Chapter 3.6: Some important information before you invest

Hold your horses there, we are not done yet. Before you start investing in mutual funds, there are some more important points you need to keep in mind.

Pre-requisites for MF investment

There are two key kinds of mutual funds on the basis of the constitution of the fund. This basically affects when investors can buy fund units and sell them.

There are three key requirements for buying a mutual fund. Here’s a look:

  • Application forms:

    These are the forms you fill with Kotak Securities. If you are a new investor, you will also have to fill up a Know Your Customer (KYC) and trading account application forms. It is fairly simple. Most of the application forms require details like your name, address, workplace address, joint account holder details, account nomination and so on. These help identify you. The KYC-KRA form is a must-have as all investors have to be complaint with SEBI norms before they can start trading in any assets. Once you register, an in-person verification will be conducted to re-check your identity details. This is mandatory as per SEBI rules. Once you are verified, the fund will upload your details on the KYC Registration Agency’s (KRA) system, which will in turn notify you of the receipt of your documents. This is just a one-time process. Without this, you will not be able to trade in the securities market.

  • Pan card and other documents:

    While filing up the application forms, you will need to submit two documents – one to prove your identity and another as a proof of your address. The list of approved documents is the same as that for a trading or demat account. It is listed below.

  • Blank cheque:

    When you open an account with either the fund house or a brokerage, you will have to link your bank account. For this reason, you will have to provide a blank cheque which states your IFSC code. This helps identify the branch your bank account belongs to.

Prerequesits of Investing In Mutual Funds By Kotak Securities®

Tax aspects of MFs

Wherever life may take you, you will always have to pay taxes – even on your investments.
Let’s look at the taxation aspects of a mutual fund:

How are Mutual Funds Taxed By Kotak Securities®

  • Tax-savings:

    The government has been trying to encourage retail investment in equities. For this reason, the government came up with the ELSS or Equity-Linked Savings Schemes. The amount you invest in ELSS schemes reduces your total income as per Section 80C of the Income Tax Act. For example, if you earn Rs 4 lakh per annum, of which you invest Rs 50,000 in ELSS schemes, your total taxable income comes down to Rs 3.5 lakh. However, the government has limited the total amount of investment eligible for tax-saving through ELSS to Rs 1.5 lakh. You also don’t pay any tax while redeeming ELSS funds.

  • Dividend income:

    Mutual fund dividends are tax-free for investors. However, mutual funds are taxed for distributing dividends. This is mainly applicable to debt mutual funds, not equity funds.

  • Securities Transaction Tax:

    This is the tax you pay for selling assets in the securities market. A STT of 0.001% is eligible when you sell your equity schemes and exchange traded funds.

  • Capital gains:

    The profit you make when you sell a financial asset at a higher rate is called capital gains. When you sell an asset within a short period, the capital gained is called short-term capital gains. If you hold your asset for a longer time, the profit you make on selling it is called long-term capital gains.

    • Equity funds:

      The holding period for equity funds is 1 year or 12 months. If you sell your fund before this period, you will be taxed 15%. If you hold it for a year or more, you will not have to pay any tax.

    • Debt funds:

      The holding period for debt funds has been increased to 36 months or 3 years in the Union Budget for FY2014-15. This means, if you sell your debt fund within 36 months, you will have to pay the short-term capital gains tax – the same as your income tax slab rate. If you hold your fund for at least 3 years, you have to pay a long-term capital gains tax of 20% for debt funds. This, however, comes with indexation benefits.

    • Indexation:

      This is the process of adjusting your income by taking into account inflation. This is done using an inflation index. This helps reduce your taxable income.

You first adjust your proceeds from sale using indexation. Then, you calculate your capital gains by a simple subtraction.
This is the formula to adjust your income through indexation:

Indexation Formula  By Kotak Securities®

For example, you invested Rs 10,000 in a debt mutual fund in 2010-11, when the inflation index was 711. You sold the fund for Rs 15,000 in 2014-15. At this time, the index figure was 1025. So you adjust your purchase price of Rs 10,000 through indexation to Rs 14,416.315. So, your after-indexation capital gain is Rs 583.68. You will then have to pay 20% of this amount as tax. This comes to Rs 116.73. Had you not adjusted using indexation, your net capital gains would have been Rs 5,000. 20% of this would have amounted to Rs 1,000. Needless to say, you have saved much on tax.

WHAT NEXT?

While understanding mutual funds, you will often come across jargons and terms specific to this field of investments. Know and understand these terms, before you start investing. Click here

Why Capital gains report?
  • Snapshot of profit/loss
  • Reflects performance of your portfolio
  • Helps compute taxes
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