Mutual Funds Investment in India- Definition, Process, Types, & Benefits
Jun 12, 2020

Mutual Funds Investment in India- Definition, Process, Types, & Benefits

Can you imagine a situation where you would invest money in the equity market and let a professionally eligible financial expert manage the funds for gaining maximum return? Well, it is actually possible through mutual funds investment. It is a beneficial approach, especially for newbies in the equity market. The mutual fund’s definition state that it is a unique financial vehicle consisting of a pool of funds collected from multiple traders and invested in stocks, bonds, commodities, and pension plans. Since professional money managers operate these funds, there are limited chances of losses. They maintain and structure the mutual fund’s portfolio according to the investment objectives mentioned in the prospectus.

The financial manager offers access to individual investors to view the professionally managed portfolios of mutual funds. So, we can say that every stock owner participates proportionally in the profit and loss of the fund. Since the fund accumulated through this financial vehicle gets invested in a vast number of securities, the results get represented as an aggregated performance of all assets. Most of you have understood the mutual fund’s meaning by now. However, if you wish to develop an in-depth idea on this concept, then go through our specially curated tutorial on mutual funds investment.

How to invest in mutual funds online?

Since mutual funds offer investors a chance to access diversified and professionally managed portfolios at a minimal price, many people show interest in this financial vehicle. Here is a step-by-step guide for investing in mutual funds online.

Step 1: Becoming KYC (Know Your Customer) Compliant Investor

The Securities and Exchange Board of India (SEBI) has made it mandatory for all investors to complete their KYC before investing in mutual funds. You can undergo the KYC process through a SEBI-registered intermediary like mutual fund distributors or KRAs (KYC registration agencies). This one-time identity verification process helps in minimising frauds during online transactions. You can complete the KYC through both online and offline methods.

Offline KYC

In offline KYC, at first, download the form from any intermediary website. Now, fill it up carefully by inputting identity and financial details. Paste a recent passport size photograph on the document. Attach self-attested copies of identity and address proofs as mentioned in the guidelines, and visit your nearest mutual fund house, investor service centres, or RTAs (Registrar and Transfer Agents) for an in-person verification of the KYC. The KYC confirmation takes place instantly.

Online KYC

You can also opt for an online or paperless KYC by a completely online process, or by generating a one-time password from your smartphone, or through the biometric system. In an entirely online KYC, investors need to visit the portal of a mutual fund house or a KRA site and upload their details and scanned copies of identity proofs after digitally signing them. Now proceed towards an online in-person verification through a video call. In the second method, you receive an OTP (one-time-password) on your phone to go ahead with the KYC. In the biometric system, the KYC details get updated on a registered or whitelisted device maintained by a mutual fund intermediary.

Step 2: Registration on Mutual Fund Sites

After you become a KYC compliant investor, register on a mutual fund portal to start investing. First-time visitors should enter their name, date of birth, e-mail, contact number and PAN for registering on these sites. Even if you are not a KYC compliant customer, the mutual fund houses will provide you with a link to get it done at the earliest.

Step 3: Input Personal Details

Registered customers must also update their personal details like nationality, profession, and annual income to go ahead with the investment process. The application form also consists of a series of boxes where you need to select the correct option. At this stage, the investor can also add an additional applicant.

Step 4: Furnish Nominee Details

It is a good idea to include a nominee for mutual fund investments. Mention your nominees’ name, date of birth, relationship, and the percentage of allocation of funds on the form. You may also skip this process if you do not wish to appoint a nominee.

Step 5: Enter Bank Details

In the next step, enter the bank details on the mutual fund’s application, including the name of the bank, IFSC code, account type and number. You also need to tick the box confirming that all transactions (investment and redemption) associated with mutual fund investments will proceed through the before-mentioned account.

Step 6: Proceed with Investment Details

Investors have to select the type of investment pattern they want in mutual funds. It can either be in the form of a one-time lump-sum payment or through monthly systematic investment plans (SIPs). In SIPs, investors have to earmark the amount, frequency, duration, number of instalments, and the date of release of the fund. Insurance facilities are also available for ELSS (Equity Linked Savings Scheme) and SIPs. You even need to clarify whether you are investing directly or through an agent in mutual funds.

Step 7: Make the Payment

In the final stage, make the payment for the mutual funds. You can do this either through online or offline process. There is also an option for automatic bill payment through net banking. Feed the SIP Registration Reference Number to the bank, for automated deduction of the mutual fund amount from your account every month.

What are the different types of mutual funds?

Mutual funds are a continually emerging domain in the equity market. Nowadays, they play a decisive role in the valuation of stocks and bonds. Let us have a look at the various types of mutual funds.

Money Market Funds

Money market funds remain invested in short-term fixed-income securities like government bonds, bankers’ acceptances, commercial paper, and treasury bills. Though the returns from these mutual funds are lower than other funds, experts consider them a safer investment.

Fixed Income Funds

Fixed income funds offer a fixed rate of return to investors. Investment-grade corporate bonds, government bonds, and high-yield corporate bonds are some examples of this type of funds. The primary aim of these bonds is to maintain a continuous money flow, mainly through interest earned through these funds. Among all the fixed-income funds, financial experts consider high-yield corporate bonds as a riskier option.

Equity Funds

Equity funds offer investors a higher return than fixed-income funds or money market funds. So, this financial vehicle remains invested in stocks. You can select various categories of equity funds like the growth stocks (do not pay dividends), income funds (deals with stocks paying high dividends), large-cap stocks, mid-cap stocks, small-cap stocks and value stocks. Investors dealing with equity funds need to bear a higher risk than fixed-income funds or money market funds.

Balanced Funds

Balanced funds consist of a mixed bag of equities and fixed income bonds. They are of two types- aggressive funds (more equities and fewer bonds) and conservative funds (fewer equities and more bonds). Here investors can attain a balance of earning high returns at moderate risk of losing money. These mutual funds tend to split the capital among various categories of investments. Here you can expect a higher risk than fixed-income funds or the money market funds, but less likelihood of losing money than equity funds.

Index funds

Index funds function by tracking the performance of a specific index, and the value of these funds remain dependant on the results of the index. It means that when the valuation of the index remains high, the prices of the mutual funds also increases proportionately and vice versa. Their cost is lower than actively managed funds as the portfolio manager do not have to play a crucial role in making investment decisions.

Specialty Funds

Specialty funds remain involved in specialised mandates like social responsibility, real estate, or commodities. For example, if you select a real estate fund, then there is a likelihood of investing in companies involved in land development or other building materials such as tiles, iron rods, and plumbing products like Cera Sanitaryware Limited, Kajaria Ceramics Limited, Somany Ceramics Limited, and Hindustan Sanitary ware Limited.

Fund-of-Funds

Fund-of-funds is a multi-managerial pooled investment. It remains invested in several funds and aims in making asset allocation and diversification convenient for traders. The portfolio of these mutual funds contains portfolios of several other funds.

What are the best mutual funds for SIP to invest in India?

If you are looking for top 10 mutual funds for SIP to invest in India, then you can consider the below-mentioned list:

  • ICICI Prudential Equity & Debt Fund
  • Axis Bluechip Fund
  • L&T Emerging Businesses Fund
  • ICICI Prudential Bluechip Fund
  • Mirae Asset Hybrid Equity Fund
  • L&T Midcap Fund
  • HDFC Mid-Cap Opportunities Fund
  • Kotak Standard Multicap Fund
  • HDFC Small Cap Fund
  • Motilal Oswal Multicap 35 Fund

You can compare these mutual funds by visiting their portal and select the best performing mutual funds based on your financial preferences.

What are the benefits of mutual funds investment?

Mutual funds are excellent investment options for freshers in the equity market. Here you do not have to put in much effort in selecting the best portfolios for pumping your funds. Your financial manager takes all these crucial decisions on your behalf. Detailed below are the benefits of investing in mutual funds

1. Mutual Funds are Easy to Operate

As already mentioned, mutual funds are one of the best investment schemes for freshers. You do not require much knowledge about economics and the movement of market indices to operate your mutual fund account successfully.

2. Convenient to Purchase

Anyone having a Demat account can invest in mutual funds. Besides, you can also visit mutual fund agencies, brokerage firms, banks and insurance companies to pump in your money in this financial vehicle.

3. Mutual Funds have a Diverse Ground

Individuals investing in mutual funds can enjoy the benefits of putting their money in a range of investment schemes (stocks, bonds, currencies). It is a balanced approach to growing your money, and the chances of making profit enhance considerably.

4. Variety of Mutual Funds

There are several types of mutual funds. So, you get the opportunity of investing in various categories of these funds according to your stock and domain preferences. Moreover, the application of automated deposit, systematic withdrawal, and limitless investment strategies have made this financial vehicle an ideal investment scheme both for newbies and experienced traders.

5. Mutual Funds are Affordable

Mutual funds are affordable, as you can adapt the SIP (systematic investment program) approach to lower down the monthly investment. It is convenient to manage a mutual fund profile than other investment schemes like stocks, bonds, commodities, or currencies. Moreover, the transaction cost, annual maintenance charges, and the subscription of research tools are also minimal in this financial vehicle.

6. Professional Management

Experienced and highly skilled money managers operate mutual funds profile of various organisations. So, you do not have to undergo exhaustive and countless hours of researches on the equity market for the selection of the best investment profiles. Mutual funds offer regular office goers in various domains, an opportunity to participate in share trading with minimal investment.

How are the mutual funds’ taxation calculated?

An investor needs to pay capital gain tax on the profits made through trading in mutual fund schemes. It is the difference between the selling value and purchase value of mutual funds. The capital gain tax is of two types- Long-Term Capital Gains Tax (LTCG) and Short-Term Capital Gains Tax (STCG). Let us have a look at the tax rate of these two schemes.

Scheme Characteristics LTCG STCG
Equity-oriented schemes Holding Period Above 12 months Up to 12 months
Tax Rate 10 per cent* 15 per cent
Non-equity-oriented schemes Holding Period Above 36 months Up to 36 months
Tax Rate 20 per cent after indexation Remain based on the income tax slab of the purchaser

* There is an exemption of up to Rs 100000 per annum on LTCG of equity mutual funds. For example, if you earn Rs 170000 through LTCG, then you need to pay tax on only Rs 70000 instead of Rs 170000.

What is Mutual Fund Dividend Taxation for FY 2020-2021?

Investors can also earn dividends on mutual funds. It is a percentage of the profit that the company distributes among investors for pooling their capital for the company growth. According to FY 2020-21 budget, investors need to pay tax on dividends earned through mutual fund investments.

Is there any tax benefit on mutual funds?

There is a tax deduction of Rs 150000 per annum under Section 80C of the Income Tax Act on Equity-Linked Savings Scheme (ELSS). However, this benefit comes with a lock-in period of 3 years. It suggests that, once you invest in ELSS, you should not withdraw it before three years to gain the tax benefit.

What is the Securities Transaction Tax (STT)?

If you invest in equity-oriented mutual funds, then at the time of redemption of these funds, you need to pay an STT (Securities Transaction Tax) of 0.001 per cent. The STT gets automatically deducted from the mutual fund returns, so you do not have to pay this tax separately.

Frequently Asked Questions

1. What is a mutual fund’s NAV?

The mutual fund NAV or Net Asset Value refers to the per-unit market value of shares. The computation of the NAV takes place at the end of the trading session based on the prices of stocks during the closing market. We can calculate the value of NAV through the formula.

Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

2. What is the mutual funds’ expense ratio?

The expense ratio of mutual funds is also known as Annual Fund Operating Expenses. It helps in calculating the per-unit cost of managing these funds. You can compute the expense ratio of funds by dividing the total expenses of mutual funds by its assets. Investors need to pay a specific percentage of assets to portfolio managers for maintaining these funds. They incur expenditures while paying the registration and transfer fees, audit, and other legal fees.

3. What are open-ended mutual funds?

Open-ended mutual funds are those funds which are available for subscription and redemption throughout the year. Investors can enter or exit these funds at any point in time. Companies launch open-ended mutual funds after the expiry of the NFO (New Fund Offers).

4. Are mutual funds safe investment options?

Yes, mutual funds are a safe investment option, as professional money managers operate these funds with the help of capital pooled in from investors. There are minimal chances of losses as these funds remain invested in a wide range of stocks, bonds, and commodities.

5. How to withdraw money from mutual funds?

You can conveniently withdraw money from your mutual funds through the Demat account. Log in to your account, enter the number of units, scheme, and the withdrawal amount, select the pay-out method, and you can expect the disbursal of your funds with ten business days.

6. What is exit load in mutual funds?

The fee charged by mutual fund companies when investors exit a scheme is known as ‘exit load’. This fee helps in reducing the number of withdrawals by traders.

7. How to stop mutual funds SIP?

You can stop mutual funds SIP both through online and offline process. In the online method, log in to your mutual fund account and select the ‘Cancel SIP’ tab to discontinue the chosen SIP within 30 working days. In the offline process, inform the mutual fund company, bank, and AMCs (asset management companies) about the intention of discontinuing the SIPs. Mention the bank account number, SIP scheme, folio number, and SIP amount in the application. The AMC will process the cancellation of SIPs within 21 business days.

8. What is CAGR in mutual funds?

In mutual funds, CAGR (Compound Annual Growth Rate) is the mean annual growth of various schemes. It helps in calculating the annual compounded returns from different investment portfolios over several years. The formula for CAGR is

CAGR = (Ending Value/Beginning Value)1/n-1.

Here n = number of years for which you have invested.

9. What is AMC in mutual funds?

An AMC or (Asset management company) helps in investing the pooled funds from investors in stocks, bonds, real estate, and commodities. They are also referred to as money managers as they operate the mutual fund portfolios on behalf of traders.

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