Money market funds are mutual funds that help investors manage short-term cash needs. These are open-ended funds and belong to the debt fund category. Money market funds invest in money market securities. These funds usually deal only in shorter term investments, cash or cash equivalents. Money market securities are those investments that have an average maturity of less than one year.
Money market funds invest in high quality financial securities such as certificate of deposit, treasury bills, repurchase agreements, and commercial papers. These funds have the goal of earning income for the unitholders. Since the investments are for the short term, there will be lesser fluctuations of the Net Asset Value (NAV) of the fund.
What are the kinds of money market investments?
Here are some of the financial securities that are part of the money market funds’ investments.
Certificate of Deposit (CD) – Scheduled commercial banks offer time deposits that are fixed deposits that have a tenure and can be redeemed only at maturity. These might be deposits held by companies and institutions.
Treasury Bills (T-bills) – These are financial securities that are issued by the Government of India. These bills are used to raise money for a tenure of up to 365 days. T-bills are one of the safest investments as they come with sovereign guarantee. The interest rate offered for T-bills is known as the risk-free rate of return. The interest rate is low on T-bills when compared to all other investments.
Commercial Paper (CPs) – These investments are issued by companies and financial institutions that have a high credit rating. Commercial papers are also known as promissory notes. They are unsecured investments. However, these investments are issued at a discount and are redeemed at face value.
Repurchase Agreements (Repos) – This is an investment that is an agreement under which the Reserve Bank of India (RBI) lends money to commercial banks.
Who should invest in these funds?
Money market funds invest in diverse short term financial securities and offer income to investors who want an alternative to savings account and fixed deposits. Investors who have a short investment horizon of up to one year can consider investing in these funds.
Any investor who has a low-risk appetite can use money market funds to park their surplus cash that is in their savings bank account. Money market funds have the potential to offer higher returns than a regular savings bank account. Even though many corporates invest in these funds, retail investors can invest their surplus money in these funds.
What to consider when you invest in money market funds?
The first consideration should be the risks involved in money market funds.Money market funds come with interest rate risks, reinvestment risks and low credit risks. Interest rate risk is the risk that the prices of the investment will increase whenever interest rates decline and prices will decrease whenever interest rates rise. Reinvestment risk is the risk that there will be other investments offering higher interest rate when the investment is redeemed. Credit risk is the risk that the credit rating of the investment might be reduced. However, money market funds have very low credit risks as they invest in sovereign guarantee investments.
The second consideration is that the money market funds can offer higher returns than a savings bank account.
The third consideration is the expense ratio or the fee charged by fund houses to manage the money market fund. The Securities Exchange Board of India has ruled that the expense ratio has to be capped at 1.05%.
Investors should ensure that the money market fund’s maturity is in line with their own investment horizon.Money market funds are suitable for investment horizons that are three months to one year. For the medium-term, investors can consider other debt funds such as dynamic bond funds.
What is the capital gains taxation for money market funds?
When you invest in money market mutual funds for three or more years, the gains once you sell will be long-term Capital Gains (LTCG). Short Term Capital Gains or STCG will be when you redeem the money market funds within three years. LTCG is taxed at the flat rate of 20% with indexation benefit. For STCG, the gains are added to your income and taxed according to your income bracket.
Markets regulator SEBI’s revised norms for valuing perpetual bonds like Additional Tier-1 (AT1) bonds has caused fears in markets. MFs hold about Rs 35,000 crore in AT1 bonds. While SEBI has asked mutual funds to treat maturity of perpetual bonds as 100 years compared to current practice of short-term instrument of similar tenure G-Sec, mutual funds say such a change will result in high mark to market loss, abrupt drop in NAVs, panic redemptions and overall corporate bond market being hit. So, the Finance Ministry has asked the SEBI to withdraw the revised perpetual bond valuation norms, as the clause on valuation is “disruptive in nature”.
Referring to the SEBI circular, which we have covered in detail here, the Finance Ministry said the revised norms ask funds to value AT1 bonds as 100 year bonds for which no benchmark exists. “Mark to market (MTM) loss will be very high, effectively reducing them to near zero. The abrupt drop in valuation is likely to lead to large NAV swings and potential disruptions in debt markets as MFs will seek to sell those bonds anticipating investor redemptions, causing panic in debt markets. This measure will also take away appetite away from mutual funds for investing in such instruments given the valuation norms,” said a March 11 office memorandum from Finance Ministry addressed to SEBI chairman and Department of Economic Affairs secretary. The SEBI circular was disclosed on March 11.
The Finance Ministry also feared that panic redemptions by mutual funds would impact overall corporate bond market as MFs may resort to selling other bonds to raise liquidity in debt schemes. This could lead to higher borrowing cost for corporates at a time when the economic recovery is nascent, the Ministry said.Also, the Finance Ministry feared that capital raising by PSU banks from the market will be adversely impacted due to limited appetite from other investors. “This would lead to increased reliance on Government for capital raising by PSU banks as AT1 and Tier 2 would need to (be) replaced by core equity,” said the office memorandum referred above. Over the long run, for all banks, not just PSU banks, more equity dilution will take place, which will lead to depressed valuations.
“Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100 years tenor be withdrawn…,” it said.
Separately, AMFI in a statement released to media said that perpetual bonds or Additional Tier I Bonds are issued without any maturity date but are usually issued with call option(s) and qualify for Tier I capital. Banks have been majority issuers of Perpetual bonds. Perpetual Bond market is reasonably active with regular trades in Large and Higher rated issuances. Most trades in Perpetual Bonds happen on a yield to call basis. “This is based on the established market convention, locally as well as globally, that the issuer will exercise the call option on the due date,” AMFI said.
The statement said that the SEBI had engaged with Association of Mutual Funds in India (AMFI) on treatment of Perpetual Bonds as it is a hybrid instrument and carries a differentiated risk reward ratio than a normal debt instrument. Treatment of Perpetual Bonds was discussed in Mutual Fund Advisory Committee (MFAC) where several members of AMFI participated.
“AMFI fully supports the need and spirit of the circular in capping exposure to Perpetual bonds. Most of the mutual fund schemes are well below the cap specified in the circular. In few of the schemes where perpetual bond exposure is higher than the SEBI prescribed cap, grand fathering is kindly permitted by SEBI to ensure that there is no unnecessary market disruption,” the MF lobby said.
The above referred SEBI circular continues the tradition of the primacy of traded prices. Perpetual bond market sees active participation from various players viz. Banks, Corporates, Mutual Funds and Individual Investors. “Only in the event of lack of traded prices, the question arises as to whether the bond should be valued to call or to maturity. Given a reasonably active market with regular trades, the issue is narrower than it appears,” AMFI said.
Following the Franklin Templeton debt funds saga, markets regulator SEBI has reviewed the norms regarding investment in debt instruments with special features. Amongst the changes announced on Wednesday, no mutual fund under all its schemes will own more than 10 per cent of such instruments issued by a single issuer. Also, a mutual fund scheme will not invest more than 10 per cent of its NAV of the debt portfolio of the scheme in such instruments. Such measures comes into effect from April 2021. Here is a quick review.
Mutual funds invest in certain debt instruments with special features such as subordination to equity (absorbs losses before equity capital) and /or convertible to equity upon trigger of a pre-specified event for loss absorption. Additional tier I bonds and tier 2 bonds issued under Basel III framework are some instruments which may have above referred special features.
Tweaks announced
Presently, there are no specified investment limits for these instruments with special features and these instruments may be riskier than other debt instruments. Therefore, the SEBI has decided the following prudential investment limits have been decided for such instruments.
1. No mutual fund under all its schemes will be able to own more than 10 per cent of such instruments issued by a single issuer.
2. A mutual fund scheme will not invest
– more than 10 per cent of its NAV of the debt portfolio of the scheme in such instruments;
– more than 5 per cent of its NAVof the debt portfolio of the scheme in such instruments issued by a single issuer.
The above investment limit for a mutual fund scheme will be within the overall limit for debt instruments issued by a single issuer, as specified at clause 1 of the Seventh Schedule of SEBI (Mutual Fund) Regulations, 1996, and other prudential limits with respect to the debt instruments.
3. The investments of mutual fund schemes in such instruments in excess of the limits specified under paragraph 2 above as on the date of this circular may be grandfathered and such mutual fund schemes will not make any fresh investment in such instruments until the investment comes below the specified limits.
Provisions for segregated portfolio
The SEBI said debt schemes which have investment in such instruments referred at para ‘A’ above or debt schemes that have provision to invest in such instruments will ensure that the Scheme Information Document (SID) of the scheme has provisions for segregated portfolio.
The provision to enable creation of segregated portfolio in the existing schemes will be subject to compliance with regulations.
If the said instrument is to be written off or converted to equity pursuant to any proposal, the date of said proposal may be treated as the trigger date. However, if the said instruments are written off or converted to equity without proposal, the date of write off or conversion of debt instrument to equity may be treated as the trigger date.
On the said trigger date, the SEBI said, AMCs may, at their option, create segregated portfolio in a mutual fund scheme subject to compliance with relevant provisions.
Further, Asset Management Companies/Valuation Agencies will have to ensure that the financial stress of the issuer and the capabilities of issuer to repay the dues/borrowings are reflected in the valuation of the securities from the trigger date onwards.
Valuation of perpetual bonds
As regards the valuation of bonds with call and/or put options, the SEBI clarified that the bonds will be valued in line with the SEBI circular No. MRD/CIR/8/92/2000 dated September18, 2000 irrespective of the nature of issuer.
Further, the maturity of all perpetual bonds will have to be treated as 100 years from the date of issuance of the bond for the purpose of valuation.
The SEBI already permits close ended debt scheme to invest only in such securities which mature on or before the date of the maturity of the scheme. Accordingly, close-ended debt schemes will not invest in perpetual bonds.
Mutual funds are the ideal investment choice when it comes to investing for your long-term financial goals. However, there are many factors that you need to consider before investing in any mutual fund that’s available in the market. These include the time horizon for your financial goal, your risk tolerance, the amount you want to invest, etc. This will help you choose the right mutual fund category. Once you know the kind of mutual fund you need, you need to consider the mutual fund schemes that are being offered by different fund houses. When you have selected your fund, you need to understand all about the fund before putting money in it. This is where a mutual fund offer document is useful.
What is a mutual fund offer document?
The Scheme Information Document (SID) or the mutual fund offer document is a brochure that has all scheme related information including the mutual fund’s investment objective, its investment strategy, the fees associated with the mutual fund, benchmark of the fund, fund manager details, etc. You can easily find this offer document on the fund house’s website and can download it. You can get a hard copy from the fund house’s office, if needed. The document is useful in understanding if the mutual fund is the right one for you. Here’s what to look at in the offer document.
Investment objective
The investment objective explains the aim behind launching the particular mutual fund scheme and how the fund house will achieve the objective. You need to make sure that the investment objective of the mutual fund matches with that of yours. The most important reason why you need to read the investment objective is because it often might not match the scheme name. For instance, capital protection oriented mutual funds do not actually offer capital protection. Reading the investment objective will help you understand what the scheme will be doing for the investors.
Asset allocation
In the SID, asset allocation of the mutual fund will be mentioned. It will state the asset allocation that the fund will follow under normal market conditions. As you might know, the asset allocation of a fund will show the allocation of the Assets Under Management (AUM) to various asset classes such as equity, debt, gold, etc. Asset allocation of the mutual fund will help you determine whether the particular mutual fund scheme is equity, debt or a hybrid fund and whether it matches your risk profile.
Typically, none of the mutual funds will have a fixed percentage that is mandated for a particular asset class. The asset allocation for each of the asset classes will be given as a range. For instance, a fund might invest 65% to 90% in the equity asset class. This indicates that the exposure to equities will be at least 65% and can go up to 90% of the total investable amount of the scheme. The fund manager will stay within the given range at any point in time. Note that if there is any change in the asset allocation provided it needs to be notified to investors.
Investment Strategy
While the investment objective of the fund provides the aim of the fund, investment strategy will tell you how the fund will achieve this objective. Investment strategy given in the SID explains the approach that will be followed by the fund while selecting different securities (equity or debt) for investment. It tells you about the investment processes and systems that will be followed by the fund house.
The investment strategy of the fund will also consist of other details such as diversification of the fund’s portfolio, the sectors the fund will be selecting for investment, the top companies that will be a part of the portfolio, etc. You need to make sure that the diversification of the fund justifies the fund’s investment objective.
Fund’s expenses
Every mutual fund has recurring costs which the investors will need to pay when they invest in a mutual fund. This includes costs such as management fees, trustee fees, distributor commissions, etc. Your net returns from a particular mutual fund scheme will be higher if the fees and expenses charged by the fund house is low. A fund with a high expense ratio or entry/exit loads will affect your investment’s long-term gains. So, select funds that have lower costs.
Risk Factors
You need to understand your risk tolerance. However, you also need to understand the kinds of risks the mutual fund will be taking to achieve its objective. Every mutual fund comes with its own set of risks. These include credit risk, interest rate risk, liquidity risk, etc. These might cause an impact on your investments.
Moreover, other than the standard risks, there may be scheme specific risks also. For instance, if you invest in international funds, your investments might be exposed to the specific country risks (geopolitical and economic risks associated with the country of investment) where the mutual fund invests. So, it is good to understand these risks and determine whether you are willing to expose your investments to such risks.
Fund managers
Mutual funds are professionally managed funds. Fund managers buy / sell securities on your behalf. A fund manager who has many years of expertise and industry experience may be better at managing a fund than a beginner. The quality of the fund manager is also important as this determines the profits the scheme will be making. Hence, make sure that you read the detailed information about the fund manager/managers in the SID. You need to look for the fund manager’s experience, his/her track record, qualifications, etc.
Investment securities
You need to understand if the mutual fund will have exposure to riskier securities such as derivatives, futures or options. However, note that if a mutual fund scheme takes exposure to derivatives only for hedging their positions, it is not risky. It reduces the risks.
Need help choosing the right mutual funds? Get in touch with wealth experts at wealthzi.com today.
Young earners tend to spend more and save less thinking that they have no goals and have plenty of years for their retirement. Just because they are single with reasonable financial independence doesn’t mean that they should invest less. Being in your 20s or 30s is the best time to plan for financial independence. Not only young earners, all breadwinners need to invest some part of their salary in mutual funds. Now, how much should that be? Here are a few answers.
What’s the thumb rule of investing?
The general thumb rule of investing in mutual funds is to put at least 10% of your monthly income in a mutual fund. You can do this using a systematic investment plan (SIP) if you are just starting to invest in mutual funds. This is applicable to all those who are able to save at least 20% or more of their income. Initially, before investing you need to build an emergency fund using the savings. Once you have this in place, you can start an SIP with about 10% of your savings a month, which you can increase as you go along. Where did the thumb rule come from?
This comes from the 50:30:20 rule. Senator Elizabeth Warren popularized this rule in her book, All Your Worth: The Ultimate Lifetime Money Plan. Every earning member of the family should mandatorily implement this rule in their financial plan. The 50:30:20 rule says that you should save at least 50% of your income for your needs, 30% of your income can be spent on wants, while the remaining 20% must be used to save and invest.
How does the 50:30:20 rule work?
Needs are those expenses that are necessary for survival and need to be paid every month without fail. These include your groceries, house rent or Equated Monthly Instalment (EMI) for home loan, utilities, and so on. You cannot be without paying these bills for your family and yourself. There is no way you can compromise on needs. Note that these don’t include expenses for movies, dining out and other non-essential expenses. Most of the time 50% of your salary goes towards these expenses. However, if you are able to make do with lesser money then, you can save more. If you are spending more than this, you need to cut down on the expenses.
Wants are those that are not absolutely necessary for running your household. These are just the expenditures that help make your life better. For instance, going to the gym or eating out at the restaurant. You can exercise at home and cook at home to cut down on these expenses. Wants also include your vacations, movie outings, subscriptions to online streaming sites, and so on. It is best to limit the spending on wants to 30% of your salary or lesser than that.
You must save the remaining 20% of your income. You can do this by making investments. You can invest in mutual funds based on your risk profile. Therefore, your investments in mutual funds should be at least 10% of your monthly salary. If you can cut down the spending on wants, then you can use that money in increasing your mutual fund investment.
Why invest in mutual funds?
A large population in India is investing in mutual funds as they offer the much-needed flexibility in terms of minimum investment and ease of investing. You can easily invest in mutual funds online with just Rs. 500 per month. You can get a variety of funds based on your risk profile. For instance, you can invest in debt funds if you have a low risk profile and equity funds are best suited for young earners who are investing for the long run. Mutual funds are one of the few investments that have the potential to offer inflation-beating returns.
If you didn’t know, inflation can reduce the worth of your money or investment over time. If your investment doesn’t provide inflation-beating returns, your savings will get reduced in the long run. For instance, the value of Rs. 1,00,000 will be worth Rs. 1.6 lakhs 10 years down the line if the inflation is 5%. If your investment is earning less than 5%, the value of your money will be negative. If you invest in mutual funds that give you more than 11.25%, your investments will be worth Rs. Rs. 2.9 lakhs. So, if you want to make wealth, you need to invest in mutual funds that provide inflation beating returns. The effect of inflation has made it essential for investors to invest in mutual funds to prevent their investment from losing its value over time.
How to start investing in mutual funds?
You can start with a simple, balanced portfolio of 3-4 mutual funds. For a long-term portfolio, you can invest equally in four funds that are large cap, diversified, index fund and debt fund. Overall, this can be a 70-30 portfolio with 70% in equity.
It is important to implement the 50:30:20 rule in your financial plan and invest at least 10% of your salary in mutual funds. You can step it up whenever possible. Need help? Get in touch with your wealth expert at wealthzi.com.
Most investors in India are not market experts. They rely on stock brokerages to invest in stocks and bonds. However, if you want your stock and debt investments to be professionally managed, you can consider investing in mutual funds. These are companies that invest in stocks and fixed-income investments for you by pooling money from different investors. The portfolio is managed by a fund manager who will be a stock/debt market expert. It is easy to invest in mutual funds online or offline. However before investing in mutual funds, you need to follow these steps.
Step 1: Look at your financial goals
Everyone has financial milestones to achieve, right? These goals could be for the short-term or long-term. Identifying your goals will help you invest right. For instance, if one of your goals is to buy a house within the next seven years, then it makes sense for you to invest in an equity mutual fund to meet this goal. Equities are the best wealth-creation instruments for long-term goals. On the other hand, if your goal is to buy a car in the next three years, you can invest in debt mutual funds. as they provide higher returns than other investment avenues.
Step 2: Stay invested
When it comes to equities, discipline matters. Markets don’t keep going up. They could be volatile at times. If you stay invested, your investments will be affected by short-term volatilities. Patience and discipline can make a significant difference to your wealth and portfolio returns in the long run.
Regular investments in mutual funds allow you to generate wealth. When you invest regularly, the money invested earlier has longer time to work for you. Investing regularly is the best way to achieve long-term financial goals. For instance, a monthly investment of Rs. 5,000 can become Rs. 4 lakhs in 5 years. If you invest for 10 years, it can be Rs. 12 lakhs and it becomes Rs. 25 lakhs in 15 years.
Step 3: Diversify your portfolio
Every portfolio should have different kinds of asset classes and investment instruments. This will help to minimise risks while allowing you to earn optimal returns. The various kinds of mutual funds can help you diversify your investment portfolio.
Step 4: Assess your risk appetite
With equities, there is always the risk of market volatility when the market is down. So, if you are totally averse to risks, you should invest in debt mutual funds. If you have a moderate risk profile, you can choose an optimal distribution across equities and debt. A person who is young can put the majority of his/her investments in equities.
Step 5: Stick to your time horizon
You should set a time frame for each of your financial goals. This will help you decide how much you have to invest and the kinds of mutual funds you will require. You should choose schemes which are in line with your goal, time frame, and risk appetite.
Step 6. Identify your fund category
The answer to this question springs directly from the answers you give to points 1, 4 and 5. Here is a table that will help you navigate this process, although this is not to be followed strictly as you could be flexible too.
Time Horizon
High Risk Appetite
Medium Risk Appetite
Low Risk Appetite
Less than 1 year
Low duration funds
Low duration funds
Liquid funds
1 – 3 years
Credit Risk funds
Short duration funds
Low duration funds
3 – 5 years
Aggressive Hybrid funds
Credit Risk funds
Short duration funds
Above 5 years
Multicap funds
Large Cap Funds
Aggressive Hybrid funds
We have not covered all 36 categories in the table as it is not feasible. There are several mutual fund categories that suit some people but not others. For instance overnight funds are more geared towards corporate treasuries, sector funds are suited for people with a high level of risk appetite and the ability to ride the ups and downs of a sector’s fortune. International funds may suit you if you have goals or expenditures such as foreign travel or education or for someone who wants to diversify geographically..Â
Step 7. Identifying funds
Once you’ve identified your fund category you can use parameters like returns, performance in bear markets, fund manager history and fund ratings to shortlist a particular fund or couple of funds. We give you our top picks in a few common categories below. Returns and performance keep changing and we encourage you to do your own research as well to supplement our picks. Wealthzi’s Explore Funds section is a good place to do research.
Category
Fund
Liquid
Aditya Birla Sun Life Liquid Fund, Invesco India Liquid Fund, HDFC Liquid Fund, Axis Liquid Fund
Low duration
Kotak Low Duration Fund, PGIM India Low Duration Fund
Short duration
Franklin India Short Term Income Plan, PGIM India Short Maturity Fund
Credit Risk
Aditya Birla Sun Life Credit Risk Fund, ICICI Prudential credit Risk Fund, HDFC Credit Risk Debt Fund
Aggressive Hybrid
L&T Hybrid Equity Fund, ICICI Prudential Equity and Debt Fund
Large Cap
ICICI Prudential Bluechip Fund, Axis Bluechip Fund, Mirae Asset Large Cap Fund, SBI Bluechip Fund
Multicap
Mirae Asset India Equity Fund, Kotak Standard Multicap
Should invest in mutual funds. Mutual funds sahi hai?
Only 5% of the average Indian household’s wealth is in financial assets. Of this only 9% is invested in mutual funds. The RBI’s household finance committee suggests that this under-allocation to productive, wealth-generating assets may be causing households to lose out on wealth creation. If you look at the returns that mutual funds have delivered over the last three, five and 10 years, this seems to be self-evident.
Mutual Fund kyun sahi hai?
Firstly, mutual Funds allow small investors to pool their savings and invest in the stock or bond market. These savings are managed by a professional fund manager at a very low cost.
High returns
Mutual Funds invest in equity and hence are able to deliver high returns over the long term. Multicap equity funds have delivered on average about 18% annualised over the past five years and large-cap funds have delivered 15%. Even debt mutual funds have done well with dynamic bond funds delivering 9.28% annualized over the past five years.
Tax-efficient
The capital gains tax on equity mutual funds held for longer than one year is 10% for the returns exceeding Rs 1 lakh in the financial year. Under Rs 1 lakh, it’s zero. For a holding period less than one year, it’s short term capital gains tax of 15%. For debt funds, it is 20% if the fund is held longer than three years and you also get the benefit of indexation. If a debt fund is held for a shorter period (less than three years), then your gains will be taxed as per your slab.
Highly regulated
Mutual Funds are tightly regulated by the Securities and Exchange Board of India (SEBI). SEBI prescribes limits on how much they can invest in a single company, how much expense they can charge and various other limits to ensure investor protection. Their value (known as NAV) is published every day. The fund’s holdings are held by an independent entity called the custodian.
Liquidity
The vast majority of mutual funds can be purchased and sold on any working day. You can buy units directly from the fund and sell them back to the fund. There is a category of funds called ‘close ended funds’ which do not have this feature. However, the units of such funds can be bought and sold on a stock exchange.
How to invest in mutual funds
You can invest in mutual funds online or offline. You need to make sure that your Know Your Customer (KYC) norms are completed. You can do this directly with an Asset Management Company (AMC) at their office, or through an investment advisor. Once you have chosen the mutual fund, you have to submit the mutual fund application form which will have details including the bank account of the unitholder.
You can set up an auto debit if you are investing via the Systematic Investment Plan (SIP). You don’t need a demat account for investing in mutual funds. You can track your investments even if you choose to invest offline. The minimum investment for mutual funds is as low as Rs. 100 for SIP. You can even make one-time investments in mutual funds.
If you are new to the world of mutual funds or don’t understand jargons, then making investment decisions on your own could be risky. You will require a seasoned mutual fund advisor such as wealthzi.com. They will be able to address your investment queries, suggest the right funds, keep track of your asset allocation and investments, and help you buy or sell funds at the right time. Click here to explore the best mutual funds.
How to invest in mutual funds online
Choosing a platform, advisor or website for mutual funds can be tough given the sheer number of options on offer. We take you through them and give you the pros and cons of each. Different ones may suit the needs of different types of investors.
Online mutual fund platforms
You can invest in mutual funds online through various platforms like Wealthzi or directly on the AMC website. You need to open an investment account on the platform before you can start investing. If you are KYC compliant already, you can start investing right away after uploading the relevant details like your PAN, address proof, bank account details and so on. Online platforms like Wealthzi have partnered with BSE Star MF for providing mutual fund transaction services. The investor transfers the investment amount to the escrow account of BSE Star MF which in turn is paid out to the AMC. The unit allocation is done after the payment reaches the AMC usually in a day or two.
What if the online platform goes out of business
The online platforms or advisors do not ‘hold your money’ once your money has been invested. Your money is transformed into units of mutual funds. The records of your holdings are held by independent Registrar and Transfer Agents (R&Ts) or in demat accounts. A platform going out of business can be an inconvenience from the point of view of managing your investments but your money and holdings will not be lost.
Also unlike brokers, your mutual fund money goes straight from your bank account to BSE Star MF’s escrow account or the fund house and the proceeds come straight back only to your bank account. The platform does not hold money on your behalf.
Are they regulated?
Platforms will either be registered as mutual fund distributors (MFDs) with Association of Mutual Funds of India (AMFI) or as Registered Investment Advisors (RIAs) with the Securities and Exchange Board of India (SEBI). All entities operate as per SEBI regulations. Most will display the registration number and status at the bottom of the home page or in the FAQ section.
How does the money transfer happen?
Most platforms will ask you to sign ‘bank mandates’ or ‘one-time mandates’ to let you transfer your money for mutual fund investments. These mandates will usually specify an upper limit such as 1 lakh or 10 lakh. Once the mandate is given, you don’t have to keep logging into net banking to authorize payments for your investments. In case of redemptions, your bank account will typically be linked to your mutual fund records and thus the money will be directly credited to your bank accounts.
How are fees/commissions usually charged?
Typically, if a platform offers regular plans, the fund house pays a commission of 0.5%-1% to the platform as your distributor. If it offers ‘direct’ plans, it may charge you a monthly fee.
Mutual fund terms you should know
If you are new to the world of mutual funds, there are many terms associated with funds. Here are some of the common ones that you need to know.
Net Asset Value (NAV)
The NAV of a mutual fund is the total value of assets for every unit of the fund that you hold. How is this calculated? The NAV is all the assets the fund is managing minus all related and permissible expenses. This is the price for your mutual fund. Does a low NAV indicate a good buy? This is a myth. The NAV of the fund shouldn’t influence your investment decision. You should look at the scheme, its performance, the portfolio it holds and fund manager expertise before you invest in a mutual fund
Expense Ratio
Total expense ratio indicates the expenses incurred for running the mutual fund. It is usually expressed as a percentage of the total assets under management. These expenses will include the advisory fees and the management charges for the fund. A very high expense ratio could mean lower returns, especially if you are investing in a debt fund. Expense ratio of over 2% is considered to be high.
Systematic Investment Plan (SIP)
SIP refers to investing a fixed amount of money in a mutual fund scheme on a regular basis. An SIP can be monthly, quarterly or daily. Investing in a monthly SIP is better if you are salaried because it matches the frequency of your income. SIPs should not be stopped during market downturns because this beats their whole purpose which is getting more units when the markets drop. As you keep buying more units during market falls, you will get great returns in the long run.
Exit Load
Similar to entry load, exit load is recovered from you when you sell a mutual fund or redeem mutual fund units.
Growth Option
Looking for capital appreciation rather than regular income? Then, you can choose the growth option for mutual funds. Choosing this option will mean that you don’t get any dividends. You will get capital appreciation if the fund does well and the NAV of your fund goes up.
An index fund is a kind of mutual fund that constructs its portfolio by tracking the composition of a standardised market index. This could be any of the benchmark indices in the stock market such as the Nifty 50 or the Sensex.
Note that the index fund will not only invest in the stocks as those the index invests in, it will also maintain the ratio in which the index has invested in these stocks. For instance, in the Nifty 50 the weightage for HDFC Bank is 10.29% while that of Infosys, it is 7.81%. An index fund that follows the Nifty 50 will allocate the same weightages to these stocks in its portfolio. So, the index fund doesn’t make investment calls on its own, it just imitates the index.
The aim of an index fund is to replicate the performance of an index in terms of the returns that the index generates. This replication is done at a minimal cost. This is the reason why index funds are also called passive funds. They are not actively managed. The fund managers do not make any buy and sell calls. So, there are no transaction costs. Naturally, the expense ratio and other fees for managing index funds are much lesser than those of actively managed funds. This makes index funds cost-efficient.
If you are looking to invest your money in index funds, you can consider the following list of the best index funds in India that have done well in the past.
Launched in 2002, this fund has a good track record of closely following the market index S&P BSE Sensex. The fund has no entry load while the exit load of 1% is applicable only if you redeem within a month. As of 3rd February 2021, the NAV of the fund (dividend option) was Rs 32. The expense ratio of the fund is 1.08%. The fund’s five year Compounded Annual Growth Rate (CAGR) return is 15.55%. The three-year return is 12.8% while the one-year return is 26.22%. If you had invested Rs 10,000 as monthly SIP in the fund for the last three years, your corpus will be Rs. 4.81 lakh.
This fund has been a part of the index fund category for close to two decades. It was launched in 2002. So, the fund has managed to garner more than Rs 1,217 crore of Assets Under Management (AUM). The fund closely follows the Nifty 50 Index. The fund has no entry load or exit load. As of 3rd February 2021, the NAV of the fund (dividend option) was Rs. 19.14. The expense ratio of the fund is low at 0.45%. The fund’s five-year CAGR return is 15.34%. The three-year return is 11.62% while the one-year return is 26.53%. If you had invested Rs. 10,000 as monthly SIP in the fund for the last three years, your corpus will be Rs. 4.76 lakh.
This fund was launched in 2002 and has AUM of more than Rs. 1770 crore. The fund closely follows the S&P BSE Sensex. The fund has no entry load while the exit load of 0.25% is applicable only if you redeem within three days of purchasing the fund units. As of 3rd February 2021, the NAV of the fund was Rs 448.49. Note that this fund doesn’t have a dividend option. The expense ratio of the fund is very low at 0.30%. The fund’s five year CAGR return is 16.58%. The three-year return is 13.41% while the one-year return is 26.56%. If you had invested Rs. 10,000 as monthly SIP in the fund for the last three years, your corpus will be Rs. 4.83 lakh.
This fund is one of the oldest funds in the index funds category. It was launched in 2000 and has AUM of more than Rs. 3,173 crore. The fund closely follows the Nifty 50 Index. The fund has no entry load or exit load. As of 3rd February 2021, the NAV of the fund (dividend option) was Rs. 49.17. The expense ratio of the fund is one of the lowest at 0.14%. The fund’s five-year CAGR return is 15.96%. The three-year return is 12.17% while the one-year return is 27%. If you had invested Rs. 10,000 as monthly SIP in the fund for the last three years, your corpus will be Rs. 4.79 lakh.
This fund was launched in 2002 and has Assets Under Management (AUM) of more than Rs. 950 crore. The fund closely follows the Nifty 50 Index. The fund has no entry load while the exit load of 0.2% is applicable only if you redeem within 15 days of purchasing the fund units. As of 3rd February 2021, the NAV of the fund (dividend option) was Rs. 65.04. The expense ratio of the fund is 0.48%. The fund’s five-year CAGR return is 15.31%. The three-year return is 11.44% while the one-year return is 25.98%. If you had invested Rs. 10,000 as monthly SIP in the fund for the last three years, your corpus will be Rs. 4.74 lakh.
The income tax slabs may have remained unchanged in Budget 2021, but that doesn’t mean everything is status quo. In fact, there are 10 key income tax related changes, announced by Finance Minister Nirmala Sitharaman in the budget 2021, that have an impact on your financial life. Here is a quick review.Â
1. Pre-filled info in income tax return forms The income tax return (ITR) form will now have pre-filled information on dividend, bank and post office interest and capital gains. This will ease compliance.Â
2. Interest tax on high EPF contribution
Targetting high-income earners, the interest on employee’s share of contribution of more than Rs 2.5 lakh a year to EPF on or after April 1, 2021 will be taxable at maturity. This will lead to additional tax liability, especially for HNIs.Â
3. Dividend payments to REIT/ InvIT exempt from TDS For ease of compliance, the government has proposed to make dividend payments to REIT/ InvIT exempt from Tax Deducted at Source (TDS) . Also, advance tax liability on dividend income will arise only after the declaration/payment of dividend.
4. Higher TDS for income-tax non-filers Budget 2021 has proposed to insert a new section 206AB in the Income Tax Act as a special provision providing for higher rate for TDS for the non-filers of income tax return.The proposed TDS rate in this section is higher of the followings rates such as twice the rate specified in the relevant provision of the Act; or twice the rate or rates in force; or the rate of 5%.
5. No income tax filing required for eligible senior citizens above 75 Finance Minister Nirmala Sitharaman, in the Union Budget 2021, has announced that senior citizens above the age of 75 years, who only have pension and interest as a source of income will be exempted from filing the income tax returns. The exemption is only in cases where the interest income is earned in the same bank where the pension is deposited.
6. High-premium ULIPs to be taxed at maturity like equity MFs Proceeds from ULIPs (except when received on death) issued on or after February 1, 2021 will be taxable as capital gains if the aggregate annual premium exceeds Rs 2.5 lakh in any year. The rate of taxation will be same as the Long Term Capital Gains for equity mutual funds, who are taxed at 10% if long term capital gain is more than Rs 1 lakh a year.Â
7. No need to estimate dividend tax on advance tax payment In a relief, taxpayers will no longer be required to estimate their dividend income while making advance tax payments. Advance tax will now be payable only when a dividend is actually declared or paid by the company.
8. Leave travel concession scheme notified The Budget for 2021-22 has proposed to provide tax exemption to cash allowance in lieu of Leave Travel Concession (LTC). The scheme was announced by the government last year for individuals who were unable to claim their LTC tax benefit due to Covid-related travel restriction(s).Â
9. Time limit for filing delayed or revised income-tax return cut The last date to file a revised income-tax return or belated return on voluntary basis now stands at December 31 after the close of the financial year.Â
10. Tax holiday on affordable housing extended The Finance Minister has announced the extension of tax holidays for the affordable housing segment. Additional interest deduction of Rs 1.5 lakh for loans taken to purchase an affordable house will now be eligible for loans taken up to March 31, 2022. Affordable housing projects can avail a tax holiday for one more year, till March 31, 2022.
The Finance Bill 2021-22 has proposed to tax the gains from ULIPs (Unit Linked Insurance Policies) with a premium of more than Rs 2.5 lakh per year. The move will bring parity to ULIPs and mutual funds in terms of taxes.
From 1st February 2021, investing more than Rs 2.5 lakh as premium in ULIP will see the maturity proceeds being taxed identically to mutual funds.
However, death benefit in ULIP will continue to remain tax-free regardless of the premium amount.
This new tax rule applies to the sum of the premium of the ULIPs purchased on or after 1st February 2021.
At present, Long-Term Capital Gains (LTCG) arise out of the sale of units of equity-oriented mutual fund schemes and the gains are taxed at the rate of 10%, if the LTCG exceed Rs 1 lakh in a financial year (gains up to January 31, 2018 being grandfathered).
However, the proceeds from ULIPs of insurance companies (including early surrender / partial withdrawals), are exempted from income tax under section 10(10d) of Income Tax Act, if the sum assured in a life insurance policy is at least 10 times the annual premium and withdrawn after a lock-in of 5 years.
The above situation led to tax arbitrage in favour of ULIPs, even though ULIPs like mutual funds are also investment products that invest in equity stocks. ULIPs even have an added advantage of tax deduction under Section 80C of the Income Tax Act on the premium paid.
The capital gain tax advantage was being used by many HNIs, and their investments went to ULIPs. With the Budget proposal, there will be some tax parity between ULIPs and mutual funds.
Educating children today isn’t as easy as it was decades ago. The cost of education is much higher and every parent wants their child to study in premier institutes. That’s the reason why many parents start saving for their children as soon as they are born. While making investments in your name for their education seems easy, investing in the child’s name will help make saving easier. Here’s how you can invest in their names.
Why invest in your child’s name
When you invest in your child’s name, you will not touch those investments in times of need. Theirs will be the last investment that you will liquidate if you are in want of money.
What are the rules regarding minor investments?
If you are investing in mutual funds for your children, note that there can’t be a second holder or a nominee for mutual funds made in a minor child’s name. You need to be registered as a guardian for the investments. If you need to make any changes to this information, you will need to write to the mutual fund house. If you are not directly investing in mutual funds and are having the mutual funds in demat, the demat account has to be in your child’s name. You will need to be the guardian for the demat account.
You will need to complete the know-your-customer (KYC) process for the investments. In case you have set up Systematic Investment Plans (SIP), note that some banks may not allow internet banking for minors. There might be restrictions on use of cheques for the minor’s bank account. It is best to choose a bank that offers good banking services for minor accounts.
Where should you invest?
Even though there are children’s mutual fund schemes (read this article for information on them), you should look at many kinds of mutual funds that are available in the market. Children’s schemes only help in being disciplined when staying invested because they come with lock-ins. They do not offer any extra benefit. Equity linked saving scheme, that is, tax saving mutual funds in the name of your child can be avoided as they have a three-year lock-in and you cannot claim tax deduction under section 80Cfor the investment.
Mid cap and small cap funds can be considered if you are investing for your child’s education that is at least 5 years away. Thematic funds are best suited for high risk profile investors who are investing for higher returns.
There are fixed-income options such as the Public Provident Fund (PPF) and the Sukanya Samriddhi Yojana (SSY). You can open a PPF account in your child’s name. However, the overall investment including your PPF account can be only Rs. 1,50,000 a year. SSY which is a savings scheme for the girl child below the age of 10. For SSY too, the maximum annual contribution to the scheme is set at Rs 1,50,000. The contributions are eligible for tax deductions under section 80C.
What will happen after your child turns 18?
If you have been making monthly investments using ECS mandates, those will be stopped. Your investments will be frozen. You will need to get a Permanent Account Number (PAN) in your child’s name. You will need to complete the KYC norms. Once your bank removes the minor status for the child, you can ask the mutual fund house to change the investments to your major child’s name. You will need to provide them with documents such as your child’s signature, bank account details and other documents. You need to follow up with each of the fund houses to get this done. Once the mutual fund folio is in your major child’s name, you will not have control over those investments. Your child will be in charge of those investments.
Do you need to pay tax?
When you sell the investments, the money will get credited to the child’s bank account. The capital gains earned on the investments will be clubbed to your income and will be taxed at the tax rate that is applicable to you. If both you and your spouse are earning, then the gains will be clubbed with the parent whose income is higher. There is an advantage when the income gets clubbed. When your income includes the income from your minor child, you can claim an exemption under Section 10 (32). This can be up to Rs. 1,500 or the clubbed income, whichever is less. However, if the investments are sold after the child turns 18, the tax liability will be on the child.
Note that for special children, the capital gains and income earned on the investments will not be clubbed with the parents’ income if you invest in the child’s name. The clubbing provisions under Section 64 of the Income Tax Act, 1961 specifically excludes ‘special child suffering from any disability as defined under Section 80U of the Act’.
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