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Understanding Of Mutual Fund |
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Mutual Funds are broadly divided into two types
• Open ended funds
• Close ended funds
based on the liquidity they offer. |
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| An open-end fund is one that is available for subscription all through the year and is not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value. |
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A closed-end fund has a fixed number of shares outstanding and operates for a fixed duration (generally ranging from 3 to 15 years). The fund would be open for subscription only during a specified period and there is an even balance of buyers and sellers, so someone would have to be selling in order for you to be able to buy it. Closed-end funds are also listed on the stock exchange so it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units.
Why they are getting popular : MF FEE structure which has cumpolsory made entry laod for open ended NFO’s :- (the AMFI exact words to be insetrted) |
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| Based on the type of securities the mutual fund invests in, mutual funds are broadly divided into |
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| These can be open ended or close ended based on liquidity offered. |
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| Investment in mutual funds also enjoys several tax advantages. Dividends from Mutual Funds are tax-free in the hands of the investor (This however depends upon changes in Finance Act).. |
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Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor.
A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared by the fund. Long-term debt funds, government securities funds (G-sec/gilt funds), monthtly income plans (MIPs) are examples of debt-oriented funds. |
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| Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds under section 115R. Diversified equity funds, sector funds, balanced funds are examples of equity-oriented funds |
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| Investment in mutual funds also enjoys several tax advantages. Dividends from Mutual Funds are tax-free in the hands of the investor (This however depends upon changes in Finance Act).. |
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Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset.
Section 10(38): Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year 2005-06.
Short-term capital gains on equity-oriented funds is chargeable to tax @10% (plus education cess, applicable surcharge). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income.
Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.
Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor. |
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Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:
1. Resident Individual & HUF -- 20% plus surcharge, education cess.
2. Partnership firms & Indian companies -- 20% plus surcharge.
3. Foreign companies -- 20% (no surcharge).
Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the central government.
Units' are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess) without the cost inflation index benefit or 20% (plus applicable surcharge) with the cost inflation index benefit, whichever is beneficial.
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