All That You Need to Know About Tax on Cryptocurrency & NFT

Taxes on digital assets were pretty vague up to Budget 2022. The finance minister didn’t notify the tax structure on corporate or individual levels. But, under new norms, all profits from cryptocurrencies are to be taxed at 30%. It is quite a steep rate and one that might lead you to think twice about investing in digital assets. To understand this move from the government, we have broken down the entire subject of taxes on digital assets into three main sections: tax on income, tax on gifts and the 1% TDS.

People who make money from digital assets must pay tax on that money

In Budget 2022, the finance minister said it would tax digital asset profits at 30%. That doesn’t mean that digital assets are legal just because they are taxed. The legality of cryptocurrency as an asset class is still not clear.

Government officials say digital assets include cryptocurrency and NFTs. 

At 30% tax, the people who make different amounts of money will pay the same tax rate.

They would calculate this tax on income after subtracting the cost of acquisition, which could be the price of the cryptocurrency and the fees for transactions.

Moreover, crypto investors can’t set off their losses against any capital gains of other asset classes. However, it’s not clear if the profits from one type of digital asset can pay for the losses of another digital asset.

If you use the foreign exchange, a peer-to-peer marketplace like LocalBitcoins or mine your own, you’ll have to pay 30% of your profits. On the other hand, miners may be able to write off the cost of things like electricity, the depreciation on their mining computers, and so on.

Moreover, it is crucial to note that you still have to pay tax on your cryptocurrency gains made before April 2022.

Tax on digital assets as gifts

The budget also said that digital assets that were given as gifts would also be taxed. Concerned authorities may include digital assets as ‘property’.

Free digital assets that you receive, such as airdrops, learn-to-earn schemes, and games where you can earn money by playing games, are also included as gifts.

However, under the Income-tax Act of 1961, gifts made to specific relatives or as a wedding gift are not taxed, no matter how big the gift is. Parents, siblings, and other relatives who give money to you don’t have to pay tax on it. Gifts that are given at weddings, through a will or inheritance, or in anticipation of the donor’s death are also not taxed, no matter how much they are worth.

But, if your friend gets you a gift that costs more than Rs. 50,000 on your birthday, you will have to pay tax on it.

So now, the question is whether the same gift taxation rules that apply to real things would also apply to virtual digital things.

As part of their pay package, people who got digital assets like cryptocurrencies or NFTs will have to pay a 30% tax because, as per the new tax law, it will be considered a gift.

They will have to pay the tax even though they have sold none of the coins yet. Not only that, but in many cases, employees may have to pay tax on more money even though the value of the coins they got has gone down since they got them.

Impact of the 1% TDS

Taxes on income and gifts aren’t the only things the government announced in this budget. They also announced a charge of 1% tax on all crypto transactions.

The new section 194S of the Income Tax Act says that crypto exchanges will have to withhold 1% TDS for most transactions starting July 1, 2022. People who use crypto will have to tell the government about all of their transactions to track them.

This TDS may be applicable only if the total amount of cryptocurrency transactions in a year reaches Rs. 50,000 for the following individuals:

• Each person, as well as Hindu Undivided Families (HUF), who have annual sales, gross receipts, or turnover above Rs. 1 crore.
• People who make more than Rs.50 lakh a year.
• People or HUFs who don’t have a job or business to make money.

For the other individuals, this TDS may apply if the total amount of crypto transactions in a year is more than Rs. 10,000.

Moreover, as crypto trading takes place all over the world, the foreign cryptocurrency exchange will not deduct 1% TDS, but it is still not clear if and how TDS would be deducted if the transaction took place between an Indian buyer and a seller from another country.

What is your opinion on the taxation of digital assets? If you have any doubts, it will be best to consult us.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme related documents carefully.

Do You Know How Your ELSS Gains Are Taxed?

Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund you can invest in and reduce your taxable income. However, the gains made from ELSS investment are taxable.     

What differentiates ELSS from other tax-saving instruments under section 80C is that ELSS has the shortest lock-in period of three years, and the fund manager needs to invest at least 80% of the fund’s portfolio in equity investments. 

There are two ways to gain from ELSS funds: capital gains after redemption of the fund’s units and dividend income.

This article will show how your gains from ELSS funds, whether you have invested lump sum or through SIP and dividend income, will be taxed.  

Tax on Capital Gains 

ELSS is an equity fund. According to the current rules, gains from redemption from equity funds within 12 months are considered short-term capital gains. On the other hand, gains made on units after the units are withdrawn after 12 months are considered as Long Term Capital Gains (LTCG). 

As you can’t redeem your units before 36 months, the capital gains on ELSS are considered long-term capital gains. So, in the case of ELSS funds, the capital gains above Rs. 1 lakh in a financial year are taxed at 10%. However, you need to remember that this Rs.1 lakh limit will consider your other equity investments, such as equity mutual funds and stocks.   

Lumpsum investment 

It is simple to know the capital gains tax on lumpsum investment as you can easily track the number of years your investment stayed invested. 

Let us consider an example.  

Assume Amal deposited Rs 5 lakhs in an ELSS fund on April 3, 2018. It was redeemed for Rs 7 lakh on June 4, 2021. During the three years that he stayed invested, he made a gain of over Rs. 2 lakh, if we assume that the fund had given an 8% return in the last three years. 

So, now he must pay 10% LTCG tax on the capital gains after deducting Rs1 lakh, which is Rs.1 lakh (Rs2 lakh – Rs1 lakh). Thus, his LTCG tax on ELSS investment will be Rs.10,000 (10% of Rs.1 lakh). 

SIP investment 

Investing a fixed sum of money every month through SIP can help you systematically plan your tax-saving investments without worrying about tax saving at the last minute. 

However, calculating the applicable capital gains on investments made through SIP may be difficult, as every installment is locked for three years. So, if you start investing in an ELSS fund through SIP in January 2022, then the units allotted to you in January 2022 will be locked till January 2025.  

For instance, if Amal invested Rs. 12,500 in an ELSS through SIP every month from April 2018 to Jan 2022. If he wants to redeem his investments now, he can only redeem the units that he invested before Feb 2019.   

Depending on the returns earned by every SIP installment, the fund house will calculate applicable tax on gains from each installment. The fund house would calculate the gains based on the Net Asset Value(NAV) on which the SIP investment and exit are processed.

So, if we consider that the NAV during April 2018 was Rs. 10, it grew to 40. Then the gains from the 1st installment would be Rs. 37,500. 

SIP Instalment  NAV Units Exit NAV  Value of the units Gains

12,500 10 1250 i.e. (12,500/10) 40 50000 i.e.(1250*40) 37,500 i.e. Value of the units-SIP instalment 

 The fund house would calculate the gains similarly for every installment until Feb 2019.

So, this was all about tax on capital gains from ELSS investment. Let us now see how the government would tax dividend income. 

If you invest in an ELSS mutual fund scheme, you can select whether or not to receive a dividend. If you choose the pay-out of income distribution cum capital withdrawal option, you will be eligible for a dividend if the fund announces one. You can earn dividends throughout the 3-year lock-in period as well. However, the dividend you receive is added to your taxable income. It is then taxed according to the tax bracket in which your income falls. For example, if your income is in the 30% tax bracket, the dividends you earn from your ELSS funds will also be taxed at 30%.

Conclusion

ELSS is an excellent tax-saving instrument, especially if you want to stay invested for the long term. However, you need to be aware of the taxation of capital gains and dividend income on ELSS investment. You can talk to us to know more.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

ELSS And NPS: What’s The Difference?

Saving on taxes is a crucial aspect of financial planning and wealth creation. There are various avenues available for individuals to invest in reducing their tax burden. For example, you can reduce your taxable income up to Rs by investing in tax-saving investment options under Section 80C. 1.5 lakhs. This article compares two popular schemes, NPS and ELSS, and discusses their differences.

What is the National Pension System (NPS)?

The National Pension System or NPS is a voluntary initiative by the central government to provide social security. The plan can be used as a long-term investment vehicle for those with a long-term investment horizon. The Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government regulate the pension fund. Every employee is eligible to invest in NPS, including those in the private, public, and unorganized sectors.

What exactly is an ELSS (Equity Linked Savings Scheme)?

The Equity Linked Savings Scheme (ELSS) is an open-ended mutual fund scheme that invests primarily in equity and equity-related instruments and allows investors to save taxes. Investment in ELSS serves both to reduce taxes and create long-term wealth. The returns generated from this scheme are market-linked; therefore, they cannot be guaranteed. ELSS funds have become popular in recent years because they offer higher returns than traditional tax-saving instruments. This scheme is better suited to investors with a long-term investment perspective.

ELSS And NPS: What’s The Difference?

The following is a complete comparison of NPS vs ELSS mutual funds, including the parameters differentiating between the two.

• The Lock-In Period

An NPS investment remains locked in until at least 60 or retirement, whichever occurs first. Investors may also extend their NPS accounts until the age of 70. Investors can partially withdraw a maximum of 25% for very specific reasons, but they must complete at least ten years. Thus, investors cannot redeem their money before they complete ten years or reach 60 years.

On the other hand, ELSS has the shortest lock-in period of three years.

• Asset Allocation In A Portfolio

NPS investors have the option to choose between auto and active investment, where the portfolio is segregated into different asset classes, such as equity, corporate debt, government securities, and alternative investment funds in different proportions. However, the maximum equity exposure that an investor can take through the NPS investment option is 75%. 

ELSS funds invest at least 80% of their assets in equity and equity-related instruments.

• Risks

We have seen that compared to NPS investment, ELSS funds have higher equity exposure. As a result, ELSS investment carries a higher risk. Professional fund managers actively manage these funds to provide attractive returns while managing the risks.

• Expenses

NPS has a management fee of 0.1%, making it one of the investment options with the lowest costs. In contrast, asset management companies charge an expense ratio of between 0.5% and 1.50%, which is much higher than the cost of managing NPS.

• Integrity

ELSS mutual funds are more transparent than NPS since they publicly disclose their asset allocation via factsheets on their websites every month. Using this information, investors can compare the holdings of different funds across different sectors. In NPS, however, asset allocation is not transparent.

• Tax benefits

Investors investing in NPS are eligible for a higher tax deduction of up to Rs 2 lakh under Sec 80C, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Sec 80CCD (1B).

ELSS investors can get tax benefits on investments up to Rs.1.5 lakh. In addition, the NPS has the advantage that subscribers can withdraw up to 60% of their total corpus as a lump sum without paying any tax. With a balance of 40%, you need to buy an annuity plan. However, the annuities will attract tax.

Both investment options offer tax benefits. However, the tax benefits of NPS funds are greater than those of ELSS funds. In ELSS funds, long-term gains above Rs. 1 lakh are taxed at 10%.

Conclusion:

Before investing in any scheme, write your financial goals and objectives. Next, decide how long you will invest. Finally, you need to align your financial goals with your financial objectives. Afterward, you can choose investments that suit your needs.

You may achieve long-term goals with ELSS funds. ELSS funds also yield higher returns than NPS funds. However, they are riskier than NPS funds. In addition, ELSS funds differ from NPS funds as they have a low lock-in period of three years.

To learn more about NPS and ELSS, contact us.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

7 Money Things You Should Do Before Hitting 30

For most of us, reaching the age of 30 is like entering a new phase in life. In our mid-20s, we take life more seriously and approach this milestone with a more mature attitude. If you have a partner or a kid, your obligations will almost certainly increase.

Here are the seven major financial decisions you should consider before celebrating your 30^th birthday.

1. Have an adequate emergency fund

It’s a given that life can be unpredictable, and preparing for the unexpected with an emergency fund is essential. An emergency fund would help you tide over a job loss.

The sum of money in your emergency fund will depend on your financial obligations. Typically, anywhere between three to nine months of expenses in an emergency fund is ideal.

Also, do not use your emergency savings for anything other than an emergency. You can keep it in a separate bank account or a liquid mutual fund for easy accessibility.

2. Make plans for alternative sources of income

Having a high-paying job with a hectic schedule isn’t unusual. Most of us are concerned about our job security. The pandemic has made us realise jobs are not as safe as it seems to be. Hence, it is essential to plan for alternative sources of income instead of depending on one source of income.

3. Buy a Health Insurance

A trip to the hospital may wipe your entire savings. In this scenario, health insurance comes to the rescue.

Even if your work provides a health insurance plan, it may not provide adequate coverage. Get health insurance that would cover your and your family’s medical bills.

4. Get a term insurance policy

If you have a dependent spouse or have kids, getting a term life insurance policy should be a priority. A pure term insurance policy will take care of your family members in the event of your untimely demise. Adequate life insurance will help your family members to continue with their dreams.

5. Start investing for future goals if you haven’t already

When you turn 30, there is a high probability that you have been working for a few years. 

One of the ways to make sure that your income can beat inflation and help you achieve your financial goals is by investing as early as possible. The easiest way to kick start your investment journey is to set up a Systematic Investment Plan (SIP) in a diversified equity fund.

SIP allows you to start small investments at a very young age and gradually increase the SIP amount invested in the upcoming years.

6. Diversify your investments

Investing in diverse asset classes that perform differently to the market news and events can help cut down the risk in your investment portfolio. For example, the equity portion of your portfolio will help in wealth generation, while the debt instruments will help to stabilise and protect your portfolio returns.

7. Plan for your retirement

Retirement may seem like a very distant event. But the years roll quicker than we realise. It is never too early to invest for your retirement. Unlike our parents and grandparents who could depend on government pensions and financial help from their children, many of us don’t have the luxury in this day and age. So, it has become imperative to take care of our retirement.

As you reach 30, it becomes crucial to take care of one of the most critical aspects of your life, i.e., the financial life. Just earning well isn’t enough. In this blog post, we have jotted down the seven important money things that you need to take care of before hitting 30.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

5 Debt Mutual Fund Terms That You Need to Know Before Investing

With the low-interest rates on traditional saving instruments, many individuals are looking at different investment options to protect their capital and earn stable returns. Debt mutual funds are one such investment option that has gained popularity among individual investors in the last few years.

However, debt funds are a little complicated than equity funds, and many of the terms associated with debt mutual funds may sound like Greek to many investors. So, today we have collated a list of essential terms that you need to be aware of before investing in debt mutual funds.

Coupon rate

The coupon on a bond is the annual interest rate paid by the bond’s issuer. For example, if a company is issuing bonds, the coupon rate will be the interest rate they will pay to their investors. The issuer company might pay the coupon on bonds quarterly, semi-annually, or annually.

Let’s say you put Rs 5,000 into a 6-year bond with a coupon rate of 5% per year, paid semi-annually.

Here’s your coupon payment:

Annual coupon payment = 5%*5000 = 250

Per coupon payment = 250/2

Yield

Many investors confuse the coupon rate with yield. But it is not the same. Let’s assume that a bond has a face value of Rs 100 with a 6% coupon rate. This indicates that for each bond purchased, the investor will receive Rs 7 every year.

However, once the bond is issued, it trades on the open market just like a stock. So, the price of the bond will fluctuate until its maturity date. The bond price will fluctuate as interest rates in the economy rise and fall, and demand for bonds rises and falls.

Assume that interest rates increase to 10%. However, the investor, in case the debt mutual fund, will continue to earn Rs 8. So, to raise the yield to 10%, which is the current market rate of interest, the bond’s price will have to fall to Rs 80. So, we have seen that the yield is not constant, and the bond’s price moves in the opposite direction of interest rates. So, an unexpected hike in interest rate follows a sharp fall in debt fund returns.

Yield to Maturity (YTM)

The YTM of a debt mutual fund is the expected rate of return, assuming that the fund manager holds all the securities in the portfolio to maturity. Taking a debt fund has a YTM of 10%, for example, it means that if the portfolio remains unchanged until all the securities mature, the investor will receive a 10% return. However, the YTM does not remain constant because the fund manager actively manages the portfolios.

Yield to maturity gives the debt fund investor a general idea of the returns they can expect. Returns may fluctuate owing to mark-to-market values or changes in the portfolio. Therefore, it’s not a sure thing.

Modified Duration

Modified duration refers to the change in the value of debt instruments, such as bonds, because of interest rate changes. Let’s assume the bond’s modified duration is 4.50. So, with a 1% increase in interest rates, the bond’s price will fall by 4.50%.

This gives a good idea of how sensitive a bond is to interest rate changes.

So, a debt instrument with a higher modified duration will be more volatile during a change in interest rate than an instrument with a lower modified duration. Because the modified duration of a portfolio considers all debt instruments, it will alter depending on the portfolio’s composition.

Weighted Average Maturity

This is mostly referred to as a debt fund’s average maturity. The weighted average maturity is the average maturity period of all the securities in a debt mutual fund after considering the invested amount.

For example, Rs 1,000 investment in Bond A will mature after five years.

Bond B, which costs Rs 2,000, matures in ten years.

Total loan portfolio investment = Rs 3,000 WAM = 1000/3000*5 + 2000/3000*10 = 8.33 years

The average maturity of a portfolio reveals how sensitive it is to interest rate changes. The higher the average maturity, the more volatile the fund’s returns are. So, debt funds with long-duration bonds are more volatile than liquid funds that need to invest in debt instruments with a maximum maturity of 90 days.

The average maturity provides a general guideline for selecting a debt fund that is appropriate for your investing time horizon.

Conclusion: Coupon rate, yield, yield to maturity, modified duration and weighted average maturity are the key terms you need to learn before investing in debt mutual funds.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

How can I invest in a mutual fund in the name of my minor child?

If you are a parent or going to be a parent, then it is obvious that you want your kids to have the best of everything. So, you need to plan for your child’s education if you want your kids to get the education of their dreams.

Mutual funds can be a great investment tool to help you plan for your child’s future. You may want them to become familiar with investments from a very tender age and let them manage money when they go to college.

However, your kids can’t invest in mutual funds before they turn 18. But, the minor’s legal guardian or parent can make investments on their behalf. You need to know that a minor’s mutual fund investment cannot be held jointly. Your child’s name should be on the account.

When your child is young to make the right financial decisions, you can invest in a mutual fund as a parent or a guardian on your minor’s behalf. You can make a one-time lump sum investment or set up systematic investment plans to help you plan for your child’s future.

Documents required to invest in a mutual fund on behalf of our children

The first document that you will need is a birth certificate or the passport that is issued by the government to verify the child’s age and date of birth. If you are a parent, your name on one of the documents is enough.

What will happen when your child turns 18?

When your child turns 18, you will not be able to continue investing as a parent or a guardian on their behalf. The mutual fund house will send you a letter informing the situation and the steps to take so that your child can continue investing in the same mutual fund.

You also have to upgrade their savings account from minor to major status. the Same process needs to be repeated for the mutual fund account as well. Your kid can invest in the same folios when the fund house converts the account to an individual account.

Advantages of investing in a mutual fund in your minor’s name

Become more committed: When you invest on your child’s behalf, you are more likely to be committed to your child’s financial needs. You will not be tempted to use the money that you are saving for your other purposes such as repaying your home loan or any other purpose. As a result, you will be disciplined and this, in turn, will help your child to achieve their higher education dreams.

Install good money habits when they are young: Having a separate mutual fund investment account under their name can help children become interested in saving and investment. They will also learn the benefits of saving and investing and the impact of every investment.

Nudging them to save the money that they receive from family elders during festivals and birthdays in the mutual fund will go a long way in helping them become financially savvy individuals.

Save tax

You can save money on taxes by investing in your child’s name. Any capital gains from mutual fund investments are taxable in your hands until the kid reaches the age of majority. But, after the child turns 18, any tax on capital gains will be taxed only in the child’s hands. As your child may not have a large income, the tax incidence on your child will be much lower than if you had invested under your name.

The Drawbacks of Investing in Mutual Funds in the Name of a Minor

Additional paperwork: You’ll need to change the single account holder’s status from Minor to Major when your child reaches 18. Till the process is completed, the fund house will stop all transactions. So, a drawback of investing in mutual funds in your minor’s name is that you will need to fill out additional documentation.

Your child may not be financially mature at 18: When your child turns 18, the entire responsibility of managing the fund will fall on their shoulders. Moreover, they may not be mature to make the best decision with the accumulated corpus.

Conclusion:

Investing in a mutual fund on your children’s behalf can be a great method to invest in their future education. This will help kids learn the value of compounding and investing at a young age.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all schemes related documents carefully.

3 Asset Allocation Strategies That You Need to Know

Most of us want to reduce the risk and get a better outcome in our investment portfolio or other areas of life. And, one of the ways to improve investment returns is through asset allocation. Asset allocation is an investment strategy that involves investing in a variety of asset classes to optimise risk and return.

Historical data have shown that the various asset classes, such as equity, fixed income or debt, and gold, indicate a low or negative association. As a result, diversification across asset classes can significantly lower risk while potentially generating higher long-term returns.

There are three main ways to carry out asset allocation: strategic asset allocation, tactical asset allocation and dynamic asset allocation.

Strategic Asset Allocation

If a mutual fund has a static asset allocation mix, then we can say that it follows a strategic asset allocation. The static asset allocation mix is usually in a range, and the fund managers can invest in the investment instruments within that range.

For example, if the asset allocation of a fund mentions that 65-80% of its assets need to be in equity instruments, then the fund manager has to invest 65-80% of the portfolio in equities at all times. In this case, the state of the market and economy doesn’t influence the fund’s asset allocation.

The fund’s asset allocation may change as the price of various investment options such as stocks fluctuates regularly. So, the fund manager may need to rebalance the fund’s portfolio from time to time to maintain the asset allocation breakup of the fund.

Let us consider the previous example where the fund maintains an equity allocation within 65-80% of the portfolio. The fund’s equity allocation may cross the maximum limit if the equity market rises more than the other assets. In this scenario, the equity allocation of the fund may become 90%. So, the fund manager has to sell stocks and/or buy the other asset class instruments such as debt securities to bring the asset allocation back to the intended asset allocation.      

Tactical Asset Allocation

You may feel that strategic asset allocation is too rigid. However, market conditions may generate additional returns from time to time that a static asset allocation strategy may be unable to take advantage of. Tactical Asset Allocation is a variation of Strategic Asset Allocation in which the fund managers may deviate a little from the strict asset allocation to take advantage of the market opportunities and earn extra returns for the investors. 

To carry out tactical asset allocation, one needs to know market timing and in-depth market and investment knowledge. For instance, if the strategic asset allocation calls for 70% in equity and 30% in debt and the fund manager believes that equities in the short run can provide attractive returns, then they might hike up the equity allocation to 75% to take advantage of the possible upswing in the equity markets. And after the window of opportunity closes, they can revert it to the original asset allocation.

Dynamic Asset Allocation

The counter-cyclical asset allocation method is the most prevalent dynamic asset allocation method implemented by mutual funds. In this asset allocation method, you regularly modify your asset allocation mix based on market conditions. When stock valuations fall, i.e., the stock prices become cheaper, these funds increase their equity allocation and reduce debt allocations. This is also known as a counter-strategy because it is based on the investment principle of buying low and selling high. For dynamic asset allocation, different fund managers utilize different valuation criteria. The most commonly used valuation metrics are the P/E and P/B ratios. In a dynamic asset allocation strategy, some fund managers employ multi-factor asset allocation models, which integrate two or more components, such as P/E, P/B, Dividend Yield, and so on.

Conclusion: There are different asset allocation strategies that investors and fund managers use. Strategic asset allocation, tactical asset allocation and dynamic asset allocation are the three common asset allocation strategies.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

How Mutual Fund Investment Can Help You During Emergencies

Preparing for emergencies is the first step in any financial plan. Having a certain amount of money parked in a savings account or liquid fund can help to tide over difficult scenarios. However, sometimes, the emergency fund may not be enough. And, you might have to borrow money. And loan against collaterals can be helpful to tide over such a situation.

You must know you can take a loan against gold or property. But did you know you can take a loan against your mutual fund investment? In this blog, we will look at loans against mutual funds.

What is a loan against a mutual fund?

A loan against a mutual fund is just like the other loans backed by collateral. In this case, the collateral is your mutual fund investment. A financial institution such as bank marks a lien against your mutual fund units and disburses the loan amount. Once they mark the lien, the bank will have ownership of your fund units. One should remember that the bank keeps a lien against your mutual fund units and not your investment amount or the current value of your investment. So, once the lien is marked, you don’t have access to your units. This means that you can’t redeem those units until you repay the loan.     

And just like other loans, banks will decide the amount of loan based on your number of units, type of mutual fund and loan tenure.

The lien gets removed as you repay the loan.

How can I apply for a loan against mutual funds?

Nowadays, most banks offer instant loans against mutual funds, similar to their overdraft facility.

You will have a loan agreement with the bank. The lender instructs a mutual fund registrar, such as CAMS or Karvy to place a lien on the quantity of pledged units. The registrar then stamps the lien and sends a letter to the lender, with a copy to the borrower, confirming the claim.

Things to keep in before borrowing against your mutual fund units

You can borrow against different types of mutual funds such as equity funds, debt funds and hybrid funds. However, the loan that you can get depends on the type of mutual fund. Different banks will have different criteria. For example, we can borrow up to 50% of your mutual fund value with equity funds and 80% with debt mutual funds. 

There will be a minimum and maximum amount that you can borrow against your fund units. This amount will differ among banks.

Banks may not offer loans against every mutual fund. Each bank has an approved list of mutual funds. E.g., ICICI Bank offers loans against mutual funds registered with CAMS.

Advantages of borrowing against mutual fund

Instead of selling your mutual fund units, taking a loan against a mutual fund can be a better option. Here are some advantages of taking a loan against mutual funds.

Tide over an emergency:  This is especially useful during a crisis because you can pledge your mutual fund units and instantly get the money into your bank account.

Fulfil short-term financial needs:Loans against mutual fund can be a unique way to raise funds for short-term financial needs. You can borrow money against your MF units for a short period and repay it over time without jeopardising your mutual fund unit ownership.

Low interest rate: Interest rates on loans secured by mutual funds may be cheaper than those on unsecured loans, such as personal loans.   

Your units stay invested: You won’t have to sell your mutual fund units if you take out a loan against them. The mutual fund units that have been pledged will remain invested and generate returns. This ensures that your financial plan and investment ownership remain intact.

Only pay interest on the utilised amount: When you take loans against mutual funds, you only pay interest on the amount credited to your account and not the total loan amount guaranteed from your mutual funds.

Conclusion:

Even if you have money in your bank account, you may need to take out loans for several reasons. It’s because of certain unexpected expenses that may require a loan. You can borrow money against mutual funds if you invest in them. This will help you meet your financial obligations while also ensuring that your investments continue to generate returns.

This blog is purely for educational purpose and not to be treated as a personal advice. Mutual fund subject to market risks, Read all scheme related documents carefully.

4 Things That Couples Should Keep in Mind While Investing In Mutual Funds

If you are married, you may spend a lot of time with your better half, helping them solve their problems, planning vacations or just relaxing at home.

However, couples also need to discuss investments as well. And, mutual funds are a popular investment option.

This article will look at the four main aspects that couples need to take care of while investing in mutual funds.

Do you want to maintain a joint account or an individual account?

You can use a joint account or a regular account to invest in mutual funds.

Many mutual fund platforms provide mutual fund joint holding accounts. You and your spouse must both be KYC compliant to invest under a joint account.

However, keep in mind that if there are any ELSS funds in the portfolio, only the primary account holder would be eligible for tax benefits.

How do you want to take care of goals?

The second factor to examine is your objectives. Goals help you to understand why you’re investing in the first place. And, because you’re investing as a couple, you’ll have two types of goals: your joint goals as a couple and your different individual goals.

Examples of joint goals

• Purchasing your first home
• Saving money for your children’s college education
• Putting money aside for retirement

Examples of Personal goals

• Creating your home gym 
• Investing in a high-end camera to pursue your photography passion
• To increase your professional possibilities by taking a course or going back to college

There are two ways to tackle joint goals: Investing together and separately. 

The first technique allows you to pool your resources and invest in a common objective. For example, if both of you are saving for retirement, you and your spouse together would buy three high-performing equity funds. If you own funds ‘A’ and ‘B,’ your spouse might invest in ‘C’ to supplement your portfolio. If the funds overlap, then you or your spouse can trim some of the holdings. 

You and your partner can pursue separate goals in the second strategy. You can, for example, invest in your child’s schooling while your spouse invests for retirement. Because you and your spouse are investing for distinct purposes with this technique, it isn’t a big problem if your portfolios coincide.

If you are investing for the same goals, keep an eye for portfolio overlap with your spouse

If you and your spouse are investing for the same goal, the funds must complement each other. It’s because too many similar funds, after a certain point, don’t add much to diversification.

Assume you have three large cap equity funds A, B, and C in your portfolio, and your spouse has three additional large cap funds, say schemes D, E, and F. If this is the case, diversification will not affect your portfolio.

Reach a mutual consensus for financial goals

It is natural for two people to have opposing view points on specific issues. Similarly, your partner may have different plans for specific significant financial goals in your life, such as retirement or a child’s schooling. Assume your partner desires a luxury retirement, however you want a conventional or frugal one. These factors influence the amount of money needed for both of your retirement goals.

As a result, it is critical for you and your partner to communicate the visions for various financial goals in your lives to reach a mutual consensus and effectively plan investments to achieve common goals.

Conclusion:

Investing together as a couple can be tricky. So, it is essential to find a middle ground that can help fulfil the common financial goals. This post discussed the top four aspects that you need to consider as a couple when investing in mutual funds.

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

Basics of National Pension System

The National Pension Scheme (NPS) is a retirement solution that aims to help individuals plan for retirement and help accumulate wealth. Through regular contributions, users can get the provision of a monthly pension in later life. The Pension Fund Regulatory and Development Authority (PFRDA) governs NPS.

Who can open a National Pension System (NPS) account?

Any Indian citizen between the ages of 18 and 65 can open an NPS account.

However, NPS registration is compulsory for all Central Government employees who joined after 1^st January 2004. Armed forces are an exception.

How does it work?

The aim of the National Pension System (NPS) is to create a retirement fund. You need to accumulate funds when you are working so that you can use the funds after retirement. So, we can classify it into two parts: the accumulation period and the withdrawal phase.

When you are 60, you get to take 60% of the accumulated corpus as lumpsum. This sum of money is tax-free withdrawal. You need to purchase an annuity with the remaining 40% of the funds. The annuity will take care of the regular monthly payments. 

Categories of NPS

The National Pension System (NPS) offers two accounts for systematic and flexible investments: Tier 1 and Tier 2.

After you open an NPS account, you get Permanent Retirement Account Number (PRAN). The PRAN is required for fund management and making contributions.

Tier 1 NPS Account:

• Tier 1 account is the compulsory NPS account. The central government and state government employees, and other employees, have a Tier 1 account.  
• This account has a set lock-in period that lasts till 60 years.
• A minimum deposit of Rs. 500 is required to open this account. It only allows for a partial withdrawal under limited circumstances.
• Contributions to Tier 1 accounts are eligible for tax deductions under Sections 80CCD (1) and 80CCD (1B). This means that you can invest up to Rs. 2 lakh in an NPS Tier 1 account and get a tax deduction on the entire amount, i.e. Rs. 1.50 lakh under Sec 80CCD(1) and Rs. 50,000 under Sec 80CCD (1B). The employer’s contribution to the NPS, up to a certain extent, is deductible under section 80CCD(2) when calculating the employee’s total income.

Tier 2 NPS Account:

• If you want to open a Tier 2 account, you must first have a Tier 1 account.
• This is a voluntary NPS account that allows members to withdraw funds as needed.
• You can make a minimum deposit of Rs.250 to open the account.
• Contributions to the NPS Tier 2 account are not tax-deductible.

Investment Choices

When you invest in NPS, you have the option in various asset classes, like debt- corporate and government securities, equity and alternative investment funds. Depending on your risk tolerance and age, you get to invest in these different asset classes.

You have two investment options to invest in your NPS Account:

1. Active Choice
2. Auto Choice

Let’s understand each one of them.

What is Active Choice in NPS?

• You can choose the percentage allocation in asset classes.
• Equity, corporate debt, government securities, alternative investment funds, or AIF are the four asset classes available under the active option.

What is Auto Choice in NPS?

• Your investment is automatically distributed among different asset classes in a pre-defined percentage based on your age in auto choice.
• Depending on your risk tolerance, you can select an aggressive, moderate, or conservative option.

Here’s the asset break up under the different options of Auto choice:

Aggressive:The maximum equity exposure is capped at 75% for individuals up to the age of 35

Moderate : The maximum equity exposure is 50% for individuals up to the age of 35

Conservative : The maximum equity exposure is 25% for individuals with a maximum equity exposure of 50%.

Conclusion: National Pension System is an investment tool that aims to help you build a retirement fund. In this article, we have shared the basics of the National Pension System. Call us to know more about NPS.

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund subject to market risks, Read all scheme related documents carefully.