What is a Mutual Fund?

A mutual fund is a trust that collects money from a group of individual investors with similar financial goals. This trust is managed by professional fund managers who invest it in stocks, bonds, money market instruments, and/or other securities. The gains generated by this collective investment are dispersed equally among the investors.

 

Types of Mutual Funds in India

Based on their investment objectives and asset allocation, Mutual funds in India are broadly classified into:

 

1. Equity Funds

These Mutual Funds primarily invest in stocks of companies listed in the stock market. These Mutual Funds usually generate higher returns than traditional instruments. They are further divided based on market capitalization:

• Large-Cap Funds: Invest in the top 100 companies by market capitalization.
• Mid-Cap Funds: Invest in companies ranked 101st to 250th by market capitalization.
• Small-Cap Funds: Invest in companies beyond the 250th rank in market capitalization.

 

2. Debt Funds

These Mutual Funds are designed for stability and liquidity. They invest in fixed-income instruments like government securities, corporate bonds, and money market instruments.

3. Hybrid Funds

Hybrid Funds offer a balance of growth and security by investing in equity and debt instruments. They keep adjusting the percentage of investment in equity and debt based on prevailing market conditions.

 

4. Equity-Linked Savings Schemes (ELSS)

These Mutual Funds offer tax benefits under Section 80C of the Income Tax Act, 1961. They invest primarily in equities and come with a mandatory lock-in period of three years.

 

Different Mutual Fund Plans

Below are the common plans or terms utilized during Mutual Fund Transaction:

• Systematic Investment Plan (SIP): This mutual fund scheme allows investors to invest a fixed amount at regular intervals.
• Systematic Transfer Plan (STP): STP enables investors to transfer their financial resources from one scheme to another instantly and without effort.
• Systematic Withdrawal Plan (SWP): SWP provides monthly returns while also earning ROI on the entire investment. 

 

Mutual Funds Taxation

As per the latest budget declaration, the tax implications on mutual fund investors may be as below:

 

1. Equity-Oriented Funds

• Short-Term Capital Gains (STCG): A 15% tax is applicable for capital gains from units held for up to 12 months.
• Long-Term Capital Gains (LTCG): Gains up to Rs 1 lakh per financial year is tax-free from units held for more than 12 months. Gains exceeding this limit are taxed at 10% without indexation.

 

2. Debt-Oriented Funds

• Short-Term Capital Gains: Gains from units held for up to 36 months are added to the investor's income and taxed as per the applicable income tax slab.
• Long-Term Capital Gains: Gains from units held for more than 36 months are taxed at 20% with indexation benefits.

 

3. Dividends

Mutual Funds declare dividends regularly. But these are not tax-free at the hands of the investor. Dividends received are added to the investor's income and taxed according to the applicable income tax slab rates. Apart from this, a Tax Deducted at Source (TDS) of 10% is applicable on dividend income exceeding Rs 5,000 in a financial year.

 

Conclusion

Mutual funds, as a promising investment avenue, have been able to appeal to all classes of investors. However, with the availability of a wide range of schemes in the market, it isn't easy to choose the right one. Consulting a financial advisor would help align investments to one’s goals and avoid risk in the long run.