MUTUAL FUND BASICS:
When we invest directly on the shares of companies it is referred to as Equity. We need to do a lot of analysis to decide on the stocks to invest which is a major burden. To make it simple we can use mutual fund. Mutual Fund has a manager called Mutual Fund Manager who decides on which stocks to invest the money. People contribute money to Mutual Fund manager which he/she invest in multiple companies. Mutual Fund can be invested in equity, debt or in both.
POSITIVE SIDE OF MUTUAL FUND:
Mutual Fund Basics: Mutual fund invest in different avenues which generates income. Income earned can be in the from of interest or in the form of dividend or it can be a gain (difference between cost price and selling price). Mutual fund will get gains and the mutual fund manager will take some portion for their own purpose and distribute the balance profit to the investors according to their investment. The small portion of money taken by the manager is called as management expenses or people call it as expense ratio, this ratio can be typically 1 to 3% of your total investment amount.
TYPES OF MUTUAL FUND:
Mutual Fund Basics: There are many mutual fund companies like ICICI mutual fund, HDFC mutual fund and so on. Each company will come up with different mutual funds and lure investors. Investors will get confused where to invest and hence SEBI (Securities Exchange Board of India) has restricted to only 5 types of mutual fund.
- Equity mutual fund:
Mutual fund institutions collect money from people like us and invest in equity or in stock market. This will be an equity oriented mutual fund.
- Debt fund:
Mutual fund institutions collect money from people and invest it in debts or government securities. In debt the risk is on lower side because debt fund will never be invested in stock market.
- Hybrid mutual fund:
It’s a combination of both equity and debt.
- Solution oriented fund:
It can be a child education fund, children marriage fund. Basically, it’s a solution for a specific time which you invest. Whenever the time come, you are going to take the money out.
- Passive/Index mutual funds:
Mutual Fund Basics: Money will be directly invested in NIFTY, SENSES depending on the shares or companies contributing to the indices.
LIQUID MUTUAL FUND: Mutual Fund Basics
It is a sub type of mutual fund. It’s basically a debt fund. Liquid funds are a type of mutual funds that invest in securities with a residual maturity of up to 91 days. Assets invested are not tied up for a long time as liquid funds do not have a lock in period.
Different aspects of liquid fund: Mutual Fund Basics
- For whom liquid fund is used?
Poor people who don’t have professional income. Better alternative to Fixed Deposit.
- On selling liquid mutual fund when will I get my money?
Immediately with in a day after selling your liquid mutual fund, you will get your money.
- Whether there is any tax exemption?
There is no tax exemption in this case. If you sold your liquid mutual fund in short term i.e less than 8 months than you must pay tax according to your income level
(your annual salary is less than 2.5 lakh then tax is exempted, if it’s up to 5 lakh then 5%, 5 lakh to 10 lakh should pay 20% tax, if income is greater than 10 lakh 30% of amount should be paid as tax). If it’s sold on long term, then flat 20% tax should be paid.
PRECAUTIONARY STEPTS FOR LIQUID FUND: Mutual Fund Basics
- Check the entry load and exit load. Entry load will be zero and exit load will be zero in some cases. In some cases, exit load will be charged if sold within 7 days.
- Check whether there is any lock-in period. Usually, no lock in period for investing in liquid mutual fund.
- There will be a chance for risk. High risk high return. Risk may be caused because fund invested company maybe running bankrupt or without cash flow. Always check for AUM which is the cumulative amount invested in fund. Higher the value better the fund.