Tax on mutual funds

The earning earned annually or grown over time are taxed under the income tax act, these mutual funds are liable to pay taxes on earnings generated from them , if is above the threshold of income tax slab rates for taxation, or a predefined criteria for taxation has been meet.

Before studying that let us understand the long term capital gain and short term capital gain criteria-

Long term capital gain–
When investment is kept in more than 12 months in equity oriented mutual fund (i.e. fund having more than 60 percent investment in equity ) , then they are taxed in long term capital gains.
When investment is kept in more than 36 months in debt oriented fund (i.e. more than 60 percent in debt oriented funds) , then they are taxed in long term capital gains.

Short term capital gains–
When investments are kept for less than 12 months in equity oriented schemes. Then they are taxed in short term capital gains.
When investments are kept for less than 36 months in debt oriented schemes , then they are taxed in short term capital gains .

Taxation-

Long term equity gains are taxed at ten percent, with the facility indexation, indexation helps in calculating the present cost of investments done before at least a year .
Long term debt funds are taxed at 20 percent with indexation.
Short term equity funds are taxed at 15 percent of the total gain received.
Short term debt funds are taxed at tax slab rates of the income tax, in which the investor falls, they are added to the total income of tax player, they are not charged separately under different head.
Also, under section 80 of income tax ,if equity mutual funds are kept for more than 3 years . they are entitle for earring rebate of 1 lac , ie. If you keep ten lac in equity mutual fund , and your value after 3 years become 2.5 lac , then you will be taxed for 50 thousand rupees, since 1 lac is rebate , also this 50 thousand is taxed with indexation, that makes your tax liability on some where 40,000 rs , on which tax will be charged ten percent i.e. 4000 only.

In , precise, it is wise to keep investment in long term plans in mutual funds .though yu can exit before also , if scheme you choose is not performing or as per your situation and money management.

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Longer duration vs Shorter duration investment In Stock Market

Many Who are planning for investing their hard earned money in to stock , always confront with dilemma Whether to invest in the market for longer duration , let say period of more than 3 years , or invest in market for period not less than 2-3 months to 3 years . In both the situation the investors are gullible they are not aware when, where, how much to invest, for that is all covered in under different articles , but for now let start with the subject of this article –

Long term investing vs. Short term investing In Stock Market

When you are investing for long term your time horizon is more than 3 years , it can be for as long many year you want to keep the stock, while short term investor keep the stock up to 1-3 months to 2-3 years .
Long term investing is for wealth building over a period of time, let say you invested in property that grew over time, but exception here is stock you are going to invest can corrode your wealth also, While short term investing is like doing some business or job for earning over period of time , exception stock can deplete.

Long term investor does the fundamental analysis of the stock for longer periods(you can find more articles about that on our blog), for performance of stock in last 5 years , while the short term investor does rely on fundamental analysis for shorter durations and technical analysis , is that most short term traders, swing traders and day traders follow.

For long term investing you keep margin of safety I e. if you go wrong you are going to lose that much amount of money let say 1 percent after anticipating the fair value of stock , while short term investor keep their stop losses , rely on support and resistances for saving their capital

Long term investor does fundamental analysis on yearly basis of companies balance sheet , profit & loss account , look prospective of share for 5 years , While short term trading can done on relying of result of single quarter of a good company , combining with technical analysis.

For long term investing can be done part time, while short term investing can also be done part time or full time.

Which type of investing you follow depends upon your attitude, purpose of investment, but both requires you to be updated on timely basis of companies events, news, macro happenings in the industry. Short term investing requires you to be more informative rather than its counterpart since chances of loss are more because of market fluctuations.

Also doesn’t follow any advisor or broker that can be misleading, learning technical analysis , fundamental analysis from books yourself or learn from experts , then dive in the river. Otherwise you will going to ruin your hard earned money.

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Mutual funds

A mutual fund is a combined capital collected from different investors ranging from few thousand to Millions , the investor can be –

Individual person
Institutional investor/ banks/ some other large pool of money .

Then the capital Pooled from different sources is invested in proportion in company shares, stocks, bonds, debentures commodities and fixed deposits depending on which fund you choose .

The fund is represented by sharing of funds by thousands of investors , like stocks have a market value for the funds of all investor , they have net asset value (nav ) for representing their trade price.

The purpose of mutual fund is the growth in its nav for which mutual fund is managed by expert fund managers , who are professional in this field and are paid with handsome salaries.

Advantage of investing in mutual funds

These funds are regulated by the norms of the board of security exchanges’ of their respective countries

These are managed by professional experts , who has the capacity to beat the market , or they can give you returns, at least chasing index funds return
It gives you opportunity to invest in different portfolios , in different sectors, balancing your risk
Returns are higher than conventional investing in stock by novices , and risk are less

Let say capital of 1 lac, if a novice earn around 5-6 percent return per annum , the can fetch you more than 10-12 percent return annum , if your fund selection is right.

They give return far more than normal fixed deposit returns

I have seen funds I will be discussing in next article, that give return more than 15 percent in a year.

You can invest as much amount as much you can , from 1000 bugs to unlimited

They provide you tax benefit under income taxes.

You can invest in stocks of different countries being part of a mutual funds, since they invest in international money market also.

if you are not willing to make a one-time investment, you can invest in smaller and manageable installments called sip, systematic investment plans .
Since, every individual cannot become professional in industry or work full time , these fund are best source of investment , as they are handled by industry experts.

They provide liquidity like shares, money in fixed deposits, you can take your money out , by giving your request and funds will be transferred with in two days .

Disadvantage of mutual funds

They charge expense or fee annually, varying from .01 percent – 2 percent of investment , they call it expense fee or operating fees.
There is no certainty of profit, as in case of bonds and fixed deposits .
Some funds have necessary holding period of 3 years , that provide tax benefits .
You cannot choose and pick shares or make portfolio in them, you are in investing in pre determined portfolio.

This statement is taken from investopedia that defines, how reliable and money rich the mutual fund market is these days –

“At the end of 2016, mutual fund assets worldwide were $40.4 trillion, according to the Investment Company Institute.^[6] The countries with the largest mutual fund industries are:

United States: $18.9 trillion
Luxembourg: $3.9 trillion
Ireland: $2.2 trillion
Germany: $1.9 trillion
France: $1.9 trillion
Australia: $1.6 trillion
United Kingdom: $1.5 trillion
Japan: $1.5 trillion
China: $1.3 trillion
Brazil: $1.1 trillion’’

Also in India, there are more than 6 corers owner of mutual fund policy owners

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Mutual funds and its types

A mutual fund is a combined capital collected from different investors ranging from few thousand to Millions , the investor can be –

Individual person
Institutional investor/ banks/ some other large pool of money.

Then the capital Pooled from different sources is invested in proportion in companies’ shares, stocks, bonds, debentures commodities and fixed deposits depending on which fund you take.

The fund is represented by sharing of funds by thousands of investors, like stocks have a market value, for the funds of all investor, they have net asset value (nav ) for representing their trade price.

The purpose of mutual fund is the growth in its (nav) for which mutual fund is managed by expert fund managers, who are professional in this field and are paid with handsome salaries.

Mutual fund types –

Equity funds- These funds invest their capital in equity shares of companies, they invest at least 70 percent of their capital in equity and rest in other instruments of money market. The risk is higher and probability of growth is also higher.

b-debt funds– these funds invest their money in the government securities, corporate bonds, government bonds, commercial papers, fixed income assets, certificate of deposits , they at least invest 70 percent in debt , rest can be in equity .Risk is lower and growth is almost predetermined .

Tax saving funds– they generally invest in equities , they are eligible for income tax deductions , they have lock in period of investment say 3 years., they have high risk , high returns.

Funds of funds– these fund invest their money in other mutual funds; these can be equity, debt or hybrid.

Balanced funds or hybrid – these funds invest in both equities and debt, it depends upon their time period of investment, they manage their portfolios of 60-40 percent either debt or equity, vice versa, depending upon time period.
Index funds– these funds invest in one index of market and create as many as portfolio possible in that index, there performance is tracked by the performance of that index .

Sectoral funds – these funds invest in one sector or industry of market , and balance their portfolios in that sector only.

Mutual fund on the basis of structure-

Mutual fund can also be classified on the basis of structure, they are classified as

Open ended funds-these are funds that are bought and sold any time day in market, these are liquid funds.
Close ended funds– these funds have maturities on which they expire.

Growth Mutual funds—

These are growth oriented funds, that give growth quite more than fixed income instrument like certificate of deposits, bonds
They generally invest in equities
They proportion of debt is lower
They have risk component involve in them also.

Fixed income mutual funds-

As the name suggest they provide fixed income to investors
They provide income generally more than fixed deposits
They are risk free investment options
They invest their money in companies and government scheme that are only open for big money of market. For more insight in –

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Stock trading vs investing in mutual funds

The investor are in confusion, in to which medium they invest their hard earned money also being novice , since market is a butcher , that never forgive mistakes , and you have will face loss for every mistake you will commit . Then how to make investment wisely, such that there earned money is put to work in best, efficient manner and yield good returns is challenging. Let start the two mediums comparing them in which you as entrant can start and you earn more.

Investing in stocks

Investing in stock you are free to select your stock in which industry and sector you want to invest , ie metal and mineral, transportation, banking and technology etc

While stock are concerned you define your own portfolio , let say you have an investment objective of 1 lac you divide it in to 8-10 stocks of 15,000- 10000 each , u reduce your risk of investing in a single stock, or you can invest in either single stock as per your wish, though it is not advisable .
It is requires proper technical analysis and fundamental analysis on your part and timely evaluating your portfolio on daily basis or weekly basis for some time.
However if you are not expert you will investment randomly there are chances of huge losses.
If you work on basis of advisor chances are you end up losing, if you do not find an expert advisor.
If you become an expert of industry then you can earn good returns from market.

Investing in mutual fund –

Mutual fund are managed by professional fund managers , who have expertise in this area , and they are heavily paid by mutual fund companies for handling investment
They handle may thousand or hundred corers of pooled wealth of investor
They diversify their investment in different portfolios , in different sector
The chances of losses in mutual fund in less as compared to equity investments yourself
However they charge fees as little as .01 to 2 percent of investment for their management from investor annually.

It is in the mind set of people that investing in stock if you are learned investor or taking advises gives better return ,but that requires your time and learning the market thoroughly ie fundamental analysis and technical analysis.

However we found investing in equity mutual fund can also give you same return or if you invest in mixed mutual fund that have equity and bond also in their portfolio will give you stable return more than deposits of banks, that you will find more details in our articles further.

if you think you have learned the art of investing than invest yourself , be your on fund manager, there are many in market, earn as much you can on investment because market can make your money 100 percent to 200 percent with your proper delegation , or it will just remain 20 percent.

Otherwise go for Mutual funds .

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Share market/ Stock market Basic

You must have heard of share , market , share trading , but if you are not aware of this , we will be discussing about it in this post , the share market is a place where , if invested wisely and cautiously after proper learning , you can earn money working in it ,either working part time or working full time.

All you required certain skills for trade.

For those the words like share, share market, share trading are like aliens , they can also invest in market like expert just following some articles on our blog .

Shares/ Stock – let suppose a company want to expand its business, but it does not have funds,

If a company requirement is 100 lacs , but it only have 40 lacs

Requirement of = 60 lacs

What will it do –

Either it will buy loan from market
It issues shares

Shares – shares are denomination of money like a coin or note, if you invested in it , you get ownership in business as per your share holding ratio .

If they divide the total requirement ie 60 lacs dividing by 10 rs share face value, ie 60,000 units of shares ,

That means company offered 60,000 unit of its ownership in the market for fulfilling it business requirements by way of 10 rs each face value share .

Suppose three person – Mr. x bought 100 unit ,

Y- bought 200 units,

z- Bought 50,000 units

they are now entitled for their respective unit holdings Stake in the company’s business .they become now share holders’ / Stock Holders’ of company .

Benefits of shares/ stock –

Share holder earns dividend on shares on annual basis

If companies is performing well , giving good results , expanding, then face value of share increases ( suppose face value 10 is now selling in market at 11 rs market value in present) because of companies profit , it gives 1 rs premium to the owner of share holder.

It is just like you purchase a house and you rented it – you are earning dividend in form of rent , also premium on increase in market value of share price, but caveat emptor , there are losses also in market value of share.

If you have shares in large quantity as per every companies norms , you are given right in the participation of working of companies
The reason people are tempted to buy shares are they give good returns ie 1 percent to 100 percent, if invested wisely after proper analysis. Unlike bond/ fixed deposits where return that is fixed.

Cons of shares

Shares are subjected to market risk; they can deplete your money also if business fails or company fails.

Irrespective of their tendency to give losses, many investors want to invest in share, because they multiply money many times/ give returns better than normal fixed deposits/ bonds.