One Step Towards Mutual Funds !
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A corporation that pools money from several people and invests it in securities like stocks, bonds, and short-term debt is known as a mutual fund. The portfolio of a mutual fund refers to all of its holdings. Mutual fund shares are purchased by investors. Each share reflects a shareholder's ownership interest in the fund and the revenue it produces.
Features of Mutual Funds
Mutual funds are a popular choice among investors because they generally offer the following features.
Professional Management
Investors can calculate how much they aim to get as Systematic Investment Plan - SWP for regular cash flows and accordingly decide SIP amount and tenure.
Diversification
"Don't put all your eggs in one basket." Mutual funds usually put their money into a wide range of businesses and industries. This makes you less likely to lose money if one company fails.
Affordability
Most mutual funds only require a small amount of money to get started and to buy more shares.
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How do Mutual Funds Work ?
- The mutual fund’s worth depends on its holdings. When an investor buys a unit or share of a mutual fund, he or she buys a percentage of the portfolio’s worth. Mutual fund shares aren’t stock. Mutual fund shares don’t have voting rights like stocks. Mutual fund shares invest in stocks or other securities.
- Net asset value (NAV) per share is a mutual fund’s share price. NAV is derived by dividing a fund’s portfolio value by its outstanding shares.
- Mutual fund shares are normally purchased or redeemed at the fund’s current NAV, which does not fluctuate during market hours but is settled at the conclusion of each trading day. When NAVPS is settled, a fund’s price is updated.
- Mutual funds own numerous securities, giving investors diversity. Take a Google-only investor who relies on its profits. Gains and losses depend on the success of one company. Mutual funds may own Google if gains and losses are covered by other stocks.
What are The Benefits
Mutual funds offer professional management of investments and the chance to spread out your money. Also, they give you three ways to make money:
Dividend payments
Dividends on stocks and interest on bonds are two common ways for a fund to bring in money. After deducting operating costs, the fund distributes nearly all of its profit to its investors.
Capital Gains Distributions
The price of the securities in a fund may rise. When a fund sells a security that has gone up in price, the fund has a capital gain. At the end of the year, the fund gives these capital gains, minus any capital losses, to investors.
Increased NAV(Net Asset Value)
Expenses are subtracted from the value of a fund's portfolio to determine its net asset value, which is subsequently reflected in the price of its shares. The higher NAV reflects the higher value of your investment.
Types of Mutual Funds
Equity Funds
Equity funds invest in company stocks. These are high-risk, high-return funds. Specialty equity funds include infrastructure, FMCG, and banking. They're market-linked and often.
Debt Funds
Debt funds invest in debentures, bonds, and other fixed income assets. They're safe, fixed-return investments. These funds don't deduct tax at source, thus investors must pay tax on earnings over Rs. 10,000.
Index Funds
Index funds are funds that invest in products that represent a specific index on an exchange in order to match the index's movement and returns, such as purchasing BSE Sensex shares.
Balanced Or Hybrid Funds
Balanced or hybrid funds mix asset classes. Sometimes equity is higher than debt, and sometimes the opposite. Balanced risk and return. Franklin India Balanced Fund-DP (G) is a hybrid fund since it invests 65% to 80% in equities and 20% to 35% in the debt market.
Liquid Funds
These are funds invest money largely in short-term or extremely short-term products, such as T-Bills, CPs, and so on, with the goal of providing liquidity. They are thought to have low risk with moderate returns, making them excellent for investors with short investment horizons.
Tax Saving Funds (ELSS)
These are funds that invest largely in equity securities. Investments in these funds are taxable under the Income Tax Act. They are considered high risk, but they also provide high profits if the fund performs well.
Difference Between Mutual Funds and Stock Market
| Parameters | Mutual funds | Stock market |
| Votatility | Less volatile – low risk. | High volatile – high risk. |
| Cost | Low trading cost. | High trading cost. |
| Management | Professional management. | Individual management. |
| Tax benefit | Tax saving benefit. | No tax exemption. |
FAQ
A mutual fund is a trust that pools the money of investors. Investors are assigned units of the funds based on their fair investment in the pool of assets. The fund manager hired by the asset management organisation then invests this money in various forms of mutual funds such as stock, debt, and other securities.The fund manager’s goal is to generate high returns. The fund’s gains or losses are dispersed to unitholders (investors) in accordance to their investment share.
There’s no easy answer. Risk-return characteristics vary each fund. You must choose a fund based on your risk tolerance and investing time frame. Your risk tolerance and the fund’s risk must be balanced. If you’re willing to assume considerable risk but your investing horizon is less than 3 years, avoid equity funds.You may consider a mix of equity and debt funds with higher debt. Select the best mutual fund depending on your risk tolerance and time horizon.
Yes, NRIs can invest in mutual funds. However, the investment process can be bit longer for NRIs. You need to remember that no approval from RBI, SEBI, or any other regulatory body is not required to invest in mutual funds. However, few fund houses may not accept investments by NRI.
Taxation Rules for Mutual Funds
The taxation rules on mutual funds are similar for resident Indians and NRIs. In case of short-term gains on debt mutual funds, the gains are added to the resident’s income, but a TDS of 30% is applied for NRIs. Gains from debt mutual fund investments that remain invested for less than 36 months are considered as short-term capital gains. You can claim Double Taxation Avoidance Treaty (DTAA) to avoid double taxation on the TDS and tax paid in India against the tax payable in the country of residence. This ensures that the same income is not taxed twice.
