What is a Mutual Fund?
- A mutual fund is an investment vehicle that pools money from multiple investors and invest in stocks, bonds, or other securities as per investment objective of the scheme.
- Professional fund managers manage these funds to achieve specific financial goals.
- So, fact is we do not invest in MF, we invest through Mutual fund.
- Legal structure of Mutual Fund is a TRUST.
How Does Mutual Funds works ?
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Mutual Fund offers various scheme with different Investment objective to cater to the need of diverse investors.
- Every scheme has pre announced Investment objective.
- Primary Objective of various schemes stems from the basic needs of an investor viz Safety, Liquidity and returns.
- All details related to schemes are disclosed in the Scheme Information Document (SID) and Key Information Memorandum (KIM).
- All details related to Mutual fund are disclosed in the Statement of Additional Information (SAI).
- A MF scheme with an objective of providing liquidity would invest in debt papers of short-term maturity.
- MF scheme that aims to generate capital appreciation over long periods, would invest in equity shares.
- Investors Invest money in scheme as per their needs and preferences.
- Mutual Funds Invest money in bonds / securities as per its investment objective.
- An investor get access to equities, bonds, money market instruments and other securities as per schemes chosen.
Scheme Information Document (SID)
- It has all the information about a mutual fund scheme.
- Investment strategy and objective.
- Asset Allocation.
- Category of Fund, equity or debt in which investment would be made. If equity then proportion in large cap, mid cap, small cap so on.
- Riskometer : It show risk level.
- Asset Management Company (AMC) Information.
- Name of Fund Manager, experience, other fund scheme they manage.
- Fund performance and top 10 holding. Same is updated regularly.
- Minimum subscription amounts, exit loads etc…
- Fees and expenses in the scheme.
Key Information Document (KIM)
- KIM works more like a concise form of SID.
- KIM has all the essential information about a scheme in a shorter format.
- KIMs are generally attached with the application form of a mutual fund scheme.
Statement of Additional Information (SAI)
- SAI has information on a larger note and not specifically about the scheme.
- Names of key persons of AMC, bankers, registrars, custodian, legal counsel & auditors are mentioned.
- It has details of the AMC itself, Sponsors and Trustees.
- Financial and legal matters are also mentioned.
Role of Mutual Funds:
The primary role of MF is to help investors in;
- earning an income or building their wealth,
- by investing in the opportunities available in securities markets.
Offer different kinds of schemes to cater to the need of diverse investors.
As a large investor, the MFs can keep a check on the ;
- operations of the investee company,
- their corporate governance and ethical standards.
The money that is raised, ultimately benefits ;
- Companies for funding of various projects & Government.
- Thus, overall economic development is promoted.
RETURNS
- Mutual fund scheme returns would depend on the returns generated from its underlying investments.
- Mutual fund returns are market-linked and not guaranteed.
- Historical performance can provide insights but does not assure future returns.
Are mutual funds risky?
The risk depends on the type of mutual fund:
- Equity Funds: Higher risk and higher potential returns.
- Debt Funds: Lower risk with moderate returns.
- Hybrid Funds: Balanced risk and return.
LIQUIDITY
- Investment is Mutual is highly Liquid.
- Investors can sell units of MF at any time. Exit load is applicable if exit before specific period, usually 1 year.
- Investors can sell part of the units as per their needs.
- Investment in ELSS has lock-in period of 3 years.
How are Income from mutual funds taxed ?
- In the hands of Mutual Funds: No tax in the hands of Mutual funds. They are not liable to pay tax on the income they earn. So, it helps for investors to earn better return and build wealth faster.
- In the hands of Investors: Investors are liable to pay tax only at the time of sale of MF schemes.
- So, money can grow for several years without paying any tax.
- This helps investors to build their wealth faster than it would have been, if they were to pay tax on the income each year.
- Investment in Equity Linked Savings Schemes (ELSS) is eligible for deduction up to Rs 150,000/-.
- Equity Funds: LTCG up to ₹1.25 lakh/year are tax-free; beyond that, LTCG are taxed @ 12.5%. STCG are taxed @ 20%. (LTCG: Holding period > 12 months, STCG: Holding period =< 12 months).
- Debt Funds: Taxed based on your income slab.
- Dividends: Taxed as per your income slab.
Important Concepts in Mutual Fund
- Units: An investor is issued units of the scheme.
- Face Value: Every unit has a face value of Rs 10.
- Net Asset Value: True worth of a unit of MF scheme is called Net Asset Value (NAV) of the scheme. Net Asset Value (NAV) is the per-unit price of a mutual fund. It is calculated as: NAV=(Assets – Liabilities) / Number of Units.
- Mark to Market: Valuing each security at its market value is called Mark to Market (MTM). It is done on a daily basis for calculation of daily NAV.
- Assets Under Management: The sum of all investments made by investors’ in the MF scheme.
- Expense Ratio (TER): The fees is paid to various MF constituents. This is charged as a % to the scheme. This is regulated by SEBI.
Advantages of Mutual Fund
- Professional Management
- Affordable Portfolio Diversification
- Economies of Scale
- Transparency
- Liquidity
- Tax Deferral
- Tax benefits
- Convenient Options
- Investment Comfort
- Regulatory Comfort
- Systematic Approach to Investments (SIP / SWP / STP…
PROFESSIONAL MANAGEMENT
MF offer investors the opportunity to earn an income/build their wealth through professional management of their investible funds.
- Investing in line with the investment objective.
- Investing based on adequate research, and
- Ensuring prudent investment processes are followed.
AFFORDABLE PORTFOLIO DIVERSIFICATION
Investing in the MF scheme provides;
- Exposure to a range of securities.
- Proportionate ownership in a diversified portfolio.
- Minimize risk;
- Maximize return;
- Reach long range financial goal.
ECONOMIES OF SCALE
- Engage professional managers for managing investments.
- Individual investors with small amounts to invest cannot afford to engage such professional management.
- Costs related to investment research and office space gets spread across investors.
- Negotiate better terms with brokers, bankers and other service providers.
TRANSPARENCY
SEBI Regulation ensures all transparency;
Critical information are available to help investors take informed decision i.e.
- Scheme related documents (SID, SAI, and KIM) containing all the information about Scheme and AMC.
- Portfolio disclosures.
- NAV of the scheme.
Even prospective investor can access all these information.
CONVENIENCE
- Ticket size: Invest as low as Rs 500/-
- Withdraw part of the money, at any time. No fixed tenor like FDR.
- Little documentation.
- Invest in line with Liquidity preference, tax position.
- Set up systematic transactions SIP, STP, SWP, etc.
- Set up Systematic Investment Plan (SIP) and money will be invested at regular intervals (monthly/quarterly)….
- Set up Systematic Withdrawal Plan (SWP) and money will be credited to your bank account at regular intervals (monthly/quarterly)….
- Set up Systematic Transfer Plan (STP) and money will be transferred from one scheme to another scheme at regular intervals (monthly/quarterly).
- Systematic approaches promote investment discipline, useful in long-term wealth creation and protection.
Regulatory Comfort
- The regulator, Securities and Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities.
- SEBI (Mutual Fund) Regulations, 1996 brought in to regulate MF Industry.
- Mutual fund investors benefit from such protection.
Mutual fund scheme categorization
- SEBI issued a circular on Categorization and Rationalization of Mutual Fund Schemes in 2017.
- To bring uniformity in the characteristics of similar type of schemes launched by different mutual fund houses.
- To help investor objectively evaluate the schemes.
- There are few broad categories of mutual fund schemes.
- Within each category, there are many sub-categories.
- Equity Funds: Invest primarily in stocks.
- Debt Funds: Invest in fixed-income securities like bonds.
- Hybrid Funds: Invest in a mix of equity and debt.
- Index Funds: Track a market index like NIFTY 50.
- Sector/Thematic Funds: Focus on specific industries or themes.
- ELSS (Equity Linked Savings Scheme): Offers tax benefits under Section 80C.
General FAQ
What is SIP ?
A Systematic Investment Plan (SIP) allows you to invest a fixed amount in a mutual fund scheme at regular intervals (monthly/quarterly).
- It promotes disciplined investing and takes advantage of rupee cost averaging.
Can I invest in mutual funds without a Demat account?
- Yes, you don’t need a Demat account for Mutual fund investments.
How do I start investing in Mutual Funds?
You can start investing by:
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- Completing your KYC (Know Your Customer) process.
- Choosing a Mutual fund scheme based on your financial goals.
- Investing through an Asset Management Company (AMC), Mutual fund distributors, or online platforms.
Can I invest lum sum in Mutual fund?
Yes, you can invest in mutual fund both ways lum sum or in SIP mode.
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