Financial Cocktail Samosas: Bitesized money morsels for YOU, 09/12/2020

Many of you may not be aware of how mutual fund companies earn profits, pay its expenses or pay to distributors. Obviously, it’s a business so all these come from customers or clients; in this case it is you—the investors.

To know how much a mutual fund scheme charges from you, you have to understand the expenses ratio. It represents the annual fund operating expenses of a scheme such as administration, management, advertising related expenses and so on. Typically, the expense ratio remains between 1% to 2.25% of AUM in case of equity-oriented schemes and less than 1% in case of debt schemes. An expense ratio of 1% per annum means that each year 1% of the fund’s total assets will be used to cover expenses. Information on expense ratio that may be applicable to a scheme is mentioned in the offer document and are easily available on the internet at various places.

One thing why mutual funds fit into most investment portfolios is because of the flexibility they provide. Almost all the mutual fund schemes come in two types of plans – growth and dividend. The growth option gives returns in the form of rising values of mutual fund units. Whereas, under the dividend option returns are paid via periodic dividends.

So, if you are investing keeping in mind a long-term goal, ideally you should choose a growth option, where your gains remain invested and keep growing. In case you feel happy with something coming to you periodically from your mutual fund investments, you can choose a dividend option. However, please note that the dividends are neither promised in value nor in frequency, and hence can never substitute for any regular income. In fact, every time a dividend is paid, the value of your fund goes down because it is taken out from the fund value itself.

Typically, every investor should choose the growth option to invest. In case regular income is required, Systematic Withdrawal Plan (SWP) is a much better and predictable way rather than Dividend option.

Many of you might not have filed your income tax return (ITR) yet. But instead of waiting till the last date, there are merits to file it at the earliest. For instance, if there is any tax to be paid on your part, the income tax department will charge you interest on the due taxes till you pay them. Even if you don’t have any tax dues, you may still have to pay a penalty if you delay filing your ITR beyond the last filing date. On the other hand, filing a return at the earliest is also better if you have tax refunds to claim since refunds typically work on first-come-first-serve basis unless the refund amount is very large, in which case there could be some more delay.

ITR also comes handy when you apply for certain types of loans like home loans, personal loans and so on. In some cases, you may need to provide ITR while applying for the visa of certain countries.