MUTUAL FUND

Mutual Funds are investment pools where money from various investors is collected and then invested in a diversified portfolio of assets like stocks and bonds. Investors in Mutual Funds own shares of the fund, which, in turn, owns shares in other companies or government bonds.

The investors cannot directly own the stocks held by the fund. They share in the profits or losses of the entire fund equally. This shared ownership model is why they are called 'Mutual Funds,' offering investors a way to access a diversified portfolio without needing to directly manage individual mutual fund investments.

These are some of the advantages of investing in Mutual Funds

1. Diversification

Mutual funds offer diversification by investing in a variety of assets, spreading risk across different securities. It helps investor’s portfolio from market volatility.

2. Professional Management

Experienced fund managers with a rich experience in the market make investment decisions, leveraging their expertise for potentially higher returns.

3. Liquidity 

Mutual funds offer high liquidity, which means investors can buy or sell fund units at any time, providing flexibility to their investments.

4. Tax Benefits

ELSS mutual funds offer tax advantages, allowing investors to save up to Rs 1.5 lakh under Section 80C with a three-year lock-in period.

5. Affordability 

Mutual funds are an affordable means of investment, which makes them accessible to investors with varying capital levels, making them affordable for all.

6. Safe Investment 

Mutual funds investments are regulated by SEBI, and provide a safe investment option for investors seeking stability and growth

The types of Mutual Fund (MF) investments can be broken down depending on different factors - here are the different types:

Types based on Asset Class 

1. Equity Funds: Invest in company shares, offering high growth potential.
2. Debt Funds: Invest in bonds, providing steady income.
3. Money Market Funds: Invest in low-risk, short-term securities.
4. Hybrid Funds: Blend stocks and bonds for growth and stability.

Types based on Investment Goals

1. Growth Funds: Aim for capital appreciation with high-growth stocks.
2. Income Funds: Generate regular income through bonds and dividends.
3. Liquid Funds: Prioritise liquidity and safety with short-term debt.
4. Tax Saving Funds: Provide tax benefits under Section 80C with equity investments.

Types based on Structure

1. Open-ended Funds: Offer continuous buying and selling flexibility.
2. Closed-ended Funds: Have fixed maturity periods and limited units.
3. Interval Funds: Combine features of open and closed-ended funds.

Types based on Risk

Mutual Funds are a good investment option for investors looking to diversify their portfolios. Instead of taking exposure to only one company or industry, a Mutual Fund investor invests in different securities and minimises your portfolio's risk.

Mutual Fund returns are calculated by computing appreciation in the value of your investments over a period as compared to the initial investment. The Net Asset Value of Mutual Fund indicates its price and is used in calculating returns for your Mutual Fund investments. Using a MF Calculator, you can easily calculate the returns on your mutual fund investment.

By investing in Mutual Funds, an investor can earn returns in the form of capital gains and dividend* income, which are taxable in the hands of the investor.

• Capital gains/ losses arise when an investor sells any number of units of Mutual Funds.

• An investor receives a dividend in proportion to the number of units held at the time of announcement of the dividend, distributed by companies when they earn a surplus.  

Tax on Capital Gains arising from the sale of Mutual Fund units:

The capital gains depend on the period of holding (short-term or long-term) and the type of capital asset.

• In the case of Equity Mutual Funds, an investment with a tenure of less than 1 year is a short-term investment. An investment with a tenure of more than 1 year is a long-term investment.

• Debt and Hybrid Mutual Funds will always be treated as short-term (irrespective of the period of holding) and taxed at applicable slab rates.

The Union Budget 2024 has introduced significant changes in the taxation of Mutual Funds which impact how various types of Mutual Funds are taxed in both the short-term as well as long-term.

* The Securities Transaction Tax (STT) is applicable on these funds as >=65% is invested in domestic equity shares.

BAFs are considered here as in most cases, BAF schemes maintain a gross exposure of 65% or more in equity and equity related instruments.

++ Irrespective of the period of holding, they will be treated as short-term.

** Equity Fund of Funds, International Funds and Gold Mutual Funds.

Debt Oriented Fund (>= 65% in Securities and Exchange Board of India (SEBI) regulated debt and money market instruments)

Hybrid Mutual Funds (> 35% and < 65% in SEBI regulated debt and money market instruments)

Specified Mutual Funds mean Mutual Funds where not more than 35 per cent of the total proceeds are invested in the equity shares of domestic companies. The definition of the ‘Specified Mutual Fund’ is amended from FY 2025-26 as below:

(a) Mutual Fund which invests more than 65 per cent of its total proceeds in debt and money market instruments or

(b) A fund which invests 65 per cent or more of its total proceeds in units of a fund referred to above.

Tax on Dividend Income received from Mutual Funds:

• Since <Apr 1, 2020>, Mutual Fund dividends have been taxable in the hands of investors. Dividend income is taxable under the head ‘Income from other Sources’ as per the individual’s income tax slab rate. 

• In addition to such taxation, the distributor of dividend* income must deduct the Tax Deducted at Source (TDS) at a rate of 10%. However, TDS will not be deducted if the total dividend paid by such a distributor during the financial year is less than ₹ 5,000.

• If the customer fails to provide the PAN to such a distributor, 20% TDS will be deducted.

• For Non-Resident Indians (NRIs), TDS is required to be deducted at the rate of 20% subject to the DTAA (Double Taxation Avoidance Agreement), if any.