund to meet the purpose. is there any exit load and tax if I withdraw the total amount of debt mutual fund invested through SIP after one year in lump sum?
Ravi
seems like a good idea . Regarding exit load – yes some funds might have the exit load before 1 yr, please check that before you invest
Thank you, Manish.
Welcome !
If you want to invest per month automatically, then you can just go to online banking and create online RD , or visit branch for it !
Great Site. 🙂 Very useful.
I want to keep about 3lacs in liquid fund. I would be redeming 50 to 60 thousand weekly and again repurchasing 50 to 60 thousand on and off in the same liquid fund. Which option should i opt for (Growth, Devidend, reinvestment). kindly reply
I suggest growth option only
I want to understand the difference between PPF and debt mf. These both provide almost fixed returns. Liquidity in case of PPF is very rigid. But it provides tax benefit in investment. Return is around 8 %. Is debt / debt oriented mf is better than ppf, if tax benefit on investment is ignored? But there is tax on withdrawl and interest in case of debt funds. Can SIP be done in debt / debt oriented mf? If yes can you suggest some good ones.
Vishal
your definition of “good” has to be defined by you only . Its like this, PPF and Debt MF are two kind of investments options with their own features. Now only you can tell if they fit your requirement or not .better you give your scenario and what you want to achieve
My annual income is around Rs. 10 lacs. I am 26 yrs old. I have 2 SIP in equity of Rs. 5000 each. I also have adequate life cover through term plan. I want to understand the difference between FD, PPF and debt mf. These all provide almost fixed returns. Liquidity in case of PPF is very rigid. But it provides tax benefit in investment. Return is around 8 %. Is debt / debt oriented mf is better than ppf, if tax benefit on investment is ignored? Can SIP be done in debt / debt oriented mf? If yes can you suggest some good ones.
Thanks & Regards
I want to say for a downpayment (target 2-3 yrs) .I dont have bulk amount and can do monthly savings.Which is better long term bank RD or debt funds like dynamic bond fund .Please advise .
RD will suit you better
Hi,
Firstly, really useful & informative blog !
I wanted to know in a liquid fund – what is the difference in return if you opt for dividend reinvestment plan – weekly/monthly/daily ? Does it have any significant variations?
Thanks
There is no difference, just that the dividend will be reinvested ! , thats all !
hi
between debt funds and liquid funds which one to go for and why ? what i understood is there is no exit load on liquid funds after the lock in period, which can be as less as 7 days , where as in debt funds even if you exit after a year you need to factor the tax 10% or 20% with or without indexation.
i need to know if i want to find a place to park my mf profits should i choose debt funds or liquid as i want to setup a stp from that new fund ( debt/liquid ) at some point.
i wanted to add a stable component to my MF portfolio ( debt or liquid ) how to go about this ?
Better setup the STP from debt fund then , liquid funds are mostly for liquidity purpose .
For ’emergency fund’ ( 3-6months entire expenses, including EMIs), which is the best place to keep ?
Bank FD (7% per-yr rate) or liquid Funds ?
Mainly looking for quick liquidity & zero risk to principal. (and if possible, keep-up with inflation, and lesser tax on returns )
Hi manish,
I am new reader of your blog…really excellent information
one q.
it still not clear to me as to who pays the tax of 28.32%. on liquid funds..
is it fund house who pays it or I have to pay during my yearly tax return ?
and if I have my money in liquid fund growth option and I put it in that fund for more than 1 year then in that case what is the tax structure…
Pranita
Company will pay it
Manish,
You said that “the effective tax rate for liquid and money market funds is 28.32%.”
how does this work?
-Is it tax free in the hands of investor(but AMC pays for it from fund profit) ? OR
– Investor has to pay it in yearly tax return ? OR
– AMC pays it ?
also, what is STCG and LTCG for liquid funds
thanks in advance
Kaval
Kaval
This is the tax you have to pay and its only for Short term , in long term , you can avail indexation benefits also.
Manish
thanks manish
sorry to question you again. As I planning to park some money into liquid funds I would appreciate your help beforehand
what I understood is that the profit from liquid funds needs to be taken care in that fiscal year tax return however i am thinking if someone comes under 20% tax bracket still he has to pay 28.32% tax on profit from liquid funds ? Can you please elaborate
Kaval
No , if you are in 20% tax braket , then the effective return is not lesser . Its just 20% , i was mainly talking about people in highest tax bracket , who also have to pay 10% and 3% of surcharges which makes their effective rate at 28.32%
>>> 25 * (1.1) * (1.03)
28.325000000000003
Manish
thats quick reply from you 🙂
I think, i got the point now.
To summarize,
if I choose the dividend option then I pay DDT which is 28.325 and if I choose this growth option I pay STCG
Yes
You pay tax on growth as STCG only before 1 yr , else its free 🙂
Manish
Hi manish,
My question is in mutual fund all we know apart from the principal amount whatever amount gained that is tax free in investor’s hand but whatever amount is investing by an investor are they tax free or taxable?
Not sure what you are asking, profits in equity funds are tax free after one year only . Not before that .
Manish
Hi Manish,
first of all thank u fr ur reply, can u plz guide me what is debt and equity market? in mutual fund is there any fund which given a tax benefit of more than 100000/ per annum to investor ? if any customer switces his fund from liquid to equity/debt fund, is there any charges involved ???????
To learn more on what is debt and equity markts , you have to read more , it cant be explained in comment section .
Nothing gives more than 1 lac of tax exemption , there is no swtiching thing in mutual funds generally , you have to sell one and buy another, in which case there can be exit loads in some mutual funds before 1 yr
Manish
manish,
what is the different between liquid and liquid plus…any idea?
Kamlesh
read this : http://www.rediff.com/money/2008/sep/15perfin1.htm
Manish
Hi manish,
I’m little confused about liquid fund, so can you please briefly clarify me the basic differences between debt and liquid funds?? how does liquid fund is more convenient as comparason to bank recurring if any ????????
Regards,
Avijit
Avijit
Liquid funds are category of debt funds , which are liquid in nature , which means that you can liquidate your money faster in liquid funds compared to other kind of debt funds . debt funds are not convenient compared to bank RD ,just that they are more tax efficient, but bank RD are much simple to understand
Manish,
how safe liquid funds are ? can we say that they are 100% safe. When Liquid funds are category of debt funds then why it has more tax rate as 28.32% as opposed to 14.16% that any debit fund has?
awaiting for your response
Amol
No liquid funds are not 100% safe, they are debt funds and they still carry the interest rate and default risk, however you can take them “as-good-as” safe . depends if you consider 1-2% risk as RISKY or not .
Manish
Hello Manish,
I am little confuse over few things about taxes on MF.
As i know(please correct me, if I am wrong)
* Debt MF
STCG : Will be added to your income slab
LTCG: 10 per cent without indexation OR 20 per cent with indexation, whichever is lower
I have two questions,
– When we say that STCG will be added to income slab does it mean AMC do not deduct the taxes at source and I have to take care of it while filing the tax return for that fiscal year?
Second question
– If I buy debt oriented funds with a growth option in that case does DDT come into picture since I bought it with Growth option and NOT dividend.
please guide on this
Trupti…
Trupti
– Yes, AMC does not deduct anything at source , all the profit you get in your hand , its your obligation to pay tax on it and file the returns .
– DDT is applicable only on Divided option of Debt funds , For growth option as there is no divided distributed to public , no DDT is applied . Also DDT is not applicable to Equity funds (even for dividend option).
Manish
Manish,
I have around 4.5 Lakh of surplus cash that I have saved in my “Marriage Fund” savings account. I want to move this whole amount to Liquid Funds (as I might have my marriage in another 4-5 months). I was able to go through the Debt:Liquid funds category on ValueResearch. Thought their allocation to “Debt” and “Other” instruments looks ok (NO equities), I am going ahead with “Fortis Money Plus Reg-G” Liquid fund plan. Just wanted to run by you to see if you can comment of this Liquid Fund and/or my plan of choosing Liquid Funds for this surplus money? I read in your article somewhere that “money that is lying ideally for more than a month, should be in Liquid Funds”. You are doing a fine job as because of your efforts I have gained some knowledge and have startede taking steps towards my PF.
Harpreet
HDFC Short term fund might be a good option : http://valueresearchonline.com/funds/newsnapshot.asp?schemecode=1237
Manish,
–Will there be DDT in case of Debt funds with Growth option and which are hold/invested for long term (say more than 1 year)?
— What is the tax structure for Equity MF which are sold below 1 year(as more than 1 year is tax free). How much tax is deducted at source ?
Amol
– No DDT in growth option , its only with dividend option of Debt Funds .
– 15% tax on short term capital gains (less than one year) of equity funds (65%+ equity) . You have to pay taxes , there is no tax deducted at source
Manish
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1
my investment is 1,00,000 (daily reinvetment option)
assume after a month – 1,05,000 (menas 5000 is reinveted)
CASE 2
my investment is 1,00,000 (payout option)
ater a month my current value is 1,00,000 (5,000 payout)
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Sandeep
DDT will not be there if its an equity fund, DDT is applicable only to debt funds .
So in case of Dividend reinvestment all your 5000 will be invested back in the same fund . nothing will be cut 🙂 . No STCG .
Manish
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1
my investment is 1,00,000 (daily reinvetment)
assume after a month – 1,05,000 (menas 5000 is reinveted)
CASE 2
My investment is 1,00,000 (5,000)
after a month my my current value is 1,00,000 as 5000 is payout
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Hi, i need a small clarification on tax part on dividend reinvestment in liquid/debt funds. let me explain my doubt with an example
CASE 1 CASE 2
my investment is 1,00,000 (daily reinvetment) 1,00,000 (payout)
assume after a month – 1,05,000 (menas 5000 1,00,000(5,000 payout)
is reinveted)
now i want to reddem my amount in both cases. I know, in CASE 2, dividend payout is taxfree after DDT in hands of investors. But how about dividend reinvestment in CASE 1. Do i need to pay STCG
Could you pls let me know
Sandeep
DDT will not be there if its an equity fund, DDT is applicable only to debt funds .
So in case of Dividend reinvestment all your 5000 will be invested back in the same fund . nothing will be cut 🙂 . No STCG .
Manish
Hi Manish,
I looked at http://www.valueresearchonline.com/toprated.asp
and I was looking for Liquid plus product so I checked Debt: Liquid Plus Inst
And in all initial investment looks like 1 crore.. 🙁
Also what is ‘pricing method’? what does ‘forward’ signify here?
Thank you,
Balbir
Balbir
go to the “Fund Details” and you will see the minimum investment required .. generaly its 5000 . No idea whats “forward”
Manish
Just check “Debt: Liquid Plus”. It is for retail investors. “Debt: Liquid Plus Inst” category is meant for the institutional investors and the list provides the information about the MFs.
Rajesh
Thanks for the information 🙂
manish
@Vikrant
* What is the minimum lock-in period
No lock in period in most of them , they are not tax saving funds , hence you can take the money out anytime you want .. But make sure to check the fund rules . some fund might put some small locking period .
* mimimum amount
Depends on the Fund , but mostly you can start with 5-10k .
* Which are best liquid funds available?
You need to look at http://www.valueresearchonline.com/toprated.asp
* How much time does it take to get invested amount back into bank account?
Not sure .. depends on what kind of debt fund are you chooseing , but it can range from 3 days to 8 days .
* How is it better from recurring deposit in the bank?
Better taxation , Might be more returns (at cost of risk)
Manish
Dear Manish
I appreciate ur efforts and quick response to our queries.
I would like to know more about liquid funds. What is the minimum lock-in period, mimimum amount,etc. Which are best liquid funds available? How much time does it take to get invested amount back into bank account?
How is it better from recurring deposit in the bank?
Regards
Vikrant
@Sumi
See this : http://www.valueresearchonline.com/toprated.asp
Well I am now considering putting some amount in a liquid fund do you have any suggestions about the various options available?
A stock fund or equity fund is a fund that invests in Equities more commonly known as stocks.
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