A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments. The money collected in mutual fund scheme is invested by professional fund managers in stocks and bonds etc.
| Fund Objective | Fund meaning |
|---|---|
| Equity invest in Stock | Mutual fund scheme that invests predominantly in equity stocks. In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme's assets in equities and equity related instruments. |
| Debt Fund invest in income | A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. |
| Money Market fund invest in | A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments and historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. |
| Balanced Fund invest in (partly in stocks and partly in fixed income sec.) | Balanced funds, also known as hybrid funds, are a class of mutual funds that contain a bond (debt) component and a stock (equity) component in a specific ratio in a single portfolio. These mutual funds help investors diversify their portfolio by investing in asset classes such as equity and debt. |
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives. The AMC hires a professional money manager, who buys and sells securities in line with the fund’s stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus. In addition; every mutual fund has a board of directors that is supposed to represent the shareholders’ interests, rather than the AMC’s.
1. Net Asset Value or NAV:
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.
2. How is NAV calculated ?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
3. Expense Ratio:
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund’s expense ratio is typically to the size of the funds under management and not to the returns earned.
4. Load:
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds:
a) Open-Ended Funds:
At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.
b) Close-Ended Funds:
Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Mutual fund tax benefits under Section 80C – Investments in Equity Linked Savings Schemes or ELSS mutual funds qualify for deduction from your taxable income under Section 80C of the Income Tax Act 1961. The maximum investment amount eligible for tax deduction under Section 80C, is Rs 1.5 lakhs. Investors in the highest tax bracket (30%) can therefore save up to Rs 46,350 in taxes (Rs 1.5 lakhs X 30.9% tax + cess) by investing in ELSS mutual funds. Investor should note that, Rs 1.5 lakhs is the overall 80C cap including all eligible items like, employee provident fund (EPF) contribution (deducted by your employer), PPF, life insurance premiums, NSC and ELSS mutual funds etc.
The table below summarizes THE TAXATION OF EQUITY AND DEBT MUTUAL FUNDS SHORT TERM/LONG TERM CAPITAL GAINS.
| Nature of Profits / Income | Equity Funds Taxation | Non-Equity Funds Taxation |
|---|---|---|
| Minimum Holding period for Long term capital gains | 1 year | 3 years |
| Short term capital gains | 15% | 30% |
| Long term capital gains | 10% (if the long term gain exceeds Rs 1 Lakh) Long term capital gains upto Rs 1 Lakh is totally tax free. | 20% with indexation |
| Dividend distribution tax | 10% + 12% surcharge + 4% cess = 11.648% | 25%+ 12% surcharge +4% cess = 29.120% |