A mutual fund is a pool of money from numerous investors who wish to save and grow their money. However, they want to invest in such a way that there money works harder for them. So, their money is pooled together and managed professionally. Now, this requires specialised skill’s. To do this, some organisations create mutual fund schemes which are managed by professional fund managers.
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.
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. Write to us firstname.lastname@example.org to let us help you in completing KYC.
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 approapriate application form (CKYC-Individual Form or CAMSKRA Non Individual Form) 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 ( email@example.com) for help in this regard.
Some mutual fund companies offer the facility on online KYC. If you have aadhar card and the have the same phone number that was given at the time of aadhar application, you can do e-KYC. We can help with that. However, in aadhar based e-KYC, you can annually invest only upto Rs 50000 per mutual fund company.
No, you dont need demat account for investing in mutual funds.
Predominantly, there are two asset classes:
- Equity – This simply means stock market investments. Equities can be further divided based on size of the stock. A small company with low market cap is small cap stock. A big company like Infosys is large cap.
- Debt or Fixed income – This is simply investing in bonds issued by government or companies. They can be further subdivided based on the maturity of bonds. A bond whose maturity is 10 years from today is long duration bonds. A bond whose maturity is one month from now is more like a fixed deposit.
- Hybrid or balanced funds- Mix of equity and debt funds. If equity component is >65% of the portfolio, its equity oriented fund, else debt oriented hybrid funds.
Based on above, we have 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. So equity mutual funds can be:
- Diversifies equity funds – invest in stocks of all sectors.
- Sectoral funds and Thematic funds- Invest in stocks of a sector or few sectors only. Thematic funds invest in stocks that are linked to some theme, like, infra.
Based on market capitalization of stocks, mutual funds can be:
- Small cap equity fund- will mainly invest in smaller companies.
- Large cap equity fund- these will mainly invest in bigger companies like only in stocks of say NIFTY 50 index.
- Multi cap equity fund- who can invest in small as well as large cap stock based on their view where the opportunities are.
Now in debt, the classification could be based on duration of bonds (short duration, long duration or fixed maturity) or it could be based on type of issuers of the bonds (government or corporates).
- Cash fund, liquid funds – mutual fund which invests primarily in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits.
- Long duration bond funds- These will invest in longer maturity bonds.
- Dynamic bond funds- These funds have the flexibility to change maturity based on where they think they can make more money.
- Fixed maturity plans- Here the maturity of the scheme is fixed and bonds are bought with the same maturity as the maturity of proposed scheme. So, we have 1 year FMP, 3-year FMP etc.
Now, the debt funds can be also categorised based on the type of issuers of debt
- Government bond fund- where the investment is only in the bonds issued by government. These funds are safer as government is unlikely to go bankrupt and default.
- Corporate bond funds – in these funds, the investment is made in bonds issued by corporates. Normally these can offer higher return but also have default risk.
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.
Mutual funds offer several advantages. Some of the main advantages are:
- Professional fund management at low cost- While many of us have achieved professional excellence in our chosen are of work, we may not be an expert when it comes to investing. Mutual funds offer the advantage of a managing your money by a professional whose full time is to make prudent in investment choices. Annual expenditure of most equity mutual fund is between 1.5% to 2.5%. Now if you are buying stocks through broker like HDFC security or ICICI direct, one buy and sell transaction will cost more than 1% .
- Flexibility – Mutual funds offer flexibility at three levels – first- depending on your risk appetite, your can chose 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. You 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 . 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 it’s planning for retirement or your kid’s future. Hence, they deserve place in your portfolio.
From large cap diversified equity funds: Between 12% to 15%
From mid and small cap equity funds: between 14% to 18%
From liquid/ultra short-term bond funds: between 6% to 7%
From dynamic bond funds: between 7% to 10%
The returns from long-term government debt fund will be less than 7%, in current environment.
Disclaimer: All returns mentioned above is annualized pre-tax return over medium term.Please remember, above return (in the case of equity funds) is based on assuming systematic investing in equity funds. This is based on our work but actual return may vary. As we all know, mutual funds are market-linked instruments and no one can guarantee any level of return but we can certainly make a guess about what to expect.
Apart from NRI investors, there is no tax deducted at source from mutual funds. While filing income tax returns, resident investors should show their income from mutual funds and their profits will be taxed accordingly. Non resident investors can claim back taxes deducted at source if their taxable income in India is less than the exemption limit. Profits from mutual funds are divided into two categories-
- Short-term capital gain– For equity mutual funds, if you sold your mutual fund holdings in less than 1 year, you will have to pay short term capital gain tax on the profit. For equity mutual funds, short-term capital gain is taxed at 15% (plus applicable cess/surcharge). 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.
- Long-term capital gain – For equity mutual funds, if you sell your mutual fund after 1 year, the profit is termed as long-term capital gain. Long-term capital gain from equity mutual funds is tax free and hence you don’t have to pay any taxes. 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.
What is indexation benefit for debt mutual fund- Let’s assume I bought debt mutual funds of rs 100. After three years, I sold my mutual fund holdings and receive 130 rs. Now, my profit is 30 rs (130-100). If I cost to pay 10%, I will pay 3 rs as tax (excluding cess etc). Now, during the 3 years that I kept mu mutual funds, let’s assume that inflation was 7%, 8% and 9% respectively.
So my indexed purchase cost is 100*(1.07*1.08*1.09)= 125.96. Now I received 130 rs from selling my mutual fund holdings. So my profit is (130-125.96) = 4.04 rs. I pay tax of 20% on this profit. The tax will be 0.81 rupees or 81 paise.
As a prudent investor, I will pay the tax using indexation benefit and pay tax of just 81 paise. You can find more information here
To boost the saving culture, government incentivizes financial saving and investments. In this context, any one can get reduction in his/her taxable income by investing in approved financial instruments. Currently, you can invest upto 1.5 lacs for tax saving purpose.
Earlier,most of the investments made for tax saving purpose was in instruments like PPF, NSC etc. These are debt instrument and while these guarantee a certain level of return, the return offered might not be high enough to beat inflation.
Equity linked saving scheme are approved tax saving mutual funds that-
1. Invest in stocks
2. Have a lock -in period of only 3 years, much lower than 15 years for PPF. Also the return generated from this investment is total tax free. Hence, investments in ELSS is exempted from tax at the time of purchase and there is no tax on the profit as well.
3. Also generate a return in the range of 12 to 15%(medium to long-term), much higher than the return offered by PPF or NSC.
4. However, return is not guaranteed and there is risk that values fluctuate. But if you are investing with more than 5 years, very unlikely that you will get less return than PPF or lose money.
Below is the comparison of main tax saving instruments:
A Non-Resident Indian (NRI) is a citizen of India who holds an Indian passport and has temporarily emigrated to another country for six months or more for employment, residence, education or any other purpose.
There is no restriction on NRIs investing in India. Furthermore, NRIs don’t need any pre approval from any regulatory authority for investing in mutual funds. NRIs can invest in Indian mutual funds after fulfilling ‘KYC’ requirements. They will need non-resident external (NRE) or non-resident ordinary (NRO) bank account to do the transactions.
Mainly there are two requirements:
- KYC compliance.
- NRE/NRO/FCNR bank account for making investments or receiving redemption proceeds.
The rule for KYC of NRI investor is the same as that for domestic investors. They need to submit following documents to the distributor or CAMS/KARVY/Mutual Fund:
- Self attested copy of PAN
- Self attested copy of Passport
- Address proof (both Indian and overseas)
- Passport size photograph
- KYC Form
You can check the complete set of instructions in the KYC form.
In person verification: In person verification ensures that some authorized person has verified the xerox copies of documents against the original documents. When NRI’s are visiting India, they can do in-person verification by visiting the CAMS centre or any bank.
Furthermore, for NRIs, officials of overseas offices of scheduled commercial banks registered in India, Notary public, court magistrate, Judge, Indian embassy consulate journal in the country where the investor resides can attest the documents.
Most importantly, with the arrival of CKYC, most probably if you are opening new bank a/c, you are probably already KYC compliant. If you are visiting India, we can do IPV and help with KYC. Contact us at firstname.lastname@example.org for more details.
Repatriable investments: Such investments are made through money in Non-resident external (NRE) accounts or FCNR accounts. These type of accounts are funded by money remitted from abroad. Redemption proceeds of such investments can be repatriated.
Non-repatriable investments: If the mutual fund investment was made through Non resident ordinary account, the redemption proceeds can not be repatriated. However, as per RBI, authorised dealers can allow remittance/s upto USD 1 million, of balances in NRO accounts/of sale proceeds of assets on production of an undertaking by the remitter together with a certificate issued by a Chartered Accountant in Annexure A and B as prescribed by the Central Board of Direct axes (CBDT).
Foreign Account Tax Compliance Act (FATCA) came into existence in 2010 and India signed the Inter-Governmental Agreement (IGA) with the USA on July 9, 2015, for improving International Tax Compliance and implementing FATCA.
Under FATCA, it is compulsory for all financial institutions to share the details of transactions involving US citizens, including NRIs with the US Government. This was done to ensure that US tax resident don’t indulge in deliberate tax evasion. While FATCA disclosures are needed for all investors, some mutual funds don’t accept investments from US and Canada tax resident people to avoid the heavy compliance burden put by the US government. The good news is that many major mutual funds accept investments from US and Canada based investors. As per Economic Times, the fund houses mentioned below accept investments from NRIs based in US and Canada
- Birla Sun Life Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- ICICI Prudential Mutual Fund
- DHFL Pramerica Mutual Fund
- L&T Mutual Fund
- PPFAS Mutual Fund
- Sundaram Mutual Fund
NRI investment income is taxed at the same rate as domestic investors. However, there is a difference in the manner in which it is taxed. Unlike domestic investment, tax is deducted (at the highest applicable rate) at source for NRI investments. The taxed amount can be claimed back as refund by filing tax. Alternatively, if the investor is in a country with which India has ‘double taxation avoidance agreement’, he or she can get a waiver for the tax paid in India.
We are AMFI registered mutual fund distributors with passion for personal finance. We are qualified professionals from IITs and top B-Schools with impeccable integrity and credentials. Here is our brief introduction:
Our value proposition is very simple:
- Unmatched professional expertise: Unlike most banks, who have sales people to serve you, we are professionals with background in investment research. Keep Investing has been started with people who have been educated at IITs/other premier institutes and have worked at top financial institutions in India and United Kingdom. So, you can rest assured that you are in safe hands.
- Personalized services: We do not think that ‘one size fits all’ approach works. You can rest assured that you will receive service that will be customized as per your financial situation.
- Ethical and professional conduct: We don’t have sales target and hence we keep our interests aligned with you. We only recommend products in which we believe.
Once we help you with KYC formality (or you are already KYC compliant), you are ready to invest. the steps that follow are as following:
- Client registration : We conduct all our transactions through the mutual fund platform of NSE (National Stock Exchange). For registration, we will need you to fill IIN FORM and provide copy of your PAN card and cancelled cheque copy. We can fill the details online also. After that, we send the signed application form and accompanying document to NSE for creation of client account. Upon successful creation of the client account, you will receive user id and password from NSE. Now you are ready to invest online or offline.
- Risk profiling and financial goal determination: Based on your risk appetite and financial goal (amount that you need for specific purpose like kid’s education and the time available for accumulating the corpus), we could suggest some mutual funds for you. We only facilitate investment through systematic investment plan or systematic transfer plans.
- Starting investments: Once we have finalized the mutual funds, we will start the SIP process. For starting SIP, we will need to submit SIP application form along with NACH mandate. If you already have lump sump amount, we can start systematic transfer plans (STPs). More details on STPs is available here.
- Redemption of investments: As you approach your financial goal or want to redeem your investment. You can do it online after logging into your account or instruct us to initiate the transaction on your behalf. Once the redemption order is placed, the money is directed credited to your bank account registered with the mutual fund company.
We are offering high quality services to you. For our services, we don’t charge our clients directly. We get remunerated from the mutual funds which ranges from 0.1% to 1%, depending on the type of funds. As we only recommend funds in which we ourselves invest, we believe that our interests are aligned.