How do Mutual Funds help manage risk?
Risks appear in many forms. For example, if you own a share of a company, there is a Price Risk or a Market Risk, or a Company-Specific Risk. The share of just that company may dip or even crash due to any of the above reasons or even a combination of these reasons.
However, in a Mutual Fund, a typical portfolio holds many securities, thus offering “diversification”. In fact, diversification is one of the biggest benefits of investing in a Mutual Fund. It ensures that the dip in the price of one or even a few securities does not affect portfolio performance alarmingly.
Another important risk to bear in mind is Liquidity Risk. What is liquidity? It is the ease of converting an asset into cash. Suppose an investor has an investment that is locked in for say 10 years and she requires money in the 3rd year. This presents a typical liquidity problem. Her priority at this point is access to cash and not returns. Mutual Funds by regulation and structure, offer tremendous liquidity. Portfolios are designed to offer an investor, ease of investing, and redemption.
What happens when the market falls midway while you have invested in a longer-term?
Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.
You can beat market volatility through rupee-cost averaging, by investing regularly in Mutual Funds through SIPs. Here you buy more units when NAV is low and vice versa. The cost per unit is averaged out over the long run if NAVs move both ways. For example, if you invest INR 1,000/- per month, you get 100 units if the NAV is INR 10 and 200 units if NAV drops to INR 5. Over a long time period, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well.
If you invest in a lump sum, the number of units would remain the same during the entire holding period, but their value would go down with falling NAV during market downturns. If you hold your lumpsum investment in an equity fund for long (say over 7-8years), the occasional blips shouldn’t impact your returns as markets usually move up over the long-term. You might end up with a far higher NAV than what you started with.
Then why does the disclaimer say Mutual Funds are subject to market risk?
Mutual Funds invest in securities and The nature of securities depends on the scheme’s objective.
For instance, an equity or growth fund would invest in company shares. A liquid fund would invest in Certificates of Deposit and Commercial Paper.
All of these securities are however traded in the ‘Market’. Company shares are bought and sold through the stock exchange, which is part of the Capital Market. Similarly, debt instruments like Government Securities can be traded through a platform at the Stock Exchange or through specialized systems called NDS. These serve as markets to buy and sell securities and the buyers and sellers are diverse. So, the entire process of buying and selling, and price determination is done by the ‘market’.
The price of any security is dependent on ‘market forces’, and the market acts on any news or development, making it difficult to predict the direction of the market, it's impossible to predict the price of a share or security in the short term. There are too many factors and players that influence its direction.
Thus, every investor should know that there always exists a certain risk to security price from an all-important entity known as the ‘Market’. They should also know that Mutual Funds are designed to reduce this risk as much as possible.
What happens when a Mutual Fund company shuts down / gets sold off?
When a Mutual Fund Company shuts down or gets sold off, it is a serious matter to note for any existing investor. However, as Mutual Funds are regulated by SEBI, events of such kind have a prescribed process.
In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
If a Mutual Fund is acquired by another fund house, then there are usually two options. One, the schemes continue in their original format, albeit with a new fund house overseeing it. Or, the acquired schemes are merged with schemes in the new fund house. SEBI approval is required for all Asset Management Company (AMC) Mergers and Acquisitions, as well as scheme level mergers too.
In all such cases, investors are given an option to exit the schemes with no load being levied. Any action by investor or fund house is ALWAYS done at prevailing Net Asset Value.
What is the difference between Equity and Debt fund?
“Aren’t all Mutual Funds the same? After all, it’s a Mutual Fund, isn’t it?” Asked Gokul. His friend Harish, a Mutual Fund distributor, smiled. He was all too familiar with such a remark coming from many.
A large number of people carry the misconception that all Mutual Funds are the same. There are various types of funds, chief among these are equity funds and debt funds. The difference between the two comes from where the money is invested. While debt funds invest in fixed income securities, equity funds invest predominantly in equity share and related securities. Both equity and fixed income securities have different characteristics that determine how the respective schemes would behave.
Different investors have different requirements. Some need high returns to achieve their goals, whereas some cannot afford to take high risks. Some investors may have long term goals, whereas some may have short to medium-term goals. An investor must choose an equity fund for long term goals and debt funds for short to medium-term goals. Equity funds have the potential to offer higher returns, but with risk, whereas debt funds offer relatively stable but moderate to low returns.
Is it safe to invest in Mutual Funds Online?
Remember the first time you boarded a flight? Did you have butterflies in your stomach or a queasy feeling? Finally, when the flight was airborne, didn’t you feel reassured? Flying at 30,000 ft. , seat belt fastened and a warm cabin crew along with an able pilot to take care of you.
Investing in Mutual Funds online is no different from that first flight. While you may be initially worried about where your money is going and if it has reached the intended recipient, the online mode of investment is as safe as any other mode. Online payment platforms are secured with necessary encryption protocols so that your personal and financial data can’t be tapped during data transmission.
The online process is far more convenient because you can access all your transactions, buy or sell at any time, and see how your portfolio is doing. When you invest online, your money is credited directly into the Mutual Fund’s account and it allows your units which you can see by logging into your account. So apart from safety and convenience, the online mode offers you transparency too similar to offline mode. Your money is safe in the system!
What is the role of an investment advisor or a mutual fund distributor in selecting a scheme?
Usually, when people select a scheme themselves, they do so based on their performance. They don’t consider that past performances may not be sustained.
Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort. The investor also needs to have the requisite expertise to be able to understand the features and nuances as well as the ability to analyze and compare from among many options. A distributor of mutual funds or an investment advisor would be qualified and trained for such a job.
Secondly, more important than investing in the best scheme, it’s important to invest in a scheme most appropriate or suitable for the investor’s current situation. Though the investor’s situation is best known to the investor, a good advisor or distributor would be able to ask the right questions and put things in perspective.
Once the portfolio is constructed, regular monitoring of the scheme characteristics and portfolio is required, which is an on-going job. An advisor/distributor helps you review these schemes too.
What is the ideal amount to start investing in a mutual fund?
Several questions rest in a potential investor’s mind regarding the ideal amount to invest. People consider Mutual Funds as just another investment avenue. Is it really the case? Is a Mutual Fund just another investment avenue like a fixed deposit, debenture, or shares of companies?
A Mutual Fund is not an investment avenue, but a vehicle to access various investment avenues.
Think of it this way. When you go to a restaurant, you have a choice to order a la carte or buffet/thali or a full meal.
Compare the full thali or the meal with a Mutual Fund, whereas individual items you order, are the stocks, bonds, etc. A thali makes the choice easy, saves time, and also some money.
The important thing is to start investing early, even if small, and gradually add on to your investments as your earnings increase. This gives you better prospects of better returns in the long run.
What is the risk of investing in Mutual Funds?
We have all heard: “Mutual Fund investments are subject to market risks.” Ever wondered what are these risks?
The image on the left talks about the various types of risks.
Not all risks impact all the fund schemes. The Scheme Information Document (SID) helps understand which risks apply to your selected scheme. So how does the fund management team manage these risks? It all depends on what type of investments the Mutual Fund has invested in. Certain securities are more sensitive to certain risks and some are exposed to some other.
Professional help, diversification, and SEBI’s regulations help mitigate risks in Mutual Funds.
Finally, and the most important question that many investors have asked: Can a Mutual Fund company run away with my money? This is just not possible given the structure of Mutual Funds as well as the strong regulations.
What is the benefit of staying invested in the long term?
Invest for the long term – advice routinely given by many Mutual Fund distributors and investment advisors. This is especially true in the case of certain Mutual Funds – such as equity and balanced funds.
Let us understand why the professionals give such advice. What really happens in the long term? Is there a benefit of staying invested for the long term?
Consider your Mutual Fund investment as a good quality batsman. Every good quality batsman has a certain style of batting. However, each good quality batsman would be able to accumulate lots of runs, if he continues to play for years.
We are talking about the record of a “good quality” batsman. Every good batsman would go through some good and poor performances. On average the record would be impressive.
Similarly, a good Mutual Fund would also go through some ups and downs – often due to factors beyond the control of the fund manager. An investor would benefit if one stays invested through these funds for long periods of time.
So, as long as you can afford, stay invested for long periods of time – especially in equity and balanced funds.
What kind of returns should one expect from Mutual Funds?
Can you generalize the answer to the whole category? Different vehicles run at different speeds – even within one category, e.g. cars, while a car made for city roads may run at a certain maximum speed, the one made for racing can run much faster.
There is not one product called Mutual Fund, there are many types of different Mutual Funds. The investment returns from the different categories could vary and then there are certain fund categories that exhibit a higher level of uncertainty in performance.
If the fund invests in a market where prices fluctuate a lot, the Net Asset Value (NAV) of the fund is likely to witness huge fluctuations (e.g. growth funds investing in the equity market); however, if it invests in a market where prices do not fluctuate much, the Net Asset Value (NAV) of the fund would be quite stable (e.g. liquid funds investing in the money market). In other terms, a liquid fund would exhibit far lower uncertainty in comparison to an equity fund.
An investor would be advised to focus on the characteristic nature of the fund and match the same with one’s own requirements.
Does the long term mean less risk?
Investments in Mutual Funds require the appropriate time horizon. Having the right time horizon, not only provides a better chance of getting expected, investment returns but also lowers the risk in the investment.
Now, what is this “risk” we are talking about? In simple terms, it is the volatility of investment performance, as well as the chances of eroding investment capital. By staying invested over the long term, some years of low/negative returns, and some years of impressive returns will make the average returns quite reasonable.
Therefore, the investor can ‘average out every year’s widely fluctuating returns’ to get a more stable long term return.
The recommended time horizon differs for every asset class as well as the Mutual Fund category. Please consult an investment advisor and read scheme related documents before making an investment decision.
Are Mutual Funds suitable for those who don’t want to invest in the share market?
Some people like to play safe and opt for familiar options. Suppose you are in a new restaurant. The menu has exotic dishes, but you still order something familiar just to be sure you don’t regret it later. You may choose a regular ‘Paneer Kathi Roll’ over a ‘Couscous Paneer Salad’ to be safe. But you managed to get an idea about the new restaurant while enjoying its services, ambiance, and food.
Investing in Mutual Funds is like ordering the right dish on the menu at a restaurant. If you prefer to stay away from the stock market, you can still choose to invest in debt funds for your financial goals. Mutual Funds are broadly categorized into equity, debt and hybrid, Solution Oriented Schemes and Other Schemes based on where they invest.
If you don’t want to invest in stocks via equity mutual funds, you can still experience the benefits of investing in mutual funds through debt funds that invest in bonds issued by banks, corporates, govt. bodies including RBI and money market instruments like commercial papers, bank CDs, T-bills, etc. A debt fund helps you grow your money better because of tax-efficient returns than your traditional choices of bank FDs, PPFs, and post office saving schemes.
Aren’t RDs and FDs enough to secure the future?
Recurring Deposits (RDs) and Fixed Deposits (FDs) are some of the most popular savings instruments in our country. They are safe and offer a guaranteed rate of return.
That really depends on what an investor expects from the future. If the investor wants her capital to be safe and earn some reasonable fixed rate of return, irrespective of inflation and taxes, then these may be good enough. However, if the investor wants to earn a positive return even after factoring inflation and taxes, then these may not be good enough.
If an investor has a large enough corpus to start with and is really not worried about enhancing purchasing power, then RDs and FDs are safe and useful savings and income-generating options. If an investor is more concerned about the safety of principal and receipt of timely and predictable income, and FD may be ideal.
Why don't Mutual Funds give a fixed rate of return like a saving account or FD?
The returns in a Mutual Fund portfolio is a function of many things, like the avenues one has invested in, the way various markets move, the ability of the fund management team, and the investment period.
Since many of these factors are uncertain, the returns cannot be guaranteed, unlike a fixed deposit where these factors are absent, at least to some extent.
With a fixed deposit – the returns are FIXED only for a FIXED period. These returns and the period, both are decided by the issuer company and not by the depositor. Hence, if one wants to invest money for six years and a deposit is available for five years, the returns are known only for the first five years, but not for the entire six-year period. Thus, the investment returns are known only in case of guaranteed return products, where the product maturity and investor’s time horizon are matching perfectly.
In all other cases, the investment returns are unknown over the investor’s investment horizon.
Can Mutual Funds help create wealth?
Business and commerce allow us to create wealth by investing our money with those who are on the path to creating wealth. We can be investors in businesses of entrepreneurs, by investing in stocks of various companies. As the entrepreneurs and the managers run their businesses efficiently and profitably, the shareholders get the benefits. In this regard, Mutual Funds are a great way to build wealth.
But how do we know which stocks to buy, and when?
That is where taking professional help counts. They also take advantage of a large corpus to explore more opportunities simultaneously. Like a balanced diet – we all need proteins, vitamins, carbohydrates, etc. Eating only one type results in some nutrient deficiency. Similarly, in a diversified equity fund, you’re exposed to different segments of the economy and also protected from the potential downside.
Invest in a professionally managed, diversified equity fund and stay invested for a long period to create wealth for yourself and the next generation.
What is inflation?
Simply put, inflation is the rise in prices over time, relative to the money available. In relatable terms, a certain amount of money buys you much less today, than it did years ago.
Let’s use an example to understand this better. Say you buy a grilled sandwich today for INR 100. The yearly inflation is 10%. Next year, the same sandwich will cost you INR 110. If your income also doesn’t increase at least as per the inflation rate, you’re unable to buy the sandwich or other such products, right?
Inflation also tells investors how much of a return (%) their investments need to make for them to maintain their current/present standard of living. For example, if investment in ‘X’ returned 4% and inflation was 5%, then the real return on investment would be -1% (5%-4%).
Mutual Funds give you investment options that have the potential to give inflation-beating returns! You can aim to protect your purchasing power over the long run by investing in the right type of Mutual Funds.
Mutual Funds v/s Shares: What’s the difference?
From where do you get the vegetables for dinner? Do you grow them in your backyard, or purchase it from the nearest mandi/supermarket depending on what you need? Growing your own veggies is a great way of eating healthy food, but the effort is spent on seed selection, manuring, watering, pest control, etc. The latter option allows you to choose from a wide variety without hard work.
Similarly, you can create wealth by investing directly in shares of good companies or invest in them through Mutual Funds. Wealth can be created when we buy company stocks that use our money to grow their business, creating value for us.
Direct investment in shares carries a relatively higher risk element. You need to pick stocks by researching the company and sector. It’s a humongous task to choose a few companies from thousands of them listed on the stock exchange. Once done, you need to keep track of every stock's performance.
In Mutual Funds, the stock-picking is done by expert fund managers. You need to keep track of the performance of the fund and not individual stocks within the fund. They also allow investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfer, etc. besides helping to ride over volatility by investing smaller amounts regularly through SIPs.
Aren’t safe investments enough to meet financial goals?
One must keep in mind that the regular expenses as well as the cost for various financial goals rise over a period. If the inflation is at 6% per year, the cost of a goal doubles over approximately 12 years. However, if the inflation is at 7%, the doubling happens roughly in ten years.
Now when inflation is at 7% and you seek total safety of the principal amount, you would be able to invest in avenues that offer returns very close to the inflation. Adjust for taxes on the investment returns and your post-tax investment returns are lower than inflation.
Let us look at some simple numbers :
If inflation is 7% per year, and you can buy something for Rs.100 now, you would need Rs.107 to buy the same thing next year. A year later, the same item would cost Rs.114.49, if the inflation remains at the same level.
At the same time, if you had saved your money in a totally safe avenue that offered 6% per year after taxes, your Rs.100 would grow to Rs.106. This is Re. 1 less than the amount required above. After two years, the amount would have grown to Rs.112.36, which is less than the cost of the item to be purchased. The table on the left highlights an approximate of values of investments, costs of goals, and the gaps between them over a period of years. So it’s important to not just save but invest.
At what age should one start investing?
Rahim and Suresh moved to Mumbai as opportunities to earn and spend were higher. Suresh looked at the income opportunity and decided to enjoy life. Rahim, on the other hand, decided to save and invest his earning, in order to survive in the city.
Rahim was concerned when he learned about Suresh’s lifestyle and tried explaining to him the benefits of saving young with numbers.
Rahim had started investing at the age of 25. He was investing ₹ 5,000 per month and earned @10% p.a. on his investments. In all, he would invest ₹ 21 lakhs and accumulate a sum of ₹ 1.70 crores at 60 years of age.
If Suresh started investing ₹ 30,000 per month even at the age of 46, his total investment over the years would be ₹ 54 lakhs. Earning @10% per year on his investments, he would accumulate less than ₹1.2 crores when he’s 60.
Although Suresh invested ₹ 54 lakhs as against Rahim’s ₹ 21 lakhs and both earned at the same rate of return, Rahim would accumulate a larger sum due to the time he gave to his investments. Starting early started the magic, and the power of compounding did the rest.
Are Debt Funds like Fixed Deposits?
When you park your money in a Bank Fixed Deposit (FD), the bank promises to pay fixed interest in return. Here you’ve lent money to the bank, and the bank is a borrower of your money, owes you a fixed periodic interest. Debt Mutual Funds invest in debt securities like Government bonds, Company bonds, and Money market securities. Bonds are issued by corporates like power companies, banks, home finance companies, and the Government. These bond issuers promise to pay their investors (those who buy their bonds), a periodic interest in return for their money invested in the bonds.
Bond issuers are like the bank (borrower) in our FD example, borrowing money from investors and promising to pay periodic interest. While you are the investor in a bank FD, Debt Funds are the investors in these bonds. Just like you earn interest from an FD, Debt Funds earn periodic interests from their bond’s portfolio. Unlike assured interest from FDs, periodic interest payments to fixed income Debt Funds from these bonds can be fixed or variable without any guarantee. When they sell bonds from their portfolio, they get the principal back. When you invest in a Fixed Income Mutual Fund, you indirectly invest in its bond portfolio, spreading the risk across different bond issuers. You benefit from such risk diversification.
Why should I invest in Debt Funds?
We must eat a balanced diet for the overall growth and well-being of our bodies.
Our body needs different nutrients to keep itself healthy and fit, and one kind of food cannot provide all the necessary nutrients. Hence, we must eat different kinds of food in the right proportion to maintain our bodies. Each nutrient has a unique role to play in the well-being of our body (e.g. Carbohydrates give us instant energy while proteins help in the growth and repair of tissues).
Similarly, we need a balanced investment portfolio in life to ensure our financial well-being. Within the portfolio, we need a mix of different kinds of assets that play different roles like the various nutrients in our diet. One should invest in different kinds of assets like equities, fixed income, gold, and real-estate for financial security and prosperity. Individual investors may find it difficult to invest directly in some asset classes like fixed income, which includes bonds and money market instruments. Instead, they can invest in Debt Funds that invest in such securities. They offer lower but relatively stable returns, thus providing balance to your portfolio of equity, gold, and real-estate investments.
What are the various types of mutual funds?
Various types of Mutual Fund schemes exist to cater to different needs of different people. Largely there are three types of mutual funds.
· These invest predominantly in equities i.e. shares of companies
· The primary objective is wealth creation or capital appreciation.
· They have the potential to generate higher returns and are best for long term investments.
· Examples would be -
o “Large Cap” funds which invest predominantly in companies that run large established business
o “Mid Cap” funds which invest in mid-sized companies.
o “Small-Cap” funds that invest in small-sized companies
o “Multi Cap” funds that invest in a mix of large, mid and small-sized companies.
o “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
o “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
o Tax-Saving Funds.
2. Income or Bond or Fixed Income Funds
· These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits, and Money Market instruments like Treasury Bills, Commercial Paper, etc.
· These are relatively safer investments and are suitable for Income Generation.
· Examples would be Liquid, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3. Hybrid Funds
· These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
· Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans, and Monthly Income Plans, etc.
Why invest in gold mutual funds when we can invest in gold ETF?
A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In India, Gold is usually held in ornament form, which has a certain making and wastage component (usually more than 10% of the bill value). This is eliminated when investing in a Gold Fund.
Buying gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialized account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.
Because of its direct gold pricing, there is complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.
What are the best Mutual Fund schemes for a five-year period?
Let us understand what could be a proper answer to the above question. Through numerous interactions with investors, we feel that in most cases the hidden, oft-unexpressed need is to find out a scheme that would deliver outstanding returns over the period that the investor plans to invest.
In reality, it is extremely difficult even for the investor to predict how long he will stay invested. It is next to impossible to know how the market will behave, and which scheme and manager would be able to capitalize the most during a said period.
What is good in one situation may not be good in another. For example, your own winter clothes will be unsuitable for you during the summers. Similarly, a banana that is good for a growing child may be harmful to his diabetic father.
History is replete with examples of many experts being unable to correctly predict the future. That’s why one must not get swayed by past performances, it is better to look for a scheme that is appropriate given one’s unique current situation and future needs.
Are all Mutual Funds risky?
Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too.
All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.
Equity schemes have the potential to deliver superior returns over the long term that can create wealth. Remember, inflation is a risk, and equities are the best asset class to beat inflation. So, in a sense, there are some risks that are worth taking.
On the other hand, the risk associated with liquid funds is significantly low when compared to equity funds. A liquid fund focuses on the protection of capital by taking a lower risk and generating returns in line with the risk taken.
It is also important to remember that the risk of returns is not the only risk you need to consider. There are other risks – liquidity risk for instance. Liquidity risk measures the ease in converting your investment into cash. This risk is lowest in Mutual Funds.
In the end, the nature and extent of risk are best understood through proper understanding and evaluation of the scheme and by taking the guidance of a Mutual Fund distributor or an investment advisor.
How is ULIP different from Mutual Fund?
A ULIP is a Unit-Linked Insurance Plan. It is a life insurance policy with an investment component that is invested in various financial markets. The returns generated by the investment component determine the value of the policy. However, the sum assured on the death of the policyholder may not be a function of the market – the minimum sum assured may remain unaffected. In other words, a ULIP is a hybrid product, combining investment and insurance.
The investment component of ULIP is similar to a Mutual Fund.
1. Both are managed investments.
2. For both, a team of professionals manages the investments and the funds are invested in line with a stated objective.
3. There would be units allotted to the investor on purchase and there would be NAV per unit declared periodically.
Since ULIP is an insurance policy, failure to pay the regular premium would result in termination of the risk cover.
In Mutual Funds, all the expenses are charged before calculation of the NAV, whereas in the case of ULIP, some expenses are charged like mutual funds, whereas some others are charged by canceling a small number of units from the investors’ accounts.
Within one ULIP product, there could be more than one fund option and the investor is free to switch between these funds. However, some schemes put a restriction on the number of free switches in a year. In the case of a mutual fund, switches from one fund to another are allowed any number of times, but depending on the scheme from which one is exiting, there may or may not be exit loads.
Are Mutual Funds an ideal investment for the small investor?
Yes! Even for an investor with modest savings or small beginnings, Mutual Funds are an ideal investment vehicle.
Almost every investor, small or big, has a Savings Bank (SB) account and anyone with that account can start investing through Mutual Funds. With amounts as low as ₹ 500 every month, Mutual Funds promote the healthy habit of regular investing.
Other benefits for a small investor in Mutual Funds are –
1. Ease of transacting - Investing, reviewing, managing, and redeeming from a Mutual Fund scheme is all simple processes.
2. Easy liquidity, maximum transparency and disclosure, timely statements of accounts, and tax benefits are all that a small or first-time investor looks out for.
3. Dividends in Mutual Funds are tax-free at the hands of the investor
4. A Mutual Fund gives the same investment performance, to an investor who has invested ₹ 500 or one who has invested ₹ 5 crores. Thus it has every investor’s interests in mind – small or big.
5. Professionally managed, diversified portfolio for someone who invests even ₹ 500 a month.
No matter how small the starting amount or modest the objectives, Mutual Funds Sahi Hai.
Should retired people invest in Mutual Funds?
Retired people usually have their savings and investments locked up in bank FDs, PPFs, gold, real estate, insurance, pension plans, etc. Most of these options are difficult to convert to cash immediately. This may lead to undue stress in case of medical or other emergencies. Mutual Funds provide the much-needed liquidity to retirees as they are easy to withdraw and offer better post-tax returns.
Most retired people fear the volatility or fluctuation in returns of Mutual Funds and stay away from them. They should put some part of their retirement corpus in Debt Mutual Funds and go for a Systematic Withdraw Plan (SWP). This will help them earn a regular monthly income from such investments. Debt funds are relatively safer than equity funds as they invest in bonds issued by banks, companies, government bodies, and money market instruments (bank CDs, T-bills, Commercial Papers).
SWP in debt funds provides tax-efficient returns as compared to bank FDs. Income from FDs/pension plans are taxed at higher effective rates compared to withdrawals under SWP. You can easily stop an SWP or change the withdrawal amount anytime depending on your need unlike in a pension plan. Thus, retirees should include Mutual Funds in their financial plans.
Where do Debt Funds invest our money?
Debt Funds invest the money pooled from investors in bonds issued by banks, PSUs, PFIs (Public Financial Institutions), corporates, and the Government. These bonds are usually medium to long-term in nature. When a Mutual Fund invests in such bonds, it earns periodic interest from these bonds which contribute to the fund’s total return over time.
Some Debt Funds also invest in money market instruments like T-bills issued by the Government, Commercial Papers, Certificates of Deposits, Bankers’ Acceptance, Bills of Exchange, etc. which are more short-term in nature. These instruments also promise to make fixed interest payments at regular intervals which contribute to the fund’s overall return over time.
While both bonds and money market instruments promise their investors i.e. your Mutual Fund to make regular interest payments in the future, they may fail to meet these obligations under certain circumstances like financial distress. Hence, while Debt Funds are considered more stable than equity funds, they still carry some risk because these issuers may fail to make timely payments which form a significant portion of the fund’s total return.
Choosing a Mutual Fund is too confusing?
Yes, there are several types of Mutual Fund schemes – Equity, Debt, Money Market, Hybrid, etc. And there are many Mutual Funds in India managing several hundreds of schemes amongst them. So it may appear that zeroing on a scheme is actually a very complex and confusing affair.
Choosing the scheme to invest in should be the last thing in an investor’s mind. There are several more important steps before that, which will help remove much confusion later.
An investor should first of all have an investment objective, say retirement planning or renovating one’s house. The investor has to arrive at two figures – how much would this cost and how long it would take, while also knowing how much risk can be taken.
In other words, based on an investor’s goals and objectives and risk profile, a type of fund is recommended, say equity or hybrid or debt, and only then specific schemes are selected, based on track record, portfolio fit, etc.
In essence, if there is clarity of investment purpose, in the beginning, there would be a lot less confusion about the choice of the fund in the end.
Which Mutual Fund should I choose for mid-term investment?
4-6 years is considered medium-term in savings and investment decisions and hence capital appreciation should be your objective here. Corporate bond funds and hybrid funds are best suited for capital appreciation as they are less volatile compared to equity funds which are ideal for wealth creation over the long-term.
Corporate bond funds invest in high-quality bonds with 3-5 years average maturity, becoming less sensitive to interest rate changes. Hybrid funds invest predominantly in debt with some equity exposure thus providing a safer investment option with the potential for capital appreciation.
While evaluating funds for medium-term investments, look beyond the recent 3-5 years returns for the fund’s long-term performance. See if it has been a consistent performer through all phases of a market cycle. Most funds will perform well during a secular bull run i.e. when markets are trending upwards, but a fund giving superior return during a market downturn will exhibit consistent returns over time. Since you want to invest for 3-5 years and if the market happens to be in a bearish mood during this time, you would benefit from investing in the consistent performers. Choose a fund from a trusted fund house with a good pedigree or seek help from an investment adviser to choose the right fund.
How do I know which fund is right for me?
Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in– Fixed Income Fund, Equity Fund, or Balanced and which Asset Management Company (AMC) to invest with?
Firstly, discuss freely with your advisor what your objective is, what time period you’re comfortable with, and what your risk appetite is.
Decisions on which fund to invest in would be made based on this information.
1. If you have a long term objective – say, retirement planning, and are willing to assume some risk, then an Equity or Balanced Fund would be ideal.
2. If you have a very short term objective – say, money to be kept aside for a couple of months; a Liquid Fund would be ideal.
3. If the idea is to generate regular income, then a Monthly Income Plan or an Income Fund would be recommended.
After deciding on the type of fund to invest in, a decision on the specific scheme from an AMC would have to be made. These decisions are usually made after ascertaining the AMC’s track record, the suitability of the scheme, portfolio details, etc.
Scheme Factsheets and Key Information Memorandum is two documents that every investor needs to peruse before investing. If one needs detailed information then one should look at the Scheme Information Document. All of these are easily accessible at every Mutual Fund’s website.
Which Mutual Fund should I choose for long-term investments?
Long-term investments aim to finance distant future goals, like a college education, home, retirement, etc. Hence, choose a fund suitable for wealth creation. Long-term goals have a horizon beyond 10 years and equity-oriented schemes (>=65% equity allocation) are one of the best long-term investment options. Equities have a higher potential for growth even though more volatile in the short-term as compared to hybrid and debt funds. A well-diversified equity fund is more likely to offer stable growth over the long-term.
Look for funds with higher risk-adjusted returns (Sharpe ratio) i.e. funds offering higher returns for the same level of risk. Expense ratios impact fund returns over the long-term due to the compounding effect. Choose a fund with a lower expense ratio, meaning more funds are available for investment that can boost the fund’s return over the long-term. Check the fund manager’s track record to see if he has been delivering good results. Look at the kind of funds he has managed and if his funds have consistently outperformed peers. You can also look at funds with higher beta for long-term investments as they tend to gain/lose more than the market, but markets usually move up. Hence a higher beta would mean your fund will gain more than the market in the long-run.
Are there different funds for different types of goals?
With so many Mutual Funds schemes in the market, often one may wonder which scheme may be the best. But, understanding the meaning of “best” is more important.
Often, people tend to select the “best” performers of a recent past period – schemes that have delivered the highest returns in the recent past.
If you watch a movie filmed in the USA in December, you would notice people wearing warm overalls. Someone may really like it and want to have those. However, can you imagine someone wearing woolen clothes around the streets in Mumbai or Chennai?
The same logic applies to Mutual Funds too. There is no such thing as the “best” Mutual Fund – it is always about what is appropriate in a given situation and is in line with your investment objective.
For long term goals, there are different funds compared to short term needs. There are aggressive funds vastly different from moderate funds or even conservative funds. There are different funds for income generation as compared to wealth accumulation or for liquidity.
So don’t search for the best – search for the most appropriate.
How should I choose whether to go for SIP or Lumpsum?
Invest in SIP or a one-time investment (lump sum)? Choosing one depends on your familiarity with Mutual Funds, the fund you want to invest in, and your goal. If you want to invest regularly to accumulate sufficient capital for a goal, invest in a suitable equity scheme through SIP. Like, if you want to save from your monthly income and put it in an option where you can grow your money significantly so that in the long run it’ll be sufficient to fund your child’s higher education, SIP is the answer. Seek help from a fund adviser if needed.
If you have surplus cash now, like a - bonus, proceeds from property sale or retirement corpus, but unsure how to use it, go for lump sum investment in a debt or liquid fund. SIPs are advisable for investing in equity-oriented schemes while lump sums are better suited for debt funds. If you are new to investing in Mutual Funds, SIPs are meant for you. SIPs need sufficiently long-time horizons to prove beneficial. You may invest in a lump sum if the market has been following an upward trend and you think it’ll continue for long. SIPs are best suited for a widely fluctuating market phase.
Why is investing better than saving?
Imagine a 50-overs cricket match in which #6 batsman walks in to bat only in the 5th over. His job is to first ensure he does not lose the wicket, and then focus on scoring runs.
While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.
Similarly, in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.
At the same time, in the cricket analogy, in order to stay at the crease as well as score runs, one must take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.
So while saving is necessary, investing is very important to achieve long term goals.
What is the power of compounding?
To many, the power of compounding seems like a difficult topic. But it is not so. We’ll help you understand this in a simple manner.
Let us assume that someone invested ₹. 10,000 @ 8% p.a. The interest for the year would be ₹.800. However, when the interest is reinvested in the same investment, the earning next year would accrue on the original investment of Rs. 10,000 as well as on the additional investment of ₹.800. This means the earning for the second year would be ₹. 864. As the year's pass, the interest for the year keeps increasing since there is additional investment each year.
“As time goes, the earnings do not multiply, but grow exponentially.”
Essentially, compounding is the process of earning income on your principal investment plus the income earned – the income also starts to earn as the same is reinvested.
Is there some external help I can get to plan my financial goals?
“My son is in the 9th grade. I am not sure what his interests are or what stream in education he should pursue. Should he go for Science, Commerce, or Arts? Can someone help?” Many parents have such concerns. That is where one may approach an education, or a career, counselor, who has evaluated various options available for youngsters.
An investor seeking help to plan for the achievement of financial goals would be in a similar position as the parent in the above case. The investor has access to so much information these days, it is mind-boggling. Getting intimidated or making mistakes is highly possible.
This is when an investment advisor or a Mutual Fund distributor is advisable.
They assess the financial situation of the investor and look at one’s financial goals. Based on this, he or she would recommend various schemes to invest in. Now it is obvious that such a person would also need to understand a lot about the various Mutual Fund schemes and keep a regular watch both on the investor’s situation as well as the various recommended schemes. Such an approach helps the investor achieve the financial goals through investments in Mutual Funds.
So can I invest now, for my vacation 8 months later?
Articles about Mutual Funds are usually written for planning to achieve certain long term specific goals and investors assume that other goals, especially the short term cannot be achieved.
Let us break this myth with an example.
Ramesh, a travel junkie got to satisfy his wanderlust, when the company he worked for achieved success and rewarded its employees with bonuses.
With his bonus, Ramesh decided to go on a Europe trip, but his work on a big and prestigious project was incomplete and approaching its deadline. The project would end in the next eight months.
The exact date of Ramesh’s trip is yet to be finalized. Looking at his expenses- some money needs to be spent before and some during the trip. Uncertainty regarding the exact dates on which how much money is to be paid is there.
Certain Mutual Fund schemes are ideal for such cases.
Ideally, Ramesh should park these savings into a liquid fund to take them out on any working day. The money will be in his account the day after he submits a request for withdrawal. Ramesh can even request for withdrawal through an SMS or App.
Planning for even short term goals becomes convenient with this.
How do I fulfill my financial goals?
To begin with, it is important to select the right scheme for your investment need. Look at it this way.
How do you decide what mode of transport you should take when you travel? Whether you want to walk it up, take an auto-rickshaw, a train, or a flight, it all depends on your destination, on your budget, and travel time available.
Planning for your financial goals are also using the same kind of principles.
Different modes of transport for different travel needs – different schemes (or combination of schemes) for different needs.
One may consider liquid funds for very short term needs; income funds for medium-term needs and equity funds (or a combination of different funds) for long term needs. Different investors may invest in different schemes of the same asset category depending on the risk that they are willing to take.
Remember, there are solutions available among Mutual Funds for each investor need. It is important to understand one’s own unique need to find which solution is appropriate.
What are the kinds of financial goals I can fulfill with Mutual Funds?
The best part about Mutual Funds is that no matter what your financial goal is, you can find an appropriate scheme for it.
So if you have a long term financial goal like planning for your retirement or your child’s future education than equity funds could be a choice to consider if your endeavor is to potentially generate regular income, a fixed-income fund could be considered.
You may have suddenly received a windfall of money and are yet to decide where you wish to invest, you can consider a liquid fund. A liquid fund is a good substitute to consider for a savings account or even a current account to park your working capital.
Mutual funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same.
Mutual Funds are a one-stop-shop for practically all investment needs.
Long Term and Short Term Investment Plans for Your choice.
Are Mutual Funds ideal for short term or long term Investment?
“Mutual Funds could be a good saving tool for the short term.”
“You must be patient with your Mutual Fund investments. It takes time to deliver results.”
People regularly come across both the above statements, which are clearly contradictory.
So what period are Mutual Funds suitable for? Short term or long term?
Well, that depends on what one’s investment goals are, and most goals are driven by time. There are schemes suitable for short periods, there are several schemes suitable for a longer horizon, and then, there are schemes for any period in-between.
Consult your Mutual Fund distributor or your investment advisor, discuss your financial goals, and then decide where you want to invest. For example;
1. Equity-oriented Mutual Funds- Look for longer periods, typically 5 years and above.
2. Fixed Income oriented Mutual Funds –
1. Liquid Funds - For very short term – Less than 1 year
2. Short Term Bond Funds – For the medium-term – 1 to 3 years.
3. Long Term Bond Funds - For the long term – 3 years or more
As you explore our website, you will know more about the various kinds of Mutual Funds too. So, trust the expertise of your advisor, know your goals, and invest!
What documents are provided as proof of my investment in Mutual Funds?
Once you invest in a Mutual Fund scheme, you will get an account statement with details like the date of the transaction, the amount invested, and the price at which the units are bought and the number of units allotted to you.
You can do multiple transactions in the same account, wherein the statement will keep getting updated. A typical account statement will list out the last few (10 in most cases) transactions – whether purchase or redemption; dividends, if any; or even non-commercial transactions. The account statement would also give you a count of your latest unit balance, the NAV of recent date, and the current value of your investments.
If you lose one statement, you can always get another one without hassles. Loss of account statement would not prevent you from future transactions, including taking your money out of the account.
How can I start investing in Mutual Funds?
Investing in Mutual Funds requires you to complete a few basic formalities. Such formalities may either be completed directly with an Asset Management Company (AMC) at their office, or authorized point of acceptance (POA), or through an authorized intermediary such as an advisor, banker, distributor, or broker.
Prior to investing in a Mutual Fund scheme, you need to complete the Know Your Customer (KYC) process. The completed KYC form may be submitted with the scheme application form (also known as Key Information Memorandum). The application form would have to be carefully filled as it would capture important details like the names of all account holders, PAN numbers, bank account details, etc. This would have to be signed by all account holders. Much of these can be done through online platforms too.
New investors may take help from their advisors, to make the entire process smooth and easy. And before investing, all investors are advised to read the important scheme related documents and know the risks of their scheme choice.
Which is a better option: Growth or Dividend Payout?
If someone asked you which car should I buy, an SUV or a premium hatchback, what would your advice be? You probably would ask, what is your main reason for buying this car? Do you need it for a long haul along with family or you need something convenient for yourself to suit the city roads for regular driving? Just how the choice of a car depends on your needs, the choice to opt for a growth or dividend option in case of mutual fund investments depends on why you are investing in the first place.
If you are a long-term investor, you need an SUV for the long haul. Invest in the growth option of the fund of your choice. The earnings by the fund accumulate and compound over time leading to a higher NAV that’ll give you a higher return when you sell. But if you are looking to supplement your regular income from other sources with some return from your Mutual Funds, opt for the dividend payout. Dividends are tax-free in the hands of investors. Look at the tax implications while making a choice between the two options and let your financial requirement decide which option works for you.
How do I withdraw my money from Mutual Funds?
One of the biggest advantages of Mutual Funds is liquidity – the ease of converting an investor’s units into cash.
Mutual Funds is regulated by the Securities and Exchange Board of India (SEBI), has well laid out norms to ensure liquidity. Open-end schemes, which comprise a large majority of schemes, offer liquidity as a major feature. Liquidity is the ease of access or conversion of an asset into cash.
Once the redemption is complete, funds are transferred to the designated bank account of the investor, within 3 business days after the redemption was lodged. However, two issues need to be kept in mind. One, there may be an exit load period in certain schemes. In such cases, redemptions before a certain specified period, say 3 months, may attract a nominal load like 0.5% of Asset Value. Fund Managers impose such loads to deter short term investors. Secondly, AMCs may indicate what the minimum amount for redemption is. Investors are advised to read all scheme related documents carefully before investing.
How can I track my investments on a regular basis?
Investors often wonder how to go about tracking the progress of my investments.
It is like chasing a target in a cricket match. In a cricket match, the team batting second knows the equation – how many runs, how many wickets, and how many overs.
It is very similar when it comes to investing in the achievement of financial goals, too. Consider the financial goal as the target score –
1. The amount you have accumulated so far is the runs you have scored so far.
2. The amount yet to be accumulated is the runs to be scored and the time left is the overs left.
3. The condition of the wickets and the quality of the bowlers may be compared to various risks – be it related to the national or global economy; global capital flows; political situation in the country; changes in laws, regulations, and taxes, etc.
4. The scoreboard in this case is the account statement you get when you invest in a Mutual Fund scheme.
5. There are also online tools, and mobile apps available to check the value of one’s investments – the scoreboard.
What happens when you miss SIP payments in-between?
Many investors worry about loss in Mutual Funds if they are unable to make SIP payments during their tenure. Such situations can arise due to many reasons like you are undergoing some financial difficulty or uncertainty about a job or business income. It’s natural that under such situations you may not be able to continue with your regular SIP payments. Since SIPs are a long-term investment option, it’s fine if you skip a few payments in-between. Unlike an insurance policy where non-payment of annual premium can lead to policy inactivation, here your investments made so far will continue to earn a return and you can withdraw it anytime. However, you would accumulate lower wealth than what you had initially expected and may miss your financial goals if you are too irregular with your SIP.
While Mutual Fund companies don’t penalize for non-payment of SIP installments, your SIP will automatically be canceled if you fail to make the payments for three consecutive months. Also, your bank will penalize you for dishonoring the auto-debit payments. Hence, it is advisable to stop the SIP by sending a request at least 30days in advance if you foresee a cash crunch in the future. Start afresh SIP later whenever you feel financially comfortable.
How do I start/stop a SIP? What happens if I miss an installment?
Before you make any Mutual Fund investment, you need to complete a KYC process. This is done through the submission of certain documents as proof of identity and proof of address. The process of starting or stopping a SIP is extremely convenient and easy. How to start a SIP is explained in the graphics on the left.
What happens when you skip an installment or two?
SIP is just a convenient mode of investing and not a contractual obligation, there is no penalty even if you miss an installment or two. At most, the Mutual Fund Company would stop the SIP, which means further installments would not get debited from your bank account. At the same time, you can always start another SIP, even in the same folio, even after the earlier SIP was stopped. Please keep in mind, this would be treated as a fresh SIP and hence there could be some time taken to set up the SIP all over again.
Consult with a financial advisor today and start enjoying the benefits of Mutual Funds!
What happens to Mutual Fund Investments after the investor passes away?
Mutual Fund schemes usually don’t have a maturity date unless you have invested in a close-ended ELSS or other close-ended schemes like FMPs. Even in the case of a SIP, there is a term for which investments need to be made regularly. If the investor passes away while the SIP term is on or before the maturity of a close-ended scheme, there are defined procedures to be followed by the nominee, survivors in case of joint holding, or legal heirs to claim the proceeds. This process is called transmission. For someone to request for transmission, the person must be aware of your Mutual Fund investments in the first place, else it can just remain unclaimed forever.
Hence, it is advisable to always add a nominee to your Mutual Fund investments just like any other investments and keep the nominee informed about it. If you have a joint account holding, the survivors mentioned in your account can claim for transmission. But if you have neither got nominees nor surviving joint holders mentioned in your folio, your legal heirs can still request for transmission by submitting all the necessary documents and proofs including a death certificate. The person requesting for transmission needs to be KYC registered.
What is the Systematic Withdrawal Plan (SWP)?
Some people invest in Mutual Funds for a regular income, and they usually look at options of getting a dividend. Thus many schemes, especially debt oriented schemes, have monthly or quarterly dividend options. It is important to note that dividends are distributed from the profits or gains made by the scheme and are in no way guaranteed every month. Though the fund house endeavors to give consistent dividends, the distributable surplus is determined by market movements and fund performance.
There is another method to get a monthly income: using the Systematic Withdrawal Plan (SWP). Here, you need to invest in the growth plan of a scheme and specify a certain fixed amount required as a monthly payout. Then on a designated date, units amounting to that fixed amount would be redeemed. For example, an investor could invest Rs.10 lakhs and request that Rs.10,000 be paid on the 1st of every month. Then, units worth Rs.10,000 would be redeemed on the 1st of every month.
It is important to note that the tax treatment for both, dividend and SWPs, vary, and investors need to plan accordingly.
*Monthly Income is not assured and should not be construed as a guarantee of future returns.
What is a Systematic Investment Plan (SIP)?
Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.
SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be - Start Early, Invest Regularly to get the best out of your investments.
Can minors invest in Mutual Funds?
Anyone under the age of 18 (minor) can invest in Mutual Funds, with the help of parents/legal guardians until the age of 18. The minor must be the sole account holder represented by the parent/guardian. Joint holding is not allowed in a minor’s Mutual Fund folio. One should have an investment goal for the minor that needs to be achieved by investing in Mutual Funds like saying funding higher education.
Once a child attains the age of 18 and becomes a major, the first thing you as a parent/guardian need to do is change the status of the sole account holder from Minor to Major else all transactions would be stopped in the account. The tax implications will now have to be borne by the sole account holder as applicable to any investor above the age of 18 years. Until the child is a minor, all incomes and gains from the child's portfolio are clubbed under the parent's income and the parent pays the applicable taxes. In the year the child turns major, he/she will be treated as a separate entity and will pay taxes for the number of months for which he/she is a major in that year.
Can NRIs invest in Mutual Funds in India?
Yes, Non-Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in Indian Mutual Funds on full repatriation as well as non-repatriation basis.
However, NRIs would have to comply with all regulatory requirements such as completion of KYC before investing. It should, however, be noted that a few countries such as the US and Canada have restricted investments by NRIs in Mutual Funds without relevant disclosures. NRIs from these countries, thus need to check once with their advisor on the feasibility of investing in Indian funds before actually investing.
NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs, they can switch as per their convenience, they can opt for growth or dividend options, and can repatriate the redemption proceeds whenever they want to.
Thus NRIs and PIOs can invest and enjoy the full benefit of investing in a wide variety of Indian Mutual Fund schemes.
What are the taxation rules and implications in Mutual Funds?
Mutual Fund investments are subject to capital gains tax. It’s paid on the profit we make while redeeming/selling our Mutual Fund holdings (units). The gain is the difference in Net Asset Value (NAV) of the scheme on the date of sale and date of purchase (Selling Price-Purchase Price). Capital gains tax is further classified depending on the period of holding. For equity funds (funds with equity exposure > =65%), holding a period of one year or more is considered long-term and subjected to Long-Term Capital Gains (LTCG) tax.
LTCG tax of 10% is applicable to equity funds if the cumulative capital gain in a financial year exceeds INR 1 lakh. While doing financial planning remember your gains remain tax-free up to INR 1 lakh. It’s applicable for all investments made after 31st Jan 2018. Profits on holdings of less than a year are subject to 15% Short-Term Capital Gains (STCG) tax in equity funds.
Long-term is defined as holding a period of 3 years or more in case of non-equity funds (debt funds) and 20% LTCG tax is applicable on such holdings with indexation i.e. purchase price is adjusted upwards for inflation while computing capital gains. Profits on holdings of less than 3 years are subject to STCG tax, which is the highest income tax slab individuals fall into.
AMFI Registered Mutual Fund Distributor | ARN- 25312 | Date of initial Registration: 11/09/2004 | Current validity: 11/09/2026
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