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Mutual Funds
Advantages
Affordability
Diversification
Variety Professional Management
Tax Benefits Regulations
Affordability
A
mutual fund invests in a portfolio of assets, i.e.
bonds, shares, etc. depending upon the investment objective of the scheme. An
investor can buy in to a portfolio of equities, which would otherwise be
extremely expensive. Each unit holder thus gets an exposure to such portfolios
with an investment as modest as Rs.500/-. This amount today would get you less
than quarter of an Infosys share! Thus it would be affordable for an investor to
build a portfolio of investments through a mutual fund rather than investing
directly in the stock market.
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Diversification
The nuclear weapon in your arsenal for your fight
against Risk. It simply means that you must spread your investment across
different securities (stocks, bonds, money market instruments, real estate,
fixed deposits etc.) and different sectors (auto, textile, information
technology etc.). This kind of a diversification may add to the stability of
your returns, for example during one period of time equities might under perform
but bonds and money market instruments might do well enough to offset the effect
of a slump in the equity markets. Similarly the information technology sector
might be faring poorly but the auto and textile sectors might do well and may
protect your principal investment as well as help you meet your return
objectives .
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Variety
Mutual funds offer a tremendous variety of schemes.
This variety is beneficial in two ways: first, it offers different types of
schemes to investors with different needs and risk appetites; secondly, it
offers an opportunity to an investor to invest sums across a variety of schemes,
both debt and equity. For example, an investor can invest his money in a Growth
Fund (equity scheme) and Income Fund (debt scheme) depending on his risk
appetite and thus create a balanced portfolio easily or simply just buy a
Balanced Scheme
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Professional Management
Qualified investment professionals who seek to
maximize returns and minimize risk monitor investor's money. When you buy in to
a mutual fund, you are handing your money to an investment professional who has
experience in making investment decisions. It is the Fund Manager's job to (a)
find the best securities for the fund, given the fund's stated investment
objectives; and (b) keep track of investments and changes in market conditions
and adjust the mix of the portfolio, as and when required
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Tax Benefits
Equity
Funds
Currently, dividends are tax-free in the hands of the investor. There is no distribution tax payable by the Mutual Fund on dividends distributed. There is no tax deduction at source on dividends as well. Investments for over 12 months qualify for long term capital gains. Moreover for resident investors there is no TDS on redemption of the units. The recently introduced Securities Transaction Tax is applicable to equity fund
investments.
Debt
Funds
Currently, dividends are tax-free in the hands of the investor. However, there is distribution tax together with surcharge and education
cess, as may be applicable, payable by the Mutual Fund on dividends distributed. There is no tax deduction at source on dividends as well. Investments for over 12 months qualify for long term capital gains. For resident investors there is no TDS on redemption of the units.
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Regulations
Securities Exchange Board of India (“SEBI”), the
mutual funds regulator has clearly defined rules, which govern mutual funds.
These rules relate to the formation, administration and management of mutual
funds and also prescribe disclosure and accounting requirements. Such a high
level of regulation seeks to protect the interest of investors.
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