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A mutual fund is a trust. It pools money from like-minded shareholders and invests in diversified portfolio of securities, through various schemes that address different needs of investors. The pool of money thus collected is then invested by the Asset Management Company (AMC) in different types of securities. These could include shares, debentures, convertibles, bonds, money market instruments or other securities, based on the investment objective of a particular scheme. Such objective is clearly laid down in the offer document for that scheme. The fund adds value to the investment in two ways: income earned and any capital appreciation realised through sale. This is shared by unit holders in proportion to the number of units they own
By Structure Open-ended schemes Close-ended schemes Interval schemes By Investment Objective Growth schemes Income schemes Balance schemes Money Market schemes Other types of schemes Tax Saving schemes Special schemes Index schemes Sector specific schemes By Structure Open-end Funds An Open-end Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices Close-ended Funds A Close-ended Fund has a stipulated maturity period which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest
in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the Stock Exchanges where they are listed
By Investment Objective Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time Income Funds The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income Balanced Funds The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are ideal for investors looking for a combination of income and moderate growth Money Market Funds The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods
Other Schemes Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity linknewed Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961 Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50. Sectoral Schemes Sectoral Funds are those which invest exclusively in a specified sector(s) such as FMCG, Infotech, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to sector(s) / industry (ies)
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What is the difference between an open ended and close ended scheme?
Open ended funds can issue and redeem units any time during the life of the scheme. Close
ended funds cannot issue new units except through a bonus or rights issue. Hence, unit capital of open ended funds can fluctuate daily. Further, new investors to an open ended fund can join the scheme by directly applying to the mutual fund at applicable Net Asset Value-related prices. In the case of close ended schemes, new investors can buy units only from the secondary market
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Next, you can make a profit by selling the mutual fund units at a price higher than that at which you bought them. This is capital gain. (If you sell the units at a lower price, you make a capital loss.) Finally, the value of the units you hold can appreciate. This is unrealised capital gain. Dividends and capital gains are treated differently
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What are the tax benefits for investing in mutual fund units?
20% rebate on contribution upto Rs 10,000/- under ELSS (equity linknewed saving schemes)
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As mutual fund schemes invest only in stock markets, are they suitable for smart investors?
Mutual funds are meant for small investors. The prime reason is that successful investments in stock markets require careful analysis which is not possible for a small investor. Mutual funds are usually equipped to carry out thorough analysis and can provide superior returns
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In the budget 2004, an Education Cess Tax of 2% has been introduced as below:
AN EDUCATION CESS OF 2 PERCENT ON INCOME TAX, CORPORATE TAX, EXCISE DUTIES, CUSTOMS DUTIES AND SERVICE TAX TO BE LEVIED. Meaning : An education cess tax is levied at 2% on TDS or advance tax paid, inclusive of surcharge. On the income tax plus surcharge payable by all categories of taxpayers, there will be an Education Cess at the rate of 2% thereon of such tax and this new tax is applicable to Excise Duties, Corporate Tax, Customs Duties and Service Tax. (A) Example for Mutual Fund: In the mutual fund context, TDS is applicable to NRI
investors. The following is the calculation of TDS on short term capital gain including education cess tax. Assume that the redemption proceeds are 1,00,000/- and Short Term Capital Gains out of the transaction is Rs. 500/-. TDS would be 30% as per tax slab + 10% surcharge + 2% education tax (33.66 %) = 500*33.66/100 = 168.30 The amount payable to investor is 1,00,000.00 169.00 = Rs. 99831.00 and the Rs. 169/- will be remitted to treasury as TDS. (B) Example - Impact on Income Tax : No change in existing Income Tax Rate and Surcharge otherwise stated below. An Additional Surcharge @ 2% (on aggregate amount of Income tax and existing surcharge) is proposed as Education Cess. A person having taxable income exceeding Rs one lakh will now be required to pay in addition to income tax (after rebate under Chapter VIII-A) an education cess at the rate of two per cent. The tax proposals also specify that a person having income exceeding Rs 8.5 lakh in this slab would be required to pay 10 per cent surcharge on the total income tax payable after the rebate under Chapter VIII-A, and also the education cess at the rate of 2 per cent. (C) Example for Interest on NRE NRE, FCNR & RFC Account : Any interest paid or credited on or after 1st September, 2004 in respect of deposits in NRE, FCNR and RFC account of an individual shall be taxable at normal rates of taxation. The bank shall be required to deduct tax at 33.66% (i.e. Income Tax 30% + Surcharge 10% + Education cess 2%). However, if such deposits are with an Indian company or bank, which is an Indian Company not being a private company as defined in the Companies Act, 1956 (1 to 1956), the rate of TDS shall be 22.44% (i.e. Income Tax 20% + Surcharge 10% + Education cess 2%). { Disclaimer : This contents above should not be considered as substitute for specialized professional advice and expert guidance may be sort before acting upon }