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Mutual funds: The pooled money of several investors is invested in the stocks, bonds, money market instruments and other types of securities. The owner of a mutual fund is allocated with a number of units proportion to the amount invested in each fund.

All the funds with different objectives and schemes are put together and managed by “Asset Management Companies (AMC)”. The AMC appoints a professional fund manager, who takes care of the entire capital and plans for buying and selling the securities in line with the pre-planned ratio and objectives stated in the fund.

All mutual funds schemes are designed based on some specific stated objectives. This objectives laid out in the fund’s prospectus and it is the legal documentation which contains complete information about the fund, history, manager and its performance.

Based on the asset class:

Equity: Corpus poured into this type is invested in ‘High risk and High return’ companies with pre formulated objectives e.g. Equity diversified funds (ELSS), Sector funds (pharma funds), Index (nifty index) etc.

Debt:  Major portion of corpus invested in debt instruments such as government securities, treasury bills, corporate bonds and other money market instruments e.g. Money market funds, Income funds, Fixed Maturity plan (FMP).

Balanced Funds: These funds will have a combination of both equity and debt with prefixed ratio like 70-30, 60-40, 50-50 etc., e.g. HDFC balanced fund

Based on the structure type:

Open-ended funds: Investors can enter and exit any time at the NAV value as per the closing price.

The drawback for open ended schemes is exit load will be applicable if redeemed before the certain period, say for 1 year.

Closed- ended funds: Investors can enter these funds only when the scheme opens and can redeem the units only when the scheme is closed. The period ranges from 3 to 5 years in most of the schemes.

Investors are provided with an option to select any fund with:

  • Growth
  • Dividend
  • Dividend re- investment

Benefits of investing in Mutual funds:

Mutual funds take advantage of their buying and selling units and thereby reduce transaction costs for investors. When one buys mutual fund units, they are able to diversify without paying hefty commissions charges. Below mentioned are some more benefits of mutual funds;

  • Need small capital to buy units of mutual funds as compared to investing directly in the capital market and each unit represents an investment made in a variety of equity and debt. This is how; our money is combined with the money from other investors and allows us to buy each unit at NAV. A minimum initial investment of Rs.500 is enough to start SIP with some schemes.
  • Higher returns when an investor opts for both medium and long-term investments as professionals invest in a diverse range of sectors and industries.
  • Mutual fund helps investors generate better inflation adjusted returns in a hassle free manner without having to spend a lot of time on it.
  • Fund managers provide regular information about the current value of the investments, along with the portion of investments done in different companies thus giving safety and transparency of how our investments are doing. Moreover investors can be assured that every mutual fund is managed in a disciplined manner and regulated by SEBI.
  • Investors can liquidate the capital along with return by selling their mutual fund units on any business day and receive the current value on their investments within T+2 days.
  • Diversification helps in reducing risk, so that if one company in the portfolio doesn’t perform well the other best performing company will maintain the returns.
  • Professional fund managers are responsible to maintain a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze in order to make informed investment decisions.
  • Mutual fund is so convenient that one can choose Growth, dividend or dividend re-investment options. It has a convenience of ‘‘Systematic Investment Plan’ (SIP), ‘Systematic Withdrawal Plan’ (SWP), ‘Systematic Transfer Plan’ (STP).
  • Income or dividend received by the investor from a mutual funds is fully exempted from tax as per the Income Tax Act. Capital gains on Mutual fund may be subjected to tax depending upon the type of fund – Equity or Debt and also the period for which it is owned.
  • SIP is the best strategy that will help the investor to invest consistently in regular intervals and which is very helpful at the bearish market to average NAV. Disciplined investing in SIP helps accumulate a healthy corpus over the long term.

Tax slabs on investing in Mutual Funds: 

  • 100% tax free on the income earned being held more than a year.
  • 100% tax free on the dividends received
  • Equity funds:
  • Short term gains are taxed at 15% (less than a year)
  • Long term totally tax free (more than a year)
  • Debt :
  • Short term gains are taxed as per slab rates applicable (less than 3 years)
  • Long term gains are taxed at 10% on capital gains without indexation or 20% on the capital gains after indexation (more than 3 years)

ELSS (Equity Linked Saving Scheme):  ELSS mostly designed for people who want to save taxes along with good returns. Investors can save tax up to Rs.1.5 lakh under section 80c with a lock in period of 3 years. ELSS is a diversified fund and with a common ratio of Equity and Debt at 65-35 in most of the schemes.

Benefits of ELSS:

  • Tax benefits under sec 80c of Income Tax Act and eligible for Rs.150000 deduction.
  • Simply work as risk directly proportional to return. As corpus is invested in equity returns are expected to be higher.
  • Can start with as less as Rs.500 and no upper limit for investment.
  • Less lock in period of say 3 years
  • Very low commission and charges to that of ULIP.
  • Flexibility to invest in growth and dividend schemes
  • Option for investing in closed and opened ended structure.
  • Flexibility to invest in lump sum and SIP.
  • Best goal setting investment strategy

Mutual funds comes with two platform based investments which are Direct and Regular

Direct Platform: Here we can invest directly in AMC’s without any involvement of a broker or intermediate. The main advantage in direct platform is saving commission.

Regular Platform: Here whatever the investments are done in mutual funds are processed through brokers (most of the investors don’t know that they are paying commission indirectly to brokers).

We suggest to go with direct platforms, in order to save commission. Example given: Top direct platform in India is Coin Zerodha.

===> INVEST WITH ZERODHA                                              ===> INVEST WITH UPSTOX


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