3 Most Misunderstood Facts in MF

3 Most Misunderstood Facts in MF It is quite heartening to note that day by day most mutual fund investors are increasingly aware about their investments. Now most of them know how long they are supposed to hold their mutual fund units to create wealth or what average return to expect from different categories of mutual fund etc. But still there are certain areas of mutual fund investment, which still seems misunderstood by many. Here is a list of 3 such facts – Rights of a nominee: Making nomination or explicitly opting out of nomination (in case of joint holders) is a must now. Failing to do so by 31st December 2023 will result into freezing your mutual fund folios for any debit transactions. But exactly what rights a nominee is entitled with? It is important to note here that a nominee is nothing but the trustee of the said mutual fund assets and does not automatically become the sole heir. If there is no Will specifying that the nominee is also the sole heir – other legal heirs can make claims to the assets and the nominee is bound to transfer the assets to the legal heirs. So, mentioning nominees is not a alternative to making a Will. NFO is not same as IPO: Initial public offering (IPO) is a way for companies to raise capital from the market by getting themselves listed at stock exchanges for the first time. The price of the IPO is determined based on the company’s valuation at that time. The higher the valuation of the company, the higher the IPO price will be. An NFO (New Fund Offer) is completely different. It is the launching of a new mutual fund scheme by an asset management company which may or may not purchase already listed stocks from the exchanges. As a mutual fund scheme randomly buys and sells multiple stocks at different times, its price is calculated relatively as unit value. When a scheme is launched for the first time, its unit value is always set to 10, be it an equity fund or debt fund. But make a note here, this is not the absolute price, instead it’s a relative price for ease of calculating return of a mutual fund scheme on ongoing basis.
Capital gain is not same as interest income: When we earn interest income from a financial instrument, such as Fixed Deposit, we are supposed to pay taxes on accrual basis every year, even if we are not making any withdrawal. This is because, interest income is anyway getting accrued to the investment, whether we are withdrawing or not. But the same is not true in case of pure debt fund (or specified mutual fund) though the tax rate is same here, that is as per respective income tax slab. In case of mutual fund, you are not supposed to pay any tax on accrual basis. Only when you make withdrawal from it, capital gain amount (or ‘profit’ in simple word) is calculated and accordingly you are supposed to pay tax in the following assessment year.