BLB Institute of financial Markets


Submitted By:

ACKNOWLEDGEMENT We, the members of the Group, hereby declare that we all have taken active part in the project on given topic “Construction of Mutual Fund Portfolio”. We all have given equal participation in making this project in the best possible way.

Contents…  Introduction.  Definition.  Mutual Fund: Concept.  Mutual Fund Cycle.  History.

Organisation of Mutual Fund. Types of Mutual Fund.

 Mutual Fund & Stock.

 Net Asset Value.  Advantages of Mutual Fund.

Disadvantages of Mutual Fund. Load & Types of Load. Risk in Mutual Fund. Growth of Mutual Fund in India. Future of Mutual Fund in India. Mutual Fund in India.

 Frequently Used Terms.

 Mutual Fund Portfolio Construction.

 Structure of Mutual Fund in India.
 

 Reasons For slow Growth.

 Conclusion.

 INTRODUCTION: Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. Mutual Fund is an instrument of investing money. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification. Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously. Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.


A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. You can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.


A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a mutual fund:

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Investors of mutual funds are known as ‘unit holders’. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.


The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases:•

First Phase – 1964-87:- Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase – 1987-1993:- (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by

Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.

Third Phase – 1993-2003:- (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more The number of mutual comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003:- In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund

Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The graph indicates the growth of assets over the years.


A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

• Mutual Fund Custodian: A trust company, bank or similar financial institution responsible for holding and safeguarding the securities owned within a mutual fund. A mutual fund's custodian may also act as the mutual fund's transfer agent, maintaining records of shareholder transactions and balances. Also refers to as a "mutual fund corporation". Since a mutual fund is essentially a large pool of funds from many different investors, it requires a third-party custodian to hold and safeguard the securities that are mutually owned by all the fund's investors. This structure mitigates the risk of dishonest activity by separating the fund managers from the physical securities and investor records. • Sponsor: Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute atleast 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

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

• Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes.

Asset Management Company (AMC): The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. The AMC must have a net worth of at least 10 crore at all times.

Registrar and Transfer Agent : The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.


Whether you’re a first-time stock investor or a seasoned veteran, you should understand what differentiates single stock investments from mutual fund investing. First, Some Working Definitions... Picture a collection of stocks, bonds, or other securities that are purchased by a group

of investors and then managed by an investment company. That’s a mutual fund. When you buy a share in a fund, you’re really buying a piece of a large, diverse portfolio. Conversely, stocks are shares of a single company. Stocks vs. Funds: The Management When it comes to managing an investment, some investors prefer leaving those details and skills to someone else. They like having an expert oversee the day-to-day decisions that a changing stock investment involves and see that as a distinct advantage. A good manager, they might argue, has access to information that would cost them an exorbitant amount, even if they had the time and inclination to do the work themselves. On the other hand, some investors would never surrender control of their investments. Part of the thrill of investing is knowing that when they succeed it was due to their own decisions, these investors might say. Individual comfort level plays a big part in your investment choice.

Diversifying Matters When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. Diversification is a big selling factor for mutual funds. But that’s not to say that an investor couldn’t diversify via his own stock selections.

Liquidity, Liquidity Fund investors can cash in on any business day. When you sell a stock, you must wait three business days before the trade settles and your money is released. The Issue of Red Tape Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings. Transacting business with stocks can be a more complicated experience. Placing buy orders, selling shares, or dictating any number of orders can be time-consuming. To some, however, that’s just part of the experience. In summary, fund investors are often attracted by the overall convenience. By way of contrast, stock investors may tend to be more comfortable with their own investing skills. Remember the value of both mutual funds and stocks will fluctuate with the changes in market conditions, and when sold the investor may receive back more or less than their original investment amount. Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 TYPES OF MUTUAL FUND SCHEMES: There are a wide variety of Mutual Fund Schemes that cater to your needs, whatever to your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals. (A)By Structure • Open-Ended Schemes These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices. • Close-Ended Schemes Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holder’s expectations and other market factors. One of the characteristics of the close-ended scheme is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI regulations ensure that at least one of the two exit routes are provided to the investor. • Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.

(B)By Investment Objective • Tax Saving Schemes These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specific avenues. For example, Equity Linked Saving Schemes (ELSS) and Pension Schemes. Recent amendments to the Income Tax Act provide further opportunities to investors to save capital gains by investing in Mutual Funds. The detail of such tax savings are provided in the relevant offer documents. Ideal for: Investors seeking tax rebates.

• Special Schemes This category includes index schemed that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or the industry specific schemes(which invest in specific industries) or sectoral schemes(which invest exclusively in segments such as 'A' Group shares or initial public offerings). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that anyone scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you.

Remember, as always, higher the return you seek, higher the risk you should be prepared to take.


Definition: The Net Asset Value, or NAV, is simply a measure of the current rupee value of one share of a mutual fund. It's the fund's assets minus its liabilities divided by the number of outstanding shares. NAV’s are calculated at the end of each trading day. If the NAV increases, then it means the value of your holdings increase (if you are a shareholder). Net asset value (NAV): In simple words, NAV of a mutual fund is nothing but its PRICE PER UINT. The NAV of mutual fund is to be calculated on a daily basis that is based on its performance with relation to other mutual funds. Technically speaking NAV of a 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. However, most people refer loosely to the NAV per unit as NAV, ignoring the “per unit”. NAV is computed on a daily basis for Open-ended funds and on a weekly basis for Close-ended listed funds whereas for close-ended unlisted funds NAV is computed once a month or once in 3 month as permitted by SEBI. Thus, if one sees a fund NAV as Rs. 10, then one can expect to buy the fund for Rs. 10 or sell it for Rs.10 (although some loaded funds don’t follow this logic). Since mutual funds hold a number of securities, the net asset value must be calculated at the end of the day on daily basis (as opposed to stocks that change prices by the second).

CALCULATING NET ASSET VALUE (NAV): Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs. 50 crore and there are 10 lakh shares of the fund, then the price per share (or NAV) is Rs. 50.00. The Following Formula Is Utilized For Calculating NAV Per Unit: NAV = Total Assets – Total Liabilities Total no. Of outstanding shares

 HOW TO USE THE NET ASSET VALUES: NAV’s are helpful in keeping an eye on your mutual fund's price movement, but NAV’s are not the best way to keep track of performance. The reason for this is mutual fund distribution. Mutual funds are forced by law to distribute at least 90% of its' realized capital gains and dividend income each year. When a fund pays out this distribution, the NAV drops by the amount paid. This is important because an investor may become frightened when they see their fund's NAV drop by Rs 3 even though they haven't lost any money (the Rs. 3 was paid out to the shareholder). The most important thing to keep in mind is that NAV’s change daily and are not a good indicator on how your portfolio is doing because things like distributions mess with the NAV (it also makes mutual funds hard to track).

If mutual fund is emerging as the favorite investment vehicle, it is because of the many advantages it has over other forms and avenues of investing, particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and market monitoring. The following are the major advantages offered by mutual funds to all investors:
1. Professional Management: Even if the investor has a big amount of capital available

to him, he benefits from the professional management skills brought in by the fund in the management of the investor’s portfolio. The investment skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own. Few investors have the skills and resources of their own to succeed in today’s fast-moving, global and sophisticated markets.
2. Reduction/Diversification of Risk: An investor in a mutual fund acquires a diversified

portfolio, no matter how small his investment. Diversification reduces the risk of loss, as compared to investing directly in one or two shares or debentures or other instruments. When an investor invests directly, all the risk of potential loss is his own. While investing in the pool of funds with other investors, any loss in one or two securities is also shared by other investors. This risk reduction is one of the most important benefits of a collective investment vehicle like mutual fund.

3. Reduction in Transaction Costs: What is true of risk is also true of the transaction

costs. A direct investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors.

4. Liquidity: Often investors hold shares or bonds they cannot directly, easily and quickly

sell. Investment in mutual fund, on the other hand, is more liquid. An investor can liquidate the investment by selling the units to the fund if it is an open-ended fund, or by selling the units in the stock market if the fund is a closed-ended fund, since closedend funds have to be listed on a stock exchange, in any case, the investor in a closedended fund receives the sale proceeds at the end of a period specified by the mutual fund or the stock exchange.
5. Flexibility: Mutual fund management companies offer many investor services that a

direct market investor cannot get. Within the same fund family, investors can easily transfer/switch their holdings from one scheme to another. They can also invest or withdraw their money as regular investors in most open-ended schemes.
6. Convenience: Mutual fund investment process has been made further more convenient

with the facility offered by funds for investors to buy or sell their units through the internet or email or using other communication means.
7. Regulated Operations: Mutual fund industry is well regulated; all funds are registered

with SEBI, which lays down rules to protect the investors. Thus, investors also benefit from the safety of a regulated investment environment.
8. Higher Returns: As these funds are well managed and well diversified, they tend to

perform better than market over longer period of time; there is potential for the unit holders to get better returns compared to fixed income avenues over longer period of time.
9. Tax Benefits: Mutual funds enjoy tax benefits on the incomes received by them as well

as on capital gains. The unit holders also enjoy certain tax benefit on the income earned, the capital gains made, and on amount invested in certain types of funds.

10. Transparency: The investors get updated market information from the funds. The fund

managers also share the information about the schemes in the transparent manner, with all material facts required by regulators to be disclosed to the investors. The NAV’s of open-ended funds are disclosed on a monthly basis ensuring transparency to the investors.

While the benefits of investing through mutual funds far outweigh the disadvantages, an investor and his advisor will do well to be aware of a few shortcomings of using the mutual fund as an investment vehicle.
1. No Control Over Costs: An investor in a mutual fund has any control over the overall

cost of investing. He pays investment management fees as long as he remains with fund, albeit in return for the professional management and research. Fees are usually payable as a percentage of the value of his investments, whether the fund value is rising or declining. A mutual fund investor also pays fund distribution cost, which he would not incur in direct investing. However, this shortcoming only means that there is a cost to obtain the benefits of mutual fund services, and this cost is often less than the cost of direct investing by the investors. Besides, the regulators have prescribed a ceiling on the maximum expenses that the fund managers can charge to the schemes, thus limiting the investors’ expense of investing through mutual funds.
2. No Tailor-made Portfolios: Investors who invest on their own can build their own

portfolios of shares, bonds and other securities. Investing through funds means that he delegates this decision to the fund managers. High-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual funds help investor overcome this constraint by offering families of schemes – a large number of different schemes – within the same fund. In each schemes there are various plans and options. An investor can choose from different investment schemes/plans/options and construct an investment portfolio that meets his investment objectives.

3. Managing a Portfolio of Funds: Availability of a large number of options from mutual

funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in. Fortunately, India now has a large number of AMFI registered and tested fund distributors and financial planners who are capable of guiding the investors.


We cannot overemphasize the importance of having a well balanced and diversified mutual fund portfolio. But what does this exactly mean? A total investment of between $5000 and $6000 could make your portfolio fairly diversified. Even the mutual funds themselves can be diversified in a variety of investments. The mutual funds that are better diversified tend to do better than the non-diversified funds. The same is true with your overall portfolio. In short, diversification provides insurance.

FREQUENTLY USED TERMS: • AMC A Company formed under the Companies Act and registered with SEBI to manage investors’ funds collected through different schemes. The trustee delegates the task of floating schemes and managing the collected money to a company of professionals, usually experts who are known for smart stock picks. This is an Asset Management Company (AMC). AMC charges a fee for the services it renders to the MF trust. Thus, the AMC acts as the investment manager of the trust under the broad supervision and direction of the trustees. • Unit A unit in a mutual fund scheme means one share in the assets of a particular scheme. So, a person holding units in a scheme is referred to, as a unit holder.

Net Asset Value (NAV)

The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). Mutual Funds invest the money collected from the investors in securities markets. In simple words, NAV is the market value of the securities held by the scheme. Since market value of the securities changes everyday, NAV of a scheme also varies on a day-to-day basis. The NAV per unit is the market value of the securities of a scheme divided by the total number of units of the scheme on any particular date. For e.g., if the market value of securities of a mutual fund scheme is Rs. 300 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs. 30. NAV is required to be disclosed by the mutual funds on a regular basisdaily or weekly-depending on the type of scheme.

• Sale Price It is the price you pay when you invest in a scheme. It is also called as Offer Price. It may include a Sales or Entry Load. • Repurchase Price It is the price at which an investor sells back the units to the Mutual Fund. This price is NAV related and may include the exit load. When an investor chooses to withdraw money from his investment in an open-ended fund at any point of time, the units are sold at NAV (after deduction of the Exit Load, if any) to the fund. When a close-ended fund completes tenure, it is redeemed at the prevailing NAV and investors are paid the proceeds thereof. It is also called as Bid Price. • Redemption Price It is the price at which open-ended schemes repurchase their units and close- ended schemes redeem their units on maturity. Such prices are NAV related. • Statement of Account A Statement of Account is a document that serves as a record of transactions between the fund and the investor. It contains details of the investor with the various transactions executed during he period, i.e., sales, repurchase, switch-over in, switch-over out. The Statement of Account is issued every time any transaction takes place.

 LOAD AND TYPES OF LOAD: Load is a charge collected by a mutual fund on units. It is of three types.





Entry Load: When a charge is collected at the time of entering into a scheme it is called as entry load or front end load or sales load. The entry load percentage is added to the NA at the time of allotment of units.

Exit Load: An Exit load or Back-end load or repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes. (Switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes.

Contingent Deferred Sales Load (CDSL): The load amounts charged to units when recovered at various period of time is called as ‘deferred load’. This load reduces the redemption proceeds paid out to the outgoing investors. Depending on how many years the investor stays with the fund, some funds may charge different mounts of loads to the investor- the longer the investor stays with the fund, lesser is the amount of exit load charged to him. This is called Contingent the Deferred Sales Charge (CDSC) and Contingent Deferred Sales Load (CDSL). Some schemes do not charge any load (i.e. Sell/repurchase at NAV) and are called No Load Schemes.


Step One - Identify your investment needs. Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions:

1. What are my investment objectives and needs?

Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs.
2. How much risk I am willing to take?

Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short-term loss in order to achieve a long-term potential gain.
3. What are my cash flow requirements?

Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don't require a current cash flow but I want to build my assets for the future. By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund investment strategy.

Step Two - Choose the right Mutual Fund. Once you have a clear strategy in mind, you have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are:

1) The track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category. 2) How well the Mutual Fund is organized to provide efficient, prompt and personalized service. 3) Degree of transparency as reflected in frequency and quality of their communications.

Step Three - Select the ideal mix of Schemes. Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. The following tables could prove useful in selecting a combination of schemes that satisfy your needs.

AGGRESSIVE PLAN Money Market Schemes Income Schemes Balanced Schemes 5% 10-15% 10-20 %

Growth Schemes MODERATE PLAN Money Market Schemes Income Schemes Balanced Schemes Growth Schemes CONSERVATIVE PLAN Money Market Schemes

60-70 %

10 % 20 % 40-50 % 30-40 %

10 %

Income Schemes

50-60 %

Balanced Schemes Growth Schemes

20-30 % 10 %

Step Four - Invest regularly

For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum every month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you.

Step Five - Keep your taxes in mind If you are in a high tax bracket and have utilised fully the exemptions under section 80L of the Income Tax Act, investing in growth funds that do not pay dividends might be more tax efficient and improve your post-tax return. If you are in a low tax bracket and have not utilised fully the exemptions available under Section 80L of the Income Tax Act, selecting funds paying regular income could be more tax efficient. Further, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore, consult your tax advisor or Chartered Accountant for specific advice.

Step Six - Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at the compounded rate of return.

Step Seven - The final step All you need to do now is to get a touch with a Mutual Fund or your agent/broker and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk-taking, growth oriented or income seeking.

 Mutual Fund Risk:

Risk Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help you to understand the risk associated with that particular fund. Generally speaking, risk and potential return are related. This is the risk/return tradeoff. Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility. While a fund with higher risk has the potential for higher return, it also has the greater potential for losses or negative returns. The school of thought when investing in mutual funds suggests that the longer your investment time horizon is the less affected you should be by short-term volatility. Therefore, the shorter your investment time horizon, the more concerned you should be with short-term volatility and higher risk. Following is a glossary of some risks to consider when investing in mutual funds.

Call Risk: - The possibility that falling interest rates will cause a bond issuer to redeem —or call—its high-yielding bond before the bond's maturity date. Country Risk: - The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk: - The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk.

Currency Risk: - The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk. Income Risk: - The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk: - The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk: - The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk: - The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk: - The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk: - The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Principal Risk: - The possibility that an investment will go down in value, or "lose money," from the original or invested amount.

How do mutual funds earn money? A mutual fund is a means of investing that enables individuals to share the risks of investing with other investors. All contributors to the fund experience an equal share of gains and losses for each dollar invested. A mutual fund owns the securities of several corporations. A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to the kind of investments the mutual fund trades. Investors purchase shares in the mutual fund as if it was an individual security. Fund managers hired by the mutual fund company are paid to invest the money that the investors have placed in the fund. Heeding the adage "Don't put all your eggs in one basket", the holders of mutual fund shares are able to gain the advantage of diversification which might be beyond their financial means individually.

 STRUCTURE OF MUTUAL FUNDS IN INDIA Like other countries, India has a legal framework within which mutual funds must be constituted. Unlike in the UK, where two distinct structures-‘trust’ and ‘corporate’- are allowed with separate regulations, depending on their nature- open end or closed end, in India, open end and closed end funds are constituted along one unique structure- as unit trusts. A mutual fund in India is allowed to issue open-end and closedend schemes under a common legal structure. Therefore, a mutual fund may have several different schemes (open and closed-end) under it i.e; under one unit trust, at any point of time. However, like the USA; all the funds and their open end and closed end schemes are governed by the same regulations and the regulatory body, the SEBI.The structure that is required to be followed by mutual fund in India is laid down under SEBI(mutual fund) Regulations,1996.
 Some facts of the growth of mutual funds in India
• •

100% growth in the last 6 years. Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which are much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rural areas like the Indian insurance industry with simple and limited products.

• • • •

SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice.


By December 2004, Indian mutual fund industry reached Rs.1, 50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs. 40, 90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)
Month/Year Mar-98 605410 Mar-00 851593 Mar-01 989141 Mar-02 1131188 Mar-03 128085 3 Mar-04 Sep-04 4-Dec 156725 1622 1 5 7 9


Change in % over last yr
Mutual Fund AUM’s Growth Month/Year MF AUM's Change in % over last yr Mar-98 68984








Mar-00 93717

Mar-01 83131

Mar-02 94017

Mar-03 75306

Mar-04 137626

Sep-04 151141

4-Dec 149300








Source - AMFI

1. Social Fabric: Indian society is represented by skewed income patterns. Rural India

is far from investible surplus. Whatever surplus a rural native may have, he is not well informed about investible avenues and mutual funds. Most of the residents of

rural area are unaware of stock market and economics. Mutual funds’ awareness has a long way to go.
2. Government Players: Private sector entities are aggressive in marketing and reach

more people with efforts. Indian mutual fund industry was with UTI and then with public sector funds. It is a well known worldwide fact that government owned entities lack in profit orientation because of excessive job security provided to the employees and ‘ownership’s [i.e. government’s] profit motive absence’. Management of these state owned funds mostly vested with these ex-bank managers and government account officials. They came on transfers or on deputation from the sponsor banks. They did not have adequate specialized skills to manage funds. Their performance was dismal in most cases and the industry faced investor confidence crises for some years. UTI’s US-64 burst also added to the fears.
3. Protected Stock Market Environment: Indian stock market was protected for

several years. Reach and visibility was much less to attract visitors. Physical shares, manual trust based systems, absence of foreign capital flows, a scam per decade are some more reasons for investors’ slow and cautious approach towards stock related [including mutual funds] investments.
4. Regulatory Environment: It improved slowly over the years and is now attracting

more investors. Slow growth is comparative. Compared to developed countries. Per se India has progressed well. More than organic growth in mutual funds industry is witnessed. No specific blames to be attributed to either government players or regulators. Infact every entity has added to the progress.


Mutual funds have become a preferred investment vehicle in today’s times. This is because they present an opportunity to the ordinary investor to invest indirectly in the stock, bond and money markets. Investors on their own have little or inclination

to research individual stocks or sectors. Professional fund managers employed by mutual funds do this job. Also a single person can’t diversify his portfolio and invest in multiple high-priced stocks for the sole reason that he may not have the sufficient resources. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. It is said that almost everyone in America owns a mutual fund scheme. This proves the popularity of mutual funds. Since mutual funds are capital market players they come under the regulatory jurisdiction of SEBI. SEBI has laid down certain guidelines for mutual funds that they are expected to follow. Thus, the set up of a legal structure, which has enough teeth safeguard investors interest, ensures that the investors are not cheated out of their hard-earned money. As we have learned before, the investment goals vary from person to person. While somebody wants security, others might give more weight age to returns alone. Somebody else might want to plan for his child’s education while somebody might be saving for the proverbial rainy day or even life after retirement. Indian MF industry offers a plethora of schemes and d serves broadly all types of investors. Thus one can say that the appeal of mutual funds cuts across investor classes. In other developed countries, Mutual funds attract much more investments as compared to the banking sector but in India the case is reverse. We lack awareness about the benefits that a re offered by these schemes. It is time that investors irrespective of the risk capacities, make intelligent decisions to generate better returns and mutual funds is definitely one of the ways to go about it.

BIBLIOGRAPHY 1) HDFC mutual fund –Key Information Memorandum dated 25 Oct 2007 2) Principal mutual funds –KIM dated 21 Jan 2008

3) Reliance mutual funds –KIM dated 12 Jan 2008 4) AMFI-Mutual Fund (Basic) Module by NCFM 5) AMFI-Mutual Fund (Dealers) Module by NCFM

WEB SITES: 1) 2) 3) 4)

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