Keywords: mutual funds, ppf interest calculator
A mutual fund can be described as a professionally managed investment that pools investment amounts from multiple investors and parks it in a diversified investment portfolio encompassing stocks, bonds, and securities. Interested Individuals can buy mutual funds. They represent their ownership stake in a fund and its total earnings. However, before investing in any kind of mutual fund in India, it is advised to know a few things about the investment option. To begin with, individuals must know about the types of mutual funds, returns on investment, and tax treatment on mutual fund options.
Let’s dive into these aspects of mutual funds below in detail.
How many types of mutual fund options are there?
Mutual funds can be essentially classified into four broad categories – bond funds, equity funds, money market funds, and target-date funds.
Each has unique features, associated risks, and potential returns on investment.
- Bond funds put investors’ money into riskier assets, which means individuals can offer higher returns on investments, but also get exposed to higher risks. The risks and rewards associated with a bond fund will vary based on the types of bonds making up the mutual fund.
- Equity funds or stock funds park money in company stocks. However, not all such funds are created equal. Some popular types of stock funds include growth funds, income funds, and index funds.
- Growth funds essentially focus on stocks with the potential for above-average growth, but they might not offer regular dividends. Income funds invest in regular dividend-paying stocks that can generate a steady income stream for investors, whereas, index funds typically track a specific market index and put in money in the stocks present in the index. Meanwhile, sector mutual funds specialize in a particular industry, such as tech or healthcare.
- Money market funds are considered safer investments as they are legally mandated to invest in high-quality short-term debt securities backed by corporations and the government.
- Target maturity funds are open-ended debt funds that put money in bonds with set maturity dates. Unlike fixed maturity plans that are close-ended, target funds can be bought and sold for their entire lifecycle. These funds track an underlying index of associated bonds, which ensures they have a diversified exposure to the current debt market.
Why do people buy mutual funds?
The following features and their associated benefits make mutual funds lucrative for investors –
- Expert fund managers are entrusted to do most of the heavy lifting. For instance, fund managers are tasked with researching and selecting profitable securities and closely monitoring their market performance.
- By investing in different companies and sectors, mutual funds help investors lower risk by diversifying their portfolios. This approach works in favor of the investor when one investment option performs poorly but does not necessarily have a drastic impact on the overall returns because of the performance of other options.
- Mutual funds are known to be affordable for investors belonging to all income levels, with most investment funds allowing investors to invest small amounts in different options on a regular basis.
- Mutual fund shares are believed to be highly liquid. This means investors can sell them at any time for the prevailing net asset value, minus redemption fees, if any.
- Investors can withdraw their mutual funds whenever they feel the need, especially if they have parked their money into open-ended funds. However, individuals do not have the flexibility to do so in the case of the tax-saving ELSS mutual fund.
How do investors earn returns on their mutual fund investment?
Typically, mutual funds generate returns on investments in two forms, namely – capital gains and dividends. Capital gains are the returns investors earn when they sell their fund units at a greater amount than their purchase price. On the other hand, dividends are paid to investors out of the company’s profits. Usually, dividends are declared when a company performs well and is left with substantial surplus cash. The amount of dividends is disbursed to investors in equal proportion to the total number of mutual fund units they hold.
However, the decision to share the profits with investors lies at the discretion of the company. Notably, both capital gains and dividends and capital gains earned on mutual funds are subject to taxes.
Do mutual funds attract taxes?
For tax treatment, mutual funds are broadly divided into two major categories -equity-oriented and debt-oriented. Equity-oriented mutual funds that are held for less than a year are subject to Short-term capital gains tax (STCGT) and taxed at 15%. On the other hand, long-term capital gains (LTCG) of more than Rs. 1 lakh earned on equity-oriented mutual funds held for over a year are taxed at 10%. On the other hand, in debt-oriented mutual funds that have an equity exposure of less than 65%, the STCG is taxed according to the investor’s tax slab if they held the units for less than 36 months.
The LTCG on debt-oriented mutual funds held for more than 36 months is subject to taxes at 20% post-indexation. Individuals can use specific mutual fund calculators like a PPF interest calculator and determine their earnings in advance to streamline their tax planning.
How investors should choose a mutual fund that suits their financial objective?
Before investing in any mutual fund, individuals must determine their risk-taking capacity and the level of risk they are willing to expose their portfolio through their investment choices.
Only once individuals are clear about this should check the mutual funds that are suitable for them and indulge in thorough research of the different categories of mutual funds. In addition, they should follow an investment approach that would help them to lower risk’s impact, increase returns, and ensure tax savings.
Individuals can also plan their mutual fund investments by using an online mutual fund calculator and plan their finances accordingly. Based on the outcomes on the calculator they can adjust their investment amount and time horizon to make more profitable investments that help them achieve their short-term and long-term financial goals.
