Beginner’s guide to mutual funds investment: Benefits, returns, tax rules & more

Amid growing avenues for investment in India mutual funds remain one of the favourite choices partly due to comparatively lower risk strict regulations and structured processes However in this everevolving financial landscape it can get difficult to keep track of official processes tax rules etc about mutual funds investmentWe speak to finance experts Kavitha Menon founder of Probitus Wealth and SEBIregistered Investment Advisor and Dr Bhavana Jangale Head of Department and Assistant Professor Commerce S K Somaiya College Somaiya Vidyavihar University who shed light on the benefits principles and processes of mutual funds investmentWhat are mutual fundsAccording to the Securities Exchange Board of India SEBI a mutual fund is a mechanism for pooling money by issuing units to the investors and then investing these funds in securities like equity and bonds Asset Management Companies AMCs pool money and fund managers maintain the mutual fundWhat are the benefits of mutual fund investmentMenonMutual funds are beneficial in several waysProfessional management of fundsDiversification of risk with the least effortHighly regulated in a way that investorsrsquo interests are given the highest priorityTax efficient compared to other vehiclesJangaleMutual funds offer the benefits of a wellmanaged portfolio with only a slice of risk They save us the time and effort of creating a balanced investment and rebalancing it time and again according to the market dynamics Also they say ldquomoney attracts more moneyrdquo That kind of holds for a mutual fund which gives the benefits of a large corpus to a single unit holderWhat should one keep in mind while investing in mutual fundsMenonHere are some important principles of mutual fund investmentInvest in funds that match your life goals and risk profileInvest regularlyInvest with an accurate understanding of the risk and reward characteristics of the fund All funds are not the sameObserve and analyse the historic performance along with risk indicators like standard deviationAlso focus on qualitative factors such as AMCrsquos experience and philosophy fund managerrsquos experience etcAnalyse the suitability of the fund in your portfolioJangaleInvestors should be wellinformed about the type of mutual fund and the sector in which it will invest This is an important criterion for an investor who knows his risktaking capacity and plans to invest according to his longterm and shortterm goalsWhat is the difference between lump sum investment and systematic investment plan SIPMenonLump sums are a single large addition to a fund For example in liquid funds or arbitrage funds where there is little volatility investors can make a single large investment without worrying about corrections In volatile assets like equity investors would be better off investing small sums over long periods to smoothen out the volatility and reduce the risk of large corrections in the portfolioSIPs help achieve this by allowing investors to put investments systematically in funds This way one can not only add to volatile assets like equity but also buy commodities such as gold and silver and longterm debtbased investmentsJangaleA systematic investment plan SIP is the lsquoherorsquo of a common man who diligently saves a small amount every month SIP will compound that small amount and the total investment in SIP will be growing at a much faster rate giving exceptional returns with lower riskA lump sum investment is a onetime investment that gives a higher return as compared to an SIP with no need to monitor the investment continually but with a slightly higher riskAre mutual funds riskfreeMenonNo All mutual funds come with varying degrees of volatility and hence risk If the invested portfolio is debt then the investor faces interest rate risks credit risks and duration risks If the portfolio is in international equities then they face currency risk in addition to the risk of equities If investing in Indian equities they face the risk of corrections and loss of capital in the short term Investors must fully understand risks and the ideal time frames for risks to play out to make an informed investment decisionJangaleMutual funds have some risk and are not at all riskfree The risk can however be reduced by investing in different categories of funds For example you can balance your risk with a combination of debt and equity funds The asset allocation will also give a clear picture of the risk involved in a mutual fundWhat are the tax rules for mutual funds investmentMenonAs per the budget ofJuly 2024 all funds except debt funds will be taxed at 12537 longterm cap gains and 2037 shortterm Debt funds will be taxed at slab ratesJangaleIf an investor buys and sells an equitybased mutual fund more than 6537 is invested in the equity market within 12 months the gain will be taxed as shortterm capital gain 2037 and beyond 12 months it will be charged as longterm capital gain 12537 However it may vary in the case of a hybrid fund depending on their asset allocation at the time of sale Investors are also charged an STT 000137 on the sale of equitybased mutual fundsWhat is the process of KYC registration for mutual fund investmentNew changes were brought in the KYC process for mutual funds investment in April this year Documents like utility bills and bank statements were removed as officially valid documents Using an Aadhaar linked to a PAN card is now important to get the KYC done Herersquos the processMenonInApril 2024 to ensure valid details in the KYC records of investors four criteria were set upPANAadhaar linkageName match as per ITR recordsMobile and email validationAadhar validationOur lsquochalta hairsquo attitude had resulted in lakhs of outdated KYC records and it was time for a cleanup Most of the KYCrelated confusions aretodayfairly sorted nowAny investor whose KYC is on hold or needs validation can now log in to an investment platform or AMCs website and get online validation via the website or an intermediary such as a registered investment advisor or MFD or simply make a physical reapplication to CAMSKarvy and validate Aadhar on the KRA KYC Registration Agency websiteAlso Read Union Budget 2024 How budget reforms shape your personal finance