What is mutual fund?
Mutual funds are financial instruments which invest in a portfolio of securities. These securities may be stocks, bonds, money market instruments, gold, silver and real estate investment trusts (REITs) etc. You can buy units of mutual funds; each unit represents a certain percentage of the mutual fund scheme portfolio. Mutual funds are managed by professional fund managers who manage the schemes according to the investment objectives of the schemes.
Different types of mutual funds
Equity funds:
These mutual fund schemes invest in equity and equity related securities. Equity funds have sub-categories based on the market cap segments, where the scheme may primarily invest in e.g. large cap, large and midcap, midcap, small cap, Multicap, flexicap etc. The primary investment objective of equity funds is capital appreciation.
Debt funds:
These mutual funds schemes invest in debt and money market instruments. Debt funds have sub-categories based on the maturity profiles of the underlying debt or money market instruments e.g. overnight, liquid, ultra-short duration, low duration, short duration, medium duration, long duration etc. The primary investment objective of equity funds is capital appreciation.
Hybrid funds:
These funds invest in both equity and debt securities. They may also invest in other classes like gold, REITs, InvITs etc. The primary investment objective of hybrid funds is asset allocation. Different types of hybrid funds include aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings etc.
Different fund categories and sub-categories have different risk profiles. Mutual funds provide investment solutions for a wide spectrum of risk appetites and investment needs. Your financial advisor can help you select the right investment option for you.
Taxation of mutual funds
Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity related securities) is 65% or more, are treated as equity funds from tax perspective. These include all equity funds and also several hybrid fund categories.
Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 15%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 100,000 and taxed at 10% thereafter. Short term capital gains (investment holding period of less than 36 months) in non equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non equity funds are taxed at 20% after allowing for indexation. Investments in mutual fund Equity Linked Savings Schemes (ELSS) qualify for deductions under Section 80C.
| Fund Type | Holding Period | Tax Rate |
|---|---|---|
| Equity Funds | < 12 months (STCG) | 15% |
| > 12 months (LTCG) | 10% (above ₹1 lakh/year) | |
| Non-Equity Funds | < 36 months (STCG) | As per income tax slab |
| > 36 months (LTCG) | 20% with indexation | |
| ELSS Funds | 3-year lock-in | Section 80C deduction (₹1.5L) |
How to invest in mutual funds?
When an asset management company (AMC) rolls out a new mutual fund scheme, it launches a New Fund Offer (NFO) to invite public subscriptions. During the NFO period, investors are given units at a base price, which is generally Rs 10. For instance, if you invest Rs 10,000 in the mutual fund during this period, you would receive 1,000 units. It is necessary to be KYC compliant to invest in mutual funds, and your financial advisor can assist you in completing the KYC requirements. In addition to the KYC documents, you will need to provide your bank details to make an investment in mutual funds, and it is important that the investment comes from your own bank account.
After the NFO period ends, the capital gathered from all investors is invested in a well-diversified portfolio of securities as per the scheme's guidelines. Once the NFO is over, investors can acquire units of open-ended schemes from the AMC at the current Net Asset Values (NAV). Investors also have the flexibility to redeem their units in open-ended mutual fund schemes at any time at the prevailing NAVs. The proceeds from the redemption will be credited to your bank account within T+3 days for equity funds. It's essential for investors to keep in mind that redemptions made within a certain timeframe after investment may incur exit loads.
KYC Compliance and Bank Details
To invest in mutual funds, you must be Know Your Customer (KYC) compliant. This involves submitting identity and address proof as mandated by SEBI. Your financial advisor or mutual fund distributor can assist you in completing the KYC process.
In addition to KYC documents, investors are required to provide bank account details, as mutual fund transactions (investments and redemptions) can only be made through the investor’s own bank account. This ensures transparency, safety, and regulatory compliance.