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Tuesday, 21 February 2012

About Mutual Fund

What is a Mutual Fund?
Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Each scheme of a mutual fund can have different character and objectives. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund.

What is the difference between an open ended and close ended scheme?      
Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds can not issue new units except in case of bonus or rights issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only.

How are mutual funds different from portfolio management schemes?
In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from each other. 
What does Net Asset Value (NAV) of a scheme signify and what is the basis of its calculation?     
 Net asset value on a particular date reflects the realisable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing by number of units outstanding.

 Can I get fixed monthly income by investing in mutual fund units?      
 Yes, there are a number of mutual fund schemes which give you fixed monthly income. Further, you can also get monthly income by making a single investment in an open ended scheme and redeeming fix value of units at regular intervals.
What are the tax benefits for investing in mutual fund units?   
 Dividend income from mutual fund units will be exempt from income tax with effect from July 1, 1999. Further, investors can get rebate from tax under section 88 of Income Tax Act, 1961 by investing in Equity Linked Saving Schemes of mutual funds. Further benefits are also available under section 54EA and 54EB with regard to relief from long term capital gains tax in certain specified schemes.
 As my dividend receipts from mutual fund units were tax free under section 80 L, will I  loose because of the new budget provision whereby my mutual fund will pay 10% tax on total dividend distributed and indirectly even I will end up paying the tax?              
 The above statement is partially true. 10% tax on dividend paid is not applicable for funds which have invested more than 50% in equity for next three years. Hence, if you have invested in an equity scheme, you will not loose out for the time being. However, in case of debt funds, your statement is true.                              
Are investments in mutual fund units safe?          
 No stock market related investments can be termed safe with certainty as they are inherently risky. However, different funds have different risk profile which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets.
 How do I find out about a scheme which suits my individual requirements?  
 You have to define your individual requirements and then simply go to ‘Choose a Scheme’   icon on the home page of this web site. You can select your defined parameters and get a list of schemes which would fit the needs.
As mutual fund schemes invest in stock markets only, are they suitable for a small investor like me?             
 Mutual funds are meant only for a small investor like you. The prime reason is that successful investments in stock markets require careful analysis of scrips which is not possible for a small investor. Mutual funds are usually fully equipped to carry out thorough analysis and can provide superior returns.


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