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My friend plans to send his son abroad for higher studies next year, and wants to save up for that. What is the best investment option for a period of nine months to a year?

Vishwanath

For a time horizon as short as this (one year or less), equity or equity funds are a clear no.

The choice is among debt options — debt mutual funds, fixed deposits with banks or post office, or NBFC deposits. It boils down to the option that offers an optimal risk-return combination.

Debt mutual funds, held for three years or less, have no tax breaks — any income is taxable at slab rates. Income from fixed deposits are also taxable at slab rates and so is that from NBFC deposits.

On post-tax return basis, debt mutual funds (liquid, ultra-short- or short-term funds) could score over NBFC deposits; that in turn could do somewhat better than fixed deposits with banks or the post office.

But on risk, the order reverses. Debt mutual funds, even the liquid and short-term funds, come with some risk attached.

High-rated NBFC deposits have relatively lower risk than debt mutual funds.

Fixed deposits of banks or the post office have the lowest risk — bank deposits of up to ₹1 lakh are insured, and the remaining is also largely low-risk. Post-office deposits have government backing.

Given that the money is for a non-negotiable purpose (son’s education), it seems better to go with fixed deposits and not get lured by the marginally higher potential return of debt funds or NBFC deposits.

Most NBFCs also do not accept deposits for less than a year.

The post office currently offers 6.6 per cent on its one-year deposit; it does not offer lower-tenure deposits. Some banks such as IDFC Bank, RBL Bank, YES Bank, DCB Bank and City Union Bank offer about 7 per cent for deposits of one year or less. So, such bank fixed deposits may be the optimal choice.

Some new banks such as RBL offer high rates (around 7 per cent) on savings banks accounts, too, on high-value deposits; these rates are comparable with fixed deposits. But with one advantage — for individuals less than 60 years of age, savings bank account interest is exempt from tax of up to ₹10,000 a year, across all banks and accounts, under Section 80TTA of the Income Tax Act. This could be used to one’s advantage, too, if the tax-exempt interest limit is not exhausted.

I am a senior citizen and a pensioner. The introduction of LTCG (long-term capital gains) tax on equity has made calculation and regular harvesting of gains quite complex. Will switching from the regular plan to the direct one of the samefund simplify the calculation?

S Prabhakar Gupta

No. The tax rules and calculations are the same, whether you invest in the mutual-fund scheme through a regular plan (through a distributor) or a direct plan (directly, without a distributor) . So, from April 1, 2018, LTCG arising from transfer of equity mutual funds exceeding ₹1 lakh will be taxed at 10 per cent. If you sell equity mutual fund units after holding them for more than 12 months from the date of acquisition, the gains are considered long-term.

The silver lining is that all LTCG up to January 31, 2018, will be grandfathered — they will continue to be exempt from tax, and only LTCG made after January 31, 2018, will be taxed.

Gains on equity mutual funds held for 12 months or less are considered short-term gains and taxed at 15 per cent. These rules apply irrespective of whether the investment is through a regular plan or a direct plan.

When you shift from a regular plan to a direct one of the same scheme, it is considered two transactions — first, redemption (sale) from the regular plan, and second, purchase in the direct plan. So, capital gains made on the redemption from the regular plan will be subject to tax.

Exit load may also apply if you sell before a specified holding period. Later, as and when you sell the units purchased in the direct plan, gains on that, too, will be subject to tax — short- or long-term depending on the period of holding.

This is not to say that you should not shift from a regular plan to a direct plan. Direct plans have lower costs since they do away with distributor commissions, and thus have better returns.

Shift, if you have to, but for the right reasons. You cannot avoid tax or simplify the calculation, but can lower costs.

Send your queries to mf@thehindu.co.in

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