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One of the reasons people don't start with mutual funds is because they don't understand them. If you have some doubts about this investment option, then this article can help you. We have compiled the answers to some frequently asked questions on the topic. Without further ado, let's jump right in.
Do you need different bank accounts to invest in different mutual funds?
You do not need to have several accounts to make investments in different mutual funds. With only one bank account, you will be able to invest in and redeem from different mutual funds.
What details do scheme-related documents provide?
You must have come across the disclaimer that asks you to read the scheme-related documents carefully before investing in mutual funds. The main objective of this message is to inform investors about their mutual funds investments. And this much-needed information comes from the scheme-related documents or SID of every mutual fund scheme. These documents provide all the details about the scheme, including the scheme's investment objective, asset allocation, risks associated with the particular scheme, investment style and so on.
What happens if one misses the SIP payment in between?
As we have discussed earlier, mutual funds are a long-term investment avenue. Given this, it is fine if you miss a SIP instalment. You will not be penalised by the broking service. But your bank will levy a penalty for dishonouring the e-mandate. Also, remember that if you miss your SIP payments for three consecutive months, your SIP in that mutual fund scheme will be cancelled automatically.
How to invest in mutual funds based on individual goals?
Various categories of mutual funds are meant for different investment goals and time horizons. For example, if you want to plan a foreign trip with your family in coming months, it will be your short-term goal. On the other hand, if you want to save for your retirement, which is say, 15 years away, then it would be your long-term goal.
Pick a mutual fund based on your goal. For your short-term goals, you can invest in debt funds. However, if your goals are at least five years away, opt for equity or equity-oriented mutual funds.
What are the differences between growth vs dividend mutual funds?
You will get two options while investing in mutual funds. In the first option, a portion of your mutual fund gains will be given to you at regular intervals. In the second option, all your investment gains will be reinvested in the scheme.
The first option is known as 'Income Distribution cum Capital Withdrawal (IDCW)/ plans, while the second one is known as growth plans. Growth plans are considered better than IDCW plans, as the reinvestment will allow your investments to grow further and at a faster pace.
What is the difference between active and passive mutual funds?
Actively managed funds intend to outperform their respective benchmark indices with the help of their expert fund managers. On the other hand, passive funds aim to replicate the performance of an index.
Expense ratios of passive funds tend to be lower than their active counterparts. The reason is simple. They have lower costs, with passive funds requiring less management, trading, and results.
What are the taxation rules in mutual funds?
Like any other type of income, your mutual fund gains are also subject to tax. However, in the case of mutual funds, three factors determine how much tax you need to pay. These include:
- The type of mutual fund you have invested: When it comes to mutual funds in India, equity-oriented funds and non-equity-oriented funds are taxed differently.
- The holding period of your investments: Your holding period can be long-term or short-term. If you invest in an equity-oriented fund and hold it for more than a year, then your gains will be considered long-term capital gains. On the other hand, if you hold it for less than a year, then it will be considered as short-term capital gains.
In the case of non-equity-oriented funds, if you invest in such a fund and hold it for more than three years, then your gains will be considered long-term capital gains. But if you hold it for less than three years, it will be considered short-term capital gains. - Your tax slab: If you invest in a non-equity fund or opt for IDCW plans of mutual funds, then your tax slab will be considered.
What happens to mutual fund investments after the death of the unit holder?
Several provisions ensure that nominee(s) can claim the mutual fund units of the deceased investor. Three kinds of claimants can be eligible for the units of the deceased.
- Joint account holders
- Nominees
- Legal heirs
When transferring units of the deceased investor to the claimant, the procedure is almost the same for all three. However, based on the types of claimant and mutual fund holdings, there may be some differences in the process and documentation.
Adding a nominee is not mandatory for mutual funds. However, it is a good idea to get it done. This is because it simplifies the transfer of your investments to another person after you pass away. Otherwise, your dependents will have to go through a long, tedious process to receive your investments.
Who regulates mutual funds in India?
The Securities and Exchange Board of India (SEBI) regulates all mutual funds in India. So, before making any mutual fund scheme, you should always check the rules and regulations drawn by SEBI.
Also read:
How to choose a mutual fund
This article was originally published on September 30, 2024.
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