Banking is considered to be the vein of the economy. Banking and the development of the economy are linked because they are interdependent. It is widely anticipated that the Indian economy is expected to perform well in the coming years; So needless to say that banking as a place will also benefit.
With many restrictions/limitations on cash transactions under Indian tax laws, fast transactions are done through banking channels. Moreover, the introduction of core banking system in Indian post offices is likely to be a game changer for lakhs of post office account holders who will now be able to access the efficiency of the banking system.
Why Invest Through Index Funds?
Direct equity investment is not an easy task as it involves choosing the right company, continuously monitoring its earnings and other developments related to the company. Since all these pose a challenge for a lay investor, they can consider investing in index funds or diversified equity mutual fund schemes.
Like other open-ended equity mutual fund schemes, an index fund offers you the flexibility to invest in a lump sum or in a systematic manner through a Systematic Investment Plan (SIP). Some of these boosters also offer innovative features like STP Step-up SIP and Systematic Withdrawal Plan (SWP). Therefore, an index fund comes in handy for most investors.
Index funds by design are built to mimic the underlying index components. The advantage of this arrangement is that the index provider periodically reviews these components to remove any non-performing stocks in it. Also, there is no need for a demat account. In short, even with a very small investment amount, an investor can invest in multiple companies at a time. Last but not least, the expenses associated with index funds are very low.
What is Nifty Bank Index and how to invest in it?
The NSE-backed Nifty Bank Index comprises 12 top liquid and well-capitalized banks, spread across the private and public sector. The index includes SBI, HDFC Bank, ICICI Bank to name a few. Apart from these, the index also includes new age banks like IDFC First Bank and AU Small Finance Bank. The components of this index are reviewed on a half yearly basis thus eliminating the task of an investor to review individual stocks. In terms of performance, the Nifty Bank index has outperformed both the Nifty 50 and Nifty 500 indexes in six of the last 10 years.
So, if you are an investor looking to invest in banking names, investing in this index is an optimal solution. Recently, one of the leading mutual fund houses – ICICI Prudential Mutual Fund – has announced an index fund offering based on this index, for which the NFO is open till February 24, 2022.
Taxation on Investing in Index Funds
Since, it is an equity oriented index fund, the profit made on this investment is eligible for concessional tax treatment under income tax laws. Profits made on redemption within 12 months are treated as short term capital gains and will be taxed at the same rate of 15%. If the redemption is made after holding for more than 12 months, there is no tax liability on the initial long-term capital gain of Rs. 1 lakh and the balance is taxed at a flat concessional rate of 10%. The initial long-term capital gain of Rs 1 lakh would include all long-term capital gains of direct listed shares as well as all equity oriented schemes.
Balwant Jain is a Tax and Investment Specialist and can be contacted at jainbalwant@gmail.com and @jainbalwant on Twitter.
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