A mutual fund gathers money from investors and invests it on their behalf. For management of wealth, the mutual fund company charges a small amount. Mutual funds are said to be a good investment vehicle for investors who do not possess a great deal of knowledge about mutual funds. Investors can select a mutual fund that suits their financial capabilities and spending abilities. They should also keep their financial goal in mind while choosing a mutual fund plan. There are plenty of good mutual fund plans available in the Indian market today. With the help of a good financial consultant, you can choose a mutual fund plan that would suit your budget and will help you in getting good returns after a stipulated time.
Kinds of Mutual Funds
Mutual funds are categorised depending upon investment objective, structure and asset class. Here is a brief explanation of all the different kinds of mutual funds available in India:
- Open-Ended Funds: Investors prefer open-ended funds because of the liquidity they offer. Shares under this fund are purchased and sold based on the demand at their NAV. The NAV of these funds is dependent on fund’s underlying securities’ value.
- Close-Ended Funds: The trading of these funds takes place among investors on an exchange and they usually have a certain number of shares. Similar to stocks, the prices of shares are determined based on demand and supply.
- Growth Funds: Investments under growth funds are mainly made in equity shares and their aim is to generate capital appreciation. While these funds are risky in nature, they are perfect for investors who are in it for the long haul.
- Liquid Funds: Investments under liquid funds are mainly made in short-term and sometimes very-short-term investment instruments such as T-Bills, CPs, etc. These funds aim at offering liquidity and are relatively less risky. The returns they offer are moderate and are perfect for investors with short-term investment objectives.
- Income Funds: Investments under these funds are mainly made in fixed income instruments like bonds, debentures, etc. They offer regular income along with capital protection.
- Equity Funds: Equity funds are the most common mutual funds. In these funds, investment is made in equity shares of companies. A lot of people around the country prefer these funds do to the quality results they provide despite being highly risky in nature.
- Debt Fund: In debt funds, investment is made in debt instruments such as fixed income assets, company debentures and government bonds. They are the safest mutual funds option as they offer fixed returns.
- Hybrid Funds: Under hybrid funds, investment is made in various asset classes. They invest in debt as well as equity funds so that risks and returns are equally balanced. They are also called balanced funds.
- Money Market Funds: Investment under money market funds are made in liquid instruments like T-Bills, CPs, etc. They are relatively safe as an investment option because they provide immediate returns, albeit moderate.
- Index Funds: Under index funds, investment is made in certain indexes on the stock exchange by monitoring the movement and returns of the index.
- Sector Funds: Investment under sector funds is made in a certain division or sector of the market. For example, investors in manufacturing funds invest only in manufacturing companies or their investment instruments. The performance of the sector determines the returns on investment.
- Tax-Saving Funds: Investments under tax-saving funds are made mainly in equity stocks. These funds offer tax benefits, but are considerably risky in comparison with debt funds. However, the returns on these funds are also quite high.
What is GST?
Goods and Services Tax (GST) is an indirect tax system that has been introduced by the Government of India to bring economic reform in the country. The GST entails a nine-rule deal that include input tax credit, registration, refund, transition, payment, return, composition, valuation, and invoice. GST will help by including taxes like central excise, service tax, CST, VAT, and customs, among others. While business will become easier for sectors like real estate, construction, and the consumer sector due to less compliance, industries like insurance and mutual funds will experience marginal changes.
Impact of GST on Mutual Funds
Following are the ways in which the GST law will impact the mutual funds industry in India:
- Increase in service tax: Of late, investors have been wondering how GST will affect the mutual funds industry and whether or not it will have any negative impact on it. According to the GST law, service tax will be increased from 15 to 18% which would make mutual funds a little expensive. Since the government has decided that when it comes to the financial services industry, the service tax has been fixed at a standard rate of 18%. This will lead to a 3% point hike in the tax liabilities of the distributors. However, smaller distributors who earn less than Rs.20 lakh per year will be exempted from this taxing system. Distributors who earn less than Rs.20 lakh per year need to get a GST registration in order to avail tax exemption.
- Security transactions to become costlier: Currently the transactions on securities are not included in Service Tax (ST) and Value Added Tax (VAT). The implementation of GST will change this scenario and the transaction of securities will be taxable.
- Increase in the expense ratio: Once the implementation of GST begins, investors will have to pay more premiums to invest in mutual funds. So, eventually mutual fund houses will eventually increase the expense ratio for most of their schemes and plans. Mutual fund houses not only provide fund management services, but they employ services from other entities as well. For instance, they use brokerage houses and custodians. This will lead to a rise in the expense ratio of any plan that the investor will choose.
- The load of compliance of mutual funds will rise: According to the present model of the GST law, a tax incidence comes up at a spot where any kind of service is delivered. Apart from this, the model law says that the Asset management Company (AMC) and its branches would be considered separate entities. The asset management ability of a house providing funding assistance is usually operated centrally whereas the marketing and sales activity of the plans run at different paces. A problem comes up when the head office and the branches are looked at as separate entities.
- Any advice related to mutual fund will also be expensive: With the increase in service tax that will be implemented with the GST law, seeking advice related to mutual funds from an investment planner, investment advisor, or financial guardian will also become more expensive. If investors decide to seek guidance or advice from mutual fund distributors, financial professionals will have to incur losses.
Should investors alter their portfolios?
With a few days remaining before the implementation of the Goods and Services Tax (GST) that is due on July 1, investors are panicking about their mutual fund portfolios. They have been consulting their respective financial advisors about their portfolios and the risks associated to it. According to financial experts, investors should not alter their portfolio and most importantly, should not panic. The market will be subjected to a variety of changes all along. These changes do not call for continuous changes in the portfolios. Since, equity mutual funds are a long-term investment, the policyholders should not get scared of any policy changes. The GST will be replacing several taxes that are charged by the state as well as the central government. The new law's intention is to remove different barriers between states in terms of taxes. This law will also help in creating a single market for goods and services. Also, since the rules and regulations under GST have been talked about for quite some time now, the market is already prepared for it.
Market experts opine that investors should not panic and make changes to their portfolios and let their financial advisors do the thinking. Since the investors do not need to bet on stocks and sectors, they should not be worried about their portfolios. Also, the impact of GST on the mutual fund industry is marginal and is earth-shattering. Since the increase in the service tax was being expected for a long time now, the market is well-prepared to handle it. So, this minor increase is not going to make any devastatingly huge changes to the portfolios of the investors.
However, if you still want to make changes to your portfolio in the mutual funds that you have invested in, you can go ahead and do it. But before making any changes, no matter how minor they are, you should be aware of the impact the new GST law will have on it. Go through your portfolio several times and consult a good financial advisor before making the minutest change in your portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.