Basics of Mutual Funds

Basics of Mutual Funds - Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Funds, Balanced Mutual Funds

Let's get to know in this blog about What are Mutual Funds, How to select them and buy them. If you want to make stocks as a part of your portfolio then there are basically two ways in which you can buy stocks:

  • By Investing in Direct Stocks
  • By way of Investing in Mutual Funds

In this blog I will talk about the second way to invest in stocks i.e by way of Investing in Mutual Funds.


What are Mutual Funds: 

There are many experts who know more than us, so why don't we give them the flexibility and autonomy to do that for us. So they, on our behalf will have a Fund which can be of a size of hundreds and thousands of crores depending on the size of Mutual Fund and retail investor like us can buy units of that fund. The fund manager will take our money and will invest our money on our behalf. They would invest in stocks, fixed deposits, gold or in corporate bonds. All these things are determined by the type of Mutual Funds and basically we get the benefit of their expertise without doing any hardwork at all. This is the Main Reason Mutual Funds are a brilliant way for you to enter the investing world.

What is a Mutual fund?
What is a Mutual fund?


What are the Different Types of Mutual Funds

There are largely 3 types of Mutual Funds:
  • Equity Mutual Funds: This Funds invest your money in equity share markets. Now here also there are different categories. It could be Large Cap Companies meaning those companies which are big companies i.e top 100 companies are called Large Cap then comes Mid Cap Companies which could be from 101st to 250th size of company and then there comes a Small Cap company which are above 250th. Large Cap are Low Risk Companies, Mid Cap are Medium Risk and Small Cap are High Risk Companies. Here Cap means Capital of a company.
  • Debt Mutual Funds: It is like a fixed deposits meaning you get an assured income (interest) and because the risk is less Return will also be less. The Fund manager invests our money in debt instruments such as Bonds or Debentures of a company.
  • Hybrid Mutual Funds: In this type of fund there will be a mix of Equity and Debt i.e it will have some part of Equity and some of Debt. It is naturally a Balanced Fund. If you don't want to take high risk but at the same time you don't want to play to safe like a debt mutual fund then you would have a Hybrid Mutual Fund. 
  • This also has a tax saving Mutual Funds. A lot of people invests in a Tax-Saving Mutual Fund or an ELSS - Equity Linked Savings Scheme. Its benefit is that upto 1.5 Lakhs of your investment in a year is tax free. Second thing which is important to know is mostly all these ELSS have a lock-in period which is a minimum of 3 years so it means that you will not be allowed to withdraw this money till 3 years. It doesn't mean that you have to keep investing money in it, if you do not want to invest in it every year then please don't but the money that you have invested, cannot be withdrawn before 3 years.
  • So in Mutual Funds, like there is a stock price of a company, similarly for mutual funds there is a NAV - Net Asset Value. So you buy the units of a Mutual Fund on the basis of a NAV. For Example if NAV of a fund is Rs 10/- and you want to invest Rs 1,000/- then you will get 100 units of that Mutual Fund. Further on the basis of the performance of this mutual fund and where it is investing its money, this NAV will change accordingly which means the NAV can increase or decrease based on the performance. 

Types of Mutual Funds
Types of Mutual Funds

  

Tax Implications on Mutual Funds 

  • When you Sell your Mutual Funds then there are Tax Implications. If you are taking a ELSS Mutual fund or an Hybrid Mutual Fund then the profit on sell will be treated as a Capital Gain like a stock. Capital gain means whatever profit you have earned. 
  • Further if you hold any Mutual Fund for a year which means you did not sell the mutual fund for a year, then it becomes a Long Term Capital Gain (LTCG). If you sell the Mutual Fund within a year then it will be a Short Term Capital Gain (STCG). 
  • In India as per the Finance Act 2021, STCG is taxable at the Rate of 15%. It means that if we earn a profit of Rs 100/- so we will have to pay 15% i.e Rs.15/- to the Government of India as a Short Term Capital Gain Tax. If we sell the Mutual Fund after a year then LTCG will be 10% (if the profit exceeds Rs. 1,00,000/-) or If the profit is within Rs 1,00,000/- then there will be No LTCG i.e it will be Tax-Free. So I would advise you all that you should not sell the Mutual Fund within a year. In fact my suggestion would be to sell after 5 to 7 years.
  • If you Sell a Debt Mutual Fund then the Capital Gain will be added to your income and you will be taxed based on the prevailing basic Slab Rates. In simple words it will be added to your other sources income and will be taxed as per the slab rates.
    Capital Gain Tax
    Capital Gain Tax


How to Select a Mutual Fund 

  • Firstly, We shall know the Company of that Mutual Fund and its Historical Performance. Though in Finance historical performance is not an indication of Future but still we can get an idea about the company
  • Secondly we should know that there is something called as Expense Ratio. It is, how much amount from whatever money you give will go into managing this account as expenses. This is Important because essentially it is saying that if you are giving Rs 100/- then how much will be taken as Expenses and remailing will be invested. Expense Ratio Can vary from as 0.1% to 3% this charges will go to manage your mutual fund. It is natural that the lower the Expense Ratio is the Better the Mutual Fund becomes because more of your money will be invested.
  • Finally there is something that is called as Exit Load. It means when you sell a mutual fund, that time how many percentage will you have to pay as a fee. It varies from Mutual Fund to Mutual Fund. Obviously the lesser the Exit Load is the Better the Mutual Fund becomes. Usually in a year exit load is 1% and 0% beyond a year but it can vary. 


How to buy Mutual Funds

There are two ways to buy a mutual fund. 

  • Direct Plans (Modern Method): On the other hand, the Modern way is through direct fund buying. It means you go online and you buy a fund directly. In this case you will only have to pay expense ratio of the fund and you don't have to pay for any middleman because most of this are commission free to buy and sell a mutual fund. These are usually called as Direct Mutual Funds.
  • Regular Plans (Traditional Method): Traditional way is buying a mutual fund through an agent. There is usually a broker or a middleman or an agent who also needs to be paid. So the amount of money which will get invested will be lesser. These are usually called Regular Mutual Funds.

Direct MF vs Regular MF
Direct MF vs Regular MF


I will share the Part 2 of this blog which will explain you about the Examples of the Mutual Fund Investments along with the Return Percentages. I will also Highlight you on what is SIP and Lumpsum Investment and Different Plans in a Mutual Funds.

Thank You for Reading this Article 


To Read My Article on Basics of Initial Public Offer (IPO). Do Visit the Following Link: https://www.yourcaguide.com/2019/11/basics-of-initial-public-offer-ipo.html

To Read My Article on Basics of Trademark. Do Visit the Following Link:
https://yourcaguide.blogspot.com/2019/11/basics-of-trademark-in-india.html

To Read My Article on Limited Liability Partnership (LLP). Do Visit the Following Link:
https://yourcaguide.blogspot.com/2019/11/llp-limited-liability-partnerships-firms.html


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