Consider these 9 things before investing in mutual funds!
What is the right way to invest in mutual funds? How do mutual funds work? What kind of risk is involved? Which fund is right for whom? What things should be kept in mind before investing? Watch this video to know-
Without infrastructural development, economic progress is impossible. Companies working in energy, power, metals, and real estate are considered part of the infrastructure category. From a mutual fund perspective, infrastructure funds are further classified under sectoral funds that invest in a specific industry sector. So, an infrastructure mutual fund is a type of sectoral fund that will invest in companies that are involved in the country’s infrastructure development. The value research data shows that the infrastructure funds have given a return of 78.07%, 13.49%, and 12.65% over one, three, and five years.
Taxation aspect?
As sector funds come under equity funds, infrastructure funds are taxed similarly to other equity funds. Dividends paid by sectoral infrastructure funds are added to your overall income and taxed at your regular income tax rate. This is referred to as the classical method of dividend taxation.
If you redeem your units during a one-year holding period, you will realise short-term capital gains and are taxed at a rate of 15%. Long-term capital gains are realised when you sell your fund units after a one-year holding period. Capital gains of up to Rs 1 lakh per year are tax-free. However, long-term capital gains above Rs 1 lakh per year are taxed at 10%.
Should you invest?
The infrastructure funds being a sectoral fund will inherently carry the risk of less diversity than a well-diversified fund. It’s like picking eggs from other baskets and putting in one.
“Aggressive investors, if has the knowledge in the infrastructure sector, and want to ride the wave of development, can look at it. But ideally, after they have done all your allocation and planning. Not more than 5 to 10% of your allocation is suggested. Have a look at past performance, be sure of opportunities ahead and then decide. Investing via systematic investment plans in these funds is also a good option to take care of the volatility,” Sandeep Bhosle VP- Customer Interaction, Quantum AMC.
Going forward
Infrastructure funds rely on the country’s economic development. Here, the reliance on government spending, liquidity, and borrowing costs is considerable, which might have a negative impact on these funds. These funds may be cyclical, and investors should be aware of the exit dates.
Sectoral funds are among the riskiest types of mutual funds. Since these funds invest exclusively in one area, they lack sector diversity, which is a primary cause for their high risk. If the sector falls, all of the portfolio’s equities will collapse, with nothing to buffer the loss. (See the returns table).
“Infrastructure funds may have different relativity in these covid times, given the of health and safety of individuals is the focus. A lot depends upon how the economy picks up and the government spends as it has planned. Most importantly — investors need to have patience with infrastructure funds. In a country like ours, infrastructure is/can be postponed due to various reasons, but it cannot be avoided. That’s the crux for these funds,” explained Bhosle.