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The Mutual
Fund .
Making investments
is a combination of knowledge and science that people train for.
Today the safe way to make investments are through mutual funds,
which offer the combination of professional investment and the
volume that no single investor can offer on his or her own.
What is a mutual fund ?
A mutual fund is a pool of money put together by a group of
investors who stand to benefit or loose from that pool to the extent
they have invested.
This pool is created since small individual investments have limited
power and ability to influence the outcome of the investment. On the
other hand, when the investment is large, the investor can have
greater control on the outcome of the investment.
Thus, many small investors gather their individual small
investments into a larger investment to take advantage of the
opportunities offered by large investments. This is called a mutual
fund.
What do they invest in?
Mutual funds can be created for investing in anything. The
investments that the mutual fund is going to make are discussed in
the mutual fund's offer document.
Typically, mutual funds invest in investment opportunities that
have a trading market around it, such as stocks and shares, bonds
and debentures, etc.
How does the investor benefit
The investor benefits because:
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The investments are managed by
professionals who know more about deciding what to buy and
sell and when to buy and sell |
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The risks and rewards of investments are
spread across a large number of individuals, so losses are
minimized |
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Access to funds is quick, since there is no
need to sell or buy from the market |
How does it work
A mutual fund is managed by and Asset Management Company (AMC).
Professional investors who study where and when to make investments
staff the AMC. The AMC creates a mutual fund and invites the public
to subscribe in the mutual fund with their investment.
The funds collected are then invested by the AMC and are
continually managed.
Unlike other investments the mutual fund itself is not traded nor
does it offer guaranteed returns like a deposit. The mutual fund's
Net Asset Value (NAV) determines the value of the investment.
Investors redeem their investments in the mutual fund on the basis
of the NAV from the mutual fund itself.
Equally, when investors want to buy, they buy into the mutual
fund on the basis of the NAV.
What is the Net Asset Value
The Net Asset Value of a mutual fund is the total market value of
the holdings of the mutual fund less its liabilities, such as
expenses, management fees, etc. This is calculated on a daily basis.
What this means is that if the mutual fund were to be dissolved
or liquidated, by selling off all the assets in the fund, on that
specified date the Net Asset Value is what the all the holders of
the mutual fund will collectively own and will be given this amount
in proportion to their holdings.
You can estimate your share of the holding of the mutual fund by
the Net Asset Value per unit. This is the value represented by the
ownership of one unit in the fund. It is calculated simply by
dividing the Net Asset Value of the fund by the number of units.
Commonly Net Asset Value is always referred by its unit value
rather than by the total Net Asset Value of the fund.
How is Net Asset Value calculated ?
Net Asset Value is calculated as follows:
Net Asset Value = (Market value of shares/debentures + Liquid
assets/cash held, if any + Dividends/interest accrued) - (Amount due
on unpaid assets + Expenses incurred but not paid + Management and
other fees)
This is how the above are calculated
Valuation of marketable shares/debentures: The last or
closing market price on the principal exchange where the security is
traded
Valuation of illiquid and unlisted and/or thinly traded
shares/debentures: For shares, this could be the book value per
share or an estimated market price based on performance of other
shares in the industry. For debentures and bonds, value is estimated
on the basis of yields of comparable liquid securities after
adjusting for illiquidity.
Accrued dividends/interest: Companies announce dividends,
however, pay it at a later date. If a dividend is announced then the
announced dividend is taken as the accrued dividend. Similarly
interest is payable on debentures/bonds in a pre-determined
frequency at a pre-determined rate. Therefore for every passing day,
interest is said to be accrued, at the daily interest rate, which is
calculated by dividing the periodic interest payment with the number
of days in each period. Thus, accrued interest on a particular day
is equal to the daily interest rate multiplied by the number of days
since the last interest payment date.
Expenses including management fees, custody charges etc. are
calculated on a daily basis. The management fees is as per the
declaration in the offer document of the mutual fund.
The many flavours of mutual funds?
In most cases the institution deducting the tax
can provide a 15 H form.
Tax Benefits of bonds
The Tax Saving Bond is a bond whose proceeds are deployed in
accordance with the Income Tax Act, 1961 in infrastructure projects.
Tax saving bond can either pay you interest regularly (say annually)
or it can be in the nature of deep discount bond. The greatest
attraction of the Tax Saving Bond is the tax rebate available under
Section 88 of the Income Tax Act, 1961 in the year in which the
amount is invested.
On the other hand, a regular income bond is a bond which pays you
interest regularly say, annually, half-yearly etc. It is designed to
meet the needs of people who want regular income. Subscription to
the same does not entitle you to tax rebate available under Section
88 of the Income Tax Act.
Who can avail the tax rebate under Section 88?
The rebate is available only to individuals and
Hindu Undivided Family (HUF's). Non Resident Indians (NRI's) can
also avail of the rebate provided NRI's opt not to be assessed under
the Special Provisions of chapter XII-A of the Income Tax Act, 1961.
What is the maximum amount eligible for
rebate?
The maximum amount eligible for tax rebate is Rs.
1,00,000/- Out of this, Rs. 30,000/- can be invested only in
infrastructure bonds. The balance Rs. 70,000/- can be invested in
these bonds or in other avenues for e.g. Public Provident Fund.
For how long is the rebate available?
Tax rebate is availed in the year in which the
amount is invested in the bonds.
What is the minimum holding period?
To avail of benefit under Section 88, such
investment needs to be held for a period of at least three years. If
these are sold or otherwise transferred within the period of 3
years, the tax rebate availed of earlier would become tax payable in
the year of transfer.
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