Why should we file our Income Tax Return on time

Tax filing time is back again. Yes, it’s that time of the year when we have to file our income tax. For many of us, filing tax returns can be a tedious process. Although, the government has simplified the tax filing process making it much easier and less cumbersome for taxpayers to file returns many of us still find it difficult to understand.

It may be simple for few and complex for others however we should not delay it which can cost us dearly.

For this year government notified a simpler one-page form for filing your tax returns. Along with this, quoting Aadhaar number is now mandatory. Linking Aadhaar can now be completed in a few simple steps. By linking your Aadhaar, we can e-verify our returns, without having to send the physical return form for processing, thus, adding to the convenience.

Income Tax Filing Dates

July 31, 2017	Due date for filing annual return of income for the assessment year 2017-18
	for all assesse other than –
	(a) corporate-assesse or
	(b) non-corporate assesse, whose books of account are required to be audited
	or
	(c) working partner of a firm whose accounts are required to be audited or
	(d) an assesse who is required to furnish a report under section 92E
September 30, 2017	Due date for filing annual of income for the assessment year 2017-18 if the
	assesse is –
	(a) corporate-assesse or
	(b) non-corporate assesse (whose books of account are required to be audited)
	or
	(c) Working partner of a firm whose accounts are required to be audited).

Why we should file it on time, here we have outlined few major reasons to file our income tax return early –

1. Fast processing of IT returns

If we file our returns well before deadline dates, our files are processed much faster. As we approach closer to deadline dates the processing time increases due to increase in volume.  Further the servers also slows down due to due to heavy volume as the tax return deadline comes nearer. So it it always advisable to file the return well in time so as to avoid the rush and possible delays.

2. Reducing the chances of errors

If we start working on our returns early we get enough time to gather all the information and enough time to do it properly and error free. When we file in last minutes, in haste, we may forget to include certain incomes/exemptions resulting into a wrong information. Although we can file a revised return before the end of the next assessment year, which is March 31, 2019 for AY2017-18. But it is always advisable to file the things correctly at first time itself.  Further from next year the deadline for filing revised returns has been reduced, i.e. AY2018-19, the deadline for filing revised returns is March 31, 2019. So it’s better to start early so as to avoid errors and delays in processing.

3. Refunds are faster
Normally the IT refund processing takes more time than processing forms with a tax due. So If we file your claim in advance and have a tax refund, our return may get processed faster. As the time goes by, it may get delayed due to the rush. So if we get our refunds sooner we can put it to productive use early and reap earnings. The longer we delay, means missing out on the income which could be earned on that amount. Further, if our refund amount is greater than 10% of the tax payable, government pays an interest @6% p.a. calculated from the date of filing the return. We lose this benefit if the returns are filed after due date.

4. It gives sufficient time to get all documents in order

We need to collect all the required documents i.e. income details, home loan EMI details, various tax savings investments, accrued income, TDS certificates, Form 26AS etc. before filing our IT returns. By starting for our income tax preparation early, we will get enough time to gather all these documents from various sources. Although we are not required to attach these documents however there details are necessary to complete the returns so we need to have all the details with us before filing the returns.

5. This will avoid late payment and penal interest

As per Income tax Act if we file the returns after due date we are liable to pay interest and also penalty. Under Section 234F of the Income Tax Act) there will be two set of penalties, first, a Rs 5,000 penalty for belated returns filed on or before December 31 for that assessment year and Rs 10,000 for any other case. For small taxpayers whose total income does not exceed Rs 5 lakh, the penalty amount is reduced to Rs 1,000. Apart from this, under Section 234A, interest would be levied @1% per month, calculated from the due date. So there is another advantage of filing returns well in time so as to avoid this extra cost.

6. Your Tax Consultant will pay more attention

If you file the return through Chartered Accountant or some professional, by reaching them well before the deadline you will get sufficient time to discuss with them and they will give you good hearing. This will also give them enough time to examine your documents and eradicate errors and/ or be able to save you more tax.. In last moments they are also filled with lot of files and may not be able to pay as much attention.

7. Faster processing of loans, visa, credit cards

Currently IT return is compulsory for getting loans, credit cards and most of the financial services. Because income tax return acts is proof of the income we earn. Therefore, if we are planning to take home loan or any other financial services, it is pertinent to have all your income proofs ready. In addition, paying your tax on time adds to your credentials as a trustworthy and law-abiding citizen.

8. It gives ideas for future tax planning

When we file returns early, we may get ideas on how to save tax in the current financial year. As every year the tax rules changes; thus, filing returns early, may give ideas on how to save on tax for the current financial year. By tis we can optimise tax deductions available. In addition, we can negotiate with our employer to alter and optimise your salary structure to save more tax. 

9. It eliminate stress

When we do anything in last moment it increases our stress level and chances of mistakes are also high. So by filing the returns on time we can avoid the additional stress of missing the due date or being charged a late fee and penal interest. Stress has been known to adversely affect our health. By submitting our tax returns before the deadline, we will be happier with a host of benefits.

We should have a proper and well planned tax planning at the start if the year. Tax planning is not just tax saving or filing returns and paying taxes but a larger financial plan which should be taken into consideration after accounting for age, financial goals, ability to take risk, and investment horizon (including nearness to financial goals).

We must file your tax returns on time and should also ensure that taxes are paid before the due date. This will not only provide you with several benefits, but also defer additional costs in the form of penalties that can arise later.

What should we do when we default on our loans?

I have a friend  Amar (name changed to protect privacy) who took a loan in 2013, after that he got married, his wife was housewife and suddenly there was a large medical expenses and he lost his job at that time due to which he defaulted on his loan payments. What recourse does he have? The bank has now started harassing him.' 

Anyone of us can be in same situation like Amar’s. Imagine yourself in a situation where you have taken a loan, say a home loan, and you lose your job and have difficulty getting another job at the same salary. Or for whatever reason, are unable to make the regular EMI payments. Perhaps you don't even have insurance on your home loan amount.

The stressful nature of this situation can lead people to panic, or worse. 

But all is not lost! It is very much possible, with some discipline, to rectify the situation. In this post we will lay out some simple steps that can be taken in this kind of situation.

Step 1: Be Calm and don’t get panicked

For you it may be first time but this is not a rare situation. Banks have many customers who default on payments all the time.

So just relax you are not the only one. There's no need to feel like you have a great weight on your shoulders and you have to bear it by yourself. In fact, your bank will be the first entity willing to help you. Defaulting on your loan, even if it is a home loan, is not the end of the road. 

Step 2: Get your documents in Order and connect with the Lender

You should have all the documents at one place. If not that first create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan i.e. date of taking the loan, tenure, interest rate, EMI amount and so forth. Keep them handy when you talk to your lender. Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, tell them that you would like to pay your loan back as soon as you can, and ask them what their options are.

Once you contact with the bank with the necessary details, you will get a call from your bank and can set up a meeting to calmly and rationally discuss your options. 

Step 3: Contemplate Your Options, in Dialogue with Your Lender

Can the bank repossess your asset i.e. your car or your home? Legally, yes they can. But there are a couple of reasons why you don't have to necessarily worry about this. 

Firstly, the repossession of assets procedure in India (and in fact elsewhere in the world as well) is very lengthy and there are steps along the way where you and the bank can work together to come to a satisfactory deal.

If you are a regular payer until now, the bank understands that you are a genuine borrower, and will take this into consideration when working together with you to find a mutually feasible solution. 'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution.
Genuine reasons that banks understand are loss of a job, illness, or an accident that may render you unable to work. You might also have multiple loans, and find yourself in too much debt to handle. 

Secondly, the banks are in lending business and are not interested to repossess your assets, it wants you to pay the money owed, or at least most or part of it. If you default, the bank's NPA ratio (Non-Performing Assets) goes up. This reflects badly on the bank. Also, they lose out on the money you would have paid them. So the bank will much prefer to cut you a deal. 

Here are what your options will likely be: 

a.      Refinancing the existing loans

If your problem is one very high monthly EMI, due to increase in overall interest rates, or an increase in your personal commitments to yourself, your loved ones, or any other matter personal to you that reduces your bank balance, or a combination of these factors and others, then what the bank can do is to restructure your loan. 

If you are currently paying Rs. 25,000 per month for 20 years, and this is too high, the bank might offer you an EMI less than to say Rs. 20,000 per month, for a little more than 20 years. So your EMI goes down, giving you some breathing room and the bank doesn't lose money because it will simply make it up from you over a longer period of time. Everybody wins on some level. 

However you should keep in mind that the payments you now make will eventually cost you more in terms of total money repaid, but if breathing room is what you need, this will provide it. However the extension in tenure will be small, so the change in your EMIs will also be small. Also, as a next step, the bank can opt for foreclosure by selling off the collaterals stated when you applied for the loan, by auction, with your co-operation.

Refinancing can be done for many situations. 

It is also the go-to option for people who find that their bank is not reducing floating interest rates in line with other banks. You can approach your bank to reduce rates, or you will shift to a more other lender who is willing to offer at lower rates. For credit card debt, you can also opt for balance transfer by shifting your existing debt onto a new card with a 0% interest rate for 6 months, and paying off as much as you can within these 6 months, however before transferring you should be clear about the terms and conditions. 

b.      Deferring Your current EMIs

There could be a different problem that currently due to loss of job or some reasons you can’t pay at all and are hopeful that once you get the job and things becomes normal you will be able to pay in normal way.  In this type of situation you can approach your bank for deferral of your payments. The bank can grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows. 

Once the time is over, your EMIs will restart (on either the same terms or your new negotiated terms), but will include late payment penalties, known as Delayed Payment Charges. These charges are applicable for payments made after their due date. In case some of your post-dated cheques (PDCs) have bounced due to insufficient funds, you will also be subject to cheque bounce charges.

c.      One time Settlements

One time settlement may not be feasible for a big loan like home loans, but it can work for a personal loan, credit card outstanding, or a car loan. On a case to case basis, banks are sometimes willing to go for one time or lump sum settlements of outstanding dues. They will waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this will impact your credit score greatly in negative way. Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both.

What happens if you still can't pay? 

Finally if you have no way out to pay off your dues, the lender will seek repossession of the asset. The asset will be auctioned off within 15 days (for a movable asset like a car) or 30 days (for an immovable asset such as a home). During this period, you still have the option of buying back your own property provided the funds are available to you.

At no time during the process will the lender not give you the option to pay, in bits and pieces or via a reduced lump sum, and maintain possession of your asset. 

Conclusion

As we understand, the best solution is that we should pay our dues on time and do not get into this situation in the first place. But once you are in it, remember that panicking will get you nowhere and your time would be better spent in dialogue with your bank, coming up with a feasible solution together. You can also contact credit counselling centres for guidance. 

One of the main tenets of financial planning is safety. This is done by way of a contingency fund. Remember, if you have EMIs, to include them in your contingency fund and have at least 6 months to 2 years of expenses set aside in a safe liquid fund, for use in case of emergency situations.

Also, we should plan our finances properly based on our future goals i..e buying homes, Retirement Planning, Kids education and marriage etc. For this the plan should be made through an experienced Financial Advisors keeping all the aspects and contingencies.

The lessons we can learn from the rich

The billionaires have specific habits which make them like that, we can learn few things from them to how become a billionaire and remain so.

1.   Smart Rich people live below their means

Most of the super-rich people do not splurge, or spend just to show-off. They choose modest houses, drive ordinary cars, and fly economy class. Warren Buffett still lives in the 5-bedroom house he purchased more than four decades ago for a mere $31,500. Mark Zuckerberg, founder and CEO of Facebook, drives a manual-transmission Volkswagen hatchback.

The learning

               i.        We shouldn’t buy a house on loan if we can't afford the EMI.

              ii.        EMI or rent of the house should not be more than 40%

            iii.        We shouldn’t spend more than 5% of our income on car loans.

            iv.        We shouldn’t stretch our finances to compete with others or just to show off.

2.   Smart Rich People save & invest first, spend later

There is a famous saying by legendry investor Warren Buffet “If you buy things you don't need, you will soon sell things you need,“.

Most smart rich people pay themselves first by saving and investing at least 20% of their income and spending the rest. Even if we are earning less, the disciplined saving habit will ensure a secure future and we won't have to struggle close in later part of our life. We should also make sure that we have an emergency corpus for rainy days.

The learning

               i.        We should automate our investing.

              ii.        We should ensure that our regular investments i.e. SIPs get invested as soon as we get our pay check.

            iii.        We should keep at least six months of monthly expenses for emergencies.

3.   They spend less on clothes, shoes, food

The smart rich people use their money on productive purposes. They don't usually run behind brands for designer clothes, shoes or accessories etc just for the sake of it. They spend on things that will keep them and their progeny rich in the future, not what will make them look rich in the present. This is the reason facebook;s   founder Mark Zuckerberg's in simple t-shirts or filmstar Rajnikanth is dressed in plain dhoti-kurta off screen.

The learning

               i.        We should control our expenses in those assets whose value is likely to go down only. Like clothes, accessories, cars etc.

              ii.        For example we shouldn’t spend more than 3-4% on clothes, 5-7% on vacations, and 10-12% on food.

            iii.        We should invest more in those assets which will increase our wealth, 3 They save & invest first, spend later.

4.   They look for discounts, coupons and ways to cut costs

Most of the smart rich people are smart spenders. They use discounts, sales, coupons, rewards or loyalty points to save money wherever they can. We should not forget small discounts add up to big money over time.

Whether it's US stars like Kristen Bell or Premji, who ensures his employees switch off lights in offices, they know how to cut costs.

The learning

               i.        We can use mobile apps like Paytm etc to pay bills or book tickets since they offer cash backs and discounts.

              ii.        Use discount sites and online price comparison sites to avail of discounts on various kind of purchases.

5.   Smart Rich people use credit cards wisely and limit their cash expenses

Sometimes if we have lot of cash in our pocket we indulge in buying unnecessary things.

Mostly the smart rich people don't carry too much cash. They also prefer to use credit cards wisely. There is debate whether plastic money makes us to spend more? This can be answered that prudent and disciplined use of credit card can be good rather than bad. We should repay the entire dues of the card in full and squeezing all benefits out of these.

The learning

               i.        Use credit cards wisely as this helps to keep better track of expenses.

              ii.        They offer free money in terms of rewards and benefits.

            iii.        It also creates a good credit history which helps to get loans at competitive rates when we actually need

            iv.        Now chip based cards also offer greater security from theft as compared to cash.

6.   They value quality over cost

There is a famous hindi saying “Sasta roye Barbar, Mahnga roye ek baar”.  It Means  a person who buys cheap things have to repent many times while the person who buys costly things have to repent only once. Here the costly thing does not mean costly by price but buy quality.

Smart rich people do not buy stuff because it's cheap, but because it's good quality that will last them longer. For example if we buy a cheaper home appliance, we may end up spending more on maintenance and repairs, or replacing it with a new item in a shorter interval.

The learning

               i.        We should conduct a cost-value comparison before buying a product.

              ii.        We should not buy something very expensive which is not going to be used for long and have very limited life clothes and expensive mobiles etc.

7.   They give back to society

Most of the rich people like Bill Gates, Warrant Buffet, Azim Premji have donated huge sums to charities and pledged their wealth for philanthropic purposes. Even common people also donate to the social wellbeing. However we should keep our net worth in mind while giving back to society and do not be over enthusiastic.

The learning

               i.        Before donating we should ensure our own financial well-being first.

              ii.        We should try to get tax benefits under Section 80G by donating to recognised institutions.

            iii.        This also ensures that money is used for the real benefits of the needy people

To become rich and remain so is also like a habit where we have to consciously make efforts to be careful with regard to our incomes and expenses. If we do it prudently we will remain rich forever.

Mutual funds: The Myths and The Reality

Mutual Funds are in India for decades however still there are lot of doubts in the minds of the investors. In this post we have tried to sort out various myths and the reality about them.

1 – SIP is the name of an investment product

Many people think that “SIP” is the name of some investment product other than mutual fund. We heard people saying – “I want to invest in SIP”. However SIP means SYSTEMATIC INVESTMENT PLAN, which means a way to regularly invest into mutual funds. Wherein a fixed amount is automatically debited from our account and gets invest in mutual funds on a pre-defined date.

2 – SIP is only on monthly basis

Generally people make investment on monthly basis however an SIP can also be done even on a weekly, fortnightly or quarterly basis. While monthly SIP is the most suitable for all (we all get monthly income), but at times if we want to invest on different frequency that can also be done.

3 – Just SIP and forget it

Many investors think that once they have started a SIP investment or even lump sum investment then just forget it for next 10-20 yrs. However a wise way is to constantly review (once in a year or so) the performance of the schemes and take corrective decisions. But we should not over do it and start looking at weekly and monthly returns.

4 – Once started we can’t stop the SIP in between

Many investors think that after starting SIP for X yrs, then it is a commitment and we can’t break in between and if we break then will face some penalty. However the truth is that once we start the SIP, we can anytime stop the SIP in between it may take one month normally. So we shouldn’t worry while starting the SIP as it can be stopped the day we want to stop it.

5 – Once SIP is done we can’t increase, decrease or add lum sum in same scheme

Many investors have misconception that if they have started an SIP in a fund ABC, then they can’t add additional money in the same fund under the same folio or they can not increase or reduce the SIP amount. However the truth is that we can add additional SIP in the same scheme even in same date or we can cancel the existing SIP to start lesser amount SIP. We can also add lum sum amount in the same scheme any time as per our own convenience.

6 –Once started We can’t skip any SIP payment

Many people get worried that what will happen if they skip the SIP. Mutual funds units are allotted on the current dates NAV basis, so if we do not have sufficient money in account the units will not be allotted on that day. For that Mutual funds company do not charge any fine or penalty for this, but our bank can levy a some ECS retun charge for this like Rs 200/300. However we can still invest same amount through online or physically for one time purchase after that. However it is better to be disciplined enough to make sure that our SIP’s go on time, but also does not hurt badly in case of emergency

7 – We should stop SIP when markets are down

SIP is a better and disciplined way of investing. Unless we are expert in understanding markets and how they will behave which actually no one knows, it does not make a lot of sense to time SIP’s . Its better to let them run in all kind of markets and focus on your long term goals.

Many investors stop their SIP’s when markets tank which is not right. Infact, this is the best time when we should accumulate more Mutual funds units in our portfolio, so that when markets are up, we can reap the benefits.

8 –When stock markets is high we should avoid starting new SIP

Although it’s better to wait when market is high but nobody knows that market will go up further from here or will go down. So its better to keep on investing regularly rather then trying to guess about the market.  Its better to continue withr SIP’s irrespective of market conditions. And when markets do down, it’s time to increase your SIP amount

9 – SIP is always better than Lump sum Investments

Actually we can’t say which is better. When market is more volatile SIP’s can outperform the onetime investments. SIP’s however are more suitable for a common man as it’s a monthly commitment and averages the risk of market’s volatility. But when market is continuously rising lump sum investments can give higher returns then SIPs.

10 – Lower NAV is better than higher NAV

This is a very confusing and interesting myth among investors. Many people think that a smaller NAV mutual fund is a better deal compared to a higher NAV mutual fund.  Due to this reason people rush to new fund offers just because the NAV is at Rs. 10/-.

The fact is that in case of mutual funds NAV has no significance. It’s ZERO !

Mutual funds appreciation is directly related to percentage growth in the NAV not in absolute numbers. For example if we have invested  Rs 1 lacs in a fund with NAV of Rs 10, and if the mutual fund performs great and in next 5 yrs it doubles in value, then the NAV will rise to Rs 20 hence the fund value will rise to Rs 2 lacs. However if the NAV was Rs 100 per unit, still the effect would be same as the NAV would have increased to Rs 200 and investment value will increase to Rs 2 lacs. Same in earlier case.

11 – Dividend in mutual funds is better than Growth option

All the Mutual fund schemes have both options i.e. growth and dividend. Many investors think that dividend option is better because they are getting “extra dividend or extra money” . However it’s not true.

Dividends is not extra ! , Once dividend is paid from the scheme, the NAV comes down by that margin. Further  if the fund is not an equity fund, a dividend distribution tax is first paid by AMC, which lowers the return of investor. However in case of growth option, the money remains in the fund itself.

For example, ABC fund with NAV of Rs 50 declares a dividend of Rs 5

·         Now in case of dividend option , Rs 5 will be paid to investor and NAV will come down to Rs 45.

·         However in case of Growth option, nothing is paid to investor , but the NAV is Rs 50.

12 – Mutual funds means Investment in Stock Market

Another common myths is that mutual funds are highly risky because they invest in stocks. However this is half true. Mutual funds have different schemes i.e. Debt Funds, Balanced funds and equity mutual funds. Only Equity and Balanced mutual funds invest in stocks and are risky or volatile. Debt funds invest in debentures, bonds and Government Securities which are not related to equity market. Infact some of the debt schemes i.e. Liquid funds are quite safe and can be considered as substitute to saving/current account.

13 – Mutual funds do offer guaranteed returns

Mutual funds do not offer a guaranteed return like a fixed deposit.  Returns of mutual funds are based on market value of the basket of securities in that scheme. The returns vary depending on the type of schemes i.e. debt or equity based schemes. Although the returns are not guaranteed they can be predicted based on historical returns, fund manager’s expertise, securities in the scheme portfolio and investment horizon. This is one of the main reason that many investors who want assured returns shy away from investing in mutual funds.

14 – Past returns indicate future returns for the mutual fund scheme

People think that if Scheme A has given good return in past it will continue to give that kind of return in future. But this is not true. Although past returns can tell that the fund did well in past and there is some probability due to legacy that it will perform well. But it’s not which can be 100% sure. The fund’s performance depends on the securities it has at that point of time and what decisions fund manager takes in future.

15 – More Mutual funds means Better Diversification

Normally a single mutual fund scheme invests in 50-70 stocks. So when we invest in an equity mutual fund, our money is already well diversified across sectors, types of companies etc.

When we add other mutual funds of same category, many of the stocks could be same hence giving hardly any further diversification. If we further add other similar schemes we may not be doing any diversification actually.

That is why it’s of no use to invest in 10-20 mutual funds of same category. 2-3 funds of a similar category are the fine for an investors perspective  if we want to invest more we can invest in the same schemes thorugh lum sum or SIPs.

16 – Tax saving under 80C is not possible through mutual funds

Many people who are investing in PPF and Insurance for many years think there is no alternative or better way to save tax. However mutual funds do offer 80C benefits. ELSS or Equity linked saving scheme is the category of mutual funds which gives 80C benefits up to Rs 1.5 lacs with lesser lockin period of three years.

17 – In ELSS all money can be withdrawn after 3 yrs if one is doing SIP

Many investors have this belief that is that if they are doing SIP in ELSS (tax saving mutual funds), then after 3 yrs, they can withdraw all their money. However that is not true. Each investment in ELSS is locked for 36 months from the date of investments. Which means that the first SIP which goes in 1^st April 2017, will be unlocked only in 31^st March 2020, Similarly the SIP made on 1^st May’17 can be redeemed only on 1^st May 2020.

18 – Mutual Funds means big Investments

Many small investors don’t enquire about mutual funds thinking it needs lot of money to invest. Hence they stay away from mutual funds and stick to recurring/fixed deposits and other products. The truth is that we can start monthly investment of even Rs 1,000 per month in most of the funds and for onetime basis, it can be Rs 5,000 .

19 – Mutual funds mean long term investments

Mutual Funds are the investment products where we can invest for as short as one week to as long as ten-twenty years. Liquid mutual funds are for short term i.e. a few week to equity funds where we can invest for decades. There are other products in between for short to medium term time horizon.

20 – We will lose all our money if Mutual Fund company goes bankrupt

Mutual Funds are governed by SEBI and have five tier structure. There is a Sponsor,  trust, an Asset management Company, Custodian of Securities and Registrar. The way it’s designed and regulated that it’s almost impossible for investors to lose money due to a scam or AMC going bankrupt. Sponsor sets up a mutual fund, Trustees are responsible to regulate the mutual funds and ensure it to adhere to the regulations, AMC manages the funds, Custodian keeps the securities and Registrar is responsible for registering the sale/purchase transactions and keeping the investors data. Since the mutual funds units does not lie with AMC (it just takes decision of buying and selling) but with custodian and hence they are highly secure.

21 – Investment in Mutual Funds needs demat account

Many people think that demat account is compulsory for investing in mutual funds. However it is not true, we can invest in mutual funds without Dmat account as well as through existing Dmat Account, but it’s not mandatory.

22 – Mutual funds investments needs lot of formalities

Mutual funds investment needs one time KYC formalities like we need to do for opening Bank Account. After that we can buy/redeem mutual funds in a very simple one page form or also through online. We do not need to provide all KYC documents every time we invest/redeem form the mutual funds. However selecting schemes based on goals and time horizon could be little difficult for a new person and its better to take guidance from some experts.

23 – In Mutual funds only humans can invest

Actually any one can invest in mutual funds be it individuals, HUF, Companies, Partnerships firms, trusts or societies.  All we need to do it so provide the required KYC, and then investment in mutual funds can be made. For companies who have current account money can be invested in liquid or debt funds and redeem them anytime by which we can earn money in the idle money.

24 – Mutual Funds are for young and not for retired investors

As mentioned above Mutual funds have various types of schemes which can cater the requirements of all class of investors be it a young office goes to a Middle aged executive to a retired person. A person can select debt schemes if he wants more security of his funds he can also invest in a debt oriented mutual funds, which can have some equity component for some return kick! Few schemes offer monthly or quarterly dividends (equity/balanced fund offers tax free dividend) which can be a better option for those who don’t have regular cash inflows. One can also go for Systematic Withdrawal Plan (SWP) and withdraw a fixed amount each month.

25 –In Mutual funds our money gets locked

There is another misconception that in mutual funds their money gets locked for a specific period. But the truth is that in case of mutual funds, most of the funds are open ended funds, which means that we can invest anytime and redeem anytime. Although there is some exit penalty in many of the mutual funds which ranges from 3 months to a year. However in ELSS funds (which comes under 80C) and close ended funds (which specifically tell you the duration for lock in) there are lockin.

26 – Mutual funds can’t be a substitute to FDs

Although in India Mutual funds are just 15% of total FDs, In US, mutual funds are already several times bigger than Fixed deposits with more than 67% of the population invest in them. It is also going to happen in India. Currently Indian mutual funds have around 18 lacs crore, which has doubled in last 4 yrs, and set to grow very fast in the next decade. So if someone thinks that mutual funds are some alien concept, he has to rethink. It’s very popular now in India and one of the standard investments products.

27 – Mutual fund redemption is complicated

Redemption in mutual funds is very easy and now through online apps we can do it by sitting at our home without  visiting mutual funds or registrars.This does not need any approval from anyone.

28 – TDS is applicable when mutual funds are redeemed

In mutual funds, there is no Tax deducted. We get the full amount in our bank account and then we need to calculate the tax amount and pay it later. However in debt mutual funds Mutual fund companies need to pay dividend distribution tax but the dividend in the hand of investors is tax free. For Equity schemes the capital gain is tax free after one year. But in case of NRI’s, if they redeem their debt funds, then TDS is applicable.

29 – I can’t invest in mutual funds as I can’t get money when I need it

Mutual funds are highly liquid and we can get our money ranging from instant redemption to 3-4 days depending on the fund type. In fact Liquid/ultra short term funds can be used as a substitute to Saving/Current Accounts as they can provide instant or liquidity within one day.

30 – We can’t withdraw a part of investments from mutual funds

Actually we can redeemed  any amount from Mutual funds as per our convinience. We can either chose specific number of units or the amount we want to redeem (in that case it will calculate the units accordingly). So that way, it’s a great product as unlike FD or RDs wherein we can invest and redeem any amount as per our convenience.

31 – We can’t switch from one scheme to other

There is another misconception that we cannot move from one scheme to another across the same fund house. We can switch from one scheme to another in same fund house without selling. However from one fund house to another we need to redeem from one scheme to other.

32 –Bigger and well-known brand’s Mutual funds are always better

A lot of first time investors in mutual funds investors want to go with trusted brands like LIC, SBI, or ICICI etc. The truth is that the Mutual funds are totally separate entity hence they may not reflect the same quality of performance as of their parent companies. We should not confuse with LIC mutual funds as LIC insurance or SBI mutual funds as SBI bank.

Mutual funds are totally different and specialised business, and it needs asset management expertise. A small fund can also have high quality funds and should be considered.

Mutual funds are very good investment options however they should be used wisely based on the investor’s specific needs, financial goals, time horizon and risk appetite.