Mutual Funds4 can be broadly divided into 2 categories:
Open Ended Funds:
These funds have no fixed corpus and period. Such funds continuously offer units for sale and is ready to buy back the units surrendered. In other words, investors are free to buy from or sell to the trust, any number of units at any point of time, at prices which are liked to the net asset value (NAV) of the units.
Close Ended Funds:
In these type of funds, subscriptions from the investors are collected during a specified time period and have a fixed corpus. It is not possible to redeem their units till the specified maturity date. However, to provide liquidity these are listed on the stock exchange4 and the investors can purchase and sell through the brokers at the market price without any difficulty.
Advantages of mutual funds:
- Professional management
- Convenient administration
- Low cost
- Choice of scheme
- Well regulated
Tax benefits from mutual funds:
- Under Section 80C, up to a limit of one lakh in a financial year is eligible for deduction in a savings scheme.
- Dividend from mutual fund scheme is tax free in the hands of investor.
- Indexation benefit under long term capital gain in debt scheme.