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Tax implications of Liquid Funds

I am a conservative investor and expectation from the Mutual Fund is just more than 10% CAGR. Keeping my Goal as 10% return with maximum security, I have invested an amount of Rs. 3 lacs in Liquid Fund and Rs. 2 lacs in Balanced fund. Every month an amount of Rs. 15,000 is getting transferred to my Savings account and the same amount is getting invested by SIP mode to two different funds ELSS and Balanced Fund (Different from the one where Rs. 2 lacs invested in lump sum). I would like to know the Income Tax or Capital Gains Tax implications for the amount kept and transferred from Liquid Fund. I will withdraw the entire amount of Lump sum Balanced fund at least after one year at an opportune moment,which will not have any tax burden I believe. The entire Balanced Fund will be transferred again to Liquid fund to continue the SIPs for 3 years. Please provide me the information I requested for?

Sep 26, 2016 by Partha Sarathi Bhattacharya,   |   Mutual Fund

I think the way you are investing in mutual funds is a bit complicated. You should have kept it simple.

Currently, you have invested in liquid funds and then redeeming Rs. 15,000 to fund your two SIPs in balanced and ELSS funds. Instead of that you could have simply put the amount in respective liquid funds of AMCs in which you are doing the two SIPs and then opted for STP. In that case there would not have been any need for redeeming the liquid fund and sending the proceeds to your bank account.

For example – Suppose, you are doing SIP in SBI Balanced Fund from the bank account where you are sending your liquid fund redemption proceeds now. You could have invested in SBI Liquid fund and done STP to SBI Balanced Fund on a fixed date or weekly basis. By doing this you could have eliminated the process of redeeming the liquid fund every month.

You have written about redeeming balanced funds after one year at an opportune moment. Please note that to invest in balanced funds you need to have an investment horizon of 3 years or more. Therefore, your idea of redeeming the balanced funds and then again start the investment loop – invest in liquid, redeem and send to bank account and then do SIP again – is complicated and may not yield the desired results. Instead of that, if you let your balanced funds and ELSS remain invested for medium to long term, chances are that you will get better returns than your expectation and also benefit by compounding.

Mutual funds investments in equity and balanced funds are for the long haul and churning and shifting or switching more often from one fund to another will not only complicate the process but shall also affect the returns.

With regards to liquid fund investments and it taxation do read these –




If you continue to remain invested with your ELSS and Balanced fund investments for 3-5 years horizon, you can expect more than your expected return of 10%!

Hope you find the above helpful. Thanks

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