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Which mutual funds are suitable for long term?

One should invest in diversified equity funds or balanced funds.

Print Edition: June 11, 2009

Mutual Funds

Q. I want to invest Rs 20,000 in equity mutual funds. I am a long-term investor with a time horizon of 10-15 years. Which funds are suitable for me?
— Ranjeet Das

Considering that you have a fairly long-term perspective, you should invest in diversified equity funds or balanced funds. If you want to save income tax too, you should invest in equity-linked savings schemes (ELSS) of mutual funds that give tax benefits under Section 80C. You can invest up to Rs 1 lakh under this section.

ELSS funds are also diversified equity funds, except that the money cannot be withdrawn for three years from the date of investment. If you do not want to take too much risk, you could opt for balanced funds. These funds invest a part of their corpus, 35-50%, in debt instruments, which are not as volatile as stocks.

Please remember that your investments in mutual funds are subject to market risks. In the past six months, the markets have displayed acute volatility. Right now, they are buoyant, but if they fall, so will the value of your investment. Therefore, it is advisable not to invest at one go. Instead, put in small amounts (Rs 1,000-2,000) every month through systematic investment plans (SIPs) in two or three funds.

Loans

Q. My home loan rate has risen from 7.5% to 12.5%. Should I withdraw from my PPF account, which gives me 8% interest, to repay a part of the home loan? I also get tax benefit on the home loan.
— Surajeet Mishra

It is better to repay a high-cost loan by liquidating a low-yield investment. In your case, the PPF account gives 8% interest, while the home loan costs 12.5%. You stand to gain if you withdraw from your PPF account to repay the housing loan. Some people let their borrowing decisions be guided by the tax benefits available on home loan repayments. They forget that the tax gain is on the interest they pay on the loan. So it is advisable to go in for as short a repayment tenure as possible.

Stocks

Q. I have 400 shares of Satyam Computer Services. The new owner, Tech Mahindra, is set to come out with an open offer of Rs 58 a share. What happens if I do not accept the proposal? Will there be a market for my shares after the offer has ended?
— K.O. George

The new owner is required to make an open offer for 25% of the company’s shares. A lot of shareholders may take up the offer, but the company will keep only 25% shares and return the excess. Satyam shares will continue to be traded even after the open offer ends. Selling the shares back to the company will not be treated as a market transaction if the securities transaction tax is not paid. Hence, it will not be eligible for long-term capital gains exemption.

Tax

Q. I am a teacher in the school where my daughter is studying, so I do not have to pay her tuition fee. Will it be treated as a perk in my hands?
— Rekha Saxena

According to the Income Tax Act, if free facilities are provided to the children of an employee in an educational institution, there will be no perquisite value if the cost of such education or the value of benefit per child does not exceed Rs 1,000 a month.

Q. My brother wants to give me Rs 3 lakh as a gift for my daughter’s wedding, which is scheduled for next year. Is the amount taxable in my hands?
— Devika Shetty

The money gifted to you by your brother is not taxable in your hands as a gift from specified relatives is tax-free. These include father, mother, spouse, children, brother, sister and other close relatives. There is no upper limit on the monetary gifts that you can receive from close relatives. However, if a person not covered under the definition of specified relatives gifts you money, then tax exemption is only for amounts up to Rs 50,000. The excess amount will be taxable in your hands as income.

Though there is no specific requirement to mention the gift in your income-tax return, it is advisable to mention the fact by way of a short note in the tax computation sheet. As a documentary evidence of the gift, it would be best if you draw up a gift deed on a stamp paper and keep it in your records.

Q. I am a salaried employee. My mother, who is suffering from intestinal cancer, is undergoing naturopathy treatment, but has not undergone any surgery till date. Last year, I spent about Rs 80,000 on her treatment and did not claim any insurance benefit for the same. Am I entitled to tax relief under any section?
— Vipin Pillai

Yes, you can claim deduction under Section 80 DDB for the expenditure incurred on the medical treatment of your dependent mother. You can seek deduction under this section only if you have not claimed any medical reimbursement from your employer or any other insurance company for the same treatment. The maximum deduction allowed from the gross total income is restricted to Rs 40,000. In case your mother is a senior citizen, that is, above 65 years of age, the maximum deduction allowed is Rs 60,000.

In order to claim this deduction in your return, you shall have to submit Form 10-I from a specialist doctor working in a government hospital in India. This is to confirm the treatment of the disease and that it is eligible for deduction as per the specified list of diseases. Form 10-I does not require the doctor to certify the amount incurred as treatment cost. For this, you shall have to submit the hospital bills separately.

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