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Mutual Fund

Mutual Funds combine the savings of a large number of investors and manage them as a single pool of money. Instead of Investors worrying about what stock or bond or commodity to invest in, Professional Fund Managers do the job. The Mutual Funds are run by Mutual Fund companies also known as Asset Management Companies (AMCs). And each AMC operates a number of fund schemes that suite different types of investment needs.

For individual Investors who don’t have time and inclination to study and research investments, Mutual Funds are the best options to reap the benefits of professional management, diversified investment with least efforts. In most Funds, it is possible to start investing with as little money as few hundred rupees. Also unlike many investments, Mutual Funds are mostly very liquid in nature and can be liquidated without any delay.

Benefits of Mutual Funds:

Professional expertise: Investing requires skill. It requires a constant study of the dynamics of the markets and of the various industries and companies within it. Anybody who has surplus capital to be parked as investments is an investor, but to be a successful investor, you need to have someone managing your money professionally.

Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in India, fund managers are acquiring global certifications like CFA and MBA which help them be at the cutting edge of the knowledge in the investing world.

Diversification: There is an old saying: Do not put all your eggs in one basket. There is a mathematical and financial basis to this. If you invest most of your savings in a single security or a single type of security (like real estate or equity become disproportionately large due to one or the reason), you are exposed to any risk that attaches to those investments.

In order to reduce this risk, you need to invest in different types of securities such that they do not move in a similar fashion. Typically, when equity markets perform, debt markets do not yield good returns.

If you want to do this on your own, it will take you immense amounts of money and research to do this. However, if you buy mutual funds -- and you can buy mutual funds of amounts as low as Rs 500 a month! -- you can diversify across asset classes at very low cost. Within the various asset classes also, mutual funds hold hundreds of different securities (a diversified equity mutual fund, for example, would typically have around hundred different shares).

Low cost of asset management: Since mutual funds collect money from millions of investors, they achieve economies of scale. The cost of running a mutual fund is divided between a larger pool of money and hence mutual funds are able to offer you a lower cost alternative of managing your funds.

Equity funds in India typically charge you around 2.25% to 2.5% of your initial money and around 1.5% to 2% of your money invested every year as charges. Investing in debt funds costs even less. If you had to invest smaller sums of money on your own, you would have to invest significantly more for the professional benefits and diversification.

Liquidity: Mutual funds are typically very liquid investments. Unless they have a pre-specified lock-in, your money will be available to you anytime you want. Typically, funds take a couple of days for returning your money to you. Since they are very well integrated with the banking system, most funds can send money directly to your banking account.

Ease of process: If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as simple as that! You need to fill in the KYC application form, attach your PAN card, photograph and an address proof and submit. Once your KYC is updated, just sign your cheque and Mutual Fund application, your investment in a fund is made.

Well regulated: India mutual funds are regulated by the Securities and Exchange Board of India, which helps provide comfort to the investors. SEBI forces transparency on the mutual funds, which helps the investor make an informed choice. SEBI requires the mutual funds to disclose their portfolios on every month basis, which helps you keep track whether the fund is investing in line with its objectives or not.

Tax benefits:

Tax Saving u/s 80C up to 150,000/-
If you are investing in Equity Linked Saving Schemes ( ELSS) of Mutual Funds, you can claim tax deduction up to 150,000/- p.a (through there is no upper limit for investing in these funds). They come with lock in period of just 3 years, which is least among the tax saving instruments under u/s 80 C.

Short term Capital Gain:

If your holding in a Equity mutual fund scheme is less than 1 year i.e. if you withdraw your mutual fund units before 1 year, after making a profit, then the profit will be considered as Short Term Capital Gain at taxed 15%.

If you make a gain / profit on your Debt fund (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital  Gain and taxed at investor’s applicable slab rate.

Long term Capital Gain:

If you make a gain / profit on your investment in an Equity Mutual Fund scheme that you have held for over 1 year, it will be classified as Long-Term Capital Gain and it’s totally tax free.

If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long-Term Capital Gain and taxed at 20% after indexation.

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