Mutual Fund

What is a Mutual Fund?

Mutual funds are investment vehicles that pool money from various investors to invest in a diversified portfolio of securities such as stocks, bonds, money market instruments, gold, silver, and real estate investment trusts (REITs). Each unit of a mutual fund represents a share in the fund's portfolio. These funds are managed by professional fund managers who operate the schemes according to their specific investment objectives.

How to Invest in Mutual Funds?

To invest in a mutual fund, look for new schemes during the New Fund Offer (NFO) period, where units are offered at a set price (typically Rs 10). For example, investing Rs 10,000 during the NFO would grant you 1,000 units. Investment requires KYC (Know Your Customer) compliance, which your financial advisor can assist you with. You'll need to provide KYC documents and bank details to make investments from your own bank account.

After the NFO period, your investment is used to buy a diverse range of securities according to the scheme's mandate. Units of open-ended schemes can be bought or redeemed at the prevailing Net Asset Values (NAV). Redemption proceeds are typically credited to your bank account within T+3 days for equity funds. Note that early redemptions may incur exit loads.

Different Types of Mutual Funds

Mutual funds can be categorized into three main types:

Equity funds:

These funds invest primarily in stocks and equity-related securities. Sub-categories include large cap, midcap, small cap, and multi-cap funds, with a primary objective of capital appreciation.

Debt funds:

These funds invest in debt instruments and money market securities. Categories include overnight, liquid, short-duration, and long-duration funds. The main objective is to provide regular income and preserve capital.

Hybrid funds:

Hybrid funds invest in a mix of equity and debt securities and may also include other assets like gold or REITs. They focus on asset allocation and include sub-categories such as aggressive hybrid funds, balanced advantage funds, and equity savings funds.

Each fund category and sub-category has distinct risk profiles and serves different investment needs. Your financial advisor can help you choose the most suitable option for your goals.

Taxation of mutual funds

For tax purposes, mutual funds with an average equity allocation of 65% or more are classified as equity funds. Short-term capital gains (for investments held less than 12 months) are taxed at 15%, while long-term capital gains (held over 12 months) are tax-free up to Rs 100,000, with a 10% tax rate beyond this threshold. Non-equity funds have short-term capital gains taxed as per the investor's income tax slab, and long-term capital gains are taxed at 20% after indexation. Equity Linked Savings Schemes (ELSS) qualify for deductions under Section 80C.