Mutual Fund- FAQs
General
Money Market Mutual Funds(MMMFs)
Equity Linked Savings Schemes(ELSS)
Systematic Investments Plans(SIPs)
Fixed Maturity Plans(FMPs)
Capital Protection-Oriented Funds(CPFs)Gold Exchange Trade Funds(GETs)
What are MMMFs?
MMMFs or liquid funds are open-ended funds that invest solely in money market instruments such as call money, repos, treasury bills, commercial papers, certificates of deposit, and collateralised lending and borrowing obligations (CBLOs). These instruments are forms of debt that mature in less than a year.
What is the aim of these funds?
The main goal of these funds is to preserve principal and maintain high liquidity; they are, therefore, the least volatile among debt funds. Corporates having surplus cash for extremely short periods of time are major investors in such funds.
How do they differ from bank accounts?
Unlike a bank account, returns from MMMFs are not guaranteed; but the risk of not earning interest is minimal as these funds invest in short-term instruments in which risks are negligible. MMMFs offer returns that are usually better than the interest on savings bank accounts. Another difference is the minimum amount that can be invested, which could be about Rs.5000 for a retail plan of a MMMF, but much lower for bank account. MMMFs, however, do not charge any entry or exit load.
What are the tax considerations?
From the tax angle, while interest on bank deposits are taxed at the marginal tax rate applicable to the investor, dividend from MMMFs is tax free for the investor. A dividend distribution tax of 25 per cent is, however, payable on the dividend given out. Short-term capital gains, if any, are also taxable at the marginal income tax rate while long-term capital gains are taxable at the rate of 10 per cent without indexation benefits and at 20 per cent with indexation benefits.
How does one differentiate between MMMFs?
The returns of the leaders and laggards do not vary much; this is because there is not much room for differentiation in their investment styles or scope to add value in such schemes. However, mutual funds differentiate among plans of the same liquid fund schemes based on expense ratios. This is an important indicator since expenses can take away a significant chunk of a scheme’s returns. Liquid funds offer multiple plans under the same scheme such as regular, institutional and super institutional (or institutional plus) plans. The underlying portfolio for the multiple plans is the same. While institutional and super institutional plans are offered to corporates and other institutional customers, the regular plans are offered to retail clients. The differentiation between the plans is based on the minimum investment amount and expense ratios. A higher minimum investment amount and lower expense ratio is offered under the institutional/super institutional plan compared to retail/regular plans. Returns are accordingly higher for institutional plans.
Who should invest?
MMMFs are ideal for investors (individuals/corporates) seeking low-risk investment avenues to park their short-term surpluses and provide one of the best alternatives to low-yield savings bank or short-term bank deposits.