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Understanding Mutual Funds

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What is a Mutual Fund?

money market instruments and other types of securities. owner of a mutual fund unit gets a proportional share of the fund¶s gains. losses. bonds. y A vehicle for investing in stocks and bonds .co.www. It pools the money of several investors and invests this in stocks.in y y y A vehicle for investing in stocks and bonds. income and expenses. Not an alternative investment option to stocks and bonds.godmind.

www. y . which is the legal document that contains information about the fund y Its history.co.godmind. its officers and its performance.in Each mutual fund has a specific stated objective Fund¶s objective is laid out in the fund's prospectus.

www.income securities. ('balance' in returns and risk) Balanced - .godmind.co.in Some popular objectives of a mutual fund are Fund Objective Equity (Growth) Debt (Income) MoneyMarket What the fund will invest in Only in stocks Only in fixed-income securities In short-term money market instruments (including government securities) Partly in stocks and partly in fixed.

godmind. AMC may have several mutual fund schemes . AMC hires a professional money manager.in y The company that puts together a mutual fund is called an AMC .www.co. who buys and sells securities in line with the fund's stated objective. y y Managed by an Asset Management Company (AMC) .

in y Mutual fund regulations require that the fund¶s objectives are clearly spelt out in the prospectus.co.godmind. y All AMCs Regulated by SEBI. Funds governed by Board of Directors . Every mutual fund has a board of directors that is supposed to represent the shareholders' interests.www. rather than the AMC¶s.

co.godmind.in THE BASICS OF MUTUAL FUNDS. .www.

co.in y NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.godmind. Net Asset Value or NAV .www.

all expenses are deducted and the resultant value divided by the number of units in the fund is the fund¶s NAV. From this.in y The value of all the securities in the portfolio in calculated daily.godmind.www.co. HOW IS NAV CALCULATED? .

in y AMCs charge an annual fee. Fund's expense ratio is typically to the size of the funds under management and not to the returns earned.www. salaries. etc.godmind.co. brokerage fee. y EXPENSE RATIO . or expense ratio that covers administrative expenses. advertising expenses.

on their funds (entry load and/or exit load) to compensate for distribution costs.in y Some AMCs have sales charges. or loads.co. Load . y Funds without a sales charge are called no-load funds.www.godmind.

Close-ended funds are listed on the stock exchanges y OpenOpen.in y Open-ended Funds : can enter and exit the fund scheme at its NAV.and Close-Ended Funds Close- . Close-Ended Funds: Redemption can take place only after the period of the scheme is over.godmind.co.www.

co.in y Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).www. Important documents .godmind.

co.godmind.www.in Benefits of Investing Through Mutual Funds .

in Fund managers are responsible for implementing a consistent investment strategy .godmind. y Fund managers monitor market and economic trends and analyze securities y Professional Money Management .www.co.

godmind. y Diversification . Mutual funds offer investors an opportunity to diversify across assets.co.www.in y Diversification is one of the best ways to reduce risk.

y Liquidity .co. Receive the current market value on their investments within a short time period (normally three.to five-days).in y Investors can sell their mutual fund units on any business day.godmind.www.

www.in y The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes.godmind.co. Affordability .

www. automatic withdrawal plans and the automatic reinvestment of interest and dividends.godmind. y Convenience .in Convenience of periodic purchase plans.co. y Reports and statements .

blue-chip stock funds.www.in y Pick from conservative. Sectoral funds.godmind. or those that combine stocks and bonds in the same fund. Funds that aim to provide income with modest growth Those that take big risks in the search for returns. You can even buy balanced funds. y y y Flexibility and variety .co.

in y 100% Income Tax exemption on all Mutual Fund dividends .www. upto 1 lakh available u/s 80(c) under investment in ELSS funds as of FY2005-2006.co. y Deduction Tax benefits on Investment in Mutual Funds .godmind.

www.co.in INVEST EARLY INVEST REGULARLY Happy Investing .godmind.