EXPERT SPEAK

Closed-Ended Mutual Funds have a fi xed tenure and redemption happens at maturity. Investors can opt for Growth or Dividend payouts during the subscription period.

Suppose Mr A opted for the maturity value under the Growth option. Meanwhile, imagine Mr X opted for the Dividend payout. Both would face diff erent taxes as per their Fund selection. EQUITY FUNDS: Funds that mature in less than 12 months face Short-term Capital Gains Tax of 15%. There is no Capital Gains Tax on Funds held beyond 12 months. But Securities Transaction Tax (STT) applies at redemption. DEBT FUNDS: Funds that mature in less than 36 months face Short-term Capital Gains Tax. Tax is as per the investor’s applicable Tax bracket. Beyond 36 months, 20% Long-term Capital Gains Tax applies after the indexation benefi t. The investor pays no Tax on Dividend received.

Diff erent Capital Gains Tax rules applyto resident and non-resident Indians.

HERE’S WHAT THE

EXPERT SAID

A reader asked us, ‘How are Closed-Ended Funds taxed?’

ANANT AGARWAL

Independent Financial Advisor

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.IN NEXT EDITION: Time fl ies! We are already nearing the festive season, starting with Navratri and Dussehra. Let’s apply some of Indian mythology’s key lessons to money matters.

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LOOK FOR THE UNIQUE SELLING

POINT (USP)

Check if the NFO has something new or

diff erent to off er. See if it has a logical plan

of action.

THINK LONG-TERM

Don’t get carried away by the USP. Seek

advice to determine the Fund’s sustainability.

KNOW THE HISTORY WELL

Assess the ability of the Fund House or

Fund Manager to deliver. Go through their

track records.

STAY UPDATED

Keep reviewing your NFO to avoid any losses.

A quarterly review works well.

TRUST THE DOCUMENTATION

Opt for an NFO that has its investment process

in writing. This adds credibility to the off er.

BUST THE NAV MYTH

Some NFOs may have a low NAV or fi xed

price. This does not mean it is cheap or

a better Fund.

WHAT NEXT?

Try new things but be cautious. Let’s look at what to keep in mind before investing in NFOs. Remember, precaution is always better than a cure.

Mutual Funds are like the bus you take to work. They move many people in a common direction. But some express buses don’t stop in between. Closed-ended

Mutual Funds are like that.

LET’S BE OPEN ABOUT CLOSED-ENDED FUNDS

A regular bus with multiple stops may take slight detours.

THE JOURNEY CONTINUES

When the bus arrives, it honks to attract passengers.

You book a ticket to reserve your seat on it.

This NFO is valid for a few days, during which you sign up for the Fund.

At the end of the subscription period, the Fund House allots you the MF units.

What happens when a Fund House launches a new Closed-Ended Fund? It announces a New Fund Off er (NFO).

Mention and pay for the number of Fund units you want.

You have now boarded the bus.

THE START OF THE JOURNEY

EMERGENCY EXITSIf you wish to exit, you must fi nd an alternative passenger to sit on your behalf.

If you wish to sell the Fund, you must fi nd another investor.

You can do this on a Stock Exchange where the Fund is listed.

But you will need a broker to help you trade on the Exchange.

BUYING AND SELLING TICKETS

When you invest in an

NFO, the Fund House sets the

initial price.

This is because high demand can push up the price

above the NAV and vice versa.

Later, the Net Asset Value

(NAV) decides the value of

each MF unit.

The NAV adds the values of all the

assets held by the MF. It divides this by the number of units.

This helps you understand

the real value of each MF

unit.

But on the Stock Exchange, you can buy or sell the Fund

at a rate higher or lower than the NAV.

WHY CLOSED-ENDED FUNDS?

Your money can remain invested for long and deliver attractive returns.

This may mean extra time until

you reach.

Investors can often redeem in bulk under poor market conditions.

So, Fund Managers have to sell Stocks to repay the investors, thus giving up on profi ts.

The lock-in period in a Closed-Ended Fund removes redemption pressures.

With MFs too, the extra stops

matter.

The bus has to fi x the number of seats before the journey begins.

With Closed-Ended Funds, the number of investors remain fi xed.

The Fund House cannot off er new units post the NFO. Bonus and Rights issues are the only exceptions here.

Once you are on the bus, you cannot exit until you reach the destination.

This is because the number of passengers are fi xed.

There is no prior track record to check. So, gauge the Fund’s prospectswith care.

Closed-Ended Funds require a lump-sum investment at the beginning. You cannot invest via a Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).

BEFORE BOOKING

THE TICKET, REMEMBER: