Mutual Fund – Meaning, Types, Risks, Returns & Taxation

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Why Mutual Fund
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“Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing.”- Hope you read this disclaimer in media. Also Mutual Fund investment is getting popular day by day. So you need to know some basic things about mutual fund.

Mutual Fund : Mutual Fund is a professionally managed investment fund that pools money from many investors to purchase securities such as stocks, bonds, money market instruments etc.

Types of Investment Schemes: Generally, there are three types of Investment Schemes,

  • High Risk / High Return (Share Market Investment)
  • Medium Risk / Medium Return (NPS)
  • Low Risk / Low Return (Capital is protected i.e. no chance of loss) FD, NSC,PPF

Types of Mutual Funds : Basically there are three types of Mutual Funds. Even Tax saving mutual funds are also available.

Equity or Growth Fund:

Key Features:

  • These invest in equities i.e. company shares.
  • High return and Long term investment. 
  • Main objective is Wealth Creation or Capital Appreciation.

Examples:

  • “Large Cap” funds which invests in large established companies.
  • “Mid Cap” funds which invests in medium sized companies.
  • “Small Cap” funds which invests in small companies.
  • “Multi Cap” funds which invests in a mix of large, medium and small companies.
  • “Sector” funds which invests in a particular types of business such as, Real Estate Funds that invest only in Real Estate companies.
  • “Thematic” funds that invest in a common theme. for e.g. Infrastructure funds that invest in companies which will benefit from the growth in the infrastructure segment.
  • Tax saving funds.

Income or Bond or Fixed Income Fund:

Key Features:

  • These invest in Fixed income securities like Government Securities or bonds, Commercial papers and debentures etc.
  • Safer investment and suitable for income generation.

Examples:

  • Liquid
  • Short term
  • Floating rate
  • Corporate Debt
  • Dynamic bond
  • Gift funds etc.

Hybrid Funds:

Key Features:

  • These invest in both Equities and Fixed income.
  • Suitable for Income generation and also have Growth potential.

Examples:

  • Aggressive balanced funds
  • Conservative balanced funds
  • Pension plans
  • Child plans
  • Monthly income plans etc.

Tax Saving Mutual Funds – ELSS: Equity Linked Savings Scheme or ELSS is a popular investment scheme. Let’s read its features.

Key features:

  • Lock-in period of three years.
  • Investments are eligible for tax deduction u/s 80C of I.T. Act upto Rs. 1.5 lakh.
  • No upper limit of investment.
  • Highest Return and Lowest Lock-in period among other conventional tax saving instruments like FD, NPS, PPF, NSC etc.
  • Suitable for individuals who want to reduce Income Tax by investing 80C tax saving schemes. Also who want to take some Risk  and invested for a long time to get benefits.
  • As the lock-in period is 3 years, the gains are treated as Long term capital gain and they are taxed @ 10% for gains over 1 lakh.

Which is better investment between Share Market and Mutual Fund?

If you want high return, then invest in Share Market. But you must have knowledge about money market. Risk factor is also high  in share market investment. Suppose you purchased some units of a company’s share, if that company faces loss then you will also face loss.

In case of Mutual Fund, it is managed by professional finance managers. They will invest your money in different company’s shares etc. If one or two company faces loss, you will not face total loss because you will gain from other companies. So risk factor is lower than share market. Also return is lower than share market investment.

How to invest in Mutual Funds ?

You can invest in Mutual Funds in two ways,

SIP : You can choose SIP or Systematic Investment Plan if you want to invest a fixed amount of money at fixed intervals of time such as daily, weekly, monthly, quarterly or half yearly in the mutual fund.

Lump Sum : It is a single payment mode, means you can invest a bulk amount at a time in mutual funds.

Which is better SIP or Lump Sum?

Both of these gateways have pros and cons.

SIP (Systematic Invest Plan)

Pros:

  • Low Risk: SIP helps to spend more time during both rising and falling markets. But in case of Lump Sum investment , there is a chance to buy few units of MF when market is high and more when market is down.
  • Invest small amounts time to time: No problem if you haven’t bulk money. Earn money and invest through SIP in MF.

Cons:

  • Lower Return than Lump Sum: There is more chance of higher return in Lump Sum than SIP as a bulk amount of money is invested for a long time.

Lump Sum

Pros:

  • Chance of Higher return than SIP

Cons:

  • Risk is also Higher than SIP

Terms of Mutual Funds:

FundsShort-TermLong-Term
Equity Funds/ Balanced FundsLess than 1 year1 year and above
Debt FundsLess than 3 years3 years and above

Taxation on Mutual Funds for Investors:

An investor need to pay Income Tax on mutual funds when any capital gain arises from fund.

Period    ->Less than 1 year1-3 yearsMore than 3 years
Types
 Equity / Hybrid15% tax applicable on STCG10% tax applicable if gains are more than 1 lakh on LTCG10% tax applicable if gains are more than 1 lakh on LTCG
 DebtTax applicable as per Income Tax Slab.Tax applicable as per Income Tax Slab.20% tax applicable with the benefit of indexation.
Tax season with wooden alphabet blocks, calculator, pen on 1040 tax form backgrounda
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Investor will get Income Tax Deduction U/s 80C in case of investment in ELSS mutual funds.

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