BASICS OF INVESTING IN MUTUAL FUND

 

One simple and safe way of investing in equity class is investment through mutual fund. So, before investing through mutual fund one should know the basics of how asset management companies use equities into different market cap. There are two ways by which an investor can invest one is through SIP and another is Lump Sum.

In mutual fund total equity class is divided into three categories one is large cap 2^nd is mid cap and rest is small cap. Each class has its own risk and return characteristics. These categories can be considered a proxy of their size or what is technically known as market cap.

Large cap companies have a well established business in the industry that they operate in. The profitability and sales growth of these companies are usually constant. So the performance of the large cap companies is typically stable compared with other smaller companies.

On the other end companies which are categorised under small cap they are in the early stage of business and have a lot of scope for expansion and growth. Hence they have the potential of earning very high profits compared with large caps. But they may not be financially strong enough to be able to withstand a bad economic situation. So investment in small cap is high risk and high return possibility.

Whereas companies categorised as mid caps are lie between large and small cap companies. Mid cap companies share some of the growth characteristics of small cap companies but they are less risky because they are slightly large.

Now, after understanding the pros and cons of various market cap fund it is good for investor to determine which fund is best suitable for his/her portfolio.

HOW TO TRANSFER PPF ACCOUNT TO ANOTHER BANK ACCOUNT

 

PPF is an investment instrument that offers a guaranteed return, it enjoys the exempt-exempt-exempt (EEE) tax status, which means that you get tax benefit at the time of investment, and there’s no tax incidence on the accrual amount or the final withdrawal amount at maturity.

PPF account comes with a lock-in-period of 15 years, which can be extended further by a block of five years as many times as you want. However, it allows partial withdrawal before maturity and even offers loan facility, subject to certain term and conditions.

Step –By-Step Process

1.      1.  Visit the bank’s branch or the post office where you maintain the PPF account and ask for the account transfer request form.

2.     2.  Fill in details of your PPF account and that of the new bank, including name, and address of the branch where you want to transfer.

3.     3.  Submit the transfer request form to the bank where you are maintaining the account. The new bank (where the account is to be transferred) may also initiate the process.

4.   4.    Take the acknowledgement receipt to keep a record.

5.  5.     The bank or post office, where you have the PPF account will verify the details and initiate the transfer process.

6.   6.    It will send a certified copy of the PPF account, account opening form, passbook, nomination form , specimen signature of the account holder and cheque or demand draft for the outstanding amount to the new bank.

7.     7. Once checked the new bank will notify the account holder.

8.  8.     In case of change in KYC the new bank may also ask the account holder to fill up a new account opening form.

9.    9.  The new bank will open a PPF account and transfer the balance in it.

1010.   The entire process could take up to a month.

Source: outlook Money. nov. 2023

s

SWP Vs. IDCW

 

Systematic Withdrawal Plan (SWP) and Income Distribution cum Capital Withdrawal plan both are used for regular income from the mutual fund by the investors. But, SWP is more reliable tool for regular income compared to dividend option. In the dividend plan of an equity fund, both the amount and frequency of the dividend are not guaranteed, and it largely depends on market and the profit the AMC earns.

Moreover, SWP is more tax efficient than IDCW. SWP is the redemption of units from the scheme; hence the tax treatment of each withdrawal will be the same as that for equity oriented funds. For units holds for more than a year, a long term capital gains tax of 10% will be applicable for gains of over Rs. 1 lac. While for a holding period of less than a year, it is 15%. Long-term capital gains of up to Rs. 1 lakh in a financial year are tax free. In comparison, when one opt for a dividend plan he/she has to pay tax on dividend as per his/her tax slab, which could go up to 30%. If the dividend exceeds Rs. 5000 in a year, the fund house deduct 10% TDS.

IDCW IN MUTUAL FUND

 

The full form of IDCW is Income Distribution cum Capital Withdrawal. Mutual fund investor has come across this new term from April 2021 when SEBI changed the term “Dividend Option”. This is only a change in terminology as such there is no impact on investment. IDCW refer to distribution of income of a mutual fund scheme, which may include both dividends paid by stocks and capital gains made by selling underlying stocks from the scheme portfolio.

SEBI has changed the terminology because of in India there have various misconception about mutual fund dividends.

1.       Dividends paid by mutual funds are actually paid by the underlying stock in the scheme portfolio.

2.       Dividend received from mutual funds is extra income over and above the capital appreciation.

3.       Dividend option of mutual fund schemes book profits regularly to pay dividends.

But in reality dividend received from mutual funds are not extra income or return over and above the gains investors make on redemption. That is the reason the NAV of the dividend scheme falls by the extent of dividend paid to investors.

One example can give more clarity on this topic.

Number of unit is 1000

NAV (before payment of dividend) is 10

Investment value is 10000

Dividend per unit is 1

Total dividend received is 1000

NAV (After payment of dividend) is 9

Total value of investment 9000

But if investor had invested in growth option of the mutual fund scheme, the value of his/her investment would have been 10000 instead of 9000.

GIFT OF MUTUAL FUND UNITS

 

Mutual fund units are non-transferable that means one cannot directly gift mutual fund units. So, gift of mutual fund unit is not possible. But there are two alternative option is available that can be used to meet the purpose.

1.       Invest in their name: First redeem the investment by the person who wants to gift and transfer the amount to the person’s bank account to whom he wants to gift. In case the person to whom gift is made is below 18 years their legal guardian, typically their mother or court – appointed representative, can manage their investment. Following this transfer the receiver of amount can initiate their own mutual fund investment through his/her own bank account.

2.       Designate them as nominee: In this option, maintain mutual fund investment in his/her own name while designating the person as nominee to whom you want to gift. This arrangement ensures that in the event of your unfortunate passing, the ownership of the mutual fund units will automatically transfer to nominee.

SWP : SYSTEMATIC WITHDRAWAL PLAN

 

At present time one investment term is very much popular to investor. The term is SWP. SWP stands for Systematic Withdrawal Plan. Systematic Withdrawal Plan is an investment strategy where one regularly withdraws a fixed amount of money from his/her mutual fund holdings. This investment tool is very much useful for maintaining regular cash flow. Suppose you have invested 2 lakh in an equity mutual fund scheme and opt to withdraw Rs. 1000 per month. SWP ensure you get 1000 per month and the balance amount in the scheme keeps growing in line with the market. Many retired individuals and senior citizens use this method to meet monthly expenses.

From the taxation point of view, SWP is very much tax efficient. Regular payout under SWP is basically redemption of units from the scheme. Hence tax treatment of withdrawal will be depending on the scheme from where payout has been taken. If redemption will be taken from equity oriented schemes then in that case equity taxation will be applicable. Generally investor started SWP from equity oriented or hybrid oriented mutual fund.

One more reason to become so popular investment strategy is that it is very much user friendly such as the date and amount of withdrawal decided by the investor and moreover investor can start, stop and modify it any time.

OVERDRAFT : A CREDIT FACILITY ONLY FOR EXISTING ACCOUNT HOLDERS.

 

Overdraft is a credit facility that provides by the bank to his account holders. This credit facility allows account holders to withdraw more than their balance in accounts. Overdraft facility can be availed by salary, savings, current and cash credit account holders.

Basically, overdraft facility can be secured as well as unsecured. In case of secured overdraft facility, account holders need to provide collateral such as salary, fixed deposit, life insurance policies or equity instruments. On the other hand no such collateral is required for unsecured overdraft.

On the basis of overdraft limit overdraft facility is divided into two categories one is authorized and another is unauthorized. In the authorized version there is an arrangement between bank and account holders regarding overdraft limit but no such arrangement is taken place in case of unauthorized version. Sometimes, account holders use unauthorized overdraft facility may exceed credit limit. Credit limit is determined by considering the account balance, credit score and repayment schedule etc of the account holder who wants to avail overdraft facility.

The amount of interest one pay on an overdraft is typically higher than the personal loan. Though the upfront rate may be lower. This is because interest on overdraft is calculated using the average daily balance technique. due to which effective payout increases.