I wish to save Rs 20 lakh...

I wish to save Rs 20 lakh for my newborn daughter's education and marriage by investing in equity funds. She would need this money after 20 years. Assuming a 15% return and 5% inflation, how much do I need to invest per month?

— Abhijit Jadhav

Congratulations to you on several counts. Firstly, you have a very clear vision of your financial goals. You will do well to start investing for these goals right away. The longer the time you allow your investments to grow, the fatter will be your returns.

Secondly, you have done the sensible thing of factoring in inflation in your financial planning. Most people make the mistake of ignoring this crucial deflator while calculating the returns from their investments. Lastly, you have chosen just the right vehicle for reaching your goals.

Equity mutual funds are a simple and convenient mode of investing in stocks. Considering your expectation of returns and the assumed rate of inflation, we have no doubts that you would be able to meet your commitments with ease.

The table below shows how much you need to invest every month to achieve a corpus of Rs 20 lakh in 20 years. There are four different rates of returns and five different inflation rates.

Just one minor clarification: your daughter may need the money for her marriage in about 24 years. That may bring down the amount you need to invest every month by about Rs 450.

If my retired mother invests in an MIP that earns 12% returns, what will be her tax liability? Also, do MIPs pay dividend distribution tax?

— Manoj

Your mother is probably a senior citizen, which means she has a tax free income of Rs 1.95 lakh a year.

If she invests in an MIP and redeems the units within a year, the profits will be included in her income for the year and taxed at the applicable rate. However, if she holds the units for over a year, the gains will be treated as long-term capital gains and taxed at a flat rate of 10% or 20% after indexation.

Dividends from mutual funds are tax free, but MIPs have to pay dividend distribution tax. It may, therefore, be better to invest in the cumulative option. She could even consider arbitrage funds that give about 9-10% returns and enjoy the tax treatment given to equity funds.