A Mutual fund (MF) is a pool of money collected from various investors with common financial goals to be invested in different investment opportunities. These opportunities could be equities, bonds, gold, or any other financial instruments. Fund managers use various mutual fund schemes to invest money on behalf of the investors. The return earned on the pool of money then gets distributed among all the investors based on their investment proportion.
Unlike the stock market where investors invest in each stock individually, mutual funds are a combination of stocks that help diversify your portfolio. There are different types of mutual funds and various ways in which investments take place.
Let's find out.
In active funds or actively managed funds, fund managers regularly work on the fund’s portfolio. Managers continuously analyze the market and use their expertise and judgment to allocate assets based on market conditions.
Contrary to active funds, passive funds replicate the market index. (For example NSE Nifty 50, BSE Sensex, etc.) Here, fund managers don’t make frequent changes to asset allocation. Investors don’t have to rely on constant market analysis and expert judgment.
Open-ended funds are available to purchase/subscribe to with no maturity period. Investors can buy/sell units as they please. The NAV is declared every day for investors to track and modify their investments as and when they want.
Closed-ended funds are available to purchase only for a specific period of time at the launch of the scheme. These funds have a maturity period of usually between 3 to 5 years. They are available to purchase only during New Fund Offer (NFO).
Equity Mutual Funds invest in companies that belong to different market capitalizations (small-cap, mid-cap, large-cap), sectors, or themes. ELSS offers tax benefits under Section 80C of the Income Tax Act.
These funds are more likely to deliver better returns than other schemes but can be riskier.
Read more about- 7 Common Types of Equity Mutual Funds
Debt funds, also known as bond funds, allocate assets to bonds such as corporate bonds, government bonds, commercial papers, treasury bills, etc.
These funds are further classified based on duration into Liquid Funds, Corporate Bonds, Banking and PSU, Gilt Funds, Short Term funds, Long Term funds.
These funds are safer to invest in but deliver lower returns compared to equity funds. However, debt funds deliver superior tax-adjusted returns as compared to Fixed Deposits.
Read more about- 15 Common Types of Debt Funds
Hybrid mutual funds distribute assets in both equity and debt instruments depending on the scheme’s objective.
While equity allocation can bring decent returns, debt allocation offers security against volatile markets thereby creating a perfect balance.
These funds can be further classified as Dynamic Asset Allocation funds, Aggressive Hybrid funds, Multi-Asset Allocation funds, or Monthly Income Plans.
The capital gains (total return) of mutual funds are taxed based on the type of scheme and the holding period.
Investments redeemed before 12 months fall under Short Term Capital Gains (STCG). Investors have to pay a 20% tax on short-term capital gains of mutual funds.
On the other hand, investments redeemed after 12 months fall under Long Term Capital Gains. In this case, the capital gains over INR 1.25 lakhs will be taxed at 12.5%. Capital gains below 1.25 lakhs are tax-free.
Capital gains on debt funds sold before 24 months are considered short term, otherwise long term. As per new rule, both short and long term capital gains on mutual funds are taxed as per investor's tax slab.
As mutual funds allocate your money to different stocks, it makes your portfolio diverse and delivers superior returns over the years.
You can sell/redeem mutual funds units quite easily on any business day. The money gets credited to your account in T+1 day in case of liquid funds. T stands for transaction day. For example; if you redeem the liquid fund on Monday, the amount is credited to your account on Tuesday.
For other debt funds, the TAT (Turnaround Time) is T+2 and for equity mutual funds, it’s T+3.
Once you invest your money, you don’t have to worry about which sectors to invest in, which companies within those sectors, what proportion to invest in, and how much exposure to take in debt and equity, etc. Fund managers take those calls and handle asset allocation to ensure superior returns.
You can start investing in mutual funds via a Systematic Investment Plan with as low as INR. 500 per month.
ELSS mutual funds offer tax benefits on investments up to INR. 1.5 lakhs under Section 80C of the Income Tax Act. You can also gain indexation benefits on debt mutual funds if you hold them for 3 years or more.
Why select individual stocks and spend hours analyzing markets when you can just invest in mutual funds?
Mutual funds are suitable for anyone who wants to explore multiple stocks without actually managing them. Fund managers can handle and may multiply your money with their market analysis.
There are various types of mutual funds that can align with your financial goals. You can start a SIP of INR. 500 per month and gradually build wealth for retirement.
Don’t wait anymore. Start investing in mutual funds. For in-depth insights on your portfolio and risk profile, contact experts at VNN Wealth, and we will help you meet your financial goals.
