Mutual Funds: If you are planning to invest in mutual funds, then before that you should understand some basic things. This will help you in taking investment decision as per your need, risk and goal. Investment in mutual funds is also affected by market fluctuations. Therefore, investment decisions should be taken keeping in mind your risk appetite. You get the benefit of compounding by maintaining investment in mutual funds in the long term. Know about some basic terms of mutual funds…
Investing in mutual funds can be done in two ways. One is that you invest lumpsum money in a fund. The second method is SIP. SIP means Systematic Investment Plan, in this regular monthly investment has to be made. Investing through SIP can be started with even Rs 100. Investing in SIP for long term gives the benefit of compounding. If the NAV of the fund increases continuously, lump sum investment instead of SIP can give more benefits.
Open Ended or Close Ended Funds
Be sure to know about this before deciding to invest in mutual funds. Open ended funds are those funds in which you can invest and sell them anytime. Whereas this is not the case in closed ended funds. Close ended funds can be purchased from AMC only during New Fund Offer (NFO). Also, it can be redeemed only on maturity.
Direct or Regular Plan
It is important to understand its meaning because it affects your cost. Distributor commission is included in the regular plan. This commission can be 0.5 percent to 1 percent or more of the fund value. This amount has to be paid to the distributor every year. Whereas, in direct schemes, you take the money directly from the company, hence distributor commission is not included in it.
Is there tax or not?
Returns received on investment in mutual funds also come under the ambit of tax. The investor has to pay Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). Different types of taxes are levied on different mutual funds like equity and debt. In case of mutual fund dividends, Dividend Distribution Tax (DDT) is also levied and TDS (Tax Deduction at Source) is deducted as per the fund.
What is NAV?
When investing in mutual funds, you should understand NAV (Net Value Asset). NAV is actually the value of the mutual fund unit. This is calculated on the basis of a formula.
(Disclaimer: Investing in mutual funds is subject to market risks. Consult your advisor before investing.)