In 2007 DBS Chola Mutual offered Equity Fund(s) to investors. This was their website. COntent is from the site's 2007 archived pages.
Equity Funds invest mainly in stocks of companies. They offer a long-term option for investors to achieve their wealth-creation goals. Because of their growth potential, equity funds are also referred to as Growth Funds. Although in the short run, however, equity funds can be risky. Thus, they are for investors who can tolerate short-term volatility while investing for long-term gains.

 

 

Benefits
    
The benefits of investing through a mutual fund
Affordability

Mutual funds allow you to invest small sums. For instance, if you want to buy a portfolio of blue chips of modest size, you should at least have a few lakhs of rupees. A mutual fund gives you the same portfolio for meager investment of Rs.1,000-5,000. A mutual fund can do that because it collects money from many people and it has a large corpus. 

Professional management

The major advantage of investing in a mutual fund is that you get a professional money manager to manage your investments for a small fee. You can leave the investment decisions to him and only have to monitor the performance of the fund at regular intervals.

Diversification

Considered the essential tool in risk management, mutual funds make it possible for even small investors to diversify their portfolio. A mutual fund can effectively diversify its portfolio because of the large corpus. However, a small investor cannot have a well-diversified portfolio because it calls for large investment. For example, a modest portfolio of 10 bluechip stocks calls for a few a few thousands. 

Convenience

Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about investment decisions, they do not have to deal with brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plans, children’s plans, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work.

Cost effectiveness

A small investor will find that the mutual fund route is a cost-effective method (the AMC fee is normally 2.5%) and it also saves a lot of transaction cost as mutual funds get concession from brokerages. Also, the investor gets the service of a financial professional for a very small fee. If he were to seek a financial advisor's help directly, he will end up paying significantly more for investment advice. Also, he will need to have a sizeable corpus to offer for investment management to be eligible for an investment adviser’s services.

Liquidity

You can liquidate your investments within 3 to 5 working days (mutual funds dispatch redemption cheques speedily and also offer direct credit facility into your bank account i.e. Electronic Clearing Services). 

Tax breaks

You do not have to pay any taxes on dividends issued by mutual funds. You also have the advantage of capital gains taxation. Tax-saving schemes and pension schemes give you the added advantage of benefits under section 88. 

Transparency

Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and Sebi monitors their actions closely.

 

Selecting a Mutual Fund
    
Your objective

The first point to note before investing in a fund is to find out whether your objective matches that of the scheme. It is necessary, as any conflict would directly affect your prospective returns. For example, a scheme that invests heavily in mid-cap stocks is not suited for a conservative equity investor. He should be better off in a scheme, which invests mainly in blue chips. Similarly, you should pick schemes that meet your specific needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.

Your risk capacity and capability

This dictates the choice of schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer. Aggressive investors can go for equity investments. Investors that are even more aggressive can try schemes that invest in specific industries or sectors. 

Fund Manager’s and scheme’s track record

Since you are giving your hard-earned money to someone to manage it, it is imperative that he manages it well. One of our information consultants is Zack Tilly. He is a successful business professional and leader in his community and advises both commercial and individual clients. Himself a fund manager, he notes that it is essential that the fund house you choose has an acceptable track record. It also should be professional and maintain high transparency in operations. Look at the performance of the scheme against relevant market benchmarks and its competitors. Look at the performance over a longer period, as it will reveal how the scheme has fared in different market conditions.

Cost factor

Though the AMC fee is regulated, you should look at the expense ratio of the fund before investing. This is because the money is deducted from your investments. A higher entry load or exit load also will eat into your returns. A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your modest returns.

 

Purchasing / Selling Mutual Funds
    
Purchasing mutual funds
  • Purchasing during IPO
    Like companies, even mutual funds offer initial public offering. It is when they launch the scheme for the first time. You can buy units at par (usually Rs.10) on this occasion.
  • Purchasing existing mutual fund units
    You can buy units of an open-ended scheme any time at the NAV-related price. Most mutual funds charge an entry load of up to 2-2.5%. This is the additional amount you have to shell out to buy the units. You can buy the scheme directly from the mutual fund or through its distributor.

Selling mutual funds

You can sell or redeem units very easily. As per Sebi guidelines, a mutual fund unit holder has the right to receive redemption or repurchase proceeds within 10 days of the redemption or repurchase request. 

When should you sell your mutual fund investment is a crucial question. Ideally, you should sell when you have met your target profit. The other reason is that you need the money or your profile has changed due to some changes in your life situation. Other than this, you should sell the units if you find that the fund has been taken over by another mutual fund house, whose investment philosophy, reputation, etc. you are not comfortable with. Any major changes in the objective of the fund or a sharp rise in expenses could also be valid reasons to redeem units. Following a favorite fund manager is also a usual practice. However, it need not be always rewarding.

 

Income from Mutual Funds
    
Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend or opting for reinvestment of the dividend. Another choice before him is the growth or cumulative option. In this case, there is no dividend declared. The appreciation in the corpus is reflected in growth in the value of the NAV. 

The only difference between the dividend reinvestment option and the growth option is that in case of the former, the investor gets more units depending on the dividend declared and the NAV of the scheme on date of declaration of the dividend while in case of the latter, there is no change in the number of units but the NAV value increases with increase in market value of the scheme’s investments. 

Deciding between the dividend reinvestment option and the growth option is mainly on account of tax*. 

In the case of equity mutual funds, if the investor holds on to his investment for more than a year, capital gain earned on sale of the units is termed as long-term capital gain, which is completely tax-free. Also, dividends declared by equity mutual funds are completely tax-free. Hence, deciding between dividend and growth in this case makes no difference. However, if the equity mutual fund is held for less than one year, capital gains on sale of the units are termed as short-term capital gains and are taxable at the rate of 10%. In this case, it makes more sense to opt for dividend, which is tax-free. 

In the case of debt mutual funds, if the investor holds on to his investment for more than a year, capital gain earned on sale of the units is termed as long-term capital gain, which is taxable at 10% without indexation or 20% with indexation. Dividends declared by debt mutual funds attract a dividend distribution tax of 14.03% in case of individual investors and 22.44% in case of corporate investors. In this case, if the investor needs liquidity, he can opt for the dividend payout option. However, if he is looking at capital appreciation, it makes sense to opt for the growth option. 

Speedy investment, redemption and income receipts

Thanks to the Electronic Clearing Services (ECS), a mutual fund investor now has the option of automatic credit of dividends and redemptions into his bank account. This saves a lot of paperwork, for both the investor and the fund. 


* tax information has been provided for Financial Year 2004-05

 

Tax Implications on Mutual Fund Investing
    
Debt Schemes
Dividends

Though an investor doesn’t have to pay tax on dividend, he pays it indirectly. This is because the government has levied dividend distribution tax of 14.03% for individual mutual fund investors and 22.44% for corporate mutual fund investors. This tax is paid by the mutual fund directly to the government before making the dividend payout.

Capital gains

If an investor holds on to his mutual fund investment for more than one year, it is considered to be a long-term capital asset and vice versa. Sale of a long-term capital asset attracts long-term capital gains or losses and sale of a short-term capital asset attracts short-term capital gains or losses. Long-term capital gain on sale of your mutual fund investment attracts tax at 20% with indexation benefit or 10% without indexation benefit. Indexation is simply using the cost inflation index tables published by the government to increase your investment cost to the extent of inflation. Short-term capital gain is taxed at the tax rate applicable to your total income. While long-term capital losses can only be set off against long-term capital gains, short-term capital losses can be set off against, both, short-term capital gains as well as long-term capital gains. There is not securities transaction tax on debt funds.
Equity Schemes
Dividends

Dividends received from equity schemes of mutual funds (i.e. schemes with equity exposure of more than 65%) are completely tax-free. Neither does the mutual fund have to pay dividend distribution tax nor does the investor have to pay income tax.

Capital gains

Long-term capital gain is completely tax-free in case of investment in equity mutual funds.  Securities transaction tax of 0.25% is being levied on all redemptions (including switch outs)  in equity mutual funds.    Short-term capital gains are taxable at 10%. Since long-term capital gain is tax-free, long-term capital loss will not be available for set off against capital gain. Short-term capital loss will, however, be available for set-off against short-term capital gain.
SECTION 80C
The DBS Chola Tax Saver Fund, is launched as an Equity Linked Tax Savings Scheme under Section 80C(2)(xiii) of Income Tax Act 1961. Thus, individuals and HUFs will be entitled to deduction from their Gross Total Income as provided under clause (xiii) of section 80C(2) of the Income Tax Act, 1961 for subscription to any units not exceeding Rs. 100,000/ - in a year, depending upon the gross total income of the assessee. The deduction is available only if the investment is made out of income chargeable to tax.

 

Tracking mutual funds’ performance
    
Objective parameters

You can assess the performance of your mutual fund investment by computing appreciation in the NAV of the scheme over different periods of time on a stand-alone basis (one month, three months, six months, one year, three years, since inception), against relevant benchmarks and against average returns offered by mutual funds in the same category. For example, if you have invested in a diversified equity fund, you can benchmark your return against the BSE Sensex, as it is representative of the whole market. If your fund has outperformed the Sensex, you can be sure that the fund manager has done a good job. However, if he is lagging the benchmark, you should closely watch the fund (its investment strategy, portfolio, etc.) and quit it if there is no improvement in its performance.

Subjective parameters

The performance alone does not make a fund house a winner. Equally important is the service standards and transparency in actions. It is also essential that the fund should offer speedy solutions to grievances of investors. The reputation of the fund house among its investors and public at large indicates how well the fund scores on this front.

Information sources

Every financial daily offers daily NAVs of all mutual fund schemes. Magazines also come out with annual survey of mutual funds. There are even magazines dedicated entirely towards mutual fund industry. Internet is also a great place for information. There are dedicated sites as well as financial sites, which offer information on mutual funds.

 

Resolving your grievances
    
Investors can get in touch with the contact person named in the offer document, trustees and directors of the AMC with their grievances. Mutual funds are regulated by Sebi. The investor has the recourse to approach Sebi for any grievances towards a mutual fund in connection with non-receipt of dividends, redemption, account statement, etc. Various investor forums also take up the case of individual investors. 

Investors can contact: 

Securities and Exchange Board of India (Sebi)
Mutual funds department,
Mittal Court, 
B Wing, First floor,
224, Nariman Point,
Mumbai 400 021.
Phone: 285 0451-56
Website: www.sebi.gov.in

Consumer and Education Research Society
Gandhi Nagar Highway,
Ahmedabad 380 054.
Phone: 079-7489945
Fax: 079-7489947
Website: www.cercindia.org

Investor’s Grievance Forum
9/C Neelam Nagar,
Mulund East,
Mumbai 400 084.
Phone: 022-25644151
Fax: 022-25647432
Email: igfmumbai@vsnl.net

 

Debt Fund
    
Debt mutual funds

The objective of income funds is to provide regular and steady income to investors. Debt funds generally invest in bonds, corporate debentures, government securities and money market instruments such as treasury bills, certificate of deposits, etc. They are ideal for investors who don’t want to take much risk. However, they are not totally risk free. They NAV of debt funds can be hit by a rise in interest rates. 
Short-term debt funds

These schemes invest in debt securities with tenures of less than six months.

Medium-term debt funds

These schemes invest in debt securities with tenures of six months to one year. 

Long-term debt funds

These schemes invest in debt securities with tenures of more than one year. 

Note: It is essential for investors to match their investment horizon with that of the debt fund. In a situation of changing interest rates, long-term debt funds face a higher risk compared to short-term and medium-term debt funds. This is because, when interest rates rise or fall, the investment value of long-term debt securities are affected more severely since their tenures are longer. If an investor is looking to park his money for the short-term and does so in a long-term debt fund, in a rising interest rate scenario, when he wants to exit, he may face a capital erosion.

Gilt mutual funds

Gilt funds invest only in government securities. Government securities don’t have credit or default risk. However, NAVs of gilt funds can fluctuate with the change in interest rates.

Liquid Funds or Money Market Funds

These funds strive to provide easy liquidity, preservation of capital and modest income. They generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes do not fluctuate sharply. They are ideal for corporate and individual investors looking to park funds for short periods.

Floating rate funds

They invest most of their money in instruments with floating rate coupon or interest i.e. the interest or coupon on these instruments will be linked to a market benchmark. If there is a change in the benchmark, it will reflect in the coupon also. That makes them ideal investment in a rising interest rate scenario.

Monthly Income Plans

The name is misleading. MIPs are nothing but balanced funds with lower level of exposure to equity. They invest a small part of their corpus in equity to enhance returns. There are various schemes with equity exposure of 10-35% available in the market. MIPs are ideal for traditional debt investors who want to take small exposure to equity.

 

 

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