What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets

Which was the First Mutual Fund to be set up in India?

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64

Which are the other institutions that have floated Mutual Funds in India?

Currently public sector banks like SBI, Canara Bank, Bank of India, institutions like IDBI, GIC, LIC Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra etc. have floated their own mutual funds

How many Mutual Funds are there in India currently?

Presently there are 33 Mutual Funds in India and close to 400 mutual fund schemes. We will very soon be putting up detailed analysis of major schemes operating in India.

Why has the concept of mutual funds taken so long to pick up in India?

Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up.

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Currently the total funds under mutual fund management in India are a little over Rs.100,000 crore. Out of this UTI accounts for nearly 70 percent while the private funds account for around 22 percent. The balance 8 percent is managed by mutual funds floated by public sector banks and financial institutions.

What is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.

Why should I choose to invest in a mutual fund?

For a retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:

• Mutual Funds provide the benefit of cheap access to expensive stocks

• Mutual funds diversify the risk of the investor by investing in a basket of assets

• A team of professional fund managers manages them with in-depth research inputs from investment analysts.

• Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

If that is the case then why has Morgan Stanley Fund given such poor returns?

A very important factor that determines the returns on a fund is the timing of the fund’s launch. Morgan Stanley Fund was launched when the equity markets were at their peak and then saw a sustained downtrend for close to 5 years. That is the reason the fund has taken such a long time to appreciate.

Can mutual funds be viewed as risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.

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A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.

In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.

Yes. But the only difference is that in case of open-ended funds, a month after the initial offer closes the continuous offer period starts when the investor can enter and exit the fund at a price linked to the NAV

Generally every fund levies either an entry load or an exit load or both to provide for administrative and other routine costs. The purchase price will be higher than the NAV to the extent of the entry load and the redemption price will be lower than the NAV to the extent of the exit load.

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.

One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.

Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

As a service to the investing community, We do it for you. Our research team evaluates each scheme based on primary as well as secondary information and presents an unbiased report which will help you to take a decision on whether a fund is worth investing or not

Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary

That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-income youngster is most likely to opt for growth plan.

A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.

A systematic investment plan (SIP) offers 2 major benefits to an investor:

• It avoids lump sum investment at one point of time
• In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment

NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary

Once again this decision will depend on factors like your income, savings, risk aversion and tax status.

In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.

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For the guidance of the investors our web site is giving a detailed analyses of the forthcoming schemes of different mutual funds .You can visit our website to get such information on forthcoming scheme openings.

As per Sebi Regulations, mutual funds are not allowed to assure returns. However, funds floated by AMCs of public sector banks and financial institutions were permitted to assure returns to the unitholders provided the parent sponsor was willing to give an explicit guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed returns to their investors.

Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.

An entry load is an additional cost that an investor pays at the point of entry. Assume that your proposed investment is Rs.10,000/-. Also assume that the current NAV of the fund is Rs.12.00 and that the entry load is Rs.0.50. Then you will receive 10000/12.50 = 800 units. For detailed explanation of entry load, refer our mutual fund glossary.

An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200. For detailed explanation of exit load, refer our mutual fund glossary.

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Yes. One can redeem part units also.

The moment you buy or get allotted the units, a passbook will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.

As an investor you need to exercise caution in two areas :

• Most funds while advertising tend to annualize their monthly returns which is arithmetically correct but technically wrong because usually such returns are not sustainable.
• The fund must have a sound strategy for analyzing and investing in infotech companies
  

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds :

• MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
• MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
• The net worth of the AMCs should be at least Rs.5 crore.
• AMCs and Trustees of a MF should be two separate and distinct legal entities.
• The AMC or any of its companies cannot act as managers for any other fund.
• AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
• All MF schemes should be registered with SEBI.
• MFs should distribute minimum of 90% of their profits among the investors.

There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.

Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20 percent of your contribution will qualify for rebate under Section 88 of the Income Tax Act.

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Yes. If the capital gains earned by you during a financial year is invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act. For more details on scheme specific exemptions. Contact Us.

Under Section 54EA the net Consideration (total sale consideration – relevant expenses) arising out of sale of Long Term capital assets need to be invested in specified in specified mutual funds with a lock-in period of 3 years. Under Section 54EB just the capital gains are re-invested but the lock-in period is 7 years.

Please note that in the latest budget this exemption is being withdrawn for investments in mutual funds and is being restricted only to bonds issued by NABARD and by the NHAI.

No. You cannot. You can either exempt your income from tax under Section 88 or exempt your capital gains from tax under Section 54.

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.

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If I gift mutual fund units, does it attract tax?

Is my income from mutual funds exempt from income tax?

Yes. Your income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50 percent of the portfolio is invested in equities.

Please note that in the current Union Budget 2000, the tax on debt funds has been increased from 10 percent to 20 percent.

Some important rights are mentioned below:

• Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
• They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
• They are entitled to receive redemption cheques within 10 working days from the date of redemption.
• 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
• 75% of the unit holders can pass a resolution to wind-up the scheme.

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Mutual Fund Tax Implications

Will there be any tax deducted at source when I redeem?

In case of resident unitholders, there will be no tax deducted at source irrespective of the amount redeemed. However, in case of non-resident following deduction will be made from the redemption proceeds after taking into consideration cost inflation index.

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Is capital gains on sale / transfer of units of mutual fund liable to tax? If yes, at what rate?

Yes. Capital Gain on sale / transfer of units of mutual fund can be classified as Short-term Gain or Long-term Gain. If units are sold/transferred/redeemed after a period of 12 months the gains arisen on sale/transfer/redemption will be treated as long-term capital gain. If units are sold/transferred /redeemed within a period of 12 months the gains arisen on sale/ transfer /redemption will be treated as short-term capital gain.

Short-term Capital Gain will be chargeable at normal rate of tax.

What is the tax liability on Redemptions?

Under Section 2(42A) of the Income Tax Act, units of the Scheme held as a capital asset, for a period of more than twelve months immediately preceding the date of transfer, will be treated as a long term capital asset for the computation of capital gains – thus attracting long term capital gains tax rate. In all other cases it would be treated as a short-term capital asset and would attract short-term capital gains tax rate. Hence depending on the period of investments, long term or short capital gains and tax thereon is applicable on redemptions.

What is the tax liability on receipt of Income on Mutual Fund Units?

As per Section 10(33) of the Income Tax Act, 1961 (‘Act’) income received in respect of units of a mutual fund specified under Section 10(23D) is exempt from income tax in India and the mutual funds are subject to pay distribution tax in debt oriented schemes.

What is the proof of the Tax Deduction at Source?

A TDS certificate is issued in the name of the investor mentioning the details of the transaction and the tax deducted. The TDS certificate is commonly known as Form16 A.

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When will the TDS certificate be issued?

A TDS Certificate in Form 16A will be despatched to the investor alongwith the redemption warrant at his registered address. To obtain a duplicate TDS certificate, investor can mail to quoting their account number.

Can an NRI have a joint account in Mutual Funds with a resident Indian?

Yes.An NRI investor can have a joint holder with a resident Indian or a Non-resident Indian.

Is the indexation benefit available to NRIs?

Yes,in case units are held for more than twelve months i.e. on long term capital gains.

Can an NRI gift the units of MFs to resident Indians?

An NRI may gift the units to any investor Indian or an NRI. Units gifted by any person would not be liable to any gift tax since the units held under the schemes are also not subject to provisions on the Gift Tax act, 1958.

Are units of MFs chargeable to Wealth Tax?

No.Units issued to NRIs etc. will not be treated as assets as defined under section 2(ea) of the Wealth-Tax Act, 1957 and hence will not be liable to wealth-tax.

What are Sections 48 & Section 112 benefit?

Sections 48 and 112 deal with capital gains that arise out of sale of mutual fund units & shares held for more than one year. At present the investor is required to pay tax at concessional rate on long-term capital gain after factoring in the benefit of Cost Inflation Index. Alternatively, the investor can opt to pay tax @ 10% (excluding exchange) on long term capital gains, but without the benefit of Cost Inflation Index.

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What is Section 88 benefit?

Under section 88, contributions made from taxable income in the specified investments will qualify for a tax rebate of 20 % of the invested amount subject to a maximum aggregated ceiling of Rs.60,000/-. For investment in infrastructure bond, maximum investment limit for tax rebate is Rs.80,000/-.