MUTUAL FUNDS

GETTING STARTED

Before I dive into the concept of a Mutual Fund, it is important to have a basic understanding of stocks and bonds.
STOCKS

Stocks represent shares of ownership in a public company. Examples of public companies include IBM, Microsoft, Ford, Reliance and Infosys. Stocks are the most common ownership investment traded on the market. Stocks or equity securities represent ownership shares in a company and the right to share in both its profits (stock dividends) and its growth (rising share price). For both of these reasons, stocks have become an "investment of choice," particularly for millions of investors looking for capital appreciation. While the stock market is known for its ups and downs, and individual stocks can rise or plummet overnight, as a whole, stocks have delivered a larger return on investment over the long run than any of the alternatives.

BONDS

Bonds are basically a chance for you to lend your money to the government or a company. You can receive interest and your principle back over predetermined amounts of time. Bonds are the most common lending investment traded on the market. Fixed-income securities or notes, bills and bonds – allow you to lend your money to a company or government entity for a year or more, in return for interest payments. When

the bond matures at the end of the designated period (up to 30 years), the borrower returns your original investment, or principal, to you. You don't participate in future profits of the borrower. And while an increase or decrease in the price of a bond is possible, studies show that 90% or more of the earnings in the bond market come from the interest payments; only a small portion comes from price appreciation. Traditionally, bonds have formed the backbone of conservative investment portfolios, providing steady income with little effort and relatively moderate risk. Over time, bonds have generated a return on investment that is second only to stocks.

MONEY MARKETS

Closely related to the bond market are very short-term fixed-income instruments known as money market instruments. Treasury bills, commercial paper and certificates of deposit are among the dozens of fixed-income investments that mature in one year or less and comprise this large marketplace. While bonds are used primarily to generate income, money market instruments are used more like savings accounts: to preserve your principal while generating a more modest level of income. There are many other types of investments other than stocks and bonds (including annuities, real estate, precious metals and art work), but the majority of Mutual Funds invest in stocks and/or bonds.

INTRODUCTION TO MUTUAL FUNDS :-

A mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. in a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. It can also be explained as 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:-

A dictionary definition of a mutual fund might go something like this: a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.

The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders. Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price. This routine is repeated every day on a neverending basis, which is why mutual funds are sometimes known as "open-end funds."

If the fund manager is doing a good job, the NAV of the fund will usually get bigger -your shares will be worth more. There are a couple of ways that a mutual fund can make money in its portfolio.

A mutual fund can receive dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. The fund might have money in the bank that earns interest, or it might receive interest payments from bonds that it owns. These are all sources of income for the fund. Mutual funds are required to hand out (or "distribute") this income to shareholders. Usually they do this twice a year, in a move that's called an income distribution. At the end of the year, a fund makes another kind of distribution, this time from the profits they might make by selling stocks or bonds that have gone up in price. These profits are known as capital gains, and the act of passing them out is called a capital gains distribution.

by selling off all the assets in the fund. represented by the ownership of one unit in the fund.ORGANIZATION OF MUTUAL FUNDS CALCULATION OF NAV The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. However. This gives rise to the concept of net asset value per unit. . most people refer loosely to the NAV per unit as NAV. if the fund is dissolved or liquidated. It is calculated simply by dividing the net asset value of the fund by the number of units. this is the amount that the shareholders would collectively own. which is the value. In other words. ignoring the "per unit".

the value has to be estimated. this could be the book value per share or an estimated market price if suitable benchmarks are available. at the daily interest rate. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation.Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. which is . For shares. valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded For illiquid and unlisted and/or thinly traded shares/debentures. Interest is payable on debentures/bonds on a periodic basis say every 6 months. For debentures and bonds. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held. interest is said to be accrued. The detailed methodology for the calculation of the asset value is given below. with every passing day. Once it is calculated. if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid Details on the above items For liquid shares/debentures. the NAV is simply the net value of assets divided by the number of units outstanding. But.

Mutual funds may be legally structured as corporations or business trusts but in either . Thus. custody charges etc. In the intermediate period. are calculated on a daily basis. Usually. Expenses including management fees. the fund issues new shares to investors and buys back shares from investors wishing to leave the fund. There is a gap between the dates on which it becomes due and the actual payment date. at the end of every day. accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date. dividends are proposed at the time of the Annual General meeting and become due on the record date. Types of mutual funds MUTUAL FUNDS OPEN ENDED CLOSED ENDED EXCHANGE TRADED 1.calculated by dividing the periodic interest payment with the number of days in each period. Open-end fund The term mutual fund is the common name for an open-end investment company. Being open-ended means that. it is deemed to be "accrued".

A sponsor. 2. the fund company prices all of the fund's holdings at the market close and adds up their value. In Canada. these are either closed-end funds or unit investment trusts. those not actively traded on the public markets. The valuation of investments that are less liquid and trade infrequently is an important issue for mutual funds. The fund retains . The sponsor has promised in the documents of the fund that it will issue and refund or units of the fund at the fund unit value. which is the closing market value for listed public securities. neither of which is mutual fund. Any participants withdrawing funds from the fund that day receive this unit value for their funds withdrawn. a mutual fund company or investment dealer. are restricted by government regulators because they are difficult to dispose of in a short period of time. when the stock market crashed 30% in a few days and the volume of stock transactions caused trading activity to be hours out date. A fund holding an illiquid investment might not be able to sell it in a short period of time or would have to take a significant discount to the valuation level the fund was using. it then subtracts amounts owing and adds amounts to be received by the fund. The documents of open mutual funds usually provide for the suspension of unit redemptions in "extraordinary conditions" such as major interruptions to the financial markets or total demands for redemptions forming a substantial portion of the fund assets in a short period of time. Open mutual funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. which means that the fund can raise money by selling securities at prices very close to those used for valuations. Closed ended funds Closed mutual funds are really financial securities that are traded on the stock market. This type of fund is valued by the fund company or an outside valuation agent. A large portion of most open mutual funds is invested in highly "liquid securities". and finally it divides this net amount by the number of units outstanding to "strike" the unit value for that day.instance are classed as open-end investment companies by the SEC. Other funds have a limited number of shares. This means that the investments of the fund are valued at "fair market" value. Essentially. most open real estate mutual funds suspended redemptions during the real estate debacle of the early 1990s. Funds also have the ability to borrow money for short periods of time to fund redemptions. will create a "trust fund" that raises funds through an underwriting to be invested in a specific fashion. Fund participants did not obtain redeemed funds until these funds were restructured into closed-end funds in the mid 1990s and they could sell their units on the stock market. These clauses were invoked in October. Any new purchases are made at the same unit value. Illiquid investments. 1987.

This has led to the phrase "submerging country" replacing "emerging market" for many of these funds. but is due in large part to the lack of liquidity of the fund units and the presence of the management fee. Because the institutional investors handle the majority of trades. ETFs are more efficient than traditional mutual funds (which are continuously issuing new securities and redeeming old ones.000). Their value is what investors will pay for them. continually buying and selling securities and maintaining liquidity position) and therefore tend to have lower expenses. An ETF usually tracks a stock index. This is wry proof of the fickleness of investor fashion! Once underwritten. keeping detailed records of such issuance and redemption transactions. is often formulated as an open-end investment company. 3. Exchange-traded funds A relatively new innovation. For example. This fund would be said to be trading at a "10% discount to its net asset value". An investment dealer would decide that a "Germany" or "Portugal" or "Emerging Country" fund would sell given the popular consensus that these were "no lose" investments. to effect such transactions. It would then retain a well respected investment advisor to manage the fund assets for a fee and underwrite a public issue that it would sell through retail stock brokers to individual investors. closed mutual funds trade on stock exchanges like stocks or bonds. this is how the institutional investor makes its profit. Shares are issued or redeemed by institutional investors in large blocks (typically of 50. Usually closed mutual funds trade at discounts to their underlying asset value. the exchange traded fund (ETF). but who. and. Exchange traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market. ETFs are traded throughout the day on a.an investment manager to manage the fund assets in the manner specified. Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value. just like closed-end funds. CLASSIFICATION OF MUTUAL FUNDS . It is interesting to note that many of these funds were caught in the sell-off of the stock market of 1994 and have languished ever since. for regulatory reasons. A good example of this type of fund is the "country funds" that were underwritten during the international investment euphoria of the early 1990s. The reason for this discount is debated by academics. ETFs combine characteristics of both mutual funds and closed-end funds. if the price of the fund assets less liabilities divided by the outstanding units is $10. the fund might trade on the stock market at $9. are unable to participate in traditional US mutual funds.

many different types of equity funds because there are many different types of equities. They are also called as income funds their purpose is to provide current income on a steady basis. When referring to mutual funds. the investment objective of this class of funds is long-term capital growth with some income. EQUITY FUNDS These funds invest a major part of their corpus in equities. Because there are many different types of bonds. as follows: • • • • Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon. These terms denote funds that invest primarily in government and corporate debt. As such. however. Debt Funds and Balanced Funds. Equity funds rank high on the risk-return matrix. The composition of the fund may vary from scheme to scheme and the fund manager’s outlook on various scrips. the terms "fixed-income. There are. banks and financial institutions are some of the major issuers of debt papers. Equity Funds. Generally. Bond funds are likely to pay higher returns than certificates of deposit and money market investments. but bond funds aren't without risk. the primary objective of these funds is to provide a steady cashflow to investors. While fund holdings may appreciate in value. private companies. these funds ensure low risk and provide stable income to the investors." "bond. Funds that invest in stocks represent the largest category of mutual funds. Government authorities. the audience for these funds consists of conservative investors and retirees. The Equity Funds are sub-classified depending upon their investment objective. By investing in debt instruments. bond funds can vary dramatically depending on where they invest. Debt funds are further classified as: • • • • • Gilt Funds: Income Funds: MIPs: Short Term Plans (STPs): Liquid Funds: BALANCED FUNDS .Mutual Funds are broadly classified into three categories viz. DEBT FUNDS These Funds invest a major portion of their corpus in debt papers." and "income" are synonymous.

technology. The objective of these funds is to provide a balanced mixture of safety. income and capital appreciation. which is pre-defined in the objectives of the fund. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. debt funds and balanced funds. A similar type of fund is known as an asset allocation fund. but these kinds of funds typically do not have to hold a specified percentage of any asset class. The investor can align his own investment needs with the funds objective and invest accordingly SCHEMES IN MUTUAL FUNDS There are different schemes under each class i. whose equities are invested in. There is a greater possibility of big gains. Each category of funds is backed by an investment philosophy.  Tax saving funds (ELSS) : These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. They invest in both equities and fixed income securities. are a mix of both equity and debt funds. provided the capital asset has been sold prior to .e. health.These funds.  Diversified equity funds : Equity diversified funds invest 90% or less of the funds collected. Selection of companies. Sector funds are extremely volatile. 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. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds. which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act. is left to the discretion of the Fund Manager of the scheme. • Schemes under Equity funds  Sector specific funds : Sectoral Funds are those. etc. 1961. The strategy of balanced funds is to invest in a combination of fixed income and equities. The weighting might also be restricted to a specified maximum or minimum for each asset class. but risk is also high. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. Equity part provides growth and the debt part provides stability in returns. Sector funds are targeted at specific sectors of the economy such as financial. Objectives are similar to those of a balanced fund. into equity. as the name suggests. Equity funds.

Some portion of the corpus is also invested in corporate debentures. in the same proportion as the weightage these shares have in the index. Nifty. popularly known as GoI debt papers. This is suitable for investors who find it difficult to decide when to quit from equity. These Funds carry zero Default risk but are associated with Interest Rate risk.  Liquid funds: Also known as Money Market Schemes.  Index schemes: It invests in shares forming part of an index such as BSE sensex. These schemes invest in short-term instruments like Treasury Bills. NSE. These schemes are safer as they invest in papers backed by Government. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).  Short term plans : Meant for investors with an investment horizon of 3-6 months..  MIP’s: Invests around 80% of their total corpus in debt instruments while the rest of the portion is invested in equities. CPs and CDs.  Dynamic funds : They alter their exposure to different asset classes based on the market scenario. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. corporate debentures and Government securities. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. 2000 and the amount is invested before September 30. It gets benefit of both equity and debt market.April 1. 2000. inter-bank call money market. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. etc. Such schemes seek to provide returns that closely correspond to the return of the index being mirrored. These funds are meant to provide easy liquidity and preservation of capital. • Schemes under Debt funds  Gilt funds: Invest their corpus in securities issued by Government.  Income funds: Invest a major portion into various debt instruments such as bonds. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. .

mid-cap ($1.539. Floating Rate Funds have a high relevance when the debt markets are volatile and investors can effectively make use of these funds to hedge their debt fund investments against the interest rate fluctuations. and large-cap ranges.386.8 .6 million . which are generally linked to some benchmark rate like Prime Landing Rate. which invest in stocks of companies that have the potential for large capital gains. What is Capitalization :Fund managers and other investment professionals have varying definitions of mid-cap.micro-cap ($54.7 billion) Russell 1000 Index .small-cap ($182. which concentrate on stocks that are undervalued.8 billion) Russell Midcap Index . value Another distinction made between growth funds.9 billion) COMPARISION OF DIFFERENT SCHEMES:Growth vs.13. Floating rate funds: It invest in securities with floating interest rates.8 .1. The following ranges are used by Russell Indexes: • • • • Russell Microcap Index .8 .5 million) Russell 2000 Index . Growth stocks typically have the potential for a greater .large-cap ($1. and value funds.

For this reason.Moreover.S. there is one who underperforms. 1968. and typically incur fewer short-term capital gains which must be passed on to shareholders. an index fund manager makes fewer trades. a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index. One study found that nearly 1. Grimblatt and Titman. yet aim for some growth. The performance of an actively managed fund largely depends on the investment decisions of its manager. Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. research. Sector funds focus on specific industry sectors. FUNDS IN Mutual Funds . Income funds tend to be more conservative investments. index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques. to stay more conservative when it comes to risk. such as biotechnology or energy. Instead. hold or sell individual holdings. many end up underperforming after expenses. Additionally. 1989. Since the composition of an index changes infrequently. such investments also bear larger risks. funds that performed well in the past are not able to beat the market again in the future (shown by Jensen. such as the S&P 500. Statistically. By minimizing the impact of expenses. The assets of an index fund are managed to closely approximate the performance of a particular published index. on average. a wellrun index fund should have average performance. while an actively managed fund attempts to outperform a relevant index through superior stock-picking techniques. Among those who outperform their index before expenses. though. index funds should be able to perform better than average. mutual funds underperformed the market in approximately half of the years between 1962 and 1992. Index funds versus active management An index fund maintains investments in companies that are part of major stock (or bond) indices. Growth funds tend not to pay regular dividends. typically including some level of investment in bonds.) and deciding when to buy. with a focus on stocks that pay dividends. etc. Before expenses. index funds generally have lower trading expenses than actively managed funds.500 U. A balanced fund may use a combination of strategies.return. than does an active fund manager. for every investor who outperforms the market. however.

Types of bond funds include term funds. Whether you're storing money for emergencies. Bond funds Bond funds carry more risk than money market funds are often used to produce income (useful in retirement) or to help stabilize a portfolio (diversification). High-yield bond funds invest in corporate bonds.e. Government Bond Funds -uses treasury or government securities. yet many banks have failed and many investors with over $100. they are funds comprised of other funds).1. Using this classification bonds are often called short-term bonds. Money market funds These funds are a great place to park your money.. Bond funds account for 18% of mutual fund assets. The funds at the underlying level are . or long-term) before they mature.000 lost out. Municipal bond funds generally have lower returns. medium-. or the date the borrower (whether it be the bank. Money market funds hold 26% of mutual fund assets in the United States. 2. but in the history of money market funds no money market fund has ever folded. The primary types of bond funds are: • • • • Municipal Bond Funds -uses tax-exempt bonds issued by state and local governments (these funds are non-taxable). The interest rate quoted by money market funds is known as the 7 Day SEC Yield. money market shares are liquid and redeemable at any time. money market funds are a safe place to invest. Unlike certificates of deposit (CDs). With the potential for high yield. Another way bond funds are often classified is by maturity. Funds of funds Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i. or long-term bonds. as well as lower rates of return. which have a fixed set of time (short-. a corporation or an individual) must pay back the money borrowed. 3.uses securities representing residential mortgages. Money market funds entail the least risk. The beauty of money market funds is that you can often write checks out of your account and they provide a high amount of liquidity (ability to cash out quickly) not found in CD's. the government. These funds are not FDIC insured. These funds invest in short-term debt instruments and typically produce interest rates that double what a bank can offer in a checking account or savings account and rival the returns of a CD (Certificate of Deposit). these bonds also come with greater risk. including high-yield or junk bonds. Mortgage-Backed Securities Funds . intermediate-term bonds. Corporate Bond Funds -uses the debt obligations of corporations. or looking for a place to store cash from the sale of an investment. but have tax advantages and lower risk. saving for the short-term.

as these both reduce the return to the investor. during which an investor cannot cash in shares. FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis). 4. The more distant the target retirement date. the more aggressive the asset mix. SEBI GUIDELINES . Vanguard. although some invest in funds managed by other (unaffiliated) advisors. Hedge funds Hedge funds in the United States are pooled investment funds with loose SEC regulation and should not be confused with mutual funds. Most FoFs invest in affiliated funds (i. Fund companies such as TIAA-CREF. There may be a "lock-up" period. etc. 2030. 5. The fund should be evaluated on the combination of the fund-level expenses and underlying fund expenses. mutual funds managed by the same advisor). Certain hedge funds are required to register with SEC as investment advisers under the Investment Advisers Act. 2050.. The Act does not require an adviser to follow or avoid any particular investment strategies. nor does it require or prohibit specific investments.typically funds which an investor can invest in individually. prospectus. Money market funds and bond funds typically provide returns just a percentage or two above inflation. The fees charged at the underlying fund level do not pass through the statement of operations. but are usually disclosed in the fund's annual report. The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for investors who are unable to or unwilling to determine their own asset allocation model. Recently. plus”performance fee” of 20% of the hedge fund’s profits. or statement of additional information. and Fidelity have also entered this market to provide investors with these options and take the "guess work" out of selecting funds. Hedge funds typically charge a management fee of 1% or more. A fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation services. but stock funds should do much better over long periods of time. The cost associated with investing in an unaffiliated underlying fund is most often higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Stock Funds Stocks funds are considered riskier than bond funds (although certain bond funds can be very risky) and are used for growing your money.e. The allocation mixes usually vary by the time the investor would like to retire: 2020.

General Obligations  Every asset management company for each scheme shall keep and maintain proper books of accounts. which are incorrect or false. for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund and intimate to the Board the place where such books of accounts.  Investment Objectives and Valuation Policies:  The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors. records and documents.Schemes of a Mutual Fund  The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board.  The asset management company shall issue to the applicant whose application has been accepted. records and documents are maintained.  The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor  The mutual fund and asset Management Company shall be liable to refund the application money to the applicants  If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1)  If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1). unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme.  Every mutual fund shall along with the offer document of each scheme pay filing fees.  The financial year for all the schemes shall end as of March 31 of each year. Rules Regarding Advertisement  The offer document and advertisement materials shall not be misleading or contain any statement or opinion. .

take delivery of relative securities and in all cases of sale.  The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made. All such investments shall be made with the prior approval of the Board of Trustees and the Board of asset Management Company. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. shall cease to carry on any activity as a mutual fund. documents. provided that aggregate inter scheme investment made by all schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5% of the net asset value of the mutual fund. as the case may be.  No mutual fund under all its schemes should own more than ten per cent of any company's paid up capital carrying voting rights. during the period of suspension. Restrictions on Investments  A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer. deliver the securities and shall in no case put itself in a position whereby  it has to make short sale or carry forward transaction or engage in badla finance. trustees or asset management company. Procedure for Action In Case Of Default On and from the date of the suspension of the certificate or the approval. the mutual fund. . trustees or asset management company. or securities that may be in its custody or control. and shall be subject to the directions of the Board with regard to any records. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. trustee or asset management company.  A mutual fund scheme shall not invest more than 10% of its NAV in un rated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme.  Such transfers are done at the prevailing market price for quoted instruments on spot basis.  Every mutual fund shall buy and sell securities on the basis of deliveries and shall in all cases of purchases.  The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under that scheme. relating to its activities as mutual fund.  A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees. which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act.

Key elements Fund sponsor The Sponsor Company establishes the mutual fund in the form of a trust and registers it with SEBI. As an investor in the fund one should Understand the investment philosophy of the fund manager. Scrutiny of the fund sponsor's track record may forewarn you against jolts like the CRB scandal. Every mutual fund shall. trust deed guidelines and the terms of the asset management agreement by the AMC. sponsors should have requisite experience and background in managing mutual funds.Find out whether the fund manager has delivered on the investment objectives of the funds he has managed in the past. Fund manager The fund manager is an employee of the asset management company who formulates the investment strategy and invests the funds. As an investor one should check the sponsors track record. . or  Any security issued by way of private placement by an associate or group company of the sponsor. Provided that. and .Check the returns he has generated on funds previously managed by him. Apart from a consistent track record.  Any unlisted security of an associate or group company of the sponsor.  Pending deployment of funds of a scheme in securities in terms of investment objectives of the scheme a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks. get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme.  A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or equity related investments in case of open-ended scheme and 10% of its NAV in case of close-ended scheme. The board of trustees holds the fund in trust for unit holders and ensures compliance with SEBI regulations. or  The listed securities of group companies of the sponsor which is in excess of 30% of the net assets [of all the schemes of a mutual fund]  No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company. .  No mutual fund scheme shall make any investment in. wherever investments are intended to be of long-term nature. the limit of 10 per cent shall not be applicable for investments in index fund or sector or industry specific scheme.

debentures and other debt related instruments 4. In such schemes. debentures and other debt related instruments as well as equity shares of companies with high dividend payouts. Income Funds Investment objective: Providing safety of investments and regular income Investment avenue: Bonds. call money market. Its units can be redeemed only on termination of the scheme. Growth Funds Investment objective: Capital appreciation of equity shares Investment avenue: Equity shares of companies with high growth potential 2. 3.Type of fund 1. preference shares as well as bonds. 2. These schemes can be classified as: 1. In an open-ended scheme. Such funds announce sale and repurchase prices from time to time. or through dealings in the secondary market. the period of the scheme is specified at the outset. investors can trade units on the bourses. They have a definite target amount for the funds and cannot sell more after initial offering. Specialized Funds Investment Objective: . investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. There are 2 aspects of income funds viz. Investment objective Mutual funds can offer different investment schemes. This is because open-ended schemes are permitted to buy/sell their own units. low investment risk with constant income and high investment risk generating high income. If the scheme is limited. Balanced Funds Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares. Money Market Mutual Funds (MMMFs) Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs). Investors who had earlier stayed away from the money market can participate indirectly through MMMFs. Open ended funds: Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. just like equities and debentures. close-ended schemes do not issue units for repurchase redemption on a periodic basis. Close ended funds: Unlike the open-ended schemes. 5. commercial papers.

To take advantage of conditions in a particular sector or a specific income producing security Investment Avenue: Specialized investments in securities of companies in certain sectors or specific income producing securities 6. Fees and charges AMCs charge a fee for managing the funds.buy rising shares and sell shares whose prices are likely to fall.and the applicable sales load is 6% the POP is NAV/ (1-Sales load) =12/(1-.000 worth of units he would receive 783.085 units (10. and safety of principal. 7. The Public offering Price (POP) is the price at which an investor buys into the fund and is a function of both the NAV and sales load. As an investor you should be aware of such entry. 06) = 12. /exit loads as they could have a material impact on returns. promotion. . For instance. It helps the fund to meet its expenses relating to sales literature. if the Funds NAV is Rs 12/. capital appreciation. You might be required to pay such load charges either at the time of buying the units or at the time of selling the units. so that the value of the index fund varies in proportion with the benchmark index. Leveraged Funds Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds Investment avenue: Speculative and risky investments like short sales to take advantage of declining market. As an investor in the fund we must be aware of the fees and charges of the AMC. Two schemes with more or less similar performances would generate different returns if one of the two schemes charges high fees. S&P CNX 50) Investment Avenue: Investments only in those shares that form a part of the benchmark index. distribution. BSE Sensex. 8. The public offering price A sales load represents the money received by the AMC as compensation for distributing units. Index Funds Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. which meet your criteria in terms of you need for regular income. advertising and agent/broker commissions. As an investor you should invest in schemes. in exactly the same proportion.77).77 If the investor applied for Rs 10. Hedge Funds Investment Objective: To hedge risks in order to increase the value of the portfolio Investment Avenue: Employ speculative trading principles .000/12.

Some fund managers use a value approach to stocks. Performance and NAV Every fund is benchmarked against an index like the BSE Sensex. CNX SNP 50. /exit loads as they could have a material impact on returns. and some others disclose it monthly. Level of communication also varies across funds. others disclose it quarterly. Managers search for stocks that have become "undervalued" -.Tax implications Investors need to understand the tax implications before investing in the schemes. Also it could be useful for the investor to compare its performance with other funds. etc. similar companies. BSE 200. These funds like to invest in companies that the market has overlooked.or priced low relative to their earnings potential. Service levels Service levels vary across funds. the manager makes a judgment that there's more potential there than the market . the share prices of these stocks have been beaten down by the market as investors have become pessimistic about the potential of these companies. as one scheme may offer more attractive post-tax returns compared to its peers. In any event. APPROACHES OF MF’S MANAGERS There are basically three approaches which mutual funds managers follow to invest money of investors:• • • Value approach Growth approach Blend approach Equity fund managers usually employ one of three particular styles of stockpicking when they make investment decisions for their portfolios. 1. Often. As Union budgets regularly offer tax benefits to mutual funds and mutual fund investors. As an investor you must track the funds performance against the benchmark index. Sometimes a stock has run into a short-term problem that will eventually be fixed and forgotten. you as an investor must review the tax implications of mutual fund investments. Fund managers search for stocks that are undervalued when compared to other. Or maybe the company is too small or obscure to attract much notice. While some disclose the fund portfolio annually.

often well known. As such. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation. it tends to be steady. tax-averse investors. trying to find stocks that are growing faster than their competitors. building a portfolio of both growth and value stocks. you'll probably have to look at the fund's holdings and make a call. In the past decade. For these reasons. MUTUAL FUND INDUSTRY IN INDIA The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. however. Another approach to picking is to look primarily at growth. is quite low. It's also why expenses and turnover (which leads to tax liability) are also higher. Before. and if you choose a good fund. His bet is that the price will rise as others come around to the same conclusion. This is known as the blend approach.But because it's also a large-cap fund. The big risk with value funds is that the "undiscovered gems" they try to spot sometimes remain undiscovered. 3. Some managers buy both kinds of stocks. Also. That can depress results for extended periods of time. these funds tend to look for the fastest-growing companies on the market. and value funds are most suitable for more conservative. As their name implies. both qualitywise as well as quantitywise. Indian mutual fund industry had seen a dramatic imporvements. because these fund managers tend to buy stocks and hold them until they turn around. Volatility.has recognized. Add it up. established corporations. These funds buy shares in companies that are growing rapidly -. the risk of doggy returns should be minimal. or the market as a whole. they are difficult to classify in terms of risk. In order to determine if a particular blend fund is right for your needs. but it accelerated from the year 1987 when non-UTI players entered the industry. only aggressive investors. They might. expenses and turnover are low. Growth funds are the most volatile of the three investment styles. or those with enough time to make up for short-term market losses. for instance. 2. the monopoly of the market had seen an . Though the growth was slow. should buy these funds. invest in both high-growth Internet stocks and cheaply priced automotive companies. These can go across the board.

470 bn in March 1993 and till April 2004. Punjab National Bank Mutual Fund (Aug 89). Bank of Baroda Mutual Fund (Oct 92). giving the Indian investors a wider choice of fund families. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. there were 33 mutual funds with total assets . Bank of India (Jun 90).004 as assets under management. Hence.47.6. constitute less than 11% of the total deposits held by the Indian banking industry. 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. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. Third Phase . except UTI were to be registered and governed. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. Each phase is briefly described as under. The first scheme launched by UTI was Unit Scheme 1964. Second Phase . The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. 67bn.540 bn. 1993 was the year in which the first Mutual Fund Regulations came into being. it is the prime responsibility of all mutual fund companies. to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. a new era started in the Indian mutual fund industry. Putting the AUM of the Indian Mutual Funds Industry into comparison. First phase. it reached the height of 1. As at the end of January 2003. The private sector entry to the fund family rose the AUM to Rs. LIC in 1989 and GIC in 1990.1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993.ending phase. The end of 1993 marked Rs. under which all mutual funds. the total of it is less than the deposits of SBI alone. Large sections of Indian investors are yet to be intellectuated with the concept. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87). the Assets Under Management (AUM) was Rs. At the end of 1988 UTI had Rs. with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. Indian Bank Mutual Fund (Nov 89). Also. The number of mutual fund houses went on increasing.700 crores of assets under management. The main reason of its poor growth is that the mutual fund industry in India is new in the country.1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament.1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds.

000 crores of AUM and with the setting up of a UTI Mutual Fund. 1.of Rs. 2004. which manage assets of Rs. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.541 crores of assets under management was way ahead of other mutual funds. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs. there were 29 funds. PNB. BOB and LIC. sponsored by SBI. the mutual fund industry has entered its current phase of consolidation and growth. The Specified Undertaking of Unit Trust of India. It is registered with SEBI and functions under the Mutual Fund Regulations.76.21. Fourth Phase .805 crores.835 crores (as on January 2003).44.29. GROWTH IN ASSETS UNDER MANAGEMENT . As at the end of September. 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.153108 crores under 421 schemes.since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. and with recent mergers taking place among different private sector funds. The graph indicates the growth of assets over the years. The Unit Trust of India with Rs. The second is the UTI Mutual Fund Ltd. conforming to the SEBI Mutual Fund Regulations.

2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund. Ltd. was incorporated on November 4. 2004 with ABN AMRO Trustee (India) Pvt. as the Trustee Company. ABN AMRO Asset Management (India) Ltd. .Major Mutual Fund Companies in India ABN AMRO Mutual Fund ABN AMRO Mutual Fund was setup on April 15. The AMC.

Deutsche Bank AG is the custodian. 1993 with two sponsors. was incorporated on April 6. of America.000 crores. Prudential ICICI Mutual Fund The mutual fund of ICICI is a joint venture with Prudential Plc. 1993. as the sponsor. The paid-up capital of the AMC stands at Rs 25. HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. and ICICI Ltd. The AMC. 10. 1999 with the same named Trustee Company. The Trustee Company formed is Prudential ICICI Trust Ltd. Sahara Mutual Fund Sahara Mutual Fund was set up on July 18. Recently it crossed AUM of Rs. Bank of Baroda Mutual Fund (BOB Mutual Fund) Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June. . Japan. 1992. 1998. Prudential Plc. Prudential ICICI Mutual Fund was setup on 13th of October. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Sun Life Financial is a global organization evolved in 1871 and is being represented in Canada. Indonesia and Bermuda apart from India. 1995 works as the AMC of Sahara Mutual Fund.Birla Sun Life Mutual Fund Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. 1992 under the sponsorship of Bank of Baroda. Ltd. Sahara Asset Management Company Private Limited incorporated on August 31. one of the largest life insurance companies in the US of A. ING Vysya Mutual Fund ING Vysya Mutual Fund was setup on February 11. Board of Trustees. ING Investment Management (India) Pvt. 1996 with Sahara India Financial Corporation Ltd. HSBC Mutual Fund HSBC Mutual Fund was setup on May 27. the US. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5. 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. It is a joint venture of Vysya and ING.8 crore. HDFC Mutual Fund HDFC Mutual Fund was setup on June 30. 2000 with two sponsors namely Housing Development Finance Corporation Limited and Standard Life Investments Limited. the Philippines.

225 cr. 1882. KMAMC started its operations in December 1998. 5.return profiles. Kotak Mahindra Mutual Fund Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. Index Funds. approximately. The sponsors of UTI Mutual Fund are Bank of Baroda (BOB).703 crores (as on April 30. It was the first company to launch dedicated gilt scheme investing only in government securities. State Bank of India Mutual Fund has more than Rs. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. Income Funds.State Bank of India Mutual Fund State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund. 1995 as Reliance Capital Mutual Fund which was changed on March 11. Limited.20000 Crore. Today it is the largest Bank sponsored Mutual Fund in India. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. The schemes of UTI Mutual Fund are Liquid Funds. State Bank of India (SBI). 2003. Equity Funds and Balance Funds. the India Magnum Fund with a corpus of Rs. The sponsorers for Tata Mutual Fund are Tata Sons Ltd. 1882. established in Jan 14. 2004. Punjab National Bank (PNB). and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt.. 7. Reliance Mutual Fund Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act. Now it has an investor base of over 8 Lakhs spread over 18 schemes.99. 2005) of AUM. Limited is the Trustee. UTI Asset Management Company presently manages a corpus of over Rs. Asset Management Funds. manages the UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. It was registered on June 30.500 Crores as AUM. It is presently having more than 1. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk . and Life Insurance Corporation of India (LIC). Unit Trust of India Mutual Fund UTI Asset Management Company Private Limited.818 investors in its various schemes. .

1999. 1995 with the name Escorts Asset Management Limited. Ltd. investment management and credit services.Standard Chartered Mutual Fund Standard Chartered Mutual Fund was set up on March 13. the Alliance Capital Asset Management India (Pvt) Ltd. 2005). Its services are also extended to high net worth individuals and retail investors. corporations. 2001 with Niche Financial Services Pvt. Ltd. The Trustee is ACAM Trust Company Pvt. Benchmark Mutual Fund Benchmark Mutual Fund was setup on June 12. This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation. . Open end Income and Liquid schemes. of Delaware (USA) as sponsor. Its AMC was incorporated on December 1. 1994 with Alliance Capital Management Corp. 2000 sponsored by Standard Chartered Bank. Franklin Templeton India Mutual Fund The group. Open end Tax Saving schemes. Closed end Income schemes and Open end Fund of Funds schemes to offer. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). Alliance Capital Mutual Fund Alliance Capital Mutual Fund was setup on December 30.2 bn. Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409. Escorts Mutual Fund Escorts Mutual Fund was setup on April 15. with the corporate office in Mumbai. Open end Sector Equity schemes. Morgan Stanley Mutual Fund India Morgan Stanley is a worldwide financial services company and its leading in the market in securities. Ltd. as the sponsor and Benchmark Trustee Company Pvt. They have Open end Diversified Equity schemes. It is one of the largest financial services groups in the world. and AMC. Ltd. It provides customized asset management services and products to governments. (as of April 30. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. Ltd. 1996 with Escorts Finance Limited as its sponsor. Standard Chartered Asset Management Company Pvt. The Trustee Company is Escorts Investment Trust Limited. Morgan Stanley Investment Management (MISM) was established in the year 1975. Open end Hybrid schemes. as the Trustee Company. is the AMC which was incorporated with SEBI on December 20. The Trustee is Standard Chartered Trustee Company Pvt. pension funds and nonprofit organizations.

For 30 years it goaled without a single second player. 1987 with Canara Bank acting as the sponsor. Though the 1988 year saw some new mutual fund companies. Canbank Mutual Fund Canbank Mutual Fund was setup on December 19. The Company started its business on 29th April 1994. The New India Assurance Co. 1997. 2000 and headquartered in Mumbai. Chola Mutual Fund Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act. Canbank Investment Management Services Ltd. The year was 1963. National Insurance Co. Ltd (OIC) and United India Insurance Co. Benchmark Asset Management Company Pvt. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act. incorporated on March 2. but UTI remained in a monopoly position. Ltd. But yes. Unit Trust of India invited investors or rather to those who believed in savings. The Oriental Insurance Co. Ltd. to park their money in UTI Mutual Fund. 1993 is the AMC. a Government of India undertaking and the four Public Sector General Insurance Companies. People rarely understood. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. 1882 PERFORMANCE OF MUTUAL FUNDS Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India.Incorporated on October 16. LIC Mutual Fund Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. Cholamandalam Trustee Co. Ltd. viz. GIC Mutual Fund GIC Mutual Fund. 1882. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund. 2 Crores towards the corpus of the Fund. is the Trustee Company and AMC is Cholamandalam AMC Limited. (NIA). is the AMC. was setup on January 3. Ltd (NIC). It contributed Rs. Ltd. The Corporate Office of the AMC is in Mumbai. some 24 million shareholders was accustomed with guaranteed high returns by . . sponsored by General Insurance Corporation of India (GIC). and of course investing was out of question.

MUTUAL FUNDS DEPENDS ON INVESTOR’S PROFILE Mutual funds are catering to the person’s individual needs and wants. people were miles away from the praparedness of risks factor after the liberalization. 1. Let me concentrate about the performance of mutual funds in India through figures. However. One needs to take a much more planned and systematic . since only closed-end funds were floated in the market. the quantitative will be investors. The Assets Under Management of UTI was Rs. The supervisory authority adopted a set of measures to create a transparent and competitve environment in mutual funds. The expectations of investors touched the sky in profitability factor. Partly owing to a relatively weak stock market performance. The measure was taken to make mutual funds the key instrument for long-term saving. 67bn. by the end of 1987. Those days. as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time.540bn. The performance of mutual funds in India suffered qualitatively. I tried to figure out the factors and conditions which can influence the decision of the investors and also tried to establish a relation between type of mutual funds(schemes) and the investor profile. The more the variety offered.the begining of liberalization of the industry in 1992. It has the flexibility to suit to the different customer. mutual funds have not yet recovered. 67bn. It rose as high as Rs. At last to mention. the Assets Under Management rose to Rs. Some of them were like relaxing investment restrictions into the market. the investors disinvested by selling at a loss in the secondary market. in March 1993 and the figure had a three times higher performance by April 2004. This good record of UTI became marketing tool for new entrants. more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds. The 1992 stock market scandal. There was rather no choice apart from holding the cash or to further continue investing in shares. 470 bn. the market regulations did not allow portfolio shifts into alternative investments. and paving the gateway for mutual funds to launch pension schemes. with funds trading at an average discount of 1020 percent of their net asset value. the losses by disinvestments and of course the lack of transparent rules in the whereabout rocked confidence among the investors. introduction of open-ended funds. One more thing to be noted. The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. From Rs.

For instance. Of course. If investor have just started saving for his eight- . risks involved and diversification. However. for short-term goals.  The younger investor is.  Proximity to goals also determines the desired rate of return from investments and the tenure of instruments. Because these investments perform differently depending on economic conditions.  Proximity of financial goals is important too. they allow investor to map out how much money he will need at certain points in his life and how much uncertainty he can tolerate in moving from one life stage to the next. The asset classes carry varying amount of risks. the farther away he is from many financial goals like retirement. a good balance can keep a portfolio strong in a wide range of economic situations. ASSET ALLOCATION One of the most important steps to building a successful portfolio is arriving at the ideal asset allocation (equity: debt ratio). Essentially. like equity mutual funds.approach towards building a personal Mutual Fund portfolio taking into account factors such as asset allocation. For such goals. investor is likely to shun high-risk investments to avoid capital erosion. besides expected returns and time horizon of investments. his risk profile plays an equally important role in determining the quantum of funds that he will dedicate towards equity. meaning that the best allocation will depend on a range of factors related to an individual’s investing profile such as his age. risk profile and financial goals. which can then be plugged in with investments comprising of various suitable Mutual Fund schemes. he has the opportunity to invest in growth schemes. all these factors are closely related.

you might be forced to invest a portion of your money in higher risk options for higher returns. define your short. Short-term goals are those that are to be achieved within the next year. Number of Dependants: Risk taking ability also reduces with a higher number of dependants.year-old daughter’s engineering studies. as you would need low-risk. medium and long-term goals. There are several factors that will influence investor risk appetite such as: Health: Chronic health problems in your family could limit your risk appetite. and long-term goals beyond five years. you might need to make your money grow fast to maintain it. he won’t be able to invest in instruments that have long tenures since his investments will need to mature faster.  Investor risk appetite is one of the most important factors that will determine the magnitude of his equity investments. Also. DEVELOP AN ASSET ALLOCATION STRATEGY Define your Goals  To develop your own asset allocation strategy. Lifestyle: If you have an expensive lifestyle. his desired rate of return will be more than that of his friend who started investing for his eight-year-old daughter’s higher studies seven years ago. Future Fund Requirement: If your future fund requirements are large. Future Employment Prospects: The greater your job security. low-return investments. the greater the opportunity to invest in growth instruments. . medium-term goals in the next five years.

 Identify your Constraints Next. To get an accurate picture of the risk associated with a given investment or portfolio of investments. debt-based instruments for medium-term goals. Balance your investments between the three categories in such a way that your wealth grows to meet your various requirements. They hence share direct relationship with the performance of the capital market. identify the constraints that could check your portfolio’s progress. so risk can be considered as the potential for loss. After identifying goals and constraints. When the capital market is on the . and liquid investments for short-term goals. Obviously. You should always have three types of financial investments in your portfolio i. you might want to retire at 45 but you have to provide for your aged parents. TYPES OF RISKS Here are some essential risk types you need to understand and assess to comprehend the overall risk level of your investment portfolio. decide whether you prefer separate portfolios for specific goals like retirement or a single portfolio geared to meet your needs. Equities are ideal for long-term goals. regular income investments such as income schemes of mutual funds and growth investments like equity schemes of mutual funds. Every investment carries with it some degree of risk.e. Risk essentially refers to the possibility of your investments declining in value. For instance.  Market Risk: Equity investments are subject to the risk associated with the capital market. the various forms of risk need to be considered collectively. liquid investments such as money market mutual fund. this decline would result in a net loss.

which in turn brings down the NAV of a mutual fund scheme. This risk arises as a result of the inverse relationship between interest rates and prices of debt securities. equity will outperform all the other investment options. This risk is the possibility of default in repayment and in payment of interest by the borrower. which has invested in debt. Gilts (Government Securities) will carry no credit risk while a corporate bond will carry a significant risk (again. Interest Rate Risk:  This is the risk that interest rate changes will lead to a change in the principal value of the debt investment.  Credit Risk: Debt investments carry this risk. which in turn pushes up the NAV of a mutual fund.bull spree. this will depend on the quality of the corporate whose debt is invested in). Selecting investments that are able to outpace the inflation rate is the only way to build real wealth. if one sector is on a downturn. For instance. if the interest rates fall. which has invested in debt.  Inflation Risk: Inflation causes money to decrease in value. the higher this risk. . and vice-versa holds true when the stock prices plummet. Higher the exposure of the mutual fund to debt investments. which are complementary to each other. prices of existing debt securities fall. If the interest rates rise. In other words. existing debt securities become more precious and rise in value. Market Risks can best be controlled by investing in a basket of equity representing different sectors. On the other hand. DIVERSIFICATION Diversification is one of the best ways to control risks. Understand the quantum of equity in the portfolio of your mutual fund investment to be able to judge how much exposure you are taking to the capital markets and its inherent risks. Inflation risk occurs whether you invest or not.

If you are expecting rates to fall. SELECTING FUNDS FOR PORTFOLIO The chart below can be used to identify the types of funds best suited to investor’s particular investment objectives.g if investor wants his investment to get many folds in shortest period of time. For such investors Growth funds and International funds are best suited because their rate of return is high compare to others stocks. . Also it gives the idea about the stocks in which funds of different type invests. assess sectoral diversity of the portfolio. If you prefer debt. As explained earlier the stock which gives highest return are generally associated with high risk due to their vulnerability. The only way to mitigate inflation risk is to invest in securities that offer a higher return than the inflation rate. Diversified equity mutual funds offer such a portfolio. Ensure that debt paper invested in carry at least an ‘A’ rating. Interest Rate Risk is best controlled by opting for floating rate mutual funds when interest rates are on the rise. check the credit rating of the debt investments in the mutual fund’s portfolio. which can result in significant capital erosion. Credit Risk can be controlled by investing in good quality credit-rated debt paper. For e.the other sector should move up helping your portfolio to maintain a balance. This table is formulated keeping in mind the objective of investor and what are the best fund types he can invest. then his objective of investment is capital growth. opt for MIP schemes where a small portion is invested in equity to help you get higher returns than pure debt schemes. To assess whether the mutual fund has invested in such debt. Before investing. opt for medium-term debt funds to lock-in at the existing higher rates. Equity is one such investment option that has consistently given returns higher than the inflation rate. This means your portfolio will never experience all your equities losing value at the same time.

If Your Basic Objective Is You Want The Following Fund Type These Funds Invest Primarily In Common stocks Potential Capital Appreciation Potential Current Income Potential Risk Maximum Capital Growth Aggressive Growth International Growth with potential for very rapid growth. May employ certain aggressive strategies Very High Very Low High to Very High High Capital Growth Specialty/ Sector Common stocks with long-term growth potential High to Very High Very Low High Current Income & Capital Growth Fixed Income Equity Income Growth & Income Common stocks with potential for high dividends and capital appreciation Both highdividendpaying stocks and bonds Money market instruments Short-term municipal notes Moderate to High Moderate to High Very Low High to Very High Low to Moderate Moderate Moderate Moderate to High High Current Income Current Income & Principal Tax-Free Income & General Money Protection of Market Funds Tax-Exempt Money Market None Very Low None Low .

Professional Management . Diversification There is no greater advantage to using Mutual Funds than diversification. but it is important to distinguish the two because there are some notable advantages to using Mutual Funds. Most wealthy investors purchase more than just a couple of stocks? If they are not using Mutual Funds (many do).Protection of Principal Current Income & Maximum Safety of Principal Municipal Bonds Tax-Exempt Income Double & Triple TaxExempt Government Money Market and bonds Treasury and agency issues guaranteed by the Government None Moderate to High Low A broad range of municipal bonds Low to Moderate Moderate to High Low to Moderate Mutual Fund Investing vs. Smart investors diversify because it greatly reduces risk without sacrificing returns. than they are purchasing a large number of stocks. Stock Investing It seems strange to compare Mutual Funds to stocks since Mutual Funds are primarily composed of stocks.

Simply put in your order during the day and when the market closes a check will be sent to you or you can have it wired to a bank account. Mutual Funds are highly liquid. . they often trade commissionfree and have personal contacts at the brokerage firms or financial institutions.By purchasing Mutual Funds. CD's offer no liquidity (not without a hefty fee) and bonds can be difficult. Some Mutual Funds also carry check-writing privileges. Efficiency By pooling investors' money together. Liquidity If you find yourself in need of money in a short amount of time. you are essentially hiring a professional manager at an especially inexpensive price. Cost Mutual Funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. too. Stocks can be much more difficult depending on what kinds of stocks you have invested in. carries high transaction fees making it difficult for the small investor to make money. With large sums of money to invest. Ease of Use Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping duties involved with stocks are much more complicated than owning a Mutual Fund. It is easier to use because all the work your Fund Manager does and you get the returns on your money without doing much. These managers have been around the industry for a long time and have the academic credentials to back it up. similar to your checking account at the bank. however. Mutual Fund companies can take advantage of economies of scale. Stock investing. which means you can actually write checks from the account.

and non-receipt of share certificates and dividend warrants. you are getting the exact same manager. Since Mutual Funds typically hold anywhere from 25-5000 companies. Certain Mutual Funds can be riskier than individual stocks. Moreover. like bad deliveries. you have to keep track of your investments. WHY INVEST IN MUTUAL FUNDS? • Convenience As an investor.per transaction.a month into stocks and the expenses including brokerage Rs. With stocks. 5. 100/. their investment is automatically down 15 percent every time they invest. 15/. that chance is next to nil. you are relieved of nagging problems associated with capital market investing.on the company. the same account access and the same investment.00. the industry and the economy – thus ensuring informed investment.Suppose. When you invest in a Mutual Fund scheme. With Mutual Funds. • Professional approach Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund.or Rs. This is primarily due to diversification. but Mutual Funds are non-discriminatory. 500/. you pass on this function to a Fund Manager. if an investor wanted to put in Rs. Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks.000/-. Risk In general. which takes time and effort. but you have to go out of your way to find them. They regularly carry out extensive research . Mutual Funds carry much lower risk than stocks. Thus for many of us who do not have the desired . one worry is that the company you are investing in goes bankrupt. It doesn't matter whether you have Rs. Secondly. they regularly track the market. all of the companies that it holds would have to go bankrupt.

• Returns Over the medium and long-term. in addition to the expenses incurred in tracking your share portfolio. These include brokerage. stamp duty and custodial charges. Mutual Funds. • Lower expenses You have to bear several costs if you invest directly in the market. with the advantage of pooling of resources. • Variety . Huge amounts would be required for an individual to achieve the desired diversification. • Reduced risk It's not possible for investors having a small capital outlay to maintain a diversified portfolio. After a brief period in the doldrums. of the 118 equity schemes in the market. the Mutual Fund industry in India has performed credibly over the past year. 91 outperformed the benchmark Bombay Stock Exchange Sensex. According to a study conducted by the Association of Mutual Funds in India. but economies of scale enable them to reduce procedural expenses like these. However. Mutual Funds have the potential to provide favorable returns within the same risk category. can. on account of a loss in a particular company/sector.expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity. as not all stocks go through a downtrend at the same time. • Diversification Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Mutual Funds too have to bear these costs. mutual funds offer an attractive alternative. which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio. This reduces the risk.

apart from the other big question WHERE to invest. SIP helps us to overcome the problem of ‘when’. • Liquidity In case of open-ended schemes. With the next 2-3 years looking good from Indian Economy point of view. one can expect handsome returns thru’ regular investing. SIP is a disciplined investing irrespective of the state of the market. unit holders can sell their units on the stock exchange. • Does not strain our day-to-day finances . regular withdrawal plans. which are appropriate for retirement planning. • Flexibility Some Mutual Funds offer products such as systematic investment plans. These allow you to invest and withdraw funds as per your needs. monthly income plans and dividend reinvestment plans. It thus makes the market timing totally irrelevant. investing in a mutual fund solves the issue of ‘where’ to invest. While. • Market timing becomes irrelevant One of the biggest difficulties in equity investing is WHEN to invest. there are growth schemes for investors who are willing to bear a greater risk. a majority of Mutual Funds provide investors easy entry and exit at prices related to the scheme's net asset value (NAV). For instance. And today when the markets are high. gilt schemes for investors who are risk-averse and retirement plans for those with an eye on the future. They are also prompt in meeting redemption demands. Some Mutual Funds also repurchase units at NAV-linked prices during certain periods. In case of close-ended schemes.Mutual Funds offer schemes to suit specific investment needs. it may not be prudent to commit large sums at one go.

You can also find information on websites and in newspapers or magazines. This is called rupee-cost averaging. • Transparency Mutual Funds send out periodic newsletters to unit holders. can take timely decisions about when to sell or buy the units. which actually is the best time to buy. This makes investing easier as it does not strain our monthly finances. detailing the scheme's portfolio. SIP works as a good discipline as it forces us to buy even when the markets are low.Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP. which ensure smooth and transparent functioning of the . • Regulation The Mutual Fund industry is well regulated both by SEBI and AMFI. who would otherwise not be able to enjoy the benefits of investing in the equity market. • Reduces the average cost In SIP we are investing a fixed amount regularly. introduced regulations. we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. • Timely Decisions and Safety against Loss The Fund Managers. we would stay away from buying when the markets are down. Timely buying or selling of units reduces the loss that could have been incurred. if we were to buy directly from the market. being experienced and armed with the market scenario. and the outlook of the scheme and the fund manager. Therefore. We generally tend to invest when the markets are rising. They have. investment strategy. as against larger one-time investment required. It. Generally. becomes an ideal investment option for a small-time investor. over the years. performance. therefore.

most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If the entire stock market declines in value. you will pay a sales commission if you buy shares in a Load Fund. even if you reinvest the money you made. • Management risk: When you invest in a mutual fund. Even if you don't use a broker or other financial adviser. financial consultants. However. • Taxes: During a typical year. you depend on the fund's manager to make the right decisions regarding the fund's portfolio. you will pay taxes on the income you receive. anyone who invests through a mutual fund runs the risk of losing money. If your fund makes a profit on its sales. DRAWBACKS OF MUTUAL FUNDS Mutual funds have their drawbacks and may not be for everyone: • No Guarantees: No investment is risk free. • Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. If the manager does not perform as well as you .mutual funds industry. the value of mutual fund shares will go down as well. Some funds also charge sales commissions or "loads" to compensate brokers. This makes it safer and convenient for investors to invest through the mutual funds. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. no matter how balanced the portfolio. or financial planners.

the total size of the corpus is limited by the size of the initial offer. TRENDS IN MARKETING OF MUTUAL FUNDS IN INDIA The changing marketing trends in the Mutual Fund industry in India can be easily linked and traced to its history of growth. The categorization was primarily based on two factors: one was the way the schemes were traded and the other through different composition of debt and equity securities in the scheme. because these funds do not employ managers. you forego management risk. if you invest in Index Funds. The entry and exit of investors is possible by only trading on the stock . from the setting up of UTI till the entry of private sector players. the only focus of the marketing strategy was different product offerings. Of course. which have evolved along with the growth and evolution of the industry. Product Focus For the first three decades of the industry. Investors are permitted to enter and exit the open-ended scheme at any point of time at a price that is linked to the net asset value (NAV). In case of close-ended schemes.had hoped. The changes in marketing strategies can be characterized by 4 stages. you might not make as much money on your investment as you expected. By the way Schemes were traded: Open-ended Schemes Close-ended Schemes In an open-ended scheme there are no limits on the total size of the corpus. UTI and various other public sector Mutual Funds focused on introducing an array of products falling in different categories.

Growth schemes invest predominantly in equities whereas Income schemes invest mainly in fixed income debt securities. they encouraged third-party distribution companies to distribute their products all over India. Some groups such as Birla Mutual Fund even set up their own distribution companies (Birla Distribution). they were soon rendered obsolete and most of the prevailing schemes today are open-ended schemes. . Balanced schemes try to derive the benefits of both equity and debt by investing in both. Sector Specific Schemes.exchanges. There were other niche schemes to fulfill specific needs. the private sector companies introduced the same products available from the pubic sector players and promised superior performance. Distribution Focus Product focus continued for 2-3 years even after the entry of private sector players in 1993. there was no dearth of subscribers. Specialist distribution companies emerged. the aim of the Mutual Fund companies was to introduce a wide variety of products and due to oligopolistic competition. When they realized that they needed to differentiate on some other parameter as well. In the Product Focus stage. Due to liquidity constraints posed by close-ended funds. Initially. they focused on distribution. Index Schemes (which are passively invested in a benchmark Index) and so on. The only parameter on which the selling was based was the relative performance of the products. Money market schemes invest in short term liquid securities like money market instruments so that they serve as appropriate products for investing short-term funds. By Composition of Debt and Equity in the Scheme:  Growth Schemes >Income Schemes >Balanced Schemes >Money Market Schemes The products were also differentiated by the composition of equity and debt in various schemes. As it was difficult and time consuming to replicate the wide-spread distribution structure of Agents set up by UTI. such as Tax Saving Schemes. Special focus was given to investor servicing so that investors could experience superior servicing standards from private players.

Specialized Product & Service Focus If one observes the trends in the recent past. which help them in the above through specialized products and services. In the rush to gain volumes and thereby commission incomes. A growth product. Middle-aged People saving for retirement and Retired People looking for steady income. Trusts. The ensuing dissatisfaction has thus paved the way at last for the most critical area for marketing. the Customer Ownership Focus. A number of Mutual Funds such as Pru-ICICI Mutual Fund . The institutional segment consisted of treasury departments of Corporates. Investors chose companies. a common financial goal is to save and invest for meeting the education needs of children. focus is on identifying one's investment needs depending on one's financial goals. As awareness levels of individual investors go up. the distribution companies many a time sold the wrong product to the wrong customer. companies have been taking the above customer focus further by designing and launching specialized products and services. For example. which invests primarily in risky instruments like equities was sold to old. Suitable products such as Growth and Balanced schemes for young families and Income schemes for retired people were marketed.While the focus on improved distribution and investor servicing did help the private players establish themselves against large players like UTI. retired people looking for regular. The individual investor was in turn divided into various segments such as Young Families with small or no children. By proper segmentation and by targeting the right product to the right customer. steady income as pension. and suitable products such as Institutional Income schemes and Money Market schemes were targeted at them. The target segment was broadly divided into institutional segment and individual investor segment. Customer Ownership Focus Mutual Fund companies began to segment their target customers and position their various products based on the target segment they proposed to address. it had also resulted in a lot of problems. risk taking ability and time horizon. Mutual Fund companies hoped to win the confidence of their customers and 'own' them for a lifetime. etc.

). there is a need for specialized services that help investors assess their risk taking ability and chose products accordingly. Repurchase or ‘Back-end’ Load Is a charge collected by a scheme when it buys back the units from the unit holders. A similar such need is planning for a comfortable retirement. Schemes that do not charge a load are called ‘No Load’ schemes. This is also called Bid Price. Also called. GLOSSARY FREQUENTLY USED TERMS Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. ‘Front-end’ load. It may include a sales load. . Sale Price Is the price you pay when you invest in a scheme. Sales Load Is a charge collected by a scheme when it sells the units. Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. In addition.and UTI Mutual Fund have launched products that are designed to serve this specific need. Some Mutual Fund companies are launching a new product called 'Fund of Funds' which is a Scheme that merely invests in a combination of other schemes (growth schemes. Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Also called Offer Price. Such prices are NAV related. of that company based on the investment objective and risk profile of the investor. income schemes etc.

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