A mutual fund is a trust. It pools money from like-minded shareholders and invests in diversified portfolio of securities, through various schemes that address different needs of investors. The pool of money thus collected is then invested by the Asset Management Company (AMC) in different types of securities. These could include shares, debentures, convertibles, bonds, money market instruments or other securities, based on the investment objective of a particular scheme. Such objective is clearly laid down in the offer document for that scheme. The fund adds value to the investment in two ways: income earned and any capital appreciation realised through sale. This is shared by unit holders in proportion to the number of units they own
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An AMC is involved in the daily administration and also acts as investment advisor for the fund. An asset management company is promoted by a sponsor which usually is a reputed corporate entity with sound record of profits. An AMC typically has three departments:
Mutual fund schemes can be classified as follows:
Open ended funds can issue and redeem units any time during the life of the scheme. Close ended funds cannot issue new units except through a bonus or rights issue. Hence, unit capital of open ended funds can fluctuate daily. Further, new investors to an open ended fund can join the scheme by directly applying to the mutual fund at applicable Net Asset Value-related prices. In the case of close ended schemes, new investors can buy units only from the secondary market
It is a document which an open-end fund, or newly issued closed-end fund, is required to provide to investors. Funds say that investors should read it carefully before investing or sending money. A prospectus contains descriptions of: Fees, in a standardized format Investment Objective Some financial data Investment methods Risk factors and description Investment management and compensation Dividend and Capital Gain distributions Other services
The net asset value (NAV) is the market value of the fund's underlying securities. It is calculated at the end of the trading day. Any open-end fund buy or sell order received on that day is traded based on the net asset value calculated at the end of the day. The NAV per units is such Net Asset Value divided by the number of outstanding units
A mutual fund may receive dividend or interest income from the securities it owns; it is required to pay out this income to its investors. Most open-end funds offer an option to purchase additional shares with the dividends. Dividends are often made monthly or quarterly, though many funds make distributions only yearly
No stock market related investments can be termed safe with certainty; they are inherently risky. However, different funds have different risk profile, which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets
Equity Funds are open to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested may decrease. Of course, the prices may also go up, making it possible for the Fund to earn profits Debts Funds are open to two main risks - Credit Risk and Interest Rate Risk. Credit Risk refers to the possibility that the company that has issued the bond or debenture in which the Fund has invested may default on interest or on principal payments. Debt Fund managers take care of this by investing in bonds which have good credit rating Interest Rate Risk refers to the possibility that the price of the bond in which the Fund has invested may go down because of an increase in the interest rates in the economy. In general, it is useful to remember that this is a "see-saw" relationship - bond prices (and therefore, NAV) goes up when interest rates drop and drops when interest rates rise
Some mutual funds have floated "assured" return schemes that guarantee a certain annual return. At present, there are very few funds who assure returns as they have realized that it is not possible to assure returns in a volatile market
There are three ways in which you can make money in a Mutual Fund First you can earn a dividend from the Mutual Fund. Most Debt Funds declare dividends around once in six months in their Dividend Option. If you do not want the dividend, you can choose to be in the Cumulative Option. When a dividend is declared, the NAV of the units will fall, since dividend is paid out of the appreciation in the value of the unit Next, you can make a profit by selling the mutual fund units at a price higher than that at which you bought them. This is capital gain. (If you sell the units at a lower price, you make a capital loss.) Finally, the value of the units you hold can appreciate. This is unrealised capital gain. Dividends and capital gains are treated differently
20% rebate on contribution upto Rs 10,000/- under ELSS (equity linknewed saving schemes)
Mutual Funds can meet the investment objectives of almost all types of investors. Younger investors who can take some risk while aiming for substantial growth of capital in the long term will find growth schemes (i.e. funds which invest in stocks) an ideal option Older investors who are risk-averse and prefer a steady income in the medium term can invest in income schemes (i.e. funds which invest in debt instruments). Investors in middle age can allocate their savings between income funds and growth funds and achieve both income and capital growth. Investors who want to benefit from regular savings, save a small sum every month, can use the Systematic Investment Plan
Mutual funds are meant for small investors. The prime reason is that successful investments in stock markets require careful analysis which is not possible for a small investor. Mutual funds are usually equipped to carry out thorough analysis and can provide superior returns
“AN EDUCATION CESS OF 2 PERCENT ON INCOME TAX, CORPORATE TAX, EXCISE DUTIES, CUSTOMS DUTIES AND SERVICE TAX TO BE LEVIED”. Meaning : An education cess tax is levied at 2% on TDS or advance tax paid, inclusive of surcharge. On the income tax plus surcharge payable by all categories of taxpayers, there will be an Education Cess at the rate of 2% thereon of such tax and this new tax is applicable to Excise Duties, Corporate Tax, Customs Duties and Service Tax. (A) Example for Mutual Fund: In the mutual fund context, TDS is applicable to NRI investors. The following is the calculation of TDS on short term capital gain including education cess tax. Assume that the redemption proceeds are 1,00,000/- and Short Term Capital Gains out of the transaction is Rs. 500/-. TDS would be 30% as per tax slab + 10% surcharge + 2% education tax (33.66 %) = 500*33.66/100 = 168.30 The amount payable to investor is 1,00,000.00 – 169.00 = Rs. 99831.00 and the Rs. 169/- will be remitted to treasury as TDS. (B) Example - Impact on Income Tax : No change in existing Income Tax Rate and Surcharge otherwise stated below. An Additional Surcharge @ 2% (on aggregate amount of Income tax and existing surcharge) is proposed as Education Cess. A person having taxable income exceeding Rs one lakh will now be required to pay in addition to income tax (after rebate under Chapter VIII-A) an education cess at the rate of two per cent. The tax proposals also specify that a person having income exceeding Rs 8.5 lakh in this slab would be required to pay 10 per cent surcharge on the total income tax payable after the rebate under Chapter VIII-A, and also the education cess at the rate of 2 per cent. (C) Example for Interest on NRE NRE, FCNR & RFC Account : Any interest paid or credited on or after 1st September, 2004 in respect of deposits in NRE, FCNR and RFC account of an individual shall be taxable at normal rates of taxation. The bank shall be required to deduct tax at 33.66% (i.e. Income Tax 30% + Surcharge 10% + Education cess 2%). However, if such deposits are with an Indian company or bank, which is an Indian Company not being a private company as defined in the Companies Act, 1956 (1 to 1956), the rate of TDS shall be 22.44% (i.e. Income Tax 20% + Surcharge 10% + Education cess 2%). { Disclaimer : This contents above should not be considered as substitute for specialized professional advice and expert guidance may be sort before acting upon }
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