Table of Contents

PAGE
SR. NO. TOPIC
NO.
INTRODUCTION
CONCEPT OF MUTUAL FUND

INVESTOR EARN FROM MUTUAL FUND

1 6
ADVANTAGES OF MUTUAL FUND

DISADVANTAGES OF MUTUAL FUND

FREQUENTIY USED TERM

2 TYPES OF MUTUAL FUND SCHEMES 15
3 ORGANIZATION OF A MUTUAL FUND 30
4 FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO 33
INDIVIDUAL SCHEME ANALYSIS 49
– THEMATIC FUNDS 49
– INDEX FUNDS 69
5
– EQUITY LINKED SAVING SCHEMES 91
– DIVERSIFIED EQUITY FUNDS 106
– DEBT FUNDS 126
6 CONSLUSION
7 BIBLIOGRAPHY 137
 Ch. 1- Introduction

The one investment vehicle that has truly come of age in India in the past decade is mutual
funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore (As of
Dec, 2006) of assets, a large part of which comes from retail investors. And this amount is
invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have
emerged as a proxy for investing in avenues that are out of reach of most retail investors,
particularly government securities and money market instruments.
Specialization is the order of the day, be it with regard to a scheme’s investment objective or its
targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by
mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a
bit daunting. Mind you, it’s not just about going with the fund that gives you the highest returns.
It’s also about managing risk–finding funds that suit your risk appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through mutual
funds? To answer that, we need to get down to brass tacks–what exactly is a mutual fund?
Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors,
and collectively invests this amount in either the equity market or the debt market, or both,
depending upon the fund’s objective. This means you can access either the equity or the debt
market, or both, without investing directly in equity or debt

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Concept of a Mutual Fund

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 are shared by its unit holders in proportion to the number of units
owned by them. 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 basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund:-

Savings form an important part of the economy of any nation. With savings invested in various
options available to the people, the money acts as the driver for growth of the country. Indian
financial scene too presents multiple avenues to the investors. Though certainly not the best or
deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide
reasonable options for an ordinary man to invest his savings.
Investment goals vary from person to person. While somebody wants security, others might give
more weightage to returns alone. Somebody else might want to plan for his child’s education
while somebody might be saving for the proverbial rainy day or even life after retirement. With
objectives defying any range, it is obvious that the products required will vary as well.

Investors earn from a Mutual Fund in three ways:

1. Income is earned from dividends declared by mutual fund schemes from time to time.
2. If the fund sells securities that have increased in price, the fund has a capital gain. This is
reflected in the price of each unit. When investors sell these units at prices higher than
their purchase price, they stand to make a gain.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's unit
price increases. You can then sell your mutual fund units for a profit. This is tantamount
to a valuation gain.

Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves
broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and
balanced funds. There are also funds meant exclusively for young and old, small and large
investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard
investors’ interest, ensures that the investors are not cheated out of their hard-earned money. All
in all, benefits provided by them cut across the boundaries of investor category and thus create
for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt for
mutual funds for the sole reason that all benefits come in a package.

Advantages of Mutual Funds

1. Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme. This risk of default by
any company that one has chosen to invest in, can be minimized by investing in mutual funds as
the fund managers analyze the companies’ financials more minutely than an individual can do as
they have the expertise to do so. They can manage the maturity of their portfolio by investing in
instruments of varied maturity profiles.
2. Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same
time and in the same proportion. You achieve this diversification through a Mutual Fund with far
less money than you can do on your own.
3. Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad
deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save
your time and make investing easy and convenient.
4. 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. Apart from liquidity, these funds have also
provided very good post-tax returns on year to year basis. Even historically, we find that some of
the debt funds have generated superior returns at relatively low level of risks. On an average debt
funds have posted returns over 10 percent over one-year horizon. The best performing funds
have given returns of around 14 percent in the last one-year period. In nutshell we can say that
these funds have delivered more than what one expects of debt avenues such as post office
schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on
dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still
tax free in the hands of investor and is generally much more than all other avenues, on a post tax
basis.
5. Low Costs
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.
6. Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related prices
from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail of the facility of direct repurchase at NAV
related prices by the Mutual Fund. Since there is no penalty on pre-mature withdrawal, as in the
cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better
placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation
and one can benefits from any such price movement.
7. Transparency
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.
8. Flexibility
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.
9. Affordability
A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets
are not likely to be deep enough. This limits him from diversifying his portfolio as well as
benefiting from multiple investments. Here again, investing through MF route enables an
investor to invest in many good stocks and reap benefits even through a small investment.
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a small investor to take the benefit of its investment
strategy.
10. Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
11. Well Regulated
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.
12. Tax Benefits
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. Simply put,
indexation benefits increase your purchase cost by a certain portion, depending upon the yearly
cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap
between your actual purchase cost and selling price. This reduces your tax liability. What’s 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

Disadvantages of mutual funds

Mutual funds are good investment vehicles to navigate the complex and unpredictable world of
investments. However, even mutual funds have some inherent drawbacks. Understand these
before you commit your money to a mutual fund.
1. No assured returns and no protection of capital
If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer
assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual
fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government
body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit
Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any
fund that assures returns and it is now compulsory for funds to establish that they have resources
to back such assurances. This is because most closed-end funds that assured returns in the early-
nineties failed to stick to their assurances made at the time of launch, resulting in losses to
investors. A scheme cannot make any guarantee of return, without stating the name of the
guarantor, and disclosing the net worth of the guarantor. The past performance of the assured
return schemes should also be given.
2. Restrictive gains
Diversification helps, if risk minimisation is your objective. However, the lack of investment
focus also means you gain less than if you had invested directly in a single security.
Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by
50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus
in Reliance, will see only a 5 per cent appreciation.
3. Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent
of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on
the income you receive, even if you reinvest the money you made.
 4. Management risk
When you invest in a mutual fund, you depend on the fund's manager to make the right decisions
regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you
might not make as much money on your investment as you expected. Of course, if you invest in
Index Funds, you forego management risk, because these funds do not employ managers.

History of Mutual Funds in India

1963 Establishment of Unit Trust of India
1964 Unit Scheme 1964 launched
1987 Entry of non-UTI, Public Sector mutual funds
1993 Entry of private sector funds
First Mutual Fund regulations came into being
1996 Substitution of prevalent rules by SEBI (Mutual Funds) Regulations 1996
2003 UTI bifurcated into two separate entities
– Specified Undertaking of Unit Trust of India
– UTI Mutual Fund
2004 Existence of 421 schemes, managing assets worth Rs. 153108

Frequently used terms

• Net Asset Value (NAV)

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.

• Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a
sales load.

• Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may include a back-
end load. This is also called Bid Price.

• Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are NAV related.

• Sales Load

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load.
Schemes that do not charge a load are called ‘No Load’ schemes.

• Repurchase or ‘Back-end’Load

Is a charge collected by a scheme when it buys back the units from the unitholders.
 Ch. 2- Types of mutual fund schemes

A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk
tolerance and return expectations etc. The table below gives an overview into the existing types
of schemes in the Industry.

By structure:
a) open-ended schemes
b) close-ended schemes
c) interval schemes

By investment objective:
a) growth schemes
b) income schemes
c) Balanced schemes
d) money market schemes

Other schemes:
a) Tax saving schemes
b) special schemes
c) index schemes
d) sector specific schemes

By Structure

a) Open-ended schemes
Open-ended or open mutual funds are much more common than closed-ended funds and meet the
true definition of a mutual fund – a financial intermediary that allows a group of investors to
pool their money together to meet an investment objective– to make money! An individual or
team of professional money managers manage the pooled assets and choose investments, which
create the fund’s portfolio. They are established by a fund sponsor, usually a mutual fund
company, and valued by the fund company or an outside agent. This means that the fund’s
portfolio is valued at "fair market" value, which is the closing market value for listed public
securities. An open-ended fund can be freely sold and repurchased by investors.
• Buying and Selling:

Open funds sell and redeem shares at any time directly to shareh

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