HOW TO INVEST IN EQUITY AND TAXATION RULES FOR THESE INVESTMENTS
1. 3 Ways to Invest in Equities
Stocks, mutual funds and shares all have their advantages but before deciding to invest in equities and choosing the preferred route, an investor must ascertain a few things such as the choice of company, the price at which he/she should invest, the investible amount, among other things. He/she can then pick from among the following three ways of investing in equity.
2. Investing directly in shares
For investing in shares, you need to open a demat account and for trading, ie, buying/selling the shares on the exchange using the broker’s platform, it is necessary to open a trading account with the broker too. You should also conduct thorough research on the company you wish to invest in. A bank account and KYC compliance are also mandatory and such bank account must be linked to your demat and trading accounts.
3. Equity mutual fund
A mutual fund is an investment vehicle that invests in different instruments like equity shares, bonds or a mix of the two. Mutual funds help you diversify easily with a very small investment. There are various types of mutual funds in the market, some are based on the market cap of the companies they invest in, namely- large, mid, small and multi cap and then there are sectoral or theme-based funds as well.
A prerequisite to investing in mutual funds is that you must complete KYC requirements and fill up the application form of the fund house, indicating the desired scheme. Once the application is accepted, units are allotted to you. The portfolio value of this investment can be ascertained at the end of each business day by multiplying the units with the NAV.
4. Portfolio management service
Investors who wish to invest a higher ticket size, ie. those who can invest significantly large amounts (above Rs 50 lakh) in the equity markets have the option to approach portfolio managers. Portfolio management service (PMS) is provided by professional money managers to informed investors and can be tailored to meet specific investment objectives. An agreement is entered between the investor and the portfolio manager which spells out the objectives, risks, securities that the latter will invest in as well as the costs and portfolio management charges. The beneficial ownership of shares invested by the portfolio manager remains with the investor in his demat account and hence the investor receives dividends/bonus allotments in his account.
5. Taxability of these options
When you sell an equity share, listed on a recognised stock exchange, within one year from the date of purchase, you earn short-term capital gains. These are taxed at the rate of 15%. Conversely, if you sell such share after a year from the date of purchase, you earn long-term capital gains and these, in excess of Rs 1 lakh, are taxable at the rate of 10% without the benefit of indexation. Capital gains tax on mutual funds is identical to that of shares. It is applicable at time of redemption and not when the fund manager buys or sells securities within the fund portfolio but the same tenure
Capital gains tax on shares invested by the portfolio manager is applicable to the investor at the time of the transaction effected by the former.
Customisation of the portfolio is possible with a PMS at a higher cost vis a vis an MF scheme which has a standard portfolio in line with the investment objective of the scheme.
Unlike mutual funds, the investors’ assets here are not pooled into one large fund. Portfolio Management Service (PMS) uses a separate bank account and demat account for each client.
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