capital market MBA Notes

Types of scheme offered by the mutual funds in India – capital market

open-ended vs. Close-ended Schemes

An open-ended scheme is a scheme. in which an investor can buy and sell it is on daily basis: the scheme has a perpetual existence and a flexible, ever-changing corpus. The investors are free to buy and sell any number of units, any point of time, at prices that are linked to the NAV of the units. In these schemes, the investor can invest or dis invest any amount, any time after the initial lock-in period. These schemes are extremely liquid and the funds announce the sale and repurchase prices from time to timeliest are not listed in stock exchanges and can be only bought and sold to the mutual fund. LA close-ended scheme is one in which, the subscription period for the mutual and remains only for the specific period, called the redemption period. At the end of this period, the entire corpus is dis invested and the proceeds distributed to the various unit holders. Thus, after final distribution, the scheme ceases to exist. However, schemes can be rolled over with the approval of the unit holders They can be listed on the stock exchanges.

Pure Growth Schemes

A pure growth scheme aims at generating long-term capital appreciation for the investors. The objective is achieved by investing a substantial portion of the corpus in high growth equity shares or other equity-related instruments of corporate bodies. The dividend can be declared and distributed as and when the boards of trustees approve it but the principal remains capital appreciation.

Pure Income Schemes

Their aim is to generate and distribute regular income to the investors. This is done by investing a substantial portion of the corpus in high-income yield/ fixed income instruments, such as debentures, bonds and so on. Declaration of regular dividends is the main objective of the scheme.

Balanced Schemes

The aim of these schemes is both, to distribute regular income and also provide capital to the investors by balancing the investments of the corpus between the high growth equity shares and the regular income-earning securities. Tax Saving Scheme These are basically growth schemes, which also offer tax rebates to the investors under the Income tax act, under Section 80 (C), which entitles an investor rebate in income tax up to a maximum investment of Rs. 1,00.000 per annum. When EET regime will come into force, as it will shortly, this scheme Will become more attractive as investments in equities are exempt from all taxes. There are two types of mutual funds according to the investment target.

Tax Saving Scheme

These are basically growth schemes, which also offer tax rebates to the investors under the Income tax act, under Section 80 (C), which entitles an investor rebate in income tax up to a maximum investment of Rs. 1,00,000/ per annum. When EET regime will come into force, as it will shortly, this scheme will become more attractive as investments in equities are exempt from all taxes. There are two types of mutual funds according to the investment target.

Debt-oriented Schemes

This type of schemes invests most of the funds in fixed income instruments like debentures of the private sector companies, public sector bonds. Government securities and money market instruments, the balance is invested in equity shams. Given the portfolio composition of such schemes, a reasonably firm indication is provided about the returns investors can expect from schemes.

Equity-oriented Schemes

As against the debt-oriented schemes, these schemes invest the bulk of their funds in equity shares and in fixed income avenues.

Sector Funds

As the name suggests, sector funds specialize in the stock of single industry or market sector. The fund’s portfolio is invested among a handful of stocks in the same industry and thus these can be regarded as aggressive funds Such schemes concentrate their investments in the specified sector/industry: such as Pharma/IT/FMCG etc. They also focus on Government securities. The diversification is lower in the case of these funds and hence the risk born investor is higher. These sector fund buyers are likely to be more sophisticated and look for a balance between the diversification of a conventional fund and the narrow focus of buying shares in an individual company.

Money Market Mutual Funds

These are designed as a conduit through which the investors can earn a market-related yield on the money market instruments. They have to operate within the framework of RBI guidelines. It has been a year now since the government has allowed domestic mutual funds to invest in the foreign equity markets; Principal MF has become the first mutual fund to launch a global equity scheme. They are in the process of launching The Principal Global Opportunities Fund, which is opening for subscription in February 2004. Under the guidelines issued by the RBI, the domestic funds are allowed to invest in foreign companies, which have more than a 10% stake in listed Indian companies. The regulations also stipulate that there will be a cap of $ I billion on the MF industry’s overseas investments and an individual MF investments limit of Rs. 200 crores The funds is an innovative concept that will allow investors to diversify) their investments in blue-chip global equities for the first time.

Tax Treatment of Mutual Funds

Income of notified mutual funds authorized by SEBI is exempt III provided 90% of the profit of a mutual fund is mandatory distributed to the unit holders. Units of mutual funds held for a continuous period of 12 months preceding the date of sale/transfer/redemption/repurchase are treated as Long-term assets and taxed at 10% capital gain tax.

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