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Our Founder

Few men in history have made as dramatic a contribution to their country’s economic fortunes as did the founder of
Reliance, Shri. Dhirubhai H Ambani. Fewer still have left behind a legacy that is more enduring and timeless.

As with all great pioneers, there is more than one unique way of describing the true genius of Dhirubhai: The
corporate visionary, the unmatched strategist, the proud patriot, the leader of men, the architect of India’s capital
markets, the champion of shareholder interest.

But the role Dhirubhai cherished most was perhaps that of India’s greatest wealth creator. In one lifetime, he built,
starting from the proverbial scratch, India’s largest private sector enterprise.

When Dhirubhai embarked on his first business venture, he had a seed capital of barely US$ 300 (around Rs
14,000). Over the next three and a half decades, he converted this fledgling enterprise into a Rs 60,000 crore
colossus—an achievement which earned Reliance a place on the global Fortune 500 list, the first ever Indian
private company to do so.

Dhirubhai is widely regarded as the father of India’s capital markets. In 1977, when Reliance Textile Industries
Limited first went public, the Indian stock market was a place patronised by a small club of elite investors which
dabbled in a handful of stocks.

Undaunted, Dhirubhai managed to convince a large number of first-time retail investors to participate in the
unfolding Reliance story and put their hard-earned money in the Reliance Textile IPO, promising them, in
exchange for their trust, substantial return on their investments. It was to be the start of one of great stories of
mutual respect and reciprocal gain in the Indian markets.

Under Dhirubhai’s extraordinary vision and leadership, Reliance scripted one of the greatest growth stories in
corporate history anywhere in the world, and went on to become India’s largest private sector enterprise.

Through out this amazing journey, Dhirubhai always kept the interests of the ordinary shareholder uppermost in
mind, in the process making millionaires out of many of the initial investors in the Reliance stock, and creating one
of the world’s largest shareholder families.

Reliance Life Insurance offers you products that fulfill your savings and protection needs. Our aim is to emerge
as a transnational Life Insurer of global scale and standard.

Reliance Life Insurance is an associate company of Reliance Capital Ltd., a part of Reliance - Anil Dhirubhai
Ambani Group. Reliance Capital is one of India’s leading private sector financial services companies, and ranks
among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital
has interests in asset management and mutual funds, stock broking, life and general insurance, proprietary
investments, private equity and other activities in financial services.

Reliance - Anil Dhirubhai Ambani Group also has presence in Communications, Energy, Natural Resources,
Media, Entertainment, Healthcare and Infrastructure.

What is Life Insurance

Life insurance is a contract between you, the policy owner, and the insurer company. It pledges the payment of a
certain sum assured to you or your family when the event that you are insured against occurs. In most cases, the
events during which the contract is valid for payment are:

• When the contract reaches maturity

• If unfortunate death occurs before the date of maturity

• Sickness

Some policies even offer the benefit of paying a percentage of the sum assured at certain periodic intervals, which
means that you can have a dual benefit of a life cover and easy liquidity through some lump sum cash.
Why You Need Insurance

Life insurance is a partial compensation for the problems caused by untimely death. It works in the following
hazardous situations:

• Premature death of the breadwinner leaving the dependents to fend for themselves.

• Surviving old age without any visible means of support.

So, even while you may think that you may not need life insurance, cast a thought over the future of your family if
they have to survive in your absence. Life insurance gives them the financial security that they will need for the
future.

Who Can Buy a Policy

You can take a life insurance policy once you have attained majority and are eligible to enter into a valid contract.
Few policies can also be taken on the life of your spouse or children, subject to certain conditions.

While endorsing an insurance proposal, most companies take into account your state of health and income among
other factors.

Life Insurance V/S Other Savings

Contract of Insurance

A contract of insurance is technically known as uberrima fides, which means it is a contract of utmost good faith. In
this principle, you have the doctrine of disclosing all material facts and that applies to all forms of insurance. Any
misrepresentation, fraud or non-disclosure in any document leading to the acceptance of the risk will render the
insurance contract null and void.

Protection

Life insurance assures payment of the entire amount assured (along with bonuses, wherever applicable) in case of
demise, whereas in other savings schemes, only the amount saved (with interest) is payable.

Aid to Thrift

Life insurance schemes allow ‘thrift’, that is, it allows long-term savings because premium payments can be made
through an easy instalment facility. Premium payments can be monthly, quarterly, half-yearly or yearly. Some
insurance schemes provide a convenient method of paying premium each month by deducting the amount from
your income.

Security on Loan

Generally, a life insurance policy is accepted as security, even for a commercial loan. You can acquire loans on the
sole security of a policy that has acquired loan value.

Tax Relief

The best way to enjoy deductions on income tax and wealth tax is through life insurance. The deductions are
available for amounts paid by way of premium for life insurance subject to the prevailing income tax rates. You can
also avail of provisions in the law for tax relief, in which case you, as the assured, can pay a lower premium for the
insurance than what you normally pay.

Easy Liquidity at Periodic Intervals

You can avail of money when you need it if you have taken a suitable insurance plan, or a combination of plans. It
will help you meet certain financial needs as and when the need arises. Situations such as children’s education,
marriage or any other need for cash can be made less stressful with the help of such policies. You can also use
policy money at the time of retirement from service, or for any other purpose such as purchase of a house,
investments, etc.

Tax and Tax Savings

What is Income Tax?

An income tax is a tax levied on the financial income of persons, corporations or other legal entities. Tax rates
levied on your income may be:

• Progressive: A progressive tax rate is charged based on how much you earn, which means that if you
earn more you are taxed more.

• Flat: A flat tax rate charges the same rate no matter how much you earn.

• Regressive: The regressive tax rate charges you only up to a certain level of income, for example, the
first Rs. 90,000 of your income.

In India, progressive income tax is levied on the income of individuals, Hindu Undivided Families (HUFs),
companies (firms), co-operative societies and trusts. There are certain slabs on which income tax calculations are
considered:

• If you earn up to Rs. 1,50,000* per year, then no income tax is charged.

• If you earn between Rs. 1,50,001–3,00,000 per year, the tax charged is 10% of the amount greater than
Rs. 1,50,000..

• If you earn between Rs. 3,00,001–5,00,000 per year, the tax charged is 20% of the amount greater than
Rs. 3,00,000 + Rs. 15000.

• If you earn above Rs. 5,00,000 per year, the tax charged is 30% of the amount greater than Rs. 5,00,000
+ Rs. 55,000.

*The basic exemption limit for women is Rs.180,000 and senior citizens is Rs.225,000.

A surcharge of 10% is payable on tax for incomes exceeding Rs. 10 lakhs.

How to Save Tax?

You should always consider tax planning as a necessary exercise in your financial planning process. How much
tax you can save depends on factors like risk appetite, investment objective and tenure of investment.

Section 88

Prior to the Finance Bill 2005, provisions for tax rebates fell under the gamut of Section 88. To claim tax benefits
under this Section, you would have had to make investments of up to Rs. 1,00,000 in Public Provident Fund (PPF),
National Savings Certificate (NSC), tax-saving funds (also referred to as Equity Linked Saving Schemes—ELSS)
and infrastructure bonds. The problem with this Section was that there were caps on the amount you could invest
in each tax-saving instrument and there was no flexibility in choosing the tax-saving instruments. Section 88
decided everything for you.

Enter Section 80C

In the Finance Bill 2005, Section 88 was scrapped and it gave way to the new Section 80C. Under this section, you
can invest up to Rs. 1,00,000 in tax-saving instruments, but the biggest advantage is that you can make your own
investment choices, i.e. you can decide how to spread your investment of Rs. 1,00,000 over PPF, NSC, ELSS and
infrastructure bonds.
FAQs

What is PAN?

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued to you in the form of a laminated
card, by the Income Tax Department. It is an important instrument for most financial transactions that take place
these days.

Is it necessary to have a PAN?

It is necessary to have a PAN because you have to quote it on return of income or any correspondence with any
income tax authority. It has also become compulsory to quote PAN in all documents pertaining to financial
transactions notified from time-to-time by the Central Board of Direct Taxes.

Who can obtain a PAN?

If you are a taxpayer or a person who has to furnish a return of income you have to obtain a PAN. Even if you enter
any financial transaction where quoting PAN is necessary, you must have a PAN.

Can more than one PAN be obtained?

You cannot obtain more than one PAN as it is against the law.

Where can I apply for a PAN?

In order to improve PAN related services, the Income Tax department has authorized UTI Investor Services Ltd
(UTIISL) to set up and manage IT PAN Service Centres in all cities or towns where there is an Income Tax office
and National Securities Depository Limited (NSDL) to dispense PAN services from Tax Identification Number (TIN)
Facilitation Centres. If you live in a big city, UTIISL has set up more than one IT PAN Service Centre for your
convenience. Likewise there are more than one TIN Facilitation Centres.

How can I apply for a PAN?

You can make an application for a PAN only by filling and submitting Form 49A. The form is available at all IT PAN
Service Centres and TIN Facilitation Centres. You can even get the form online from the website of the Income Tax
Department.

About Us
Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with Average Assets Under
Management (AAUM) of Rs. 84694.24 Crores (AAUM for June 30th 08 ) and an investor base of over 67.39
Lakhs.

Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest growing
mutual funds in the country.
RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has
presence in 118 cities across the country.

Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to
increase value to investors.

"Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary
of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital
being held by minority shareholders."

Reliance Capital Ltd. is one of India’s leading and fastest growing private sector financial services
companies, and ranks among the top 3 private sector financial services and banking companies, in terms of
net worth.

Reliance Capital Ltd. has interests in asset management, life and general insurance, private equity and
proprietary investments, stock broking and other financial services.

AUM Source : http://www.amfiindia.com/

Statutory Details :
Sponsor : Reliance Capital Limited.
Trustee : Reliance Capital Trustee Co. Limited.
Investment Manager : Reliance Capital Asset Management Limited. The Sponsor, the Trustee and the
Investment Manager are incorporated under the Companies Act 1956.
General Risk Factors : Mutual Funds and securities investments are subject to market risks and there is no
assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in
securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and
forces affecting the capital markets. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of
the future performance of the Scheme. The Sponsor is not responsible or liable for any loss resulting from
the operation of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up of the Mutual
Fund and such other accretions and additions to the corpus. The Mutual Fund is not guaranteeing or
assuring any dividend/ bonus. The Mutual Fund is also not assuring that it will make periodical
dividend/bonus distributions, though it has every intention of doing so. All dividend/bonus distributions are
subject to the availability of the distributable surplus in the Scheme. For details of scheme features and
scheme specific risk factors, please refer to the provisions of the offer document. Offer Document and KIM is
available at all the DISCs/ Distributors of RMF and also our web site http://www.reliancemutual.com/. Please
read the offer document carefully before investing.
What is a Mutual Fund?
The following are some of the more popular definitions of a Mutual Fund
A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities,
bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can
be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having
received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't
want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual
fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount
you invest, you own part of the overall fund.
The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap
returns as high as those provided by the equity markets or have a steady and comparatively secure investment as
offered by debt instruments.

What are the benefits of investing in a Mutual Fund?


There are several benefits from investing in a Mutual Fund.

• Small investments : Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide
spectrum of companies with small investments. Such a spread would not have been possible without their
assistance.
• Professional Fund Management : Professionals having considerable expertise, experience and resources
manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick
good investment opportunities.
• Spreading Risk : An investor with a limited amount of fund might be able to to invest in only one or two stocks /
bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound
stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified
at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a
distress, mutual funds have the advantage of the redemption option at the NAVs.
• Transparency and interactivity : Mutual Funds regularly provide investors with information on the value of their
investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various
schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy
to the investor.
• Liquidity : Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at
their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they
announce the repurchase.
• Choice : The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick
up a scheme depending upon his risk / return profile.
• Regulations : All the mutual funds are registered with SEBI and they function within the provisions of strict
regulation designed to protect the interests of the investor.

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A Mutual Fund is not an alternative investment option to stocks and bond; rather it pools the money of several
investors and invests this in stocks, bonds, money market instruments and other types of securities.

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 realised are shared by its
unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket
of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund :
CONCEPT
Mutual Fund Operation Flow Chart

What does a Mutual Fund do with investor's money?


Anybody with an investible surplus of as little as a few hundred rupees can invest in mutual funds. The investors
buy units of a fund that best suits their investment objectives and future needs. A Mutual Fund invests the pool of
money collected from the investors in a range of securities comprising equities, debt, money market instruments
etc. after charging for the AMC fees. The income earned and the capital appreciation realised by the scheme, are
shared by the investors in same proportion as the number of units owned by them.

How are Mutual Funds different from portfolio management schemes?


In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and
gain/loss to all investors during a given period are same for all investors while in case of portfolio management
scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the
investors will be different from each other.

How is investment in a Mutual Fund Different from a Bank Deposit?


When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you
specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas,
in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment
strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or
distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you.

What are the types of returns one can expect from a Mutual Fund?
Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution.
Capital Appreciation : An increase in the value of the units of the fund is known as capital appreciation. As the
value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit by
selling the units at prices higher than the price at which he bought the units.
Dividend Distribution : The profit earned by the fund is distributed among unit holders in the form of dividends.
Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to the investor.
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How are Mutual Funds classified?

Why do Mutual Funds come out with different schemes?


A Mutual Fund may not, through just one portfolio, be able to meet the investment objectives of all their Unit
holders. Some Unit holders may want to invest in risk-bearing securities such as equity and some others may want
to invest in safer securities such as bonds or government securities. Hence, the Mutual Fund comes out with
different schemes, each with a different investment objective.

Does investing in Mutual Funds mean investing in equities only?


Mutual Funds can be divided into various types depending on asset classes. They can also invest in debt
instruments such as bonds, debentures, commercial paper and government securities apart from equity.
Every mutual fund scheme is bound by the investment objectives outlined by it in its prospectus. The investment
objectives specify the class of securities a mutual fund can invest in.

What are sector funds?


These are speciality mutual funds that invest in stocks that fall into a certain sector of the economy. Here the
portfolio is dispersed or spread across the stocks in a particular sector.This type of scheme is ideal for the investor
who has already made up his mind to confine his risk and return to one particular sector. Thus, a FMCG fund
would invest in companies that manufacture fast moving consumer goods.
What is the difference between Growth Plan and Dividend Reinvestment Plan?
Under the Growth Plan, the investor realizes the capital appreciation of his/her investments while under the
Dividend Reinvestment Plan, the dividends declared are reinvested automatically in the scheme.

What is a Portfolio?
A portfolio of a mutual fund scheme is the basket of financial assets held by that scheme. It comprises of
investments in a variety of securities and asset classes. This diversification helps reduces the overall risk. A mutual
fund scheme states the kind of portfolio it seeks to construct as well as the risks involved under each asset class.

What is Net Asset Value (NAV)?


Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given business day. The NAV
reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is
calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and
dividing it by number of units outstanding.

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What is a load?
The charge collected by a Mutual Fund from an investor for selling the units or investing in it.
When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or
Sales load. The entry load percentage is added to the NAV at the time of allotment of units.
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.
Some schemes do not charge any load and are called "No Load Schemes"

What is a Sale Price?


It is the price paid by an investor when investing in a scheme of a Mutual Fund. This price may include the sales or
entry load.

What is a Redemption/Repurchase Price?


Redemption or Repurchase Price 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.

What is the Repurchase or Back End Load?


It is the charge collected by the scheme when it buys back the units from the unit holders.

What is a Switching Facility?


Switching facility provides investors with an option to transfer the funds amongst different types of schemes or
plans. Investors can opt to switch units between Dividend Plan and Growth Plan at NAV based prices. Switching is
also allowed into/from other select open-ended schemes currently within the Fund family or schemes that may be
launched in the future at NAV based prices.
While switching between Debt and Equity Schemes, one has to take care of exit and entry loads. Switching from a
Debt Scheme to Equity scheme involves an entry load while the vice versa does not involve an entry load.

What is the applicable NAV for switch?


Switch requests are effected the day the request for switch is received. The Applicable NAV for the switch will be
the NAV on the day that the request for switch is received

What is an Account Statement?


An Account Statement is a non-transferable document that serves as a record of transactions between the fund
and the investor. It contains details of the investor, the units allotted or redeemed and the date of transaction. The
Account Statement is issued every time any transaction takes place.

Who is a Registrar?
A Registrar accepts and processes unitholders' applications, carries out communications with them, resolves their
grievances and despatches Account Statements to them. In addition, the registrar also receives and processes
redemption, repurchase and switch requests. The Registrar also maintains an updated and accurate register of
unitholders of the Fund and other records as required by SEBI Regulations and the laws of India. An investor can
get all the above facilities at the Investor Service Centres of the Registrar.

Who is a custodian?
Custodian is the agency which will have the physical possession of all the securities purchased by the mutual fund.
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How do I track the performance of the Fund?


The NAVs are published in financial newspapers and also available on the AMFI website on a daily basis.

Can the NAV of a debt fund fall?


A debt fund invests in fixed-income instruments, where safety of capital and regular returns are assured. These
include Commercial Paper, Certificates of Deposit, debentures and bonds. While the rate of interest on these
instruments stays the same throughout their tenure, their market value keeps changing, depending on how the
interest rates in the economy move.
A debt fund's NAV is the market value of its portfolio holdings at a given point in time. As interest rates change, so
do the market value of fixed-income instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that
the debt fund's NAV does not fall.

What is a Systematic Investment Plan?


This is an investment technique where you deposit a fixed, small amount regularly into the mutual fund scheme
(every month or quarter as per your convenience) at the then prevailing NAV (Net Asset Value), subject to
applicable load.

What is a Systematic Withdrawal Plan?


The unitholder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to
redeem a fixed number of units.

Besides the NAV, are there any other parameters which can be compared across different funds of the
same cateogry?
Besides Net Asset Value the following parameters should be considered while comparing the funds :
AVERAGE RETURNS An investor should look at the returns given by the fund over a period of time. Care should
be taken to see whether all dividends and bonuses have been accounted for. The higher and more consistent the
returns the better is the fund.
VOLATILITY In addition to the returns one should also look at the volatility of the returns given by the fund.
Volatility is essentially the fluctuation of the returns about the mean return over a period of time. A fund giving
consistent returns is better than a fund whose returns fluctuate a lot.
CORPUS SIZE : A Large corpus is generally considered good because large funds have lower costs, as expenses
are spread over large assets but at the same time a large corpus has some inefficiencies too. A large corpus may
become unwieldy and thus difficult to manage.
PERFORMANCE VIS A VIS BENCHMARK OTHER SCHEMES An investor should not only look at the returns
given by the scheme he has invested in but also compare it with benchmarks like BSE Sensex, S & P Nifty, T-bill
index etc depending on the asset class he has invested in. For a true picture it is advised that the returns should
also be compared with the returns given by the other funds in the same category.

Thus it is prudent to consider all the above-mentioned factors while comparing funds and not rely on any one of
them in isolation. This is important because as of today there is no standard method for evaluation of un-traded
securities.
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What is CDSC?
Contingent Deferred Sales Charge (CDSC) is a charge imposed on unit holders exiting from the scheme within 4
years of entry. It is intended to enable the AMC to recover expenses incurred for promotion or propagation of the
scheme.
Or
Sometimes the selling expenses of the fund are not charged to the fund directly but are recovered from the unit
holders whenever they redeem their units. This load is called a CDSC and is inversely proportional to the period of
unit holding.

What is the difference between contigent defered sales load and an exit load?
Contingent Deferred Sales charge (CDSC) is a charge imposed when the units of a fund are redeemed during the
first few years of ownership. Under the SEBI Regulations, a fund can charge CDSC to unit holders exiting from the
scheme within the first four years of entry.
Exit load is a fee an investor pays to a fund whenever he redeems his/her units. As per SEBI regulations, the
maximum exit load applicable is 7%. There is a further stipulation by SEBI that the entry load and exit load put
together cannot exceed 7% of the sale price.
Does out performance of a benchmark index always connote good performance?
No, it is not necessary that out performance of a benchmark index always connotes good performance. The
volatility does not permit the investor to rely on one factor only. The index performance is volatile and may be
driven by a few scrips only, which may not be very reflective. So it is better to keep other factors like risk adjusted
returns (volatility of returns) and NAV movement in mind while deciding to invest in a fund.

Does higher return necessarily mean a better fund?


Yes, on the face of it high return does connote good fund but there is also some a risk taken by the scheme to
achieve these returns. Thus it is prudent to measure risk alsowhile considering returns to rank a scheme. Today
there are a lot of statistical tools like Beta, Sharpe ratio, Alpha and Standard Deviation to measure this risk. A risk
adjusted return is the best measure to use while judging a scheme. You can also refer to the ratings assigned by a
reputed rating agency.

What should one keep in mind while choosing a good Mutual Fund?
Each individual has different financial goals, based on lifestyle, financial independence and family commitments
and level of incomes and expenses and many other factors. Thus before investing your money you need to
analyze the following factors :

• Define the Investment objective


Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of
income and expenses among many other factors. Therefore, the first step should be to assess your needs. You
can begin by defining the investment objectives, which could be regular income, buying a home or finance a
wedding or educate your children or a combination of all these needs. Also your risk appetite and cash flow
requirements need to be taken into account.
• Choose the right Mutual Fund
Once the investment objective is clear in your mind the next step is choosing the right Mutual Fund scheme.
Before choosing a mutual fund the following factors need to be considered:
o NAV performance in the past track record of performance in terms of returns over the last few years in relation to
appropriate yardsticks and other funds in the same category.
o Risk in terms of volatility of returns
o Services offered by the mutual fund and how investor friendly it is.
o Transparency, which is reflected in the quality and frequency of its communications.

Go for a proper combination 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.

What is meant by recurring sales expenses?


The Asset management Company may charge the fund a fee for operating its schemes, like trustee fee, custodian
fee, registrar fee, transfer fee etc. This fee is called recurring expense and is expressed as a percentage of the
scheme's average net assets. The recurring expenses are subject to certain limits as per the regulations of SEBI.

WEEKLY AVERAGE NET ASSETS


EQUITY SCHEMES DEBT SCHEMES
RS.
FIRST 100 CRORES 2.50% 2.25%
NEXT 300 CRORES 2.25% 2.00%
NEXT 300 CRORES 2.00% 1.75%
BALANCE ASSETS 1.75% 1.50%

Debt Funds FAQs


What are Money Markets and money market instruments?
Money markets allow banks to manage their liquidity as well as provide the Central Bank means to conduct
monetary policy. Money markets are markets for debt instruments with a maturity up to one year.

The most active part of the money market is the call money market (i.e. market for overnight and term money
between banks and institutions) and the market for repo transactions. The former is in the form of loans and the
latter are sale and buyback agreements - both are obviously not traded. The main traded instruments are
Commercial Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).
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Commercial Paper
A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India
Corporates, Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can issue these notes.

It is generally companies with very good ratings which are active in the CP market, though RBI permits a minimum
credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular
duration is 90 days. Companies use CPs to save interest costs

Certificates of Deposit
These are issued by banks in denominations of Rs 5 lakhs and have maturity ranging from 30 days to 3 years.
Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to
issue CDs with a maturity of at least one year.

Treasury Bills
Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money
market. In India Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days and 364 days.

Apart from the above money market instruments, certain other short-term instruments are also in vogue with
investors. These include short-term corporate debentures, bills of exchange and promissory notes.

What are debt markets and debt market instruments?


Typically those instruments that have a maturity of more than a year and the main types are -
Government Securities (G-secs or Gilts)

• Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing
program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity
ranging from 1 year to 20 years.
• Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market
Operations (OMO) . OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity
and thereby the interest rates to desired levels

The other types of Government Securities are


o Inflation linked bonds
o Zero coupon bonds
o State Government Securities (State Loans)

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Bonds/Debentures

What is the difference between bonds and debentures?


World over, a debenture is a debt security issued by a corporation that is not secured by specific assets, but rather
by the general credit of the corporation. Stated assets secure a corporate bond, unlike a debenture. But in India
these are used interchangeably.

A bond is a promise in which the issuer agrees to pay a certain rate of interest, usually as a percentage of the
bond's face value to the investor at specific periodicity over the life of the bond. Sometimes interest is also paid in
the form of issuing the instrument at a discount to face value and subsequently redeeming it at par. Some bonds
do not pay a fixed rate of interest but pay interest that is a mark-up on some benchmark rate.

Typically bonds are issued by PSUs, Public Financial Institutions and Corporates. Another distinction is SLR
(Statutory Liquidity Ratio) and non-SLR bonds. SLR bonds are those bonds which are approved securities by RBI
which fall under the SLR limits of banks.

Statutory liquidity ratio(SLR): It is the percentage of total deposits a bank has to keep in approved securities.

What affects bond prices?


Largely it will be the interest rates and credit quality of the issuer.

• Interest Rates : The price of a debenture is inversely proportional to changes in interest rates that in turn is
dependent on various factors. When the interest rates fall down, the existing bonds will become more valuable and
the prices will move up until the yields become the same as the new bonds issued during the lower interest rate
scenario(for a detailed explanation see "what affects interest rates").
• Credit Quality : When the credit quality of the issuer deteriorates, market expects higher interest from the
company and the price of the bond falls and vice versa.

Another factor that determines the sensitivity of a bond is the "Maturity Period" - a longer maturity instrument will
rise or fall more than a shorter maturity instrument.

What affects interest rates?


The factors are largely macro-economic in nature -

• Demand/Supply of money : When economic growth is high, demand for money increases, pushing the interest
rates up and vice versa.
• Government Borrowing and Fiscal Deficit : Since the government is the biggest borrower in the debt market,
the level of borrowing also determines the interest rates.
On the other hand, supply of money is done by the Central Bank by either printing more notes or through its Open
Market Operations (OMO).
• RBI : RBI can change the key rates (CRR, SLR and bank rates) depending on the state of the economy or to
combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates and the Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determines the availability of credit and the level
of money supply in the economy.

(CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets and SLR is
the percentage of its total deposits a bank has to keep in approved securities. The purpose of CRR and SLR is to
keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, it increases the money
available for credit in the system. This eases the pressure on interest rates and interest rates move down. Also
when money is available and that too at lower interest rates, it is given on credit to the industrial sector that pushes
the economic growth)
• Inflation Rate : Typically a higher inflation rate means higher interest rates. The interest rates prevailing in an
economy at any point of time are nominal interest rates, i.e., real interest rates plus a premium for expected
inflation. Due to inflation, there is a decrease in purchasing power of every rupee earned on account of interest in
the future; therefore the interest rates must include a premium for expected inflation. In the long run, other things
being equal, interest rates rise one for one with rise in inflation.

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What is Yield Curve?


The relationship between time and yield on securities is called the Yield Curve. The relationship represents the
time value of money - showing that people would demand a positive rate of return on the money they are willing to
part today for a payback into the future.

A yield curve can be positive, neutral or flat.

• A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer
end is higher than that at the shorter end of the time axis. This is as a result of people demanding higher
compensation for parting their money for a longer time into the future.
• A neutral yield curve is that which has a zero slope, i.e. is flat across time. This occurs when people are willing to
accept more or less the same returns across maturities.
• The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long-
term yield is lower than the short-term yield. It is not often that this happens and has important economic
ramifications when it does. It generally represents an impending downturn in the economy, where people are
anticipating lower interest rates in the future.

What is Yield to Maturity (YTM)?


Simply put, the annualised return an investor would get by holding a fixed income instrument until maturity. It is the
composite rate of return of all payouts and coupon.

What is Average Maturity Period?


It is a weighted average of the maturities of all the instruments in a portfolio.

What are LIBOR and MIBOR?


LIBOR : Stands for London Inter Bank Offered rate. This is a very popular benchmark and is issued for US Dollar,
GB Pound, Euro, Swiss Franc, Canadian Dollar and the Japanese Yen. The British Bankers Association (BBA)
asks 16 banks to contribute the LIBOR for each maturity and for each currency. The BBA weeds out the best four
and the worst four, calculates the average of the remaining eight and the value is published as LIBOR.
MIBOR : Stands for Mumbai Inter Bank Offered Rate and is closely modeled on the LIBOR. Currently there are
two calculating agents for the benchmark - Reuters and the National Stock Exchange (NSE). The NSE MIBOR
benchmark is the more popular of the two and is based on rates polled by NSE from a representative panel of 31
banks/institutions/primary dealers
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Credit Ratings
What is a credit rating ?
Credit Rating is an exercise conducted by a rating organisation to evaluate the credit worthiness of the issuer with
respect to the instrument being issued or a general ability to pay back debt over the specified period of time. The
rating is given as an alphanumeric code that represents a graded structure or creditworthiness. Typically the
highest credit rating is that of AAA and the lowest being D (for default). Within the same alphabet class, the rating
agency might have different grades like A, AA and AAA and within the same grade AA+, AA- where the "+" denotes
better than AA and "-" indicates the opposite. For short term instruments of less than a year maturity, the rating
symbol would be typically "P" (varies depending on the rating agency).

In India, currently we have four rating agencies -

• CRISIL
• ICRA
• CARE
• Fitch

What is the "SO" in a rating ? [AAA(SO)]


Sometimes, debt instruments are so structured that in case the issuer is unable to meet repayment obligations,
another entity steps in to fulfill these obligations. A bond backed by the guarantee of the Government of India may
be rated AAA (SO) with the SO standing for structured obligation

Forex Markets

How is a currency valued?


The floating exchange rate system is a confluence of various demand and supply factors prevalent in an economy
like -

• Current account balance : The trade balance is the difference between the value of exports and imports. If India is
exporting more than it is importing, it would have a positive trade balance with USA, leading to a higher demand for
the home currency. As a result the demand will translate into appreciation of the currency and vice versa.
• Inflation rate : Theoretically, the rate of change in exchange rate is equal to the difference in inflation rates
prevailing in the 2 countries. So, whenever, inflation in one country increases relative to the other country, its
currency falls down.
• Interest rates : The funds will flow to that economy where the interest rates are higher resulting in more demand for
that currency
• Speculation : Another important factor is the speculative and arbitrage activities of big players in the forex market
which determines the direction of a currency. In the event of global turmoil, investors flock towards perceived safe
haven currencies like US dollar resulting in a demand for that currency.

What are the implications of currency fluctuations on debt markets?


Depreciation of a currency affects an economy in two ways, which are in a way counter to each other. On the one
hand, it makes the exports of a country more competitive, thereby leading to an increase in exports. On the other
hand, it decreases the value of a currency relative to other currencies, and hence imports like oil become dearer
resulting in an increase of deficit.

What does one mean by a currency being over valued? What is Real Effective Exchange Rate (REER)?
When RBI says that the rupee is overvalued, they mean that it has been appreciating against other major
currencies due to their weakening against dollar which might impact the competitiveness of India's exports.
REER is the change in the external value of the currency in relation to its main trading partners. It is Rupee's value
on a trade-weighted basis. It takes into account the Rupee's value not only in terms of dollar but also Euro, Yen
and Pound Sterling.

The exchange rates versus other major currencies are average weighted by the value of India's trade with the
respective countries and are then converted into a single index using a base period which is called the nominal
effective exchange rate. But the relative competitiveness of Indian goods increases even when the nominal
effective exchange rate remains unchanged when the rate of price increases of the trading partner surpasses that
of India's. Taking this into account, prices are adjusted for the nominal effective exchange rate and this rate is
called the "Real Effective Exchange Rate."

EQUITY FUNDS FAQS

• What are equity assets ?


• How does an investor in equities make money?
• Why do stock prices move up and down?
• What are main approaches used for analyzing stocks and forecasting future movements?
• What are equity markets?
• What are bonus issues and stock splits? What is their impact?
• What are ADRs and GDRs? What is margin trading?
• What are derivatives?
• What are the derivative products that are currently allowed in India?
• What are index futures?
• What are Options?

What are equity assets ?


Corporate can raise money in two ways; by either borrowing (debt instruments) or issuing stocks (equity
instruments) that represent ownership and a share of residual profits. The equity instruments are in turn typically of
two types - common stock and preferred stocks.

Common stock (or a share) : This represents an ownership position and provides voting rights.

Preferred stock : It is a "hybrid" instrument since it has features of both common stock and bonds. Preferred-
stock holders get paid dividends which are stated in either percentage-of-par (the value at which the stock is
issued) or rupee terms. If the preferred stock had a Rs.100 par value, then a Rs.6 preferred stock would mean that
a Rs. 6 per share per annum in dividends will be paid out. This fixed dividend gives a bond-like characteristic to the
preferred stock.
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How does an investor in equities make money?


Investors get returns on their investments in two ways - dividend and capital gains. The former depends on earning
levels of the particular company and the decision of its management. The latter arises happens when the market
price of the shares rises above the level at which the investment was made. Say, you invested Rs.10,000 by
buying 100 shares of X company at a price of Rs.50 and sold all the 100 shares later at a price of Rs.100, you
would have made a capital gain of Rs.5000.

Sale value of Shares (Rs.100 x 100) Rs.10,000


Value of original investment (Rs.50 x 100) Rs. 5,000
Capital gain Rs. Rs.5,000

Why do stock prices move up and down?


The market price of a particular share is dependent on the demand/supply for that particular scrip. If the players in
the market feel that a particular company has a track record of good performance or has the potential to do well in
the future, the demand for the shares of the company increases and players are willing to pay higher prices to buy
the share. And since the number of shares issued by the company is constant at a given point in time, any
increase in demand would only increase the market price.
Fluctuations in a stock's price occur partly because companies make or lose money. But that is not the only
reason. There are many other factors not directly related to the company or its sector. Interest rates, for instance.
When interest rates on deposits or bonds are high, stock prices generally go down. In such a situation, investors
can make a decent amount of money by keeping their money in banks or in bonds.

Money supply may also affect stock prices. If there is more money floating around, some of it may flow into stocks,
pushing up their prices. Other factors that cause price fluctuations are the time of year and public sentiments.
Some stocks are seasonal, i.e cyclical stocks; they do well only during certain parts of the year and worse during
other parts. Publicity also affects stock prices. If a newspaper story reports that Xee Television has bought a stake
in Moon Television, odds are that the price of Xee's stock will rise if the market thinks its a good decision.
Otherwise it will fall. The price of Moon Television stocks may also go up because investors may feel that it is now
in better hands. Thus, many factors affect the price of a stock.

What are main approaches used for analyzing stocks and forecasting future movements?
The behaviour of the price movement of a stock is said to predict its future movement. One such approach is
called technical analysis and is based on the historical movements of the individual stocks as well as the indices.
Their belief is that by plotting the price movements over time, they can discern certain patterns which will help
them to predict the future price movements of the stocks. On the other hand we have "fundamental analysis",
where the forecasting is done on the basis of economic, industry and company data. Technical analysis is used
more as a supplement to fundamental analysis rather than in isolation.

What are equity markets?


These are markets for financial assets that have long or indefinite maturity i.e, stocks. Typically such markets have
two segments - primary and secondary markets. New issues are made in the primary market and outstanding
issues are traded in the secondary market (i.e., the various stock exchanges)

There are three ways a company can raise capital in the primary market -

• Public Issue : Sale of fresh securities to the public


• Rights Issue : This is a method of raising capital existing shareholders by offering additional securities to them on
a pre-emptive basis.
• Private Placement : Issuers make direct sales to investor groups i.e., there is no public issue.

What are bonus issues and stock splits? What is their impact?
Bonus Issues : Instead of cash dividends, investors receive dividends in the form of a stock. The investor
receives more shares when a bonus issue is announced. For example, when there is a bonus issue in the ratio of
1:1, the number of shares owned by an investor would double in number. However, the market price of the share
would decrease as well at times the decrease might not be proportionate to the extent of bonus because market
players might push the price up if they view the bonus issue as a positive development. Some companies might
announce bonus issues to bring the market price of its share to a more popular range and also promote active
trading by increasing the number of outstanding shares.

Stock Splits : Whenever a stock split occurs, the company ends up with more outstanding shares which will not
only have a lower market price but also lower par value. Stock splits are prompted when the company thinks its
stock price has risen to a level that is out of the "popular trading range".

For example, X corporation has 1 million outstanding shares. The par value is Rs.10 and the current market price
is Rs.1000 per share. If the management feels this price is resulting in a decrease in trading volumes, they can
declare a 1-for-1 split. By doing this, there will be 2 million outstanding shares with a par value of Rs.5 and a
theoretical market price of Rs.500 per share. Sometimes when the market price is very low, the company might
announce a "reverse split" which has the opposite effect of the normal stock split.

In the case of splits, there is no change in the reserves and surplus of the company unlike the bonus issue.
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What are ADRs and GDRs?


American Depositary Receipt (ADR): A security issued by a company outside the U.S. which physically remains
in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. ADRs are issued to
offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens
buying shares on local exchanges. The first ADR was issued in 1927. ADRs are listed on the NYSE, AMEX, or
NASDAQ.

Global Depository Receipt (GDR) : Similar to the ADR described above, except the GDR is usually listed on
exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first
GDR was issued in 1990.

They are shares without voting rights. The ratio of one depository receipt to the number of shares is fixed per scrip
but the quoted prices may not have strict correlation with the ratio. Any foreigner may purchase these securities
whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The
purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI
permission required) but in practice, no one appears to be interested in exercising this right.

What is margin trading?


Securities can be paid for in cash or a mix of cash and some borrowed funds. Buying with borrowed funds permits
the investors to buy a security at a good price at a good time. This act of borrowing money from a bank or a broker
to execute a securities transaction is referred to as using "margin". As of now in India, only brokers are allowed to
provide the margins. Traders can put up part of the payment. Brokers borrow the remaining funds from a
moneylender with whom they would lodge the shares as collateral for the loan. The safety of this mechanism rests
on the risk management capabilities of both the stockbroker and the lender.

However, recently SEBI has proposed to RBI that banks could lend to exchanges on margin trading and the
exchanges could provide assistance to brokers. When this happens, the volumes should increase in the markets
making them more vibrant.
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What are derivatives?


s A derivative is an instrument whose value is derived from the value of one or more underlying security, which can
be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of
derivative instruments are Forwards, Futures, Options and Swaps.

What are the derivative products that are currently allowed in India?
The index futures were introduced in June 2000. One year later, index options and stock options were introduced
as SEBI banned the age-old badla system (which was a combination of both forward and margin trading).

What are index futures?


In a forward contract, two parties irrevocably agree to settle a trade at a future date, for a stated price and quantity.
No money changes hands at the time the trade is agreed upon.

Currently in India, index futures are allowed. These are nothing but future contracts with the underlying security
being the cash market index.

Index futures of different maturities would trade simultaneously on the exchanges. For instance, BSE may
introduce three contracts on BSE sensitive index for one, two and three months maturities. These contracts of
different maturities may be called near month (one month), middle month (two months) and far month (three
months) contracts. The month in which a contract will expiry is called the contract month. For example, contract
month of "Nov. 2001 contract" will be November, 2001.

All these contracts will expire on a specific day of the month (expiry day for the contract) say on last Wednesday or
Thursday or any other day of the month; this would be defined in the contract specification before introduction of
trading.

What are Options?


Options give a buyer the right to buy a scrip and the seller the right to sell a scrip at a pre-determined price on a
particular date. Unlike futures contract, there is no obligation only a "right" There are two types of Options:

• Call Option : Here, the buyer decides to buy a scrip at a particular price on a particular date. For e.g the buyer
takes a call Option on RIL @Rs.150 after 3 months. For this, he pays a premium which is determined by the
demand-supply equation. For e.g, if a particular stock is in favour with investors, there would be more people
willing to buy the stock at a future date, resulting in a higher premium. In this example, let us assume the premium
is Rs.10.
• Put Option : This is used to manage downside risk. A seller today agrees to sell TISCO @Rs.130 after 3 months
and pays the required premium. If the price of TISCO is in excess of Rs.130, he decides not to sell and loses the
premium (which is the profit of the Option Writer). However, if the price is below Rs.130, he "calls" his right and
cushions his loss.

The Option Buyer has the right to exercise his choice of buying or selling in the Call and Put Option respectively.
The Option Writer or Seller has to meet his commitment based on the choice exercised by the Option Buyer.
Options have finite maturities. The expiry date of the Option is the last day (which is pre-determined) when the
owner can exercise his Option.

What are the main differences between options and futures?

BASICS OF MUTUAL FUNDS

The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to
explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it
can serve as an investment tool.

Getting Started
Before we move to explain what is mutual fund, it’s very important to know the area in which mutual funds works,
the basic understanding of stocks and bonds.

Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance,
ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds
Bonds are basically the money which you lend to the government or a company, and in return you can receive
interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be
the most common lending investment traded on the market.

There are many other types of investments other than stocks and bonds (including annuities, real estate, and
precious metals), but the majority of mutual funds invest in stocks and/or bonds.

WORKING OF MUTUAL FUNDS

Regulatory Authorities :
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified
regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or
by private sector entities including one promoted by foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types
of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be
independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that
the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the
mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry
practices in diverse areas such as valuation, disclosure, transparency etc.

What is a Mutual Fund?


A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their
money together with a predetermined investment objective. The mutual fund will have a fund manager who is
responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a
mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or
unit holder of the fund.

Mutual funds are considered as one of the best available investments as compare to others they are very cost
efficient and also easy to invest in, thus 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. But the biggest advantage to mutual
funds is diversification, by minimizing risk & maximizing returns.

Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By
choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.

The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up
to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding
bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a
few mutual funds you could be done in a few hours because mutual funds automatically diversify in a
predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade
corporate bonds, etc).

Types of Mutual Funds Schemes in India


Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and
return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors
can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from.
It is easier to think of mutual funds in categories, mentioned below

Overview of existing schemes existed in mutual fund category.

BY STRUCTURE

• Close-ended Fund/ Scheme :


A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription
only during a specified period at the time of launch of the scheme. 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
the units 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 i.e. either repurchase facility or through
listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

• Growth / Equity Oriented Scheme :


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

• Interval Schemes :
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The
units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals
at NAV related prices
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect
higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For
example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead
to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as
compared to the bank deposits but the risk involved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional
management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free. This
is because the money that is pooled in are not invested only in debts funds which are less riskier but are also
invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a
very high risk since it is mostly traded in the derivatives market which is considered very volatile.

BY NATURE :

• Equity fund :
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary
different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-
classified depending upon their investment objective, as follows :
o Diversified Equity Funds
o Mid-Cap Funds
o Sector Specific Funds
o Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

• Debt funds :
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and
financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds
ensure low risk and provide stable income to the investors. Debt funds are further classified as :
o Gilt Funds :
Invest their corpus in securities issued by Government, popularly known as Government of India debt papers.
These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they
invest in papers backed by Government.
o Income Funds :
Invest a major portion into various debt instruments such as bonds, corporate debentures and Government
securities.
o MIPs :
Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets
benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared
with other debt schemes.
o Short Term Plans (STPs):
Meant for investment horizon for three to six months. These funds primarily invest in short term papers like
Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in
corporate debentures.
o Liquid Funds :
Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These
schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These
funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of
1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.

• Balanced funds :
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income
securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide
investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in
returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund.
The investor can align his own investment needs with the funds objective and invest accordingly.

BY INVESTMENT OBJECTIVE :

• Growth Schemes Growth Schemes are also known as equity schemes. The aim of these schemes is to provide
capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities
and are willing to bear short-term decline in value for possible future appreciation.

• Income Schemes
Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady
income to investors. These schemes generally invest in fixed income securities such as bonds and corporate
debentures. Capital appreciation in such schemes may be limited.

• Balanced Schemes
Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and
capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion
indicated in their offer documents (normally 50:50).

• Money Market Schemes


Money Market Schemes aim 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.

OTHER SCHEMES

• Tax Saving Schemes :


Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of
the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
• Index Schemes :
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50.
The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each
stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes
would be more or less equivalent to those of the Index.

• Sector Specific Schemes :


These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the
offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc.
The returns in these funds are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch
on the performance of those sectors/industries and must exit at an appropriate time.

TYPES OF RETURNS
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors :

• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives
over the year to fund owners in the form of a distribution.
• 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.
• 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.

PROS & CONS OF INVESTING IN MUTUAL FUNDS :


For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

Advantages of Investing Mutual Funds :

• Professional Management - The basic advantage of funds is that, they are professional managed, by well
qualified professional. Investors purchase funds because they do not have the time or the expertise to manage
their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their
investments.
• Diversification – purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk
is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of
assets so that a loss in any particular investment is minimized by gains in others.
• Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.
• Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when
they want.
• Simplicity – Investments in mutual fund is considered to be easy, compare to other available instruments in the
market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as
Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds :

• Professional Management - Some funds doesn’t perform in neither the market, as their management is not
dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or
not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
• Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an
investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
• Dilution - Because funds have small holdings across different companies, high returns from a few investments
often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too
big. When money pours into funds that have had strong success, the manager often has trouble finding a good
investment for all the new money.
• Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For
example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the
individual is from the sale. It might have been more advantageous for the individual to defer the capital gains
liability.

• With futures, both parties are obligated to perform. With options only the seller (writer) is obligated to perform.
• With options, the buyer pays the seller (writer) a premium. With futures, no premium is paid by either party.
• With futures, the holder of the contract is exposed to the entire spectrum of downside risk and has the potential for
all the upside return. With options, the buyer limits the downside risk to the option premium but retains the upside
potential.
• The parties to a futures contract must perform at the settlement date. They are not obligated to perform before that
date. The buyer of an options contract can exercise any time prior to the expiration date.