The Guide to Unit Trust (UT) registration is meant for you if you are looking for an investment. After all, “investment in the stock market” is one of the most lucrative things in this day and age. But where can you start? What should be your investment criteria?
How do you pick the right investment vehicle? You don’t want to lose money on bad investments, so what kind of due diligence should be done before investing in any UT? And how does it all work when it comes to taxation?
To help out budding investors like yourself, we have decided to put together this guide that will look into some of these questions. This guide is meant for beginners who aren’t familiar with the world of stocks and shares. If you are already a stock market veteran, investing in UT may not be for you anyway – there are probably better ways to spend your time! Learn more about the details at company 123.
Right Investment
So, let’s start with the first question – how does one go about finding the right investment? Usually, one enters into a contract with a brokerage firm to invest his money into a stock or share that is chosen by an expert analyst. Let’s take the example of Apple Inc., which is trading at $100 now. An investor can buy around 5 shares (depending on the broker), paying $100 x 5 = $500 as initial capital.
The fundamental value of this investment will depreciate as soon as new information comes out about the company – that may be good information (for example, the company is making a lot of money) or bad news (the company is losing money). In simple terms, this means that investing in UT requires forward-looking – investors need to predict how a particular stock will perform in future.
Taxation
That brings us to the question of taxation. As with any other form of income, you end up paying tax on your investment gains as well! However, there are certain things one needs to keep a note of – firstly, capital gains from units purchased before 1 st April 2009 are subject to income tax only if they have been sold after 1 st April 2009.
Secondly, long term capital gains arising from units purchased before 1 st January 2011 and which have been held for more than twelve months will be exempt from income tax. This is called the Section 54 EC (Exempt-Cum-Tax) status.
However, if you are looking to hold your units for another 12 months, then there is no point waiting – if you sell it now, you will get the same benefit of exemption under Section 54 EC status!
Investment Gains
The next question that comes up naturally is about taxation on investment gains. As mentioned earlier, capital gains arising out of investments made before 1 st April 2009 will be subject to income tax only if they have been sold after 1 st April 2009. Therefore, this particular gain cannot be offset against any other source of income.
On the other hand, long term capital gains arising out of investments made before 1 st January 2011 and which have been held for more than twelve months will be exempt from income tax. This is called the Section 54 EC (Exempt-Cum-Tax) status.
However, if you are looking to hold your units for another 12 months, then there is no point waiting – if you sell it now, you will get the same benefit of exemption under Section 54 EC status!
Money
Next, up is a question that most people don’t think about – what happens when they need money? Most individuals who put their savings into UT funds prefer fixed dividends as opposed to fixed interest rates on deposits with banks or NBFCs. And this brings us to the next question that begs to be asked when it comes to UT funds – how much return should you expect on your investments? This depends largely on risk appetite.
For instance, if you are in the higher income bracket (in other words, in case your total taxable income exceeds Rs 10 lakhs) and would like a steady stream of dividend payments (at least Rs 30,000 per year), then you could invest in Fixed Maturity Plans or fixed deposits that may yield you 6% – 7%.
On the other hand, if you are more of a high-risk taker or have just started saving for yourself, then equities might be something worth considering. Here’s an interesting statistic – an equity mutual fund investor has earned a compounded annual growth rate (CAGR) of 15.39% as opposed to fixed deposits or fixed maturity plans which earn anywhere between 8-10%.
Comparing Funds
One important question that needs to be asked is whether UT funds are better than ELSS (Equity Linked Saving Schemes). The answer to this depends on the taxation year and your TDS status.
Remember, ELSS is a category of equity mutual fund schemes and therefore will fall under the same tax bracket as Equity Funds – long term capital gains up to 10 lakhs per financial year (and short term capital gains up to 2 lakhs per financial year) are not taxable!
It must be noted that these figures apply only if the total of all your taxable income is less than Rs 10 lakhs. Therefore, for those who do not have a taxable income because they are either full-time housewives or students with part-time jobs, you will need to remember that all gains made on ELSS investments are exempt from tax up to the limits mentioned above.
Savings
And finally, the question that everyone wants to ask – how much should I save? This depends largely on your financial goals and the company you keep. If you are young, ambitious and would like to make enough money to retire by 40 (in other words, if you want to live the good life), then it’s best if you start saving early.
That means right now! A fund manager at UTI Mutual Fund says that if you save an equal sum every year for 20 years, it will help you create a corpus of Rs 6.64 lakhs (assuming an average return on your investments of 9% per year).
However, if you are in the highest tax bracket and would like to retire early with enough money to buy yourself that beach-side bungalow in Goa, then it is best if you start putting aside at least 10% of your salary into ELSS or equity funds!
But in case this doesn’t sound feasible for you right now, don’t worry! If someone tells you that they started saving in their 30’s but were able to build up an investment corpus worth Rs 5 crore before they turned 50, don’t think that there is no hope for you. You will get there too, so long as you start saving right away and put your money to work!
That’s all folks! Remember, it’s vital that you take the time to find out about the different types of funds and then determine which course best suits your financial goals. Happy investing!