History of mutual funds

The modern mutual fund was first introduced in Belgium in 1822.

This form of investment soon spread to Great Britain and France.
Mutual funds became popular in the United States in the 1920s and •
continue to be popular since the 1930s, especially open-end mutual
funds. Mutual funds experienced a period of tremendous growth after World War II, especially in the 1980s
and 1990s.
What are mutual funds

A mutual fund is a managed group of owned securities of several corporations. These corporations receive
dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors
purchase shares in the mutual fund as if it was an individual security. After paying operating costs, the
earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion
to the amount of money invested. Investors hope that a loss on one holding will be made up by a gain on
another. Heeding the adage "Don't put all your eggs in one basket" the holders of mutual fund shares are
able collectively to gain the advantage by diversifying their investments, which might be beyond their
financial means individually.

A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a
set number of shares; it may be considered as a fluid capital stock. The number of shares changes as
investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time
for a market price. However the open-end market price is influenced greatly by the fund managers. On the
other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with
the market. But with close-end funds, the fund manager has less influence because the price of the
underlining owned securities has greater influence.

How do mutual funds earn money

A mutual fund is a means of investing that enables individuals to share the risks of investing with other
investors. All contributors to the fund experience an equal share of gains and losses for each dollar invested.
A mutual fund owns the securities of several corporations. A mutual fund pools money from hundreds and
thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to
the kind of investments the mutual fund trades. Investors purchase shares in the mutual fund as if it was an
individual security. Fund managers hired by the mutual fund company are paid to invest the money that the
investors have placed in the fund. Heeding the adage "Don't put all your eggs in one basket" the holders of
mutual fund shares are able to gain the advantage of diversification which might be beyond their financial
means individually.

Professional management of mutual funds

Mutual funds use professional managers to make the decisions regarding which companies' securities
should be bought and sold. The managers of the mutual fund decide how the pooled funds will be invested.
Investment opportunities are abundant and complex. Fund managers are expected to know what is
available, the risks and gains possible, the cost of acquiring and selling the investments, and the laws and
regulations in the industry. The ability of the managers to select profitable investments and to sell those
likely to decline in value is a key factor for the mutual fund to earn money for the investors
What are the tax benefits investors get by investing in Mutual Funds?

Since, April 1, 2003, all dividends declared by debt-based mutual funds are tax-free in the hands of the
investor. A dividend distribution tax of 12.5% (including surcharge) is be paid by the mutual fund on the
dividends declared by the fund.

Investors in ELSS (equity-linked savings schemes) can avail rebate under Section 88 of the Income Tax Act,
1961 on investment up to Rs 10,000 subject to the various conditions laid down in the said Section.

The actual amount of rebate depends on the level of income of the investor.

Is a capital gain on sale/transfer of units of mutual fund liable to tax? If yes, at what rate? Section
2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the
same is held for less than 12 months. The units held for more than 12 months are treated as long-term
capital asset.

Section 10(38): Under Section 10(38) of the Act, long-term capital gains arising from transfer of a unit of
mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities
transaction tax is paid to the appropriate authority.

Section 111A: Under Section 111A of the Act, short-term capital gains arising from transfer of a unit of
mutual fund is chargeable to tax @ 10% (plus applicable surcharge) if the said transaction is undertaken
after October 1, 2004 and the securities transaction tax is paid.

However, such securities transaction tax will be allowed as rebate under Section 88E of the Act if the
transaction constitutes business income.

Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section
10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:

• Resident Individual & HUF --- 20% plus surcharge.

• Partnership Firms & Indian Companies --- 20% plus surcharge.
• Foreign Companies --- 20% (no surcharge).

Capital gains will be computed after taking into account cost of acquisition as adjusted by Cost Inflation
Index notified by the central government.

'Units' are included in the proviso to the sub-section (1) to Section 112 of the Act and hence unit holders can
opt for being taxed at 10% (plus applicable surcharge) without the cost inflation index benefit or 20% (plus
applicable surcharge) with the cost inflation index benefit whichever is beneficial.

Under Section 115AB of the Income Tax Act, 1961, long-term capital gains in respect of units purchased in
foreign currency by an overseas financial organisation held for a period of more than 12 months will be
chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No
surcharge is applicable for taxes under section 115AB, in respect of corporates.

What are the tax benefits for foreign investors?

Section 115E: Under Section 115E of the Act, capital gains chargeable on transfer of long-term capital
assets of an Non-Resident Indians (NRIs) are subject to following rates of tax:

• Investment income: --- 20%

• Long term capital gains: --- 10%

Section 10(23D): Under provisions of Section 10(23D) of the Act, any income received by the Mutual Fund
is exempt from tax.

Section 115R: Under Section 115R, the Income distributed to a unit holder of a Mutual Fund shall be
charged to following rates of tax to be payable by the Mutual Fund.

• Amounts distributed to individual or HUF: 12.5%

• Amounts distributed to others: 20.0%

However, the above distribution tax will be exempted for open-ended Equity-Oriented Funds (funds investing
more than 50% in equity or equity related instruments).

Are there any other tax benefits related to mutual funds?

Under Section 88, contributions made from taxable income in the specified investments qualifies for a tax
rebate of 20% where gross total income is up to Rs 150,000 and 15% of the invested amount where gross
total income is between Rs 150,000 and Rs 500,000, subject to a maximum aggregated ceiling of Rs
70,000.

For investment in infrastructure bonds and/or equity-linked saving schemes (ELSS) (not exceeding Rs
10,000/- under clause (23D) of Section 10), or eligible issue of equity shares or debentures the maximum
qualifying investment limit for tax rebate is Rs 100,000. However, such tax rebate is not available in respect
of tax on long-term capital gains as per Section 112 and short-term capital gains as per Section 111A of the
Act.

Is there any wealth tax applicable to mutual fund investments?

No. Units held under the Scheme of the Fund are not treated as assets within the meaning of Section 2(EA)
of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth Tax.

Is there any gift tax applicable to mutual funds investments?

No. Units of the mutual fund may be given as a gift and no gift tax will be payable either by the donor or the
donee; since mutual funds do not fall within the purview of the Gift Tax Act.
How can I avoid payment of long-term capital gains on mutual fund investments?

The capital gain, which is not exempt from tax as explained above, can be invested in the specified asset
mentioned below within 6 months of the sale.

History of Mutual Funds

History of Mutual Funds has evolved over the years and it is sure to appear as something very
interesting for all the investors of the world. In present world, mutual funds have become a main
form of investment because of its diversified and liquid features. Not only in the developed world,
but in the developing countries also different types of mutual funds are gaining popularity very fast
in a tremendous way. But, there was a time when the concept of Mutual Funds were not present in
the economy.

There is an ambiguity about the fact that when and where the Mutual Fund Concept was
introduced for the first time. According to some historians, the mutual funds were first introduced in
Netherlands in 1822. But according to some other belief, the idea of Mutual Fund first came from a
Dutch Merchant ling back in 1774. In 1822, that idea was further developed. In 1822, the concept
of Investment Diversification was properly incorporated in the mutual funds. In fact, the
Investment Diversification is the main attraction of mutual funds as the small investors are also
able to allocate their little Funds in a diversified way to lower Risks.

After 1822 in Netherlands, the Mutual Funds Concept came in Switzerland

in 1849 and thereafter in Scotland in the 1880s. After being popular in Great Britain and France,
Mutual fund concept traveled to U.S.A in the 1890s. In 1920s and 1930s, the Mutual Fund
popularity reached a new high. There was record investment done in mutual funds. But, before
1920s,the mutual funds were not like the modern day mutual funds.

The modern day mutual funds came into existence in 1924, in Boston. Massachusetts Investors
Trust introduced the Modern Mutual Funds and the funds were available from 1928. At present
this Massachusetts Investors Trust is known as MFS Investment Management Company. After
the glorious year of 1928, Mutual fund ideas expanded to different levels and different regulations
came for well functioning of the funds.

Still today, the funds are evolving and improving in order to offer people much wider choices and
better advantages for fulfillment of their various investment needs and financial objectives.

Features of a Mutual Fund

Trading in mutual funds is carried out under strict government regulations. In accordance with the
Securities Act of 1933 and the Securities Exchange Act of 1934, all mutual funds must be registered
with the US Securities and Exchange Commission (SEC). Disclosure of information about relevant
details and the acquired securities are also legally essential.
Specific features of mutual funds include liquidity, transfer of money, purchase of units and high
competition. Investment in mutual funds is highly liquid as funds are required to redeem shares
daily. It permits transfer of money from one type of fund to another, but the exchange takes place
within the same fund family. Units of mutual funds can either be purchased directly or through an
investment professional, such as a broker or a financial planner.

Types of Mutual Funds

Mutual funds are classified on the basis of maturity period or investment objective. On the basis of
maturity period, mutual funds include open ended funds and close ended funds.

Mutual funds based on investment objectives include growth/equity-oriented funds, income/debt-

oriented funds, balanced funds, gilt funds and index funds.

Benefits of a Mutual Fund

• Facilitates easy access of professionally-managed portfolios to small investors. Allows

investors to instantly diversify into several sectors and reduce the risk profile of their portfolio.
• The cost of transaction in a mutual fund is divided among all the shareholders, which
facilitates cost-effective diversification.
• Enables investors to benefit from professional services like that of a fund manager.

Risks of a Mutual Fund

• Separately managed accounts may perform better than mutual funds.

• High risk and unpredictability of returns.
• Some mutual funds over-diversify or invest within a specific sector or region. This
eliminates the benefits of diversification.

Despite these risks, investors are keen to diversify their portfolios and utilize the benefits of mutual
funds to earn high returns.