Unlike in a savings bank account or FD, you don’t get interest in mutual funds. So how does your money grow?
Money in mutual funds grows in a manner similar to gold or property. You buy a unit (10 gms of gold, or 1 apartment) for a specific price. After a few years, the price increases (or decreases) and you sell it for a different price. The difference between sale price and purchase price is your return.
Similarly, whenever you invest in an equity mutual fund, you buy “units” from the mutual fund company at that day’s price. For example, if you invest Rs. 10,000 into a fund and that day’s price is Rs. 20, you will get 500 units (Rs. 10,000 / Rs. 20 per unit). When you sell, if that day’s price is Rs. 30, you would get Rs. 15,000 (500 units x Rs. 30 per unit). The Rs. 5,000 difference is your gain.
The price of a mutual fund is called Net Asset Value (NAV).
What makes mutual funds very useful is that you can buy really small quantities. This is why you might actually see yourself holding 13.1741 units.
Just like gold or property, mutual fund price does not go up in a predictable manner and you have to hold them for a while to realize the gain.
But what makes the price go up? Who determines the price (NAV)?
We’ll cover these 2 questions in the following articles.
Frequently Asked Question
Mutual funds are not considered a high-risk investment. The performance of mutual funds is subject to fluctuations in the market. Hence, they are subject to market risk and bear a possibility of loss as well. You can lose your money in mutual fund investment whether partially or in full. Interest and dividends are also dynamic according to market conditions.
The answer is in the goal of the investor. When to exit from an investment depends on the goal with which the investor invested the funds. If the goal is just to save for the short-term then he can exit as and when he has a need of funds. If the goal is long-term then it is advisable to stay invested for at least 7 years. This is known as goal-based investing.
It depends on the type of mutual fund. A tax-saving mutual fund has a lock-in period of 3 years and you cannot withdraw before 3 years. While you can withdraw other mutual funds. However, before withdrawing you must consider the exit load due to early redemption and short-term capital gain tax. Also, you must consider the fact whether the goal is met or not.
“It is very simple and convenient to cash out mutual funds. You can place the request with the same channel you invested in the funds.
By submitting a redemption request to the AMC
Initiating the redemption from your demat account
Redeem Mutual Fund Through Online Mutual Fund Investment Portal
Redeem Mutual Fund Through Registrar and Transfer Agency”
Once you withdraw your mutual funds you will have to pay an exit load and the income tax. The income tax depends on the type of fund and the duration of holding the funds. If you withdraw equity mutual funds before 12 months then STCG will be applicable at 15% + cess + surcharge. Or else LTCG at 10% + cess + surcharge. If you withdraw debt mutual funds before 36 months then LTCG will be applicable at the rate of 20% + cess + surcharge. The STCG is taxable at the slab rate applicable to the investor.