Corporate Debentures or bonds
Mutual funds extend beyond the limits of equity. They also invest in Debt Instruments. The same principle higher the risk, the higher the returns applies here. Debt products are lower in risk as compared to equity funds. Debt funds are also known as Fixed Income Funds or Bond Funds and they invest only in debt securities. Some examples of debt securities are as follows :
Corporate Debentures or bonds
Commercial papers
Certificate of Deposits
Government Securities or bonds
Treasury Bills
Unlike in equities, where one is part owner of a company to the extent of their share holding, an investor isn’t an owner in the case of fixed income investments. But on the upside, an investor is a lot more aware of the key variables involved, such as :
Reasonable assurance that the principal will be returned.
Tenure post which the principal is returned.
The coupon rate, or simply put, the interest rate.
Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year.
Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years.
First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes under Rajiv Gandhi Equity Savings Scheme (RGESS) and benefit from deductions under Section 80 CCG.
No tax is to be paid for redemption of units of an equity scheme held for over a year.
In case of non-equity mutual funds, benefit from indexation (refer table below)
No tax is to be paid on dividends. The fund deducts a dividend distribution tax at source in case of non-equity schemes
In case of Equity Oriented Scheme, no dividend distribution tax is deducted at source by the fund house
SIP is a way of investing in Mutual Funds where you pay a fixed amount each month for a fixed tenure. Like If you take an SIP of 5,000 for 1 year on Jan 1, 2014, you will be paying Rs 5,000 per month for next 12 months. Please understand that its not a financial instrument, but a way of investing in mutual funds, some people confuse SIP with PPF, NSC, and mutual funds, they think they can invest in “SIP” , its just a mode of investment.
Investment through SIP must be done only when markets are uncertain or very volatile, when you dont know which side they are headed to .. SIP will be beneficial only if markets really are volatile or going down after you invested. If it happens that markets turns bullish and starts going up , in that case SIP will not be beneficial and will give less return compared to lumpsum investment in start. SIP is a simple concept and hence very powerful, lets see some reasons why its worth investing through SIP
More convenient for average person on wallet
Its more easy for a person to invest in small amount every month , rather than a lump sum amount. Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 year, rather than investing 60,000 at a same time
It brings your average cost price for unit down (in volatile market)
The biggest advantage of SIP is this part , There is a concept of rupee-cost averaging, In SIP you buy less when market and NAV are UP and you get more units when they are low.
