What are Indexation benefits?

06 Feb, 20233 mins read
What are Indexation benefits?

Table Of Content

  • arrow Indexation in Mutual Funds.
  • arrow Benefits of Indexation
  • arrow Conclusion

Indexation is a process by which the cost of acquisition of an asset can be adjusted over a period of time in order to bring it to current prices after taking inflation into consideration. Indexation in mutual funds is a method of adjusting the cost of investment to account for inflation.

In this blog, we will discuss the benefits of indexation in mutual funds.

Quick Summary

Indexation in mutual funds adjusts cost of investment for inflation, reducing tax liability and providing inflation-adjusted returns for improved long-term performance and increased transparency. Indexation simplifies investment decision-making. Better investment outcomes likely for those choosing indexation-based mutual funds.

Indexation In Mutual Funds

Mutual fund investments generate Capital gains (Capital gain is a gain or profit realized by way of selling a property or other such asset/investment). These gains can either be Short Term or Long Term in nature, depending on the period for which these assets are held. Taxation is different for different types of mutual funds. However, the indexation benefit is available only for capital gains realized in Debt mutual funds.

A holding period of 36 months or more is considered long-term for Debt Funds. (For Equity mutual funds, long-term means a holding period of 12 months or more)

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Indexation Benefit In Mutual Funds

The concept of Indexation makes investment in Debt mutual funds a lucrative proposition. Some of the notable benefits include:-

Lower Tax Liability: Indexation helps reduce the tax liability of the investor by adjusting the cost of investment for inflation. This leads to a lower taxable amount, reducing the overall tax burden on the investor.

Inflation-Adjusted Returns: By adjusting the cost of investment for inflation, indexation helps investors earn inflation-adjusted returns. This means that the returns generated from the investment are not eroded by the effects of inflation, and the investor's real purchasing power is maintained.

Improved Long-Term Performance: Over the long term, the effects of inflation can significantly impact the returns generated by an investment. Indexation helps mitigate this impact and leads to the improved long-term performance of the investment.

Increased Transparency: Indexation makes it easier for investors to understand the true performance of their investment. By adjusting for inflation, investors can better assess the returns generated by their investments and make informed investment decisions. Simplifies Investment Decision Making: By reducing the impact of inflation, indexation simplifies investment decision-making for investors. Investors can focus on other factors, such as the quality of the portfolio and the fund manager's track record when evaluating their investment options.

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In conclusion, indexation offers several benefits to investors in mutual funds. It helps reduce tax liability, provides inflation-adjusted returns, leads to improved long-term performance, increases transparency, and simplifies investment decision-making. As a result, investors who choose indexation-based mutual funds are likely to benefit from better investment outcomes over the long term.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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