What is Mutual Fund A mutual fund is a form of collective investment that pools money from many investors and

invests the 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 loss, 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 (NAV), is calculated daily based on the total value of the fund divided by the number of shares purchased by investors. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient. History The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924, and after one year had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today. In 1951, the number of funds surpassed 100 and the number of shareholders exceeded 1 million. Only in 1954 did the stock market finally rise above its 1929 peak and by the end of the fifties there were 155 mutual funds with $15.8 billion in assets. In 1967 funds hit their best year, one quarter earning at least 50% with an average return of 67%, but it was done by cheating using borrowed money, risky options, and pumping up returns with privately traded "letter stock". By the end of the 60's there were 269 funds with a total of $48.3 billion. With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s there were around 270 funds with $48 billion in assets. The first retail index fund was released in 1976, called the First Index Investment Trust. It is now called the Vanguard 500 Index fund and is one of the largest mutual funds ever with in excess of $100 billion in assets. One of the largest contributors of mutual fund growth was Individual Retirement Account (IRA) provisions made in 1975, allowing individuals (including those already in corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401k), IRAs and Roth IRAs. As of April 2006, there are 8,606 mutual funds that belong to the Investment Company Institute (ICI), the national association of Investment Companies in the United States, with combined assets of $9.207 trillion USD.[3]

Regulatory Authorities To protect the interest of the investors. liquidity. SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. and professional management consulting service than is normally available to individual investors. Custodian. two thirds of the directors of Trustee Company or board of . the investment company provides more diversification. According to SEBI Regulations. They collect money from investors by way of floating various mutual fund schemes.Working of Mutual Fund An Asset Management Company (AMC) is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. holds the securities of various schemes of the fund in its custody. For a fee. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations. registered with SEBI. The diversification of portfolio is done by investing in such securities which are inversely correlated to each other. SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time.

Till date all the AMCs are that have launched mutual fund schemes are its members. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. The objectives of Association of Mutual Funds in India The Association of Mutual Funds of India works with 30 registered AMCs of the country. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI.trustees must be independent. the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. transparency etc. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association. AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry. 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. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation. It functions under the supervision and guideli of its Board of Directors. It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The objectives are as follows:  This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders. Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. Its objective is to increase public awareness of the mutual fund industry.     . disclosure. Association of Mutual Fund of India do represent the Government of India. It develops a team of well qualified and trained Agent distributors.

The mutual fund manager. investors have a better chance to purchase undervalued shares. size. sector it is doing business in and so on. Other considerations include the kind of bonds or shares the manager chooses to invest in. maximizing dividends. A security offering in which investors may purchase units of a closed-end mutual fund. including information about the companies the mutual fund is invested in. etc. allowing the firm to raise capital for purchasing securities. Dividend The Fund Houses declare some amount time to time as dividend. The people who invest in a mutual fund are normally ordinary people who are interested in getting a return on their investment. Because the future is less certain for companies engaging in an IPO. who does have knowledge of these matters. However. The main purpose of the manager's job is to help investors get the best returns on their money by investing those funds in return-yielding companies.AMFI undertakes all India awarness programme for investors inorder to promote proper understanding FUND MANAGER The mutual fund manager is a professional financial expert and the principal adviser on the investors' investments. The manager is expected to provide all details of an investment plan. return. such as the companies index. dividend option has 2 sub plans: . Further. NFO A new fund offer is similar to an initial public offering. This is because the net asset value of the mutual fund typically prevails. A new fund offer occurs when a mutual fund is launched. They often are not aware of which investments will get them returns and often don't understand the intimate goings-on in the share market. The underlying logic of diversity in a fund is to make sure that losses of any one fund or investment do not become unmanageable. This is not only the managers' source of income. the price paid for shares or units is often close to a fair value. Dividend declaration depends upon the fund performance that is majorly linked to the market performance. evaluates risks and potential returns and builds a portfolio to accomplish the aims of the mutual fund (growth. Both represent attempts to raise capital to further operations. New fund offers are often accompanied by aggressive marketing campaigns. unlike an initial public offering (IPO).). it is also what determines their reputations in the market. The manager makes sure the investments are spread and diversified over a number of investment options. These are based on a number of factors regarding the individual companies they are investing in. created to entice investors to purchase units in the fund. The information about the companies the fund owns shares in is included in a prospectus sent to investors.

it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. If an investor has 200 units of Fund A and this fund declares 20% dividend. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus. respectively. Closed-end funds may trade at a higher or lower price than their NAV. after the close of trading on some specified financial exchange. and so only process orders after the NAV is determined.A) Dividend Payout In this option. the NAV is determined daily. In the absence of a public market for these securities. Some mutual funds own securities which are not regularly traded on any formal exchange. he/she will receive Rs 400 as dividend. Rs. is a fund's value of its holdings. they may be derivatives. Therefore. These may be shares in very small or bankrupt companies. the investor will receive 20% of Rs 10 on 200 units i. or NAV. this is known as a premium or discount. or they may be private investments in unregistered financial instruments (such as stock in a nonpublic company). For most funds.e. Then. reflecting differences in fees and expenses paid by the different classes. Types of mutual funds Open-end fund . each class will typically have its own NAV.e. but some funds update their NAV multiple times during the trading day. Net asset value The net asset value. usually expressed as a pershare amount. If a fund is divided into multiple classes of shares. Rs 2 per unit. the Fund House distributes the amount of dividend declared to the investors B) Dividend reinvestment In case of Dividend Reinvestment option. 10 Eg. Open-end funds sell and redeem their shares at the NAV. the dividend amount gets reinvested in the scheme at the ex-dividend NAV In Mutual Funds dividend is always calculated on face value i.

Capitalization Some mutual funds focus investments on companies of particular size ranges. The size ranges include micro-cap .9 billion) Growth vs. Being open-ended means that at the end of every day. Mutual Funds may be legally structured as corporations or business trusts but in either instance are classed as open-end investment companies by the SEC. Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value through which the institutional investor makes their profit. with size measured by their market capitalization.5 million) .small cap ($182. An ETF usually tracks a stock index (see Index funds).1. which mainly consist of stock investments. midcap. are the most common type of mutual fund.large cap ($1. ETFs are traded throughout the day on a stock exchange. Exchange-traded funds A relatively new innovation. value Another division is between growth funds. is often formulated as an openend investment company.8 billion) .539. and large-cap. Equity funds Equity funds.000 shares). [5] Oftentimes equity funds focus investments on particular strategies and certain types of companies.8 . small-cap.13. The following ranges are used by Russell Indexes [6] include: . Other funds have a limited number of shares.7 billion) .386. which invest in stocks of companies that have the . Equity funds hold 49 percent of total funds invested in mutual funds in the United States.The term Mutual fund is the common name for an open-end investment company.6 million . The way ETFs work combines characteristics of both mutual funds and closed-end funds. just like closed-end funds. Fund managers and other investment professionals have varying definitions of these market cap ranges. ETFs are more efficient than traditional mutual funds and therefore tend to have lower expenses. the investment management company sponsoring the fund issues new shares to investors and buys back shares from investors wishing to leave the fund. Because the institutional investors handle the majority of trades. these are either closed-end fund or unit investment trusts neither of which are mutual funds. the exchange traded fund (ETF). Shares are only created or redeemed by institutional investors in large blocks (typically 50.

A balanced fund may use a combination of strategies. versus value funds.) and deciding when to buy. Growth funds tend not to pay regular dividends. a well-run index fund should be average. such as biotechnology or energy. With the potential for high yield. Additionally. medium. Moreover. than does an active fund manager. Instead. with a focus on stocks that pay dividends.A. index funds generally have lower trading expenses than actively-managed funds. Sector funds focus on specific industry sectors. etc. Grimblatt and Titman. Statistically. including high-yield or junk-bonds. but have tax advantages and lower risk. funds that performed well in the past are not able to beat the market again in the future (shown by Jensen. which concentrate on stocks that are undervalued. hold or sell individual holdings. these bonds also come with greater risk.potential for large capital gains. [7] finds that nearly 1. typically including some investment in bonds. Income funds tend to be more conservative investments. 1989. however such investments also bear larger risks.500 U. and typically incur fewer short-term capital gains which must be passed on to shareholders. Municipal bond funds generally have lower returns.[8] However. 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. on average. index funds should be able to perform better than average. Before expenses. research. long-term) before they mature. for every investor who outperforms the market. Bond funds Bond funds account for 18% of mutual fund assets. index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques. The assets of an index fund are managed to closely approximate the performance of a particular published index. many end up underperforming after expenses. to stay more conservative when it comes to risk. 1968. while an actively-managed fund attempts to outperform a relevant index through superior stock-picking techniques. Index funds versus active management An index fund maintains investments in companies that are part of major stock indices. High-yield bond funds invest in corporate bonds. [9] Types of bond funds include term funds. which have a fixed set of time (short. an index fund manager makes fewer trades. mutual funds under-performed the market in approximately half the years between 1962 and 1992. there is one who underperforms. Growth stocks typically have a potential for larger return. a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index.S. yet aim for some growth. as quantitative finance is in its early stages of development more accurate studies are required to reach a decisive conclusion. though. Among those who outperform their index before expenses. such as the S&P 500. . The performance of an actively-managed fund largely depends on the investment decisions of its manager. By minimizing the impact of expenses. For this reason. Since the composition of an index changes infrequently.

SBI Mutual Fund 4.HDFC Mutual Fund 2. Birla Sun Life Mutual Fund .Money market funds Money market funds hold 26% of mutual fund assets in the United States. during which an investor cannot cash in shares. Unlike certificate of deposits (CDs). [11] The Act does not require an adviser to follow or avoid any particular investment strategies. Kotak Mutual Fund 7. TOP 10 MUTUAL FUND COMPANY OF INDIA 1. as well as lower rates of return. Tata Mutual Fund 3. Reliance Mutual Fund 5. Franklin Templeton Mutual Fund 10. Hedge funds Hedge funds in the United States are pooled investment funds with loose SEC regulation. plus a "performance fee" of 20% of a hedge fund's profits. DSP BlackRock Mutual Fund 6. nor does it require or prohibit specific investments. [10] Money market funds entail the least risk. Certain hedge funds are required to register with SEC as investment advisers under the Investment Advisers Act. Principal Mutual Fund 8. Sundaram BNP Paribas Mutual Fund 9. There may be a "lock-up" period. assets in money market funds are liquid and redeemable at any time. and should not be confused with mutual funds. Hedge funds typically charge a fee greater than 1%.

you get more units per Rs 1. Two percent on Rs 10. This is because. When the NAV falls. You will get 40 units. . you just hand over the cheque and you get your fund units depending on the value of the units on that particular day. So you will get 326. every month. Tax implications Let's say you have invested in the SIP option of a diversified equity fund. NAV The Net Asset Value is the price of a unit of a fund. after three months. when the NAV is high. So. If you sell if before a year. Let's say the NAV on the day you invest in the first month is Rs 20. On an average. the NAV is Rs 18. All you have to do is approach the fund and buy units worth Rs 10. you have just Rs 9. Let's say that the NAV on the day you invest is Rs 30. Rs 1.56 units. That means that. you would have 145. There will be two factors determining how many units you get.000.000* would Rs 200. you would have invested Rs 12. you get fewer units per Rs 1. you will get 50 units.How can a person invest in mutual fund? A one-time outright payment If you invest directly in the fund. 2.000. you commit to investing.000. The following month.000 in your fund. Entry load This is the fee you pay on the amount you invest. Let's say you want to invest Rs 10. Now.67 units (Rs 9800 / 30). the NAV is Rs 25. Periodic investments This is referred to as a SIP. At the end of a year. you would have paid around Rs 21 per unit.000 in your fund. Let's say the entry load is 2%. If you sell the units after a year of buying.56 units. you pay no capital gains tax. say. The next month. You will get 55.000.800 to invest. you pay capital gains tax of 10%.

Beyond that. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. Mutual funds are set up to buy many stocks. you want to sell some units. So. thus mutual funds has Variety of flavors. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent. will be regarded as the units you sell in February 2009. the units that you sell first will be considered as the first units bought. Being a collection of many stocks. For tax purposes. Open . It is easier to think of mutual funds in categories. .Ended Schemes: An open-end fund is one that is available for subscription all through the year. mentioned below. etc). the amount you invest in January 2008 and the units you bought with that money. Now. emerging or mid size companies. There are over hundreds of mutual funds scheme to choose from. These do not have a fixed maturity. Overview of existing schemes existed in mutual fund category: BY STRUCTURE 1. risk tolerance and return expectations etc. The key feature of open-end schemes is liquidity. 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. first-out applies here. . then international. Types of Mutual Funds Schemes in India Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position. an investors can go for picking a mutual fund might be easy. in February 2009. you can diversify even more by purchasing different kinds of stocks.Let's say you invest through a SIP for 12 months: January to December 2008. then adding bonds. and so on. The most basic level of diversification is to buy multiple stocks rather than just one stock. Will you be charged capital gains tax? The system of first-in. Diversification Diversification is nothing but spreading out your money across available or different types of investments.growth companies.e. low-grade corporate bonds. It could take you weeks to buy all these investments.

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. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. 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. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 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 . however one cannot buy units and can only sell units during the liquidity window. which combines the features of open-ended and closeended schemes. For example. if an investors opt for bank FD. One can invest directly in the scheme at the time of the initial issue.2. Close . 3. Interval Schemes: Interval Schemes are that scheme. which provide moderate return with minimal risk.Ended Schemes: These schemes have a pre-specified maturity period. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation. expectations of unitholder and other market factors. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. which would be satisfied by lower returns.

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. Income Funds: Invest a major portion into various debt instruments such as bonds. Government authorities. 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. as Mutual funds provide professional management. convenience and liquidity. Debt funds: The objective of these Funds is to invest in debt papers. That doesn’t mean mutual fund investments risk free. popularly known as Government of India debt papers. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile. By investing in debt instruments. corporate debentures and Government securities. private companies. It gets benefit of both equity and debt market. These Funds carry zero Default risk but are associated with Interest Rate risk. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. thus Equity funds rank high on the risk-return matrix. as follows:     Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon. diversification.   . Thus investors choose mutual funds as their primary means of investing. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. Equity fund: These funds invest a maximum part of their corpus into equities holdings. 2. Overview of existing schemes existed in mutual fund category: BY NATURE 1.proportion. The Equity Funds are sub-classified depending upon their investment objective. Debt funds are further classified as:  Gilt Funds: Invest their corpus in securities issued by Government. these funds ensure low risk and provide stable income to the investors. banks and financial institutions are some of the major issuers of debt papers. These schemes are safer as they invest in papers backed by Government.

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 short-term instruments like Treasury Bills. Equity part provides growth and the debt part provides stability in returns. Short Term Plans (STPs): Meant for investment horizon for three to six months.  3. such as treasury bills. Some portion of the corpus is also invested in corporate debentures. Each category of funds is backed by an investment philosophy. short-term instruments. 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 generally invest in fixed income securities such as bonds and corporate debentures. 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. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. These funds provides easy liquidity and preservation of capital. Further the mutual funds can be broadly classified on the basis of investment parameter viz. certificates of deposit. The investor can align his own investment needs with the funds objective and invest accordingly. They invest in both equities and fixed income securities. Balanced funds: As the name suggest they. These schemes aim to provide investors with the best of both the worlds. Capital appreciation in such schemes may be limited. By investment objective:  Growth Schemes: Growth Schemes are also known as equity schemes.  Income Schemes:Income Schemes are also known as debt schemes. preservation of capital and moderate income. CPs and CDs. inter-bank call money market. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). The aim of these schemes is to provide regular and steady income to investors. Liquid Funds: Also known as Money Market Schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes invest in both shares and fixed income securities. which are in line with pre-defined investment objective of the scheme. which is pre-defined in the objectives of the fund. are a mix of both equity and debt funds. These schemes generally invest in safer. commercial   . Money Market Schemes: Money Market Schemes aim to provide easy liquidity. in the proportion indicated in their offer documents (normally 50:50).

If fund holdings increase in price but are not sold by the fund manager. While these funds may give higher returns. Other schemes  Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. The percentage of each stock to the total holding will be identical to the stocks index weightage. e. contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.paper and inter-bank call money. the returns from such schemes would be more or less equivalent to those of the Index. the fund has a capital gain.88 of the Income Tax Act. Software. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares. Types of returns There are three ways. the fund's shares increase in price. where the total returns provided by mutual funds can be enjoyed by investors:  Income is earned from dividends on stocks and interest on bonds.   . Most funds also pass on these gains to investors in a distribution. You can then sell your mutual fund shares for a profit. Fast Moving Consumer Goods (FMCG). Petroleum stocks.g. they are more risky compared to diversified funds. Under Sec. etc. And hence. If the fund sells securities that have increased in price. The portfolio of these schemes will consist of only those stocks that constitute the index. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.  Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. Pharmaceuticals. The returns in these funds are dependent on the performance of the respective sectors/industries.  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.

When money pours into funds that have had strong success.Pros & cons of investing in mutual funds: For investments in mutual fund. for picking up stocks. It might have been more advantageous for the individual to defer the capital gains liability. 2000. mutual fund also allows investors to liquidate their holdings as and when they want. fund managers don't consider your personal tax situation. the manager often has trouble finding a good investment for all the new money. 3. by well qualified professional. . 4. Professional Management. they are professional managed. the investors risk is spread out and minimized up to certain extent. Liquidity . Economies of Scale . 2. Taxes .50 per month basis.The basic advantage of funds is that. high returns from a few investments often don't make much difference on the overall return. at the time of purchase.when making decisions about your money. 2.Because funds have small holdings across different companies. when a fund manager sells a security.Purchasing units in a mutual fund instead of buying individual stocks or bonds. which affects how profitable the individual is from the sale. thus help to reducing transaction costs. thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self. as their management is not dynamic enough to explore the available opportunity in the market.Mutual fund buy and sell large amounts of securities at a time.Investments in mutual fund is considered to be easy.Some funds doesn’t perform in neither the market. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. 4. For example. and the minimum investment is small. Professional Management . A mutual fund is considered to be relatively less expensive way to make and monitor their investments. is generally from the entry & exit load which they charge from an investors. one must keep in mind about the Pros and cons of investments in mutual fund. Dilution is also the result of a successful fund getting too big. Simplicity . compare to other available instruments in the market. Dilution . where SIP start with just Rs. 5. The mutual fund industries are thus charging extra cost under layers of jargon. a capital-gain tax is triggered. Most AMC also have automatic purchase plans whereby as little as Rs. Costs – The biggest source of AMC income. Disadvantages of Investing Mutual Funds: 1. 3. and help to bring down the average cost of the unit for their investors. 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.Just like an individual stock. Diversification . Advantages of Investing Mutual Funds: 1.