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which are usually referred to by their acronym UCITS." Most mutual funds are "open-ended. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U. There is controversy about the level of these expenses. Internal Revenue Code. Investors in a mutual fund pay the fund’s expenses. They are sometimes referred to as "investment companies" or "registered investment companies. see articles on specific types of funds including open-ended investment companies. While there is no legal definition of the term "mutual fund". A single mutual fund may give investors a choice of different combinations of . stock or equity funds and hybrid funds. unitized insurance funds. most notably in retirement planning. mutual funds must be registered with the Securities and Exchange Commission. In the United States. The four main categories of funds are money market funds. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. bond or fixed income funds. Today they play an important role in household finances. which reduce the fund's returns/performance. it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. Funds may also be categorized as index or actively managed. For collective investment vehicles outside of the United States. Mutual funds are generally classified by their principal investments.Mutual fund A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. They have a long history in the United States. unit trusts and Undertakings for Collective Investment in Transferable Securities.S. most notably in retirement planning." meaning investors can buy or sell shares of the fund at any time. The term mutual fund is less widely used outside of the United States and Canada. They have a long history in the United States. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. SICAVs. overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment adviser. Hedge funds are not considered a type of mutual fund. Today they play an important role in household finances.

Internal Revenue Code. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. The investment approach describes the criteria that the fund manager uses to select investments for the fund. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors but are retained by the fund to be able to offset future gains. Mutual funds were introduced into the United States in the 1890s. The types of securities that a particular fund may invest in are set forth in the fund's prospectus. distribute a high percentage of their income and capital gains (net of capital losses) to their investors annually. Specifically.expenses (which may include sales commissions or loads) by offering several different types of share classes. The Origins of Mutual Funds The first mutual funds were established in Europe. Mutual funds are not taxed on their income and profits as long as they comply with requirements established in the U. limit ownership of voting securities. They became popular during the 1920s. A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers. Mutual funds may invest in many kinds of securities. they must diversify their investments. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. For example. For example.S. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust. Mutual funds pass taxable income on to their investors by paying out dividends and capital gains at least annually. which describes the fund's investment objective. rather than from dividend or interest income. The investment objective describes the type of income that the fund seeks. a "capital appreciation" fund generally looks to earn most of its returns from increases in the prices of the securities it holds. . investment approach and permitted investments. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio. mutual fund distributions of dividend income are reported as dividend income by the investor. which was established in London in 1868. The characterization of that income is unchanged as it passes through to the shareholders. and earn most of the income by investing in securities and currencies.

By 1929. with more than $100 billion in assets as of January 31. which is a practice prohibited by fund policy. However. When confidence in the stock market returned in the 1950s. which is illegal. new product introductions (including tax-exempt bond. the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders. headed by John Bogle.The first open-end mutual fund with redeemable shares was established on March 21. The first retail index fund. as a result of three factors: a bull market for both stocks and bonds. is now part of the MFS family of funds. which is the principal regulator of mutual funds. this act also created the Securities and Exchange Commission. By 1970. This fund. all of which surged in popularity in the 1980s. First Index Investment Trust. be registered with the Securities and Exchange Commission and that they provide prospective investors with a prospectus that discloses essential facts about the investment. while the Investment Company Act of 1940 governs their structure. international and target date funds) and wider distribution of fund shares. 1924. report regularly to their investors. . Fund industry growth continued into the 1980s and 1990s. Among the new distribution channels were retirement plans. open-end funds accounted for only 5% of the industry's $27 billion in total assets. The Securities Act of 1933 requires that all investments sold to the public. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans. the Massachusetts Investors Trust. including mutual funds. Some fund management companies allowed favored investors to engage in late trading. or market timing. 2011. including mutual funds. the mutual fund industry began to grow again. there were approximately 360 funds with $48 billion in assets. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. was formed in 1976 by The Vanguard Group. specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs). After the stock market crash of 1929. The scandal was initially discovered by then-New York State Attorney General Eliot Spitzer and resulted in significantly increased regulation of the industry. closed-end funds remained more popular than open-end funds throughout the 1920s. it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds. In 2003. sector. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. The Securities and Exchange Act of 1934 requires that issuers of securities.

Mutual funds play an important role in U. Roughly half of assets in 401(k) plans and individual retirement accounts were invested in mutual funds. Advantages and disadvantages Mutual funds have advantages compared to direct investing in individual securities. Their role in retirement planning is particularly significant. funds accounted for 23% of household financial assets. At the end of 2011.000 mutual funds in the United States with combined assets of $13 trillion. which include:     Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize . household finances and retirement planning.S.At the end of 2011.8 trillion on the same date. there were over 14. These include:        Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison Mutual funds have disadvantages as well. The ICI reports that worldwide mutual fund assets were $23. a trade association of investment companies in the United States. according to the Investment Company Institute (ICI).

and closed-end funds. The total investment in the fund will vary based on share purchases. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. these shares are also priced at net asset value.6 trillion.Types There are 3 principal types of mutual funds in the United States: open-end funds. Open-end funds are the most common type of mutual fund. There is no legal limit on the number of shares that can be issued.581 open-end mutual funds in the United States with combined assets of $11. share redemptions and fluctuation in market valuation. Their shares are then listed for trading on a stock exchange. Most open-end funds also sell shares to the public every business day. they must sell their shares to another investor in the market. there were 7. it is more commonly used to refer exclusively to the open-end type. unit investment trusts (UITs). While the term "mutual fund" may refer to all three types of registered investment companies. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). At the end of 2011. they have gained in popularity recently. the price they receive may be significantly different from net asset value. A professional investment manager oversees the portfolio. Closed-end funds Closed-end funds generally issue shares to the public only once. buying and selling securities as appropriate. It . Instead. Open-end funds Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. when they are created through an initial public offering.

However. there were 6. ETFs issue and redeem large blocks of their shares with institutional investors. when they are created.022 UITs in the United States with combined assets of $60 billion. Unit investment trusts do not have a professional investment manager. buying and selling securities as appropriate. Like closed-end funds. A professional investment manager oversees the portfolio. UITs generally have a limited life span. ETFs combine characteristics of both closed-end funds and open-end funds. there were 634 closed-end funds in the United States with combined assets of $239 billion. Less commonly. Exchange-traded funds A relatively recent innovation. investors normally receive a price that is close to net asset value. . Unit investment trusts Unit investment trusts or UITs issue shares to the public only once.may be at a "premium" to net asset value (meaning that it is higher than net asset value) or. though ETFs may also be structured as unit investment trusts. the exchange-traded fund or ETF is often structured as an open-end investment company. established at creation. investments trust. they can sell their shares in the open market. Investors can redeem shares directly with the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust. as with open-end funds. partnerships. at a "discount" to net asset value (meaning that it is lower than net asset value). Their portfolio of securities is established at the creation of the UIT and does not change. ETFs are traded throughout the day on a stock exchange at a price determined by the market. To keep the market price close to net asset value. more commonly. At the end of 2011. grantor trusts or bonds (as an exchange-traded note). At the end of 2011.

In 1987 other public sector banks were allowed to offer mutual funds.38 billion with 25 different schemes·.32.298. assured retum schemes and others which totaled to Rs.The Mutual Funds Industry in India The beginning of mutual funds in India was laid by the enactment of the Unit Trust of India (UTI) Act in 1963.218 billion w~h 33 mutual fund families and 401 funds.7 million investors in mutual funds". UTI brought out its first fund. By 2003 the total assets under management (AUM) had increased to Rs.SEBI (mutual fund) Regulations 1996. Punjab National Bank.246. Other public sector banks such as Bank of India. which had faced serious problems in the late 90's and again during 2002. was spl~ into two entities.4 billion and the other was UTI Mutual Fund . This was later substituted by a more comprehensive set of regulations .390 billion>' There were 44. The collective assets under management continued to grow and by the end of 1993 it was Rs. Unit Scheme (US) 64 in 1964. 1992-93 saw the beginning of economic reforms in India. Two public sector insurance companies Life Insurance Corporation of India (LlC) and General Insurance Corporation of India (GIC) also started their own mutual fund companies.67. The objective was to provide investors from the middle and lower income groups with a route to invest in the equity market.7 millionS. In the same year the first mutual fund regulations 1993 SEBI (mutual fund) Regulations came into being. UTI remained a monopoly in the mutual fund industry till 1987. In keeping with tihis direction the private sector was allowed to enter the mutual fund industry in 1993. Indian Bank entered the fray by 1990. One was the specified undertaking of UTI which managed US 64. By then US 64 had grown to Rs.1 . But during this period only public sector companies were permitted to enter the mutual fund market. The State Bank of India (SBI) set up the SBI Mutual Fund and Canara Bank Mutual Fund. UTI alone accounted for Rs.445 billion of the total AUM9.69 billion and the overall asset base of UTI was RS.470 billion with UTI alone accounting for RS. The reforms aimed at reducing government control over the economy and allowing for greater play for the private sector besides others. In 2003 the public sector UTI. UTI did not come under these regulations and continued to be governed under the UTI Act of 1963. However. It was also meant to encourage savings. In keeping with this direction the private sector was allowed to enter the mutual fund industry in 1993. It called an amount of Rs.

in the same proportions as the index.591 billion showing a phenomenal growth of 47 percent yearon-year since 2003".3. respectively Index fund An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund that aims to replicate the movements of an index of a specific financial market. The difference between the index performance and the fund performance is called the "tracking error". The latter came under the regulations of SEBI. in taxable accounts. "jitter". lower taxes. colloquially. By March 2007 the total AUM excluding UTI touched Rs. During this period only Russia and China did better than India w~h AUM growth rates of 97 percent and 67 percent. Tracking Tracking can be achieved by trying to hold all of the securities in the index. Other methods include statistically sampling the market and holding "representative" securities.Ltd'o. . cannot be 100% accurate. regardless of market conditions. index funds made up over 11% of equity mutual fund assets in the US. Many index funds rely on a computer model with little or no human input in the decision as to which securities are purchased or sold and are thus subject to a form of passive management. Fees The lack of active management generally gives the advantage of lower fees (which otherwise reduce the investor's return) and. Since 2003 the mutual fund industry has also seen a spate of mergers. Hence this period was marked by consolidation. In addition it is usually impossible to precisely mirror the index as the models for sampling and mirroring. by their nature. or a set of rules of ownership that are held constant. As of 2007. or.

who created "research indexes" in order to develop asset pricing models. ” John Bogle graduated from Princeton University in 1951. . Bogle founded The Vanguard Group in 1974. The Fama-French three-factor model is used by Dimensional Fund Advisors to design their index funds.. Charles Ellis' 1975 study.. fund spokesmen are quick to point out "You can't buy the averages. and sales.there is no greater service [the New York Stock Exchange] could provide than to sponsor such a fund and run it on a nonprofit basis. Malkiel wrote “ What we need is a no-load. It was becoming well known in the lay financial press that most mutual funds were not beating the market indices. such as their Three Factor Model. and the FTSE 100. Such a fund is much needed. book value. it is now the largest mutual fund company in the United States as of 2009. Burton Malkiel wrote A Random Walk Down Wall Street. Some common indices include the S&P 500." Bogle wrote that his inspiration for starting an index fund came from three sources.Index funds are available from many investment managers. and Al Ehrbar's 1975Fortune magazine article on indexing. "Challenge to Judgment". . Whenever below-average performance on the part of any mutual fund is noticed.. Origins In 1973." It's time the public could.. incidentally has considered such a fund) is unwilling to do it. Less common indexes come from academics like Eugene Fama and Kenneth French. which presented academic findings for the lay public. and if the New York Stock Exchange (which. I hope some other institution will.. minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stockmarket averages and does no trading from security to security in an attempt to catch the winners.. all of which confirmed his 1951 research: Paul Samuelson's 1974 paper. the Nikkei 225. where his senior thesis was titled: "Mutual Funds can make no claims to superiority over the Market Averages. "The Loser's Game". earnings. Robert Arnott and Professor Jeremy Siegel have also created new competing fundamentally based indexes based on such criteria as dividends.

Bogle started the First Index Investment Trust on December 31. Bogle predicted in January 1992 that it would very likely surpass the Magellan Fund before 2001. the firm finally attracted its first index client. At the time. this astonishing increase was funded by the market's increasing willingness to invest in such a product. it was heavily derided by competitors as being "un-American" and the fund itself was seen as "Bogle's folly". Jeremy Grantham and Dean LeBaron at Batterymarch Financial Management "described the idea at a Harvard Business School seminar in 1971. . in December 1974. 1975. David Booth and Rex Sinquefield started Dimensional Fund Advisors (DFA). For its efforts. Two years later.A. Indexing methods Traditional indexing Indexing is traditionally known as the practice of owning a representative collection of securities. Modification of security holdings happens only when companies periodically enter or leave the target index. individual investors were excluded. in the same ratios as the target index. but found no takers until 1973. Wells Fargo started with $5 million from their own pension fund. DFA further developed indexed based investment strategies. In 1981. and it now operates as Barclays Global Investors. while Illinois Bell put in $5 million of their pension funds at American National Bank. Grauer at Wells Fargo harnessed McQuown and Booth's indexing theories such that Wells Fargo's pension funds managed over $69 billion in 1989 and over $565 billion in 1998. which it did in 2000. Both of these funds were established for institutional clients. Frederick L. In 1971. John McQuown and David G. It started with comparatively meager assets of $11 million but crossed the $100 billion milestone in November 1999. Wells Fargo sold its indexing operation to Barclay's Bank of London. Fidelity Investments Chairman Edward Johnson was quoted as saying that he "[couldn't] believe that the great mass of investors are going to be satisfied with receiving just average returns". Booth at Wells Fargo and Rex Sinquefield at American National Bank in Chicago both established the first Standard and Poor's Composite Index Funds in 1973. which tracks the Standard and Poor's 500 Index. it is one of the world's largest money managers. and McQuown joined its Board of Directors many years later. Bogle's fund was later renamed the Vanguard 500 Index Fund. Batterymarch won the "Dubious Achievement Award" from Pensions & Investments magazine in 1972.

Synthetic indexing Synthetic indexing is a modern technique of using a combination of equity index futures contracts and investments in low risk bonds to replicate the performance of a similar overall investment in the equities making up the index.S.15% for U. taking account of the expense ratio difference would result in an after expense return of 9. synthetic indexing can result in more favourable tax treatment. yield curve positioning. a technique referred to as enhanced indexing. and timing strategies. Enhanced index funds employ a variety of enhancement techniques. Enhanced indexing Enhanced indexing is a catch-all term referring to improvements to index fund management that emphasize performance. These enhancement strategies can be:   lower cost. dividend withholding taxes. Enhanced indexing strategies help in offsetting the proportion of tracking error that would come from expenses and transaction costs. Typically expense ratios of an index fund range from 0. it costs less to run an index fund. exclusion rules. The bond portion can hold higher yielding instruments. trading strategies. Although maintaining the future position has a slightly higher cost structure than traditional passive sampling.64% for the actively managed large cap fund. including customized indexes (instead of relying on commercial indexes). No highly paid stock pickers or analysts are needed. with a trade-off of corresponding higher risk. possibly using active management. sector and quality positioning and call exposure positioning. The expense ratio of the average large cap actively managed mutual fund as of 2005 is 1. The cost advantage of indexing could be reduced or eliminated by employing active management. Advantages Low costs Because the composition of a target index is a known quantity. particularly for international investors who are subject to U. If a mutual fund produces 10% return before expenses. Large Company Indexes to 0.85% for the large cap index fund versus 8.S.97% for Emerging Market Indexes. issue selection.36%. .

this drift is not possible and accurate diversification of a portfolio is increased. According to a study conducted by John Bogle over a sixteen-year period. turnover has both explicit and implicit costs. both under. Managing one's index fund holdings may be as easy as rebalancing every six months or every year. which directly reduce returns on a dollar-for-dollar basis. For example. Drifting into other styles could reduce the overall portfolio's diversity and subsequently increase risk.Simplicity The investment objectives of index funds are easy to understand. the turnovers are lower than actively managed funds. Because index funds are passive investments. . which are sometimes passed on to fund investors. what securities the index fund will hold can be determined directly. which holds its value compared to the market. Such drift hurts portfolios that are built with diversification as a high priority. but they keep 87% in a market index fund.e. investors get to keep only 47% of the cumulative return of the average actively managed mutual fund. mid-cap value.000 vs. This means $10. large cap income. Lower turnovers Turnover refers to the selling and buying of securities by the fund manager. etc. Even in the absence of taxes.000 invested in the index fund grew to $90. Selling securities in some jurisdictions may result in capital gains tax charges. an inefficient index fund may generate a positive tracking error in a falling market by holding too much cash.000 in the average actively managed stock mutual fund. That is a 40% gain from the reduction of silent partners. No style drift Style drift occurs when actively managed mutual funds go outside of their described style (i. $49. Disadvantages Possible tracking error from index Since index funds aim to match market returns. Once an investor knows the target index of an index fund.and overperformance compared to the market is considered a "tracking error".) to increase returns. With an index fund.

in part due to arbitrageurs. the price of the stock that has been removed from the index tends to be driven down. These losses can. The index fund. they can earn by simply putting their money in a fund that closely tracks key indices such as Sensex and Nifty. an index fund seeks to match rather than outperform the target index. The S&P 500 index has a typical turnover of between 1% and 9% per year. . In effect.According to The Vanguard Group. an index fund is an investment that tries to mirror the movement of the index of a specific financial market regardless of market conditions. in a practice known as "index front running". but rather produces a rate of return similar to the index minus fund costs. be considered small relative to an index fund's overall advantage gained by low costs. and the price of stock that has been added to the index tends to be driven up. a good index fund with low tracking error will not generally outperform the index. and consequently all funds tracking the index. These funds have a tracking error i. however. As a result. difference between index and fund returns. Cannot outperform the target index By design. An index fund gives the opportunity to buy stocks in the same proportion as their reference index. INDEX FUND : GOOD OPTION FOR NEW INVESTORS Index funds are for those investors who aren’t comfortable with stock picking and the idea of keeping a close watch on their portfolio. Lower the tracking error better is the alignment of returns. Index composition changes reduce return Whenever an index changes. Theoretically. Both the indices represent India’s largest companies across leading sectors. Therefore. has suffered market impact costs because it had to sell stock whose price was depressed and buy stock whose price was inflated. and purchasing the stock that was added to the index. but a Morningstar survey found an average of 38 basis points across all index funds.e. the fund is faced with the prospect of selling all the stock that has been removed from the index. the index. however. are announcing ahead of time the trades that they are planning to make. a well run S&P 500 index fund should have a tracking error of 5 basis points or less.

49% respectively in one year ending July 20. From this. According to the experts. According to the experts though performance assessment is required to make an investment decision. With index funds. The investors are realizing the importance of passive investing strategy that attempts to reproduce or match the returns of an index. The investor should go for the fund which closely maps the index. entry-level investors can invest a good amount of money in these types of funds. There is less churning in the index fund portfolio. but they fall less sharply during a downturn. An index fund provides investors the opportunity to own a basket of blue-chip stocks. portfolios are naturally diversified because the market itself id diversified. The good point about index funds is that the management expense ratio on these is lesser in comparison to the dynamically supervised mutual funds. whereas S&P Nifty and BSE Sensex stood at 3. Index funds are easier to create. The category average of diversified funds stood at 1.say three . This shows that the diversified funds have underperformed the broad market index. The index funds category generated 3. As the index fund category has generated more returns than the actively managed funds.five years. According to the investment experts. while not relying only on one sector or a diverse portfolio to generate returns.32% returns in one year as on 20th July 2011. Index funds save investors significant amount of money in annual fees compared to actively managed funds. a combination of low expenses and low tracking error will help in identifying good funds.71% and 3. one will prefer to invest in index funds than in actively managed funds. if an index fund outperforms its benchmark. Therefore.59% in one year. In recent times the volatility in markets has made investors cautious on direct exposure in equities. there is less risk because not all of the investor’s eggs are in one basket.First time investors can opt for index funds as they have good exposure to large cap stocks and don’t cause undue volatility. Within index funds. 2011. . then it can underperform the same later. It has been noticed that several diversified funds have underperformed compared index funds. They are sold as a safer alternative to actively managed equity funds. Though index funds fetch low returns compared to diversified funds. manage and sell than the actively managed counterparts. it is only useful if the comparison is made on a long term basis.

Where does ICICI Prudential Index Fund invest your money ? ICICI Prudential Index Fund is a large cap index fund which means your money will be invested in stocks on the Nifty in the same proportion as they occur on the index. It has 98% exposure to large size companies and close to 1% exposure to mid cap companies. ICICI Prudential Index Fund ICICI Prudential Index Fund is being managed by Kayzad Eghlim since Aug 2009. you do not need to monitor how index fund is going. Large cap companies tend to be stable compared to mid cap and small cap companies. The fund manager’s job ends at allocating funds in stocks in the same proportion as found in Nifty index. However. one who wants to invest in index funds should consider two important factors – tracking error and expense ratio.In short. You can just look at the index and you will know how your investments are performing. Whereas other types of funds call for more understanding and attention. The fund has given average returns like most other index funds. Index funds are a good option for new investors who do not have any previous experience of investing in the markets. Suitable for what?    Lifestyle needs Creating wealth quickly Short term needs Not suitable for what?     Child's education Child's marriage Planning for retirement Home Purchase . New investors can skip this one for better large cap funds.

. What are the tax implications? The returns in an equity mutual fund are absolutely tax free. commissions. The fund has been giving around 3% returns to those who have stayed invested for 5 years. What are the charges applicable? If units are sold within a year an exit load of 1% is deducted from your total returns.50%. your value of investments would be around Rs 5. etc. Your mutual fund returns will be total returns less expense ratio. Expense ratio of ICICI Prudential Index Fund is 1. This is charged to recover the fund management company’s expenses on securities’ transactions. registrar fees. provided you do not withdraw within 1 year. The performance has been not better or similar to other large cap mutual funds.How has ICICI Prudential Index Fund performed in the past? If you had invested Rs 1 lakh when the fund was launched in Feb 2002. No exit load applies for units withdrawn post one year.15 lakhs.000 every month in ICICI Prudential Index Fund through SIP for the past 5 years today you would have around Rs 7.19 lakhs. Assume you had invested Rs 10. If you had invested Rs 1 lakh five years back it would have become Rs 1.5 lakhs.