Investing in a portfolio of securities, mutual funds are financial instruments. The securities they invest in can include stocks, bonds, money market instruments, as well as gold, silver, and real estate investment trusts (REITs). When you purchase mutual funds, you are essentially buying units, with each unit representing a specific percentage of the mutual fund scheme portfolio. Professional fund managers are responsible for managing mutual funds, aligning their management with the investment objectives of the schemes.

An asset management company (AMC) house solicits public subscriptions for a new mutual fund scheme through a New Fund Offer (NFO). Investors receive units at par value (often Rs 10) during the NFO period. 1,000 units would be awarded to you if, during the NFO period, you invested Rs 10,000 in a mutual fund plan. To invest in mutual funds, you have to comply with KYC regulations. Your financial advisor can assist you in meeting KYC obligations. To invest in mutual funds, you must submit bank account information along with KYC documentation. Mutual fund investments can only be made from an investor’s personal bank account.

As per the scheme’s mandate, the money collected from all investors at the end of the NFO period is invested in a diversified portfolio of securities. Investors can purchase open-ended scheme units from the AMC at the current Net Asset Values (NAV) following the NFO. Additionally, open-ended mutual fund schemes are redeemable at any moment at the current NAVs. For equity funds, the redemption profits will be credited to your bank account on T+3. Investors should be aware that loads could apply for redemptions made within a specific window of time following the departure of an investment.

Three major types comprise mutual funds:

Mutual fund schemes that invest in equities and assets related to equity are known as equity funds. The market cap segments that the plan may predominantly invest in, such as large cap, large and midcap, midcap, small cap, multicap, flexicap, etc., are the subcategories of equity funds. Capital appreciation is the main goal of equity funds as an investment.

Debt funds: These mutual fund programs make investments in money market and debt securities. Based on the maturity profiles of the underlying debt or money market instruments, debt funds are divided into subcategories, such as overnight, liquid, ultra-short duration, low duration, short duration, medium duration, and long duration. Capital appreciation is the main goal of equity funds as an investment.

Funds that invest in both debt and equity securities are known as hybrid funds. They might also put money into gold, REITs, InvITs, and other asset types. Asset allocation is the main goal of hybrid funds investments. Aggressive hybrid funds, conservative hybrid funds, balanced advantage funds, equity savings, etc. are among the several varieties of hybrid funds.

The risk profiles of various fund types and subcategories vary. Investment options for a broad range of risk tolerances and requirements are offered by mutual funds. You can choose the best investment option for you with the assistance of your financial advisor.

Mutual funds are classified as equity funds from a tax standpoint if their average equity allocation is 65% or above, meaning that the underlying assets are securities related to equities. These comprise all equity funds as well as a number of forms of hybrid funds. The tax rate on short-term capital gains—investments held for less than a year—in equity funds is 15%. In equities funds, long-term capital gains (investments held for more than a year) are tax-free up to Rs. 125000 and then subject to 12.5% tax after that. When an investor holds an investment for less than 36 months, it is considered a short-term capital gain and is subject to taxation at the investor’s income tax rate. Long-term capital gains (keeping an investment for more than three years) in non equity funds are taxed at 20% after allowing for indexation. Investments in mutual fund Equity Linked Savings Schemes (ELSS) qualify for deductions under Section 80C.