Ultra Short-Term Fund Vs Bank FD: Where should I invest ₹7 lakh for 18 months?

-Arun

The investment decision mainly depends on your income tax slab. Assuming you are in the highest slab of 20% or 30%, then you should not invest your hard earned money in bank fixed deposits as even after tax returns will not beat inflation. It would be a better option to invest your surplus funds in “Ultra Short Duration Fund” of a reputed AMC. Due to the tax efficient structure of the said fund, your returns will be better as compared to the post-tax interest from the bank. Fixed deposit. Also, you will enjoy the facility of “anytime liquidity” which is not the case with bank FDs (without penalty on interest income). However, if your tax liability is zero, you can consider investing in a suitable bank FD or higher rated corporate FD i.e. Bajaj Finance, which can give slightly higher returns as compared to bank FDs.

I have several investments in various mutual fund schemes, which include debt schemes as well as equity schemes. I have opted for dividend option in all the schemes, as I need regular income. What are the implications of tax on dividend income as I understand some amendments to it?

-Name withheld on request

The treatment of dividend income from various mutual fund schemes is quite simple as all the income tax liabilities thereon are taken care of by the Asset Management Company (AMC) itself. In other words, any dividend income you receive in your bank account from time to time is already tax compliant and you do not have to pay any further income tax on it. You should include the net dividend amount received under the head “Income from other sources” in your income tax return and claim it to be exempt from income tax as the tax has already been paid by the mutual fund.

However, it is not advisable to opt for dividend option for regular cash flow requirements. To meet regular income requirements one can opt for SWP option from debt funds (banking and PSU and corporate bonds) as it is more tax efficient in nature. While opting for SWP, the annual rate of withdrawal should be less than the net YTM of debt funds to avoid erosion of the invested capital.

Rajiv Bajaj, Chairman and MD, Bajaj Capital Limited answered the question.