Why invest in mutual funds?/ What are the benefits of mutual funds?
Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual fund include the following:-
- Accessibility
Mutual funds units are easy to buy.
- Liquidity
Mutual fund unit holders can convert their units into cash on any working day. They will promptly receive the current value of their investment. Investors do not have to find a buyer; the fund buys back (redeems) the units.
- Diversification
By investing the pool of unit holders’ money across number of securities, a mutual fund diversifies its holdings. A diversified portfolio reduces the investors’ risk. It would be difficult for an average investor to buy varied securities to achieve the same level of diversification as is available with investment in mutual fund.
- Professional Management
Asset Management Company evaluates all the opportunities that arises in the market, carefully examines them and then takes decision for investing the mutual fund’s money whereas it is not an easy task for an individual and even for corporate company if investing is not their core business.
According to Section 62 of the Income Tax Ordinance, 2001, a “resident’ tax payer other than a company, is entitled to tax credit on investment in new shares offered to public by a public company listed on a stock exchange in Pakistan. This tax credit is available on the lower of (a) the amount of actual Cost of Investment (b) 20% of Taxable Income for the tax year or (c) Rs. 1 million. The tax credit availed on acquisition of such shares will be need to be paid back, if such shares are disposed off within 24 months of the date of acquisition. Units of Mutual Funds are covered under the definition of shares as per Income Tax Ordinance, 2001. In case of self employed individuals, the maximum tax credit of Rs. 220,417 is available on annual taxable income of Rs. 6 million or more at an average tax rate of 22% whereas Rs. 203,571 is the maximum tax credit available on annual taxable income of Rs. 7million or more at an average tax rate of 20%).
Self-employed Individuals: | |||||
---|---|---|---|---|---|
Annual Taxable Income (Upper Limits) | Average Rate of Tax [as per formula given in Section 62(2)] | Gross Tax Payable [as per rates given in First Schedule] | Amount of Investment eligible for tax credit | Tax Credit available as per Section 62(2) | Tax Saving as a % of Investment (i) |
A | B (%) | C | D = A*20% | (A/B)*C | |
750,000 | 5% | 35,000 | 150,000 | 7,000 | 4.7% |
1,500,000 | 10% | 147,500 | 300,000 | 29,500 | 9.8% |
2,500,000 | 14% | 347,500 | 500,000 | 69,500 | 13.9% |
4,000,000 | 18% | 722,500 | 800,000 | 144,500 | 18.1% |
6,000,000 | 22% | 1,322,500 | *1,200,000 | 220,417 | 22.0% |
*Note: Maximum amount of investment that is available for tax credit is restricted to Rs. 1 million. |
Salaried Individuals: | |||||
---|---|---|---|---|---|
Annual Taxable Income (Upper Limits) | Average Rate of Tax [as per formula given in Section 62(2)] | Gross Tax Payable [as per rates given in First Schedule] | Amount of Investment eligible for tax credit | Tax Credit available as per Section 62(2) | Tax Saving as a % of Investment (i) |
A | B (%) | C | D = A*20% | (A/B)*C | |
750,000 | 2% | 17,500 | 150,000 | 3,500 | 2.3% |
1,400,000 | 6% | 82,500 | 280,000 | 16,500 | 5.9% |
1,500,000 | 6% | 95,000 | 300,000 | 19,000 | 6.3% |
1,800,000 | 8% | 140,000 | 360,000 | 28,000 | 7.8% |
2,500,000 | 11% | 262,500 | 500,000 | 52,500 | 10.5% |
3,000,000 | 12% | 362,500 | 600,000 | 72,500 | 12.1% |
3,500,000 | 14% | 475,000 | 700,000 | 95,000 | 13.6% |
4,000,000 | 15% | 600,000 | 800,000 | 120,000 | 15.0% |
7,000,000 | 20% | 1,425,000 | *1,400,000 | 203,571 | 20.4% |
*Note: Maximum amount of investment that is available for tax credit is restricted to Rs. 1 million. |
For further details consult your Income Tax Advisor.