What does a mutual fund actually do?
A mutual fund gathers money from investors and parks this money into investments that an investor
wants. The main objective of Mutual Fund Company is investment of investor’s money.
Open-ended funds: These funds buy and sell units on a continuous basis and, hence, allow investors to
enter and exit as per their convenience. The units can be purchased and sold even after the initial offering
(NFO) period (in case of new funds). The units are bought and sold at the net asset value (NAV) declared
by the fund.
Closed-ended funds: The unit capital of closed-ended funds is fixed and they sell a specific number of
units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO
period is over. This means that new investors cannot enter, nor can existing investors exit till the term of
the scheme ends.
What you need to begin investing in mutual funds?
To begin investing, the first thing you need to do is to be “KYC compliant”. This is nothing but a
submission of your address proof, photographs, date of birth proof and definitely your PAN card. You can
directly approach brokers for investing in mutual funds or can directly approach the mutual fund house. It
is important to remember that you have to update your KYC each time you change your address.
What are the Types of mutual funds that you can invest in?
Equity related mutual funds, which put bulk of their money, as high as 80 per cent in shares. These are
risky. They not only give you high returns, but, you can also lose money.
Debt related mutual funds, unlike equity mutual funds, they out their money in safe instruments like
Balanced funds, which put a little money in equities and little in debt.
The type of returns that you can get from mutual funds
There are two types of returns that you can get from a mutual fund. One is the capital appreciation and
the other is dividends. So, when you invest, you have to choose either a dividend plan or a growth
plan. Under the growth plan the money is not distributed like dividends, but is added back and the
How are returns from mutual funds taxed in India?
Under the dividend distribution plan, the dividend earned by the investor is tax free in the hands of the
investor. In fact, this is same like equity shares where dividends are tax free, up to a sum of Rs 10 lakhs.
On the other hand if you go in for the growth plan, there is a capital gain that applies on the units that are
sold at a profit. Hence, it is always advisable to take a look at the option of dividend distribution. There is
no tax liability on equity mutual funds, if the same is sold before one year. However, there would be a tax
of 15 per cent if you sell your equity mutual fund before a period of one year.
Tax saving mutual fund are a good option to save tax. They offer tax savings under Sec 80C. You can
invest in them through the Equity Linked Saving Schemes (ELSS). The lock-in period here is 3 years and
the amount is invested in equities. The good thing is that the returns are tax free and you also gain by
way of Sec 80C benefits. You can also invest through ULIPs, whereby you would get the same tax
benefits, as well as insurance. The advantage of ULIPs over ELSS is that the former gives you insurance
and an option to invest in debt. In ELSS, mutual fund parks all their money in equity and related schemes.
A list of mutual funds in India
Most of the equity mutual funds give good returns when the markets are climbing. There are many mutual
funds in India. Some of the top Mutual Funds are SBI Mutual Fund, Reliance Mutual Fund, HDFC Mutual
Fund, ICICI Prudential, Birla Sunlife, Quantum Mutual Fund, DSP Black Rock Mutual Fund, Franklyn
India etc. Each fund runs a very wide range of mutual fund scheme that investors can choose from.
Important terms in a mutual fund
Expense ratio: This ratio is nothing but the expenses that a mutual fund house incurs on advertising and
selling, administrative costs to manage the fund etc. This is deducted from the investor’s returns.
Expense ratio= Expenses Incurred per Unit/Average NAV
Exit load: Amount received by the investor at the time of selling 1 unit or Amount paid by the company at
the time of repurchasing 1 unit.
Exit load= NAV (1- Exit load)
Entry load: Amount paid by the investor for purchasing 1 unit or Amount received by mutual fund
Company in selling 1 unit.
Entry load= NAV (1+ Entry load)
NAV: The net asset value is the rate at which an investor’s, buys and sell the units of a mutual fund. NAV
is calculated on daily basis while considering market value.
NAV= Total assets- total external liabilities/ Total number of units
Units refer to equity shares.
KIM (Key Information Memorandum): It is a document which states all the information relating to mutual
fund scheme. It is just like a prospectus.
NFO: NFO stands for New Fund Offer. It is just like an IPO (Initial Public Offer) in case of equity shares.
Ultimately, whether you invest in gold, bonds, fixed deposits or mutual funds, it is all about returns. I
believe equity mutual funds in the longer term have generated superior returns than bank deposits. If you
are a long term investor it beats returns from gold and real estate. The debt mutual funds tend to give you
returns almost similar to bank deposits and government securities.