Mutual funds are becoming a favourable asset class among investors to add to their portfolios for diversification and achieve financial goals. There are several kinds of mutual funds that can help individuals invest, grow money and fulfil their ambitions.
From large-caps to liquid funds, investors can choose from many options and start investments either by lumpsum investment or via the SIP route. They can also look at funds that offer wealth creation as well as tax saving. But, how does one choose and start investments in different kinds of mutual funds?
To help investors make a well-informed decision and give them a complete understanding of different funds, Kotak Mutual Fund and Network18 have launched Investmentor. In this series, experts provide a holistic view of mutual funds.
In the seventh episode of this series, financial experts Harsha Upadhyaya, President and Chief Investment Officer – Equity, Kotak Mahindra Asset Management Company, and Devender Singhal, Executive Vice President & Fund Manager, Kotak Mahindra Asset Management Company, spoke at length about ELSS and Hybrid Mutual Funds and how to add them to your portfolio.
Tax saving + growth potential
During the episode, experts explored the Equity Linked Saving Scheme (ELSS) fund, its objective, design and how they are different from other mutual funds. They explained in detail how the ELSS funds, which come with a lock-in period of three years, give diversified exposure to the equity asset class, tax exemptions up to Rs 1.5 Lacs under Section 80C* of the Income Tax, and much more.
“It has complete flexibility that a diversified Flexi-cap fund would have in terms of investing into all the available options. The portfolio manager can take a more long-term view on the stocks since the money that comes in the fund is locked-in for three years,” said Upadhyaya.
The experts also spelt out ways to choose an ELSS fund, such as quality, performance ratio, risk profile, financial goal, etc.
Investors can also add hybrid mutual funds in their portfolio and take advantage of a minimum of two asset classes- equity and fixed income-in one fund.
“Hybrid fund has a minimum of two asset classes within. So, equity and debt are the two basic categories where investors put their money into. The categorisation, as per SEBI, depends upon what is the maximum and minimum level of equity. The most conservation fund in the hybrid category is the debt hybrid, which has 75-90% of the money invested in debt instruments,” said Singhal, adding, “the 10-25% of the money is invested in the equity.”
While getting into the nitty-gritty of hybrid funds, he also spoke about how different categories include equity-saving funds, equity hybrids, balanced funds, multi-asset fund, and balanced advantage fund.
The experts also delved into tax implication in hybrid funds, saying any fund that has 65% or more equity and related instruments will be taxed as equity taxation.
* The individual is assumed to earn a taxable income of more than 5 Crore. The effective tax rate is 30% marginal tax + 37% surcharge on the tax rate + 4% Health and Education cess = 42.74% i.e. highest marginal tax bracket. The individual is assumed to utilise the complete tax deduction limit of 150,000 per financial year under Section 80C. This deduction is allowed to an individual or an HUF. This is only to illustrate the tax-saving potential of ELSS and is not tax advice. Please consult your tax consultant for tax purpose.
This is applicable assuming the person is in the old tax regime. The Finance Bill, 2020 has proposed a New Personal Tax Regime where most of the deductions/exemptions such as section 80C, 80D, etc., are foregone. This is, however, optional.