A mutual fund is a trust that pools the savings of a number of investors who share a common investment objective. The money thus collected is invested in capital market instruments such as shares, debentures, and other securities. The combined holdings the mutual fund owns are known as its portfolio. Each unit represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.
The income earned through these investments is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Investments in securities are spread across a wide cross section of industries and sectors and thereby reduce the risk. Asset Management Companies (AMCs) normally come out with a number of schemes with different investment objectives from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.
In India, mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers of mutual fund in India as follows:
1. Sponsor: The sponsor is a person who establishes a mutual fund and gets it registered with Sebi. The sponsor forms the Trust, appoints the Board of Trustees, and has the right to appoint the Asset Management Company (AMC) or the fund manager.
2. Trustees: The mutual fund is managed by a Board of Trustees. The trustees act as a protector of unit holders' interests. They do not directly manage the portfolio of securities and appoint an AMC (with approval of Sebi) for fund management. If an AMC wishes to float additional or different schemes, it will need to be approved by the trustees. Trustees play a critical role in ensuring full compliance with Sebi's requirements.
3. Asset Management Company: The AMC is appointed by trustees for managing fund schemes and corpus. An AMC functions under the supervision of its own board of directors and also under the directions of trustees and Sebi. The market regulator has mandated the limit of independent directors to ensure independence in AMC workings.
1.Custodian and depositories: The fund management includes buying and selling of securities in large volumes. Therefore, keeping a track of such transactions is a specialist function. The custodian is appointed by trustees for safekeeping of physical securities while dematerialised securities holdings are held in a depository through a depository participant. The custodian and depositories work under the instructions of the AMC, although under the overall direction of trustees.
2.Registrar and transfer agents: These are responsible for issuing and redeeming units of the mutual fund as well as providing other related services, such as preparation of transfer documents and updating investor records. A fund can carry out these activities in-house or can outsource them. If it is done internally, the fund may charge the scheme for the service at a competitive market rate.
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India (UTI) at the initiative of the RBI & Government of India. The objective then was to attract small investors and introduce them to market investments. Since then, the history of mutual funds in India can be broadly divided into six distinct phases.
Phase I (1964-87): Growth Of UTI:
In 1963, UTI was established by an Act of Parliament and was the only entity offering mutual funds in India. The first scheme was Unit Scheme 1964 followed by many others. The first Indian offshore fund, India Fund was launched in August 1986.
Phase II (1987-93): Entry of Public Sector Funds:
The year 1987 marked the entry of other public sector mutual funds. With the opening up of the economy, many public sector banks and institutions were allowed to establish mutual funds. The State Bank of India established the first non-UTI Mutual Fund, SBI Mutual Fund in November 1987.
Phase III (1993-96): Emergence of Private Funds:
A new era in the mutual fund industry began in 1993 with the permission granted for the entry of private sector funds. This gave the Indian investors a broader choice of 'fund families' and increasing competition to the existing public sector funds. Quite significantly foreign fund management companies were also allowed to operate mutual funds, most of them coming into India through their joint ventures with Indian promoters. The private funds have brought in with them latest product innovations, investment management techniques and investor-servicing technologies. During the year 1993-94, five private sector fund houses launched their schemes followed by six others in 1994-95.
Phase IV (1996-99): Growth And SEBI Regulation:
Since 1996, the industry scaled newer heights in terms of mobilization of funds and number of players. Deregulation and liberalization of the Indian economy had introduced competition and provided impetus to the growth of the industry. A comprehensive set of regulations for all mutual funds operating in India was introduced with SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform standards for all funds.
Phase V (1999-2004): Emergence of a Large and Uniform Industry:
The year 1999 marked the beginning of a new phase in the history of the mutual fund industry in India, a phase of significant growth in terms of both amount mobilized from investors and assets under management. In February 2003, the UTI Act was repealed and it adopted the same structure as any other fund in India. The emergence of a uniform industry with the same structure, operations and regulations make it easier for distributors and investors to deal with any fund house. Between 1999 and 2005 the size of the industry has doubled in terms of AUM which have gone from above Rs 68,000 crores to over Rs 1,50,000 crores.
Phase VI (From 2004 Onwards): Consolidation and Growth:
The industry has lately witnessed many of mergers and acquisitions. At the same time, more international players continue to enter India while new domestic players have also entered the market. Sebi has in recent times introduced many significant regulations in the industry for monitoring the same and protecting investor interests.
Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. Mutual funds are managed by fund managers generally with knowledge and experience whose time is solely devoted to tracking and updating the portfolio. They have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. Thus investment in a mutual fund not only saves time and effort for the investor but is also likely to produce better results.
Diversified investment improves the risk return profile of the portfolio. Optimal diversification has limitations due to low liquidity among small investors. The large corpus of a mutual fund as compared to individual investments makes optimal diversification possible. Due to the pooling of capital, individual investors can derive benefits of diversification.
Low Transaction Costs:
Mutual fund transactions are generally very large. These large volumes attract lower brokerage commissions and other costs as compared to smaller volumes of the transactions that individual investors enter into.
Choice of products & assets:
There are four basic types of mutual funds based on the asset class they invest in: equity, bond, hybrid and money market. Further, within each asset class there are further choices of products. For any investment objective of any investor, the choice of the products available are many.
Liquidating a portfolio is not often easy and you have to rely on the market liquidity for the security. A mutual fund house stands ready to buy and sell its units at any point of time. Thus it is easier to liquidate holdings in a Mutual Fund as compared to direct investment in securities. There are however also products like close-ended funds or intervals funds which have restrictions on the buy and sell transactions.
In India dividend received by investors is tax-free. This enhances the yield on mutual funds marginally as compared to income from other investment options. Also in case of long-term capital gains, the investor benefits from indexation and lower capital gain tax. Investments in the ELSS schemes qualifies under the section 80 C.
There are many flexibilities available in terms of payment and credit modes, investing, swtiching and withdrawing from the portfolio like SIP, SWP, STP and Switch with different frequency options. The schemes also offer flexibilities in the nature of plan – with dividend payout, reinvestment and growth options. There are virtually no restictions on the amount, period, product type, plan choices you can make.
Well Regulated & Transparent:
All mutual funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interest of investors. The SEBI regularly monitors the operations of an AMC. There is high degree of disclosures and transparency also. You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme. You can also track your investments on a daily basis.
Operationally, there is a lot of convenience and ease in transacting with mutual funds. All your holdings and fund accounting is managed by high quality custodians and registrars. You may make use of auto-debit mandates, ECS, etc. to make & schedule investments. The redemption proceeds, dividends can be automatically credited into your accounts within few days of the transaction. Mutual funds are also available on the stock exchange and you can do transactions through online and other modes in a paper-less manner.
Open to everyone:
Any rich or poor person can invest in mutual funds. Often you can even start a SIP with amount as low as Rs.500/-. There is no upper limit on the amoun of investment you can make. Most other government backed investment products in the market have these restrictions. Any person – be it individual, trusts, firms or companies can invest in mutual funds.
The rates are applicable for the financial year 2015-16.
|Individual/ HUF||Domestic Company||NRI|
|Equity Oriented Schemes||Nil||Nil||Nil|
|Debt oriented schemes||Nil||Nil||Nil|
|Individual/ HUF||Domestic Company||NRI|
|Equity Oriented Schemes*||Nil||Nil||Nil|
|Money Market & Liquid Schemes||25% + 12% Surcharge + 3% Cess = = 28.84%||30% + 12% Surcharge + 3% Cess = 34.608%||25% + 12% Surcharge + 3% Cess = 28.84%|
|Debt schemes (other than infrastructure debt fund)||25% + 12% Surcharge + 3% Cess = = 28.84%||30% + 12% Surcharge + 3% Cess = 34.608%||25% + 12% Surcharge + 3% Cess = 28.84%|
|Infrastructure Debt Fund||25% + 12% Surcharge + 3% Cess = = 28.84%||30% + 12% Surcharge + 3% Cess = 34.608%||5% + 12% Surcharge + 3% Cess = 5.768%|
* Securities transaction tax (STT) will be deducted on equity funds at the time of redemption/ switch to the other schemes/ sale of units.
** With effect from 1 October 2014, for the purpose of determining the tax payable, the amount of distributed income has to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.
|Individual/ HUF$||Domestic Company@||NRI$/#|
|Equity Oriented Schemes |
• Long Term Capital Gains (units held for more than 12 months) • Short Term Capital Gains (units held for 12 months or less)
|Long term capital gains||Nil||Nil||Nil|
|Short term capital gains||15%||15%||15%|
|Other Than Equity Oriented Schemes |
• Long Term Capital Gains (units held for more than 36 months) • Short Term Capital Gains (units held for 36 months or less)
|Long term capital gains||20%&||20%&||Listed - 20%& Unlisted - 10%*|
|Short term capital gains||30%^||30%||30%^|
|Short Term Capital Gain||Long Term Capital Gain|
|Equity Oriented Schemes||15%||Nil|
|Other than Equity Oriented schemes||30%^||10%* (for unlisted) & 20%& (for listed)|
$ Surcharge at 12% to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore.
@ Surcharge at 7 to be levied for domestic corporate unit holders where income exceeds Rs 1 crore but less than Rs. 10 crores and at 12%, where income exceeds Rs. 10 crores.
# Short term/ long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors only.
& After providing indexation.
* Without indexation
^ Assuming the investor falls into highest tax bracket.
Education Cess at 3% will continue to apply on tax plus surcharge.
The Finance Bill, 2015 proposes to provide tax exemption to unit holders upon consolidation or merger of mutual fund schemes, provided consolidation is of two or more schemes of equity oriented fund or two or more schemes of a fund other than equity oriented fund.
Dividend Stripping: The loss due to sale of units in the schemes (where dividend is tax free) will not be available for set off to the extent of tax free dividend declared; if units are:(A) bought within three months prior to the record date fixed for dividend declaration; and (B) sold within nine months after the record date fixed for dividend declaration.
Bonus Stripping: The loss due to sale of original units in the schemes, where bonus units are issued, will not be available for set off; if original units are: (A) bought within three months prior to the record date fixed for allotment of bonus units; and (B) sold within nine months after the record date fixed for allotment of bonus units. However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such unsold bonus units.
For Individuals, Hindu Undivided Family, Association of Persons, Body of Individuals and Artificial juridical persons Total Income Tax Rates
|Total Income||Tax Rates|
|Up to Rs. 250,000(a)(b)(d)||Nil|
|Rs. 250,001 to Rs. 500,000(d)||10%|
|Rs. 500,001 to Rs. 1,000,000(d)||20%|
|Rs. 1,000,001 and above(c)(d)||30%|
STT is levied on the value of taxable securities transactions as under.
|Purchase/ Sale of equity shares||0.1%||Purchaser/Seller|
|Purchase of units of equity oriented mutual fund||Nil||Purchaser|
|Sale of units of equity oriented mutual fund||0.001%||Seller|
|Sale of equity shares, units of equity oriented mutual fund (non-delivery based)||0.025%||Seller|
|Sale of an option in securities||0.017%||Seller|
|Sale of an option in securities, where option is exercised||0.125%||Purchaser|
|Sale of a futures in securities||0.010%||Seller|
|Sale of units of an equity oriented fund to the Mutual Fund||0.001%||Seller|
|Interest received on loans given in foreign currency to Indian concern or Government of India.||20%|
|Income received in respect of units purchased in foreign currency of specifies Mutual Funds / UTI||20%|
|Royalty or fees for technical services||10%|
|Interest income from a notified infrastructure debt fund||5%|
|Interest on FCCB, FCEB / Dividend on GDRs(b)||10%|
|Rs. 1,000,001 and above(c)(d)||30%|
These rates will further increase by applicable surcharge and education cess.
Other than dividends on which DDT has been paid.
In case the non-resident has a Permanent Establishment (PE) in India and the royalty/ fees for technical services paid is effectively connected with such PE, the same could be taxed at 40% (plus applicable surcharge and education cess) on net basis.
|Transaction||Short-term capital gains(a)||Long-term capital gains(a)(b)|
|Sale transactions of equity shares/ unit of an equity oriented fund which attract STT||15%||Nil|
|Sale transaction other than mentioned above:|
|Individuals (resident and non-residents)||Progressive slab rates||20% / 10%|
|Partnerships (resident and non-residents)||30%|
|Overseas financial organizations specified in section115AB||40% (corporate) 30% (non corporate)||10%|
|Other Foreign companies||40%||20% / 10%|
|Local authority||30%||20% / 10%|
|Co-operative society rates||Progressive slab|
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