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Most profitable mutual fund for a year

If you have any mutual fund queries, message on ET Mutual Funds on Facebook. We will get it answered by our panel of experts.

ET Online|
Updated: Nov 06, 2019, 09.25 AM IST
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I wanted to know which mutual fund would be the most profitable to invest for one year.
-Karen Fernandes

Focusing on profits is a wrong way to approach your mutual fund investments. You should always choose mutual funds based on your financial goals, investment horizon, and risk profile. Ignoring these crucial factors and focusing only on profits would lead you to schemes that are not suitable for you. When an investor chooses a scheme that is not in line with his goals, horizon, or risk profile, we have noticed that the investor would often stop or abandon the investment during a bad phase in the market. For example, if a conservative investor chooses a small cap mutual fund based on the stupendous returns offered by them, s/he would find it difficult to continue with the scheme when the scheme starts making huge loses and faces lots of volatility.

If you are investing for a year, the most important thing is to preserve your capital. When you are investing for a short period, you cannot take risks because you don’t have time to make up for the losses. That is why you should stick to debt mutual funds and bank deposits to take care of your short-term goals. Again, you should choose debt mutual funds based on your horizon. For example, if you are investing for a few weeks, you should choose a liquid mutual fund. If you are investing for a few months or up to a year, you may choose an ultra short duration scheme. If you are investing for a few years, you may opt for a short duration scheme.

Some investors, especially those who fall in the highest income tax slab, prefer investing in arbitrage mutual funds. Arbitrage funds, as the name suggests, exploit the arbitrage opportunities (or price differences) available in the cash and derivative markets. These schemes are considered as equity mutual funds for the purpose of taxation. That means if arbitrage schemes are sold before a year, the short term capital gains will be taxed at 15 per cent. Debt mutual funds, if sold before three years, attract short term capital gains tax at a higher rate. The gains are added to the income and taxed as per the income tax slab applicable to the investor. That means the investors in the highest tax slab would pay short term capital gains tax at 30 per cent plus surcharge.

If you are new to mutual funds, you should seek the help of a mutual fund advisor.
(If you have any mutual fund queries, message us on ET Mutual Funds on Facebook. We will get it answered by our panel of experts.)
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