Friends, I Have Written A Lot Of Articles on Investing. How to Invest in your 20s,How To Invest In Your 30s, And A Common Element In All These Suggestion And Articles Is That Equity Or Stocks Should Be A Major Component In Your Investment Strategy. There Are Two Ways Of Buying A Stocks, Either You Can Buy A Direct Stocks Or You Buy Something Called Mutual Funds. Today I Will Tell You All That I Know About Mutual Funds. So That You Can Start Your Investing Journey Through Mutual Funds Too.
We Will Cover 5 Things.
1. What Are Mutual Funds?
2. What Are The Types of mutual funds.
most important element which should never be ignored in investing that is
3.what are tax implications when buying a mutual funds.
4. how to select a mutual funds.
5. if you want to buy a mutual funds, then from where and how?
Let's start first of all,
WHAT ARE MUTUAL FUNDS?
Like I said, in an investment strategy, You can buy direct stocks, which i do but that doesn't mean it should be your approach too. There are many experts for this who know more than us, so why don't we give them a flexibility and the autonomy to do that for us. So they will be running a fund on your behalf. This fund will have a size, which is in hundreds and thousands of crores depending on the size of the mutual funds. Retail investors like us buy unit of that funds. The fund manager makes investment with our money on our behalf. They would invest in stocks, fixed deposit, maybe in gold, corporate bonds. All these things are based on the type of mutual fund and basically, we get the benefits of their expertise without doing any hardwork at all. That is why mutual fund is a brilliant way for you to enter the investing world.
TYPES OF MUTUAL FUND'S
Now if we talk about how many types of mutual funds are there?
Largely, there are 3 types of mutual funds.
- Equity Mutual Fund's – these funds invest your money in equity or stocks. That also has different categories it could be large capital meaning the big companies. So the top 100 companies are called the large cap or capital companies. Then there is mid cap companies also known as middle capital companies which could be 101st to 250th size of the company. Small cap which is also known as small capital companies which has below 250.
- Debt Mutual Fund's – It is like a fixed deposit. You get an assured income and because the risk is less in this fund return is also less.
- Hybrid Mutual Fund's – It will have some features of equity mutual fund and some features of debt mutual funds. Hybrid mutual funds is also known as balanced mutual funds. If you don't want to take risk and at the same time you don't want to play to safe like a debt mutual funds then you would have a hybrid mutual fund for your investment. This also has a tax saving mutual funds.
I don't think people invest in tax saving mutual funds or Equity Linked Saving Scheme (ELSS). Its benefit is that upto 1.5 lakh of your investment in a year is tax free. Second thing which is important to know, is mostly all these ELSS have a lock-in period which is minimum of 3 years which means you are not allowed to withdraw that money before 3 years. It doesn't mean that you have to keep investing your money in it. If you don't want to invest in it every year then please don't but the money that you have invested, You cannot withdraw it before 3 year's.
NET ASSET VALUE
So as in stock market there is a stock price of a company, similarly for mutual funds there is NET ASSET VALUE (NAV). Think of it like a stock price. Don't be too confused because it is not that complicated. So you buy the unit of that mutual funds according to its NAV. For example if NAV is 20 rupees and you want to invest your 100 rupees in it then you will buy 5 units of that mutual funds @ 20 rupees. Then however the mutual funds perform, basis where it is investing it's money this NAV will keep increasing accordingly. This also means that if NAV is increasing it can decrease also. Specially when it's an equity linked mutual funds because if equity market can rise then it can fall also depending on what the volatility of the market is and based on that your NAV can also go up and down.
TAX IMPLICATIONS
Now when you sell your mutual funds then there are some tax implications and that is the third segment I wanted to touch upon.
WHAT ARE TAX IMPLICATION?
The best thing is that if you are taking an equity linked mutual funds or even a hybrid mutual fund it is treated like a capital gain like stocks. Capital gain means whatever the profit you have earned you have to pay tax on that.
LONG TERM GAIN TAX
If you hold mutual funds for a year which means if you did not sell that mutual funds for a year then it will become a long term capital gain tax.
SHORT TERM CAPITAL GAIN TAX
And if you sell that mutual funds within a year then it becomes a short term capital gain tax. In India short term capital gain tax right now is 15% which means if you earn a profit of 100 rupees by selling your mutual funds within a year then you will have to give 15% of it to the government as short term capital gain tax.
WHEN TO SELL A MUTUAL FUND
If you sell it after a year then you have to pay long term capital gain tax which is 10%. If your profit is under rupees 1 lakh then there is no tax which is great.
EQUITY & HYBRID MUTUAL FUND
So it automatically tells you that if you buy an equity or a hybrid mutual fund then my advice would be to not sell your mutual funds before a year. In fact my suggestion would be yo keep it for 5 – 7 years.
DEBT MUTUAL FUND
If you sell your debt mutual fund then whatever is the capital gain or profit get added to your income and then you have to pay tax according to your income tax slab. So it is not the part of capital gain, short term or long term tax.
It is simply counted as your income From other sources and you pay income tax on that.
HOW TO SELECT MUTUAL FUND?
When you want to buy a mutual fund then what are the things you have to keep in mind.
- Knowing the company of that mutual funds – First of all you have to decide that mutual fund is of which company.
- Knowing it's historical performance – Secondly the Historical Performance of that company. Though in finance historical performance is never an indication of the future but you still get an idea that in the past 5 years 3 years 1 years how much return had this fund generated because that is essentially why you are putting in your money.
- What is the Net Asset Value (NAV) of that mutual fund – Then there is the Net Asset Value (NAV) which I have already told you this is like a stock price. You cannot take decision based on it since for instance you can never take a decision based on the stock price whether you should buy or not. But it is important for you to know about NAV because your money will be Translated in those units only.
- Expense ratio of that mutual fund – Then there is something called Expense Ratio. Expense ratio is how much amount from whatever money you give will go into managing this account as expense. This is important because essentially it is saying that if you are giving 100 rupees then the full 100 rupees wouldn't go into your investment some percentage which can be as low as 1% or as high as 2-2.5% can go towards managing the fund because salaries need to be given to the people like developers,financial analysis,experts etc.So some money is needed to go in to that too and that is why there is the need to know about the expense ratio. It is natural that lesser the expense ratio the better is the mutual fund because then more of your money will be deployed.
- Exit load of that mutual fund – which means when you sell your mutual funds that time how much percentage will you have to pay as a fee. It varies from mutual funds to mutual funds. Again obviously lesser the exit load better it is. Usually in a year exit load is 1% and 0% beyond that but this is like ballpark or an indication it can vary but that is exactly what you have to figure out
2 WAYS TO BUY A MUTUAL FUND
- Parents way of buying - Parents way is a life long way buying through an agents. There is a broker or middleman or an agent who also need to be paid. So suddenly the amount of money that you are putting to use become lesser.
- New generation way of buying - But on the other hand today's generation has option of doing direct fund buying. What does that mean? You go online and you can buy the funds directly in that case you will only have to pay the expense ratio of fund, You don't have to pay for any middleman any broker because most of these apps are commission free they do not charge anything from you to buy or sell a mutual funds.
CONCLUSION :-
So at the end I would like to conclude that mutual fund is a very powerful investment option which has the potential to generate long-term wealth for the investors. Mutual funds has schemes for all types of future goals, right from creating a pool of wealth to retirement. They have schemes for risk-averse and conservative investors.
Mutual fund has benefits of low cost, flexibility to invest in smaller amounts and professional fund management, low risk, diversification etc.
Connected with the online investment platform you have a great tool that makes mutual funds investment a quick and hassle-free experience.
FOR MORE INFORMATION JUST CHECKOUT OUR YOUTUBE VIDEOS ON MUTUAL FUNDS.