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Knowledge bites

Association of Mutual Funds of India (AMFI)
AMFI is the self regulatory body of mutual funds of India. AMFI has made the Indian Mutual Fund Industry professional, healthy, an ethical market and given a standard to the industry. It protects and promotes both the interest of AMCs and the investors or unit holders.

AMFI works with all the registered AMCs of the country. They interact with SEBI and work according to SEBIs guidelines. They also help in developing qualified and trained agents, distributors of Mutual funds industry by implementing programmes for training, certifications. For investors they try to create awareness or promote the concept of Mutual Fund for proper understanding.

Capital gains tax

If your investments grow in value, and you sell or move them around, the government steps in to collect a share of the pie. This tax, on the increase in value your investments have seen, is called capital gains tax.

 The computation of the gains and tax can get complicated sometimes, but the broad thumb rule to remember is that the government currently favours:

  • Longer term investments over short term ones
  • Equity investments over real estate or debt ones

It taxes them appropriately. At Fisdom, our recommendations take into account minimisation of your tax outflow.

Voluntary deductible

Voluntary deductible is the minimum amount you need to pay at the time of claiming your insurance.

For example, if your claim amount is Rs. 100000 and the voluntary deductible is Rs. 3000 then you have to bear the first Rs 3000 and the claim will be worth Rs 170000 which will be paid to you. This voluntary deductable amount will not be refunded or paid by the insurance company.

The higher the voluntary deductable the lower would be the premium paid by you.
Short term capital gains (STCG)

The government currently frowns upon shorter tenure investments, and taxes them more. For each type of investment, it has fixed a time horizon to determine whether the investment is short or long term. Any gains coming from investments sold off before this cut-off is called short term capital gains. Of course, no gains are computed until and unless the investment is sold off or moved around. 

Short term capital gains, in general

  • Are taxed more
  • Cannot be set off against other long term capital losses
  • Do not benefit from indexation
Compounded Annual Growth Rate (CAGR)

It is the yearly returns your assets make. Its computation in a big portfolio can get complex; but if you arrive at this number yourself or using our tools, it is easy to make sense of whether your assets are earning you good returns or not. After this, your intuition is usually correct – anything less than <7% is usually poor, 7-10% is decent, and anything above that is great!

Remember that what matters to you is returns after taxes. So the numbers above need to be adjusted accordingly. In general, you make poor CAGR after taxes if your money lies idle in savings bank, or if you put it away in bank fixed deposits.Your CAGR is often better if you invest your money wisely instead.

Asset Management Company (AMC)
Every Mutual Fund in India is managed by a company called Asset Management Company. The founders of the mutual fund along with trustee (ones who safeguard the interests of the investors) select and appoint the Asset Management Company (AMC).

An AMC must have a minimum of Rs. 10 crore as minimum net worth at all times. They cannot indulge in any other businesses other than that of asset management (managing the investments of investors mainly through mutual funds). All the mutual fund schemes are managed by a fund manager or investment manager who has to be registered under SEBI. An AMC cannot act as an AMC or trustee for another mutual fund.

Basically, AMCs are appointed for running the mutual fund business and schemes and make sure they appoint the right staff and people such as accountants, operations team, compliance team and fund managers and manage them. 

For Example, The AMC of ICICI Prudential Mutual Fund is ICICI Asset Management Company Limited which was started in June’- 1993.

What is 'exit load'?

This is what gets knocked off your investment, when you exit a fund. A fraction of your redemption amount is removed, and the balance gets credited to you. Today, exit loads typically do not exist if you hold an investment long enough. At Fisdom, we optimize your investments and withdrawals to minimize or eliminate your exit load.

What is a 'debt' mutual fund

A debt mutual fund invests money into different forms of debt securities – bank fixed deposits, company deposits, etc. However, unlike these deposits themselves, these funds do not provide a fixed or guaranteed return. They carry no exposure to the stock market, and yet are very tax efficient and can at times give you handsome returns too!

Equity funds, monthly income plans (MIPs), balanced funds, gold funds, etc are other types of mutual funds available in the Indian market today.

Balance Sheet
Balance Sheet is a statement which tells you the financial status of a company. It is broken down into three parts:-

-Assets: are categorized as Fixed Assets and Current Assets. Office building, machinery or long term investments are all Fixed Assets. Current assets are cash, insurance etc. 

-Liabilities: Loan borrowed for long term (more than 1 year), Mortgage owed are all long term liabilities. Expenses for short term period(less than 1 year) are all current liabilities

-Shareholder’s Equity: is the amount financed by shareholders to the company along with retained earnings. Assets minus Liabilities give shareholder’s Equity.

A single year’s balance sheet would not be helpful in finding out if company is growing or worthy of investing. However, you need to compare 2 to 3 years balance sheet, which will tell you how cash is being spent, the amount of debt being paid off, and the level of investments being made each year.
Exchange Traded Funds (ETF)
ETFs are open ended funds which trade on an exchange like equity shares. The prices of ETFs are provided on real time basis (price is updated and traded every second just like any other equity share). ETFs are generally used to invest in indices – for example there is the Nifty ETF which tracks the S&P CNX Nifty. An investor wishing to invest in the index can go for the ETF, rather than trying to replicate the constituents of the index himself.
Personal Provident Fund (PPF)

This is a scheme where the government borrows from you at a fixed interest rate (currently 8% tax-free). In an earlier era when investment options were limited, this was the one source of extremely safe returns. While the benefits of PPF remain its tax-free status and its safety, the problems are numerous. 

You cannot invest less than Rs 500/- in a financial year in PPF, or over Rs 70,000/-. Amounts are locked in for as many as 15 years, though some partial withdrawals are possible in the interim. PPFs are administered only through public sector banks, many of whom offer poor quality of service on this account. The returns themselves barely beat inflation. 

On the whole, when general interest rates are low, the 8% here may be attractive. Otherwise, several other options have become more attractive for the customer from a returns and convenience perspective.

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