The Truth About Rainy Day Funds

In the story about the ant and the grasshopper, the ant was considered smart because he saved all his sugar for a showery day, while the grasshopper paid the price for squandering away his time. Unfortunately even among the most diligent of us humans, whether your personality is like the ant’s or grasshopper ‘s, if you’re earning an income, you are going to have to save a part of it for the state as tax. This can get rather, er, taxing over the long term, so it’s still good to look for ways to park your funds in order to obtain a tax break. One of the easiest and safest methods is with mutual funds. A mutual fund is an investment product created by a fund company. Investors buy units or actions of a fund and the money collected goes into buying securities. There are various types of mutual funds like stock, bond, hybrid, and equity funds based on what it’s invested in. A fund has a net asset value or NAV which is the level of a unit part of the mutual fund in the market. Investors generally pay a premium amount at regular intervals till the period of the fund matures. When the return of it is more than the amount it was bought at, this is called the capital gain which is generally taxed in investments.

Usually when investing into a mutual fund a person purchases units within that fund. These units act like shares within the fund as well as the number of units purchased will decide the rate of returns the investor is entitled to. Each unit has its own cost which can increase or decrease based on the kind of fund on market conditions. This cost is referred to as the net asset value or the mutual fund’s NAV.

The Whole Rainy Day Fund Enchilada

As discussed, while investing in mutual funds can be safer than investing directly into the share market, it is even important to arm yourself with all the information available. Also, speak to experts to take a decision on what your investment goals are and which funds are better suited for you to meet these goals.

Usually capital gains are what are taxable for investors. There are exceptions however with it. A short-term debt fund that is redeemed within a year is taxable. However if held for more than a year, the capital gains tax is significantly reduced. Similarly, an equity fund held during more than a year, the tax is seriously reduced, and in some instances may be negligible. Dividends from both equity and debt funds are bereft of taxation, on the other hand.

Rainy Day Fund Conundrum

Some things to look out for when you are ready to make sure you are investing in a tax saving fund is to examine the kind of fund you’re investing in I.e. whether it’s equity or debt, the term you plan to keep the fund I.e short-term or more than a year, whether the income is dividend or capital gains. Some capital gains may be reinvested to save on tax, so make sure to check on this. It’s worthwhile to do some investigations into the top mutual funds to invest in and have a study the fine print. The tax benefits will commonly be mentioned so make sure to compare them to arrive at what suits you best.