mutual fund final 100

8/8/2019 Mutual Fund Final 100

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INTRODUCTION TO MUTUAL FUNDSINTRODUCTION TO MUTUAL FUNDS

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and

are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not

a wise option, as in real terms the value of money decreases over a period of time.

One of the options is to invest the money in stock market. But a common investor is not

informed and competent enough to understand the nature of stock market. This is where mutual

funds come to the rescue.

A mutual fund is a group of investors operating through a fund manager to purchase a

diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to

invest in. By pooling money together in a mutual fund, investors can purchase stocks or bondswith much lower trading costs than if they tried to do it on their own. Mutual fund issues units to

the investors in accordance with quantum of money invested by them. Investors of mutual funds

are known as Unit holders.

The profits or losses are shared by the investors in proportion to their investments. The

mutual funds normally come out with a number of schemes with different investment objectives,

which are launched from time to time. A mutual fund is required to be registered with Securities

and Exchange Board of India (SEBI) which regulates securities market before it can collectfunds from the public.

Investments may be in stocks, bonds, money market securities or some combination of

these. Those securities are professionally & efficiently managed on behalf of the shareholders,

and each investor holds a pro rata share of the portfolio entitled to any profits when the securities

are sold, but subject to any losses in value as well.

DEFINNITIONDEFINNITION

Mutual fund is vehicle that enables a

number of investors to pool their money


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and have it jointly managed by a

professional money manager.

WHAT IS MUTUAL FUNDS..???WHAT IS MUTUAL FUNDS..???

A Mutual Fund is a pool of money, collected from investors, and is invested according to certain

investment objectives. A Mutual Fund is a trust that pools the savings of a number of investors

who share a common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through these

investments and the capital appreciation realized is shared by its unit holders in proportion to the

number of units owned by them. Mutual Fund companies are known as asset management

companies. They offer a variety of diversified schemes. Mutual Fund acts as investment

companies. They pool the savings of investors and invest them in a well-diversified portfolio of

sound investments. The following diagram shows their working of mutual fund.

WORKING OF THE MUTUAL FUND


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MYTHS ABOUT MUTUAL FUNMYTHS ABOUT MUTUAL FUNDD

1. Mutual Funds invest only in shares.

2. Mutual Funds are prone to very high risks/actively traded.

3. Mutual Funds are very new in the financial market.

4. Mutual Funds are not reliable and people rarely invest in them.

5. The good thing about Mutual Funds is that you dont have to pay attention to them.

FACTS ABOUT MUTUAL FUNDSFACTS ABOUT MUTUAL FUNDS

1. Equity Instruments like shares form only a part of the securities held by mutual funds.

Mutual funds also invest in debt securities which are relatively much safer.

2. The biggest advantage of Mutual Funds is their ability to diversify the risk.

3. Mutual Funds are there in India since 1964. Mutual Funds market is very evolved in

U.S.A and is there for the last 60 years.

4. Mutual Funds are the best solution for people who want to manage risks and get good

returns

5. The truth is as an investor you should always pay attention to your mutual funds and

continuously monitor them. There are various funds to suit investor needs, both as a long

term investment vehicle or as a very short term cash management vehicle.


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HISTORY OF THE INDIAN MUTUAL FUNDHISTORY OF THE INDIAN MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve Bank . The history of mutual funds in India

can be broadly divided into four distinct phases:


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FIRST PHASE 1964-87:Unit Trust of India (UTI) was established on 1963 by an Act

of Parliament. It was set up by the Reserve Bank of India and functioned under the

Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-

linked from the RBI and the Industrial Development Bank of India (IDBI) took over the


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regulatory and administrative control in place of RBI. At the end of 1988 UTI had Rs.6, 700

crores of assets under management.

SECOND PHASE 1987-1993 (PUBLIC SECTOR FUNDS): SBI Mutual Fund was

the first non- UTI Mutual Fund established in June 1987 followed by Punjab National Bank

Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of

Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had

set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had

assets under management ofRs 47000 crores.

THIRD PHASE 1993-2003 (PRIVATE SECTOR FUNDS): With the entry of private

sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian

investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual

Fund Regulations came into being, under which all mutual funds, except UTI were to be

registered and governed. The 1993 SEBI (Mutual Fund) Regulations were substituted by a

more comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund

houses went on increasing, with many foreign mutual funds setting up funds in India and also

the industry has witnessed several mergers and acquisitions. As at the end of January 2003,there were 33 mutual funds total assets ofRs. 1, 21,805 crores.

FOURTH PHASE SINCE FEBRUARY 2003:In February 2003, following the repeal

of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities.

One is the Specified Undertaking of the Unit Trust of India with assets under management of

Rs.29, 835 crores as at the end of January 2003.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. With thebifurcation of the UTI which had in March 2000 more than Rs.76, 000 crores of assets under

management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund Regulations, and with recent mergers taking place among different private sector funds,

the mutual fund industry has entered its current phase of consolidation and growth. As at the


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end of September, 2004, there were 29 funds, which manage assets ofRs.153108 crores

under 421 schemes.

CHARACTERISTICS OF A MUTUAL FUNDCHARACTERISTICS OF A MUTUAL FUND

The following are the characteristics of the mutual funds:-


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VARIETYVARIETY

There are 5 basic type of mutual funds namely equity, bond, hybrid, money market and

GILT. So investor has a wide variety of schemes to choose from according to its

convenience such as risk and return factor etc .Investor also gets a variety in time as well

for how much period he would like to invest if he is a short term investor he would invest

in money market funds or if he is a long term investor he would invest in other

diversified funds.

LIQUIDITYLIQUIDITY

Some mutual funds are required by law to redeem shares on a daily basis, fund shares are

very liquid investment. Most mutual funds also continually offer new shares to investors,

and many fund companies allows shareholders to transfer money or make exchanges

from one fud to another within the same fund family. Mutual funds process sales,

redemptions, and exchanges as a normal part of daily business activity.

ACCESSIBILITY AND AFFORDABILITYACCESSIBILITY AND AFFORDABILITY

Mutual fund shares are available through a variety of sources. Investors can purchase

fund shares either with the help of an investment professionals such as broker, financial

planner, bank representatives etc. Many Mutual funds can be purchased directly from

fund companies but in this case investor is required to do their own research to determine

which funds meet their need.

Mutual funds offer their many benefits and services at an affordable prices even a

small investor can purchase it and make huge profit.

ADVANTAGESADVANTAGES


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Every investment has advantages and disadvantages. But it's important to remember that

features that matter to one investor may not be important to you. Whether any particular feature

is an advantage for you will depend on your unique circumstances. For some investors, mutual

funds provide an attractive investment choice because they generally offer the following

benefits.

PROFESSIONAL MANAGEMENTPROFESSIONAL MANAGEMENT

Mutual Funds provide the services of experienced and skilled professionals,

backed by a dedicated investment research team that analyses the performance and

prospects of companies and selects suitable investments to achieve the objectives of the

scheme. This risk of default by any company that one has chosen to invest in, can be

minimized by investing in mutual funds as the fund managers analyze the companies

financials more minutely than an individual can do as they have the expertise to do so.

DIVERSIFICATIONDIVERSIFICATION


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Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks

decline at the same time and in the same proportion. You achieve this diversification

through a Mutual Fund with far less money than you can do on your own

LOWLOW COSTSCOSTS

Mutual Funds are a relatively less expensive way to invest compared to directly

investing in the capital markets because the benefits of scale in brokerage, custodial and

other fees translate into lower costs for investors.

TRANSPARENCYTRANSPARENCY

Investors get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion invested in

each class of assets and the fund manager's investment strategy and outlook.

FLEXIBILITYFLEXIBILITY

Through features such as regular investment plans, regular withdrawal plans and

dividend reinvestment plans; you can systematically invest or withdraw funds according

to your needs and convenience.

WELLWELL REGULATEDREGULATED


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All investments whether in shares, debentures or deposits involve risk: share

value may go down depending upon the performance of the company, the industry, state

of capital market and the economy; generally, however longer the term, lesser the risk;

companies may default in payment of interest/principal on their deposits/bonds

debentures; the rate of interest on investment may fall short of the rate of inflation

reducing the purchasing power.

While risk cannot be eliminated, skillful management can minimize risk. Mutual

fund helps to reduce risk through diversification and professional management. The

experience and expertise of Mutual Fund managers in selecting fundamentally sound

securities and timing their purchases and sales help them to build a diversified portfolio

that minimize risk and maximizes returns.

TAX BENEFITSTAX BENEFITS

Last but not the least, mutual funds offer significant tax advantages. Dividends

distributed by them are tax-free in the hands of the investor. They also give you the

advantages of capital gains taxation. If you hold units beyond one year, you get the

benefits of indexation. This reduces your tax liability. Whats more, tax-saving schemes

and pension schemes give you the added advantage of benefits under Section 88. You

can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the

scheme in a year.

BASIC CONCEPTS OF MUTUAL FUNDBASIC CONCEPTS OF MUTUAL FUND


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NAV (net asset value)

The Mutual Fund Net Asset Value or NAV is the total market value of all the assets,

including cash, held by the fund, after deducting its liabilities. The per unit NAV

represents the market value of one unit of the mutual fund. It is the price at which

investors can buy or redeem the mutual funds units.

NAV = Total value of the funds

liabilities

No. of shares currently issued and

outstanding

ENTRY/ EXIT LOADENTRY/ EXIT LOAD

A Load is a charge, which the mutual fund may collect on entry and/or exit from a

fund. A load is levied to cover the up-front cost incurred by the mutual fund forselling the fund. It also covers one time processing costs. Some funds do not charge any

entry or exit load. These funds are referred to as No Load Fund. Funds usually charge

an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.

For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is

Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is

Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units.The units are allotted

to an investor based on the amount invested.

Let us now assume that the same investor decides to redeem his 761.6146 units. Let us

also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption

price per unit works out to Rs. 14.925.


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The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

FUND OFFER DOCUMENT:FUND OFFER DOCUMENT:

A Fund Offer document is a document that offers you all the information you could

possibly need about a particular scheme and the fund launching that scheme. That way, before

you put in your money, you're well aware of the risks etc involved. This has to be designed in

accordance with the guidelines stipulated by SEBI.

The prospectus must disclose following details:-

Investment objectives.

Risk factors and special considerations.

Summary of expenses.

Constitution of the fund.

Guidelines on how to invest.

Organization and capital structure.

Tax provisions related to transactions.

Financial information.


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DIFFERENT TYPES OF FUNDS

Mutual funds come in many varieties. For example, there are index funds, stock funds,

bond funds, money market funds, and more. Each of these may have a different investment

objective and strategy and a different investment portfolio. Different mutual funds may also be

subject to different risks, volatility, and fees and expenses.

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. The diagram below gives an overview into

the existing types of schemes in the Industry:

ON THE BASIS OF FLEXIBILITYON THE BASIS OF FLEXIBILITY
http://www.sec.gov/answers/indexf.htmhttp://www.sec.gov/answers/mfstock.htmhttp://www.sec.gov/answers/bondfunds.htmhttp://www.sec.gov/answers/mfmmkt.htmhttp://www.sec.gov/answers/mffees.htmhttp://www.sec.gov/answers/indexf.htmhttp://www.sec.gov/answers/mfstock.htmhttp://www.sec.gov/answers/bondfunds.htmhttp://www.sec.gov/answers/mfmmkt.htmhttp://www.sec.gov/answers/mffees.htm


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1.11.1 OPEN-ENDED FUNDSOPEN-ENDED FUNDS

All mutual funds fall into one of two broad categories: open-end funds and closed-end

funds. Most mutual funds are open-end. The reason why these funds are called "open-end" is

because there is no limit to the number of new shares that they can issue. New and existing

shareholders may add as much money to the fund as they want and the fund will simply issue

new shares to them. Open-end funds also redeem, or buy back, shares from shareholders. In

order to determine the value of a share in an open-end fund at any time, a number called the Net

Asset Value is used. You purchase shares in open-end mutual funds from the mutual fund itself

or one of its agents; they are not traded on exchanges.


Open funds are much more flexible and provide instant liquidity as

funds sell shares daily. You will generally get a redemption (sell) request

processed promptly, and receive your proceeds by check in 3-4 days. Open

funds range in risk depending on their investment strategies and objectives,

but still provide flexibility and the benefit of diversified investments, allowing

your assets to be allocated among many different types of holdings.

Diversifying your investment is key because your assets are not impacted bythe fluctuation price of only one stock. If a stock in the fund drops in value, it

may not impact your total investment as another holding in the fund may be

up. But, if you have all of your assets in that one stock, and it takes a dive,

youre likely to feel amore considerable loss.

1.2CLOSE-ENDED FUNDSCLOSE-ENDED FUNDS

Closed-end funds behave more like stock than open-end funds; that is to say, closed-end

funds issue a fixed number of shares to the public in an initial public offering, after which time

shares in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end

funds are not obligated to issue new shares or redeem outstanding shares. The price of a share in

a closed-end fund is determined entirely by market demand, so shares can either trade below


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their net asset value ("at a discount") or above it ("at a premium"). Since you must take into

consideration not only the fund's net asset value but also the discount or premium at which the

fund is trading, closed-end funds are considered to be more suitable for experienced investors.

You can purchase shares in a closed-end fund through a broker, or agents.


The prospect of buying closed funds at a discount makes them appealing to experienced

investors. The discount is the difference between the market price of the closed-end fund and its

total net asset value. As the stocks in the fund increase in value, the discount usually decreases

and becomes a premium instead. Savvy investors search for closed-end funds with solid returns

that are trading at large discounts and then bet that the gap between the discount and the

underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy

the benefits of professional investment management and a diversified portfolio of high quality

stocks, with the ability to buy at a discount.

ON THE BASIS OF OBJECTIVEON THE BASIS OF OBJECTIVE

2.12.1EQUITY FUNDSEQUITY FUNDS

The aim of growth funds is to provide capital appreciation over the medium to

long- term. Such schemes normally invest a major part of their corpus in equities. Such

funds have comparatively high risks. These schemes provide different options to the

investors like dividend option, capital appreciation, etc. and the investors may choose an


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option depending on their preferences. The investors must indicate the option in the

application form. The mutual funds also allow the investors to change the options at a

later date. Growth schemes are good for investors having a long-term outlook seeking

appreciation over a period of time.

As explained earlier, such funds invest only in stocks, the riskiest of asset classes.

With share prices fluctuating daily, such funds show volatile performance, even losses.

However, these funds can yield great capital appreciation as, historically, equities have

outperformed all asset classes. At present, there are four types of equity funds available in

the market. In the increasing order of risk, these are:

2.1.12.1.1 INDEX FUNDSINDEX FUNDS

These funds track a key stock market index, like the BSE (Bombay Stock

Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their

portfolio mirrors the index they track, both in terms of composition and the individual

stock weightages. For instance, an index fund that tracks the Sensex will invest only in

the Sensex stocks. The idea is to replicate the performance of the benchmarked index to

near accuracy.

Investing through index funds is a passive investment strategy, as a funds

performance will invariably mimic the index concerned, barring a minor "tracking error".

Usually, theres a difference between the total returns given by a stock index and those

given by index funds benchmarked to it. Termed as tracking error, it arises because the

index fund charges management fees, marketing expenses and transaction costs (impact

cost and brokerage) to its unit holders. So, if the Sensex appreciates 10 per cent during a

particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is

said to have a tracking error of 1 per cent.

2.1.22.1.2 DIVERSIFIED FUNDSDIVERSIFIED FUNDS


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Such funds have the mandate to invest in the entire universe of stocks. Although

by definition, such funds are meant to have a diversified portfolio (spread across

industries and companies),the stock selection is entirely the prerogative of the fund

manager.

This discretionary power in the hands of the fund manager can work both ways

for an equity fund. On the one hand, astute stock-picking by a fund manager can enable

the fund to deliver market-beating returns; on the other hand, if the fund managers picks

languish, the returns will be far lower.

The crux of the matter is that your returns from a diversified fund depend a lot on

the fund managers capabilities to make the right investment decisions. On your part,

watch out for the extent of diversification prescribed and practiced by your fund manager.

Understand that a portfolio concentrated in a few sectors or companies is a high risk, high

return proposition. If you dont want to take on a high degree of risk, stick to funds that

are diversified not just in name but also in appearance.

2.1.32.1.3 TAX-SAVING FUNDSTAX-SAVING FUNDS

Also known as ELSS or equity-linked savings schemes, these funds offer benefits

under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year

in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You

can invest more than Rs 10,000, but you wont get the Section 88 benefits for the amount

in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the

scheme for three years.

In terms of investment profile, tax-saving funds are like diversified funds. The

one difference is that because of the three year lock-in clause, tax-saving funds get more

time to reap the benefits from their stock picks, unlike plain diversified funds, whose

portfolios sometimes tend to get dictated by redemption compulsions.


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2.1.42.1.4 SECTOR FUNDSSECTOR FUNDS

The riskiest among equity funds, sector funds invest only in stocks of a specific

industry, say IT or FMCG. A sector funds NAV will zoom if the sector performs well;

however, if the sector languishes, the schemes NAV too will stay depressed.

Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries

alternate between periods of strong growth and bouts of slowdowns. The way to make

money from sector funds is to catch these cyclesget in when the sector is poised for an

upswing and exit before it slips back. Therefore, unless you understand a sector well

enough to make such calls, and get them right, avoid sector funds.

2.22.2DEBT FUNDSDEBT FUNDS

Debt funds are funds which invest money in debt instruments such as short and

long term bonds, government securities, t-bills, corporate paper, commercial paper, call

money etc. The fees in debt funds are lower, on average, than equity funds because the

overall management costs are lower. The main investing objectives of a debt fund is

usually preservation of CapitaLand generation of income. Performance against a

benchmark is considered to be a secondary consideration. Investments in the equity

markets are considered to be fraught with uncertainties and volatility. These factors may

have an impact on constant flow of returns. This is why debt schemes, which are

considered to be safer and less volatile, have attracted investors.

Debt markets in India are wholesale in nature and hence retail investors generally

find it difficult to directly participate in the debt markets. Not many understand the

relationship between interest rates and bond prices or difference between Coupon and

Yield. Therefore venturing into debt market investments is not common among investors.


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Investors can however participate in the debt markets through debt mutual funds. One

must understand the salient features of a debt paper to understand the debt market. Debt

paper is issued by Government, corporate and financial institutions to meet funding

requirements. A debt paper is essentially a contract which says that the borrower is taking

some money on loan and after sometime the lender will get the money back as well as

some interest on the money lent.

THE RISK IN DEBT FUNDSTHE RISK IN DEBT FUNDS

Although debt funds invest in fixed-income

instruments, it doesnt follow that they are risk-free.

Sure, debt funds are insulated from the vagaries of

the stock market, and so dont show the same degree

of volatility in their performance as equity funds.

Still, they face some inherent risk, namely credit risk,

interest rate risk and liquidity risk.

INTEREST RATE RISKINTEREST RATE RISK

This is common reason why the NAVs of

debt funds dont show a steady, consistent rise.

Interest rate risk arises as a result of the inverse

relationship between interest rates and prices of debt securities. Prices of debt securities react to

changes in investor perceptions on interest rates in the economy and on the prevalent demand

and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign

themselves with the new market yield. This, in turn, brings down the NAV of a debt fund. On the

other hand, if interest rates fall, existing debt securities become more precious, and rise in value,

in line with the new market yield. This pushes up the NAVs of debt funds.


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CREDIT RISK:CREDIT RISK:

This throws light on the quality of debt instruments a fund holds. In the case of debt

instruments, safety of principal and timely payment of interest is paramount. There is a credit

risk attached with debt securities issued by companies. The ability of a company to meet its

obligations on the debt securities issued by it is determined by the credit rating given to its debt

paper. The higher the credit rating of the instrument, the lower is the chance of the issuer

defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also

normally much more liquid than lower-rated paper. For income funds, however, credit risk is

real, as they invest primarily in corporate paper.

33 PREPAYMENT RISK:PREPAYMENT RISK:

This risk increases as interest rates decline, increasing the likelihood that the bond issuer

will call the bond early to issue new bonds at the lower prevailing interest rate. Although,

like interest rate risk, the risk is minor, it will lessen a funds future income, unless the

company is willing to buy bonds with a higher credit risk

2.32.3 MONEY MARKET FUNDSMONEY MARKET FUNDS

These funds are also known as liquid funds and their aim is to provide easy

liquidity, preservation of capital and moderate income. These schemes invest exclusively

in safer short-term instruments such as treasury bills, certificates of deposit, commercial

paper and inter-bank call money, government securities, etc. Returns on these schemes

fluctuate much less compared to other funds. These funds are appropriate for corporate

and individual investors as a means to park their surplus funds for short periods.

By far the biggest contributor to the Mutual Fund industry, Liquid Funds attract a

lot of institutional and High Networth Individuals (HNI) money. It accounts for


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approximately 40% of industry AUM. Less risky and better returns than a bank current

account are the two plus points of Liquid Funds.

Money Market instruments have maturities not exceeding 1 year. Hence Liquid

Funds have portfolios having average maturities of less than or equal to 1 year. Thus such

schemes normally do not carry any interest rate risk. Liquid Funds do not carry Entry/

Exit Loads. Other recurring expenses associated with Liquid Schemes are also kept to a

bare minimum.

The period of investment could be as short as a day in these funds. They have

emerged as an alternative for savings and short term fixed deposit accounts with

comparatively higher returns. These funds are ideal for corporate, institutional investors

and business houses that invest their funds for very short periods

2.42.4 GILT FUNDSGILT FUNDS

Gilt funds are mutual funds that predominantly invest in Central and State

Government securities Unlike conventional debt funds that invest in debt instruments

across the board, gilt funds target just a given category of debt instruments i.e. G-

Securities. Being sovereign paper, they do not expose investors to credit risk. Since the

market for G-Securities (as is the case with most debt instruments) is largely dominated

by institutional investors, Gilt funds offer retail investors a convenient means to invest in

G-Securities. Depending on their investment horizon, investors can choose between

short-term and long-term gilt funds.

The repayment of principal and periodic payment of interest is assured by the

government in these funds. So, unlike income funds, they dont face the problem of

default on their investments. This element of safety is why, in normal market conditions,

gilt funds tend to give marginally lower returns than income funds.


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2.5 BALANCED FUNDS /HYBRID FUNDSBALANCED FUNDS /HYBRID FUNDS

The aim of balanced funds is to provide both

growth and regular income as such schemes invest

both in equities and fixed income securities in the

proportion indicated in their offer documents. These

are appropriate for investors looking for moderate

growth. They generally invest 40-60% in equity and

debt instruments. These funds are also affected

because of fluctuations in share prices in the stock

markets. However, NAVs of such funds are likely

to be less volatile compared to pure equity funds.

As the name suggests, balanced funds have an

exposure to both equity and debt instruments.

They invest in a pre-determined proportion in equity and debtnormally 60:40 in

favour of equity. On the risk ladder, they fall somewhere between equity and debt funds,

depending on the funds debt-equity spiltthe higher the equity holding, the higher the

risk. Therefore, they are a good option for investors who would like greater returns than

from pure debt, and are willing to take on a little more risk in the process.


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RISK V/S RETURN


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The above diagram represents the relation between the risk and the return. If a person

chooses a fund that has got low risk it will generate low returns. The percentage of risk

goes on increasing if the person opts for higher returns.


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MUTUAL FUNDS V/S OTHER INVESTMENTSMUTUAL FUNDS V/S OTHER INVESTMENTS

METHODS OF INVESTING IN MUTUAL FUNDMETHODS OF INVESTING IN MUTUAL FUND

PRODUCT RETURN SAFETY LIQUIDITY TAX

BENEFIT

CONVENIENCE

Bank Deposit Low High High No High

Equity Instruments High Low High No Moderate

Debentures Moderate Moderate Low No Low

Fixed Deposits by

Companies

Moderate Low Low No Moderate

Bonds Moderate Moderate Moderate Yes Moderate

RBI Relief Bonds Moderate High Low Yes Moderate

PPF Moderate High Low Yes Moderate

National Saving

Certificate

Moderate High Low Yes Moderate

National Saving

Scheme


Monthly Income

Scheme


Life Insurance Moderate High Low Yes Moderate

Mutual Funds Moderate Moderate High No High


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1.1. ONE TIME PAYMENTONE TIME PAYMENT

In onetime payment, the investor needs to invest a fixed amount to buy a particularnumber of units. For example, at the time of the initial public issue the shares may

be of value Rs.10 per unit. So if the investor decides to invest Rs.20000/- to that

fund, he can buy 2000 units of that particular fund.

2.2. SYSTEMATIC INVESTMENT PLANSYSTEMATIC INVESTMENT PLAN

An SIP is a vehicle offered by mutual funds to help you save regularly. It is just like arecurring deposit with the post office or bank where you put in a small amount every

month. The difference here is that the amount is invested in a mutual fund. The minimum

amount to be invested can be as small as Rs 500 and the frequency of investment is

usually monthly or quarterly.

The Systematic Investment Plan (SIP)

is a simple and time honored

investment strategy for accumulation

of wealth in a disciplined manner over

long term period. The plan aims at a

better future for its investors as an SIP

investor gets good rate of returns

compared to a one time investor.

SIP ensures averaging of rupee cost as

consistent investment ensures that

average cost per unit fits in the lower

range of average market price. An

investor can either give post dated


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cheques or ECS instruction and the investment will be made regularly in the mutual fund

desired for the required amount.

Lets take an example of "Ajay" who invests 1,000 per month through SIP starting Jan 2, 2007.

How SIP helps in this case? See the result below:

ADVANTAGES OF SYSTEMATIC INVESTMENT PLANADVANTAGES OF SYSTEMATIC INVESTMENT PLAN

POWER OF COMPOUNDINGPOWER OF COMPOUNDING

The power of compounding underlines the essence of making money work if only

invested at an early age. The longer one delays in investing, the greater the financial

burden to meet desired goals. Saving a small sum of money regularly at an early age

makes money work with greater power of compounding with significant impact on

wealth accumulation.

RUPEE COST AVERAGINGRUPEE COST AVERAGING

Timing the market consistency is a difficult task. Rupee cost averaging is an

automatic market timing mechanism that eliminates the need to time one's investments.


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Here one need not worry about where share prices or interest are headed as investment of a

regular sum is done at regular intervals; with fewer units being bought in a declining

market and more units in a rising market. Although SIP does not guarantee profit, it can go a

long way in minimizing the effects of investing in volatile markets.

CONVENIENCECONVENIENCE

SIP can be operated by simply providing post dated cheques with the completed

enrolment form or give ECS instructions. The cheques can be banked on the specified dates and

the units credited into the investor's account. The SIP facility is available in the Principal

Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, GrowthFund, Equity fund and Tax Savings Fund.

Disciplined investing is vital to earning good returns over a longer time frame. Investors

are saved the bother of identifying the ideal entry and exit points from volatile markets. SIP

options such as equity, debt and balanced schemes offer a range of investment plans. While

there is no entry load on SIP, investors face an exit load if the units are redeemed within a

stipulated time frame. The success of your SIP hinges on the performance of your selected

scheme.

3.3. SYSTEMATIC TRANSFER PLANSYSTEMATIC TRANSFER PLAN

There is another method available to investors called STP i.e. systematic transfer plan.

Using this facility the investor can transfer a fixed amount from one type of fund into another

type of fund of the same fund house. For example, an investor can transfer a fixed amount

periodically from a debt fund into an equity fund or vice a versa. This is a very useful strategyfrom the investors overall financial planning perspective.

When an investor is having a big amount forinvestment, but in a situation when the

stock market is in doldrums and it is a very risky to invest lump sum amount into equity

funds, he should not invest a lump sum amount in equity mutual funds. In this scenario, the
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investor can invest the lump sum amount into a debt fund and then systematically he can

transfer a fixed amount periodically into an equity fund. There might be another situation,

where an investor has accumulated a large corpus in an equitymutual fund, but he wants to

gradually cut down his equity exposure. In this case he can transfer a fixed amount periodically

into a debt fund from the equity fund.

While following this strategy the investor should note that when he is transferring

the fixed amount into another fund, actually he is withdrawing from one fund and investing

into another fund. So while withdrawing from one fund he has to pay the exit load if applicable

and he has to pay the entry load while investing into the other fund. So he should take into

consideration this cost structure before using this STP facility.

4. SYSTEMATIC WITHDRAWL PLANSYSTEMATIC WITHDRAWL PLAN

We have learned about the Systematic Investment Plan, there is another facility

called SWP, i.e. Systematic Withdrawal Plan. This facility is similar to that of SIP. But

in this case the investor can withdraw his investment systematically. Suppose an investor

has accumulated a good corpus and if he needs money periodically then by using SWP

he can withdraw a fixed amount. The investor can either withdraw a fixed amount or

redeem fixed number of units from the fund.If the investor has accumulated a sizeable

amount and want to withdraw a fixed amount for a particular expenses/event, then in this

case he can use the SWP facility and withdraw a fixed amount every month, quarter, year

etc. the advantage of this facility is that the investor withdraws only the required amountperiodically, so the balance amount remains invested in the fund. This balance amount

fetches return and so the corpus goes on increasing to some extent even after withdrawal

from the fund.
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FOR EXAMPLEFOR EXAMPLE

An investor aged 60 years has invested Rs. 20 lakhs and he wants to use

this money over a 20 year period, he can withdrawRs. 20, 00,000/ 20 = Rs. 1, 00,000 per annum.Rs. 20, 00,000/ 20 = Rs. 1, 00,000 per annum.

This translates into Rs. 8,333 per month. The investor will also get return on

his investment of Rs. 20 lakh, depending on where the money has been invested by

the mutual fund. In this example we have not considered the effect of compounding. If

that is considered, then he will be able to either draw some more money every month, or

he can get the same amount of Rs. 8,333 per month for a longer period of time.

CHOOSING BETWEEN:-CHOOSING BETWEEN:-

1. DIVIDEND PAYOUT

2. DIVIDEND REINVESTMENT

3. GROWTH OPTIONS

WHICH ONE IS BETTER FOR THE INVESTOR???WHICH ONE IS BETTER FOR THE INVESTOR???

Investors often get confused between the above mentioned (Dividend Payout,

Dividend Reinvestment and Growth Options) three options which he has to choose while

investing in mutual funds units. These options have to be selected by the investor at the time of

purchasing the units and many a times investors feel that the dividend reinvestment option is

better than growth as they get more number of units. Lets understand the three options:


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GROWTH OPTIONGROWTH OPTION

Growth option is for those investors who are looking for capital appreciation. Say an

investor aged 25 invests Rs 1 lakh in an equity scheme. He would not be requiring a regularincome from his investment as his salary can be used for meeting his monthly

expenses. He would instead want his money to grow and this can happen only if he remains

invested for a long period of time. Such an investor should go for Growth option. The

NAV will fluctuate as the market moves. So if the scheme delivers a return of 12% after 1

year, his money would have grown by Rs. 12,000. Assuming that he had invested at a

NAV of Rs. 100, then after 1 year the NAV would have grown to Rs 112.

Notice here that neither is any money coming out of the scheme, nor the investor is

getting more units. His units will remain at 1,000 (1, 00,000/ 100) which he bought

when he invested Rs. 1 lakh @ Rs. 100/ unit.

DIVIDEND PAYOUT OPTIONDIVIDEND PAYOUT OPTION

In case an investor chooses a Dividend Payout option, then after 1 year he would ReceiveRs. 12 as dividend. This results in a cash outflow from the scheme. The impact of this

would be that the NAV would fall by Rs. 12 (to Rs.100 after a year. In the growth option the

NAV became Rs. 112) . Here he will not get any more number of units (they remain at

1,000), but will receive Rs 12,000 as dividend (Rs. 12 per unit * 1,000 units). Dividend

Payout will not give him the benefit of compounding as Rs. 12,000 would be taken out of

the scheme and will not continue to grow like money That is still invested in the scheme.

DIVIDEND REINVESTMENT OPTIONDIVIDEND REINVESTMENT OPTION

In case of Dividend Reinvestment option, the investor chooses to reinvest the Dividend in

the scheme. So the Rs. 12, which he receives as dividend gets invested into the scheme

again @ Rs. 100. This is because after payment of dividend, the NAV would fall to Rs. 100.


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Thus the investor gets Rs. 12,000/ Rs. 100 = 120 additional units. Notice here that although the

investor has got 120 units more, the NAV has come down to Rs. 100.

Hence the return in case of all the three options would be same. For Growth Option, the

investor will have 100 units @ 112, which equals to Rs. 1,12,000while for Dividend

Reinvested Option the investor will have 1120 units @ Rs.100 which again amounts to Rs.

1,12,000.

Thus it can be seen that there is no difference in either Growth or Dividend Reinvestment

Plan. It must be noted that for equity schemes there is no Dividend Distribution Tax, however for

debt schemes, investor will not get Rs. 12 as dividend, but slightly less due to Dividend

Distribution Tax. In case of Dividend Reinvestment Option, he will get slightly lesser number of

units and not exactly 120 due to Dividend Distribution Tax. In case of Dividend Payout option

the investor will lose out on the power of compounding from the second year onwards.

ORGANISATION OF A MUTUAL FUNDORGANISATION OF A MUTUAL FUND

Mutual funds in India are governed by SEBI (Mutual Fund) Regulations, 1996, as

amended till date. The regulations permit mutual funds to invest in securities including moneymarket instruments, or gold or gold related instruments or real estate assets. Mutual funds are

constituted as Trusts.

The mutual fund trust is created by one or more Sponsors, who are the main persons

behind the mutual fund operation. Every trust has beneficiaries. The beneficiaries, in the case of

a mutual fund trust, are the investors who invest in various schemes of the mutual fund. In order

to perform the trusteeship role, either individuals may be appointed as trustees or a Trustee

company may be appointed. When individuals are appointed trustees, they are jointly referred to

as Board of Trustees. A trustee company functions through its Board of Directors.

Day to day management of the schemes is handled by an AMC. The AMC is appointed

by the sponsor or the Trustees. Although the AMC manages the schemes, custody of the assets of

the scheme (securities, gold, gold-related instruments & real estate assets) is with a Custodian,
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who is appointed by the Trustees. Investors invest in various schemes of the mutual fund. The

record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint

a Registrar & Transfer Agent (RTA). The sponsor needs to have a minimum 40% share holding

in the capital of the AMC. The sponsor has to appoint at least 4 trustees at least two-thirds of

them need to be independent. Prior approval of SEBI needs to be taken, before a person is

appointed as Trustee.

AMC should have net worth of at least Rs10crore. At least 50% of the directors should be

independent directors. Prior approval of the trustees is required, before a person is appointed as

director on the board of the AMC.

The mutual fund is formed as trust in India, and not as a company.

In the US mutual funds are formed as investment companies.

Investors money is held in the Trust (the mutual fund).

Mutual funds in India have a 3-tier structure of Sponsor-Trustee-AMC.
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SPONSOR

Sponsor is the person who acting alone or in combination with another body corporate

establishes a mutual fund.

The Sponsor is not responsible or liable for any loss or shortfall resulting from the

operation of the Schemes beyond the initial contribution made by it towards setting up of

the Mutual Fund

Sponsor is the promoter of the fund.

Sponsor could be a bank, a corporate or a financial institution.

Sponsors then form Trust and appoint Board of Trustees.


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The sponsor also appoints Custodian.

As per SEBI regulations, sponsor must contribute at least 40% of the net worth of the

AMC and possess a sound financial track record over five years prior to registration.

Sponsor signs the trust deed with the trustees.

Sponsor creates the AMC and the trustee company and appoints the board of directors of

companies, with SEBI approval.

Sponsor should have at least a 5 year track record in the financial services business and

should have made profit in at least 3 out of the 5 years.

The AMCs capital is contributed by the sponsor.

Sponsor should contribute at least 40% of the capital of the AMC.

TRUSTEE

A mutual fund in India is form as Trust under Indian Trust Act, 1882.

The trust-mf is managed by Board of Trustees.

The board of Directors i.e. Trustees do not manage the portfolio of securities directly

rather they appoint as AMC (Asset Management Company)

The main responsibility of the Trustee is to safeguard the interest of the unit holders and

ensure that the AMC functions in the interest of investors and in accordance with the

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

Trustees ensure that fund is managed by stated objective and as per SEBI regulations.

Trusts always work for the interest of unit holders. The trust is created through a document called Trust Deed that is executed by sponsor in

favors of Trustees.

The Trustees being the primary guardians of unit holders funds and assets.

Trustees must ensure that the investors interests are safeguarded and that the AMC

operations are as per regulation laid down by SEBI.


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SEBI mandates a minimum of 2/3rd independent directors on the board of the trustee

company.

Trustees are appointed by the sponsor with SEBI approval.

Trustees are required to meet at least 4 times a yea to review the AMC.

The trustees make sure that the funds are managed according to the investors mandate.

RIGHTS OF TRUSTEES:-

The trustee appoints AMC with prior approval of SEBI.

They also approve each new scheme floated by AMC.

They have the right to request any necessary information from the AMC concerning the

operations of various schemes.

The trustees may take any necessary action against AMC if they found AMC operations

are not as per the SEBI regulations.

Manages the mutual fund and look after the operations of the appointed AMC.

Trustees approve each MF scheme floated by AMC

Trustees receive fee for their services.

The investments are held by the Trustee

Trustees can seek remedial actions from AMC

Trustees can dismiss the AMC

The trustees have the right to ensure that, based on their quarterly review of AMCs net

worth; any shortfall in the net worth is made by the AMC.

OBLIGATIONS OF TRUSTEES:-

To ensure that funds transactions as per SEBI regulations

To ensure that the proper key person of AMC has been appointed. And also operations of

other staffs of AMC.

To ensure that the due diligence (care) has been given for empanelment of brokers.

Trustees Manages the Mutual Fund and look after the operations of the appointed AMC

The investments are held by the Trustee

At least 4 members should be there in Board of Trustees.


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2/3 members in the Board of Trustees should be independent.

Sponsors execute and register Trust Deed in favors of Trustees.

Trustee of one MF cannot be a trustee of another MF, unless he/she is an independent

trustee in both the cases.

The appointment of all trustees has to be done with prior approval of SEBI.

Trusts are formed through Trust Deed

Trust ensures that AMC has not given any undue advantage to any associates.

Trustee ensures that AMC is managing the fund as per SEBI regulations

Meeting of Trustees should held once in every two months.

SEBI CATEGORIZES THE OBLIGATIONS OF TRUSTEES AS

1. General Due Diligence

Appointment of AMC & its directors

Observance of AMC functioning and desirability of its continuance

Protection of Trust property

Ensuring that all constituents and associations are registered

entities

Review of service contracts and terms

Reporting to SEBI any special developments in the mutual fund

2. Specific Due Diligence

Trust must appoint independent auditor and obtain from them

periodic internal audit reports from AMC

Obtain compliance test reports from the AMC once every two

months.

These reports are to be discussing in meeting of trustees.

Trustees set a code of ethics for trustees and for AMC personnel

ASSET MANAGEMENT COMPANY (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund.


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At least 50% of the directors of the AMC are independent directors who are not

associated with the Sponsor in any manner.

The AMC must have a net worth of at least 10 crores at all times.

The AMC supervision under its own board of directors and also the directors of trustees

and SEBI

The trustees are empowered to terminate the appointment of AMC and appoint a new

AMC with prior approval of SEBI and unit holders.

The AMC is the name of the Trust; manage different investment schemes as

perinvestment managementagreement with the trustees.

The AMC of a MF must have a net worth of at least Rs.10 Crores at all times.

Director of AMC should have complete finance professional experience.

The AMC can not act as a trustee of any other MF.

The AMC always act in the interest of unit holders (investor)

The AMC gets a fee for managing the funds, according to the mandate of the investors

At least of the AMCs Board should be of independent members

An AMC can not engage in any business other than portfolio advisory and management

An AMC of one fund cannot be Trustee of another fund

AMC should be registered with SEBI

AMC signs an investment management agreement with the trustees

OBLIGATION OF AMC & ITS DIRECTORS

Investment of the fund according to the SEBI regulation & trust deed.

They are answerable to the trustees and must submit quarterly reports to them on AMC

activities and compliance with SEBI regulations
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Each day NAV is updated on AMFI website by 9 pm

In the event ofmergeror consolidation of schemes, the unit holders are intimated through

a letter giving them option to exit at prevailing NAV without exit load.

CUSTODIANS

For safekeeping of physical securities of MF custodian is appointed by board of trustees.

The custodian should be registered with SEBI.

The investors fund and the investments are held by the custodian, who is the guardian of

the funds and assets of the investors.

Sponsor and the Custodian cannot be the same entity

FUNCTION OF CUSTODIAN

Responsible for the securities held in the mutual funds portfolio

Keep an investment record of the mutual fund

Collect dividends and investment payments due on the mutual funds investment

Track corporate actions like bonus issues, right offers, offer for sale, buy back and open

offers for acquisition.

DEPOSITORIES

Indian capital markets are moving away from physical certificates for securities to

dematerialized form with a Depository.

Will hold the dematerialized security holdings of the Mutual Fund.

REGISTRARS & TRANSFER AGENTS

The AMC if so authorised by the Trust Deed appoints the Registrar and Transfer Agent to the

Mutual Fund.


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Receive dividend within 30 days of their declaration and receive the redemption orrepurchase proceeds within 10 days from the date of redemption or repurchase.

The trustees shall be bound to make such disclosures to the unit holders as are essential inorder to keep them informed about any information, which may have an adverse bearing

on their investments

75% of the unit holders with the prior approval of SEBI can terminate the AMC of thefund.

75% of the unit holders can pass a resolution to wind-up the scheme.

An investor can send complaints to SEBI, who will take up the matter with the concernedMutual Funds and follow up with them till they are resolved.

DISTRIBUTION CHANNELS

Mutual Funds are primary vehicles for large collective investments, working on the

principle of pooling funds.A substantial portion of the investments happen at the retail

level.Agents and distributors are a vital link between the mutual funds and investors.

AGENTS

- Is a broker between the fund and the investor and acts on behalf of the principal.

- He is not exclusive to the fund and also sells other financial services. This in a way helps

him to act as a financial advisor.

DISTRIBUTION COMPANIES


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mutual fund final 100

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