The mutual fund is a mechanism of pooling money from the general public or investors and investing it in hybrid instruments namely debt, equity, gold ETF, and gold funds. Furthermore, you can invest funds in pure debt, purely equity, or various combinations of these. Similar to equity shares having a price, mutual funds have a NAV (Net asset value). Read about the types of mutual funds in India and the benefits of investing in mutual funds.
Types of Mutual Fund Schemes:
- 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 the initial issue. Once they are listed on the stock exchange, the investor can buy and sell these units.
- Interval scheme: this scheme has the combined advantage of open-ended as well as close-ended schemes. Investors can trade at predetermined intervals.
- Based on investment objectives
- Growth Schemes: Most importantly 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.
- Other schemes
- Tax saving scheme: These schemes offer tax benefits to investors. The government offers tax incentives for investment in specific instruments. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.
- Sector Funds: Sector funds are for investors with the main 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.
Why invest in Mutual Funds?
- There is no minimum amount required to invest in a Mutual Fund. So, essentially investment in all types of 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 has strict rules and regulations. Therefore, the distributor has to mandatorily pass the exam for selling the products and all the AMCs (Asset Management Companies) give the training to the distributor.
- In the case of Mutual Funds, a professional manage your money and keeps a track of markets and find out for the best opportunities for you. Therefore, 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 a long term equity plan.
- Various types of Mutual Funds Schemes are tax-saving instruments as mutual fund investment in all asset classes for a period of more than a year is a long term investment for the income tax purpose. The income tax on mutual funds is charged at the rate of 10% in excess of Rs.1 lac on Long Term Capital Gains from sale of such mutual funds.
- ELSS is a tax saving mutual fund that qualifies for tax exemption under Section 80C of the Income Tax Act. Taxpayer can claim exemption of up to Rs. 1.5 lacs in the Income Tax Return filed on Income Tax Website. Compared to other tax-saving instruments, ELSS has the lowest lock-in period of 3 years.
Yes. FY 2020-21 onwards, the government abolished DDT (Dividend Distribution Tax). As a result, dividend income which was earlier exempt is now taxable. Further, the payer must deduct TDS under Sec 194K at 10% on dividends paid on Mutual Funds in excess of Rs. 5000.
Yes, Equity linked savings scheme or ELSS mutual funds are eligible for exemption u/s 80C. Deductions can be availed up to Rs. 1.5 Lakh per year. However, no deductions u/s 80C are available to taxpayers who have opted for the new regime.
ELSS i.e. Equity Linked Saving Scheme just like all tax-saving investments comes with a lock-in period. They, however, have the lowest lock-in period of 3 years. Thus, the investor cannot withdraw money from the ELSS Scheme for a period of 3 years.