Mutual Fund Basics

When one chooses to invest in equity markets, BSE Sensex and Nifty 50 are the two most familiar words for the investors. These are the name of two major stock indices in the country – BSE Sensex and Nifty 50. Since such indices are constructed using scientific methodologies and back-tested techniques, retail investors may prefer to have investment exposure in such indices. However, one cannot invest in such indices directly as they are not a security within themselves, but just an index of different securities. 

Systematic Investment Plan (SIP) allows an investor to invest regularly in mutual funds on periodic intervals. As such, it enables investors to steer through the market movements effortlessly. Indian retail investors also prefer to invest in the markets through SIPs, as is evident from the monthly SIP inflows, which have sustained above Rs. 8,000 crores for more than a year now (Source: Association of Mutual Funds in India – AMFI, as on 31st December 2019).

Market indices such as S&P BSE Sensex, NSE Nifty50, etc. are created by adopting scientific methodologies and back-tested techniques. As such, the investors may wish to invest in such indices to have smooth investment experience. However, since such indices are not tradable security in themselves, it is a difficult proposition for the investors to construct a similar investment portfolio, which replicates such an index. Index funds may be suitable to meet such investing needs.

Section 80C of the Income Tax Act provides various investment options to the taxpayers to be eligible for a tax benefit. While many taxpayers prefer tax-saving fixed deposit (FD) due to more natural investment process and guaranteed returns, ELSS (Equity Linked Savings Scheme) has been emerging as a preferred tax saving investment option off late.

While you are planning for your taxes, one may choose to invest in a variety of investment options to save tax. Section 80C provides a full bouquet of options for the taxpayers to choose from, including the Equity Linked Savings Scheme (ELSS) with a tax benefit of up to Rs. 1.50 lakhs in aggregate for all the options. While this tax benefit available under Section 80C is most commonly known, there are investment avenues available under other sections of the Income Tax Act as well, which provide tax benefits to the investors.

While you are creating an investment portfolio, you must not overlook how mutual funds are taxed. Different taxation rates applicable to different types of investments, and such rates may specific investment options more attractive than others.

If one has ever invested in mutual funds, the folio number is the address where the mutual fund units are housed. A folio number is to mutual funds, what bank account number is to bank. Like one may have multiple bank accounts with different banks and even multiple savings/ deposit accounts with the same bank, one may also have numerous folios with a single mutual fund house and across various mutual funds. 

Mutual funds offer a wide range of investment options to the investors, to suit different risk profiles, investment horizon, and financial goals. An investor may choose to invest in equity schemes, debt schemes, hybrid schemes, solution-oriented schemes, index funds, etc. as per their financial plans. One of the primary financial goals for a parent is planning for their child’s education. With high emotional value attached to this goal, one always intends to plan the best for his/ her children. 

KYC stands for 'Know Your Customer' and is one of the obligations every investor must fulfil before investing in mutual funds. Through the KYC process, the market participants fetch relevant records of the investors to establish a unique identity for the investors in the mutual funds' records. 

Mutual funds are steadily emerging as one of the most preferred investment products amongst the retail investors for the benefits they bring on the table, including professional fund management at lower costs, diversification, preferential taxation rates for equity funds, etc. However, it is crucial to stay committed to the investment philosophy at all times.