Mutual Funds in India: Types & Taxability

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By Hiral Vakil on March 6, 2019

The mutual fund is a mechanism of pooling money from general public or investors and investing it in hybrid instruments namely debt, equity, gold ETF and gold funds. The fund can be invested in pure debt, purely equity or various combinations of these. Just like shares have a price, a mutual fund has a NAV (Net asset value).

Tax Savings & Deductions

Types of Mutual Fund Schemes:

Mutual fund schemes are divided into 3 broad categories namely, as mentioned below:

  1. Based on the maturity period
    • Open-ended schemes: This scheme doesn’t have a fixed maturity period. Investors can buy and sell directly at any time in this scheme.
    • Closed-ended scheme: This scheme has a stipulated maturity period. In this scheme, the investor can directly invest at the time of initial issue and can later buy and sell these units whenever they are listed on the stock exchange.
    • Interval scheme: this scheme has the combined advantage of open-ended as well as close-ended scheme. Investors can trade at predetermined intervals.

  2. Based on investment objectives
    • Growth Schemes: The aim of this scheme is to provide capital appreciation. These schemes generally invest in equities and are ready to bear short-term loss to gain in the long run.
    • Income Schemes: These schemes provide a steady flow of income to its investors. It will generally tend to invest in bonds and stocks.
    • Balanced Schemes: These schemes aim to provide the combined benefits of Growth schemes and income schemes. They invest in shares and fixed income securities in the proportion indicated in their offer documents.
    • Money Market Schemes: This is suitable for investors looking to utilize their surplus funds for a short period of time while searching for better options. These schemes invest in short-term debt instruments and try to provide reasonable returns for the investors.

  3. Other schemes
    • Tax saving scheme: These schemes offer tax benefits to investors. Tax saving is made possible because the Government offers tax incentives for investment in specified places. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.
    • Sector Funds: Sector funds are for investors with the objective to invest only in the equity of the companies existing in a specific sector, as mentioned in the fund’s offer document. For example, a technology fund will invest in software companies like Infosys Technologies, Satyam Computers etc.
    • Index Funds: A fund that tries and works on the performance of a specific Index as BSE Sensex or NSE 50.
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Why invest in Mutual Funds?

  • There is no minimum amount required to invest in a Mutual Fund. So, essentially investment in Mutual Funds is helpful when you want to save more. It is also helpful for first-time investors who don’t have much knowledge about the market.
  • Mutual Fund Industry is highly regulated. The distributor has to mandatorily pass the exam for selling the products and is given training by all the AMCs (Asset management companies) with whom he is associated with.
  • In the case of Mutual Funds, your money is handed over to a professional, whose job is to keep a track of markets and find out for the best opportunities for you. Mutual Funds publish a monthly fact sheet that lists out all the facts you need to know about the scheme you’ve invested in. Hence, mutual funds are transparent and safe.
  • You can either invest one time or have a systematic investment plan (SIP) to get the advantage of long term equity plan.
  • Mutual Fund Schemes are tax saving instruments as mutual fund investment in all asset class for a period of more than a year is considered the as long term for the tax purpose.
  • ELSS is a tax saving mutual fund which qualifies for tax exemption under section 80C of the Income Tax Act. Compared to other tax saving instruments, ELSS has the lowest lock-in period of 3 years.
What is ELSS (Equity Linked Savings Scheme)?

Taxability of Mutual Funds:

Taxability of Mutual Funds depends on the Type of fund i.e; equity or debt fund as well as the holding period for which it is owned. Capital Gain will be calculated accordingly.

Holding period of the Asset

The holding period of the asset will determine whether it is Short Term or Long Term Capital Asset.

Type of AssetShort Term Capital AssetLong Term Capital Asset
Equity FundsMF units held for 1 year or less.MF units held for more than 1 year.
Debt FundsMF units held for 3 years or less.MF units held for more than 3 years.

Capital Gain tax rates on Mutual Funds

Following are the capital gain tax rates applicable on Mutual Funds:

Type of AssetShort Term Capital AssetLong Term Capital Asset
Equity Funds15% + Surcharge and Education Cess10% (Without Indexation)+Surcharge and Education Cess
Debt FundsNormal Slab Rate applicable to Individuals20% (with Indexation) + Surcharge and Education Cess
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