All about Mutual funds

A mutual fund is a pool of money from numerous investors who wish to save and grow their money but either lack time or skill to manage it properly. So, their money is pooled together and managed professionally. Now, this requires specialised skills.  To do this, some organisations create mutual fund schemes which are managed by professional fund managers and this is regulated by SEBI.

Broadly, there are three types of mutual fund schemes:

Equity: This simply means stock market investments. Mutual fund schemes that predominantly invest in stocks of companies listed on the stock exchanges are called equity oriented mutual fund schemes.

 

Debt or Fixed income: Mutual fund schemes that predominanly invest in bonds issued by government or corporates are called debt or fixed income schemes. Return of debt schemes are less volatile and are suitable for risk-averse investors.

Hybrid or balanced funds: Mutual fund schemes that invest in both equities as well as debt instruments are called hybrid schemes. If equity component of the portfolio is more than 65%, the mutual fund scheme is called equity-oriented hybrid scheme else it is called debt oriented hybrid scheme. 

Based on above, we have mainly two types of mutual fund, namely equity mutual fund and debt mutual fund.

Now equity mutual fund can be further divided based on sectors in which they invest and also based on the market capitalization of the stocks. Similarly, debt mutual fund schemes can be categorised based on maturity of the debt instruments or type of issuer (government of corporates) of the debt instruments.

Mutual funds offer several advantages. Some of the main advantages are:

 

Flexibility: Mutual funds offer flexibility at three levels - First- depending on your risk appetite, you can choose debt or equity mutual funds. Then they also offer the option to start your investing journey with any amount (more than 500rs in some cases) you are comfortable with. The third layer of flexibility comes from ability to invest or redeem as per your requirement. You can invest on weekly, monthly or quarterly basis. Furthermore, as and when you have reached your financial goals, you can redeem your investments. Your money will be in your bank account in 3 working days (at most).

 

Tax efficiency:  If you hold equity funds for more than 1 year, you don’t have to pay any taxes upto a capital gain of 1 lacs. Further, equity mutual fund schemes have short-term capital gain tax of 15% and long-term capital gain tax (above 1 lacs) is 10%. These are someof the lowest rate of taxes on capital gain. If you hold debt funds for more than 3 years, you get indexation benefit and pay less taxes than what you will pay in fixed deposit. If you invest equity linked tax saving funds (ELSS schemes), you get tax exemption at the time of investing as well.

Transparency and tight regulation reduces fraud risk: In the last few years, people have lost lot of money through Ponzi schemes (remember Saradha scam). Mutual funds are market linked instruments and their values fluctuate but you are unlikely to lose money due to fraudulent practices.

Mutual funds are the most versatile, low cost and transparent instruments for all your financial goals, whether its planning for retirement or your kids future. Hence, they deserve place in your portfolio.

All Indian resident citizens are eligible to invest in mutual funds after fulfilling Know Your Customer requirement. Non-resident Indians, person of Indian origin, Hindu undivided family as well as corporates can invest in mutual funds, subject to fulfilling KYC requirements.

For investing in mutual funds, an adult person should have:

  • PAN card
  • Bank Account in his/her name
  • Know your customer or KYC compliance: Mutual fund companies need to ensure that the person in whose name investments are being made is the beneficial owner. Hence, regulators have mandated fulfilling KYC as prerequisite for mutual fund investments. KYC is one time activity and once KYC is done; it is valid across all mutual funds. You can check your KYC here. We can facilitate KYC. Please drop us an email (keepinvesting2014@gmail.com or info@keepinvesting.net) or call us at +91 824 764 6498.

For KYC requirement, you need to provide:

Address proof: Normally passport, bank statement, updated pass book, driving license etc

Identity proof: PAN card

Along with these you need to fill the appropriate application and submit it at the nearest office of CAMS. Please carry original as well as xerox of above documents. Registered mutual fund advisors can also do KYC after verifying your documents. Send us an  email (keepinvesting2014@gmail.com or info@keepinvesting.net) for help in this regard.

For resident Indian investors having aadhar, KYC can be done online. Reach out to us for completing KYC online.

Yes, legal guardians can invest on behalf of minors. For this, the guardian should be KYC compliant and the bank account should be under the name of child. Tax status of such investments is "on behalf of minor" and any capital gain is clubbed with the guardian. Once the minor attains the age of 18, the investor will need to update the same by submitting "minor to major' form and completing KYC requirement.

SIP or systematic investment plan is a way to invest in mutual fund schemes in which you invest equal amount every month on the same date. It is similar to recurring deposit but the difference is insteaf of fixed deposit, you have the flexibility to choose any mutual fund scheme. 

STP or systematic transfer plan is when you shift equal amount from one mutual fund scheme to other mutual fund scheme at specified frequency (daily, weekly, monthly etc). This is especially suitable when you have lump sum amount but you don't want to invest in equity at one go. What you do is to invest the lump sum amount into a debt fund scheme and from that you shift to chosen equity scheme at the chosen frequency.

How to invest

We are AMFI registered mutual fund distributor (ARN-119185). We help investors invest their money into suitable mutual fund schemes. We provide additional services in the form of general insurance, tax preparation.

Our entire process of investing is online and paperless. Mainly there are three steps:

Check the KYC: If you are already KYC compliant, you are ready to invest else we facilitate the KYC.

Onboard the KYC compliant investor: We need below details to onboard the client:

Name

PAN card number

BANK account details

Address

Mother's name

Nominee's name

Date of birth

Email address/phone number

Start investing: Onboarding process takes 1-2 days. Once onboarding is done, you are ready to invest.

 

Once onboarded, we give you log-in details for our website and mobile apps (both iOS and Android). All information about your investments with us is available online. You can log on to the "invest Online" section of the website and check the details. Further, you can also check details in the mobile app.

Yes, you can do the same also. However, unlike other mutual fund platforms, we provide customized services and it is always better to discuss the same with us.

Save more and invest more, grow more: How we invest (systematic or haphazard), how much we invest (savings rate is low or high) and how long we remain invested are the key controllables of the investor. There are lots of study that allude to the fact that investors may make mistakes in each of the above aspect. Most online platforms allow you to invest. We help investors with all the three elements of investing and can help you to make fewer or avoid investing mistakes by:

How we invest - Be systematic: Flows into mutual funds is more when the market is near its peak and there are outflows when market is down. It just means that most investors buy when markets are at high and sell when they are down. Prudent investing will demand just the opposite. Furthermore, we are strong proponent of  systematic investment. It protects us from making big investing mistakes.

Invest more: Sometimes we don't invest more as we are not too much focused on it. A friend who reminds you to invest more to reach all your financial goals can help you remain on track.

Remain invested - Handholding during turbulent market periods. Recently, in March 2020, we saw many investors selling in panic. We do the opposite. We can give you confidence to hold on to your investments during such dark period.

 

Choosing the right mutual fund depends on:

What is your investment time horizon? If your holding period is more than 5 years, only then you should venture into the world of equity mutual funds.

What is your risk appetite? Even if your investment time horizon is long, you are not comfortable with the ups and downs of equity market, you should favour debt-oriented funds. It is very important that you are comfortable with your choice of funds,

Often, we looked at combination of your investment time horizon and risk appetite to find which category of mutual fund is suitable for your specific scenario.

 

Taxation

When equity mutual fund is sold within one year from the date of purchase, short-term capital gain tax is imposed. The short-term capital gain tax rate is 15%.

When equity mutal fund is sold after being held for more than a year, long-term capital gain tax is imposed. However, long-term capital gain upto 1 year is exempt from long-term capital gain tax. Above 1 lacs of capital gain, long-term capital gain is taxed at 10%. For example, if someone had bought 5 lacs worth of equity mutual fund. If the value of equity mutual fund grows to 10 lacs and investor after holding it for more than 1 year, sells the equity mutual fund holdings. The total capital gain is 5 lacs. As long-term capital gain upto 1 lacs is exempted, long-term capital gain tax has to be paid on 4 lacs. So, on a capital gain of 5 lacs, he will have to pay 40000 as capital gain tax (5-1)*10%

For debt mutual funds, if you sell debt mutual fund holding in less than 3 years, you will have to pay short-term catalogue gain tax. The profit from debt mutual fund is added to your taxable income and it is taxed at the same rate as your applicable tax rate. If you are in 30% tax bracket, you will pay 30% tax on short-term gain from debt mutual funds.

For debt mutual funds, if you sell the mutual fund holding after more than 3 years, the capital gain is termed as long-term capital gain. You will have to pay 20% tax with indexation benefit (plus applicable cess/surcharge) on the profit.

 

There is no TDS or tax deducted at source for resident Indian investors. For non-resident Indians (NRIs), there is TDS. However, NRIs can claim tax refund by filing income tax return in India.