This is a question we come across quite often. They regularly
crop up in people’s mind and at times in internet forums and discussions. Let’s
look at the issue a little elaborately.
Fact is there will always be the fear of the unknown for
anything. If you familiarise yourself with the basics, then your fear will
certainly be replaced by reason. We can control the outcome of an event when we
understand how it works and the causes and effects. On the other hand, if we have
no idea about something, then we are all at sea in that aspect. We would fear
to handle that task or subject.
Equity Mutual funds invest their money in stock market where
they act to own chosen parts of ownership of a selection of companies. The idea
is to gain from the progress of these companies that will get reflected in the higher
prices for those part ownerships.
Mutual funds are in India from 1964 in the form of Unit Trust of
India and in the current regulated and professional form from about 1993. As
population and prosperity has grown mutual funds have made tremendous progress.
Being a developing economy, the scope of economic progress is outstanding in
India. So mutual funds attempt to seek a pie of out of that ever-growing cake.
Because mutual funds invest in equity shares of companies
(ownerships), their values fluctuate due to their prices being the result of
buying and selling actions in the market. Throughout the trading hours prices
go up and down till we get the closing values at end of day.
If you choose open ended funds, your money is liquid in the
sense that you can withdraw at any time and get your money back in 3 working
days through electronic transfer in your bank account. However, a shorter
period of holding will entail about 1% exit load.
There is a 15% flat income tax on your gains if your holding
period is less than a year. If your holding period is more than a year, then
your gains up to Rs 1 lakh every year is exempt from tax even under the new and
proposed changes. If your profits exceed Rs 1 lakh, 10% income tax will apply.
There is risk of losing money if you are dependent on the money
invested in the short term. But as the period of investment increases your
chance or risk of losing money will gradually come down.
Another factor is choosing the category of funds you are
investing in and the scheme you have chosen. You must invest in only highly
rated low risk options when you start.
Equity mutual funds can be a
great option with returns beyond your expectations, if you can segregate some
money for the long term that you will not withdraw in a hurry, barring of
course, any unforeseen circumstances.
