METHODS FOR

INVESTMENT IN
MUTUAL FUNDS
MUTUAL FUND & FIXED INCOME SECURITIES
Contents
■ Objectives of AMFI
■ Advantages of mutual funds
■ Systematic investment plan (SIP)
■ Systematic transfer plan (STP)
■ Systematic withdrawal plan (SWP)
■ Choosing between dividend payout, dividend reinvestment and growth options.
■ Capital gains taxation, indexation benefit, FMPS, without indexation, with indexation
Association of Mutual Funds in India
■ AMFI, the association of SEBI registered mutual funds in India of all the registered
Asset Management Companies, was incorporated on August 22, 1995, as a
non-profit organization. As of now, all the 44 Asset Management Companies that are
registered with SEBI, are its members.
■ The Association of Mutual Funds in India (AMFI) is dedicated to developing the
Indian Mutual Fund Industry on professional, healthy and ethical lines and to
enhance and maintain standards in all areas with a view to protecting and
promoting the interests of mutual funds and their unit holders.
■ It is a non-profit government organization and primary regulator under the purview
of SEBI.
■ Mutual fund is still a comparatively untapped financial sector. Initially, there was a
lot of ambiguity and myths around them, and people were reluctant to invest.
Therefore, statutory bodies like SEBI and AMFI have a huge role to keep investors
informed.
Association of Mutual Funds in India
■ AMFI Registration Number or ARN
– AMFI Registration Number (ARN) is a unique number assigned to mutual fund
agents, distributors, and brokers. Only those who clear NISM Certification can
get the ARN Number. Without this number, agents cannot sell a mutual fund or
even recommend one.
– Brokers, agents, and middlemen play a key role in encouraging more investors
to invest in mutual funds. To make sure that only qualified people sell funds to
prospective investors, AMFI authorizes only people or entities with ARN
Number to sell mutual funds. All third-party agents must register and pass a
qualification test to become AMFI-registered advisers. These people are well-
versed about the mutual fund types, market trends and the reasoning behind.
Do not entertain any entity without ARN when it comes to mutual fund
investing. Always double check the registration number before investing.
Objectives of AMFI
■ Outlines ethical and uniform professional standards in every mutual fund operation under the
association
■ Encourages members and investors to maintain ethical business practices and regulations
■ Gets AMCs, agents, distributors, advisories and other bodies involved in the capital market or
financial service fields to comply with their guidelines
■ Networks with SEBI and comply with their mutual fund regulations
■ Represents the Finance Ministry, RBI, and SEBI on everything related to the industry
■ Spreads awareness across the country on safe mutual fund investments
■ Distributes information on Mutual Fund Sector and conduct research and workshops on various
funds
■ Keeps a check on Code of Conduct of everyone included and take disciplinary action in case of rule
violations
■ Investors can approach AMFI to air their grievances and register complaints against a fund house.
■ Safeguards the interest of investors and asset management companies
Advantages of Mutual Funds
■ Liquidity
– Unless a MF investor opt for close-ended mutual funds, it is relatively easier to
buy and exit a scheme. Investor can sell investor units at any point (when the
market is high). However exit load or pre-exit penalty charges need to be
considered while redeeming the Mutual Funds.
■ Diversification
– Mutual funds have their own share of risks as their performance is based on
the market movement. Hence, the fund manager always invests in more than
one asset class (equities, debts, money market instruments etc.) to spread the
risks. It is called diversification. This way, when one asset class doesn’t
perform, the other can compensate with higher returns to avoid the loss for
investors.
Advantages of Mutual Funds
■ Expert Management
– Mutual fund is favored because it doesn’t require the investors to do the
research and asset allocation. A fund manager takes care of it all and makes
decisions on what to do with investor investment. He/she decides whether to
invest in equities or debt. He/she also decide on whether to hold them or not
and for how long.
– The fund manager’s reputation in fund management should be an important
criterion for investor to choose a mutual fund for this reason. The expense ratio
(which cannot be more than 1.05% of the AUM guidelines as per SEBI)
includes the fee of the manager too.

■ Less cost for bulk transactions

– The price drops with increased volume. If investor buy multiple units at a time,
the processing fees and other commission charges will be less compared to
when investor buy one unit.
Advantages of Mutual Funds
■ Invest in smaller denominations
– By investing in smaller denominations (SIP), investor get exposure to the entire
stock (or any other asset class). This reduces the average transactional
expenses – investor benefit from the market lows and highs. Regular (monthly
or quarterly) investments as opposed to lump sum investments give investor
the benefit of rupee-cost averaging.
■ Suit investor financial goals
– There are several types of mutual funds available in India catering to investors
from all walks of life. No matter what investor income is, investor must make it
a habit to set aside some amount (however small) towards investments. It is
easy to find a mutual fund that matches investor income, expenditures,
investment goals and risk appetite.
Advantages of Mutual Funds
■ Cost-efficiency
– investor have the option to pick zero-load mutual funds with less expense
ratios. investor can check the expense ratio of different mutual funds and
choose one that fits in investor budget and financial goals. Expense ratio is the
fee for managing investor fund. It is a useful tool to assess a mutual fund’s
performance.

■ Quick & painless process

– investor can start with one mutual fund and slowly diversify. These days it is
easier to identify and handpick fund(s) most suitable for investor. Maintaining
and regulating the funds too will take no extra effort from investor side. The
fund manager with the help of his team of will decide when, where and how to
invest. In short, their job is to consistently beat the benchmark and deliver
investor maximum returns.
Advantages of Mutual Funds
■ Tax-efficiency
– investor can invest up to Rs. 1.5 lakhs in tax-saving mutual funds mentioned
under 80C tax deductions. ELSS is an example for that. Though a 10% Long
Term Capital Gains (LTCG) is applicable for returns in excess of Rs 1 Lakh after
one year, they have consistently delivered higher returns than other tax-saving
instruments like FD in the recent years.
■ Automated payments
– It is common to forget or delay SIPs or prompt lump sum investments due to
any given reason. investor can opt for paperless automation with investor fund
house or agent. Timely email and SMS notifications help to counter this kind of
negligence.
■ Safety
– There is a general notion that mutual funds are not as safe as bank products.
This is a myth as fund houses are strictly under the purview of statutory
government bodies like SEBI and AMFI. One can easily verify the credentials of
the fund house and the asset manager from SEBI. They also have an impartial
grievance redressal platform that work in the interest of investors.
Systematic Investment Plan
■ Systematic Investment Plan, commonly referred to as an SIP, allows investor to
invest regularly a fixed sum in investor favorite mutual fund scheme/s. In SIP, a fixed
amount is deducted from investor savings account every month and directed
towards the mutual fund investor choose to invest in.
■ It imparts financial discipline to investor life and helps investor to invest regularly
without wrestling with market mood, index level,
Systematic Investment Plan: Benefits
■ Convenience
– investor can invest in a disciplined and phased manner using SIP. It allows
investor the convenience of starting investor investment with as low as Rs 500.
■ Rupee Cost Averaging
– No need to time the market. Buy more units when markets are low. This
reduces investor overall cost of investment.
■ Power of Compounding
– Compound interest ensures better long-term benefits compared to one-time
investment
■ Higher returns than RD
– As compared to the conventional FDs, ELSS gives higher returns to beat
inflation in an efficient manner.
Systematic Investment Plan: Benefits
Systematic Withdrawal Plan
■ Systematic Withdrawal Plan or SWP allows an investor to withdraw from his mutual fund
scheme every month on an already set date. This withdrawal could be a fixed or a
variable amount and the withdrawal can be either annually, semi-annually, quarterly or
even monthly
■ Systematic Withdrawal Plan is used to redeem investor investment from a mutual fund
scheme in a phased manner. Unlike lump sum withdrawals, SWP enables investor to
withdraw money in installments. It can be viewed as an opposite of SIP. In SIP, investor
channelize investor bank account savings into the preferred mutual fund scheme.
Whereas in SWP, investor channelize investor investments from the scheme to the
savings bank account. It is one of the strategies to deal with market fluctuations.
■ With the Systematic Withdrawal Plan, investor can customize the cash flow as per
investor requirement. investor can choose to either withdraw just the capital gains on
investor investment or a fixed amount. This way investor will not only have investor
money still invested in the scheme, but investor will also be able to access regular
income and returns. The money that investor withdraw can be used to reinvest in some
other fund or can be retained by investor in the form of cash.
Systematic Withdrawal Plan
■ How does a Systematic Withdrawal Plan work?
– When investor choose a Systematic Withdrawal Plan, it affects investor mutual fund account as well. It is
important to note that an SWP is not the same as opening a fixed deposit account in a bank where
investor receive monthly interests. With a fixed deposit, the corpus value is not impacted when investor
withdraw the interest but in the case of a systematic withdrawal plan in mutual fund schemes, the value
of investor fund is reduced by the number of units investor withdraw.

■ Example:
– Imagine investor have 10,000 units in investor mutual fund scheme, and investor wish to withdraw INR
5000 every month through investor systematic withdrawal plan.
– Let us assume the Net Asset Value (NAV) of the scheme is INR 10. The withdrawal of INR 5000 from this
scheme will mean that 500 units are being sold which is INR 5000/INR 10. The remaining amount in
investor mutual fund post this withdrawal will be 7500 units (8000-500).
– During the start of the next month if the NAV of investor scheme increases to INR 20, then the
withdrawal of INR 5000 would mean selling 250 units, which is INR 5000/20. The mutual fund would
be left with 7250 units post this withdrawal (7500-250).
– So, with each withdrawal, investor mutual fund will see a decline in its units. At higher NAVs, investor
may redeem fewer units to fulfill the cash requirements. Conversely, as the NAV falls, it would have the
opposite effect, requiring the redemption of more units.
Systematic Transfer Plan
■ An STP is a plan that allows investors to give consent to a mutual fund to periodically
transfer a certain amount / switch (redeem) certain units from one scheme and
invest in another scheme of the same mutual fund house.
■ STP is a smart strategy to stagger investor investment over a specific term to reduce
risks and balance returns. For instance, if investor invest ‘systematically’ in equities,
investor can earn risk-free returns even during volatile market scenarios. Here, an
AMC permits investor to put a lump sum in one fund and transfer a fixed amount to
another scheme regularly. The former fund is called source scheme or transferor
scheme, and the latter is called target scheme or destination scheme.
Systematic Transfer Plan
■ Scope for Higher returns
– If investors opt for STP instead, investor tend to generate higher returns. It is
because for an STP, investor will be initially investing the lump sum in a debt fund
like a liquid fund. Liquid funds are known to yield higher returns in the range of 7%-
9% as compared to the mere 4% returns earned in a saving bank account.
■ Earning steady returns
– The returns investor earn via STP are reliable. This is because the amount in source
fund (debt fund) generates interest until investor transfer the entire amount.
■ Managing risks
– An STP can also be used to move from a risky asset class to a less risky asset class.
For instance, say, investor initiated a SIP for 30 years into an equity fund towards
retirement planning. As investor approach investor retirement, investor can initiate
an STP to prevent loss of fund value. Here, investor instruct the fund house to
transfer a fixed amount from the equity fund to a debt fund. In this way, by the time
investor retire, investor would have moved all the accumulated corpus to a safer
haven.
Systematic Transfer Plan
■ Re-balancing portfolio
– investor portfolio should strike a balance between debt and equities. An STP re-
balances the portfolio by moving investments from debt to equity funds or vice
versa.
Systematic Transfer Plan
■ Fixed STP
– Here, the amount to transfer periodically is fixed. The investor can decide on
this amount as per his financial goal and apply for the same.
■ Capital Appreciation
– For this kind of STP, only the capital appreciated is transferred from source
fund to the destination fund and the capital part remains safe.
■ Flexi STP
– As the name suggests, Flexi STP is flexible. This means investor can choose to
transfer varied amount from the source fund to the target fund. Investors
generally choose the amount as per the market rate fluctuations. For instance,
if the Net Asset Value of the destination fund dips, investor can increase the
amount and vice versa.
Mutual Funds with a Growth Option
■ Mutual Funds with a Growth Option
– The growth option on a mutual fund means that an investor in the fund will not
receive any dividends that may be paid out by the stocks in the mutual fund.
Some shares pay regular dividends, but by selecting a growth option, the
mutual fund holder is allowing the fund company to reinvest the money it would
otherwise pay out to the investor in the form of a dividend. This money
increases the net asset value (NAV) of the mutual fund.
– The growth option is not a good one for the investor who wishes to receive
regular cash pay-outs from his/her investments.
– However, it's a way to maximize the fund's NAV and, upon the sale of the
mutual funds, realize a higher capital gain on the same number of shares
he/she originally purchased. This is because all dividends that would have
been paid out have been used by the fund company to invest in more stocks
and grow clients' money. In this case, the investor does not receive more
shares, but his/her shares of the fund increase in value.
Mutual Funds with a Dividend Reinvestment
Option
■ Mutual Funds with a Dividend Reinvestment Option
– The dividend reinvestment option is quite different. Dividends that would
otherwise be paid out to investors in the fund are used to purchase more
shares of the fund. Again, cash is not paid out to the investor when dividends
are paid on the stocks in the fund. Instead, cash is automatically used by the
fund's administrators to buy more fund units on behalf of the investors and
transfer them to individual investors' accounts.
– This method increases the number of shares owned over time and typically
results in the account growing in value at a faster rate than if dividends were
not reinvested. Many investment companies offer this service to shareholders
at no cost.
Mutual Funds with a Dividend Distribution
Option
■ Mutual Funds with a Dividend Distribution Option
– In this plan, the fund declares dividends out of profits. A fund can pay dividends
only out of profits and not out of capital. That is applicable to equity funds and
to debt funds. The NAV of the dividend plan reduces to the extent of the
dividends paid
Fixed Maturity Plans
■ FMPs are closed-end debt funds having a fixed maturity period and are not available
for subscription on a continuous basis.
■ The fund house comes up with a New Fund Offer (NFO) for a specific duration. NFO
will have an opening date and a closing date during which investors may invest in
the NFO only during these days. After the closing date, the offer to invest ceases to
exist.
■ FMPs usually invest in debt instruments like a certificate of deposits (CDs), money
market instruments, corporate bonds, commercial papers (CPs) and bank fixed
deposits. Based on the duration of the scheme, the fund manager allocates investor
money in instruments of similar maturity. For example, if FMP is for 5 years, then the
fund manager invests in a corporate bond having a maturity of five years.
■ The fund manager of FMP follows a buy and hold strategy. There is no frequent
buying and selling of debt securities like other debt funds. This helps to keep the
expense ratio of FMPs at lower level vis-a-vis other debt funds.
Fixed Maturity Plans
■ FMPS vs FD’s
– FMPs are a stark contrast to FDs when investor look at it from a returns
perspective. Unlike the guaranteed returns that reflect on the FD certificate,
FMPs offer an indicative yield – the returns offered by FMPs are not assured
but indicative in nature. It means that there is a chance of the actual returns
being higher or lower than the returns indicated during the NFO launch.
– Premature redemption is possible in FD’s but not possible in FMP’s as
investors in FMP’s are required to stay invested for at least a minimum of 3
years.
– The indexation benefit is not available to subscribers of FD instruments, but it
is available for subscribers of FMP’s(provided they stay invested for 3 years)
Fixed Maturity Plans
■ Things to consider before investing in FMPs
– Returns trend
■ While FDs assure returns, FMPs indicate a probable return. investor need to understand
the difference and expect a small change in the returns indicated during the initial buying
phase.
– Tax implications
■ FMPs can also be useful for investors in the high-income tax brackets. These investors
usually end up paying huge amounts as the tax on the interest earned on the FDs held by
them. FMPs give them the option of earning similar returns at a much lower tax rate (due to
indexation benefit in long-term capital gains).
– Investment objective
■ Look for the investment objective of the scheme, indicated yield and investment strategy.
Once investor are in sync with these, invest an amount that investor can leave invested for
three years and reap tax-efficient returns.
Taxation on Mutual Funds
■ Mutual Funds Holding Period is one of the significant determinants of applicable tax
on MF returns.
Taxation on Mutual Funds
■ Tax-Saving Equity Funds
– Equity-Linked Saving Scheme (ELSS) are the most efficient tax-saving
instruments under Section 80C. These diversified equity funds invest in equity
shares of companies across market capitalization.
– ELSS comes up with a lock-in period of 3 years
– After redemption, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-
free in investors hands. LTCG in excess of Rs 1 lakh is taxable at the rate of
10% without the benefit of indexation.
■ Non-tax Saving Equity Funds
– Long-term capital gains (LTCG) on non-tax saving equity funds of up to Rs 1
lakh are tax-free in investor hands. LTCG in excess of Rs 1 lakh is taxable at
the rate of 10% without the benefit of indexation.
– There is a 15% tax on short-term gains from equity funds, if the units are
redeemed before 12 months.
Taxation on Mutual Funds
■ Debt Funds
– Long-term capital gains on debt fund are taxed at the rate of 20% after
indexation. Indexation is a method of factoring in the rise in inflation between
the year when the debt fund units were bought and the year when they are
sold.
■ Balanced funds
Taxation on Mutual Funds
■ Investments into MF schemes via SIP route
– Gains from SIPs are taxable as per the type of mutual fund and the holding
period. For the purpose of taxation, each individual SIP is treated as a fresh
investment and gains on it are taxed separately.
■ For instance, investor begin an SIP of ₹10,000 a month in an equity fund for 12
months. Each individual SIP is considered to be a fresh investment. Hence, after 12
months, if investor decide to redeem investor entire accumulated corpus
(investments plus gains), all investor gains will not be tax-free. Only the gains
earned on the first SIP would be tax-free because only that investment would have
completed one year. The rest of the gains would be subject to short-term capital
gains tax.
■ Securities Transaction tax (STT)
– Apart from all the above, there is also something called the Securities
Transaction Tax (STT). An STT of 0.001% is levied by the fund company itself,
when investor sell units of an equity fund or balanced fund. There is no STT on
the sale of debt fund units.
Indexation
■ Indexation is a technique to adjust income payments by means of a price index, in
order to maintain the purchasing power
■ Indexation is used to adjust the purchase price of a debt fund so as to reflect the
effect of inflation on it. A higher purchase price means lesser profit, which effectively
means lesser tax.
■ By applying indexation, investor can actually reduce the long-term capital gains to
lower the taxable income. It’s due to this reason that debt funds are regarded as
superior fixed-income investments than fixed deposits (FDs).
■ ICoA = Original cost of acquisition * (CII of year of sale/CII of year of purchase)
■ Long term capital gains on debt funds are taxable at the rate of 20% with the benefit
of indexation.
■ It is applicable to only debt funds, and if and only if the MF is held for 3 years.
■ Indexation is not applicable to Equity Funds.