Introduction

A mutual fund is a professionally-managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. Investors in a mutual fund have a common financial goal and their money is invested in different asset classes in accordance with the fund’s investment objective. Investments in mutual funds entail comparatively small amounts, giving retail investors the advantage of having finance professionals control their money even if it is a few thousand rupees.

Types Of Mutual Funds

Based on the maturity period

Open-ended Fund

It is a fund that is available for subscription and can be redeemed on a continuous basis. It is available for subscription throughout the year and investors can buy and sell units at NAV related prices. These funds do not have a fixed maturity date. The key feature of an open-ended fund is liquidity.

Close-ended Fund

A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. These funds are listed on a recognized stock exchange.

Interval Funds

This kind of funds combine the features of both open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV.

Based on investment objectives

Equity Funds

Equity funds invest a major part of its collection in stocks and these funds are for long-term capital growth. When you buy shares of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. Equity funds invest 65% of its entity in equity and equity related securities. These funds are invested in industries. These types of funds are suitable for investors with a long-term outlook and higher risk appetite.

Debt Funds

Debt funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest 65% of its collection in fixed income securities. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. Investors whose have an objective of the safety of capital with moderate growth would invest in these type of fund.

Balanced Funds

Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. These funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth. They generally have an investment pattern of investing around 60% in Equity and 40% in Debt instruments.

Money Market Funds

Money market funds are safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of fewer than 91 days. The Money Market Funds have easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds.

Some of the common types of mutual funds and what they typically invest in:

Type of FundTypical Investment
Equity or Growth FundEquities like stocks
Fixed Income FundFixed income securities like government and corporate bonds
Money Market FundShort-term fixed income securities like treasury bills
Balanced FundA mix of equities and fixed income securities
Sector-specific FundSectors like Information Technology, Pharmaceuticals, Automobile etc.
Index FundEquities or Fixed income securities chosen to replicate a specific Index for example S&P CNX Nifty
Fund of fundsOther mutual funds

Benefits of investing in mutual funds

Professional Management

When you invest in a mutual fund, your money is managed by finance professionals. Investors who do not have the time or skill to manage their own portfolio can invest in mutual funds. By investing in mutual funds, you can gain the services of professional fund managers, which would otherwise be costly for an individual investor.

Diversification

Mutual funds broader investments across multiple industries. Therefore, by investing in a mutual fund, you can gain from the benefits of diversification, without investing a large amount of money that would be required to build an individual portfolio.

Liquidity

Mutual funds are usually very liquid investments. Unless they have a pre-specified lock-in period, your money is available to you anytime you want subject to exit load if any. Normally funds take a couple of days for returning your money to you. Since they are well integrated with the banking system, most funds can transfer the money directly to your bank account.

Flexibility

Investors can benefit from the convenience and flexibility offered by mutual funds to invest in a wide range of schemes. The option of systematic (at regular intervals) investment and withdrawal are also offered to investors in most open-ended schemes.

Low transaction cost 

Due to economies of scale, mutual funds pay lower transaction costs. The welfare passed on to mutual fund investors, which may not be in the interest of an individual who enters the market directly.

Transparency

Funds provide investors with updated information pertaining to the markets and schemes through fact-sheets, offer documents, annual reports etc.

Well regulated

Mutual funds in India are controlled and observed by the Securities and Exchange Board of India (SEBI), which endeavors to protect the interests of investors. All funds are subscribed under SEBI and complete transparency is enforced. Mutual funds are required to provide investors with standard information about their investments, in addition to other disclosures like specific investments made by the scheme and the quantity of investment in each asset class.

Saving Tax in Mutual Fund

ELSS is a type of equity mutual fund which is qualified for tax exemption under section 80C of the Income Tax Act and it also offers the double advantage of capital appreciation and also tax benefits and it comes with a lock-in period of 3 years.

A person can invest in equity-linked savings scheme (ELSS) under section 80C of the Income Tax Act and can save tax by investing up to Rs.1.5 lakh.

 Tax Saving or ELSS schemes

An equity-linked savings scheme (ELSS) is a kind of mutual fund that gives the option in order to save tax. These funds thus invest in the equities and investors can also choose dividend or growth options. You can, however, invest any amount up to Rs.1.5 lakh in an ELSS scheme in order to save tax. ELSS scheme gives the opportunity to earn higher returns in the long run and offers growth to the investors. However, in cases with all the mutual fund schemes, there is also no guarantee of any fixed returns. Under Section 80C, ELSS funds are one of the best platforms for the purpose of saving of tax. This is because along with the tax deduction, the investor also gets the potential upside of the investing in the equity markets. Also, no tax is levied on the long-term capital gains from these funds. Moreover, when it is compared to other tax saving options, ELSS has the shortest lock-in period which is only of 3 years.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business ReturnBulk Return or Revised Return Filing.