Introduction to Mutual Funds

Introduction to Mutual Funds

Mutual fund is a hot topic always for people, but due to lucrative returns in the pandemic now everyone wants to understand it. “Mutual funds are subjected to market risk” this phrase surmounts our mind when we think of mutual funds. The reverberance of risk associated with mutual funds acts as a hurdle for investor to take the first step towards Mutual fund investments.  This risk factor over-shadows the benefits in lime light. With this blog I’am putting an effort to explain you what is mutual fund in simple language. I will explain you the benefits and cons of mutual funds and types of mutual fund. Here is the simplest guide to mutual funds. So let’s start learning.

What is Mutual Fund ?

Mutual means shared by two or more people. Fund stands for money collected. Mutual Fund is a pool of investment created by the mutual fund trust to be used for investing further in securities, bonds and debts etc. This investment is managed by experienced fund managers for getting maximum benefits in the form of incomes. This benefit or income from the fund, so invested by the Assets Management Company are distributed among the investors in the form of returns.

Why to go for Mutual Funds ?

We do investment in different assets & securities. Investment provides us an additional income and future security. Everyone tries to diversify their investment portfolio which involves investing in securities, shares, bonds and debentures. But if one wants to invest in securities, bonds and debts, they need to do lots of research to avoid loss and have desired returns. This involves a lot of skills and knowledge as well as time to time monitoring is necessary to avoid any uncertainty. Mutual fund Company does the same think on your behalf from the fund invested by you and others. As mutual funds are managed by experts you can relax and concentrate on your work and your funds will keep earning.

Terminologies

In order to understand Mutual Funds better lets understand the few terminologies and abbreviations most used in the mutual funds operation and mechanism.

1.   Sponsors – Mutual fund is formed in the form of Trust, established by Sponsors. Sponsors are like regulators of mutual funds. They appoint AMC for the management of Mutual Funds. The very well recognised mutual fund trust is UTI (Unit Trust of India). There may be one sponsor or one sponsor along with other corporates to form a mutual fund trust.

2.    AMC – Assets Management Company. This company manages the investment of the investor and invest this fund money in securities and bonds. Mutual fund is been formed by sponsors and they hire AMC’s to handle the investment of investors.  AMC do all the work to management the mutual fund like investment, marketing, accounting and other functions. They charge fees for their service from the investors. Example of AMC are SBI Mutual Fund, HDFC Mutual Fund.

3.    AUM – Asset under management. It is the total asset which the AMC manage for the mutual fund. The value of the securities, debts and bonds less the liabilities of the mutual fund is its AUM. 

4.    Fund Manager -  AMC allocated proper fund manager for a particular mutual fund to manage and plan its investment and evaluate its performance. Fund manger is the proper person who manages the portfolio of mutual fund scheme. For example – Mr. Prashant Jain is the Fund Manager of HDFC Balanced Advantage Fund.

5.   NAV – Net asset value. It is the market value of the securities held by the AMC under the respective scheme of mutual fund. It varies on day to day basis as the market fluctuates. But the NAV is same for a scheme throughout the day, as it is valued at the end of the trading day. For example HDFC Balanced Advantage Fund - Growth Plan - Direct Plan : NAV on 09/11/2021 : ₹ 303.8310.

Benefits of mutual funds

There are varies benefits of mutual funds. This is the reason now a days it the prime choice of investors.

1.   Professionally managed – Mutual funds are managed by fund managers. Fund managers are expert in their work and this provides the expert level performances to the mutual fund. Investor doesn’t have to personally get involved in the investment decisions.

2.  Tax Saving – ELSS (Equity linked saving scheme) is the type of mutual fund type which qualify for deduction under Sec. 80C of the Income Tax Act. Will discuss this in detail below.

3.   Liquidity – Mutual provides you easy entry and exit options. There are open end schemes which provide high liquidity.

4.   Generating Income & High Returns - Mutual fund can be used for a generating passive or additional income. Mutual may provide high returns as when the stock market is high the returns on mutual funds are high. Diversification – Investor can diversify his investment portfolio by investing in mutual funds. In place of personally investing in different assets or securities one can invest in mutual fund which has various securities in its scheme structure. Diversification helps to achieve a balanced investment and safe returns in future.

5.    Time Saving – A person can concentrate on his main business or profession and side by side invest in mutual funds to get an additional income as Mutual funds are managed by Fund Managers.

6.    Easy Accessibility – Now one can very easily invest in mutual funds either directly or through a distributor or discount agent.

If one has its advantage then will have disadvantage as well. Here are the disadvantages or some of the cons of mutual funds.

1. Greed - Mutual Funds are managed by people only and people have a psychological factor of greed. Mutual fund managers tries to get maximum investment from investors because in return of that investment they get fees. Sometimes they even compromise on the level of fund performance to get maximum investment for earning more fees. They do extra manipulative advertisement to entice investors.

2. Risk – “Mutual Funds are subjected to risk”. As they are based on share market securities and share market is volatile. The market goes up and down, the mutual fund returns also go up and down.

3. Investors sentimental effect - Share market is volatile. Its goes up and down from time to time. Many a times a down fall in Share market spread fear in investors and they start withdrawing from the mutual fund their Investments. This in turn makes the fund manager to withdraw or sale the investment of the Mutual fund. This lowers the value of mutual fund as a result the NAV of the mutual fund decreases.

Types of Mutual Funds

There are various types of mutual funds. They are categorised in four broad categories. 

I. Mutual fund based on fund scheme

II. Mutual fund based on investment objective

III. Based on asset invested

IV. Special funds


I. Mutual fund based on fund scheme.

There are basically two types of mutual funds based on fund scheme :-

(a) Close ended scheme

(b) Open ended scheme


(a) Close ended scheme

In this mutual fund scheme the maturity period of the mutual fund scheme is fixed. There is a well defined initial issue period within which you can purchase the units of the scheme. Once the issue period is closed, only the already issued units can be purchased or sold. Example - Reliance Close Ended Equity Fund - Series A – Growth, etc.

(b) Open ended scheme

In this mutual fund scheme the maturity period is not define. You can purchase the units of mutual funds at any time and sell it at any time. These are highly liquid Mutual Fund schemes. Example - SBI Small Cap Fund, etc.

II. Mutual fund based on investment objective

Every investor has a different investment objective; this mutual fund is based on the objective of the investor. Some investors want more growth on the other hand some investors want fixed income. There are basically of three types :-

(a) Growth funds

(b) Fixed income fund

(c) Balanced fund

(a) Growth funds

These scheme basically target long term growth. They are meant for long term investment. They are highly risk prone because they invest more and more on equities and market securities. Example – Axis Growth Opportunities Fund, etc.

(b) Fixed income fund

These mutual fund schemes provide regular returns for a period of time. They won't provide high returns as they have low risk. Example - Mirae Asset Short Term Fund, etc.

(C)Balanced fund

These mutual fund schemes provide your balance between risk and return. They provide a combination in there investment portfolio of equity and debt to get a stable income. The risk is lower as compared to growth funds but higher as compared to fix income funds. Example - DSP Equity & Bond Fund, etc.

III. Based on asset invested

Here the mutual funds are categorised on the basis of the securities in which they invest. Based on asset invested by mutual fund scheme there are three types of mutual funds :-

(a) Equity fund

(b) Debt fund

(c) Hybrid funds

(a) Equity fund

These funds majorly invest in stock or equities of companies. They can invest in Large cap, Mid Cap or small cap companies. They also invest in bluechip companies as well. They have high risk and provide high return. Example - Axis Small Cap Fund, etc. 

(b) Debt fund

These funds invest in debt market security. They provide Low Returns as compared to equity fund. They usually invest in government securities like Government Bonds, debentures, other government securities. Example - Axis Gilt Fund, etc.

(C) Hybrid funds

These Mutual Funds invest in both equity and debt. They create a combination of equity and debt, in some scheme debt portion is more as compared to equity and in some scheme equity portion is more. They are also called balanced fund. They are more risky then debt funds and less risky than equity funds. In the same way they provide more returns as compared to debt funds and less returns as compared to equity funds. Example - Axis Triple Advantage Fund, etc.

III. Special funds

These fund scheme invest in special kinds of asset as per the investment plan or purpose of the Mutual Fund scheme. They can be categorised in four types :-

(a) Index funds

(b) Sectoral funds

(c) Regional Funds

(d) Tax Saving Funds


(a)Index scheme

Index are market benchmark like Nifty 50 or Sensex. Index scheme invest in index stock. They are highly risky. Example - Tata Index Fund Sensex Direct Plan, etc.

(b) Sectoral funds

These mutual funds invest in specific sectors or industrial sector. Like some mutual funds invest in infrastructural companies and some in IT companies etc. Nippon India Pharma fund Direct Growth is a sectoral fund which invest in pharma companies etc.

(c) Regional funds

These mutual funds invest in specific geographical area. They basically invest in companies working or planning to start working in specific geographical area. These funds are mostly popular and operating in foreign countries. Example – Matthews Korea Fund, etc.

(d) Tax Saving Funds

These mutual funds investment are eligible for tax deduction under Section 80 C of the Income Tax Act. In these mutual funds scheme there is a lock in period which starts from three years. These are the most adored mutual fund scheme in India. ELSS (Equity linked saving scheme) are the tax saving funds. Example – JM Tax Gain Fund, etc.

I tried my best to explain you all about mutual funds. This is just the introduction and I will be coming up with specific blogs over it to share with you further details. If you have any comments and queries, feel free to share over the comment box below. The mutual funds mentioned above are just for education purpose and they are not in any manner a advice or recommendation.

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Disclaimer :

The above blog is purely for educational and  guidance purpose. It's just the reflection of the author's personal experience and judgment. The author has just provided the general information & understanding and its not at all an alternative of any legal advice or practitioner. The content stated in the blog should be used by the reader at his own discretion and sole responsibility. The content of the blog can be only used for any other document, write-up, article, blog and any written or printed material whether on paper or digitally in any form, with the prior permission of the author.  

Composition Scheme - Blessing for Small Businesses

Composition Scheme Under GST

This blog will provide you the complete details about Composition Levy, also known as composition Scheme under GST (Goods and Service Tax). It is a relaxed scheme under GST Regime in which small business can find an ease in terms of compliance. There are simple quarterly and annual returns, no requirement of audit, no ITC (input tax credit) compliance, low tax rates etc.

Initially Composition levy was basically for good's manufacturers & traders and there was only one exception that was Restaurants Service (in legal term defined as; supply of food or any other article for human consumption or drinks excluding alcoholic liquor). But now it is available to Service-Providers w.e.f 1st April 2019. 

The details under this blog are derived from Sec.10 of GST Act read with composition rules and various notifications.

 

Benefits of Composition Levy

Composition Levy is a easy compliance scheme under GST basically drafted in consideration to small business persons. There are many benefits of Composition levy and few of them are mentioned below :

1) Simple return - 4 quarterly return (CMP 08) and 1 annual return (GST 9A)

2) Less burden to maintain various books & records.

3) Low rate of Tax

4) No bothering of ITC (Input Tax Credit).

5) Easy to operate business without many employees. 

6) No need to collect any tax from purchaser or Recipient.

7) No need for GST Audit.

 

Restrictions under Composition Levy

1) Cannot Avail Input Tax Credit (ITC).

2) Cannot provide/forward tax credit to purchaser or Recipient.

3) Cannot issue Invoice (details below).

4) Non compliance will make them ineligible for the scheme. 

Return filing

Under composition levy the return filing compliance is very simple, & less in number. your have to file quarterly return in "CMP 08" by '18th of the month following the quarter" and an annual return in "GSTR 9A/GSTR 4" by '31st of March of the Assessment Year (A.Y.) following the Financial Year (F.Y.)'.

Currently for F.Y. 2018-19 annual return available  is GSTR 9A & GSTR 4 is currently not available.

Rate of Tax

Service along with goods

As per Sec.10 of GST Act, a person who opt composition scheme may provide service of 10% of its turnover or ₹ 5,00,000 (Rupees Five Lakhs) which ever is higher. Exceeding this limit will make the person ineligible for this scheme and his transition will to done to the regular scheme/levy forthwith.

• Rate of tax will same a manufacturers & traders. 

Eligibility  

Now Composition levy is available to trader, manufacturer and service providers (w.e.f 01/04/2019). A person registered under this scheme cannot issue invoice, in its place has issue "Bill of Supply". But for service providers there are certain additional conditions, so to make it more understandable we will discussing them one by one.

 

For Traders and Manufactures

As per the Notification No. 14/2019 - Central Tax dt. 7th March 2019 of CBIC, a person whose aggregate turnover in the preceding financial year (F.Y.) did not exceed ₹ 1,50,00,000 (Rupees One Crore Fifty Lakhs) may opt for composition scheme. The limit for the following states is ₹ 75,00,000 (Rupees Seventy Fifty Lakhs):

 (i)     Arunachal Pradesh

 (ii)    Manipur

 (iii)   Meghalaya

 (IV)   Mizoram

 (v)    Nagaland

 (vi)   Sikkim

 (vii)  Tripura

 (Viii) Uttarakhand

Here, for the calculation of "Aggregate Turnover" the meaning shall be driven from Sec.2 Clause (6) of the act. 

Aggregate Turnover includes :
1) All taxable sales/supplies.
2) Excluding RCM (Reverse charge mechanism) purchases/inwards.
3) Exempt sales/supplies.

4) Exports.

5) Inter state sales/supplies. 

The following are the conditions :-

1.   He is not a service provider.

2.   He is not supplying goods which are not taxable under GST.

3.   He is not carrying out inter-state sales/supplies.

4.  He is not supplying goods though E-Commerce Operates like Amazon, Flipkart etc., required to Collect TCS (tax collected at source).

5.   He is not a manufacturer of goods as notified by council.

6.   He is not a casual taxable person or a non-resident person.

7.  He has not held stock from : Inter-state purchase, imports, Other state branches, Purchases from Unregistered person or RCM.

8.   He is not a ISD (Input Service Distributor).

9.   He is not a Tax Collector/Tax Deductor. 

10. He has to pay tax like regular levy in case of purchase from Unregistered Person.

11. He has to mention the word "Composition taxable Person" on every notice, signboard and very other place.

12. He has to mention the word "Composition taxable person not eligible to collect tax on supplies" at the top of 'Bill of Supply'.

For Service Provider

A person whose aggregate turnover in the preceding financial year (F.Y.) did not exceed ₹ 50,00,000 (Rupees Fifty Lakhs) may opt for composition scheme.

• Here for calculating aggregate turnover there is a exception, value of supply of exempt services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount, shall not be taken into account.

The following are the conditions :-

1.   He is a registered person under Regular Levy GST.

2.   He is not eligible to pay tax under sub-section (1) of section 10.

3.   He is not engaged in supplies which are not taxable under GST.

4.   He is not carrying out inter-state supplies.

5.   He is not a casual taxable person or a non-resident person.

6.  He is not engaged in supplies though E-Commerce Operates like Amazon, Flipkart etc., required to Collect TCS (tax collected as source). 

7.  He is not engaged in supplies as notified by council.

8.  He is not a Tax Collector/Tax Deductor.

9.  Who all are registered under same PAN will be levied under Composition scheme, if even applied by one.

10. He has to mention the word "Taxable person paying tax in terms of notification No. 2/2019-Central Tax (Rate) dated 07.03.2019, not eligible to collect tax on supplies" at the top of 'Bill of Supply'.

 

This is complied details about the Composition Levy. For any suggestion, comment & query please comment in the comment box below.

Disclaimer :

The above blog is purely for educational and  guidance purpose. It's just the reflection of the author's personal experience and judgment. The author has just provided the general information & understanding and its not at all an alternative of any legal advice or practitioner. It has no connection with the websites mentioned in its contents. The content stated in the blog should be used by the reader at his own discretion and sole responsibility. The content of the blog can be only used for any other document, write-up, article, blog and any written or printed material whether on paper or digitally in any form, with the prior permission of the author.