Jagoinvestor

November 13, 2008

Introduction to Equities, Debt funds and Liquid Funds – For beginner investors

We will talk about Equity, Debt and Liquid Funds. We will also discuss dividend distribution tax is treated for all these funds.

mutual 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.

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Arora
Arora
7 years ago

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

Nitu
Nitu
8 years ago

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?

Akhilesh
Akhilesh
8 years ago

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.

Nilesh
Nilesh
8 years ago

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.

anilmegur
anilmegur
8 years ago

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?

ravi
ravi
9 years ago

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?

ravi
ravi
Reply to  Jagoinvestor
9 years ago

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.

ravi
ravi
Reply to  ravi
9 years ago

or it should be RD (recurring deposit) of rs . 2000.00 each month. is return of RD is more than debt mutual fund.

ravi
ravi
Reply to  Jagoinvestor
9 years ago

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
ravi
Reply to  Jagoinvestor
9 years ago

Thank you, Manish.

Dilip
Dilip
10 years ago

Great Site. 🙂 Very useful.

Chaitanya
Chaitanya
10 years ago

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

trackback
11 years ago

[…] I Read manish article http://jagoinvestor.dev.diginnovators.site/2008/11/difference-between-equity-debt-and.html stating that the tax rate for liquid and money market funds is 28.32%.  Im […]

Vishal Jain
Vishal Jain
11 years ago

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 Jain
Vishal Jain
11 years ago

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

saravana
saravana
11 years ago

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 .

Poonam
Poonam
11 years ago

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

sorabh
sorabh
11 years ago

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 ?

Ranganath
Ranganath
11 years ago

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 )

pranita
pranita
12 years ago

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…

Kaval
Kaval
13 years ago

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
Kaval
Reply to  Jagoinvestor
13 years ago

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
kaval
Reply to  Jagoinvestor
13 years ago

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

Avijit Sarkar
Avijit Sarkar
13 years ago

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?

Avijit Sarkar
Avijit Sarkar
13 years ago

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 ???????

kamlesh
kamlesh
13 years ago

manish,

what is the different between liquid and liquid plus…any idea?