WHAT IS MUTUAL FUND AND SIP?

Mutual Fund is a kind of Investment Vehicle that combines money received from Public and invest that sum in securities such as Shares, Debentures, Bonds, Digital Gold etc on their behalf. The sum total of all money is called Asset Under Management (AUM).

Mutual Fund is managed by Professional Fund Managers which are employed by Mutual Fund House. They can only invest in a security which is in their Scheme Memorandum.

This kind of investment vehicle helps people to get exposure in markets that they do not or cannot track on daily basis even with their small capital.

You can invest Lump Sum in one or many tranches, or you can decide a period when you are automatically invested by Bank Debit on a particular day. The period can be monthly, quarterly or Half-Yearly. The latter one is called Systematic Investment Planning (SIP).

HOW MUTUAL FUND WORKS?

The unit to measure Mutual Funds is ‘UNIT’. The price of a Mutual Fund Unit is called NAV (Net Asset Value).

Just like there is IPO of stocks and Bonds, there is NFO (New Fund Offer) for Mutual Funds, the period in which a new mutual fund scheme gets initial investment. Generally, NAV for 1 Unit is kept at Rupees 10 in this period.

After the NFO period is over, Mutual Fund Manager invest that sum within the asset class mentioned in prospectus and memorandum of the Scheme, the NAV keeps changing now with the fluctuation of the Investment made.

There are mainly 2 kinds of Mutual Fund on the basis of their acceptance of new investment from public: Open Ended and Close Ended.

An open ended mutual fund scheme is the one which keeps accepting money even after the NFO period is over. The new unit allocation happens at prevailing NAV at that time. These funds are mostly listed, so as to provide investors an ease to track and invest in them.

A Close Ended Scheme is the one which do not accept any further investment after NFO period is over. However, you can withdraw or sell your Units after Lock-in Period is over.

WHERE TO BUY MUTUAL FUND?

It is advisable to buy Mutual Funds from trusted person and websites only.

You can buy it from Mutual fund distributors and advisors, they select the scheme most suitable to you own your behalf. It is called Regular Plan. If you are new and do not understand different asset class, schemes and stock much, you can take help from them.

If you have chosen the scheme you want to invest in, it is better to buy direct plan to avoid advisor and distributor commission. You can buy direct plan schemes from the fund house website or branch. However, if you want to invest in many different fund house schemes it is better to buy from your stock brokers you trade with, so you can track all of them at one place.

Some of the stock brokers have become distributors, who put your investment in Regular Plan so as to earn commission. Always check which plan broker is offering you.

You can buy direct plan from “Coin by Zerodha” as they sell direct plans only, with no hidden charges.

WHICH MUTUAL FUND IS THE BEST?

There are many Mutual Funds like Equity Mutual Fund, Debt Mutual Fund, Hybrid Mutual Fund (Equity and Debt Mixed), Gold Mutual Fund etc.. Among the Equity Mutual Funds, there are Large Cap, Mid Cap, Multi Cap, ELSS etc. (Complete explanation in next Blog)

So first of all, you have to decide what kind of Asset Mutual Fund you want to buy according to your risk appetite. Mutual Fund Scheme also has a risk-o-meter which indicates risk involved. Short Term Debt Mutual Funds has low risk while Mid Cap – Small Cap Equity Mutual Fund has high risk.

Let’s assume you want to buy Large Cap Equity Mutual Funds (which only invest in Top 100 Listed Companies by Market Cap.)

Now check which mutual fund houses offer Large Cap Mutual Fund Schemes.

Sort them with Highest Return in 1 year, 3 Year and 5 years, that will enable you to find consistent performers.

If you understand stocks a bit, also check their portfolio and Top 10 holdings.

Among the top performer schemes, choose Fund House with long track record to be in this industry and backed by good promoter. Generally you will find SBI, HDFC and ICICI mutual fund scheme in every category, good to start with them.

Lastly, check their Expense ratio, Entry Load and Exit Load. Schemes with low expense ratios and No Entry Load and Exit Load are better.

There are no fixed criteria to find Best Mutual Fund, but this should help. All these data are freely available on many websites.

CAN WE SELL MUTUAL FUND HOLDING ANYTIME?

Yes, Mutual Fund units can be sold fully or partially anytime. However, Lock-in period (Few years after the NFO Period is over) which is pre determined is required to be checked. All Schemes whose lock in period is over can be traded on daily basis. However, NAV price changes only once in a day, so all trades execute at that price only.

WHEN NAV IS UPDATED IN INDIA?

Mutual Fund NAV is updated only once in a day at 11 PM on a working day. The cut-off time to invest on the same working day is 3 PM.

Here is the NAV and Investment Matrix taken from Association of Mutual Fund website:

WHAT IS EXPENSE RATIO IN MUTUAL FUND?

Expense Ratio is the total expenditure made to manage money divided by total AUM. These expenses include Managers and other staff salary, share/ bond transfer fees and brokerages, distributor commission, advertisement expenses, legal fees etc. It is not directly or separately charged from investors. These expenses are deducted from total AUM (Asset Under Management) of the Scheme. As the same is deducted from AUM, NAV reduces.

The expense ratio is presented in Annual Percentage and charged on a daily basis irrespective if the fund makes profit or not.

The said expense ratio is higher in Regular Plan, as it includes distributor and advisor commission and lower in Direct Plan, where you can directly invest in a scheme by yourself and save around 0.50% annually.

Regardless to say, lower expense ratio schemes are better.

IS MUTUAL FUND INVESTMENT SAFE?

Mutual Fund Industry is regulated by Securities and Exchange Board of India (SEBI). It has made many rules and regulation to curb any fraud.

However, safety of a Mutual Fund can only be decided by the Investment they make from the Asset Under Management (AUM).

The AUM is spread among many Stocks and Bonds; therefore payment breach from a few companies may not hurt overall return. It is always advisable to check portfolio holding of any mutual fund scheme before investing in it.

ARE MUTUAL FUND RETURNS TAXABLE?

Debt Mutual Funds earn you through Interest Payment and Equity Mutual Funds through Dividend. Apart from that there are Capital Gains (Difference between buying and selling NAV).

All 3 types of earning Interest, Dividend and Capital Gain are subject to tax.

Hybrid Fund which invests 65% or more of its AUM in Equity is treated as Equity Fund for Tax purpose.

If you are a taxable person, who has gross yearly income above the prescribed threshold, you will have to pay tax on Dividend and Interest income as per the slab rates in ‘other income’ head.

Suppose you buy 100 Units of an Equity Mutual Fund at 750 Rupees per unit and sell it at 900 Rupees. The difference of Rupees 15,000 (150*100) is taxable under ‘Capital Gains’ head.

CAN MUTUAL FUND INVESTMENT SAVE TAX?

The answer to this question is also affirmative J

Mutual Fund can save your tax. There is a specific type of Mutual Fund called as ‘Equity Linked Saving Scheme’ (ELSS).

If you are a taxable person and invest in ELSS, a maximum sum of Rupees 1,50,000 is deductible from your Gross Income if you invest in it. This deduction is available under section 80C of the Income Tax Act.

As the name says, this Mutual Fund invests its AUM in Equity and there is also a Lock-in period of 3 Years. If you withdraw the sum before lock-in period is over, your tax deduction would be reversed. Gains from selling ELSS Units are taxed as per table showing above.

WHY YOU SHOULD INVEST IN MUTUAL FUND?

The following benefits make mutual fund a necessary investment

1.       Mutual Fund Investment enables you to own diversified Portfolio of so many stocks or other assets even with low capital.

2.       You do not have to track markets every day. So it saves time.

3.       Higher Return than other investment options with low risk.

4.       Gives you liquidity to withdraw anytime.

5.       Legal authorities have made it completely transparent. Chances of fraud are very low.

6.       Tax saving option is also available.

To this we conclude, Mutual Fund sahi hai!

Mutual Fund Investments are subject to market risk, please read all scheme related documents carefully before investing. (Can’t complete anything on Mutual Fund without these words haha!)