MUTUAL FUND
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What is mutual fund?
A mutual fund is a pool of money managed by a professional Fund Manager.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.
Next, let us understand what is “Net Asset Value” or NAV. Just like an equity share has a traded price, a mutual fund unit has Net Asset Value per Unit. The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges). NAV per Unit represents the market value of all the Units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.
TYPE OF MUTUAL FUND SCHEMES
Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or passively managed.
OPEN-ENDED AND CLOSED-END FUNDS
An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business throughout the year, (akin to a savings bank account, wherein one may deposit and withdraw money every day). An open ended scheme is perpetual and does not have any maturity date.
A closed-end fund is open for subscription only during the initial offer period and has a specified tenor and fixed maturity date (akin to a fixed term deposit). Units of Closed-end funds can be redeemed only on maturity (i.e., pre-mature redemption is not permitted). Hence, the Units of a closed-end fund are compulsorily listed on a stock exchange after the new fund offer, and are traded on the stock exchange just like other stocks, so that investors seeking to exit the scheme before maturity may sell their Units on the exchange.
ACTIVELY MANAGED AND PASSIVELY MANAGED FUNDS
An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and continuously monitors the fund’s portfolio , deciding on which stocks to buy/sell/hold and when, using his professional judgement, backed by analytical research. In an active fund, the fund manager’s aim is to generate maximum returns and out-perform the scheme’s bench mark
A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund , the fund manager remains inactive or passive inasmuch as, she does not use her judgement or discretion to decide as to which stocks to buy/sell/hold , but simply replicates / tracks the scheme’s benchmark index in exactly the same proportion. Examples of Index funds are an Index Fund and all Exchange Traded Funds.
Benefits of investing in a mutual fund?
As an investor, you would like to get maximum returns on your investments, but you may not have the time to continuously study the stock market to keep track of them. You need a lot of time and knowledge to decide what to buy or when to sell. A lot of people take a chance and speculate, some get lucky, most don t. This is where mutual funds come in. Mutual funds offer you the following advantages
Diversification.
The cliché, “don’t put all your eggs in one basket” really applies to the concept of intelligent investing.
Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.
More Choice.
Mutual funds offer a variety of schemes that will suit your needs over a lifetime
When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.
Affordability.
As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes
which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.
Professional Management.
Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies.
They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.
Liquidity.
With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares.
Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.
Transparency.
The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another.
As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund’s holdings and the fund manager’s strategy.
Regulations.
All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors.
All operations are also regularly monitored by the SEBI.
Rupee-Cost Averaging.
With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment’s unit price.
As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.
Are there any taxes levied on Mutual Fund Investment?
There are no taxes levied on Mutual Fund Investments while there are some tax rebates applicable on the same. But there are taxes to be paid on mutual fund investment returns according to certain criteria.
Is there any tax relief allowed on Mutual Fund Investment?
Only investment made in Tax Plan Schemes (ELSS) qualifies under section 80 (C) for tax rebate up to Rs 100,000.
Are there any taxes levied on Mutual Fund Investment returns?
Income earned by any mutual fund registered with SEBI is exempt from tax. Dividends to unit holders from a close-ended fund or a debt fund pay a dividend distribution tax as per the government stipulation. Please note open-ended equity-oriented schemes (More than 50% in equity) are exempted from dividend distribution tax.
Dividend Taxation
Yes, there are taxes levied on Dividend Income from Mutual Fund investment as well as sales proceeds of mutual fund investment which may not be payable directly by the investor. Dividend income at the investor’s end is not taxable for any of the schemes but for dividend distribution of schemes other than Equity schemes, there is a distribution tax on dividend @12.81% payable by the distributor.
Capital Gains taxation
The gain earned from the price difference at the time of purchase and selling any kind of investment is called capital gains. If an investor sells his units and earns capital gains on the same, he is liable to pay capital gains tax.
Capital gains are of two types:
Short Term Capital Gains:
If an investor holds the units for a period less than or equal to 12 months from the date of purchase, then the gains earned from selling the units are called short term capital gains. The taxation for the same is as per the latest changes in taxation rates. The gains will be added to the total income of the investor and then taxed on the applicable rates.
Long Term Capital Gains:
If an investor holds the units for a period more than 12 months from the date of purchase, then the gains earned from selling the units are called long term capital gains. There are two ways in which taxes can be charged on long term capital gains – either with indexation or without indexation.
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