MUTUAL FUNDS

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INTRODUCTION TO MUTUAL FUNDS
Mutual funds, as the name indicates is the fund where in numerous investors come together to
invest in various schemes of mutual fund.
Mutual funds are dynamic institution, which plays a crucial role in an economy by mobilizing
savings and investing them in the capital market, thus establishing a link between savings and the
capital market.
A mutual fund is an institution that invests the pooled funds of public to create a diversified
portfolio of securities. Pooling is the key to mutual fund investing. Each mutual fund has a
specific investment objective and tries to meet that objective through active portfolio
management.
Experienced professionals, who buy and sell a diversified, or well-mixed, number of stocks,
bonds, or money market securities for the fund, manage this money.
Originally, mutual funds were heralded as a way for the little guy to get a piece of the market.
Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all
you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you
might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in
reality, they haven't always delivered. Not all mutual funds are created equal, and investing in
mutuals isn't as easy as throwing your money at the first salesperson who solicits your business.
Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a
mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they
tried to do it on their own. Mutual fund issues units to the investors in accordance with quantum
of money invested by them. Investors of mutual funds are known as Unit holders.
Investors who invest in mutual funds are provided with units to participate in stock markets.
These units are investment vehicle that provide a means of participation in the stock market for
people who have neither the time, nor the money, nor perhaps the expertise to undertake the
direct investment in equities.

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On the other hand they also provide a route into specialist markets where direct investment often
demands both more time and more knowledge than an investor may possess.
A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI)
which regulates securities market before it can collect funds from the public.
Investments may be in stocks, bonds, money market securities or some combination of these.
Those securities are professionally & efficiently managed on behalf of the shareholders, and each
investor holds a pro rata share of the portfolio entitled to any profits when the securities are sold,
but subject to any losses in value as well. The profits or losses are shared by the investors in
proportion to their investments. The mutual funds normally come out with a number of schemes
with different investment objectives, which are launched from time to time.
The price of units in any mutual fund is governed by the value of underlying securities. The
value of an investors holding in a unit can therefore, like an investment in share, can go down as
well as up. Hence it is said that mutual funds are subjected to market risk. Mutual fund cannot
guarantee a fixed rate of return. It depends on the market condition. If the particular scheme is
performing well then more return can be expected.
It also depends on the fund manager expertise knowledge. It is also seen that people invest in
particular funds depending on who the fund manager is.
But every rose must have a thorn and with moneymaking comes RISK!!
Investors may put their money to work in various ways. Some of them may be able to eliminate
the risk factor but may not be able to provide the extra money all are looking for. Others may
be able to do so but may also have a very high risk factor. Most investors today face this
universal paradox of risk and return.




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Most small investors face a number of similar problems while
investing:
Limited resources in the hands of investors quite often take them away from stock
market transactions.
Lack of funds forbids investors to have a balanced and diversified portfolio.
Lack of professional knowledge associated with investment business disables investors
from operating gainfully in the market. Also, small investors can hardly afford to have
ex-pensive investment consultations.
To buy shares, investors have to engage share brokers who are the members of stock
exchange and have to pay their brokerage.
They hardly have access to price sensitive information in time.
And most importantly an average investor spends most of his rare free time either
investing or thinking about his investment

Hence, comes into the picture the institution called MUTUAL FUNDS!
Thus a Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost.
Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and strategy.




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DEFINITION
Mutual fund is vehicle that enables a number of investors to pool their money and
have it jointly managed by a professional money manager.

A mutual fund is an investment that pools your money with the money of an unlimited
number of other investors. I n return, you and the other investors each own shares of
the fund. The fund's assets are invested according to an investment objective into the
fund's portfolio of investments. Aggressive growth funds seek long-term capital growth
by investing primarily in stocks of fast-growing smaller companies or market segments.
Aggressive growth funds are also called capital appreciation funds.

WHAT IS MUTUAL FUNDS..???
A Mutual Fund is a pool of money, collected from investors, and is invested according to certain
investment objectives. A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through these
investments and the capital appreciation realized is shared by its unit holders in proportion to the
number of units owned by them. Mutual Fund companies are known as asset management
companies. They offer a variety of diversified schemes. Mutual Fund acts as investment
companies. They pool the savings of investors and invest them in a well-diversified portfolio of
sound investments.
An investment vehicle that is made up of a pool of funds collected from many investors for the
purpose of investing in securities such as stocks, bonds, money market instruments and similar
assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt
to produce capital gains and income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives stated in its prospectus.
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WORKING OF MUTUAL FUND:-

A Mutual Fund is created
Makes an offer to the public for investment in its various schemes. It distributes application
forms to prospective investors.
Investors fill in the application forms and submit them along with the money to be invested, to
the Mutual Fund.
The Mutual Fund issues units of face value of Rs.10 each against money received from investors.
For instance, if X has filled in the application form and deposited Rs.10,000 with XYZ Mutual
Fund, he will receive 1,000 units (face value per unit being Rs.10).
The Mutual Fund invests the money collected from investors in securities such as equity shares,
debentures, bonds, etc depending on the investment rules laid down in the scheme. For instance,
if it is an equity scheme, between 75-90% of the amount collected will be invested in equity
shares and the balance in debt securities.
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The Mutual Fund collects the dividends, interest and sale proceeds from these investments and
distributes them to the investors on a pro-rata basis. This means that an investor holding 300
units of the Mutual Fund will get more dividend than an investor holding 100 units.
Some investors may opt for reinvestment of the dividends due to them from the Mutual Fund,
back into the scheme. In this case, they will not receive the money but will receive a statement of
account showing the amount due to the investor and the price at which this amount has been
reinvested in the scheme. The total number of units held by the investor will then be the original
number of units he has been allotted at the initial public offering and the units he earns from the
reinvestment of the dividends.
If the scheme of the Mutual Fund is open-ended, the Fund re-opens the scheme for fresh
investments by new investors or purchase of additional units by existing investors. These units
will be offered at a price higher or lower than the face value (at the actual NAV) and sometimes,
with a sales load (entry load).
The new investors will fill in the application form and submit it to the Mutual Fund with the
moneys to be invested. The Mutual Fund issues units at this price to the new investors.

Example:
XYZ Mutual Fund was set up and has made an Initial Public Offering (IPO) to the public for its
equity scheme. Mr.T filled in the application form and invested Rs.10,000 in this scheme. XYZ
Mutual Fund issued him 1,000 units (Rs.10,000 / Rs.10 per unit). XYZ Mutual Fund received a
total of Rs.50,00,000 from investors (like Mr.T). After completion of the IPO, XYZ Mutual Fund
invested this Rs.50,00,000 in various equity shares of companies listed on the stock exchange.
XYZ Mutual Fund received dividends from the companies it had invested in and distributed this
among all its unit holders on a prorata basis. XYZ Mutual Fund declared a dividend of 10%.
Hence Mr.T received Rs.1,000 as his dividend (Rs.10,000 x 10%). [Note: dividend is always
declared on the face value of the unit i.e. as a percentage of Rs.10].

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PHASES OF MUTUAL FUNDS IN INDIA-

THE EVOLUTION-
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in
the year 1963. The primary objective at that time was to attract the small investors and it was
made possible through the collective efforts of the Government of India and the Reserve Bank of
India.
The history of mutual fund industry in India can be better understood divided into following
phases:

Phase 1.
ESTABLISHMENT AND GROWTH OF UTI (1964-1967)-
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an
act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under
the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was
transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first
scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of
investors in any single investment scheme over the years. UTI launched more innovative
schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six
more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first
offshore fund) in 1986, Master share (Indias first equity diversified scheme) in 1987 and
Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's
assets under management grew ten times to Rs 6700 Crores.


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Phase II.
ENTRY OF PUBLIC SECTOR FUNDS (1987-1993)-
The Indian mutual fund industry witnessed a number of public sector players entering the market
in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the
first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Can bank Mutual
Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual
Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to Rs. 47,004 Crores. However, UTI remained to be the leader with about 80%
market share.
1992-93
Amount
Mobilized
Assets Under
Management
Mobilization as % of gross Domestic
Savings
UTI 11,057 38,247 5.2%
Public
Sector
1,964 8,757 0.9%
Total 13,021 47,004 6.1%


Phase III.
EMERGENCE OF PRIVATE SECTOR FUNDS (1993-1996)-
The permission given to private sector funds including foreign fund management companies
(most of them entering through joint ventures with Indian promoters) to enter the mutual fund
industry in 1993, provided a wide range of choice to investors and more competition in the
industry. Private funds introduced innovative products, investment techniques and investor-
servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.
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Phase IV-
GROWTH AND SEBI REGULATION (1996-2004)-
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the
year 1996. The mobilization of funds and the number of players operating in the industry reached
new heights as investors started showing more interest in mutual funds.
Inventors' interests were safeguarded by SEBI and the Government offered tax benefits to the
investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by
SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999
exempted all dividend incomes in the hands of investors from income tax. Various Investor
Awareness programmes were launched during this phase, both by SEBI and AMFI, with an
objective to educate investors and make them informed about the mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a
trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual
fund players on the same level. UTI was re-organized into two parts: 1. The Specified
Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of
UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being
gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In
1999, there was a significant growth in mobilization of funds from investors and assets under
management which is supported by the following data:
ASSETS UNDER MANAGEMENT (RS. CRORES)
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Phase V.
GROWTH AND CONSOLIDIATION 2004 ONWARDS-

The industry has also witnessed several mergers and acquisitions recently, examples of which are
acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and
PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund
players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29
funds as at the end of March 2006. This is a continuing phase of growth of the industry through
consolidation and entry of new international and private sector players.


AS ON UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL
31-March-99 53,320 8,292 6,860 68,472
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FEATURES OF A MUTUAL FUND

V VA AR RI IE ET TY Y
There are 5 basic type of mutual funds namely equity, bond, hybrid, money market and
GILT. So investor has a wide variety of schemes to choose from according to its convenience
such as risk and return factor etc .Investor also gets a variety in time as well for how much
period he would like to invest if he is a short term investor he would invest in money market
funds or if he is a long term investor he would invest in other diversified funds.
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L LI IQ QU UI ID DI IT TY Y
Some mutual funds are required by law to redeem shares on a daily basis, fund shares are
very liquid investment. Most mutual funds also continually offer new shares to investors, and
many fund companies allows shareholders to transfer money or make exchanges from one
fund to another within the same fund family. Mutual funds process sales, redemptions, and
exchanges as a normal part of daily business activity.
A AC CC CE ES SS SI IB BI IL LI IT TY Y A AN ND D A AF FF FO OR RD DA AB BI IL LI IT TY Y
Mutual fund shares are available through a variety of sources. Investors can purchase fund
shares either with the help of an investment professionals such as broker, financial planner,
bank representatives etc. Many Mutual funds can be purchased directly from fund
companies but in this case investor is required to do their own research to determine which
funds meet their need.
Mutual funds offer their many benefits and services at affordable prices even a small investor
can purchase it and make huge profit.




FLEXIBILITY OF DATES
Investor can invest in top Mutual Fund Scheme on their choice of dates. Many large Mutual
Fund companies offer multiple dates for investing into its top performing mutual fund
schemes. E.g Few dates would be 1st, 5th, 10th, 15th, 25th of each month. This makes
regular investments on salary dates possible.

TOP-UP FACILITY
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Apart from regular payments investors can also invest via top-up facility. The amount of SIP
can be increased at fixed intervals. The Top-up amount has to be in multiples of Rs 500/-
depending upon fund. The frequency is fixed at Yearly and Half-Yearly Basis.

Investing Through POA (Power of Attorney)
Investments in Mutual Funds can be done through Assignment of a Power of Attorney for
effective financial planning. Army Personnel, Officers posted on-duty at far off places,
owners/directors of limited companies, Non-Resident Indians, Resident Indian posted
onsite/outside India can invest through the convenience of POA.

Direct Credit of Dividend Payments
Asset Management Companies offer direct credit of dividend payment proceeds to investors
bank accounts in order to ensure faster processing and timely credits of dividend amount.
Helpful for people having bank accounts in PSU banks. These banks have small branches
with too many customers to manage.

OTHER FEATURES:
A mutual fund actually belongs to the investors who have pooled their funds.
A mutual fund is managed by investment professionals and other service providers, who earn
a fee for their services, from the fund.
The pool of funds is invested in a portfolio of marketable investments. The value of the
portfolio is updated every day.
The investors share in the fund is denominated by units. The value of the units changes
with change in the portfolios value, every day.
ADVANTAGES OF MUTUAL FUNDS
Since their creation, mutual funds have been a popular investment vehicle for investors. Their
simplicity along with other attributes provide great benefit to investors with limited knowledge,
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time or money. To help you decide whether mutual funds are best for you and your situation, we
are going to look at some reasons why you might want to consider investing in mutual funds.

PROFESSIONAL MANAGEMNT-
The basic advantage of funds is that, they are professional managed, by well qualified
professional. Investors purchase funds because they do not have the time or the expertise to
manage their own portfolio. A mutual fund is considered to be relatively less expensive way
to make and monitor their investments.

DIVERSIFICATION-
Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors
risk is spread out and minimized up to certain extent. The idea behind diversification is to
invest in a large number of assets so that a loss in any particular investment is minimized by
gains in others.

ECONOMIES OF SCALE-
Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.

LIQUIDITY-
Just like an individual stock, mutual fund also allows investors to liquidate their holdings as
and when they want




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SIMPLICITY
Investments in mutual fund are considered to be easy, compare to other available instruments
in the market, and the minimum investment is small. Most AMC also have automatic
purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
L LO OW W C CO OS ST TS S
Mutual Funds are a relatively less expensive way to invest compared to directly investing in
the capital markets because the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.

T TR RA AN NS SP PA AR RE EN NC CY Y
Investors get regular information on the value of your investment in addition to disclosure on
the specific investments made by your scheme, the proportion invested in each class of assets
and the fund manager's investment strategy and outlook.

F FL LE EX XI IB BI IL LI IT TY Y
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans; you can systematically invest or withdraw funds according to your needs
and convenience.

W WE EL LL L R RE EG GU UL LA AT TE ED D
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
regularly monitored by SEBI.

CONVENIENT ADMINISTRATION
Investing n in a Mutual Fund reduces paperwork and helps you avoid many problems such as
bad deliveries, delayed payments and unnecessary follow up with brokers and companies.
Mutual Funds save your time and make investing easy and convenient.
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RETURN POTENTIAL
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as
they invest in a diversified basket of selected securities.

UNDERSTANDING AND MANAGING RISK
All investments whether in shares, debentures or deposits involve risk: share value may go
down depending upon the performance of the company, the industry, state of capital market
and the economy; generally, however longer the term, lesser the risk; companies may default
in payment of interest/principal on their deposits/bonds debentures; the rate of interest on
investment may fall short of the rate of inflation reducing the purchasing power.While risk
cannot be eliminated, skillful management can minimize risk. Mutual fund helps to reduce
risk through diversification and professional management. The experience and expertise of
Mutual Fund managers in selecting fundamentally sound securities and timing their
purchases and sales help them to build a diversified portfolio that minimize risk and
maximizes returns.
T TA AX X B BE EN NE EF FI IT TS S
Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by
them are tax-free in the hands of the investor. They also give you the advantages of capital
gains taxation. If you hold units beyond one year, you get the benefits of indexation. This
reduces your tax liability. Whats more, tax-saving schemes and pension schemes give you
the added advantage of benefits under Section 88. You can avail of a 20 per cent tax
exemption on an investment of up to Rs 10,000 in the scheme in a year.

Economies of Scale:
The easiest way to understand economies of scale is by thinking about volume discounts; in
many stores, the more of one product you buy, the cheaper that product becomes. This also
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occurs in the purchase and sale of securities. If you buy only one security at a time, the
transaction fees will be relatively large.

DISADVANTAGES OF MUTUAL FUNDS
PROFESSIONAL MANAGEMENT-
Some funds doesnt perform in neither the market, as their management is not dynamic
enough to explore the available opportunity in the market, thus many investors debate over
whether or not the so-called professionals are any better than mutual fund or investor
himself, for picking up stocks.

COSTS-
The biggest source of AMC income is generally from the entry & exit load which they
charge from investors, at the time of purchase. The mutual fund industries are thus charging
extra cost under layers of jargon.

DILUTION-
Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result
of a successful fund getting too big. When money pours into funds that have had strong
success, the manager often has trouble finding a good investment for all the new money.

TAXES-
When making decisions about your money, fund managers don't consider your personal tax
situation. For example, when a fund manager sells a security, a capital-gain tax is triggered,
which affects how profitable the individual is from the sale. It might have been more
advantageous for the individual to defer the capital gains liability.
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Cash, Cash and More Cash:
To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to
keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but
money sitting around as cash is not working for you and thus is not very advantageous.

RISK INVOLVED IN MUTUAL FUND INVETMENTS











Market risk:
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Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting
the market in general lead to this. This is true, may it be big corporations or smaller mid-
sized companies. This is known as Market Risk.

Credit Risk:
The debt servicing ability of a company through its cash flows determines the Credit Risk
faced by you. This credit risk is measured by independent rating agencies like CRISIL who
rate companies and their paper. An AAA rating is considered the safest whereas a D
rating is considered poor credit quality

Inflation Risk:
Things you hear people talk about: "Rs. 100 today is worth more than Rs. 100 tomorrow."
"Remember the time when a bus ride costed 50 paisa. Inflation is the loss of purchasing
power over time. This happens when inflation grows faster than the return on your
investment

Political/Government Policy Risk:
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.

Liquidity Risk:
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid securities.
Systematic risk:
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The systematic risk affects the entire market. The economic conditional, political
situations, sociological changes affect the entire market in turn affecting the company
and even the stock market. These situations are uncontrollable by the corporate and
investor.
Unsystematic risk:
The unsystematic risk is unique to industries. It differs from industry to industry.
Unsystematic risk stems from managerial inefficiency, technological change in the
production process, availability of raw materials, changes in the consumer preference,
and labor problems. The nature and magnitude of above mentioned factors differ from
industry to industry and company to company.





DIFFERENT TYPES OF MUTUAL FUNDS

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ON THE BASIS OF FLEXIBILITY
MUTUAL
FUNDS
ON THE BASIS
OF FLEXIBILITY
OPEN ENDED
FUNDS
CLOSE ENDED
FUNDS
ON THE BASIS
OF OBJECTIVES
EQUITY FUNDS
DEBT FUNDS
MONEY
MARKET FUNDS
GILT FUNDS
HYBRID FUNDS
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OPEN-ENDED FUNDS
All mutual funds fall into one of two broad categories: open-end funds and closed-end funds.
Most mutual funds are open-end. The reason why these funds are called "open-end" is
because there is no limit to the number of new shares that they can issue. New and existing
shareholders may add as much money to the fund as they want and the fund will simply issue
new shares to them.
Open-end funds also redeem, or buy back, shares from shareholders. In order to determine
the value of a share in an open-end fund at any time, a number called the Net Asset Value is
used. You purchase shares in open-end mutual funds from the mutual fund itself or one of its
agents; they are not traded on exchanges.
A AD DV VA AN NT TA AG GE ES S
Open funds are much more flexible and provide instant liquidity as funds sell shares daily.
You will generally get a redemption (sell) request processed promptly, and receive your
proceeds by check in 3-4 days. Open funds range in risk depending on their investment
strategies and objectives, but still provide flexibility and the benefit of diversified
investments, allowing your assets to be allocated among many different types of holdings.
Diversifying your investment is key because your assets are not impacted by the fluctuation
price of only one stock. If a stock in the fund drops in value, it may not impact your total
investment as another holding in the fund may be up. But, if you have all of your assets in
that one stock, and it takes a dive, youre likely to feel amore considerable loss.



CLOSE-ENDED FUNDS
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Closed-end funds behave more like stock than open-end funds; that is to say, closed-end
funds issue a fixed number of shares to the public in an initial public offering, after which
time shares in the fund are bought and sold on a stock exchange. Unlike open-end funds,
closed-end funds are not obligated to issue new shares or redeem outstanding shares.

The price of a share in a closed-end fund is determined entirely by market demand, so shares
can either trade below their net asset value ("at a discount") or above it ("at a premium").
Since you must take into consideration not only the fund's net asset value but also the
discount or premium at which the fund is trading, closed-end funds are considered to be more
suitable for experienced investors. You can purchase shares in a closed-end fund through a
broker, or agents.

A AD DV VA AN NT TA AG GE ES S
The prospect of buying closed funds at a discount makes them appealing to experienced
investors. The discount is the difference between the market price of the closed-end fund and
its total net asset value. As the stocks in the fund increase in value, the discount usually
decreases and becomes a premium instead.

Savvy investors search for closed-end funds with solid returns that are trading at large
discounts and then bet that the gap between the discount and the underlying asset value will
close. So, one advantage to closed-end funds is that you can still enjoy the benefits of
professional investment management and a diversified portfolio of high quality stocks, with
the ability to buy at a discount.




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ON THE BASIS OF OBJECTIVE
EQUITY FUNDS
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds have comparatively
high risks. These schemes provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for investors having a
long-term outlook seeking appreciation over a period of time.

As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share
prices fluctuating daily, such funds show volatile performance, even losses. However, these
funds can yield great capital appreciation as, historically, equities have outperformed all asset
classes.

At present, there are four types of equity funds available in the market. In the increasing
order of risk, these are:
INDEX FUNDS:
These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or
the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index
they track, both in terms of composition and the individual stock weightages. For instance, an
index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate
the performance of the benchmarked index to near accuracy. Investing through index funds is a
passive investment strategy, as a funds performance will invariably mimic the index concerned,
barring a minor "tracking error". Usually, there is a difference between the total returns given by
a stock index and those given by index funds benchmarked to it.

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DIVERSIFIED FUNDS:
Such funds have the mandate to invest in the entire universe of stocks. Although by definition,
such funds are meant to have a diversified portfolio (spread across industries and companies), the
stock selection is entirely the prerogative of the fund manager.
This discretionary power in the hands of the fund manager can work both ways for an equity
fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver
market-beating returns; on the other hand, if the fund managers picks languish, the returns will
be far lower.

The crux of the matter is that your returns from a diversified fund depend a lot on the fund
managers capabilities to make the right investment decisions. On your part, watch out for the
extent of diversification prescribed and practiced by your fund manager. Understand that a
portfolio concentrated in a few sectors or companies is a high risk, high return proposition. If you
dont want to take on a high degree of risk, stick to funds that are diversified not just in name but
also in appearance.

TAX-SAVING FUNDS
Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section
88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can
claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs
10,000, but you wont get the Section 88 benefits for the amount in excess of Rs 10,000.

The only drawback to ELSS is that you are locked into the scheme for three years.In terms of
investment profile, tax-saving funds are like diversified funds. The one difference is that because
of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their
stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by
redemption compulsions.
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SECTOR FUNDS
The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT
or FMCG. A sector funds NAV will zoom if the sector performs well; however, if the sector
languishes, the schemes NAV too will stay depressed.
Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries
alternate between periods of strong growth and bouts of slowdowns. The way to make money
from sector funds is to catch these cyclesget in when the sector is poised for an upswing and
exit before it slips back. Therefore, unless you understand a sector well enough to make such
calls, and get them right, avoid sector funds.

DEBT FUNDS:
Debt funds are funds which invest money in debt instruments such as short and long term bonds,
government securities, t-bills, corporate paper, commercial paper, call money etc. The fees in
debt funds are lower, on average, than equity funds because the overall management costs are
lower. The main investing objectives of a debt fund are usually preservation of CapitaLand
generation of income. Performance against a benchmark is considered to be a secondary
consideration. Investments in the equity markets are considered to be fraught with uncertainties
and volatility. These factors may have an impact on constant flow of returns. This is why debt
schemes, which are considered to be safer and less volatile, have attracted investors. Debt
markets in India are wholesale in nature and hence retail investors generally find it difficult to
directly participate in the debt markets. Not many understand the relationship between interest
rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt
market investments is not common among investors. Investors can however participate in the
debt markets through debt mutual funds. One must understand the salient features of a debt paper
to understand the debt market. Debt paper is issued by Government, corporate and financial
MUTUAL FUNDS


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institutions to meet funding requirements. A debt paper is essentially a contract which says that
the borrower is taking some money on loan and after sometime the lender will get the money
back as well as some interest on the money lent.


MONEY MARKET FUNDS
These funds are also known as liquid funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in safer short-
term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank
call money, government securities, etc. Returns on these schemes fluctuate much less compared
to other funds. These funds are appropriate for corporate and individual investors as a means to
park their surplus funds for short periods.

By far the biggest contributor to the Mutual Fund industry, Liquid Funds attract a lot of
institutional and High Net worth Individuals (HNI) money. It accounts for approximately 40% of
industry AUM. Less risky and better returns than a bank current account are the two plus points
of Liquid Funds.

Money Market instruments have maturities not exceeding 1 year. Hence Liquid Funds have
portfolios having average maturities of less than or equal to 1 year. Thus such schemes normally
do not carry any interest rate risk. Liquid Funds do not carry Entry/ Exit Loads. Other recurring
expenses associated with Liquid Schemes are also kept to a bare minimum.

The period of investment could be as short as a day in these funds. They have emerged as an
alternative for savings and short term fixed deposit accounts with comparatively higher returns.
These funds are ideal for corporate, institutional investors and business houses that invest their
funds for very short periods

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GILT FUNDS

Gilt funds are mutual funds that predominantly invest in Central and State Government securities
Unlike conventional debt funds that invest in debt instruments across the board, gilt funds target
just a given category of debt instruments i.e. G-Securities. Being sovereign paper, they do not
expose investors to credit risk. Since the market for G-Securities (as is the case with most debt
instruments) is largely dominated by institutional investors, Gilt funds offer retail investors a
convenient means to invest in G-Securities. Depending on their investment horizon, investors
can choose between short-term and long-term gilt funds.

The repayment of principal and periodic payment of interest is assured by the government in
these funds. So, unlike income funds, they dont face the problem of default on their
investments. This element of safety is why, in normal market conditions, gilt funds tend to give
marginally lower returns than income funds.

MEDIUM-TERM GILT FUNDS:

They aim to provide steady returns with low risk and highest possible safety by investing
primarily in Government Securities. The average maturity of the securities in the portfolio
would be over three years.
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SHORT-TERM GILT FUNDS:

They are dedicated gilt schemes, which seek to generate reasonable returns with investments
in Government Securities. The securities invested in are of short to medium term residual
maturities.


HYBRID FUNDS-QUASI EQUITY/QUASI DEBT
Many mutual funds mix the different types of securities in their portfolios. Thus, most funds,
equity or debt, always have some money market securities in their portfolios as these securities
offer the much needed liquidity. However, money market holdings will constitute a lower
proportion in the overall portfolios of debt or equity funds. There are funds that, however, seek
to hold a relatively balanced holding of debt and equity securities in their portfolios. Such funds
are termed as Hybrid Funds as they have a dual equity/ bond focus.

Some of the funds in this category are as follows:
BALANCED FUNDS
A balanced fund is one that has a portfolio comprising debt instruments, convertible
securities, preference shares and equity shares. Their assets are generally held in more or less
equal proportions between debt/ money market securities and equities. By investing in a mix
of this nature, balanced fund seek to attain the objectives of income, moderate capital
appreciation and preservation of capital, and are ideal for investors with a conservative
approach and long term orientation.

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GROWTH-&-INCOME FUNDS
Unlike the income-focused or growth-focused funds, these funds seek to strike a balance
between capital appreciation and income for the investor. The portfolios are mix between
companies with good dividend paying records and those with potential for capital
appreciation. These funds would be less risky than pure growth funds, though more risky
than income funds.




M ME ET TH HO OD DS S O OF F I IN NV VE ES ST TI IN NG G I IN N M MU UT TU UA AL L F FU UN ND D

ONE TIME PAYMENT
In onetime payment, the investor needs to invest a fixed amount to buy a particular number
of units. For example, at the time of the initial public issue the shares may be of value Rs.10
per unit. Thus, if the investor decides to invest Rs.20000/- to that fund, he can buy 2000 units
of that particular fund.

SYSTEMATIC INVESTMENT PLAN
An SIP is a vehicle offered by mutual funds to help you save regularly. It is just like a
recurring deposit with the post office or bank where you put in a small amount every month.
The difference here is that the amount is invested in a mutual fund. The minimum amount to
be invested can be as small as Rs 500 and the frequency of investment is usually monthly or
quarterly.

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The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for
accumulation of wealth in a disciplined manner over long term period. The plan aims at a
better future for its investors as an SIP investor gets good rate of returns compared to a one
time investor.

SIP ensures averaging of rupee cost as consistent investment ensures that average cost per
unit fits in the lower range of average market price. An investor can either give post dated
cheques or ECS instruction and the investment will be made regularly in the mutual fund
desired for the required amount.







SYSTEMATIC TRANSFER PLAN-

In SIP investors money moves out of his savings account into the scheme of his choice.
Lets say an investor has decided to invest Rs 5,000 every month, such that Rs. 1,000 gets
invested on the 5th, 10th, 15th, 20th and 25th of the month. This means that the Rs. 5000,
which will get invested in stages till 25th will remain in the savings account of the investor
for 25 days and earn

Interest @ 3.5%. If the investor moves this amount of Rs. 5000 at the beginning of the month
to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice, then
not only will he get the benefit of SIP, but he will earn slightly higher interest as well in the
Liquid Funds as compared to a bank FD. As the money is being invested in a Liquid Fund,
the risk level associated is also minimal. Add to this the fact that liquid funds do not have any
exit loads. This is known as STP.
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STRUCTURE OF MUTUAL FUNDS


MUTUAL FUNDS


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The structure of mutual funds in India is governed by the SEBI Regulations, 1996. These
regulations make it mandatory for mutual funds to have a 3-tier structure of Sponsors-Trustee-
AMC (Asset Management Company).
Sponsor :
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. Sponsor must contribute atleast 40% of the net worth of the
Investment Managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible
MUTUAL FUNDS


34

or liable for any loss or shortfall resulting from the operation of the Schemes beyond the
initial contribution made by it towards setting up of the Mutual Fund.

Trust :
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian
Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration
Act, 1908.

Trustee :
A Board of Trustees a body of individuals, or a trust company a corporate body, may
manage the Trust. Board of Trustees manages most of the funds in India. The Trust is created
through a document called the Trust Deed that is executed by the Fund Sponsor in favors of
the trustees. They are the primary guardian of the unit holders funds and assets. They ensure
that AMCs operations are along professional lines.
The mutual fund is required to have an independent Board of Trustees, i.e. two thirds of the
trustees should be independent persons who are not associated with the sponsors in any
manner whatsoever.

Right of Trustees :
o Appoint the AMC with the prior approval of SEBI
o Approve each of the schemes floated by the AMC
o Have the right to request any necessary information from the AMC concerning
the operations of various schemes managed by the AMC
o Trustees review and ensure that net worth of the AMC is according to stipulated
norms, every quarter.
Obligations of the Trustees
o Trustees must ensure that the transactions of the mutual fund are in accordance
with the trust deed.
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35

o Trustees must ensure that the AMC has systems and procedures in place, and that
all the fund constituents are appointed.
o Trustees must ensure due diligence on the part of AMC in the appointment of
constituents and business associates.
o Trustees must furnish to SEBI, on half-yearly basis, a report on the activities of
the AMC.
o Trustees must ensure that the activities of the mutual fund are in compliance with
the SEBI regulations.

Asset Management Company (AMC) :
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The
AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act
as an asset management company of the Mutual Fund. At least 50% of the directors of the
AMC are independent directors who are not associated with the Sponsor in any manner. The
AMC must have a net worth of at least 10 Crores at all times. The role of the AMC is to
manage investors money on a day to day basis. Thus it is imperative that people with the
highest integrity are involved with this activity.

The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC
cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD
lies with the AMC. Appointments of intermediaries like independent financial advisors
(IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is
the AMC which is responsible for the acts of its employees and service providers.



Appointment OF the AMC and its functions
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The trustees, on the advice of the sponsors, usually appoint the AMC. The trust deed
authorizes the trustees to appoint the AMC. The AMC Is usually a private limited company,
in which the sponsors and their associates or joint venture partners are shareholders. The
AMC has to be a SEBI registered entity, and should have a minimum net worth of Rs. 10
crore. The trustees sign an investment management agreement with their AMC, which spells
out the functions of the AMC. The investment management agreement has to be in
accordance with Chapter IV of the SEBI regulations.

o Restrictions on the AMCs
AMCs cannot launch a fund scheme without the prior approval of trustees.
AMCs have to provide full details of investments by employees and Board members,
in all cases where such investments exceed of Rs. 1 lakh.
AMCs cannot take up any activity that is in conflict with the activities of the mutual
fund.

Registrar and Transfer Agent :
The Registrars & Transfer Agents(R & T Agents) are responsible for the investor servicing
function, as they maintain the records of investors in mutual funds. They process investor
applications; record details provide by the investors on application forms; send out to
investors details regarding their investment in the mutual fund; send out periodical
information on the performance of the mutual fund; process dividend payout to investor;
incorporate changes in information as communicated by investors; & keep the investor
record up-to-date, by recording new investors & removing investors who have withdrawn
their funds.

Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor
records.

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Custodian :
A custodians role is safe keeping of physical securities and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by the companies in which the
fund has invested. The Custodian is appointed by the Board of Trustees. The custodian also
participates in a clearing and settlement system through approved depository companies on
behalf of mutual funds, in case of dematerialized securities. In India today, securities (and
units of mutual funds) are no longer held in physical form but mostly in dematerialized form
with the Depositories. The holdings are held in the Depository through Depository
Participants (DPs). Only the physical securities are held by the Custodian.

The deliveries and receipt of units of a mutual fund are done by the custodian or a depository
participant at the instruction of the AMC and under the overall direction and responsibility of
the Trustees. Regulations provide that the Sponsor and the Custodian must be separate
entities.

Depository:
Indian capital markets are moving away from having physical certificates for securities, to
ownership of these securities in dematerialized form with a Depository. Sponsor hires an
asset management company to invest the funds according to the investment objective. It also
hires another entity to be custodian of the assets of the funds and perhaps a third one to
handle registry work for holders (subscribers) of the funds. In the Indian context, the
sponsors promote the Asset Management Company also in which it holds majority stake.

In many cases a sponsor can hold a 100% stake in Asset Management Company (AMC).
This has floated different mutual funds schemes and also acts as an assets manager for the
funds collected under the scheme.

MUTUAL FUNDS


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SEBI NORMS FOR MUTUAL FUNDS
The AMC will be authorized by SEBI on the basis of the criteria indicated in the guidelines.
SEBI regulations clearly state that all funds and schemes operational under them would be bound
by their regulations. SEBI has recently taken following steps for the regulation of mutual funds:
Formation:
Certain structural changes have also been made in the mutual fund industry, as part of which,
mutual funds are required to set up asset management companies with fifty percent
independent directors, separate board of trustee companies, consisting of a minimum fifty
percent of independent trustees and to appoint independent custodians. This is to ensure an
arm's length relationship between trustees, fund managers and custodians, and is in contrast
with the situation prevailing earlier in which all three functions were often performed by one
body which was usually the sponsor of the fund or a subsidiary of the sponsor .

Thus, the process of forming and floating mutual funds has been made a tripartite exercise by
authorities. The trustees, the asset management companies (AMCs) and the mutual fund
shareholders form the three legs. SEBI guidelines provide for the trustees to maintain an
arm's length relationship with the AMCs and do all those things that would secure the right
of investors.

Registration:
In January 1993, SEBI prescribed registration of mutual funds taking into account track
record of a sponsor, integrity in business transactions and financial soundness while granting
permission. This will curb excessive growth of the mutual funds and protect investor's
interest by registering only the sound promoters with a proven track record and financial
strength. In February 1993, SEBI cleared six private sect9r mutual funds viz. 20th Century
MUTUAL FUNDS


39

Finance Corporation, Industrial Credit& Investment Corporation of India, Tata Sons, Credit
Capital Finance Corporation, Ceat Financial Services and Apple Industries.


Documents:
The offer documents of schemes launched by mutual funds and the scheme particulars are
required to be vetted by SEBI. A standard format for mutual fund prospectuses is being
formulated.

Investment of funds mobilized:
In November 1992, SEBI increased the time limit from six months to nine months within
which the mutual funds have to invest resources raised from the latest tax saving schemes.
The guideline was issued to protect the mutual funds from the disadvantage of investing
funds in the bullish market at very high prices and suffering from poor NAV thereafter.

Assurance on returns:
SEBI has introduced a change in the Securities Control and Regulations Act governing the
mutual funds. Now the mutual funds were prevented from giving any assurance on the land
of returns they would be providing. However, under pressure from the mutual funds, SEBI
revised the guidelines allowing assurances on return subject to certain conditions. Hence,
only those mutual funds which have been in the market for at least live years are allowed to
assure a maximum return of 12 per cent only, for one year. With this, SEBI, by default,
allowed public sector mutual funds an advantage against the newly set up private mutual
funds.

MUTUAL FUNDS


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As per basic tenets of investment, it can be justifiably argued that investments in the capital
market carried a certain amount of risk, and any investor investing in the markets with an aim
of making profit from capital appreciation, or otherwise, should also be prepared to bear the
risks of loss.
Underwriting:
In July 1994, SEBI permitted mutual funds to take up underwriting of primary issues as a
part of their investment activity. This step may assist the mutual funds in diversifying the
business.
Minimum corpus:
The current SEBI guidelines on mutual funds prescribe a minimum s art-up corpus of Rs.50
crore for a open-ended scheme, and Rs.20 crore corpus: or closed-ended scheme, failing
which application money has to be refunded.

The idea behind forwarding such a proposal to SEBI is that in the past, the minimum corpus
requirements have forced AMCs to solicit funds from corporate bodies, thus, reducing
mutual funds into quasi-portfolio management outfits. In fact, the Association' of Mutual
Funds in India (AMFI) has repeatedly appealed to the regulatory authorities for scrapping the
minimum corpus requirements,

Investment in money market:
SEBI guidelines say that mutual funds can invest a maximum of 25 per cent of resources
mobilized into money-market instruments in the first six months after closing the funds and a
maximum of 15 per cent of the corpus after six months to meet short term liquidity
requirements. Private sector mutual funds, for the first time, were allowed to invest in the call
money market after this year's budget.

As SEBI regulations limit their exposure to money markets, mutual funds are not major
players in the call money market. Thus, mutual funds do not have a significant impact on the
MUTUAL FUNDS


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call money market. SEBI also conclude that mutual funds were not responsible for the
unprecedented shooting up of call money rates.

Some funds exceeded their limits in an effort to improve their sagging net asset values
(NAVs), usually, funds can early only about 9-12 per cent. Thus, the prospect of earning
more than 40 per cent may have been tempting,




Valuation of investment:
SEBI should work in tandem with the Institute of Chartered Accountants of India (ICAI) to
take up a fresh look at mutual fund regulations enacted in 1993. The valuation of
investments, a key aspect of fund accounting, as on balance sheet date, needs review, SEBI
regulations 1993, give discretionary powers to the fund managers as far as the valuation of
the investment portfolio on the balance sheet date is concerned, There are no accounting
standards or guidelines prescribed by the ICAI for the valuation of a mutual fund's
investment portfolio.

The mutual funds are clearly taking advantage of this situation and valuing the portfolio at
cost of acquisition. The subsequent depreciation or appreciation in the investment portfolio is
not accounted for. Thus, the mutual funds may be able to show profits in the balance sheet
even if there is severe erosion in the value of the investment portfolio. This erosion in the
values of the investment portfolios is clearly seen in the net asset values (NAV) as on the
balance sheet date. But the accounts of the mutual funds do not reveal the same.

The objective of the accounting in case of a mutual fund should be besides showing details of
income, expenses, assets and liabilities, has to reveal the true value of the fund. The value of
MUTUAL FUNDS


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the fund is already reflected in, its NAV and the balance sheet is expected to be in
consonance with this value. This requires that the investment portfolio be calculated at
market values, providing for any depreciation or appreciation.

Inspection:
SEBI inspect mutual funds every year. A full SEBI inspection of all f the 27 mutual funds were
proposed to be done by the March 1996 to streamline their operations and protect the investor's
interests. Mutual funds are monitored and inspected by SEBI to ensure compliance with the
regulations.


REGULATION OF MUTUAL FUNDS
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000. A market Index is a convenient and effective product because of the following
reasons:
It acts as a barometer for market behavior;
It is used to benchmark portfolio performance;
It is used in derivative instruments like index futures and index options;
It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also
to diversify the trading products, so that there is an increase in number of traders including
banks, financial institutions, insurance companies, mutual funds , primary dealers etc. to transact
through the Exchanges. In this context the introduction of derivatives trading through Indian
Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.
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43

The primary authority for regulating Mutual Funds in India is SEBI. SEBI requires all Mutual
Funds to be registered with it. The SEBI (Mutual Funds) Regulations, 1996 outlined the broad
framework of authorization process and selection criteria. Accordingly, the authorization for the
mutual fund will be granted in two steps. The first step will involve approval and eligibility of
each of the constituents of the mutual fund viz. sponsors, trustees, asset management company
(AMC) and custodian. For this purpose the interested parties would be required to submit
necessary information only in on prescribed formats).
The second stage will involve formal authorization of the mutual funds for business. For this
purpose the sponsor or the AMC would be required to apply to SEBI in an application form for
authorization along with an application fee to be specified later.



The authorization shall be granted subject to conditions as may be considered necessary by SEBI
and payment of auth9risation fee as may be specified. It shall be SEBI's endeavor to advise an
applicant within 10 to 15 working days of receipt of his letter / application form regarding status
of his application. The eligibility of the sponsor will be examined with respect to the following:

Sponsor could be a registered company, scheduled bank or all India or State level financial
institution;
More than one registered company can also act as sponsor for a mutual fund;
Joint sponsorship with any of the entities in (a) above will also be eligible, and
Sponsoring registered companies could be private or public limited companies either listed or
unlisted.

Sponsor and where there is more than one sponsor, each of the sponsoring entities, must have a
sound track record as evidenced by -
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Audited balance sheet and profit and loss .account for last five years;
A positive net worth and consistent record of profitability and a good financial standing
during the last five years;
Good credit record with banks and financial institutions;
General reputation in the market;
Organization and management, and
Fairness in business transactions.
Sponsor or more than one sponsor put together should have at least a 40 per cent stake in the
paid-up equity of the AMC.



C CO ON NC CE EP PT TS S O OF F M MU UT TU UA AL L F FU UN ND DS S- -

NET ASSET VALUE-
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit
NAV is the net asset value of the scheme divided by the number of units outstanding on the
Valuation Date. Thus, NAV of a mutual fund unit is nothing but the 'book value.'
How NAV is calculated
NAV = the total market of all the securities in the mutual fund divided by the number of units in
the mutual fund.
Example:
Units = slices of pie and Mutual fund = total pie.
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45

Say you have one or more units, you bought 10 units of the mutual fund at 10 per unit = 100
total. Value per unit is now 16, Total = 160 (10 units x 16 per unit).
Profit = 60% (16 divided by 10) plus any distributions (cash) you received over you holding
period.
NAV and its impact on the returns
It is often felt that MF with lower NAV will give better returns. This again is due to the wrong
perception about NAV. An example will make it clear that returns are independent of the NAV.
Say, you have Rs 10,000 to invest. Say one Fund A has an NAV of Rs 10 and another Fund B
has NAV of Rs 50. You will get 1000 units of Fund A or 200 units of Fund B. After one year,
both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after
one year would be Rs 12.50 for Fund A and Rs 62.50 for Fund B. The value of your investment
would be 1000*12.50 = Rs 12,500 for Fund A and 200*62.5 = Rs 12,500 for Fund B. Thus your
returns would be same irrespective of the NAV.
E EN NT TR RY Y/ / E EX XI IT T L LO OA AD D
A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A
load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It
also covers one time processing costs. Some funds do not charge any entry or exit load.
These funds are referred to as No Load Fund. Funds usually charge an entry load ranging
between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.

For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the
entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The
investor receives 10000/13.13 = 761.6146 units. The units are allotted to an investor based on
the amount invested.

MUTUAL FUNDS


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Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also
assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price
per unit works out to Rs. 14.925.
The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.


F FU UN ND D O OF FF FE ER R D DO OC CU UM ME EN NT T: :
A Fund Offer document is a document that offers you all the information you could possibly
need about a particular scheme and the fund launching that scheme. That way, before you put
in your money, you're well aware of the risks etc involved. This has to be designed in
accordance with the guidelines stipulated by SEBI.
The prospectus must disclose following details:-
Investment objectives.
Risk factors and special considerations.
Summary of expenses.
Constitution of the fund.
Guidelines on how to invest.
Organization and capital structure.
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Tax provisions related to transactions.
Financial information.

NEW FUND OFFER-
A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to
further operations. New fund offers are often accompanied by aggressive marketing campaigns,
created to entice investors to purchase units in the fund. However, unlike an initial public
offering (IPO), the price paid for shares or units is often close to a fair value. This is because the
net asset value of the mutual fund typically prevails. Because the future is less certain for
companies engaging in an IPO, investors have a better chance to purchase undervalued shares.
Once the 3 tier structure is in place, the AMC launches new schemes, under the name of the
Trust, after getting approval from the Trustees and SEBI. The launch of a new scheme is known
as a New Fund Offer (NFO). We see NFOs hitting markets regularly. It is like an invitation to
the investors to put their money into the mutual fund scheme by subscribing to its units. When a
Scheme is launched; the distributors talk to potential investors and collect money from them by
way of cheques or demand drafts. Mutual funds cannot accept cash.


MARKETING OF MUTUAL FUNDS
Individual Agents
Use of agents has been the most widely prevalent practice for distribution of funds over the
years. By definition, an agent acts on behalf of a principal in this case the mutual fund. An
agent is essentially a broker between a fund and the investor. In India, we also have a unique
system whereby a broker has a number of sub brokers working under him. The vast sub
broker network ensures a larger geographic coverage than otherwise. According to AMFI,
there are nearly 100,000 agents selling mutual funds and other financial products. Of this
number, 80-85000 are UTI agents Indian Mutual Fund giant.
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Distribution Companies
Availing of the services of established distribution companies is a practice accepted by
mutual funds internationally. This practice evolved with a view to circumvent the huge
administrative mechanism required to support a large agent force. Instead of having to deal
with several agents, a fund can interact with a distribution company which has several
employees or sub brokers under it. A distribution company usually manages distribution of
several funds simultaneously and receives commission for its services. Many private funds
have preferred to adopt this practice because of its sophisticated nature and because they
benefit from specialist knowledge and established client contacts of these marketing firms. In
India, there are about 10 major distribution companies in addition to few hundred smaller
ones. Few firms are Karvy Consultancy, JP Morgan, Morgan Stanley, SBI Capital etc.

Banks & NBFCs (Non Banking Financial Companies)
In developed countries, banks are important marketing vehicle for mutual funds, given that
banks themselves have a large depositor/client base of their own. We can see the opening up
of this new channel in India also. Several banks, particularly private and foreign banks are
involved in the fund distribution by providing similar to those of distribution companies, on a
commission basis. Some NBFCs are also providing such services. All funds do not yet use
this channel, nor have all banks yet taken up the fund distributors work/job. But increasingly
use of banks networks for mutual fund distribution is almost a certain development.
Direct Marketing
Direct marketing means that the mutual funds sell their own products without the use of any
intermediaries. Usually, this takes the form of the sales officers and employees of the AMC
who approach the investors and accept their contributions directly. However in India,
independent agents can be treated as a direct marketing channel, in the same sense that they
do not form a well knit, independent and organized single entity and act more like fund
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employees. Other channels like the distribution companies or banks or even stock brokers are
clearly distinct and independent intermediaries.

Direct marketing by the funds themselves accounts very small percentage of mutual fund
sales. In case of UTI only 5 to 6 % of total sales come through direct channels. Many private
sector funds require that invests into any of their schemes be routed only through registered
brokers and they do not accept direct subscriptions from investors.

Regular Meetings with distributors:
Most of the funds conduct monthly/bi-monthly meetings with their distributors. The
objective is to hear their complaints regarding service aspects from funds side and other
queries related to the market situation. Sometimes, special training programs are also
conducted for the new agents/ distributors.
Training involves giving details about the products of the fund, their present performance in
the market, what the competitors are doing and what they can do to increase the sales of the
fund.
Advertising and sales promotion
By their very nature, mutual funds require higher advertisement and sales promotion
expenses than any consumer product offering measurable performance. Different kinds of
advertising and sales promotion exercises are required to serve the needs of different classes
of investors. For instance, an aggressive push marketing strategy is required for retail
markets, where investors are not adequately aware of the product and do not have specialized
skill in financial market, in contrast with pull marketing strategies for the wholesale market.
There are certain issues with reference to advertisement, publicity literature and offer
documents, which deserve attention. Most of the mutual fund advertisements look similar,
focusing on scheme features, returns and incentives. An investor exposed to the increasing
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number of mutual fund products finds that all the available brands are rather identical, and
cannot appreciate any distinction.
Rules Regarding Advertisement
The advertisement for each scheme shall disclose investment objective for each scheme.
An advertisement shall be truthful, fair and clear and shall not contain a statement, promise
or forecast which is untrue or misleading.
Advertisements shall not be so framed as to exploit the lack of experience or knowledge of
the investors.
All advertisements issued by a mutual fund or its sponsor or asset management company,
shall state "all investments in mutual funds and securities are subject to market risks and the
NAV of the schemes may go up or down depending upon the factors and forces affecting the
securities market".
The advertisement shall not compare one fund with another, implicitly or explicitly, unless
the comparison is fair and all information relevant to the comparison is included in the
advertisement.
The offer document and advertisement materials shall not be misleading or contain any
statement or opinion, which are incorrect or false.








MUTUAL FUNDS AND SELF-REGULATORY ORGANISATIONS
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The deregulation of financial services has posed several challenges to the policy-makers,
economic administrators, academicians and researchers. One of most critical challenges is how
to face the market impact of undesirable activities of the financial services industry and the
managers associated with financial institutions. Economic history is rife with examples of such
activities, which have played havoc in the market, jeopardizing the transmission mechanism and
market equilibrium. They have terminated the process of intermediation (and disintermediation)
in the financial system, leading to a collapse of the system. Various types of defense
mechanisms have been devised to confront the challenges originating from deregulation.
Broadly, these mechanisms are re-regulation of the market and its activities (exercised through
legislative institutions), and self-regulating (exercised through non-legislative, voluntary
organisations). Both these systems have certain advantages and disadvantages, and experience
shows that neither one should be relied on totally. However, a particular system can be more
useful when its implicit advantages apply to the given level of market maturity, the market
psychology and socio-economic environment.

Role of AMFI
AMFI represents the AMCs in India. Established as a non-profit organisation on 22 August
1995, the association is dedicated to:
Promoting and protecting the interests of mutual funds and their unit-holders;
Increasing public awareness of mutual funds ; and
Serving the investors interest by defining and maintaining high ethical and professional
standards in the mutual funds industry

The vision of AMFI echoes the mission which is to advance the interest of investment
companies and their shareholders, to promote public understanding of investment company
business, and to serve the public interest by encouraging adherence to high ethical standards by
all elements of the businesses.


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Given the short span of time, operational limitations and emerging nature of mutual funds
industry in India, AMFI has made a very significant contribution to the promotion of sound
practices among mutual funds and towards protecting the interest of its members. However, it
still does not function as an SRO to any significant extent, which is mutual fund industry
requires today. The various activities undertaken by AMFI are as under:

AMFI has brought out publications on investor awareness, code of ethics, model compliance,
manual on mutual funds directory and a standard offer document.
AMFI has formed several committees and submitted their reports to SEBI in order to
promote high professional standards. Among the committees are :
(i) The valuation committee for valuation of securities, appropriate accounting
standards, valuation of traded and non-traded equities and valuation of non-
traded debt securities ;
(ii) The committee on NPA to identify and recommend norms for recognizing
NPAs of mutual funds, as well as the principles and system for provisioning
such NPAs, and to suggest the standard and frequency of disclosures ;
(iii) The committee on compliance to prepare a compliance manual;
(iv) The committee on inspection fees - to suggest the basis for the fees to be paid
to the auditors appointed by SEBI.
(v) The committee on advertising guidelines to finalize comprehensive
guidelines for advertisement ;
(vi) The committee on derivatives to formulate guidelines for trading in
derivatives.
(vii) The committee on the non-performing assets of mutual funds;
(viii) The committee on investors education and training and;
(ix) A committee which has devised the process of certification for intermediaries
selling mutual funds products.
AMFI has finalized a testing programme for intermediaries and employees. The programme
includes a comprehensive workbook and question bank. AMFI has selected NSE to conduct the
tests.
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TOP MUTUAL FUNDS COMPANIES IN INDIA-























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CONCLUSION
The Global market is fast growing in investment business. Countries like US, whole of
Europe spread their investment in different investment alternatives with the help of
advisory services to recommend investor.
In Indian scenario the investments are spread over Bank Deposits, Savings Certificate,
Post Office, Equity Markets and the latest Mutual Fund. Since Mutual Funds are subject
to market risk the investor take help of advisory services for financial planning which
helps the investor to take calculated risk.
It was in 1995, the scenario got changed when depository act was passed and PAN card
details and Demat account was made compulsory for all those investor who are investing
a heavy amount. So as to protect the interest of the investors, From July 2 of 2007 it has
been made mandatory to have PAN card details, this will enhance the faith of investors in
stock market and many investor would come forward to invest in mutual fund.
The mutual fund industry today needs to develop products to fulfill customer needs and
help customers understand how its products cater to their needs.
No doubt, watching the value of investments go down day after day can be pretty tough.
However, the pain becomes more bearable if one follows a proper investment plan and
invests for the long term. Having a well diversified portfolio as well as a plan to
rebalance it from time to time also helps a great deal. No wonder, Mutual fund is
considered to be the best way to invest in the stock market.
The mutual fund industry has gained a higher growth in the recent years. There are
around 34 Asset Management Companies which are currently operating and the
numbers of Mutual Funds are over 630 funds, so it is difficult to analyze each and
every fund in order to known their riskiness and return. Some tools are used to find
risk & return of the fund, which helps an investor to find out their risk.
Lastly, I can conclude that MUTUAL FUND ARE SUBJECT TO MARKET
RISKS AND THERE IS NO ASSURANCE OR GUARANTEE THAT THE
OBJECTIVES OF THE MUTUAL FUND WILL BE ACHIEVED.
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