MF Corner: Experts discuss how to optimise tax on mutual fund and future sources of alpha generation

In this episode of Mutual Fund Corner, Joydeep Sen, Corporate Trainer & Author, talks about the taxation in mutual fund investments and how to optimise them. Also Kushal Bhagi, co-founder of Tortuga Wealth Managers, will talk about the future sources of alpha generation for mutual fund investments.

On taxation for mutual fund investments, Sen said, “For taxation purposes on mutual fund schemes, there are two options one is called the dividend and one is called growth. Now, a dividend option is now called IDCW as an income distribution from capital withdrawal plan. Now, as you rightly pointed out, the dividend or the IDCW option is now taxable in your hands, which means if you are in 30 percent bracket, you have to pay tax at 30 percent plus surcharge plus cess.”

“Now, there is another option called a growth option, which is entirely taxable in your hands with different taxation rules. So, there is something for the short term something for the long term. In equity funds, long-term is one year as a holding period of more than one year, debt funds long term is three years, which is a holding period of more than three years and the taxation rule in equity funds if you hold for more than one year, you pay tax at 10 percent and less than one year it is 15 percent plus surcharge and cess."

"Debt funds you hold for three years you pay long-term taxation with the benefit of indexation the rate is 20 percent, but with the benefit of indexation, the effective tax rate comes down significant like something like 5, 6 - 7 percent or thereabouts.”

On future sources of alpha generation, Bhagi said, “Once you start investing, you realise that it is emotionally really hard to remain 100 percent invested all the time. The one thing that people don't like to do is they don't like to lose money. If you are going to be invested over a period of time, you are going to lose money from time to time and at times, you are going to lose massive amounts."

"So what we have typically seen happens, and this is just human emotion, no matter where you are in the world, when you can't see the bloodshed anymore when you can't see the market destroy your wealth further, your investment approach can be pretty haphazard, because you are buying at the wrong time selling at the wrong time and as a result, you do end up earning lesser returns, then the underlying fund itself."

He said achieving market returns over a long period of time is no easy job, it is a feat in itself, and a pat on the back for those investors who have been able to do it because spending time in the market is the most amazing skill set to possess in the world of investing.