Mutual Funds
Mutual funds (MF) act as intermediaries and facilitate investments in various securities (stocks and bonds). One might wonder why do I need to invest in a MF When I can just invest directly?
The advantage though MF
It allows you to minimize risk and maximize returns, because it acts as a middle man for a likeminded group of investors with a shared and predefined objective. If your main objective is security in investment but you don't know how to begin, a MF is the way to go. Typically, a fund manager will manage the fund, and since you are one shareholder in the fund, you have the added advantage of easy investment, and lower trading costs.Who are the fund managers?
Asset management companies (AMCs) approved by the Securities and Exchange Board of India (Sebi) manage the funds by making investments in various baskets of securities. All recognized AMCs are monitored by higher authorities and stringent regulations, and funds are managed by professionals who have the necessary expertise.Is your risk minimized?
Investing in a MF means investing in more than one stock. Some fund managers will diversify your investment further by buying a mosaic of stocks and bonds. Investing in a large number of assets, means that a loss incurred on one investment is minimized by gains in others.Is trading costs reduced?
The AMC buys and sells large amounts of securities at a time, transaction costs are reduced, and the benefit is passed on to the investor, because the average cost of the unit is lowered.How do I see returns from a MF?
Following are the ways in which you will see returns on your investment in a mutual fund:- By dividends on stocks and interest on bonds; and
- Through capital gains, if the fund sells securities that have increased in price;
MF can either be open-ended or close-ended in nature. With open-ended funds, you enter or exit the fund any time during the scheme period. Thereby providing a high degree of liquidity. Close-ended funds, means that an exit is possible only when the scheme period is over. MF schemes in India are varied and cater to a wide range of requirements and profiles, based on your financial position, tolerance to risk, and expectations of returns. Each MF has a specific stated objective.
The fund's objective is laid out in the prospectus. This is the legal document that contains information about the fund, its history, its officers and its past performance. Higher the risk, higher the return in Equity funds. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes invest a major part of their fund in equitites and are willing to bear short-term decline in value for possible future appreciation.
They may be furture classified into diversified Equity Funds , sector Specific Funds,mid-cap funds and Tax savings Funds (ELSS). Debt funds, or income schemes,invest in dept intruments. These are issued by the government,private companies,banks and other financial institutions, and promise low risk and a stable income.
These scheme invest in fixed income securities such as bond and corporate debentures.Capital appreciation in such scheme are limited. These are further classified as Gilt Funds, Income Funds, MIPs, Short Term Plans and Liquid Funds. Hybrid funds. are a mix of both equity and debt funds.They invest in both equities and fixed income securities, offering both growth and stability. Money Market Schemes offer high liquidity, preservation of capital and a moderate income.These schemes invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
ELSS offer tax rabates to the investors under tax low. For example, under Sec 80C of the Income Tax Act, contributions made to any Equity Linked Saving Schemes(ELSS) are eligible for rebate. Index scheme track and try to copy the performance of a particular index such as the BSE Sensex.
The stock in these portfolios will mirror those in the Index, as will the percentage of each stock retained. Returns will therefore mirror the movement of the Index. Lower the tracking error, better is the performance of funds. A further benifit from investing mutual funds is the 100 per cent income tax exemption on all mutual fund dividends. For Equity Funds, short-term capital gains are taxed at 15 per cent. Long-term capital gains are nil. For Debt Funds, short-term capital gains are taxed as per the slab rates applicable to you.
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