What is Mutual Fund?

Mutual funds are financial instruments which invest in a portfolio of securities. These securities may be stocks, bonds, money market instruments, gold, silver and real estate investment trusts (REITs) etc. You can buy units of mutual funds; each unit represents a certain percentage of the mutual fund scheme portfolio. Mutual funds are managed by professional fund managers who manage the schemes according to the investment objectives of the schemes.

Different types of mutual funds

There are three broad categories of mutual funds:-

Equity funds:

These mutual fund schemes invest in equity and equity related securities. Equity funds have sub-categories based on the market cap segments, where the scheme may primarily invest in e.g. large cap, large and midcap, midcap, small cap, multicap, flexicap etc. The primary investment objective of equity funds is capital appreciation.

Debt funds:

These mutual funds schemes invest in debt and money market instruments. Debt funds have sub-categories based on the maturity profiles of the underlying debt or money market instruments e.g. overnight, liquid, ultra-short duration, low duration, short duration, medium duration, long duration etc. The primary investment objective of debt funds is capital preservation.

Hybrid funds:

These funds invest in both equity and debt securities. They may also invest in other classes like gold, REITs, InvITs etc. The primary investment objective of hybrid funds is asset allocation. Different types of hybrid funds include aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings etc.

Different fund categories and sub-categories have different risk profiles. Mutual funds provide investment solutions for a wide spectrum of risk appetites and investment needs. We can help you select the right investment option for you.

Advantages of Mutual Fund

• Professional Management: Your investment is handled by experienced fund managers and their research teams, who are experts at selecting securities and making investment decisions.
• Diversification: Mutual funds invest in a wide basket of stocks, bonds, or other assets. This diversification helps spread risk, so the poor performance of any single security has a smaller impact on your overall investment.
• Affordability and Accessibility: You can start investing with a relatively small amount of money, often through a Systematic Investment Plan (SIP), making it accessible to almost everyone.
• Liquidity: Most open-ended mutual funds are highly liquid. You can easily buy or sell your units on any business day, giving you flexibility to access your money when needed.
• Tax Benefits: Certain types of mutual funds (like Equity-Linked Savings Schemes or ELSS in India) offer tax deductions on the amount invested under specific sections of the tax law.
• Transparency and Regulation: Mutual funds are regulated by governmental bodies (like SEBI or the SEC) and are required to regularly disclose their portfolio holdings, performance, and expenses, ensuring safety and clarity for investors.
• Variety of Schemes: There is a vast selection of funds (equity, debt, hybrid, etc.) to choose from, allowing you to select a scheme that aligns with your specific financial goals, risk appetite, and time horizon.

Benefits of SIP

Systematic Investment Plans (SIPs) offer several advantages to investors who want disciplined, long-term exposure to mutual funds.

• Inculcates Savings Habit - SIPs encourage regular investing by committing a fixed amount and investing it systematically every week, month, or quarter.
• Flexibility - Starting or stopping a SIP is easy and can be done as per your convenience.
• Wide Choice - You get a wide selection of mutual fund schemes and asset management companies to choose from.
• Convenient - No need to visit an AMC office or deposit cheques every month. Sign an auto-debit/ECS form and the SIP amount is deducted from your bank account on the chosen date.
• Low Investment Amount - You can start a SIP in India with as low as Rs. 1,000 per month.
• Diversification - Investing via SIPs in equity mutual funds spreads risk across companies, sectors, and markets. Further diversification can be achieved by investing on different dates in a month.
• Helps Achieve Your Goals - SIPs help you meet future financial goals such as retirement, higher education, marriage, etc. You can set a target amount and reach it over time by investing small sums regularly; the SIP amount can be decided based on your goal.
• Tax Savings - By choosing an SIP in an ELSS (Equity Linked Savings Scheme), you can save tax under Section 80C. This provides tax benefits and the advantage of rupee cost averaging. Note: ELSS investments have a lock-in period of 3 years for each investment.
• Helps in Compounding - Starting early and saving regularly for a longer period allows you to benefit from compounding returns.
• Rupee Cost Averaging - Discipline and commitment to invest a fixed sum at regular intervals ensures you buy more units when NAVs are low and fewer units when NAVs are high, reducing the effects of market volatility over time.

Tips: Review your SIPs periodically to ensure they still align with your risk profile and financial goals. Consider increasing SIP amounts over time as your income grows to accelerate goal achievement.

Taxation of mutual funds

Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity related securities) is 65% or more, are treated as equity funds from tax perspective. These include all equity funds and also several hybrid fund categories. Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 20%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 125,000 in a financial year and taxed at 12.5% thereafter.

With regards to Debt funds, short term capital gains (investment holding period of less than 36 months) in non-equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non-equity funds are taxed at 20% after allowing for indexation for investments made prior to 1st April 2023. However, following the Amendment to Finance Bill 2023, the indexation benefit on debt mutual funds has been withdrawn. Debt funds will now be taxed at investor's tax slab rate. These changes bring taxation of debt and debt oriented mutual funds at par with fixed deposits for investments made from 1st April 2023 onward.

Other mutual funds including schemes with equity allocation between 35 - 65% and schemes of asset classes other then equity and debt, e.g. commodities, international etc have long term capital gains taxation holding period of 2 years. Short term capital gains are taxed at investor's tax slab rate, while long term capital gains are taxed at 12.5% (no indexation).

Investments in mutual fund Equity Linked Savings Schemes (ELSS) up to Rs 150,000 in a financial year qualify for deductions under Section 80C of The Income Tax Act 1961.

How to invest in mutual funds?

When an asset management company (AMC) house launches a new mutual fund scheme, it invites subscriptions from the public in the New Fund Offer (NFO). In the NFO period, investors are allotted units at par value (usually Rs 10). If you invested Rs 10,000 in a mutual fund scheme during the NFO period, you would be allotted 1,000 units. You need to be KYC compliant to invest in mutual funds. We can help you fulfil KYC requirements. Along with KYC documents, you need to provide bank details to invest in mutual funds. Investors can invest in mutual funds only from their own bank accounts.

At the end of the NFO period, the money pooled from all the investors are invested in a diversified portfolio of securities according to the scheme's mandate. After the NFO, investors can buy units of open ended schemes from the AMC at prevailing Net Asset Values (NAV). You can also redeem open ended mutual fund schemes at any time at prevailing NAVs. The redemption proceeds will be credited to your bank account on T+3 for equity funds. Investors should note that for redemptions within a certain period of time from investment exit loads may apply.