Here are five things you should do, once you have made your first investment:
1.Track your funds
You should track the performance of your funds, at least once every quarter. This will give you an idea of where the fund is headed and how it is shaping up against peers. This does not mean that you should exit your fund at the first instance of underperformance. Mutual Funds are volatile instruments and no fund ranks at the top, all the time.
For instance Axis Midcap Fund ranks in the fourth quartile (bottom 25%) of all funds in its category if you look at five year returns. The fund performance picked up in more recent years and on a three-year basis, the fund’s ranking moves up to the third quartile. There was another pick up in the past year and the fund has moved up to the top quartile based on one year returns. Something similar may have happened to erstwhile outperforming funds but in the reverse direction.
2. Block out the noise
Media channels, newspapers and even know-it-all colleagues at work will tell you why ABC mutual fund is better than yours or rave about some success story of doubling their money in 3 years. Most of this is noise and will simply push you off track.
A leading magazine recently ran an advertisement stating the 20%+ returns achieved by its chosen funds in the ‘first’, ‘third’ and ‘fifth’ year after launch. Only savvy readers noticed that some of the funds had been launched as far back 1995. In other words, the magazine was referring readers to returns made in 1998 and 2000!
3. Don’t worry about endless mutual fund emails
Emails will subjects such as ‘Change in Total Expense Ratio’ and ‘Mutual Fund Portfolio for the Month’ will flood your inbox. This is a result of regulatory requirements. Don’t worry about trying to figure out what each one means. You can have a look at them when you are doing your quarterly or biannual review. Otherwise you can simply look up these statistics on the Paisabazaar website at a time of your convenience.
4. Maintain your records well
Your purchase date and NAV are important for both calculating your returns in the fund and for calculating your tax. If you have chosen the dividend payout option, this will be credited to your bank account and will be deducted from the fund’s NAV. In such as a case your return in the fund will be more than the fund’s NAV growth. Only tracking your funds and dividends properly will give you an idea of this difference. Investing through Paisabazaar will automatically keep track of these investments.
5. Exit when required
If the fund continues to underperform on a sustained basis, check why this is happening. Is it a change of fund manager or is it a single company in the portfolio that has gone south? If the problem looks temporary, you don’t have to head for the exit doors. For instance, mutual funds holding Manpasand Beverages were badly hit when the company’s auditor resigned. However if the holding is fairly low and the fund manager is taking remedial steps, you may not want to exit right away.
If the reason for the underperformance does not look temporary, you can exit. In such a case, check the exit load and tax applicable.
Capital Gains Tax on Mutual Funds
| Category | Short Term Capital Gains | Long Term Capital Gains |
| Equity | 15% | 10% |
| Debt | Slab Rate (which could be 30%) | 20% with indexation |
*Holding period for LTCG is one year for equity funds and three years for debt funds.
Equity funds typically have exit loads up to one year. The capital gains tax on them is as shown above. It is 15% for exits within one year and 10% for exits after one year. You also get a tax exempt capital gains allowance of Rs 1 lakh per year. Debt funds have a tax at slab rate (which could be as high as 30%) for exits within 3 years and 20% with indexation thereafter.