10 common questions about investing in mutual funds answered

Mutual funds are one of the most common forms of investment. Here, we will cover the most frequently asked questions on mutual funds and provide clear answers. By the end, you will have all the necessary information to make an informed decision.

Are mutual funds safe?

Investing in a mutual fund is not safe as its performance is linked to the market. Mutual funds are also affected by the economy as a whole. The price of each unit may fluctuate daily. When the markets tumble, so do your mutual funds.

Are mutual funds taxable?

The gains from mutual funds are taxable after redemption. Tax on Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) will apply as per the holding period and type of fund.

A tax of 15% will apply if you redeem units of equity mutual funds after staying invested for less than one year. This is called a tax on Short Term Capital Gains (STCG). But, if you stay invested for more than one year, the Long Term Capital Gains (LTCG) above Rs.1 lakh will be taxed at 10%.

In the case of non-equity funds, the short term capital gains, i.e. gains made on investments with an investment period of less than 36 months, is added to the income. LTCG or gains made after holding for 36 months is 20% after considering indexation.

Are mutual funds better than stocks?

Mutual funds and direct stock investments have their own set of pros and cons. You invest in different stocks at one time when you invest in equity mutual funds. In the case of direct equity investment, you have to invest in each of these stocks individually.

However, when you invest in stocks, you have complete control over your investments.

Are mutual funds and sip the same?

Systematic Investment Plan (SIP) is a systematic way to invest in mutual funds. Once you set up the SIP, the fund house will automatically debit the SIP amount from your bank account and credit your folio with mutual fund units.

Can mutual funds be gifted?

Mutual fund units cannot be given as gifts or transferred. Only in the event of the investor's passing is a transfer from one person to another permitted. In this case, the nominee must provide the KYC credentials and the investor's death certificate. The units of mutual funds are then transferred in the nominee's name.

How do mutual funds pay dividends?

The fund manager will invest the dividends received from a company.

If you have opted for the dividend payout option, the payout can include a part of the returns generated by the fund. Dividends from a firm are not the only thing that is paid out.

The SEBI mandated that the names of these plans be changed to Income Distribution cum Capital Withdrawal (IDCW) plans to reflect the true nature of what dividend plans pay more accurately.

Why are mutual funds subject to market risk?

Mutual funds carry risk because they invest in various financial instruments such as stocks, corporate bonds, and government securities. These instruments' prices are influenced by various circumstances, which might lead them to change and depreciate. Therefore, it is essential to ascertain the risk profile before investing in mutual funds.

Will mutual funds recover?

When you invest in equity mutual funds, it is essential to understand that equity or stock is an investment for the long term, and volatility is a part of equity investing. So, if you started investing in mutual funds in the last few months, it is normal to see your mutual fund portfolio in red.

However, if you keep holding your equity investments for the long term, you might see your investment recover and get substantial gains.

Can senior citizens invest in equity mutual funds?

It is seen that most seniors avoid risky investments as they are retired and can't afford losses on their investments. They seek guaranteed-return plans.

However, mutual funds can be a vital investment alternative for elders. It is because although equities are volatile in the short run, it has the potential to give good returns over the long term.

In the current scenario, if we consider the retirement age is 60 years, and a person expects to live at least till 80. Then, the person has around 20 years of post-retired life.

So, senior citizens can easily invest a part of their portfolio in equity mutual funds to beat inflation.

Do mutual funds have a lock-in period or a maturity date?

Mutual funds, except Equity Linked Savings Schemes (ELSS) or tax-saving mutual funds, don't have any lock-in period. This means an investor can invest and redeem their money per their requirement. However, it is essential to keep the tax implications and exit load in mind before making any redemptions.

ELSS funds have a three-year lock-in period, and investments made to these funds can help reduce taxable income under section 80C.

We will answer a few more critical questions on mutual funds soon. Stay tuned!

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.