MUTUAL FUND

Mutual Fund is a professionally managed investment plan. Mutual Fund is a vehicle (in form of trust) to mobilize money from the investors, to invest in different markets and securities in line with defined investment objectives. Through the investment in mutual funds, an investor can get access to equities, bonds, money market instruments,s and/or other securities and through the mutual fund, an investor can get the professional fund management services offered by the assets management companies.

If you have a small amount of money and you want to invest in the share market then you can only invest in a limited number of the company however through the mutual fund you can invest in a large number of companies, whose shares are purchased by the assets management company in which you have invested. Currently, more than 50 asset management companies are registered in India with the Security Exchange Board of India and the Association of Mutual Funds of India.

Further as per the guidelines of the Association of Mutual Funds of India the assets management companies cannot advertise a particular scheme through celebrities however they can advertise the mutual fund as Industry. As you have seen Sachin Tendulkar in the advertisement for mutual funds says that “ Mutual Fund Sahi Hai”, he is not promoting any scheme however he is promoting mutual funds as Industry.  

Role of Mutual fund  

 The primary role of the mutual fund is to help the investors in earning an income and creation of wealth, by investing in opportunities available in the security markets. It is possible for mutual funds to structure a scheme for different kinds of investment objectives.

 Mutual funds offer different kinds of schemes to cater to the needs of diverse investors. In the mutual fund industry, the word ‘fund’ and ‘scheme’ are used interchangeably. Various categories of the scheme are called funds.

 The money that is raised for the investors, ultimately benefits the government, companies, and other entities, directly or indirectly for the funding of the various projects or paying for various expenses. The projects that are facilitated through such financing, offer employment to the people, and the income they earn helps them buy goods and services offered by other companies, thus supporting projects of these goods and services companies. Thus the overall economic development is promoted. 

As a large investor, the mutual fund can keep a check on the operation of the investee company,  and its corporate governance and ethical standard.

A mutual fund can also act as a market stabilizer, in centering large inflow or outflow from a foreign investor. Therefore mutual fund is a key participant in the capital market of any economy.

An important concept of Mutual Funds

1. Units:-
2. Face Value:-
3. Net Assets Value:- 
4. Exit Load:- 

Units:- The investment that an investor makes in a scheme is translated into a certain number of the “unit” in the scheme. 

Face Value:- Typically every unit of a mutual fund has a face value of Rs. 10. 

Net Assets Value:- The true worth of a unit of a mutual fund is called Net Assets Value (NAV) on which units of the mutual fund are sold or purchased. It is per unit value of the total net assets (assets- liabilities) of the mutual fund.

Exit Lode:- Exit load is the amount of expenditure that you have to incur when you exit from the mutual fund scheme before the specified tenure.

Type of Mutual funds Schemes:-

1. Equity Oriented Mutual Fund:-  
2. Debt Oriented Mutual Fund:- 
3. Hybrid Fund:- 
4. Multi Assets Fund:-  

Equity Oriented Mutual Fund:- Equity-oriented mutual fund invests in the Equity  Shares of the companies which are listed on the stock exchange.

Debt Oriented Mutual Fund:- Debt-oriented Mutual Fund invests in debt market instruments such as bonds, government securities, and corporate FDRs.

Hybrid Fund:- Hybrid fund invests in both equity and debt market instrument.

Multi Assets Fund:-  It invests in multiple assets such as equity market, debt market, real estate, commodities, etc.

Method of investing in the Mutual fund Scheme:-

Direct Scheme:- When you purchased the mutual fund from an assets management company directly.

Regular Scheme:- When you purchased the mutual fund with the help of a mutual fund advisor.

If you buy the mutual fund through a direct scheme then you can save the commission however if bought through the mutual fund advisor then you have to pay a commission not directly but it will be debited to the whole scheme and separate NAV for the Direct and Regular Scheme will be maintained by the assets management company. However, it is always advisable to go with a mutual fund advisor because we can take benefit of his expertise for the investment and asset allocation. He can easily understand our risk profile and suggest us accordingly.

Taxation/ Income Tax on Sales Mutual Funds 

The gains/profits from the sales of mutual funds are taxable in India. However, we need to check whether it is a long-term capital gain or short-term capital gain. The short-term capital gain is incurred when you hold the unit of equity-oriented mutual funds for less than 1 year and when you hold them for more than 1 year then it is a long-term capital gain. The long-term capital gain from the sales of equity-oriented mutual funds is taxed at the rate of 10% however short-term capital gain from the sales of equity-oriented mutual funds is taxed @ 15%. Further, in the case of debt-oriented mutual funds, the tenure for holding long-term gain is 3 years.

If you sold the unit of mutual funds before 3 years it will be short-term capital gain and taxed at the rate as per the applicable slab of the Income however in the case of long-term capital gain it is taxed at 20% however indexing benefit will be allowed on the long term capital gain. Further, the long-term capital gain from the sales of equity-oriented mutual funds is not taxable up to 1 Lacs. 

Benefits of Mutual Funds

1. Professional Management:-
2. Portfolio Diversifications:-
3. Low Cost:- 
4. Liquidity:- 
5. Transparency:- 
6. Flexibility:-
7. Well Regulated:- 

Professional Management:- The biggest advantage of investing in mutual funds is that they are managed by a qualified fund manager(professional expert) that are backed by a dedicated investment research team that analyses the performance and prospects of the companies and selects suitable investments.

Portfolio Diversifications:- The mutual fund invests in the number of companies across a border cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks make losses at the same time and in the same portion.

Low Cost:- Mutual funds are one of the best investment options considering the costs involved. They are relatively less expensive if compared to directly investing in the capital market because the benefit of scale in brokerage, custodial and other fees translate into the low cost for investors.

Liquidity:- In open ender schemes, you can get your money back at net assets value related price from the mutual fund itself, except for the ELSS which has a locking period of 3 years.

Transparency:- In the mutual fund investor gets regular information on the value of investments through account statement and in addition to disclosure on the investment made by your scheme through portfolio disclosure, which indicates the proportion invested in a class of assets.

Flexibility:- Through features such as regular investment plans, regular withdrawal plans, and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs.

Well Regulated:- All mutual funds are registered with SEBI and they function within the regulatory provisions famed to protect the interest of investors. 

Limitation of Mutual Funds:-

Diversification may reduce the risk but does not guarantee a higher return.

There is no guarantee of return as some mutual funds may underperform.

Mutual fund performance is judged on the basis of past performance but this cannot take guarantee future return.

Q & A

1. Gain from the Sale of Mutual Funds is taxable in India?
Answer:- Yes gain from the mutual funds is taxable in India 

2. What is NAV in Mutual Fund?
Answer:- Net Assets Value

3. What is the Regular Scheme of the Mutual Funds?
Answer:- When you invest in the mutual fund's scheme with the help of a mutual fund advisor, this is called a regular scheme.

4. Lock-in period for ELSS (equity-linked saving scheme)?
Answer:- 3 Years