Mutual Funds

A Mutual fund works as an investment vehicle that collects money to invest in a diversified portfolio such as stocks, bonds other securities. Now, when you are investing in a mutual funds scheme, it allots specific units called NAV or net asset value that represents your holdings or ownership in a particular fund. Let's see a step-by-step guide to how mutual funds work:

1. Pooling Money: Investors give money by buying shares or units in the mutual fund. This collective money is managed by experts.
2. Investment Strategy: The fund manager uses the pooled money to invest in various assets based on the fund's objectives (e.g., stocks for growth, bonds for income).
3. NAV Calculation: The value of one share of the fund is known as the NAV or the Net Asset Value. It’s calculated by dividing the total value of the fund’s investments by the number of outstanding shares. The net asset value changes daily based on the performance of the assets.
4. Value Changes: If the investments do well, the NAV goes up, and if they perform poorly, the NAV goes down.
5. Returns to Investors: Investors earn returns through capital gains (profits from selling assets) and income distributions (like dividends or interest). These returns can be reinvested or paid out to investors.
6. Buying and Selling: Investors can buy or sell their shares in the mutual fund at the NAV (net asset value) price that is calculated at the end of each trading day.
7. Fees: The mutual funds charge a fee for managing your investments and administrative costs and exit loads. It is necessary to understand that these can affect your total returns.
8. Tax Implications: Mutual fund returns are subject to capital gains tax. Investors pay taxes on any profits made by the fund.

Example of how NAV is calculated:

Imagine you invest Rs 10,000 in a mutual fund. The fund’s NAV is Rs 10, and you buy 1,000 units.

• If the NAV increases to Rs 12 after a year, your 1,000 units will now be worth Rs 12,000, giving you a profit of Rs 2,000.
• If the NAV drops to Rs 8, your investment would be worth Rs 8,000, resulting in a loss of Rs 2,000.

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You can filter the Best Mutual Funds by using these 4 principles:

1. Investment Strategy: Make sure that the investment strategy match with your financial goals and risk taking capacity. Observe the fund based on its growth, balanced approach and asset allocation to measure the quality it brings to your portfolio.
2. Consistency in Returns: Look at the fund's past track record, like trailing and rolling returns, which will give you an idea of how the fund performs during market volatility. The best mutual funds showcase stable performance in the long term with timely recovery.
3. Robust Fund Management: The consistency of the fund manager is very important. It speaks to the understanding of the fund and managing tactics of the manager, giving higher chances of strong returns.
4. Risk & Reward Ratio: Use key metrics such as standard deviation, which measures volatility and beta and compare risk to the fund's benchmark. It helps you understand how much return the fund generates per unit of risk taken.

Mutual funds offer you investment via two different types of plans: direct and regular plans. Here is a comparison of direct plans vs regular plans based on several parameters:

Here is a quick and easy guide to starting your mutual fund's investment:

• Sign Up: Register using your email and OTP for a secure account.
• Select Fund: Choose the mutual fund you want to invest in.
• Enter Investment Amount: Decide how much you want to invest.
• Investment Type: Select one-time lumpsum investment or start a SIP (Systematic Investment Plan).
• Enter Details: Provide your PAN full name and verify your mobile number.
• Bank Details: Input your bank account details and select the payment method.
• Set Up SIP (if applicable): For SIP, set up a payment mandate.
• Complete KYC: Go through the KYC process by uploading a selfie, completing a live video and e-signing.
• Transaction Processing: Once KYC is verified, your transaction will be processed.

Here is how you can calculate tax implications on your mutual funds under the New Tax Regime:

1. Equity Mutual Funds

   • Short-Term Capital Gains (STCG): If you sell your units within 1 year, the gains are taxed at 15%.
   • Long-Term Capital Gains (LTCG): If you hold the units for more than 1 year, the gains over Rs.1 lakh in a financial year are taxed at 10% without the benefit of indexation.

2. Debt Mutual Funds

   • Short-Term Capital Gains (STCG): If sold within 3 years, the gains add to your income and are taxed as per your income tax slab.
   • Long-Term Capital Gains (LTCG): If held for more than 3 years, you are taxedat 20% with indexation.

3. Hybrid Funds (Combination of Equity and Debt)

   • Taxation depends on the fund’s asset allocation. If more than 65% of the fund’s assets are in equities, it is taxed as an equity fund. Otherwise, it follows the debt fund tax rules.

4. Dividend Income

   • Equity Funds: Dividends are tax-free in the hands of investors.
   • Debt Funds: Dividends are subject to 10% TDS if the amount exceeds Rs.5,000 in a financial year.