Mutual Funds
Financial instruments known as mutual funds make investments in a variety of securities. Stocks, bonds, money market instruments, gold, silver, and real estate investment trusts (REITs) are a few examples of these securities. Mutual fund units, which each represent a specific percentage of the mutual fund scheme portfolio, are available for purchase. Professional fund managers oversee mutual funds, managing the schemes in accordance with the schemes’ investment goals.
Equity Funds
Equity funds are mutual funds that invest primarily in stocks or shares of companies. These funds aim to provide long-term capital appreciation by taking advantage of the growth potential of the stock market. They are classified into various types, such as:
- Small-Cap Funds (invest in smaller companies with growth potential)
- Sectoral or Thematic Funds (focus on specific sectors or themes like IT, pharma, etc.)
- Large-Cap Funds (invest in large, established companies)
- Mid-Cap Funds (invest in medium-sized companies)
Risk: High, as they depend on stock market fluctuations.
Returns: Potentially high in the long term.
Debt Funds
- Liquid Funds (invest in short-term instruments, typically less than 91 days)
- Corporate Bond Funds (focus on high-rated corporate bonds)
- Gilt Funds (invest in government securities)
- Dynamic Bond Funds (adjust the portfolio as per interest rate changes)
Risk: Low to moderate, but sensitive to interest rate changes and credit risk.
Returns: Moderate and predictable.
Debt Funds
- Liquid Funds (invest in short-term instruments, typically less than 91 days)
- Corporate Bond Funds (focus on high-rated corporate bonds)
- Gilt Funds (invest in government securities)
- Dynamic Bond Funds (adjust the portfolio as per interest rate changes)
Risk: Low to moderate, but sensitive to interest rate changes and credit risk.
Returns: Moderate and predictable.
Hybrid Funds
Hybrid funds are mutual funds that invest in a mix of equity and debt instruments. They aim to balance risk and return by diversifying the portfolio.
- Aggressive Hybrid Funds (more equity than debt)
- Conservative Hybrid Funds (more debt than equity)
- Balanced Advantage Funds (dynamic allocation between equity and debt)
Risk: Moderate, depending on the allocation between equity and debt.
Returns: Balanced, with potential for both capital appreciation and income stability.
Taxation of Mutual Funds in India
• Short-Term Capital Gains (STCG): Gains from units held for less than 1 year are taxed at 20%
• Long-Term Capital Gains (LTCG): Gains from units held for more than 1 year are taxed at 12.5% on gains exceeding ₹1 lakh in a financial year.
• Short-Term Capital Gains (STCG): Gains from units held for less than 3 years are added to your income and taxed as per your income tax slab
• Long-Term Capital Gains (LTCG): Gains from units held for more than 3 years are taxed at 20% after indexation benefits.
Taxation depends on the proportion of equity in the portfolio:
• If equity exposure is more than 65%, they are taxed as equity funds.
• If equity exposure is less than 65%, they are taxed as debt funds.
Dividends from mutual funds are added to your income and taxed as per your income tax slab rate.
How to invest in mutual funds?
An asset management company (AMC) firm solicits public subscriptions through the New Fund Offer (NFO) when it introduces a new mutual fund scheme. Investors are given units at par value (often Rs 10) during the NFO period. You would receive 1,000 units if you invested Rs 10,000 in a mutual fund plan during the NFO period. To invest in mutual funds, you must comply with KYC regulations. You can fulfill KYC standards with the assistance of your financial advisor. To invest in mutual funds, you must submit bank account information in addition to KYC documents. Mutual fund investments can only be made from an investor’s personal bank account.
