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 analyse securities in order to make informed investment decisions.
Diversification. Diversification is one of the best ways to reduce risk. Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity. 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.
Affordability. The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience. Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
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. Mutual funds have historically been more efficient from the tax point of view. A debt fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to an individual investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend tax on dividends from an equity fund for individual investor.
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.
The Basics of Mutual Funds
Net Asset Value or NAV . NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day
NAV calculation.The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
Expense Ratio.AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Load.Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds
Open-Ended Funds.At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.
Close-Ended Funds.Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
