BASICS OF INVESTING

Your returns as an investor depend not only on the performance delivered by your chosen asset class but also by
the taxes and expenses that you incur in the transaction. Two factors that an investor must consider before
redeeming are exit loads and capital gains tax as per Income Tax Act, 1961.
1.

Exit load: Exit Load is an amount charged by mutual fund schemes on redemption of investments before
a specified period. It is charged as a percentage of the Net Asset Value (NAV) as on the date of
redemption. Such exit load could range from 1% to even more. For example, lets say a scheme charges
an exit load of 1% on redemption of investment within one year. Suppose the NAV of the scheme is `100
on the date of your redemption, you will get only `99 on your units after application of exit load, if
redeemed within 1 year. Exit Load is imposed in order to discourage short term investing.

2.

Taxation: All market related investment products are subject to capital gains tax owing to appreciation in
their prices at the time of sale/redemption by an investor. Depending on the holding period, they are
classified as long term or short term as depicted below. Long term capital gains typically enjoy lower tax
than short term capital gains.

Short term capital gains

Long term capital gains

Tax rate

Equity oriented mutual fund

schemes

Period
Up to
1 year

Other than equity oriented

schemes or liquid schemes

Up to
3 years

Gains added to taxable income

and taxed at applicable slab rate

Period
More than
1 year

15%

Tax rate
Nil

More than 20% after providing

indexation
3 years

Note: Surcharge at 12% to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore. Education Cess
at 3% will continue to apply on tax plus surcharge. Illustration valid for domestic (resident) investor.

CUMULATIVE IMPACT OF EXIT LOAD & CAPITAL GAINS TAX ON RETURNS

(A) Equity Mutual Fund :
The following illustration shows how investors returns are impacted by exit load and capital gains tax. Let us take
the example of Mr Niveshak who invests Rs.1 lakh in an equity mutual fund scheme. Eleven months later, let us
say the investment value has increased to Rs 115,000. Mr Niveshak planned redeeming his investments
considering the appreciation.
Unfortunately, returns from the Scheme reduced after calculating the impact post exit load (assuming exit load
period of 1 year) and short term capital gains tax. Mr Niveshaks investment return of 15% reduced to 11.71%
owing to the impact of exit load and taxation. This loss can be minimised by holding investments for the long
term and if such favourable market conditions persist. Had the investor held on to his investments for more than a
year his returns would have been 15%. (Assuming no change in market condition).

ILLUSTRATION of Mr Niveshaks investment gains

Early Exit
S.N.
A
B
C
D
E
F
G
H
I

Category
Amount invested
Gross Return
Amount Before Exit Load
Exit Load Applicable
Amount Post Exit Load
STCG Rate
STCG
Net Amount After Tax
Net Investment return

FORMULAE :

E = C x (100%-D),

1 year or Below
` 1,00,000
15%
` 1,15,000
1%
` 1,13,850
15.45%
` 2,140
` 1,11,710
11.71%
G = F x (E-A),

Long Term Investing

Above 1 year
` 1,00,000
15%
` 1,15,000
Not Applicable
` 1,15,000
Long Term - Nill
Not Applicable
` 1,15,000
15.00%
H = E G,

I = (H-A)/A

Short Term Capital Gains Tax rate is as per tax slab applicable for the financial year 2016. For illustrative purpose to explain the impact of exit
load and capital gains tax and benefits of investing for long term. There is no assurance or guarantee of returns on investments in mutual
funds. Investments in mutual funds are subject to market and various other risks and it is advisable to consult with financial advisor before
investing. Securities Transaction tax has been ignored for the purpose of illustration. Illustration valid for domestic (resident) investor

(B) Non-Equity Mutual Fund (Other than liquid schemes)

Lets say Mr. Niveshak invests Rs.1 lakh in a debt mutual fund scheme. One year later, let us say the investment
value has increased by 12% CAGR (Compounded annual growth rate). Mr Niveshak considered redeeming his
investments owing to good returns from the Scheme. Unfortunately, returns from the Scheme reduced from 12%
to 7.52% owing to the impact of exit load and taxation. This loss can be minimised by holding investments for the
long term and if such favourable market conditions persist.
Now, if Mr Niveshak had held on to his investments for the long term (more than 3 years), he would not have
incurred exit load (assuming exit load period of 15 month) and he would have paid lower capital gains tax post
indexation. In addition, long term investing could be beneficial with an opportunity for increase in scheme NAV.
Assuming investments held for just above 3 years and a CAGR of 12%, his Net investment return would be
11.46%.

ILLUSTRATION of Mr Niveshaks investment gains

Early Exit
S.N.
A
B
C
D
E
F
G
H
I

Long Term Investing

Category
(say after 12 months)
Amount Invested
1,00,000
Gross return
(CAGR 12%)
12.00%
Amount Before Exit Load
1,12,000
Exit Load Applicable
1%
Amount Post Exit Load
1,10,880
Tax Rate on Gains
30.90%
Tax Applicable
3,362
Net Amount After Tax
1,07,518
Net Return (CAGR)
7.52%

FORMULAE :

E = C x (100%-D),

G = F x (E-A),

(Say above 3 years)

1,00,000
40.49%
1,40,492
Not Applicable
1,40,492
20% with Indexation*
2,009
1,38,483
11.46%

H = E G,

I = (H-A)/A

* Assuming investment in FY 11-12 and Redemption in FY 14-15

Cost Inflation Index = 785 for FY 11-12 and 1024 for FY 14-15
Indexed Cost of Capital = (1024/785)*100000 = Rs 130446
Tax on Gains = (140492-130446)*20% = Rs 2009
^Short Term Capital Gains Tax rate is as per tax slab applicable for the financial year 2016. This is assuming the investor
falls in the highest tax slab. For illustrative purpose to explain the impact of exit load and capital gains tax and benefits of
investing for long term. There is no assurance or guarantee of returns on investments in mutual funds. Investments in
mutual funds are subject to market and various other risks and it is advisable to consult with financial advisor before
investing. Illustration valid for domestic (resident) investor.

INVESTING FOR THE LONG TERM IS BENEFICIAL

Mutual fund investments are subject to market risks, read all scheme related documents carefully.