MUTUAL FUNDS

INTRODUCTION:

Mutual fund is a trust that pools together resources (savings) of investors through issue of units for investments in capital market instruments such as shares, debentures and bonds and money-market instruments such as commercial papers, certificate of deposits and treasury bonds. It is a trust for investors who share a common financial goal. Over 2 crore investors have faith in mutual funds. A systematic investment may lead to give rich dividends in the long term.

Anybody with a small amount of money (a few thousands) may invest by buying units of a mutual fund scheme that has a defined investment objective and strategy.           

How MF work for you? :

The money collected from various investors is invested by a fund manager in different types of securities. The income earned through these investments and capital appreciation realized by the scheme is shared by its unit holders in proportion to the units owned by them.

Investors invest their savings into the mutual fund and in return mutual funds provide high return to its investors.

There is a big question people are confused at:

WHETHER TO INVEST IN STOCKS OR MUTUAL FUNDS?

As both are capital market investments; it’s up to you to decide what kind of investor you are?

If you want a well-diversified portfolio while investing in stocks, consider investing in 15-20 stocks. Suppose if you have few thousand bucks can say 5000, it would be impracticable to invest in as many stocks across the market. (DO NOT PUT ALL YOUR EGGS INTO ONE BASKET) remember this line. While if you would have invested these 5000 in funds you would be able to gain access to wide basket of stocks. Even at beginning in case of stocks brokerage could eat into your returns if you purchase small quantities of stock.

Choosing stocks to invest is another a big question. It asks for your full time efforts to earn returns in these investments. You need to get experienced focused while investing in them. So do you have enough time to read newspapers, magazines, annual reports, quarterly updates, industry reports and talking to people who are familiar with industry practices .You have to be a active investor which means continuously monitor the stocks you pick and make changes. Additionally these actions have cost, capital gains are taxed under it. Again if you love the thrills of up and down in the stock market, if you are interested in making your full time efforts and if you are courageous and enough emotionally matured to bear the risk and losses when you’re ahead, then you can trust yourself to invest in stocks. Undoubtedly, once you start investing your time valuably and get experienced by the time you may earn higher returns. But to achieve it, it asks your worth.

Otherwise you have a great and safe option to invest in MF. Because you may start investing in these with smaller amounts and earn return as well.

MUTUAL FUNDS can be the best avenue for the risk-averse investors.

SO CHOOSE WISELY!

The Mutual Fund industry started in 1963 in INDIA with the formation of UNIT TRUST OF INDIA (Set up and regulated by RBI and later by INDUSTRIAL DEVELOPMENT BANK OF INDIA). Thereafter public sector trusts came into the picture by 1987 to be the first non-UTI MF and then private sector came up by 1993 and also the first MF regulation came into force, where all mutual funds except UTI were to be registered and governed, thereafter it start governing under SEBI. In FEB 2003 UTI was bifurcated into two separate entities. Specified undertaking of UTI and UTI mutual fund.

            SINCE, may 2014 the industry has witnessed steady inflow and increase in number of investors.

CLASSIFICATION OF MUTUAL FUNDS

Taxes paid on your mutual fund investments vastly depends on factors such as what kind of funds you have invested in, the duration of your investment, and which income tax slab you belong to.

CAPITAL GAIN TAX ON MUTUAL FUNDS:

When you sell your assets at a profit, the total profit earned is called a capital gain. Capital is nothing but the principal investment that was made to purchase your mutual fund units. Let’s look at an example to understand what mutual funds capital gains mean.

Let’s assume you purchased a few units of a mutual fund for Rs. 5000. Your capital expenditure, in this case, is the principal amount of Rs. 5000. If the fund generated a return of 20%, the value of your investment is now Rs. 6000. So the capital gain on this investment is Rs. 1000. Therefore, the capital gain is total income minus the initial capital.

The capital gain, Rs. 1000, in this case, will be the taxable income.

Also, it is important to note that one incurs capital gain tax only when it is sold. If you continue to stay invested, you will not have to pay mutual funds capital gains tax.

Capital gains tax in India depends on the mutual fund scheme and the tenure of the investment. Based on your choice of investments, you will have to pay short-term capital gains tax (STCG) or long term capital gains tax (LTCG).

TAX ON DIVIDEND INCOME:-

If you invest in a mutual fund with a dividend payout option, you will receive timely payments in the form of dividends.

Whenever a dividend option mutual fund makes a profit, that profit gets distributed among investors (as per the number of units held by each investor) as dividend payments.

In the Union Budget 2020, the finance ministry has changed the mutual fund’s dividend tax rules in India. Dividends will now be taxable in the hands of investors and DDT scrapped. Hence, fund houses need not pay the Dividend Distribution Tax DDT on equity mutual funds and debt mutual funds starting April 1st, 2020.

Fund	DDT Base Rate	Surcharge	Cess	Effective DDT
Equity MUTUAL FUNDS	10%	1.2%	0.448%	11.648%
Debt Mutual Funds	25%	3%	1.120%	29.120%

A surcharge of 12% on base rate and cess of 4% on base + surcharge rate is included in DDT.

From April 1st, 2020, mutual funds dividends are taxed in the hands of investors at their income tax slab rate. This is done to reduce the burden on small investors. Dividend income will be treated as normal income and added to the total income and is taxable at the income tax slab rate.

Additionally, mutual funds dividends paid out to a person is more than INR 5,000 is subject to TDS (tax deducted at source) of 10%. If the PAN is linked to Aadhar, this rate is applicable. In its absence, the TDS will be 20%.

TAX ON EQUITY MUTUAL FUNDS:-

If equity investments are sold under one year, the fund returns are treated as short term capital gains (STCG). These are subject to short term capital gain tax of 15% (plus 4% cess). Equity investments that are redeemed after one year are considered long-term capital gains (LTCG). The LTCG of up to Rs. 1 lakh is tax-free, whereas gains over Rs. 1 lakh is subject to LTCG tax of 10% (plus 4% cess) without any indexation benefit.

Equity-Linked Saving Scheme (ELSS funds) is another equity scheme that deserves to be mentioned here. It is the most efficient tax saving scheme under Section 80C. ELSS mutual funds have a lock-in period of 3 years.

Equity oriented balanced, and hybrid funds, in which at least 65% of the assets are invested in equities, are also taxed the same way as equity mutual funds.

TAX ON DEBT MUTUAL FUNDS:-

Taxation on debt mutual funds is very different from that of equity mutual funds.

As previously mentioned, If debt investment is sold under three years, they are considered as short term capital gain. This short term capital gain is then added to the investor’s income and taxed as per the income tax slab applicable to the investor.

The debt investments sold after three years will be considered long-term capital gains. These are subject to the LTCG tax of 20% with indexation benefit.

The indexation benefit makes investing in debt mutual funds particularly attractive for investors looking for tax-efficient investment options.

In short, indexation helps in reducing tax as it inflates the purchase cost. Indexation achieves this by adjusting capital gains to the cost inflation index (CII). It is important to note that indexation applies only to long-term capital gains earned on non-equity oriented mutual funds.

Indexation can be slightly tricky to follow. Please read the detailed explanation provided here to understand how indexation works.

In addition to all of these, you also need to be aware of the Securities Transaction Tax STT. The fund manager will charge you an STT of 0.001% if you decide to sell your equity fund units. Securities Transaction Tax STT does not apply to the sale of units in debt mutual funds.

DECLARATION OF MUTUAL FUNDS IN NCOME TAX RETURNS:-

Declaring your investment returns while filing your income tax returns is not as straightforward as it may seem. Let’s look at how tax filing of capital gains can be done seamlessly.

If you are a salaried person with no accumulation of capital gains yet, you will need to fill in Form 1 along with Form 16 provided by your employer.

If, on the other hand, you are a salaried individual who has accumulated capital gains over the years, you will need to fill in Form 2.

ITR Form 2 is for individuals not conducting any other business under proprietorship but receive additional income from other sources apart from salary.

While filing your income tax returns, mutual fund investments have to be declared. However, investments in tax savings funds like ELSS mutual funds help save tax under section 80c.

Also, Scrip box Income tax calculator can be used to determine the taxable income and makes the tax filing process easy for an investor. It also suggests investment plans in case there is scope to save tax.

TERMS ASSOCIATED WITH MUTUAL FUNDS:-

• NAV
• ENTRY AND EXIT LOAD IN MUTUAL FUNDS
• TRAIL COMMISSION
• EXPENSE RATIO
• SIDE POCKETING
• TRACKING ERROR