Emergency Fund
I  have emergency funds parked in liquid schemes and plan to use these only in case of extreme emergency. What are the tax implications of this fund and the withdrawal amount in case of any emergency? Should I keep holding this fund or should I convert it to a bank FD?
 
MLF’s Reply: Capital gains on mutual fund units are calculated on a ‘first-in-first-out’ (FIFO) basis. Therefore, on units purchased three years ago or more, long-term capital gains will be taxed at a rate of 20% with indexation (Finance Bill 2014). 
 
Capital gains on units held for less than three years will be taxed as per your income-tax bracket.
 
Since the purpose of this investment is for an emergency, a bank FD may not serve the purpose, as you may end up withdrawing your investment before maturity and may have to pay for premature withdrawal.
 
The tax-implication (short-term) will be the same for both the financial investments. However, for units held for more than three years, you may have to pay lower tax on the liquid scheme because of the indexation benefit.

User

Best Time To Sell
I s it advisable to redeem units if some scheme is suddenly giving a higher return than the average return as per its historic pattern, let’s say, over a period of two years?
 
MLF’s Reply: There may be several ways to decide when to sell and when to hold. As the market has hit all-time highs in recent months, the recent returns would be higher than the average returns. However, if you look at the valuations, it is not as high as that seen in 2007 and in 2010. There are multiple strategies one can use to time the buying or selling. Choose a method that you have tested and one that would have worked over multiple periods.
 
You should consider other factors as well, such as your investment horizon or goals, your existing allocation to equity/debt, scheme performance, changes in the fundamental attributes of the scheme, expense ratio, portfolio composition, etc.

User

Best Mutual Funds
Which is the best mutual fund equity & debt plan for 1.5 years’ horizon?
 
MLF’s Reply: There are many factors that go into selecting a scheme. One needs to look for consistent performance, low expense ratio, portfolio composition, etc.
 
Ideally, we do not suggest investing in equity investments for a short term like 1.5 years. Equity investments for a short period can be risky. A safer option would be to choose a short-term debt mutual fund scheme. If you are looking for safe debt schemes, you could opt for low-risk short-term debt schemes.

User

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