Understanding Mutual Funds
Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.
Tax benefits on Investment in Mutual Funds
1) 100% Income Tax exemption on all Mutual Fund dividends
2) Equity Funds - Short term capital gains is taxed at 15%. Long term capital gains is not applicable.
Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term capital gains tax to be lower of -
10% on the capital gains without factoring indexation benefit and
20% on the capital gains after factoring indexation benefit.
3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.
Note: Equity Funds are those where the investible funds are invested in equity shares in domestic companies to the extent of more than 65% of the total proceeds of such funds.