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

“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 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:

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.

  • Lock-in period of three years.
  • Investments are eligible for Income Tax saving instruments like FD, NPS, PPF, NSC etc.
  • Suitable for individuals who want to reduce Income Income 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 atime 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:

    Funds

    Short-Term

    Long-Term

    Equity
    Funds/ Balanced Funds

    Less
    than 1 year

    1 year
    and above

    Debt
    Funds

    Less
    than 3 years

    3 years
    and above

    Taxation on Mutual Funds for Investors:


    An investor need to pay Income

    Period   
    ->

    Less than 1 year

    1-3 years

    More than 3 years

    Types

    Equity /
    Hybrid

    15%

    10%

    10%

    Debt

    Income Tax Slab.

    Income Tax Slab.

    20% Income Tax Deduction U/s 80C in case of investment in ELSS mutual funds.



    You may also read:

    Is Dividend received from Mutual Fund above 10 lakh really taxable? – Here is the answer.



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