Doubt on Ultra short term and liquid funds

POSTED BY kkk ON January 23, 2013 10:13 am COMMENTS (4)

Reliance money manager fund is listed under ultra short term funds but its bench mark index is liquid fund index. Is it treated as an ultra short term fund or liquid fund for dividend distribution tax purposes? Does a liquid fund always has the word liquid in its name?

Context for the question: I have 4,5 FMPS maturing over next 1.5 year starting this month. I want to use STP to invest in equity funds as a part of balancing my portfolio. So I want to invest in ultra short term – dividend plan funds and implement STP. Just want to make sure that I am not using a liquid fund due to higher dividend distribution tax. I want to invest in dividend option to make sure that there are not many short term gains as the STP will be over in an year and I am in 30% tax bracket.

4 replies on this article “Doubt on Ultra short term and liquid funds”

  1. Dear KKK, in the light of the added info by you, please go ahead ‘ll be my take for you.

    Thanks

    Ashal

  2. Dear KKK, as you are in 30% tax slab, dividend stripping ‘ll create more problem to calculate your STCG. So in my personal opinion, please invest in growth plans only.
    There is more to it – as you are planning to invest in Eq. funds using STP. You can notuse STP from Rel. debt fund to HDFC eq. funds or to DSP eq. funds or to Quantum eq. funds.
    You w’d have to invest in the debt funds of respective individual eq. funds where you want to invest finally.

    Thanks

    Ashal

    1. kkk says:

      Actually I thought of dividend stripping.My calculations showed that it is still better to go for dividend than growth funds if you are selling everything within a year. Yes it is going to be a complicated calculation but an excel sheet can easily manage it. Basically the worst that could happen is you can not offset the losses with other gains. And if you have gains, dividend stripping doesnt apply as it is used only to offset a loss. On the top of that only the dividends that were received in first 3 months (2 months if you arrange the STP dates properly) need to be stripped. Out of those dividends also, some units you will be selling after 9 months of receiving dividend.

      I am aware that you can do STP only among funds of same AMC. As of now I invest only in HDFC, Reliance and ICICI AMCs in about 4 equity funds. This restriction is to manage as few AMCs as possible as I buy from them directly. If I still want to invest in other fund I use ICICI direct but these 4 funds are as good as any other so I generally dont have the need for other fund. So I can buy 3 debt funds from these AMCs and have STP for the 4 equity funds I invest in (HDFC prudence & equity, ICICI discovery and Reliance RSF- Balanced).

  3. It is a ultra short term debt so it will be taxed as such. BNP Paribas Money Plus is a similar fund with same benchmark.

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