9 Lesser Known Features of Mutual Funds

The fall in interest rates over the past couple of year has made loans cheaper for borrowers. However they have had an unfortunate side effect – returns from traditional investments like fixed deposits have also declined. In this situation, market-linked investments have yielded superior returns due to a sustained rally in equity markets. However, investing in stocks and bonds is not always that easy for novice investors. This is where mutual funds score by allowing even small time novice investors earn market-linked returns with minimum effort. In fact as per recent data released by AMFI, mutual fund inflows have reached record levels exceeding Rs. 62,000 crores for the month of August 2017. The popularity of mutual funds however does not always guarantee a clear understanding of the product itself. With that in mind, the following are 9 lesser known features of mutual funds that every investor should know.

Mutual Funds are Flexible Investments: Mutual funds are flexible investments that can potentially provide investors with the benefits of superior returns no matter how long one stays invested or how much one invests. For example, there are mutual funds like liquid funds where an investor can park surplus funds for a period as short as a day and still get returns that exceed those of many other short term investments. In terms of minimum investment amount, even an amount as small as Rs. 500 can be invested into a mutual fund scheme to obtain commensurate returns.

Mutual Funds are Easy to Invest in: Like any financial investment, mutual funds require mandatory documentation including KYC compliance as per SEBI guidelines. While the earlier paper-based KYC and investment system used to be quite cumbersome, the new method of eKYC based on Aadhaar has made the system very streamlined. Now you can make your investments through net banking and online investment accounts from the comfort of your home. Such transactions can be made directly through the fund house website or through a registered 3^rd party intermediary such as Paisabazaar.com without having to worry about filling out a bunch of forms and post-dated cheques.

Mutual Funds are transparent investments: As per existing rules, all fund houses i.e. asset management companies (AMCs) are required to mandatorily publish a document – the “fact sheet” on a monthly basis. This document contains key information about all the funds managed by the AMC including details such as which stocks/bonds the fund is invested in, current sector-wise allocation, expense ratio of the fund and so on. This ensures transparency with regards to the fund’s investment so that investors can make informed decisions regarding their investments.

Mutual Funds offer multiple investment choices: There are various types of mutual funds across the key categories of equity, debt and hybrid each featuring its own unique risk-reward relationship. For instance risk tolerant investors seeking high returns can opt to invest in equity funds such as small/medium cap funds which have the potential of providing high ROI. On the other hand, risk-averse investors can opt for lower risk investments such as ultra short term debt funds to potentially generate returns that are superior to fixed deposits or savings accounts.

Mutual Funds are diversified investments: A key strategy that mutual funds implement to reduce overall risk of the portfolio is diversification i.e. investing in multiple options. Thus mutual funds may choose to invest in various equities as well as debt and money market instruments in order to achieve their objective. Such diversification ensures that high degree of exposure to a specific sector or type of investment option is prevented and overall risk of the fund’s portfolio is managed.

Mutual Fund returns may be tax free: Contrary to a popular myth, not all mutual fund returns are taxable. It is common knowledge these days that equity-linked savings schemes (ELSS) provide tax-saving benefits under 80C of the IT Act. Additionally, returns as well as maturity value of ELSS investments are also tax free. But apart from ELSS, other equity funds and equity-oriented hybrid schemes can also provide tax-free returns. This is because long term capital gains i.e. profits from investments held for over a year in case of equity funds are completely tax free. However, in case of debt funds, all profits from the investment are taxable as per current taxation rules.

Mutual Funds are Professionally Managed: This is perhaps the greatest benefit of investing in mutual funds. Each mutual fund scheme is managed by a designated fund manager who is supported by team of researchers and analysts who help select the most lucrative investments for the scheme. Thus mutual fund investors can save valuable time and energy to focus on other ventures instead of getting involved in time consuming research and analysis required to find suitable investment options.

Mutual Funds have Several withdrawal and reinvestment options: Mutual funds investments are not just about investing a lump sum and then liquidating it later for a profit. You have the option of making small regular investments through a SIP or systematic investment plan. Subsequently, you also have the option of making periodic withdrawals using the SWP or systematic withdrawal plan option. Alternately, you could also make periodic transfers of your current investment to another scheme through the STP or systematic transfer plan. These features ensure that your money is never idle and always working towards the goal of wealth generation.

Mutual Funds are exempt from Wealth Tax: Your investment and returns from mutual funds are definitely part of your net worth just like your bank balance, physical gold and all the real estate owned by you. However unlike real estate and physical gold investments,  your investments in mutual fund schemes are completely exempt from wealth tax as only capital gains taxation rules (short term and long term) apply.