What is a Mutual Fund?

Mutual Fund (MF) is a trust comprising like-minded investors who pool in their money into a corpus that is invested by the MF’s Asset Management Company (AMC) in different types of investments such as stocks, government and corporate bonds, and more. All MFs have a specified investment objective. Investors are allocated units under their respective folios wherein the unit value depends on the MF’s Net Asset Value. The MF grows its investment in two ways: income earned and any capital appreciation realized through sale. This is shared by individual unitholders in proportion to the number of units they own.

1.How is a MF set up?

Ans:A MF is set up in the form of a trust, comprising Sponsor(s), Trustees, Asset Management Company (AMC), and Custodian(s). The sponsor may be likened to the promoter of a company while the trustees hold the MF’s property for the benefit of the unit holders (investors). The AMC, which must have SEBI’s approval, invests and manages the MF’s investment portfolio. Trustees are vested with the general power of superintendence and direction over the AMC, monitoring its performance and compliance with SEBI regulations.

Regulations laid down by SEBI require that at least two-thirds of the trust’s directors or board of trustees be independent, i.e., not associated with the MF’s sponsors. Similarly, 50% of the directors in the AMC must be independent.All MFs are required to register with SEBI before they can launch any scheme. UTI MF has been registered with SEBI on January 14, 2003 under Registration Code MF/048/03/01.

2.What is NAV?

Ans:The performance of a particular MF scheme is reflected in its Net Asset Value (NAV). This NAV denotes the market value of the portfolio under the scheme, and it changes on a day-to-day basis. The NAV per unit is the total NAV divided by the total number of units on that particular date.

3.Schemes

Ans:

Sector-specific Fund Schemes

MFs run schemes that exclusively invest in the stocks of companies operating in a particular sector. For e.g., Pharmaceuticals, Software, Petroleum stocks, etc. The returns depend on the performance of the respective sector and the risk is higher as compared to diversified funds. Investors need to keep a close watch on the sectorwise performance or seek expert advice.

Tax-saving schemes

These schemes help get you tax rebates under specific provisions of the Income Tax Act, 1961, for e.g., Equity-Linked Savings Schemes (ELSS). Pension schemes also offer tax benefits. These schemes are growth-oriented and invest predominantly in equities, and hence risk factors apply accordingly.

4.Load Funds and No-load Funds

Ans:A Load Fund is one where you pay a charge for a certain specified percentage of the NAV —for entry or exit from the scheme, applicable to each time you buy or sell its units. Do consider the loads alongside the scheme’s performance track record and service standards while investing, as these impact your yields/returns.

A No-Load fund is one that you can enter or exit at NAV, without incurring any additional charges.

5.What is Sales price?

Ans:The price or NAV you pay while investing in an open-ended scheme is its sales price. It may include sales load, if applicable.

6.What is Re-Purchase or Redemption price?

Ans:Repurchase or redemption price is what you get (at NAV) when your MF scheme repurchases or redeems its units from you. It may include exit load, if applicable.

7.Assured Return Scheme

Ans:Such schemes offer assured returns irrespective of their market performance. A scheme cannot promise returns unless these are fully guaranteed by the AMC’s sponsor, and any such guarantee must be disclosed in the MF’s offer document.As an investor, you must read it carefully to ascertain the time period for which returns are assured.

8.ADVANTAGES

Ans:

How do I get tax benefits from investing in MFs?

Income other than Capital Gains

As per the provisions of Section 10(35) of the Income Tax Act, income received in respect of the units of a mutual fund specified under Section 10(23D) of the Act is exempt from income tax in the hands of the recipient investors.

Tax Deduction at Source

No income tax is deductible at source on the income distribution by the mutual fund, as stated under the provisions of Sections 194K of the Income Tax Act, 1995.

CAPITAL GAINS

As per Section 2(42A) of the Income Tax Act, units of the scheme held as a capital asset for a period of more than 12 months immediately preceding the date of transfer, will be treated as a long-term capital asset. In all other cases, it would be treated as a short-term capital asset.Also, sub-section (7) of Section 94 of the Act provides that loss, if any, arising from the sale/transfer of units (including redemption) purchased up to 3 months prior to the record date and sold within 3 months after such date, will not be available for set off to the extent of income distribution (excluding redemptions) on such units claimed as tax exempt by the Investors.Long-term and short-term capital gains arising to resident investors from the transfer of the units of the scheme will be taxed at the following rates:

BOX Item

Short-term: Tax rate applicable as per the prescribed tax slabs

Long-term: 20% with cost inflation index benefit or 10% without cost inflation benefit, whichever is lower

Tax Deduction at Source (Capital Gains)

No TDS

No tax deducted at source from capital gains arising from repurchase or redemption of the units.

Wealth tax benefits

Under Section 2(ea) of the Wealth Tax Act, 1957, units held under MF schemes are not treated as assets, and therefore, do not attract any wealth tax.

Gift Tax

Gifts of units purchased under MF Schemes are exempt from Gift Tax as The Gift Tax Act, 1958, has ceased to apply to gifts made on or after October 1, 1998.

Religious and charitable trusts

Mutual fund investments are recognized as an eligible form of investment under Section 11(5) of the Income Tax Act read with Rule 17C of Income Tax Rules, 1962, for Religious and Charitable Trusts.

Keep the table as it is

For NRI/PIO/FII Investors:

Key tax implications applicable to Non-Resident Indians (NRI) and Persons of Indian Origin (PIO) and Foreign Institutional Investors (FII) are summarized as follows based on the relevant provisions under the Income Tax Act, 1961, Wealth Tax Act, 1957, and Gift Tax Act, 1958 (collectively referred to as ‘the relevant provisions’), subsequent to the amendments enacted by the Finance Act, 2003.

Income other than capital gains:

As per the provisions of Section 10(35) of the Income Tax Act, any income received by the investor in respect of the holding of units of a mutual fund specified under Section 10(23D) of the Act is exempt from Income Tax.

For Foreign Institutional Investors

Long-term capital gains on the sale of units would be taxed at the rate of 10% under Section 115AD of the Income Tax Act. These would be calculated without considering the indexation of the cost of acquisition. Short-term capital gains are taxed at 30%. Rates are subject to the applicable tax treaty relief, and would increase by the surcharge applicable.There is no TDS (Tax deducted at source) from capital gains (long-term or short-term) arising to an FII on repurchase/redemption of units in view of the provisions of Section 196D(2) of the Act.

Taxes on schemes for NRIs/PIOs

For an investor who is an NRI or Person of Indian Origin, following tax rates apply to your capital gains from your Mutual Fund investments:

Exemption under long-term capital gains

You can get an exemption under Section 54EC of the Income Tax Act 1961 on long-term capital gains upon transfer of units if you invest the entire capital so realized, within six months from the date of transfer, into bonds issued by National Bank of Agricultural and Rural Development (NABARD), National Highways Authority of India (NHAI) or Rural Electrification Corporation Limited (RECL), which are redeemable after three years.

The long-term capital gains upon transfer of units would be exempt from tax under Section 54ED of the Income Tax Act if the entire capital gains so realized, are invested within six months from the date of transfer, into public issue of equity shares of a company formed and registered in India. However, if the amount thus invested is less than the total capital gains realized, the exemption would apply proportionally to the invested amount. If you transfer or sell these shares within one year of investment, the amount exempted from tax would become taxable.

W.e.f. April 1, 2001, the losses arising from the sale of securities or units (in respect of which dividend or income on such securities or units is exempt from tax) would be disallowed under Section 94(7) of the Income Tax, 1961, if such securities or units have been purchased up to 3 months prior to the record date and have been sold within 3 months after such date. The amount of loss to be disallowed will be restricted to the amount of dividend or income on such securities or units claimed as tax exempt by the taxpayer.

9.FAQs

Ans:

What makes mutual funds a popular investment option? OR What kind of Investor should invest in Mutual Funds? OR Are Mutual Funds a great option for me?

Mutual Funds have a wide range of investment schemes to suit the financial planning needs of different kinds of investors. There are growth schemes for young investors who can take risks, income schemes for those who have a lower risk appetite, dividend schemes for those who want periodic returns. Moreover, SIPs make mutual funds convenient and easily accessible.

As mutual funds primarily invest in the stock market, are they suited to the small investor?

Mutual funds are great for the small investor, who seeks to grow their savings – generally not possible without investing in the equity market. Small investors do not have the time or the expertise to analyse stocks. A Mutual Fund does it for them. Moreover, the small investor can invest a small amount regularly through SIPs.

What is the structure of a mutual fund?

Q. How to invest in a mutual fund?

Step 1 Identify your investment needs.

1. What are my investment objectives and needs?
2. How much risk am I willing to take?

Step 2: How to choose the right mutual fund.

1. Track the Mutual Fund’s record of performance over the last few years, compare with similar funds in the same category
2. Look into how well the mutual fund is organised to provide efficient, prompt, and personalised services
3. Degree of transparency as reflected in frequency and quality of their communications.

Select the ideal mix of schemes

Invest in a couple of schemes instead of just one scheme.

*Please ask your financial advisor for details and advice.

Question:

Which one to buy?

Schemes

Disclaimer

Mutual Fund investments are subject to market risks. Please read the offer documents carefully before investing.