What is mutual fund?
Mutual funds are financial instruments which invest in a portfolio of securities. These securities may be stocks, bonds, money market instruments, gold, silver and real estate investment trusts (REITs) etc. You can buy units of mutual funds; each unit represents a certain percentage of the mutual fund scheme portfolio. Mutual funds are managed by professional fund managers who manage the schemes according to the investment objectives of the schemes.
How to invest in mutual funds?
When an asset management company (AMC) house launches a new mutual fund scheme, it invites subscriptions from the public in the New Fund Offer (NFO). In the NFO period, investors are allotted units at par value (usually Rs 10). If you invested Rs 10,000 in a mutual fund scheme during the NFO period, you would be allotted 1,000 units. You need to be KYC compliant to invest in mutual funds. Your financial advisor can help you fulfil KYC requirements. Along with KYC documents, you need to provide bank details to invest in mutual funds. Investors can invest in mutual funds only from their own bank accounts.
At the end of the NFO period, the money pooled from all the investors are invested in a diversified portfolio of securities according to the scheme's mandate. After the NFO, investors can buy units of open ended schemes from the AMC at prevailing Net Asset Values (NAV). You can also redeem open ended mutual fund schemes at any time at prevailing NAVs. The redemption proceeds will be credited to your bank account on T+3 for equity funds. Investors should note that for redemptions within a certain period of time from investment exit loads may apply.
Different types of mutual funds
There are three broad categories of mutual funds:-
funds:These mutual fund schemes invest in equity and equity related securities. Equity funds have sub-categories based on the market cap segments, where the scheme may primarily invest in e.g. large cap, large and midcap, midcap, small cap, multicap, flexicap etc. The primary investment objective of equity funds is capital appreciation.
Debt funds:These mutual funds schemes invest in debt and money market instruments. Debt funds have sub-categories based on the maturity profiles of the underlying debt or money market instruments e.g. overnight, liquid, ultra-short duration, low duration, short duration, medium duration, long duration etc. The primary investment objective of equity funds is capital appreciation.
Hybrid funds:These funds invest in both equity and debt securities. They may also invest in other classes like gold, REITs, InvITs etc. The primary investment objective of hybrid funds is asset allocation. Different types of hybrid funds include aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings etc.
Different fund categories and sub-categories have different risk profiles. Mutual funds provide investment solutions for a wide spectrum of risk appetites and investment needs. Your financial advisor can help you select the right investment option for you.
Taxation of mutual funds
Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity-related securities) is 65% or more, are treated as equity funds from a tax perspective. These include all equity funds and also several hybrid fund categories. Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 20%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 125,000 in a financial year and taxed at 12.5% thereafter. NRIs are subject to 20% TDS for short term capital gains and 12.5% TDS for long term capital gains.
With regards to Debt funds, short term capital gains (investment holding period of less than 36 months) in non-equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non-equity funds are taxed at 20% after allowing for indexation for investments made prior to 1st April 2023. However, following the Amendment to Finance Bill 2023, the indexation benefit on debt mutual funds has been withdrawn. Debt funds will now be taxed at investors tax slab rate. These changes bring taxation of debt and debt oriented mutual funds at par with fixed deposits for investments made from 1st April 2023 onward. NRIs are subject to 30% TDS for short term and long-term capital gains in debt funds.
Other mutual funds including schemes with equity allocation between 35 - 65% and schemes of asset classes other than equity and debt, e.g. commodities, international etc have long term capital gains taxation holding period of 2 years. Short term capital gains are taxed at investors tax slab rate, while long term capital gains are taxed at 12.5% (no indexation). TDS on short term capital gains is 30%, while that on long term capital gains is 12.5%
Investments in mutual fund Equity Linked Savings Schemes (ELSS) up to Rs 150,000 in a financial year qualify for deductions under Section 80C of The Income Tax Act 1961.
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What are bonds?
Bonds are fixed income instruments which pay fixed rate of interest at regular intervals and the principal amount on maturity. Bonds as an asset class are very popular in the developed economies. However, the bond market in India has historically been relatively small. In more recent times, with Bank FD interest rates declining, bonds are gaining a lot of popularity among retail and HNI investors.
How do bonds work?
You can buy bonds both from the primary market (at the time when the bond is issued) or from the secondary market (stock exchanges). You need to have Demat accounts to invest in bonds in secondary market. If you buy in the primary issue, you will get the bond at face value. In the secondary market, the bonds will be priced either at premium or discount to the face value based on prevailing interest rates. The bond will make periodic interest payments to you based on the coupon rate. On maturity you will get the face value of the bond. You can also sell the bond before maturity in the secondary market at prevailing market price.
Key terms to understand in bond investing
Secured / unsecured : Under this service, the choice as well as the timings of the investment decisions is solely lies with the Portfolio Manager.
Face Value : The bonds are issued at face value. Face value is the amount that will be paid to you upon maturity of the bond. Coupon or interest paid by the bond is on face value. Bonds may trade at premium or discount to the face value. In other words, if you are buying the bond in secondary market (i.e. stock exchanges), then the price at which you buy will be higher or lower than the face value.
Coupon Rate : This is the rate of interest that will be paid to you on a periodic basis. For example, if face value of a bond is Rs 1,000 and the coupon rate is 8%, then you will get Rs 80 as interest every year
Frequency of coupon payments : This refers to the intervals at which coupon payments will be made e.g. half yearly, annual etc.
Redemption date : This refers to the date when the bond will mature. You will get the face value of the bond, along with accrued interest (if any) on the redemption date..
Accrued Interest : Accrued interest is the interest accrued by the seller from the last coupon payment date till the date on which the bond is sold. Since the buyer will get the full years interest on the next coupon date, the accrued interest is included in the bonds quoted price. The bonds price including the accrued interest is known as the dirty price. The clean price of the bond = Dirty price - accrued interest.
Yield to maturity : YTM of a fixed income instrument is the return on investment (assuming interest payments are re-invested at the same rate) if you hold the instrument till its maturity. When calculating yields, both interest payments (coupons) and principal payment (face value) on maturity must be taken into consideration. Higher the YTM, higher the returns. YTM.
Duration :Duration refers to the interest rate risk of a bond. There are two types of durations - Macaulay Duration and Modified Duration. Macaulay and Modified Durations are closely related. Macaulay duration is the weighted average term to maturity of the cash flows from a fixed income security. In simplistic terms, Macaulay Duration is the weighted average number of years an investor must maintain a position in a fixed income instrument until the present value of the fixed income instruments cash flows equals the amount paid for the instrument. Duration and maturity are related - longer the maturity, longer is the duration. It is important for you to know that duration is directly related to the interest rate sensitivity of a bond. Higher the duration, higher is the bonds sensitivity to interest changes. Modified duration is simply the percentage change in price due to the percentage change in interest rate.
Bond rating :Bonds are rated by credit rating agencies like CRISIL and ICRA. Higher the credit rating lower is the credit risk. You should know that bo nds with lower ratings will have higher YTMs but the risk is also higher. You should make informed investment decisions.
Different types of bonds
Corporate Bonds - These are secured bonds issued by companies
Sovereign Gold Bonds (SGBs) -These are gold bonds (backed by gold) issued by RBI on behalf of the Government
Government Securities (G-Secs) - These are Government bonds issued by RBI on behalf of the Government of India. These bonds have sovereign guarantee
Non convertible debentures (NCDs) - These are unsecured bonds issued by companies
Capital Gains Bonds - You can save capital gains tax arising out sale of capital assets e.g. property etc by investing in capital gains bonds u/s 54EC.
How to invest in bonds?
You can invest in bonds through your stockbroker, just like stocks. You need to have demat and trading accounts. Contact your stockbroker if you want to know more about investing in bonds.
The plan and action of accumulating a certain corpus by the time you are of retirement age is known as retirement planning. It is a plan for living the choice of life you have dreamt for your silver years. This essentially means that you need to plan for a steady source of income for yourself at the time that you retire from your active career.
Why should you plan for retirement?
Planning for retirement is a very important financial decision you should make if you want to live a stress free independent life when your steady income from your job or work stops.
Your expenses that you incur today will not be the same when you retire, as with inflation, cost of living and all other expenses will only grow. Therefore your plan has to not only save for your retirement but also to invest in such a way that the future cost of living can be taken care of. For this, you need to start planning for your retirement as soon as possible, even if you find the retirement to be a remote happening.
Steps of retirement planning
The first step to plan your retirement is to decide what kind of life you see for yourself in your retirement. Do you want to live a quiet life in the countryside growing your own vegetables, or would you want to live in a community with like minded people. Would you like to spend time reading books, or travelling the world? The type of life you want to live will decide how much money you would need to save up for those days.
The next step is to take stock of your assets. Your value of your existing assets will make up some of your retirement corpus. The rest of the corpus needs to be built over the time you have left till your retirement.
A very important consideration while planning for your retirement is to take a look at how much time you still have till the time your retirement sets in. As a rule of thumb, the longer you have for your investment till your retirement, the larger the corpus you can build, helping you to come closer to your dream life. The investments you plan will have to be done with respect to the time left as well as your risk appetite.
The next step is to plan the investment avenues that can help you reach your goals. You can take your pick from a variety of options like, ETFs, NPS or mutual funds that may offer you the growth of equity or the assurance of debt. You may also consider investing in some good stocks for added returns.