Oh yes, did I mention that , now, you do not pay any commissions to your agent for buying or selling this product & that practically anyone with a PAN card, an address proof & a bank account can buy this humble investment option…

Also, not the least, that this investment tool, offers the widest variety of choices, ample liquidity & if it had been used wisely over the past decade, would have given practically most PMS & Equity gurus, a run for their money. No, it is not a LIC Product, it can never be an insurance product & it is not something exotic that only the select few have access to.

Some of you, who are aware of the Investment world, and have been reading my BLOG regularly, should have guessed by now. Yes, I am talking about the humble, ubiquitous, but often ignored Investment Avenue,

Mutual FUNDS, I believe, is the UNSUNG Hero of Indian Investment universe……..
Now, after making such tall claims, let me substantiate them with raw data…

Claim 1: Mutual Funds in India are in existence for more than a decade now, and well chosen ones have given phenomenal double digit returns over the past decade.

Let us take the 3 most popular Mutual Fund Schemes that I am sure we have all heard the name of:

1.Franklin India Bluechip Fund ,HDFC Equity Fund & 3.HDFC Top 200 Fund

No.Scheme NameDate of Inception10 year cagr return**Annualised return since inception
1Franklin India Bluechip FundDec 1, 199326.50% per annum25.51% per annum
2HDFC Equity FundJan 1, 199533.11% per annum22.80% per annum
3HDFC Top 200 FundOct 11, 199631.57% per annum25.17% per annum

*Returns as on Mar 31, 2011
**Cagr returns means compounded returns year on year & Data taken from respective fund house fact sheets.

Now let us compare the returns of these top performing schemes to the returns given by the bellwether of Indian stock market, the BSE Sensex.

No.Scheme Name10 year cagr return**Sensex
(Had you bought the Index)
Incremental return from Mutual Fund schemes over BSE Sensex
1Franklin India Bluechip Fund26.50% per annum18.45% per annum8.05% per annum
2HDFC Equity Fund33.11% per annum18.45% per annum14.66% per annum
3HDFC Top 200 Fund31.57% per annum18.45% per annum13.12% per annum

Have a hard look at the graphic above and you realise that while the BSE Sensex itself has done very well over the past decade giving 18.45% per annum compounded return; some of the well performing equity schemes have done much better than the Sensex, and by what margin?
Thus, a Franklin India bluechip fund has beaten the Sensex by 8.05% year on year for the past decade giving a phenomenal return of 26.50% pa… But the 2 HDFC Schemes have done even better and have beaten the Sensex by a good double digit return of 13 to 14% per annum, giving extraordinary compounded return of 31 to 33% per annum….what a show….and we say that equity is risky & that you only lose money in the stock market….

Claim 2: Mutual Funds offer the Indian Investor ample choice of Investment tenure (ranging from 1 week to 1 decade & beyond)

Most investors that I talk to, both during the course of my practice & on my CNBC appearances, tend to equate Mutual Funds with stock market…While, it is true that, Mutual Funds is the best way to take exposure to the Stock Market & that most investors should avoid buying stocks directly and should take the mutual funds route instead, yet, the mutual fund universe is not that narrow. In fact, there is a wide variety of Mutual Fund categories to suit all types of investment tenures…

Invest-ment TenurePopular Choice of the unin-formed retail investorExp-ected return per annumTax-ationMutual Fund answer to thatEx-pected return per annum from Mutual Fund counter-partTax-ation
0 to 3 monthsSavings bank a/c4.0% paTax-freeLiquid plus funds6.50 % to 7.50% paShort Term Capital Gain (if sold within 1 year)** – as per your Income Tax  slab; Long Term Capital Gain (if sold after  1 year) –  taxed @ 10%**(20% with indexation);Dividend Income from all mutual fund schemes is tax free
3 to 6 monthsShort Term bank FDs8.50% to 9.5% paTaxed as per your Income tax slabDebt Funds (short term)8.50% to 10.25% pa an-nualised
6 months to 1 yearMedium Term bank FDs9.50% to 10.25% paTaxed as per your Income tax slabDebt Funds (medium term)9.50% to 10.50 % pa an-nualised
1 year to 3 yearsLonger Duration Bank FDs9.0% to 10.25% paTaxed as per your Income tax slabMonthly Income Plans or MIPs9.75% to 11.50 % pa
3 years and beyondPPF; NSC; KVP; 5 year bank FDs, In-surance Plans etc…8, 9 or 10% paPPF income is tax free & so is matu-rity amount of some in-surance plans; rest are taxed as per your Income Tax slabEquity Div-ersified Mutual FundsMarket-linked (one can expect approx. 15.0% pa com-pounded returns based on past performance)If equity funds sold within a year (STCG), then taxed @ 15.45%; however if sold after 1 year, ZERO rate of  tax

*highest expected returns from these avenues

For a detailed overview of non-equity based Mutual Funds, please read my previous article titled – “The Rich Man’s Bank Accounts

Claim 3: Mutual Funds are either marginally taxed or not taxed at all (irrespective of the quantum of return that you make)

Most investors are not aware of the great tax advantage that investing in mutual funds offer…
Now, though a little complex, let me explain mutual fund taxation.

First and foremost, from the taxation point of view, there are 2 broad categories of Mutual Funds, namely;
I.Equity Mutual Funds (those that invest at least 65% in equity and includes Equity mutual funds & balanced schemes)
II.Almost all other Schemes Mutual Funds (most other mutual fund schemes that are not equity-based fall in this category)

The taxation of both these categories differs, except in case of Dividends.

The dividend receipts, in the hand of the investor, is exempt for all mutual Fund schemes…may it be equity-based or other schemes….(although, in case of the Other schemes, there is a Dividend Distribution Tax (or DDT) that is paid by the Mutual Fund company directly).
Now, comes the treatment of Capital Gains, both Short Term (holding period less than 1 year) & Long Term ((holding period more than 1 year).

The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of equity based mutual funds are taxed @ 15.45%…The long Term Capital Gains (if sold after 1 year) is tax-free…yes, you heard it right, even if you double your money in equity mutual funds, but take the precaution of selling them after 1 year, you pay zero taxation……

Now, the treatment of capital gains is slightly different in case of non-equity mutual funds…
The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of non-equity based mutual funds are taxed as per your Income Tax slab – (10, 20 or 30%)…The long Term Capital Gains (if sold after 1 year) are taxed either @ 10% (without indexation) or at 20% (with indexation) ……the choice is with the investor

(PN: the above taxation provisions are for Resident Individuals & HUFs, the taxation of Companies is a bit different)

Claim 4: Mutual Funds offer one of the best tax saving avenue u/sec 80C

Tax Saving Mutual Funds or ELSS, are a specific category of Mutual funds that allow deduction u/80 c up to a maximum of Rs. 1 lac per annum and have a minimum lock-in of 3 years amongst other tax saving investment avenues. To read detailed article on Tax Saving Mutual Funds, visit the link below;(Link)

Claim 5: Mutual Funds offer one of the cheapest Investment avenues to invest in India today with zero agent commissions

With effect from Aug 1, 2009, after SEBI’s Abolition of entry loads on Mutual Funds, we do not pay any commissions to our agent for buying or selling Mutual Funds…. Nothing whatsoever….Now compare this with double digit commissions that we shell out from our pocket whenever we purchase any Insurance plan….

For detailed explanation on the impact of entry load abolition, do visit the following link;( Link).

Claim 6:  If it had been used wisely over the past decade, a portfolio of well chosen Mutual Funds, would have given practically most PMS & Equity gurus, a run for their money……

How many PMS guys, or Wealth Mangers of so called MNC banks, or high profile Stock brokers, have such enviable track record of providing a CAGR return of 18 to 24% per annum, year on year, post expenses & post tax, for the past decade….There are at least 10 Mutual Fund schemes that have given such phenomenal returns over the last 10 years, year on year, post all expenses and post taxes ….
Indian Mutual Fund Industry has some of the best Fund Managers in the country, if not in the world…Their services are available to you and me, at a pittance, via the Mutual Funds route…It is up to us how we make the best use of their services to create WEALTH for us & our family….


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