Beginners Guide Mutual FundsIndia Infoline

BASICS OF MUTUAL FUNDS - INDIAINFOLINE.
COM
MUTUAL FUNDS: AN OVERVIEW ..............................................................................................................................

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TYPES OF MUTUAL FUNDS .............................................................................................................................

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Open-ended Funds.................................................................................................................................................4
Closed-ended Funds...............................................................................................................................................4
Interval Funds........................................................................................................................................................4
BY INVESTMENT OBJECTIVE:............................................................................................................................................4
Growth Funds........................................................................................................................................................4
Income Funds.........................................................................................................................................................4
Balanced Funds.....................................................................................................................................................4
Money Market Funds.............................................................................................................................................5
Load Funds............................................................................................................................................................5
No-Load Funds......................................................................................................................................................5
OTHER SCHEMES....................................................................................................................................................5
Tax Saving Schemes...............................................................................................................................................5
Special Schemes.....................................................................................................................................................5
BENEFITS OF INVESTING IN MUTUAL FUNDS..............................................................................................

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NET ASSET VALUE (NAV)...........................................................................................................................................

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CALCULATION OF NAV...................................................................................................................................................7
MUTUAL FUNDS IN INDIA (1964 - 2000)............................................................................................

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1999—YEAR OF THE FUNDS................................................................................................................................9
INDIAN SCENARIO...........................................................................................................................................
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BANKS V/S MUTUAL FUNDS .............................................................................................................................10
GLOBAL SCENARIO...........................................................................................................................................
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FUTURE SCENARIO......................................................................................................................................
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LIST OF VARIOUS FUNDS ALONG WITH ITS FUND MANAGERS.................................................................13
MUTUAL FUNDS AND THE BUDGET 1999-2000...........................................................................................

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INCOME RECEIVED FROM MUTUAL FUNDS.......................................................................................................................14

TAX IMPLICATION FOR INCOME RECEIVED ON OPEN-END EQUITY ORIENTED SCHEME:.................................................................15
DIFFERENCE BETWEEN TDS AND DISTRIBUTION TAX........................................................................................................15
LONG TERM CAPITAL GAINS ARISING FROM SALE OF MUTUAL FUND UNITS.............................................................................15
MUTUAL FUNDS AND THE BUDGET 2000-2001...........................................................................................

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Mutual Funds: Indiainfoline
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REGULATORY ASPECTS OF MUTUAL FUND...........................................................................................

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SCHEMES OF MUTUAL FUND............................................................................................................................17

RULES REGARDING ADVERTISEMENT...........................................................................................................17
INVESTMENT OBJECTIVES AND VALUATION POLICIES:............................................................................18
GENERAL OBLIGATIONS....................................................................................................................................18
PROCEDURE FOR ACTION IN CASE OF DEFAULT: .......................................................................................19
RESTRICTIONS ON INVESTMENTS:.................................................................................................................19
FREQUENTLY ASKED QUESTIONS...................................................................................................

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GLOSSARY.......................................................................................................................................................................
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LIST OF BOOKS.........................................................................................................................................
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MUTUAL FUNDS: AN OVERVIEW
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 invested by the fund manager in different types of securities depending
upon the objective of the scheme. These could range from shares to debentures to money market
instruments. The income earned through these investments and the capital appreciation realized by the
scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). 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.
A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets
for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have
become mature and information driven. Price changes in these assets are driven by global events
occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and
time to keep track of events, understand their implications and act speedily. An individual also finds it
difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.
A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced
staff that manages each of these functions on a full time basis. The large pool of money collected in the
fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle
exploits economies of scale in all three areas - research, investments and transaction processing. While
the concept of individuals coming together to invest money collectively is not new, the mutual fund in its
present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second
World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with
different investment objectives. Today, mutual funds collectively manage almost as much as or more
money as compared to banks.
A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the
investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules
for entry into and exit from the fund and other areas of operation. In India, as in most countries, these
sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI
looks at track records of the sponsor and its financial strength in granting approval to the fund for
commencing operations.
A sponsor then hires an asset management company to invest the funds according to the investment
objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one
to handle registry work for the unit holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a
majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company
(AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.,
which has floated different mutual funds schemes and also acts as an asset manager for the funds
collected under the schemes.
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TYPES OF MUTUAL FUNDS
Mutual fund schemes may be classified on the basis of its structure and its investment objective.
By Structure:
Open-ended Funds
An open-end fund is one that is available for subscription all through the year. These do not have a fixed
maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key
feature of open-end schemes is liquidity.
Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund
is open for subscription only during a specified period. Investors can invest in the scheme at the time of
the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges
where they are listed. In order to provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or
redemption during pre-determined intervals at NAV related prices.
By Investment Objective:
Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes
normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have
outperformed most other kind of investments held over the long term. Growth schemes are ideal for
investors having a long-term outlook seeking growth over a period of time.
Income Funds
The aim of income funds is to provide regular and steady income to investors. Such schemes generally
invest in fixed income securities such as bonds, corporate debentures and Government securities. Income
Funds are ideal for capital stability and regular income.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically
distribute a part of their earning and invest both in equities and fixed income securities in the proportion
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indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally
keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of
income and moderate growth.
Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income.
These schemes generally invest in safer short-term instruments such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending
upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a
means to park their surplus funds for short periods.
Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in
the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be
worth paying the load, if the fund has a good performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is
payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus
is put to work.
OTHER SCHEMES
Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws
as the Government offers tax incentives for investment in specified avenues. Investments made in Equity
Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income
Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB
by investing in Mutual Funds.
Special Schemes
• Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer document. The investment of
these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals etc.
• Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE
50
• Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or
various segments such as 'A' Group shares or initial public offerings.
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BENEFITS OF INVESTING IN MUTUAL FUNDS
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.
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.
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.
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.
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.
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.
Transparency
You 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.
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.
Affordability
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.
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Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
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.
Net Asset Value (NAV)
The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In
other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the
amount that the shareholders would collectively own. This gives rise to the concept of net asset value per
unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by
dividing the net asset value of the fund by the number of units. However, most people refer loosely to the
NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.
Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by the fund. Once it is
calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The
detailed methodology for the calculation of the asset value is given below.
Asset value is equal to
Sum of market value of shares/debentures
+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
Expenses accrued but not paid
Details on the above items
For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the
principal exchange where the security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares,
this could be the book value per share or an estimated market price if suitable benchmarks are available.
For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after
adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to
interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted
and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are
believed to take advantage of this and adopt flexible valuation policies depending on the situation.
Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing
day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic
interest payment with the number of days in each period. Thus, accrued interest on a particular day is
equal to the daily interest rate multiplied by the number of days since the last interest payment date.
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Usually, dividends are proposed at the time of the Annual General meeting and become due on the record
date. There is a gap between the dates on which it becomes due and the actual payment date. In the
intermediate period, it is deemed to be "accrued".
Expenses including management fees, custody charges etc. are calculated on a daily basis.
MUTUAL FUNDS IN INDIA (1964 - 2000)
The end of millennium marks 36 years of existence of mutual funds in this country. The ride through
these 36 years is not been smooth. Investor opinion is still divided. While some are for mutual funds
others are against it.
UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came
from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came
into existence during a period marked by great political and economic uncertainty in India. With war on
the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter
capital market.
The already existing companies found it difficult to raise fresh capital, as investors did not respond
adequately to new issues. Earnest efforts were required to canalize savings of the community into
productive uses in order to speed up the process of industrial growth.
The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be "open to any
person or institution to purchase the units offered by the trust. However, this institution as we see it, is
intended to cater to the needs of individual investors, and even among them as far as possible, to those
whose means are small."
His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twin
objectives of mobilizing retail savings and investing those savings in the capital market and passing on
the benefits so accrued to the small investors.
UTI commenced its operations from July 1964 "with a view to encouraging savings and investment and
participation in the income, profits and gains accruing to the Corporation from the acquisition, holding,
management and disposal of securities." Different provisions of the UTI Act laid down the structure of
management, scope of business, powers and functions of the Trust as well as accounting, disclosures and
regulatory requirements for the Trust.
One thing is certain – the fund industry is here to stay. The industry was one-entity show till 1986 when
the UTI monopoly was broken when SBI and Canbank mutual fund entered the arena. This was followed
by the entry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Starting with an asset
base of Rs. 25 crore in 1964 the industry has grown at a compounded average growth rate of 27% to its
current size of Rs. 90000 crore.
The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From one
player in 1985 the number increased to 8 in 1993. The party did not last long. When the private sector
made its debut in 1993-94, the stock market was booming.
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The opening up of the asset management business to private sector in 1993 saw international players like
Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital International along with the host
of domestic players join the party. But for the equity funds, the period of 1994-96 was one of the worst in
the history of Indian Mutual Funds.
1999—YEAR OF THE FUNDS

Mutual funds have been around for a long period of time to be precise for 36 yrs but the year 1999 saw
immense future potential and developments in this sector. This year signaled the year of resurgence of
mutual funds and the regaining of investor confidence in these MF’s. This time around all the participants
are involved in the revival of the funds ----- the AMC’s, the unit holders, the other related parties.
However the sole factor that gave lifr to the revival of the funds was the Union Budget. The budget
brought about a large number of changes in one stroke. An insight of the Union Budget on mutual funds
taxation benefits is provided later.
It provided centrestage to the mutual funds, made them more attractive and provides acceptability among
the investors. The Union Budget exempted mutual fund dividend given out by equity-oriented schemes
from tax, both at the hands of the investor as well as the mutual fund. No longer were the mutual funds
interested in selling the concept of mutual funds they wanted to talk business which would mean to
increase asset base, and to get asset base and investor base they had to be fully armed with a whole lot of
schemes for every investor .So new schemes for new IPO’s were inevitable. The quest to attract investors
extended beyond just new schemes. The funds started to regulate themselves and were all out on winning
the trust and confidence of the investors under the aegis of the Association of Mutual Funds of India
(AMFI)
One cam say that the industry is moving from infancy to adolescence, the industry is maturing and the
investors and funds are frankly and openly discussing difficulties opportunities and compulsions.
Indian Scenario
A lone UTI with just one scheme in 1964, now competes with as many as 400 odd products and 34
players in the market. In spite of the stiff competition and losing market share, UTI still remains a
formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for the industry. New players have
come in, while others have decided to close shop by either selling off or merging with others. Product
innovation is now passé with the game shifting to performance delivery in fund management as well as
service. Those directly associated with the fund management industry like distributors, registrars and
transfer agents, and even the regulators have become more mature and responsible.
The industry is also having a profound impact on financial markets. While UTI has always been a
dominant player on the bourses as well as the debt markets, the new generation of private funds which
have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection
criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent
management with higher valuations, a system of risk-reward has been created where the corporate sector
is more transparent then before.
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Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology
sector. Funds performances are improving. Funds collection, which averaged at less than Rs100bn per
annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998-99. In the current year
mobilization till now have exceeded Rs300bn. Total collection for the current financial year ending March
2000 is expected to reach Rs450bn.
What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual
funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore
during the first nine months of the year as against a net inflow of Rs.604.40 crore in the case of public
sector funds.
Mutual funds are now also competing with commercial banks in the race for retail investor’s savings and
corporate float money. The power shift towards mutual funds has become obvious. The coming few years
will show that the traditional saving avenues are losing out in the current scenario. Many investors are
realizing that investments in savings accounts are as good as locking up their deposits in a closet. The
fund mobilization trend by mutual funds in the current year indicates that money is going to mutual funds
in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-
99.
India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an Asset
base that is much higher than its bank deposits. In India, mutual fund assets are not even 10% of the bank
deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the
current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17%.
(Source: Thinktank, The Financial Express September, 99) This is forcing a large number of banks to
adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets which
improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual Funds are
going to change the way banks do business in the future
BANKS V/S MUTUAL FUNDS

BANKS MUTUAL FUNDS
Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation Minimum balance between 10th. & Everyday
30th. Of every month
Guarantee Maximum Rs.1 lakh on deposits None
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GLOBAL SCENARIO
Some basic facts-

• The money market mutual fund segment has a total corpus of $ 1.48 trillion in the U.S. against a
corpus of $ 100 million in India.
• Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital
are non-bank mutual funds in this group.
• In the U.S. the total number of schemes is higher than that of the listed companies while in India
we have just 277 schemes
• Internationally, mutual funds are allowed to go short. In India fund managers do not have such
leeway.
• In the U.S. about 9.7 million households will manage their assets on-line by the year 2003, such a
facility is not yet of avail in India.
• On- line trading is a great idea to reduce management expenses from the current 2 % of total
assets to about 0.75 % of the total assets.
• 72% of the core customer base of mutual funds in the top 50-broking firms in the U.S. are
expected to trade on-line by 2003.
(Source: The Financial Express September, 99)
Internationally, on- line investing continues its meteoric rise. Many have debated about the success of e-
commerce and its breakthroughs, but it is true that this aspect of technology could and will change the
way financial sectors function. However, mutual funds cannot be left far behind. They have realized the
potential of the Internet and are equipping themselves to perform better.
In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have already begun on
the Net, while in India the Net is used as a source of Information.
Such changes could facilitate easy access, lower intermediation costs and better services for all. A
research agency that specializes in internet technology estimates that over the next four years Mutual
Fund Assets traded on- line will grow ten folds from $ 128 billion to $ 1,227 billion ; whereas equity
assets traded on-line will increase during the period from $ 246 billion to $ 1,561 billion. This will
increase the share of mutual funds from 34% to 40% during the period.
(Source: The Financial Express September ,99)
Such increases in volumes are expected to bring about large changes in the way Mutual Funds conduct
their business.
Here are some of the basic changes that have taken place since the advent of the Net.
• Lower Costs: Distribution of funds will fall in the online trading regime by 2003 . Mutual funds
could bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI
regulations , bond funds can charge a maximum of 2.25% and equity funds can charge 2.5% as
administrative fees. Therefore if the administrative costs are low , the benefits are passed down
and hence Mutual Funds are able to attract mire investors and increase their asset base.
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• Better advice: Mutual funds could provide better advice to their investors through the Net rather
than through the traditional investment routes where there is an additional channel to deal with
the Brokers. Direct dealing with the fund could help the investor with their financial planning.
• In India , brokers could get more Net savvy than investors and could help the investors with the
knowledge through get from the Net.
• New investors would prefer online : Mutual funds can target investors who are young
individuals and who are Net savvy, since servicing them would be easier on the Net.
• India has around 1.6 million net users who are prime target for these funds and this could just be
the beginning. The Internet users are going to increase dramatically and mutual funds are going to
be the best beneficiary. With smaller administrative costs more funds would be mobilized .A fund
manager must be ready to tackle the volatility and will have to maintain sufficient amount of
investments which are high liquidity and low yielding investments to honor redemption.
• Net based advertisements: There will be more sites involved in ads and promotion of mutual
funds. In the U.S. sites like AOL offer detailed research and financial details about the
functioning of different funds and their performance statistics. a is witnessing a genesis in this
area . There are many sites such as indiainfoline.com and indiafn.com that are doing something
similar and providing advice to investors regarding their investments.
FUTURE SCENARIO
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as
investor’s shift their assets from banks and other traditional avenues. Some of the older public and private
sector players will either close shop or be taken over.
Out of ten public sector players five will sell out, close down or merge with stronger players in three to
four years. In the private sector this trend has already started with two mergers and one takeover. Here too
some of them will down their shutters in the near future to come.
But this does not mean there is no room for other players. The market will witness a flurry of new players
entering the arena. There will be a large number of offers from various asset management companies in
the time to come. Some big names like Fidelity, Principal, Old Mutual etc. are looking at Indian market
seriously. One important reason for it is that most major players already have presence here and hence
these big names would hardly like to get left behind.
In the U.S. most mutual funds concentrate only on financial funds like equity and debt. Some like real
estate funds and commodity funds also take an exposure to physical assets. The latter type of funds are
preferred by corporate’s who want to hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an
equivalent amount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a
conservative U.S. based fund invests a fixed percentage of it’s corpus in Gold, Silver, Swiss francs,
specific stocks on various bourses around the world, short –term and long-term U.S. treasuries etc.
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In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real estate funds
(investing in real estate and other related assets as well.).In India, the Canada based Dundee mutual
fund is planning to launch a gold and a real estate fund before the year-end.
In developed countries like the U.S.A there are funds to satisfy everybody’s requirement, but in
India only the tip of the iceberg has been explored. In the near future India too will concentrate on
financial as well as physical funds.
The mutual fund industry is awaiting the introduction of DERIVATIVES In the coutyr as this would
enable it to hedge its risk and this in turn would be reflected in it’s Net Asset Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to trade in Derivatives.
Importantly, many market players have called on the Regulator to initiate the process immediately, so that
the mutual funds can implement the changes that are required to trade in Derivatives.
LIST OF VARIOUS FUNDS ALONG WITH ITS FUND MANAGERS
Fund name Major Schemes Fund manager Telephone no. Website

Alliance Capital 1)Alliance ’95 Fund Samir Arora 4960094 4975604 www.alliancecapital.co
Mutual Fund 2)Alliance Equity Vineet Udeshi 4978000 m
Fund
3) Alliance Liquid
Income Fund
Birla Mutual 1) Birla Advantage Bharat Shah 8326000 8326100 www.birlamutual.com
Fund 8326200
2) Birla Income Plus
Kothari Pioneer 1)Kothari Pioneer R.Sukumar 8240674 8240744 www.kotharipioneer.co
Mutual Fund Prima Plus m
2)Kothari Pioneer
Blue Chip
SBI Mutual Fund 1)SBI Magnum Ved Prakash 2185696 2180221-27 www.sbimf.com
Multiplier Scheme’90 Chaturvedi
2)SBI Magnum Sandeep Sabarwal
Taxgain Scheme 1993 Mihir Vora
3) SBI Magnum Bond
Fund
4) SBI Rising Income
Scheme
Prudential - ICICI 1) Prudential ICICI Dileep Madgavkar 2679676 www.pruiciciamc.com
Growth Plan V.Kannan
2) ICICI Premier
DSP Merrill Lynch DSP Merrill Lynch James Leighton 2884831 2884822 www.ml.com
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Fund Equity Fund

Morgan Stanley Morgan Stanley Vinod Sethi 2096600 www.msgfindia.com
Growth Fund
Tata Mutual Fund Tata Balanced Fund Shyam Bhat 2881190 www.tata.com/mutualf
und
Canbank Mutual Fund Canganga -------- 2693590 Canbank.cimbom1@c
anbank.gms.vsnl.net.i
n (e-mail)
Templeton Asset Templeton India Nilesh Shah and 2886123 2886132 www.templeton.com
Management Ltd. Income Fund Shobit Mehrotra
Unit Trust of India UTI MIP 94 (III) - -- -- -- -- - 2180221 www.unittrustofindia.c
om
LIC Mutual Fund LIC Dhanvarsha 9 V.Ramanan and - -- - -- - -- www.licindia.com
C.S.Madhavrao
Mutual funds and the Budget 1999-2000
The Union Budget of India, 1999 presented in Parliament on February 27 has brought good things for
mutual fund investors. The budget aims at making mutual funds tax friendly for the individual investor,
resulting in large inflows into the capital markets through mutual funds.
Income Received From Mutual Funds
The Finance Bill has made income (i.e. dividends) received from all mutual funds tax free in the hands of
investors. Effective April 1, 1999 (i.e. assessment year 2000-2001) investors need not pay any tax on
dividend received from a mutual fund. For the investor it does not matter what kinds of mutual fund
scheme they have invested in. Dividend whether received from equity, equity & debt or a debt scheme
will all be tax-free for the investor. Since investors shall be receiving tax-free dividends, the benefits of
section 80L will no longer be relevant to mutual funds. Section 80L allowed you to take a deduction of up
to Rs. 15,000 (of which Rs.3,000 was specifically reserved for mutual funds) for dividends received from
mutual funds together with income from other securities. Now that investors will receive tax-free
dividends from mutual funds, Section 80L is no longer applicable to dividends from them.
While dividends in the hands of the investor are free from tax, mutual funds are now required to pay a
"distribution tax" of 10%. For financial year 1999-2000, however, only distributions made after June 1,
1999 will be subject to the tax. The good news is that the distribution tax does not have to be paid on all
types of mutual fund schemes. Effective April 1,1999, for a period of three years, open-end equity
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oriented schemes will be exempt from paying the distribution tax.
Tax implication for income received on open-end equity oriented scheme:
As per the Finance Bill, income distributed under the US-64 scheme and other open-ended equity oriented
scheme of UTI and Mutual Funds would be exempt from the levy of this tax for a period of three financial
years starting from 1.4.1999. An open-end equity oriented scheme is defined as one where more than 50%
of the scheme's investible funds are invested in domestic equities. The 50% is computed taking the annual
average of the monthly averages of the scheme's equity holdings. The monthly average, in turn, is
calculated by taking the opening and closing percentage of a particular month's equity holdings.
Tax implication for income received from schemes other than open-end equity oriented scheme
By definition all schemes that are not open-end equity oriented schemes must pay a distribution tax. This
tax has been fixed at 10%. In fact, the actual tax will be 11% since the mutual fund must pay a 10%
surcharge as well.
Difference Between TDS and Distribution Tax
The distribution tax is different from "TDS" or tax deducted at source. In the case of TDS, the fund
deducts tax and deposits it with the Government. This tax is deducted by the fund from income payable to
the investor and the investor gets credit of the same while filing his annual return of tax. In cases where
the investor is not liable to pay tax he may claim an exemption from TDS by filing a Form 15H with the
fund. Distribution tax is, however, a tax that has to be paid by the fund, not the investor. It is not a direct
tax paid by the investor therefore, he cannot file for exemption from distribution tax. Hence, while the
dividend pay out will be tax-exempt in the hands of the investors, in all schemes where the mutual fund
has to pay a distribution tax, the dividend pay out will be affected to that extent by the 11% distribution
tax.
Long Term Capital Gains arising from sale of mutual fund units
As per the current provisions of the budget, long term capital gains arising from the sale of listed
securities and shares as defined under the Securities Contracts (Regulation) Act, 1956 (SCRA) are now
chargeable to tax at a maximum rate of 10 %. As per the earlier Income Tax law, long-term capital gains
from shares and securities were taxed at 20 per cent after giving benefit of cost inflation indexation. The
present budget capped capital gains tax at 10 per cent for securities as defined under Section 2(h) of
SCRA and listed in recognised stock exchanges in India. The benefit of cost indexation, however, would
not be available in such cases. That is, persons would have the option of either availing of cost indexation
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on the capital gains and paying 20 per cent capital gains tax or paying a flat rate of 10 per cent without
cost indexation. As a result, the maximum capital gains tax payable has been capped at 10 per cent. The
finance ministry is considering extending the benefit of the 10 % cap on long term capital gains tax to
units of all mutual funds. Since the definition of securities in the SCRA Act does not include units issued
by mutual funds, these do not get the benefit of the capping of capital gains tax. However, UTI may get
this benefit as the SCRA definition includes all 'securities issued by a body corporate' and UTI is one by
statute.
Important
The above is a general description of the tax laws. Tax laws may change in the future and the applicability
of these laws may vary from person to person, depending on your particular circumstances. You should
consult with your own tax advisor with respect to the tax benefits available from a mutual fund
investment
Mutual funds and the Budget 2000-2001
Important measures
1. Deletion of sections 54 EA and 54 EB of the Income Tax Act, 1961.
The above two sections provided relief from capital gains tax if investments were made in
specified securities and locked in for a period of 3 years in the case of 54EA and 7 years in the
case of 54EB. Mutual fund units were one of the specified securities and this resulted in a lot of
money realised as profit from sale of securities being reinvested in the market through mutual
funds.
With the withdrawal of the exemption to mutual funds, investors have lost out on a very viable
alternative for tax saving and funds also would be faced with the problem of ‘hot money’ as there
would no longer be any lock in period for investments. It is estimated that 54EA investments
formed approximately 15% of the corpus.
2. Increase in dividend tax from 10% to 20% for debt funds.
The existing dividend tax payable by debt schemes has been doubled to 20%. This would lead to a
reduction in returns available to investors by approximately 1.5% from the average of approximately
14%. This is expected to hurt retail investment in debt schemes and could lead to a pull out and reduced
mobilisation. Two implications of this move could be:
1. Reinvestment of dividends by investors; since capital gains would be taxed at a lower rate as
compared to dividend, investors would prefer to reinvest dividend and earn long-term capital
appreciation.
2. Switch over from debt to equity schemes; since open ended equity schemes are free from paying
dividend tax, these schemes could attract some of the investment that is pulled out from debt
schemes.
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Instead of taxing debt schemes so as to bring parity between the banks and mutual funds, it is widely felt
that the finance minister could have simply extended some of the benefits enjoyed by mutual funds to
banks and FIs. The experience with mutual funds has in any case shown that turning dividends tax free in
the hands of investors has simply improved collections, widened the tax base and reduced procedural
delays
REGULATORY ASPECTS OF MUTUAL FUND
SCHEMES OF MUTUAL FUND

• The asset management company shall launch no scheme unless the trustees approve such scheme
and a copy of the offer document has been filed with the Board.
• Every mutual fund shall along with the offer document of each scheme pay filing fees.
• The offer document shall contain disclosures which are adequate in order to enable the investors
to make informed investment decision including the disclosure on maximum investments
proposed to be made by the scheme in the listed securities of the group companies of the sponsor.
• No one shall issue any form of application for units of a mutual fund unless the form is
accompanied by the memorandum containing such information as may be specified by the Board.
• Every close ended scheme shall be listed in a recognized stock exchange within six months from
the closure of the subscription
• The asset management company may at its option repurchase or reissue the repurchased units of a
close ended scheme.
• A close-ended scheme shall be fully redeemed at the end of the maturity period. "Unless a
majority of the unit holders otherwise decide for its rollover by passing a resolution".
• The mutual fund and asset management company shall be liable to refund the application money
to the applicants,-
(i) If the mutual fund fails to receive the minimum subscription amount referred
to in clause (a) of sub-regulation (1);
(ii) If the moneys received from the applicants for units are in excess of
subscription as referred to in clause (b) of sub-regulation (1).
• The asset management company shall issue to the applicant whose application has been accepted,
unit certificates or a statement of accounts specifying the number of units allotted to the applicant
as soon as possible but not later than six weeks from the date of closure of the initial subscription
list and or from the date of receipt of the request from the unit holders in any open ended scheme.
RULES REGARDING ADVERTISEMENT

• The advertisement for each scheme shall disclose investment objective for each scheme.
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• 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.
INVESTMENT OBJECTIVES AND VALUATION POLICIES:

• The moneys collected under any scheme of a mutual fund shall be invested only in transferable
securities in the money market or in the capital market or in privately placed debentures or
securitised debts.
• Provided that moneys collected under any money market scheme of a mutual fund shall be
invested only in money market instruments in accordance with directions issued by the Reserve
Bank of India;
• The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds
for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit
holders.
• The mutual fund shall not advance any loans for any purpose.
• Every mutual fund shall compute and carry out valuation of its investments in its portfolio and
publish the same in accordance with the valuation norms specified in Eighth Schedule
• Every mutual fund shall compute the Net Asset Value of each scheme by dividing the net assets
of the scheme by the number of units outstanding on the valuation date.
• The Net Asset Value of the scheme shall be calculated and published at least in two daily
newspapers at intervals of not exceeding one week:
• The price at which the units may be subscribed or sold and the price at which such units may at
any time be repurchased by the mutual fund shall be made available to the investors.
GENERAL OBLIGATIONS
• Every asset management company for each scheme shall keep and maintain proper books of
accounts, records and documents, for each scheme so as to explain its transactions and to disclose
at any point of time the financial position of each scheme and in particular give a true and fair
view of the state of affairs of the fund and intimate to the Board the place where such books of
accounts, records and documents are maintained.
• The financial year for all the schemes shall end as of March 31 of each year.
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• Every mutual fund or the asset management company shall prepare in respect of each financial
year an annual report and annual statement of accounts of the schemes and the fund as specified
in Eleventh Schedule.
• Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in
any way associated with the auditor of the asset management company.
PROCEDURE FOR ACTION IN CASE OF DEFAULT:

• On and from the date of the suspension of the certificate or the approval, as the case may be, the
mutual fund, trustees or asset management company, shall cease to carry on any activity as a
mutual fund, trustee or asset management company, during the period of suspension, and shall be
subject to the directions of the Board with regard to any records, documents, or securities that
may be in its custody or control, relating to its activities as mutual fund, trustees or asset
management company.
RESTRICTIONS ON INVESTMENTS:
• A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a
single issuer, which are rated not below investment grade by a credit rating agency authorized to
carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV
of the scheme with the prior approval of the Board of Trustees and the Board of asset
management company
• A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt instruments
issued by a single issuer and the total investment in such instruments shall not exceed 25% of the
NAV of the scheme. All such investments shall be made with the prior approval of the Board of
Trustees and the Board of asset management company.
• No mutual fund under all its schemes should own more than ten per cent of any company's paid
up capital carrying voting rights.
• Transfers of investments from one scheme to another scheme in the same mutual fund shall be
allowed only if, -
3. Such transfers are done at the prevailing market price for quoted instruments on spot
basis.
4. The securities so transferred shall be in conformity with the investment objective of the
scheme to which such transfer has been made.
• A scheme may invest in another scheme under the same asset management
company or any other mutual fund without charging any fees, provided that
aggregate interscheme investment made by all schemes under the same
management or in schemes under the management of any other asset
management company shall not exceed 5% of the net asset value of the mutual
fund.
• The initial issue expenses in respect of any scheme may not exceed six per cent
of the funds raised under that scheme.
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• Every mutual fund shall buy and sell securities on the basis of deliveries and
shall in all cases of purchases, take delivery of relative securities and in all cases
of sale, deliver the securities and shall in no case put itself in a position whereby
it has to make short sale or carry forward transaction or engage in badla finance.
• Every mutual fund shall, get the securities purchased or transferred in the name
of the mutual fund on account of the concerned scheme, wherever investments
are intended to be of long-term nature.
• Pending deployment of funds of a scheme in securities in terms of investment
objectives of the scheme a mutual fund can invest the funds of the scheme in
short term deposits of scheduled commercial banks.
• No mutual fund scheme shall make any investment in;
Any unlisted security of an associate or group company of the sponsor; or
Any security issued by way of private placement by an associate or group
company of the sponsor; or
The listed securities of group companies of the sponsor which is in excess of
30% of the net assets [of all the schemes of a mutual fund]
• No mutual fund scheme shall invest more than 10 per cent of its NAV in the
equity shares or equity related instruments of any company. Provided that, the
limit of 10 per cent shall not be applicable for investments in index fund or sector
or industry specific scheme.
• A mutual fund scheme shall not invest more than 5% of its NAV in the equity
shares or equity related investments in case of open-ended scheme and 10% of its
NAV in case of close-ended scheme
Frequently Asked Questions
Why have mutual funds in India performed so poorly?

Most investors associate mutual funds with Mastergain, Monthly Equity Plans of SBI Mutual Fund, UTI
and Canbank Mutual Fund and of course Morgan Stanley Growth Fund. This is so because these funds
truly had participation from masses, with a fund like Morgan Stanley having more than 1 million
investors. Investors feel that after 5 years, Morgan Stanley Growth Fund units still trade below the
original IPO price of Rs 10.
It is incorrect to think that all mutual funds have performed poorly. If one looks at some income funds,
they have come with reasonable returns. It is only the performance of equity funds, which has been poor.
Their poor performance has been amplified by the closed end discounts ie units of these funds quoting at
sharp discounts to their NAV resulting in an even poorer return to the investor.
One must remember that a Mutual Fund does not provide assured returns and neither can it "manufacture"
returns out of thin air. Returns provided by mutual funds are a function of the returns in the underlying
asset class in which the fund invests. Good funds can beat returns in their asset class to some extent but
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that’s all. Eg take the case of a sector specific fund like a pharma fund which invests only in shares of
pharmaceutical companies. If the Govt. comes with new regulation that severely restricts the pricing
freedom of these companies resulting in negative outlook for the sector, the prices of all stocks in the
sector could fall substantially resulting in a severe erosion in the NAV of the fund. No one can do
anything about it. A good fund manager would probably sell part of the fund before prices fall too much
and wait for an opportune time to reinvest at lower levels once the dust has settled. In that case, the NAV
of the fund would fall to a lesser extent – but fall it will. If the investor in the fund has invested in some
stocks in the sector on his own, in all probability, his personal investments may have depreciated to a
larger extent.
Let us extend this example to an analysis of the investment climate in the last 7 years. The stock markets
have done very badly in the last seven years. The BSE Sensex crossed 3000 for the first time in early
1992. Since then it has gone up and come down several times but has remained in the same range.
Effectively, for a seven-year investment period, the total return has been almost zero. The prices of many
leading stocks of yesteryear have fallen by more than 50% in these seven years. If one considers the fact
that the Sensex has been changed several times, with all the weak stocks having been weeded out, the
effective returns on the old Sensex, existing in 1992, have been substantially negative. The following
table gives some of the prices of stocks considered "blue chips" in 1992, in 1994 and the prices prevailing
at present.
Price in Rs
Name of the 1992 high 1994 high Current price
Company
Tata Steel 552 336 99
Grasim Industries 650 793 137
Century Textiles 490 550 28.6
Reliance Industries 218 213 149
Raymond 250 263 71
Arvind Mills 353 290 27.65
ICICI 290 197 55.4
It is quite obvious that if a fund had invested in any of these shares in 1992 or subsequently in the 1994
boom, and if it remained invested in the share, then it would be confronting a huge fall in NAV. This is
exactly what has happened.
A similar table for prices of shares of Public Sector Undertakings (PSUs) is given below.
Price in Rs
Name of the 1994 high Present
Company price
MTNL 325 161
HPCL 550 188
Indian Oil n/a 251
ONGC n/a 134.5
SAIL 83 5.05
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Most mutual fund managers took some time to realize the changed circumstances wherein the open
economy ushered in by the liberalization took the full impact of the global deflation in commodity prices.
This problem was compounded further by the Asian crisis after which cheap imports from Asia caused
severe pressure on profits.
To add to this, most funds had invested some part of their portfolio in medium sized "growth" companies.
Many of these companies have performed even worse than bigger ones and quite a few have seen share
prices dip more than 90% from their 1994 highs. More important, funds could not sell these shares
because of complete lack of liquidity with, at best, few hundred shares being traded every day.
Meanwhile, shares of companies in sectors like consumer goods (FMCG) and software, were showing
good growth and they went up rapidly in price. Most fund managers were unwilling to sell shares of
erstwhile "blue chips" at low prices and buy shares of emerging "blue chips" at high prices. This resulted
in poor performance and negative returns.
One more issue is that the fund managers in many funds were not "professionally qualified and
experienced". This is especially true of some of the funds floated by nationalized banks. Some of these
individuals were transferred from the parent organization and did not really know much about investment
management.
Lastly, investors would do well to have a look at the investments, which they made on their own. In most
cases, they would have done much worse than the mutual funds. We have received numerous requests for
advice from individual investors on what to do about their own investments. If that were any indicator,
investors would have done really badly.
Is it true that globally mutual funds underperform benchmark indices? Why are smart money
managers unable to do as well as the market? Or is it that they are not smart at all? What are the
limitations of mutual funds?
It is 100% true that globally, most mutual fund managers underperform the asset class that they are
investing in. It is not true that the fund managers are dumb; this under performance is largely the result of
limitations inherent in the concept of mutual funds. These limitations are as follows:
Entry and exit costs: Mutual funds are a victim of their own success. When a large body like a fund
invests in shares, the concentrated buying or selling often results in adverse price movements ie at the
time of buying, the fund ends up paying a higher price and while selling it realizes a lower price. This
problem is especially severe in emerging markets like India, where, excluding a few stocks, even the
stocks in the Sensex are not liquid, let alone stocks in the NSE 50 or the CRISIL 500. So, there is simply
no way that a fund can beat the Sensex or any other index, if it blindly invests in the same stocks as those
in the Sensex and in the same proportion. For obvious reasons, this problem is even more severe for funds
investing in small capitalization stocks. However, given the large size of the debt market, excluding UTI,
most debt funds do not face this problem
Wait time before investment: It takes time for a mutual fund to invest money. Unfortunately, most
mutual funds receive money when markets are in a boom phase and investors are willing to try out mutual
funds. Since it is difficult to invest all funds in one day, there is some money waiting to be invested.
Further, there may be a time lag before investment opportunities are identified. This ensures that the fund
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underperforms the index. For open-ended funds, there is the added problem of perpetually keeping some
money in liquid assets to meet redemptions.
Fund management costs: The costs of the fund management process are deducted from the fund. This
includes marketing and initial costs deducted at the time of entry itself, called "load". Then there is the
annual asset management fee and expenses, together called the expense ratio. Usually, the former is not
counted while measuring performance, while the latter is. A standard 2% expense ratio means that,
everything else being equal, the fund manager underperforms the benchmark index by an equal amount.
Cost of churn: The portfolio of a fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager ie whether he is a buy and hold type of
manager or one who aggressively churns the fund. It is also dependent on the volatility of the fund size ie
whether the fund constantly receives fresh subscriptions and redemptions. Such portfolio changes have
associated costs of brokerage, custody fees, registration fees etc. which lowers the portfolio return
commensurately.
Change of index composition: World over, the indices keep changing to reflect changing market
conditions. There is an inherent survivorship bias in this process, with the bad stocks weeded out and
replaced by emerging blue chips. This is a severe problem in India with the Sensex having been changed
twice in the last 5 years, with each change being quite substantial. Another reason for change index
composition is Mergers & Acquisitions. The weightage of the shares of a particular company in the index
changes if it acquires a large company not a part of the index.
Tendency to take conformist decisions: From the above points, it is quite clear that the only way a fund
can beat the index is through investment of some part of its portfolio in some shares where it gets
excellent returns, much more than the index. This will pull up the overall average return. In order to
obtain such exceptional returns, the fund manager has to take a strong view and invest in some
uncommon or unfancied investment options. Most people are unwilling to do that. They follow the
principle "No fund manager ever got fired for investing in Hindustan Lever" ie if something goes wrong
with an unusual investment, the fund manager will be questioned but if anything goes wrong with the blue
chip, then you can always blame it on the "environment" or "uncontrollable factors" knowing fully well
that there are many other fund managers who have made the same decision. Unfortunately, if the fund
manager does the same thing as several others of his class, chances are that he will produce average
results. This does not mean that if a fund manager takes "active" views and invests in heavily researched
"uncommon" ideas, the fund will necessarily outperform the index. If the idea does not work, it will result
in poor fund performance. But if no such view is taken, there is absolutely no chance that the fund will
outperform the index.
Should an investor invest in a mutual fund despite its limitations or no?
Yes. Investor should invest some part or their investment portfolio in mutual funds. In fact some investors
may be better off by putting their entire portfolio in mutual funds. This is on account of the following
reasons:
• On their own, uninformed investors could perform much worse than mutual funds.
• Diversification of risks which is difficult for an investor to achieve with the small amount of
funds at his disposal
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• Possibility of investing in small amounts as and when the investor has funds to invest
• Unquestioned service of transaction processing, tracking of investments, collecting
dividends/interest warrants etc.
• Debt funds in India offer exposure to a diversified portfolio of bonds/debentures, which is
possible, only if the investor is investing millions of rupees. Further, they offer easy liquidity and
tax benefits. Debt funds thus offer a great proposition that is impossible for ordinary investors to
replicate on their own. This proposition compares favorably against competing investments like
small savings.
• Investors require analytical capability and access to research and information and need to spend
an enormous amount of time to make investment decisions and keep monitoring them. Some
people have the inclination and the time to make better decisions than fund managers do, but the
vast majority does not. Those who can are advised to invest some part of their money into funds,
especially debt funds, to diversify their risk. They may also note that one of the objectives of this
site is to help them improve the odds in their favor.
Are mutual funds safe? Are returns on mutual funds guaranteed by Government of India, or
Reserve Bank or any other government body?
Any mutual fund is as safe or unsafe as the assets that it invests in. There are two basic categories of
mutual funds with others being variations or mixtures of these. Firstly, there are those that invest purely in
equity shares (called equity funds or " growth funds") and secondly, there are those that invest purely in
bonds, debentures and other interest bearing instruments called "income" or "debt" funds. The NAV of
growth funds fluctuates in line with the fluctuation of the shares held by them. They can also witness face
substantial erosion in value, which could be permanent in some cases. On the other hand, prices of debt
instruments fluctuate to a much lesser degree and an income fund is extremely unlikely to face erosion in
value – especially of the permanent kind.
Most mutual funds have qualified and experienced personnel, who understand the risks of investing. But,
nobody is immune from making mistakes. However, funds diversify the investment portfolio substantially
so that default in any single investment (in the case of an income fund) will not affect the overall
performance of a fund in a significant manner. In the event of default of a part of the portfolio, an income
fund is extremely unlikely to face erosion in face value.
Generally, mutual funds are not guaranteed by anybody. However, in the Indian context, some of the
mutual funds have floated "guaranteed" or "assured" return schemes which guarantee a certain annual
return or guarantee a buyback at a specified price after some time. Examples of these include funds
floated by the UTI, Canbank Mutual Fund, SBI Mutual Fund, LIC Mutual Fund etc. Many of these funds
have not earned returns that they promised and the asset management companies of the respective mutual
funds or their sponsors have made good their promises. The biggest case pertains to the US 64, which
never guaranteed any returns but is being bailed out by the Government due to the millions of individuals
who have invested in it.
Can the foreign mutual funds operating in India take investors money outside the country?
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A mutual fund and the company that manages it are 2 entirely different companies. Legally speaking, a
mutual fund is a trust formed and registered under the Indian Trust Act. The sponsor asset management
company is formally appointed by the trustees of the trust to manage money on their behalf eg DSP
Merrill Lynch equity fund is a mutual benefit trust registered under the Indian Trust Act. The trustees
have appointed DSP Merrill Lynch Asset Management Company Pvt. Ltd. to manage the funds in the
trust and the company cannot touch one rupee from the trust except to the extent of the fees that it receives
for managing the funds.
Repatriation of money outside India comes under the purview of the Foreign Exchange Regulation Act,
1973 which specifies the situations in which money can be remitted outside India. Under the act, banks
that repatriate money on behalf of their clients have to ensure compliance with various legal formalities
and ensure that the entity, which remits money, is entitled to do so. Any failure or violation leads to
serious consequences for both the remitter and the bank. Money collected by a mutual fund domestically
is not allowed to be remitted outside India.
Is mutual funds outperformance always good?
Mutual fund performance of index may not always be a positive indicator. In several cases one notices
that the funds performance is very lop sided and is driven by few scrips. In other words the fund manager
has taken significantly higher risks and in the game of probability he would have made more money. But
it is very likely that if his call had not been right, he would have under performed and lost badly. From an
investor’s point of view, when he is looking at such out-performances in the past, he cannot derive
confidence and comfort in the fund managers' ability to repeat the performance in future. As markets are
not rational, there is no methodology in the world to scientifically predict stock prices. Therefore it is not
possible for anyone to beat the market on a consistent basis and hence there is no guarantee that the fund
manager would perform well all the while.
How does one see through the marketing hype given out by mutual funds?It is amazing how fund
marketers can come up with statistics to show how their particular fund has done extremely well.
Standard techniques include the following:
Defined period returns: Some period is depicted in which the particular fund outperformed others or
some benchmark. One should look very carefully at start and end dates – they can always be chosen in a
way that shows the fund in a favorable light
Outperformance vs performance: Sustained periods of low absolute performance are a cause for
concern. It is all right to look at relative returns with respect to benchmark indices; but there is no sense if
a particular fund produces absolute returns less than the deposit interest rates, even after a few years of
existence.
Promise of long term performance: Lack of performance is often explained away as temporary with
promises of good performance in the long term. Few define what this "long term" is – 1 or 2 or 5 or 10
years. Do not forget that the longer the period, the longer is the uncertainty in between – in other words,
would you want to wait for 10 years to get an uncertain 2% higher returns as compared to the certain
returns that you get in say the Public Provident Fund.
Rupee cost averaging: This is a term that has found its way into the marketing literature of all mutual
funds. What it means is that if you put in a fixed amount of money every month in a fund, then, in months
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when the NAV is low, the investor gets more units which benefits him when the NAV rises. Do not forget
the implicit assumption behind this – that the NAV will rise eventually. If it does not, you are no better off
than by not buying.
Equities are the best bet in the long run: Ask this to any investor who put money in the Sensex in 1992.
After a long run of 7 years, the investor is down on his investment by 50%. He would have been better off
by investing in other investment.
What went wrong with US64?
Basically, for a period of 2-3 years, the UTI distributed more dividend to the unitholders of US 64 than
the return earned from the investments in the scheme. This reduced the value of the residual investments
in the scheme. This problem was compounded by the persistent fall in the prices of shares, especially the
shares of companies in basic commodity industries like cement, steel, manmade fibres etc. and shares of
public sector units. Throughout this period, when the NAV of US 64 was going down, UTI kept
increasing the sale and repurchase prices of US 64 units. The stock market collapse after the Pokhran II
nuclear tests was the last straw, which resulted in the erosion of the scheme’s book reserves and a wide
difference between the actual NAV and the sale/repurchase price.
When this became known, it set a panic amongst investors of US 64. Many people felt that if there were
large-scale redemptions, UTI would not be able to meet them without support of outside bodies like the
RBI. Further, theoretically, if all investors wanted to redeem their US 64 units on the same day, the US 64
simply did not have the money to meet the redemptions on its own (due to the difference between NAV
and the repurchase price).
What went wrong with Morgan Stanley?
Morgan Stanley raised large corpus (more than Rs 10bn) in around early 1994. The entire exercise in fund
raising was centered on the hype of the fund being was the first fund promoted by an internationally
acclaimed asset management company. It was marketed like any other public issue and fund investors
rushed to invest in the scheme hoping to get superior returns. No one bothered to explain to them that
Morgan Stanley AMC was a service provider - providing them the service of investment advice and
management. No one explained to them that they were not investing in a share of a company – in fact the
artificial gray market premium served to perpetrate this feeling.
The IPO was a great success. It ensured that the name "Morgan Stanley" was now a part of the dreams of
more than 1 million Indians.
The fund raising exercise, unfortunately, coincided with the peak of stock market boom. Indian stock
markets lack depth and are quite illiquid. The fund managers were compelled to invest in equities in a big
hurry as a number of Foreign Institutional Investors were investing huge sums of money in the country
resulting in a mad rush for equity stocks. The fund’s managers invested a considerable amount of money
in smaller companies with low floating stock and low market capitalization, either through the secondary
market or through private placements. These companies had experienced the highest appreciation in
prices in the immediate past.
The market position started changing from late 1994. The boom in the market made it possible for many
companies to raise equity capital and literally hundreds of public/rights issues opened for subscriptions
every week, many of them at high issue prices. There were also massive private placements of equity
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shares and GDR issues at huge premiums. There were very few companies which did not wash their
hands in this great gravy train. This deluge of paper soaked up money and reduced the amount available
for fresh investment both from resident Indians, domestic mutual funds and from foreign institutional
investors.
At this time, the RBI commenced on its tight money policy in a bid to control inflation from raising its
head. Money supply tightened and bond yields started increasing dramatically. High industrial growth and
tight money created a shortage for credit and rates started going sky high. Many corporates and banks
started redeeming their holdings in the Unit Trust of India and other mutual funds. This put major
pressure on the market, which was already showing signs of weakness. What followed was the great
crash.
And in this crash, the biggest losers were the smaller capitalization stocks. Many of these stocks lost more
than 90% of their peak prices.
Morgan Stanley AMC restructured the funds portfolio at big losses.
As the NAV went below par, investors’ confidence was shattered. Being a closed-ended scheme the
Morgan Stanley’s mutual fund unit is also listed on the stock markets. Crisis of confidence led to its price
on the stock exchange crashing and it started quoting at a steep discount to its NAV. The fund started
buying back units in order to reduce the discount and also to boost the NAV (buying back units at prices
below the NAV results in a profit, which will reduce the NAV). Given its large corpus size no amount of
buy back or otherwise support could help boost the investor confidence.
Since then the equity markets have gone nowhere with the index still below the level at which the fund
was invested. Most of the stocks in the Sensex have performed poorly with markets punishing commodity
companies and companies with non-transparent Indian managements. To top it, many erstwhile bluechips
have reported disastrous financial performances.
Consequently, the NAV of MSGF mirrors this gory saga of the Indian markets. In fact, the fund invested
considerable amount of money in FMCG, pharmaceutical and software companies at the right time which
improved the NAV from 1998 onwards.
How important is an AMC (Asset Management Company) behind a mutual fund?AMC controls the
operations and functioning of a mutual fund. It is very critical to the performance of a mutual fund as it
decides on the style of functioning, people who are going to manage the funds, the commitment to service
quality and overall supervision.
The financial strength and the commitment of the AMC sponsors to the business are very key issues. This
is because most AMCs lose money in the first few years of operations. In most cases, these losses are
much more than the capital requirements stipulated by SEBI. Hence, a sponsor which is financially weak
or which cannot capital to the business either because of its inability or unwillingness will result in an
unhealthy operation. There will be a tendency to cut corners and unwillingness to spend money to expand
operations. This is the last place where high quality persons would want to remain and work. The AMC
then remains stunted and the sponsors lose interest. The worst affected are the investors. This is exactly
what has happened with some AMCs promoted by Indian business houses.
This is also a problem that has afflicted some of the AMCs floated by nationalized banks. In these
organizations, the traditional thinking is prevalent which can be summarized as "money is power". Since
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mutual fund business did not have access to too much money, a posting in the AMC became punishment
postings for some personnel who were not doing well in the parent organization or who lost out in the
organizational politics. The management of the banks also did not allow these AMCs to become
independent viable businesses. The CEO’s of the AMCs did not have any clue of the mutual fund business
and neither were they interested in it – the entire effort was spent in getting a posting back in the parent.
The fund managers had no experience in the activity making a mockery of "professional management".
The sad results are there to see. Some of the parents had to provide funds to bridge the gap in "assured
return schemes". It looks extremely likely that some of these AMCs will no longer exist in a few years.
How and against what should you benchmark the performance of a mutual fund?All mutual funds
have different objectives and therefore their performance would vary. A mutual funds performance should
be benchmarked against mutual funds of similar type or India infoline mutual fund index for a particular
type. eg equity fund index, income fund index or balanced fund index or liquid fund index. One can also
benchmark the fund against the Sensex or any other broadbased index for the particular asset class.
One has to be very careful about choosing the comparison period. Ideally, one should compare the
performance of equity or an index fund over a 1-2 year horizon. Any comparison over a shorter period
would be distorted by short term, volatile price movements. Comparisons over a longer period need to be
interpreted carefully by looking at other factors such as change in individuals managing the fund, one
time investment successes etc. Similarly, the ideal comparison period for a debt fund would be 6-12
months while that for a liquid/money market fund would be 1-3 months. Apart from the entire period, one
should also compare the performance in smaller intervals within the same period say intervals of one
month duration.
To make comparison meaningful, one has to compare the average annual compounded rate of return. This
adjusts for comparisons of differing period and also facilitates comparison across different classes. The
return also incorporates dividend payouts. Thus, for example, one can say that ABC income fund has
given a compounded annual growth rate (CAGR) of 13% p.a. including dividends in the last 2 years while
XYZ income fund has given a CAGR of 13.2% p.a. over the last 3 years.
Apart from NAV, what other parameters can be compared across different funds of the same
category?
Apart from plain numerical comparison of NAV’s, several other things can be checked, eg correlation of
changes in NAV with changes in portfolio composition and appreciation/depreciation in valuation of
individual items, increase in the size of the corpus etc. In debt funds, it is useful to compare the extent to
which the growth in NAV comes from interest income and from changes in valuation of illiquid assets
like bonds and debentures. It is also useful to compare expense ratios of funds eg Birla Income Plus has
an expense ratio of 1.7% which is one of the lowest expense ratios of all income funds in the industry –
this means that, everything else being equal, the performance of that fund will be higher by 0.55% than
other funds, which have an expense ratio of 2.25%. Last, but not the least, one has to compare the risk
profile of two funds. For income funds, this could mean credit quality of the portfolio and the fluctuations
in the NAV with periodic changes in the interest rate environment. For equity funds, it could mean the
volatility of the NAV with the ups and downs in the market or the percentage exposure to smaller
company shares etc.
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How different are styles of different mutual funds?

Different mutual funds have very different investing styles. These styles are a function of the individuals
managing the fund with the overall investment objectives and policies of the organization acting as a
constraint. These are manifest in things like
Portfolio turnover – Buy and hold strategy versus frequent investment changes
Kind of investments made – small versus large companies, multi baggers (investments which yield high
gains) versus percentage players (investing in shares which will give small gains in line with the market),
high quality – low yield bonds versus low quality – high yield bonds
Asset allocations – Varying percentage of cash depending on aggressive views on markets
The following examples serve to illustrate a few styles of equity fund managers
Some fund managers are passive value seekers and some are value creators. The former type buys
undervalued assets and patiently waits for the market to discover the value. The latter aggressively
promote the undervalued stocks that they have bought.
Some fund managers restrict themselves to liquid stocks while some thrive on illiquid stocks which offer
themselves easily to large price changes.
Some fund managers are masters of the momentum game and seek to buy stocks that are in market fancy.
They attach lesser importance to fundamentals and believe that a rising stock price and favorable
momentum indicators imply that fundamentals are changing. In effect, they are following the philosophy,
" The trend is my friend". Other fund managers go more by deep fundamental analysis completely
ignoring price movements. They do not mind price going down and are in fact happy to buy more.
Some fund managers are growth investors ie they buy stocks with a high P/E using the forecasted growth
to justify the high valuation. Others are value investors who buy shares with low P/E or P/BV multiples -
typically companies rich with undervalued assets.
When you buy a mutual fund unit what exactly do you buy?
When you buy a mutual fund unit you are buying a part of the equity or debt portfolio owned by the
mutual fund. In other words you are buying a part ownership of various companies and when you buy a
debt mutual fund you are buying a part right to title to debt securities. In other words you step into the
shoes of owners or lenders indirectly. The value of your part of the assets will fluctuate in line with the
value of the individual components of the portfolio on the stock or the bond market.
In effect, you are buying a bundle of services as follows:
Investment management – which means investment advice and execution rolled into one
Diversification of investment risk – buying a larger basket of securities reduces the overall risk of
investment
Asset custody – which means registration and physical custody of assets, ensuring corporate actions like
payment of dividend and interest, bonus, rights entitlements etc
Portfolio information – which means calculating and disseminating ownership information like NAV,
assets owned, etc on a periodic basis
Liquidity – Ability to speedily disinvest assets and obtain disinvestment proceeds
The mutual fund exploits economies of scale in research, execution and transaction processing to provide
the first three services at low costs. The pooling of money makes it possible to offer the fourth service
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(since all investors are unlikely to exit at the same time). In addition, one also gets benefits like special
tax concessions.
What you do not get is a guaranteed way of making money. There is no way that a mutual fund can
insulate the investor from the vagaries of the market place and ensure that he always makes money. In
addition, one is implicitly taking the risk of bad service quality in any of the four elements above
including investment management.
What are load and no-load funds? Why are loads charged?
Some asset management companies (AMCs) levy service charges for allowing subscribers entry into/exit
from mutual fund schemes. The service charge is termed as entry/exit load and such schemes are called
"load" schemes. In contrast, funds for which no entry/exit charge is levied are called no-load funds.
The load is levied to cover the up-front cost incurred by the AMC in the process of marketing and selling
the fund and other one-time transaction processing costs.
Why is the buy and sell price different for some mutual fund units and same for others?
Buying and selling prices are different for those mutual funds which have up front sales charges or entry
loads. Usually, the selling price is the NAV while the buying price incorporates the service charge or the
load. In case the fund is a no-load fund, there is no difference between the buying and selling prices. We
have a detailed section on the characteristics of all mutual fund schemes, which tells you the exact load
charged by respective funds.
Where can one obtain information on the market price of specific mutual fund units?
Buying and selling prices for units of open-ended mutual funds are declared every day. You can obtain
this information on our website. Check out the section on mutual funds.
Most closed-ended mutual funds are listed on the stock exchanges. The trading volume in some of the
widely held mutual fund units is considerable. The latest NAV and market price information of closed-
ended mutual funds is available on our website.
All the above information is also available on the stock market page of popular newspapers.
Why do returns from debt/income mutual funds fluctuate from period to period despite them being
invested in fixed interest instruments?
The returns differ from year to year on account of the following reasons:
An income fund invests in instruments from which it earns two kinds of returns – The first comes from
interest income. The second comes from any increase in the market price of invested instruments. The
second component could also be negative when there is a fall in the market value of the invested
instruments. The rise and fall in market prices of debt instruments is a function of the prevailing interest
rates. Thus changes in interest rate environment cause fluctuations in returns.
Secondly, income mutual funds invest in an array of instruments with different maturity. Whenever any
debt instrument in which the fund has invested is redeemed, the redemption proceeds have to be
reinvested in a fresh instrument(s). This fresh investment would earn a rate of return depending on the
prevailing interest rate which could be higher or lower than that prevailing in the earlier period.
Accordingly, the overall return of the portfolio will change.
A third reason can be active view taking by the fund manager eg a fund manager can take a view that
interest rates are expected to rise. Accordingly, he would disinvest a large part of his holdings and convert
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them into cash so as to avoid loss in the value of his holdings. If this view is wrong, he may end up
having a low return on a large part of his portfolio, since cash is invested in low yielding money market
avenues. On the other hand, if the view is right, the cash can be deployed in higher yielding instruments
after interest rates rise, thus improving the overall return and more important avoiding the loss.
There is a fourth reason, which is relevant only for open-ended income funds. Such funds have a
fluctuating level of idle cash (depending on the level of fresh collections) which is typically invested in
low yielding money market instruments. This causes change in the rate of return.
Lastly, there is always the possibility of a credit loss for any income mutual fund ie losses arising out of
default in any of the instruments in which the fund has invested. The fund will declare a low return in the
period in which such losses show up.
What are the risks associated in investing in income mutual funds and how should one find out
about these?
Income funds invest in a diversified portfolio of debt instruments which provide interest income. There is
a possibility that some of these instruments are of low credit quality and the issuers of these instruments
default in the payment of interest or principal. Such losses, called "credit losses", constitute an area of risk
for income funds. The process of diversification mitigates this risk ie by the fund investing in a number of
debt instruments. However, it should be noted that the funds returns could be eroded considerably if even
10% of the investments have credit quality problems. Also, the problem can be accentuated for investors
who are investing for a short period if the losses show up in a particular period resulting in a short term
decline in NAV. Investors can check the credit quality of the investment portfolio, which is published by
most funds on a quarterly basis.
The second area of risks comes from the fluctuations in the prices of the underlying instruments in which
the fund invests. Any rise in interest rates will result in a fall in the value of the investments causing a dip
in the NAV. The fall in value is maximum for longer dated instruments and negligible for short dated
instruments. Hence, the risk is higher in a fund that has an investment portfolio with a higher average
maturity. This can again be checked from the investment portfolio, which is published by the funds.
Even if interest rates rise by 2-3%, the fall in NAV for most mutual funds is unlikely to exceed 5%.
Similarly, a portfolio with as high as 10% of poor quality instruments will result in a fall in NAV by 10%.
Regular interest income will take care of the losses in a few months. Thus, there is unlikely to be
permanent erosion of capital in most reasonable circumstances. Hence, debt or income funds have a much
lower risk than equity funds, which can have permanent erosion in value.
Today’s environment is characterized by a deep industrial recession and consequent high level of defaults
on loans provided by banking sector to industry. In such a scenario, it may be prudent to look at the credit
quality aspect very carefully before investing in an income mutual fund.
What are the tax benefits available for investing in mutual funds?
The tax benefits for investing in mutual funds are as follows:
Twenty percent of the amount invested in specified mutual funds (called equity linked savings schemes or
ELSS and loosely referred to as "tax savings schemes") is deductible from the tax payable by the investor
in a particular year subject to a maximum of Rs2000 per investor. This benefit is available under section
88 of the I.T. Act.
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Investment of the entire proceeds obtained from the sale of capital assets for a period of three years or
investment of only the profits for a period of 7 years, exempts the asset holder from paying capital gains
tax. This benefit is available under section 54EA and 54EB of the I.T. Act.
The mutual fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it.
While this is a benefit to the fund, it is the indirect benefit of unitholders as well. This benefit is available
to the mutual fund under section 10 (23D) of the I.T. Act.
A mutual fund has to pay a withholding tax of 10% on the dividends distributed by it under the revised
provisions of the I.T. Act putting them on par with corporates. However, if a mutual fund has invested
more than 50% of its assets into equity shares, then it is exempt from paying any tax on the dividend
distributed by it, for a period of three years, by an overriding provision. This benefit is available under
section 115R of the I.T. Act.
The investor in a mutual fund is exempt from paying any tax on the dividend received by him from the
mutual fund, irrespective of the type of the mutual fund. This benefit is available under section 10(33) of
the I.T. Act.
The units of mutual funds are treated as capital assets and the investor has to pay capital gains tax on the
sale proceeds of mutual fund units sold by him. For investments held for less than one year the tax is
equal to 30% of the capital gain. For investments held for more than one year, the tax is equal to 10% of
the capital gains. The investor is entitled to indexation benefit while computing capital gains tax. Thus if a
typical growth scheme of an income fund shows a rise of 12% in the NAV after one year and the investor
sells it, he will pay a 10% tax on the selling price less cost price and indexation component. This reduces
the incidence of tax considerably. This concession is available under section 48 of the I.T. Act. The
following calculations show this in more detail:
Purchase NAV = Rs 10
Sale NAV = Rs 11.2
Indexation component = 8%
Capital gains = 11.2 – 10(1.08)
= 11.2 – 10.8
= 0.4
Capital gains tax = 0.4*0.1 = 0.04.
If an investor buys a fresh unit in the closing days of March and sells it in the first week of April of the
following year, he is entitled to indexation benefit for two financial years which close in the two March
ending periods. This is termed as double indexation and lowers the tax even further especially for income
funds. In the above example, the calculation would be as follows:
Capital gains = 11.2 – 10(1.08)(1.08)
= 11.2 – 11.7
= -0.5
Thus there would be no capital gains tax.
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GLOSSARY
Advisor
The organization employed by a mutual fund to give professional advice on the fund's investments and to
supervise the management of its assets.
Asked or Offering Price
The price at which a mutual fund's shares can be purchased. The asked or offering price means the current
net asset value (NAV) per share plus sales charge, if any. For a no-load fund, the asked price is the same
as the NAV.
Asset Allocation Fund
A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign
stocks and bonds, government securities, gold bullion and real estate stocks. This gives small investors far
more diversification than they could get allocating money on their own. Some of these funds keep the
proportions allocated between different sectors relatively constant, while others alter the mix as market
conditions change.
Automatic Reinvestment
A service offered by most mutual funds whereby income dividends and capital gain distributions are
automatically invested into the fund by buying additional shares and thus building up holdings through
the effects of compounding.
Balanced Fund
A mutual fund that maintains a balanced portfolio, generally 60% bonds or preferred stocks and 40%
common stocks.
Bid or Sell Price
The price at which a mutual fund's shares are redeemed (bought back) by the fund. The bid or redemption
price means the current net asset value per share, less any redemption fee or back-end load.
Bond Fund
A mutual fund whose portfolio consists primarily of corporate, municipal or U.S. Government bonds.
These funds generally emphasize income rather than growth.
Bond Rating
System of evaluating the probability of whether a bond issuer will default. Standard and Poor's Corp. and
Moody's Investors Services, among other firms, analyze the financial stability of both corporate and
government bond issuers. Ratings range from AAA or Aaa (extremely unlikely to default) to D (currently
in default). Bonds rated BBB or below by S&P or Baa or below by Moody's are not considered to be of
investment grade. Mutual funds generally restrict their bond purchases to issues of certain quality ratings,
which are specified in their prospectuses.
Capital Appreciation Fund
A mutual fund that seeks maximum capital appreciation through the use of investment techniques
involving greater than ordinary risk, such as borrowing money in order to provide leverage, short-selling
and high portfolio turnover.
Capital Gains Distributions
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Payments (usually annually) to mutual fund shareholders of gains realized on the sale of portfolio
securities.
Capital Growth
A rise in market value of a mutual fund's securities, reflected in its net asset value per share. This is a
specific long-term objective of many mutual funds.
Certificate of Deposit
Interest-bearing, short-term debt instrument issued by banks and thrifts.
Closed-End Investment Company
An investment company that offers a limited number of shares. They are traded in the securities markets,
usually through brokers. Price is determined by supply and demand. Unlike open-end investment
companies (mutual funds), closed-end funds do not redeem their shares.
Commercial Paper
Short-term, unsecured promissory notes with maturities no longer than 270 days. They are issued by
corporations, in denominations starting at $10,000, to fund short-term credit needs.
Common Stock Fund

An open-end investment company whose holdings consist mainly of common stocks and usually
emphasize growth.
Confirm Date
The date the fund processed your transaction, typically the same day or the day after your trade date.
Contingent Deferred Sales Charge (CDSC)
A fee (or back-end load) imposed by certain funds on shares redeemed within a specific period following
their purchase. These charges are usually assessed on a sliding scale, such as four percent to one percent
of the amounts redeemed, with the fee reduced each year the units are held.
Custodian
The bank or trust company that maintains a mutual fund's assets, including its portfolio of securities or
some record of them. Provides safekeeping of securities but has no role in portfolio management.
Daily Dividend Fund

This term applies to funds that declare their income dividends on a daily basis and reinvest or distribute
monthly.
Deferred Compensation Plan
A tax-sheltered investment plan to which employees of state and local governments can defer a
percentage of their salary.
Distributor
An individual or a corporation serving as principal underwriter of a mutual fund's shares, buying shares
directly from the fund, and reselling them to other investors.
Diversification
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The policy of spreading investments among a range of different securities to reduce the risks inherent in
investing.
Rupee-Cost Averaging
The technique of investing a fixed sum at regular intervals regardless of stock market movements. This
reduces average share costs to the investor, who acquires more shares in periods of lower securities prices
and fewer shares in periods of high prices. In this way, investing risk is spread over time.
Exchange Privilege (Or switching privilege)
The right to transfer investments from one fund into another, generally within the same fund group, at
nominal cost.
Ex-Dividend Date
The date on which a fund's Net Asset Value (NAV) will fall by an amount equal to the dividend and/or
capital gains distribution (although market movements may alter the fund's closing NAV somewhat).
Most publications which list closing NAVs place an "X" after a fund’ name on its ex-dividend date.
Expense Ratio
The ratio of total expenses to net assets of the fund. Expenses include management fees, 12(b)1 charges,
if any, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's
prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling
expenses.
Fannie Mae (Federal Mortgage Association)

An agency established by the federal government, but owned by private stockholders, which issues
mortgage-backed certificates in $25,000 denominations. Timely payment of both interest and principal
are insured. A growing number of mutual funds emphasize investments in these and other mortgage-
backed securities.
Fiscal Year
An accounting period consisting of 12 consecutive months.
Global Fund
A fund that invests in both Indian. and foreign securities.
Growth Fund
A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in
common stocks with significant growth potential.
Income Dividend
Payment of interest and dividends earned on the fund's portfolio securities after operating expenses are
deducted.
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Income Fund
A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in
stocks and bonds that normally pay high dividends and interest.
Index Fund
A mutual fund that seeks to mirror general stock-market performance by matching its portfolio to a broad-
based index, most often the Standard & Poor's 500-stock index.
International Fund
A fund that invests in securities traded in markets outside India.
Investment Company
A corporation, partnership or trust that invests the pooled monies of many investors. It provides greater
professional management and diversification of investments than most investors can obtain
independently. Mutual funds, or "open-end" investment companies, are the most popular form of
investment company.
Investment Objective
The financial goal (long-term growth, current income, etc.) that an investor or a mutual fund pursues.
Junk Bond
A speculative bond rated BB or below by Standard & Poor's Corp. and Ba or below by Moody's Investor
Service."Junk bonds" are generally issued by corporations of questionable financial strength or without
proven track records. They tend to be more volatile and higher yielding than bonds with superior quality
ratings. "Junk bond funds" emphasize diversified investments in these low-rated, high-yielding debt
issues.
Load
A sales charge or commission assessed by certain mutual funds ("load funds,") to cover their selling costs.
The commission is generally stated as a portion of the fund's offering price, usually on a sliding scale
from one to 8.5%.
Load Fund
A mutual fund that levies a sales charge up to 8.5%, which is included in the offering price of its shares,
and is sold by a broker or salesman. A front-end load is the fee charged when buying into a fund; a back-
end load is the fee charged when getting out of a fund.
Low-Load Fund
A mutual fund that charges a small sales commission, usually 3.5% or less, for the purchase of its shares.
Management Fee
The amount a mutual fund pays to its investment adviser for services rendered, including management of
the fund's portfolio. In general, this fee ranges from .5% to 1% of the fund's asset value.
Money Market Fund

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A mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe,
highly liquid securities, including bank certificates of deposit, commercial paper, government securities
and repurchase agreements. Money Market funds make these high interest securities available to the
average investor seeking immediate income and high investment safety.
Mortgage-Backed Securities
Certificates backed by pooled mortgages (e.g., Freddie Mac or Ginnie Mae). Issuing agencies buy
mortgages from lending institutions and repackage them as securities that they sell to investors. They are
generally issued in denominations of $25,000 or above. Yields, which stem from interest and principal on
underlying mortgages, are generally higher than those of Treasury bonds that provide comparable
liquidity and safety. A growing number of income mutual funds concentrate their holdings in these
securities.
Municipal Bond Fund
A mutual fund that invests in a broad range of short, intermediate or long-term tax-exempt bonds issued
by states, cities and other local governments. The interest obtained from these bonds is passed through to
shareholders free of tax. The objective of these funds is current tax-free income.
Mutual Fund
An open-end investment company that buys back or redeems its shares at current net asset value. Most
mutual funds continuously offer new shares to investors.
Net Asset Value Per Share

The current market worth of a mutual fund share. Calculated daily by taking the funds total assets
securities, cash and any accrued earnings deducting liabilities, and dividing the remainder by the number
of shares outstanding.
No-Load Fund
A commission-free mutual fund that sells its shares at net asset value, either directly to the public or
through an affiliated distributor, without the addition of a sales charge.
Option Income Fund

A fund that invests primarily in dividend-paying common stocks on which call options are traded on
national securities exchanges. These funds seek high current return consisting of dividends, premiums
from selling options, net short-term gains (including those from the exercising of options) and any profits
from closing purchase transactions.
Payable Date
The date on which distributions are paid to shareholders who do not want to reinvest them. This date can
be anywhere from one week to one month after the Record Date.
Payroll Deduction Plan
An arrangement between an employer and a mutual fund, authorized by the employee, through which a
specified sum is deducted from an employee's salary to buy shares in the fund.
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Portfolio Turnover Rate

The rate at which the fund's portfolio securities are changed each year. If a fund's assets total $100 million
and the fund bought and sold $100 million worth of securities that year, its portfolio turnover rate would
be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative
funds that invest for the long term. High portfolio turnover rates generally add to the expenses of a fund.
Prospectus
An official document that each investment company must publish, describing the mutual fund and
offering its shares for sale. It contains information required by the Securities and Exchange Commission.
Record Date
The date the fund determines who its shareholders are; "shareholders of record" who will receive the
fund's income dividend and/or net capital gains distribution. Frequently the business day immediately
prior to the Ex-Dividend Date.
Redemption Fee
A fee charged by a limited number of funds for redeeming, or buying back, fund shares.
Redemption Price
The price at which a mutual fund's shares are redeemed (bought back) by the less expensive fund. The
redemption price is usually equal to the current net asset value per share.
Regional Fund
A mutual fund that concentrates its investments within a specific geographic area, usually the fund's local
region. The objective is to take advantage of regional growth potential before the national investment
community does.
Reinvestment Date (Payable Date)
The date on which a share's dividend and/or capital gains will be reinvested (if requested) in additional
fund shares.
Reinvestment Privilege
A service that most mutual funds offer whereby a shareholder's income dividends and capital gains
distributions are automatically reinvested in additional shares.
Sector Fund
A fund that operates several specialized industry sector portfolios under one umbrella. Transfers between
the various portfolios can usually be executed by telephone at little or no cost.
Series Fund
A mutual fund whose prospectus allows for more than one portfolio. Portfolios may be specialized (Sector
Fund) or broad (growth stock, along with a money market portfolio). Management can create additional
portfolios as it sees fit.
Short Selling
Page 39 of 40
The sale of a security which is not owned by the seller. The "short seller" borrows stock for delivery to the
buyer, and must eventually purchase the security for return to the lender.
Short-Term Municipal Bond Fund

A fund that invests in municipal bonds with maturities not exceeding two years. See Municipal Bond
Fund.
Simplified Employee Pension
An alternative to a Keogh plan that allows employers who have not established qualified retirement plans
to contribute to their employee’s Individual Retirement Accounts.
Specialty Fund
A mutual fund specializing in the securities of a particular industry or group of industries or special types
of securities.
Systematic Withdrawal Plans
Many mutual funds offer withdrawal programs whereby shareholders receive payments from their
investments. These payments are usually drawn from the fund’s dividend income and capital gain
distributions, if any, and from principal only when necessary.
Underwriter
The organization that acts as the distributor of a mutual fund's shares to broker/dealers and the public.
A type of insurance contract that guarantees future payments to the holder, or annuitant, usually at
retirement. The annuity's value varies with that of the underlying portfolio securities, which may include
mutual fund shares. All monies held in the annuity accumulate tax-deferred.
Voluntary Plan
A flexible plan for capital accumulation, involving no specified time frame or total sum to be invested.
Yield
Income or return received from an investment, usually expressed as a percentage of market price, over a
designated period. For a mutual fund, yield is interest or dividend before any gain or loss in the price per
share.
Zero Coupon Bond

Bond sold at a fraction of its face value. It appreciates gradually, but no periodic interest payments are
made. Earnings accumulate until maturity, when the bond is redeemable at full face value. Nonetheless,
interest is taxable as it accrues. As a result, zero coupon bonds are often used for IRAs, Keoghs and other
tax-deferred retirement plans.
Page 40 of 40
LIST OF BOOKS
• Investment Policy and Performance of Mutual Funds

M.Jayadev
• Mutual Funds Management and Working
Lalitb K. Bansal
• Mutual Funds a Comprehensive Approach
Dr. Peeush Rajan Agrawal
• Working at Mutual Fund Organization in India
P. Mohana Rao
• How Mutual Funds Work
A. J. Friedman & Russ Wiles
• The Future of Fund Management in India
Tushar Waghmare
• Mutual Funds in India
S. Krishnamurti

Beginners Guide Mutual FundsIndia Infoline

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BASICS OF MUTUAL FUNDS - INDIAINFOLINE.

MUTUAL FUNDS: AN OVERVIEW ..............................................................................................................................

TYPES OF MUTUAL FUNDS .............................................................................................................................

BENEFITS OF INVESTING IN MUTUAL FUNDS..............................................................................................

NET ASSET VALUE (NAV)...........................................................................................................................................

MUTUAL FUNDS IN INDIA (1964 - 2000)............................................................................................

1999—YEAR OF THE FUNDS................................................................................................................................9

BANKS V/S MUTUAL FUNDS .............................................................................................................................10

LIST OF VARIOUS FUNDS ALONG WITH ITS FUND MANAGERS.................................................................13

MUTUAL FUNDS AND THE BUDGET 1999-2000...........................................................................................

INCOME RECEIVED FROM MUTUAL FUNDS.......................................................................................................................14

MUTUAL FUNDS AND THE BUDGET 2000-2001...........................................................................................

REGULATORY ASPECTS OF MUTUAL FUND...........................................................................................

SCHEMES OF MUTUAL FUND............................................................................................................................17

FREQUENTLY ASKED QUESTIONS...................................................................................................

MUTUAL FUNDS: AN OVERVIEW

TYPES OF MUTUAL FUNDS

Money Market Funds

Tax Saving Schemes

BENEFITS OF INVESTING IN MUTUAL FUNDS

Net Asset Value (NAV)

MUTUAL FUNDS IN INDIA (1964 - 2000)

1999—YEAR OF THE FUNDS

BANKS V/S MUTUAL FUNDS

Some basic facts-

LIST OF VARIOUS FUNDS ALONG WITH ITS FUND MANAGERS

Fund name Major Schemes Fund manager Telephone no. Website

Fund Equity Fund

Mutual funds and the Budget 1999-2000

Income Received From Mutual Funds

oriented schemes will be exempt from paying the distribution tax.

Tax implication for income received on open-end equity oriented scheme:

Difference Between TDS and Distribution Tax

Mutual funds and the Budget 2000-2001

REGULATORY ASPECTS OF MUTUAL FUND

SCHEMES OF MUTUAL FUND

RULES REGARDING ADVERTISEMENT

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

PROCEDURE FOR ACTION IN CASE OF DEFAULT:

Frequently Asked Questions

Why have mutual funds in India performed so poorly?

How different are styles of different mutual funds?

Common Stock Fund

Daily Dividend Fund

Exchange Privilege (Or switching privilege)

Fannie Mae (Federal Mortgage Association)

Money Market Fund

Net Asset Value Per Share

Option Income Fund

Portfolio Turnover Rate

Short-Term Municipal Bond Fund

Zero Coupon Bond

• Investment Policy and Performance of Mutual Funds

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