MUTUAL FUNDS

GETTING STARTED

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

STOCKS

Stocks represent shares of ownership in a public company. Examples of public

companies include IBM, Microsoft, Ford, Reliance and Infosys. Stocks are the most
common ownership investment traded on the market.

Stocks or equity securities represent ownership shares in a company and the right to share
in both its profits (stock dividends) and its growth (rising share price). For both of these
reasons, stocks have become an "investment of choice," particularly for millions of
investors looking for capital appreciation.

While the stock market is known for its ups and downs, and individual stocks can rise or
plummet overnight, as a whole, stocks have delivered a larger return on investment over
the long run than any of the alternatives.

BONDS

Bonds are basically a chance for you to lend your money to the government or a
company. You can receive interest and your principle back over predetermined amounts
of time. Bonds are the most common lending investment traded on the market.

Fixed-income securities or notes, bills and bonds – allow you to lend your money to a
company or government entity for a year or more, in return for interest payments. When
the bond matures at the end of the designated period (up to 30 years), the borrower
returns your original investment, or principal, to you.

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

MONEY MARKETS

Closely related to the bond market are very short-term fixed-income instruments known
as money market instruments. Treasury bills, commercial paper and certificates of
deposit are among the dozens of fixed-income investments that mature in one year or less
and comprise this large marketplace. While bonds are used primarily to generate income,
money market instruments are used more like savings accounts: to preserve your
principal while generating a more modest level of income.

There are many other types of investments other than stocks and bonds (including
annuities, real estate, precious metals and art work), but the majority of Mutual Funds
invest in stocks and/or bonds.
INTRODUCTION TO MUTUAL FUNDS :-

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

It can also be explained as A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. The money thus collected is then invested
in capital market instruments such as shares, debentures and other securities. The income
earned through these investments and the capital appreciation realised are shared by its
unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is
the most suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow
chart below describes broadly the working of a mutual fund:-

A dictionary definition of a mutual fund might go something like this: a single portfolio
of stocks, bonds, and/or cash managed by an investment company on behalf of many
investors.
The investment company is responsible for the management of the fund, and it sells
shares in the fund to individual investors. When you invest in a mutual fund, you become
a part owner of a large investment portfolio, along with all the other shareholders of the
fund. When you purchase shares, the fund manager invests your funds, along with the
money contributed by the other shareholders.

Every day, the fund manager counts up the value of all the fund's holdings, figures out
how many shares have been purchased by shareholders, and then calculates the Net Asset
Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If
you want to buy shares, you just send the manager your money, and they will issue new
shares for you at the most recent price. This routine is repeated every day on a never-
ending basis, which is why mutual funds are sometimes known as "open-end funds."

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

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

CALCULATION OF NAV

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

The most important part of the calculation is the valuation of the assets owned by the
fund. Once it is calculated, the NAV is simply the net value of assets divided by the
number of units outstanding. The detailed methodology for the calculation of the asset
value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

Expenses accrued but not paid

Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing market
price on the principal exchange where the security is traded

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be
estimated. For shares, this could be the book value per share or an estimated market price
if suitable benchmarks are available. For debentures and bonds, value is estimated on the
basis of yields of comparable liquid securities after adjusting for illiquidity. The value of
fixed interest bearing securities moves in a direction opposite to interest rate changes
Valuation of debentures and bonds is a big problem since most of them are unlisted and
thinly traded. This gives considerable leeway to the AMCs on valuation and some of the
AMCs are believed to take advantage of this and adopt flexible valuation policies
depending on the situation.

Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with
every passing day, interest is said to be accrued, at the daily interest rate, which is
calculated by dividing the periodic interest payment with the number of days in each
period. Thus, accrued interest on a particular day is equal to the daily interest rate
multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become
due on the record date. There is a gap between the dates on which it becomes due and the
actual payment date. In the intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily
basis.

Types of mutual funds

MUTUAL FUNDS

EXCHANGE TRADED
OPEN ENDED CLOSED ENDED

1. Open-end fund
The term mutual fund is the common name for an open-end investment company. Being
open-ended means that, at the end of every day, the fund issues new shares to investors
and buys back shares from investors wishing to leave the fund.
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.
Other funds have a limited number of shares; these are either closed-end funds or unit
investment trusts, neither of which is mutual fund.

The sponsor has promised in the documents of the fund that it will issue and refund or
units of the fund at the fund unit value. This type of fund is valued by the fund company
or an outside valuation agent. This means that the investments of the fund are valued at
"fair market" value, which is the closing market value for listed public securities.
Essentially, the fund company prices all of the fund's holdings at the market close and
adds up their value; it then subtracts amounts owing and adds amounts to be received by
the fund; and finally it divides this net amount by the number of units outstanding to
"strike" the unit value for that day. Any participants withdrawing funds from the fund
that day receive this unit value for their funds withdrawn. Any new purchases are made at
the same unit value.

Open mutual funds keep some portion of their assets in short-term and money market
securities to provide available funds for redemptions. A large portion of most open
mutual funds is invested in highly "liquid securities", which means that the fund can raise
money by selling securities at prices very close to those used for valuations. Funds also
have the ability to borrow money for short periods of time to fund redemptions. The
documents of open mutual funds usually provide for the suspension of unit redemptions
in "extraordinary conditions" such as major interruptions to the financial markets or total
demands for redemptions forming a substantial portion of the fund assets in a short period
of time. These clauses were invoked in October, 1987, when the stock market crashed
30% in a few days and the volume of stock transactions caused trading activity to be
hours out date.

Illiquid investments, those not actively traded on the public markets, are restricted by
government regulators because they are difficult to dispose of in a short period of time. A
fund holding an illiquid investment might not be able to sell it in a short period of time or
would have to take a significant discount to the valuation level the fund was using. In
Canada, most open real estate mutual funds suspended redemptions during the real estate
debacle of the early 1990s. Fund participants did not obtain redeemed funds until these
funds were restructured into closed-end funds in the mid 1990s and they could sell their
units on the stock market.

The valuation of investments that are less liquid and trade infrequently is an important
issue for mutual funds.

2. Closed ended funds

Closed mutual funds are really financial securities that are traded on the stock market. A
sponsor, a mutual fund company or investment dealer, will create a "trust fund" that
raises funds through an underwriting to be invested in a specific fashion. The fund retains
an investment manager to manage the fund assets in the manner specified. A good
example of this type of fund is the "country funds" that were underwritten during the
international investment euphoria of the early 1990s. An investment dealer would decide
that a "Germany" or "Portugal" or "Emerging Country" fund would sell given the popular
consensus that these were "no lose" investments. It would then retain a well respected
investment advisor to manage the fund assets for a fee and underwrite a public issue that
it would sell through retail stock brokers to individual investors. It is interesting to note
that many of these funds were caught in the sell-off of the stock market of 1994 and have
languished ever since. This has led to the phrase "submerging country" replacing
"emerging market" for many of these funds. This is wry proof of the fickleness of
investor fashion!

Once underwritten, closed mutual funds trade on stock exchanges like stocks or bonds.
Their value is what investors will pay for them. Usually closed mutual funds trade at
discounts to their underlying asset value. For example, if the price of the fund assets less
liabilities divided by the outstanding units is $10, the fund might trade on the stock
market at $9. This fund would be said to be trading at a "10% discount to its net asset
value". The reason for this discount is debated by academics, but is due in large part to
the lack of liquidity of the fund units and the presence of the management fee.

3. Exchange-traded funds
A relatively new innovation, the exchange traded fund (ETF), is often formulated as an
open-end investment company. ETFs combine characteristics of both mutual funds and
closed-end funds. An ETF usually tracks a stock index. Shares are issued or redeemed by
institutional investors in large blocks (typically of 50,000). Investors typically purchase
shares in small quantities through brokers at a small premium or discount to the net asset
value; this is how the institutional investor makes its profit. Because the institutional
investors handle the majority of trades, ETFs are more efficient than traditional mutual
funds (which are continuously issuing new securities and redeeming old ones, keeping
detailed records of such issuance and redemption transactions, and, to effect such
transactions, continually buying and selling securities and maintaining liquidity position)
and therefore tend to have lower expenses. ETFs are traded throughout the day on a, just
like closed-end funds.
Exchange traded funds are also valuable for foreign investors who are often able to buy
and sell securities traded on a stock market, but who, for regulatory reasons, are unable to
participate in traditional US mutual funds.

CLASSIFICATION OF MUTUAL FUNDS

 Mutual Funds are broadly classified into three categories viz. Equity Funds, Debt Funds
and Balanced Funds.

EQUITY FUNDS

These funds invest a major part of their corpus in equities. The composition of the fund
may vary from scheme to scheme and the fund manager’s outlook on various scrips.
Funds that invest in stocks represent the largest category of mutual funds. Generally, the
investment objective of this class of funds is long-term capital growth with some income.
There are, however, many different types of equity funds because there are many
different types of equities. The Equity Funds are sub-classified depending upon their
investment objective, as follows:

• Diversified Equity Funds

• Mid-Cap Funds
• Sector Specific Funds
• Tax Savings Funds (ELSS)

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

DEBT FUNDS

These Funds invest a major portion of their corpus in debt papers. Government
authorities, private companies, banks and financial institutions are some of the major
issuers of debt papers. By investing in debt instruments, these funds ensure low risk and
provide stable income to the investors. They are also called as income funds their purpose
is to provide current income on a steady basis. When referring to mutual funds, the terms
"fixed-income," "bond," and "income" are synonymous. These terms denote funds that
invest primarily in government and corporate debt. While fund holdings may appreciate
in value, the primary objective of these funds is to provide a steady cashflow to investors.
As such, the audience for these funds consists of conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market
investments, but bond funds aren't without risk. Because there are many different types of
bonds, bond funds can vary dramatically depending on where they invest. Debt funds are
further classified as:

• Gilt Funds:
• Income Funds:
• MIPs:
• Short Term Plans (STPs):
• Liquid Funds:

BALANCED FUNDS
These funds, as the name suggests, are a mix of both equity and debt funds. They invest
in both equities and fixed income securities, which are in line with pre-defined
investment objective of the scheme. These schemes aim to provide investors with the best
of both the worlds. Equity part provides growth and the debt part provides stability in
returns. The objective of these funds is to provide a balanced mixture of safety, income
and capital appreciation. The strategy of balanced funds is to invest in a combination of
fixed income and equities. A typical balanced fund might have a weighting of 60% equity
and 40% fixed income. The weighting might also be restricted to a specified maximum or
minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to
those of a balanced fund, but these kinds of funds typically do not have to hold a
specified percentage of any asset class. The portfolio manager is therefore given freedom
to switch the ratio of asset classes as the economy moves through the business cycle.

Each category of funds is backed by an investment philosophy, which is pre-defined in

the objectives of the fund. The investor can align his own investment needs with the
funds objective and invest accordingly

SCHEMES IN MUTUAL FUNDS

There are different schemes under each class i.e. Equity funds, debt funds and balanced
funds.
• Schemes under Equity funds

 Sector specific funds : Sectoral Funds are those, which invest exclusively in
a specified industry or a group of industries or various segments such as 'A'
Group shares or initial public offerings. Sector funds are targeted at specific
sectors of the economy such as financial, technology, health, etc. Sector funds
are extremely volatile. There is a greater possibility of big gains, but risk is
also high.
 Diversified equity funds : Equity diversified funds invest 90% or less of the
funds collected, into equity. Selection of companies, whose equities are
invested in, is left to the discretion of the Fund Manager of the scheme.

 Tax saving funds (ELSS) : These schemes offer tax rebates to the investors
under specific provisions of the Indian Income Tax laws as the Government
offers tax incentives for investment in specified avenues. Investments made in
Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as
deduction u/s 88 of the Income Tax Act, 1961. The Act also provides
opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds, provided the capital asset has been sold prior to
 April 1, 2000 and the amount is invested before September 30, 2000.

 Index schemes: It invests in shares forming part of an index such as BSE

sensex, NSE, Nifty, etc., in the same proportion as the weightage these shares
have in the index. Such schemes seek to provide returns that closely
correspond to the return of the index being mirrored.

 Dynamic funds : They alter their exposure to different asset classes based on the
market scenario. Such funds typically try to book profits when the markets are
overvalued and remain fully invested in equities when the markets are undervalued.
This is suitable for investors who find it difficult to decide when to quit from equity.

• Schemes under Debt funds

 Gilt funds: Invest their corpus in securities issued by Government, popularly

known as GoI debt papers. These Funds carry zero Default risk but are
associated with Interest Rate risk. These schemes are safer as they invest in
papers backed by Government.
 Income funds: Invest a major portion into various debt instruments such as
bonds, corporate debentures and Government securities.
 MIP’s: Invests around 80% of their total corpus in debt instruments while the
rest of the portion is invested in equities. It gets benefit of both equity and
debt market. These scheme ranks slightly high on the risk-return matrix when
compared with other debt schemes.
 Short term plans : Meant for investors with an investment horizon of 3-6
months. These funds primarily invest in short term papers like Certificate of
Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is
also invested in corporate debentures.
 Liquid funds: Also known as Money Market Schemes, These funds are
meant to provide easy liquidity and preservation of capital. These schemes
invest in short-term instruments like Treasury Bills, inter-bank call money
market, CPs and CDs. These funds are meant for short-term cash management
of corporate houses and are meant for an investment horizon of 1day to 3
months. These schemes rank low on risk-return matrix and are considered to
be the safest amongst all categories of mutual funds.
  Floating rate funds: It invest in securities with floating interest rates, which are
generally linked to some benchmark rate like Prime Landing Rate. Floating Rate
Funds have a high relevance when the debt markets are volatile and investors can
effectively make use of these funds to hedge their debt fund investments against the
interest rate fluctuations.

What is Capitalization :-
Fund managers and other investment professionals have varying definitions of mid-cap,
and large-cap ranges. The following ranges are used by Russell Indexes:
• Russell Microcap Index - micro-cap ($54.8 - 539.5 million)
• Russell 2000 Index - small-cap ($182.6 million - 1.8 billion)
• Russell Midcap Index - mid-cap ($1.8 - 13.7 billion)
• Russell 1000 Index - large-cap ($1.8 - 386.9 billion)

COMPARISION OF DIFFERENT SCHEMES:-

Growth vs. value
Another distinction made between growth funds, which invest in stocks of companies
that have the potential for large capital gains, and value funds, which concentrate on
stocks that are undervalued. Growth stocks typically have the potential for a greater
return; however, such investments also bear larger risks. Growth funds tend not to pay
regular dividends. Sector funds focus on specific industry sectors, such as biotechnology
or energy. Income funds tend to be more conservative investments, with a focus on stocks
that pay dividends. A balanced fund may use a combination of strategies, typically
including some level of investment in bonds, to stay more conservative when it comes to
risk, yet aim for some growth.

Index funds versus active management

An index fund maintains investments in companies that are part of major stock (or
bond) indices, such as the S&P 500, while an actively managed fund attempts to
outperform a relevant index through superior stock-picking techniques. The assets of
an index fund are managed to closely approximate the performance of a particular
published index. Since the composition of an index changes infrequently, an index
fund manager makes fewer trades, on average, than does an active fund manager. For
this reason, index funds generally have lower trading expenses than actively managed
funds, and typically incur fewer short-term capital gains which must be passed on to
shareholders. Additionally, index funds do not incur expenses to pay for selection of
individual stocks (proprietary selection techniques, research, etc.) and deciding when
to buy, hold or sell individual holdings. Instead, a fairly simple computer model can
identify whatever changes are needed to bring the fund back into agreement with its
target index.
The performance of an actively managed fund largely depends on the investment
decisions of its manager. Statistically, for every investor who outperforms the market,
there is one who underperforms. Among those who outperform their index before
expenses, though, many end up underperforming after expenses. Before expenses, a well-
run index fund should have average performance. By minimizing the impact of expenses,
index funds should be able to perform better than average.
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. One study found that nearly 1,500 U.S. mutual funds under-
performed the market in approximately half of the years between 1962 and
1992.Moreover, funds that performed well in the past are not able to beat the market
again in the future (shown by Jensen, 1968; Grimblatt and Titman, 1989.

FUNDS IN Mutual Funds

1. Bond funds
Bond funds carry more risk than money market funds are often used to produce
income (useful in retirement) or to help stabilize a portfolio (diversification). The
primary types of bond funds are:

• Municipal Bond Funds -uses tax-exempt bonds issued by state and local
governments (these funds are non-taxable).
• Corporate Bond Funds -uses the debt obligations of corporations.
• Mortgage-Backed Securities Funds - uses securities representing
residential mortgages.
• Government Bond Funds -uses treasury or government securities.

Another way bond funds are often classified is by maturity, or the date the borrower
(whether it be the bank, the government, a corporation or an individual) must pay back
the money borrowed. Using this classification bonds are often called short-term bonds,
intermediate-term bonds, or long-term bonds.

Bond funds account for 18% of mutual fund assets. Types of bond funds include term
funds, which have a fixed set of time (short-, medium-, or long-term) before they mature.
Municipal bond funds generally have lower returns, but have tax advantages and lower
risk. High-yield bond funds invest in corporate bonds, including high-yield or junk
bonds. With the potential for high yield, these bonds also come with greater risk.

2. Money market funds

These funds are a great place to park your money. Whether you're storing money for
emergencies, saving for the short-term, or looking for a place to store cash from the sale
of an investment, money market funds are a safe place to invest. These funds invest in
short-term debt instruments and typically produce interest rates that double what a bank
can offer in a checking account or savings account and rival the returns of a CD
(Certificate of Deposit). The beauty of money market funds is that you can often write
checks out of your account and they provide a high amount of liquidity (ability to cash
out quickly) not found in CD's. These funds are not FDIC insured, but in the history of
money market funds no money market fund has ever folded, yet many banks have failed
and many investors with over $100,000 lost out.

Money market funds hold 26% of mutual fund assets in the United States. Money market
funds entail the least risk, as well as lower rates of return. Unlike certificates of deposit
(CDs), money market shares are liquid and redeemable at any time. The interest rate
quoted by money market funds is known as the 7 Day SEC Yield.

3. Funds of funds
Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds
(i.e., they are funds comprised of other funds). The funds at the underlying level are
typically funds which an investor can invest in individually. A fund of funds will
typically charge a management fee which is smaller than that of a normal fund because it
is considered a fee charged for asset allocation services. The fees charged at the
underlying fund level do not pass through the statement of operations, but are usually
disclosed in the fund's annual report, prospectus, or statement of additional information.
The fund should be evaluated on the combination of the fund-level expenses and
underlying fund expenses, as these both reduce the return to the investor.
Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor),
although some invest in funds managed by other (unaffiliated) advisors. The cost
associated with investing in an unaffiliated underlying fund is most often higher than
investing in an affiliated underlying because of the investment management research
involved in investing in fund advised by a different advisor. Recently, FoFs have been
classified into those that are actively managed (in which the investment advisor
reallocates frequently among the underlying funds in order to adjust to changing market
conditions) and those that are passively managed (the investment advisor allocates assets
on the basis of on an allocation model which is rebalanced on a regular basis).
The design of FoFs is structured in such a way as to provide a ready mix of mutual funds
for investors who are unable to or unwilling to determine their own asset allocation
model. Fund companies such as TIAA-CREF, Vanguard, and Fidelity have also entered
this market to provide investors with these options and take the "guess work" out of
selecting funds. The allocation mixes usually vary by the time the investor would like to
retire: 2020, 2030, 2050, etc. The more distant the target retirement date, the more
aggressive the asset mix.

4. Hedge funds

Hedge funds in the United States are pooled investment funds with loose SEC regulation
and should not be confused with mutual funds. Certain hedge funds are required to
register with SEC as investment advisers under the Investment Advisers Act. The Act
does not require an adviser to follow or avoid any particular investment strategies, nor
does it require or prohibit specific investments. Hedge funds typically charge a
management fee of 1% or more, plus”performance fee” of 20% of the hedge fund’s
profits. There may be a "lock-up" period, during which an investor cannot cash in shares.

5. Stock Funds
Stocks funds are considered riskier than bond funds (although certain bond funds
can be very risky) and are used for growing your money. Money market funds and
bond funds typically provide returns just a percentage or two above inflation, but
stock funds should do much better over long periods of time.

SEBI GUIDELINES
 Schemes of a Mutual Fund

 The asset management company shall launch no scheme unless the trustees
approve such scheme and a copy of the offer document has been filed with the
Board.
 Every mutual fund shall along with the offer document of each scheme pay filing
fees.
 The offer document shall contain disclosures which are adequate in order to
enable the investors to make informed investment decision including the
disclosure on maximum investments proposed to be made by the scheme in the
listed securities of the group companies of the sponsor
 The mutual fund and asset Management Company shall be liable to refund the
application money to the applicants
 If the mutual fund fails to receive the minimum subscription amount referred to in
clause (a) of sub-regulation (1)
 If the moneys received from the applicants for units are in excess of subscription
as referred to in clause (b) of sub-regulation (1).
 The asset management company shall issue to the applicant whose application has
been accepted, unit certificates or a statement of accounts specifying the number
of units allotted to the applicant as soon as possible but not later than six weeks
from the date of closure of the initial subscription list and or from the date of
receipt of the request from the unit holders in any open ended scheme.

Rules Regarding Advertisement

 The offer document and advertisement materials shall not be misleading or

contain any statement or opinion, which are incorrect or false.
 Investment Objectives and Valuation Policies:
 The price at which the units may be subscribed or sold and the price at which such
units may at any time be repurchased by the mutual fund shall be made available
to the investors.

General Obligations

 Every asset management company for each scheme shall keep and maintain
proper books of accounts, records and documents, for each scheme so as to
explain its transactions and to disclose at any point of time the financial position
of each scheme and in particular give a true and fair view of the state of affairs of
the fund and intimate to the Board the place where such books of accounts,
records and documents are maintained.
 The financial year for all the schemes shall end as of March 31 of each year.
  Every mutual fund shall have the annual statement of accounts audited by an
auditor who is not in any way associated with the auditor of the asset management
company.

Procedure for Action In Case Of Default

On and from the date of the suspension of the certificate or the approval, as the case
may be, the mutual fund, trustees or asset management company, shall cease to carry
on any activity as a mutual fund, trustee or asset management company, during the
period of suspension, and shall be subject to the directions of the Board with regard to
any records, documents, or securities that may be in its custody or control, relating to
its activities as mutual fund, trustees or asset management company.

Restrictions on Investments

 A mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer, which are rated not below investment grade
by a credit rating agency authorized to carry out such activity under the Act. Such
investment limit may be extended to 20% of the NAV of the scheme with the
prior approval of the Board of Trustees and the Board of asset Management
Company.
 A mutual fund scheme shall not invest more than 10% of its NAV in un rated debt
instruments issued by a single issuer and the total investment in such instruments
shall not exceed 25% of the NAV of the scheme. All such investments shall be
made with the prior approval of the Board of Trustees and the Board of asset
Management Company.
 No mutual fund under all its schemes should own more than ten per cent of any
company's paid up capital carrying voting rights.
 Such transfers are done at the prevailing market price for quoted instruments on
spot basis.
 The securities so transferred shall be in conformity with the investment objective
of the scheme to which such transfer has been made.
 A scheme may invest in another scheme under the same asset management
company or any other mutual fund without charging any fees, provided that
aggregate inter scheme investment made by all schemes under the same
management or in schemes under the management of any other asset management
company shall not exceed 5% of the net asset value of the mutual fund.
 The initial issue expenses in respect of any scheme may not exceed six per cent of
the funds raised under that scheme.
 Every mutual fund shall buy and sell securities on the basis of deliveries and shall
in all cases of purchases, take delivery of relative securities and in all cases of
sale, deliver the securities and shall in no case put itself in a position whereby
 it has to make short sale or carry forward transaction or engage in badla finance.
  Every mutual fund shall, get the securities purchased or transferred in the name of
the mutual fund on account of the concerned scheme, wherever investments are
intended to be of long-term nature.
 Pending deployment of funds of a scheme in securities in terms of investment
objectives of the scheme a mutual fund can invest the funds of the scheme in short
term deposits of scheduled commercial banks.
 No mutual fund scheme shall make any investment in;
 Any unlisted security of an associate or group company of the sponsor; or
 Any security issued by way of private placement by an associate or group
company of the sponsor; or
 The listed securities of group companies of the sponsor which is in excess of 30%
of the net assets [of all the schemes of a mutual fund]
 No mutual fund scheme shall invest more than 10 per cent of its NAV in the
equity shares or equity related instruments of any company. Provided that, the
limit of 10 per cent shall not be applicable for investments in index fund or sector
or industry specific scheme.
 A mutual fund scheme shall not invest more than 5% of its NAV in the equity
shares or equity related investments in case of open-ended scheme and 10% of its
NAV in case of close-ended scheme.

Key elements

Fund sponsor

The Sponsor Company establishes the mutual fund in the form of a trust and registers it
with SEBI. The board of trustees holds the fund in trust for unit holders and ensures
compliance with SEBI regulations, trust deed guidelines and the terms of the asset
management agreement by the AMC.
As an investor one should check the sponsors track record. Scrutiny of the fund sponsor's
track record may forewarn you against jolts like the CRB scandal. Apart from a
consistent track record, sponsors should have requisite experience and background in
managing mutual funds.

Fund manager

The fund manager is an employee of the asset management company who formulates the
investment strategy and invests the funds. As an investor in the fund one should -
Understand the investment philosophy of the fund manager. - Check the returns he has
generated on funds previously managed by him, and - Find out whether the fund manager
has delivered on the investment objectives of the funds he has managed in the past.
Type of fund

1. Open ended funds:

Investors under this scheme are free to join the fund or withdraw from the fund at
any time after an initial lock-in period. Such funds announce sale and repurchase
prices from time to time. In an open-ended scheme, investors can resell units in
the fund to the issuing mutual fund at the net asset value (NAV) of the units. This
is because open-ended schemes are permitted to buy/sell their own units.

2. Close ended funds:

Unlike the open-ended schemes, close-ended schemes do not issue units for
repurchase redemption on a periodic basis. Its units can be redeemed only on
termination of the scheme, or through dealings in the secondary market. In such
schemes, the period of the scheme is specified at the outset. They have a definite
target amount for the funds and cannot sell more after initial offering. If the
scheme is limited, investors can trade units on the bourses, just like equities and
debentures.

Investment objective

Mutual funds can offer different investment schemes. These schemes can be classified as:
1. Growth Funds Investment objective:
Capital appreciation of equity shares Investment avenue: Equity shares of companies
with high growth potential

2. Income Funds Investment objective:

Providing safety of investments and regular income Investment avenue: Bonds,
debentures and other debt related instruments as well as equity shares of companies
with high dividend payouts. There are 2 aspects of income funds viz. low investment
risk with constant income and high investment risk generating high income.

3. Balanced Funds Investment objective:

Modest risk of investment and reasonable rate of return Investment avenue: Judicious
mix of equity shares, preference shares as well as bonds, debentures and other debt
related instruments

4. Money Market Mutual Funds (MMMFs) Investment objective:

To take advantage of the volatility in interest rates in the money market Investment
Avenue: Certificate of deposits (CDs), call money market, commercial papers.
Investors who had earlier stayed away from the money market can participate
indirectly through MMMFs.

5. Specialized Funds Investment Objective:

 To take advantage of conditions in a particular sector or a specific income producing
security Investment Avenue: Specialized investments in securities of companies in
certain sectors or specific income producing securities

6. Leveraged Funds Investment objective:

To increase the value of the portfolio and benefit the shareholders by gains exceeding
the cost of borrowed funds Investment avenue: Speculative and risky investments like
short sales to take advantage of declining market.

7. Index Funds Investment Objective:

To increase the value of the portfolio in line with the benchmark index (for eg. BSE
Sensex, S&P CNX 50) Investment Avenue: Investments only in those shares that
form a part of the benchmark index, in exactly the same proportion, so that the value
of the index fund varies in proportion with the benchmark index.

8. Hedge Funds Investment Objective:

To hedge risks in order to increase the value of the portfolio Investment Avenue:
Employ speculative trading principles - buy rising shares and sell shares whose prices
are likely to fall. As an investor you should invest in schemes, which meet your
criteria in terms of you need for regular income, capital appreciation, and safety of
principal.

Fees and charges

AMCs charge a fee for managing the funds. As an investor in the fund we must be aware
of the fees and charges of the AMC. Two schemes with more or less similar
performances would generate different returns if one of the two schemes charges high
fees.

The public offering price

A sales load represents the money received by the AMC as compensation for distributing
units. It helps the fund to meet its expenses relating to sales literature, promotion,
distribution, advertising and agent/broker commissions. The Public offering Price (POP)
is the price at which an investor buys into the fund and is a function of both the NAV and
sales load.
For instance, if the Funds NAV is Rs 12/- and the applicable sales load is 6% the POP is
NAV/ (1-Sales load) =12/(1-. 06) = 12.77 If the investor applied for Rs 10,000 worth of
units he would receive 783.085 units (10,000/12.77). You might be required to pay such
load charges either at the time of buying the units or at the time of selling the units. As an
investor you should be aware of such entry. /exit loads as they could have a material
impact on returns.
Tax implications

Investors need to understand the tax implications before investing in the schemes, as one
scheme may offer more attractive post-tax returns compared to its peers. As Union
budgets regularly offer tax benefits to mutual funds and mutual fund investors, you as an
investor must review the tax implications of mutual fund investments.

Service levels

Service levels vary across funds. Level of communication also varies across funds. While
some disclose the fund portfolio annually, others disclose it quarterly, and some others
disclose it monthly.

Performance and NAV

Every fund is benchmarked against an index like the BSE Sensex, CNX SNP 50, BSE
200, etc. As an investor you must track the funds performance against the benchmark
index. Also it could be useful for the investor to compare its performance with other
funds. /exit loads as they could have a material impact on returns.

APPROACHES OF MF’S MANAGERS

There are basically three approaches which mutual funds managers follow to invest
money of investors:-
• Value approach
• Growth approach
• Blend approach

Equity fund managers usually employ one of three particular styles of stockpicking when
they make investment decisions for their portfolios.

1. Some fund managers use a value approach to stocks,

Fund managers search for stocks that are undervalued when compared to other, similar
companies. Often, the share prices of these stocks have been beaten down by the market
as investors have become pessimistic about the potential of these companies.

These funds like to invest in companies that the market has overlooked. Managers search
for stocks that have become "undervalued" -- or priced low relative to their earnings
potential.

Sometimes a stock has run into a short-term problem that will eventually be fixed and
forgotten. Or maybe the company is too small or obscure to attract much notice. In any
event, the manager makes a judgment that there's more potential there than the market
has recognized. His bet is that the price will rise as others come around to the same
conclusion.

The big risk with value funds is that the "undiscovered gems" they try to spot sometimes
remain undiscovered. That can depress results for extended periods of time. Volatility,
however, is quite low, and if you choose a good fund, the risk of doggy returns should be
minimal. Also, because these fund managers tend to buy stocks and hold them until they
turn around, expenses and turnover are low. Add it up, and value funds are most suitable
for more conservative, tax-averse investors.

2. Another approach to picking is to look primarily at growth, As their name implies,

these funds tend to look for the fastest-growing companies on the market. Growth
managers are willing to take more risk and pay a premium for their stocks in an effort to
build a portfolio of companies with above-average earnings momentum or price
appreciation. trying to find stocks that are growing faster than their competitors, or the
market as a whole. These funds buy shares in companies that are growing rapidly -- often
well known, established corporations. Growth funds are the most volatile of the three
investment styles. It's also why expenses and turnover (which leads to tax liability) are
also higher. For these reasons, only aggressive investors, or those with enough time to
make up for short-term market losses, should buy these funds.

3. Some managers buy both kinds of stocks, building a portfolio of both growth and value
stocks. This is known as the blend approach.

These can go across the board. They might, for instance, invest in both high-growth
Internet stocks and cheaply priced automotive companies. As such, they are difficult to
classify in terms of risk.But because it's also a large-cap fund, it tends to be steady. In
order to determine if a particular blend fund is right for your needs, you'll probably have
to look at the fund's holdings and make a call.

MUTUAL FUND INDUSTRY IN INDIA

The origin of mutual fund industry in India is with the introduction of the concept of
mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated
from the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both
qualitywise as well as quantitywise. Before, the monopoly of the market had seen an
ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector
entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it
reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is
less than the deposits of SBI alone, constitute less than 11% of the total deposits held by
the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept.
Hence, it is the prime responsibility of all mutual fund companies, to market the product
correctly abreast of selling.
The mutual fund industry can be broadly put into four phases according to the
development of the sector. Each phase is briefly described as under.
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 regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank
Mutual Fund (Dec 87), 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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under
management.
Third Phase - 1993-2003 (Entry of 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 erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.

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 with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.
Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One
is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as
on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
AUM 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 end of September, 2004, there were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.

The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT
Major Mutual Fund Companies in India
ABN AMRO Mutual Fund

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

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from
India. Birla Sun Life Mutual Fund follows a conservative long-term approach to
investment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under
the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the
AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank
AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing
Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital
Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund
acts as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee
Company. It is a joint venture of Vysya and ING. The AMC, ING Investment
Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the
largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup
on 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee
Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset
Management Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation
Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on
August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the
AMC stands at Rs 25.8 crore.
State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch
offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today
it is the largest Bank sponsored Mutual Fund in India. They have already launched 35
Schemes out of which 15 have already yielded handsome returns to investors. State Bank
of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor
base of over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for
Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The
investment manager is Tata Asset Management Limited and its Tata Trustee Company
Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with
more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is

presently having more than 1,99,818 investors in its various schemes. KMAMC started
its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering
to investors with varying risk - return profiles. It was the first company to launch
dedicated gilt scheme investing only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages
the UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTI
Asset Management Company presently manages a corpus of over Rs.20000 Crore. The
sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB),
State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of
UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index
Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The
sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is
the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which
was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of
various schemes under which units are issued to the Public with a view to contribute to
the capital market and to provide investors the opportunities to make investments in
diversified securities.
Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard
Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard
Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated
with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with a
global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial
services groups in the world. Investors can buy or sell the Mutual Fund through their
financial advisor or through mail or through their website. They have Open end
Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid
schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed
end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market
in securities, investment management and credit services. Morgan Stanley Investment
Management (MISM) was established in the year 1975. It provides customized asset
management services and products to governments, corporations, pension funds and non-
profit organizations. Its services are also extended to high net worth individuals and retail
investors. In India it is known as Morgan Stanley Investment Management Private
Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the
first close end diversified equity scheme serving the needs of Indian retail investors
focussing on a long-term capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its
sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was
incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as sponsor. The Trustee is ACAM Trust
Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd.
with the corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt.
Ltd. as the sponsor and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company.
Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset
Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the
sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993
is the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance
Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the
Trustee Company and AMC is Cholamandalam AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was
constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. .
The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund
have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the
Investment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a

Government of India undertaking and the four Public Sector General Insurance
Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd.
(NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII)
and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,
1882

PERFORMANCE OF MUTUAL FUNDS

Let us start the discussion of the performance of mutual funds in India from the day the
concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited
investors or rather to those who believed in savings, to park their money in UTI Mutual
Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw some
new mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to
satisfactory level. People rarely understood, and of course investing was out of question.
But yes, some 24 million shareholders was accustomed with guaranteed high returns by
the begining of liberalization of the industry in 1992. This good record of UTI became
marketing tool for new entrants. The expectations of investors touched the sky in
profitability factor. However, people were miles away from the praparedness of risks
factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me
concentrate about the performance of mutual funds in India through figures. From Rs.
67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure
had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started
falling in the year 1992. Those days, the market regulations did not allow portfolio shifts
into alternative investments. There was rather no choice apart from holding the cash or to
further continue investing in shares. One more thing to be noted, since only closed-end
funds were floated in the market, the investors disinvested by selling at a loss in the
secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in the
whereabout rocked confidence among the investors. Partly owing to a relatively weak
stock market performance, mutual funds have not yet recovered, with funds trading at an
average discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a transparent and

competitve environment in mutual funds. Some of them were like relaxing investment
restrictions into the market, introduction of open-ended funds, and paving the gateway for
mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term saving.
The more the variety offered, the quantitative will be investors.

At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to
invest until and unless they are fully educated with the dos and donts of mutual funds.

MUTUAL FUNDS DEPENDS ON

INVESTOR’S PROFILE

Mutual funds are catering to the person’s individual needs and wants. It has the flexibility to suit
to the different customer. I tried to figure out the factors and conditions which can influence the
decision of the investors and also tried to establish a relation between type of mutual
funds(schemes) and the investor profile. One needs to take a much more planned and systematic
approach towards building a personal Mutual Fund portfolio taking into account factors such as
asset allocation, risks involved and diversification.

ASSET ALLOCATION

One of the most important steps to building a successful portfolio is arriving at the ideal
asset allocation (equity: debt ratio), which can then be plugged in with investments
comprising of various suitable Mutual Fund schemes.

Because these investments perform differently depending on economic conditions, a

good balance can keep a portfolio strong in a wide range of economic situations. The
asset classes carry varying amount of risks, meaning that the best allocation will depend
on a range of factors related to an individual’s investing profile such as his age, risk
profile and financial goals, besides expected returns and time horizon of investments.
Of course, all these factors are closely related.

Essentially, they allow investor to map out how much money he will need at certain
points in his life and how much uncertainty he can tolerate in moving from one life stage
to the next.

 The younger investor is, the farther away he is from many financial goals like
retirement. For such goals, he has the opportunity to invest in growth
schemes, like equity mutual funds. However, his risk profile plays an equally
important role in determining the quantum of funds that he will dedicate
towards equity.

 Proximity of financial goals is important too. For instance, for short-term

goals, investor is likely to shun high-risk investments to avoid capital erosion.

 Proximity to goals also determines the desired rate of return from investments
and the tenure of instruments. If investor have just started saving for his eight-
 year-old daughter’s engineering studies, his desired rate of return will be more
than that of his friend who started investing for his eight-year-old daughter’s
higher studies seven years ago. Also, he won’t be able to invest in instruments
that have long tenures since his investments will need to mature faster.

 Investor risk appetite is one of the most important factors that will determine
the magnitude of his equity investments. There are several factors that will
influence investor risk appetite such as:

Health: Chronic health problems in your family could limit your risk appetite, as you
would need low-risk, low-return investments.

Future Employment Prospects: The greater your job security, the greater the
opportunity to invest in growth instruments.

Number of Dependants: Risk taking ability also reduces with a higher number of
dependants.

Future Fund Requirement: If your future fund requirements are large, you might be
forced to invest a portion of your money in higher risk options for higher returns.

Lifestyle: If you have an expensive lifestyle, you might need to make your money grow
fast to maintain it.

DEVELOP AN ASSET ALLOCATION STRATEGY

 Define your Goals

To develop your own asset allocation strategy, define your short, medium and long-term goals.
Short-term goals are those that are to be achieved within the next year, medium-term goals in the
next five years, and long-term goals beyond five years.
  Identify your Constraints

Next, identify the constraints that could check your portfolio’s progress. For instance, you might
want to retire at 45 but you have to provide for your aged parents.

After identifying goals and constraints, decide whether you prefer separate portfolios for specific
goals like retirement or a single portfolio geared to meet your needs.

You should always have three types of financial investments in your portfolio i.e. liquid
investments such as money market mutual fund; regular income investments such as
income schemes of mutual funds and growth investments like equity schemes of mutual funds.
Balance your investments between the three categories in such a way that your wealth grows to
meet your various requirements.

Equities are ideal for long-term goals, debt-based instruments for medium-term goals, and liquid
investments for short-term goals.

Risk essentially refers to the possibility of your investments declining in value. Obviously, this
decline would result in a net loss, so risk can be considered as the potential for loss. Every
investment carries with it some degree of risk. To get an accurate picture of the risk associated
with a given investment or portfolio of investments, the various forms of risk need to be
considered collectively.

TYPES OF RISKS

Here are some essential risk types you need to understand and assess to comprehend the overall
risk level of your investment portfolio.
 Market Risk:

Equity investments are subject to the risk associated with the capital market. They hence share
direct relationship with the performance of the capital market. When the capital market is on the
bull spree, equity will outperform all the other investment options, and vice-versa holds true
when the stock prices plummet. Understand the quantum of equity in the portfolio of your mutual
fund investment to be able to judge how much exposure you are taking to the capital markets and
its inherent risks.

 Credit Risk:

Debt investments carry this risk. This risk is the possibility of default in repayment and in
payment of interest by the borrower. Higher the exposure of the mutual fund to debt investments,
the higher this risk. For instance, Gilts (Government Securities) will carry no credit risk while a
corporate bond will carry a significant risk (again, this will depend on the quality of the corporate
whose debt is invested in).

 Interest Rate Risk:

This is the risk that interest rate changes will lead to a change in the principal value of the debt
investment. This risk arises as a result of the inverse relationship between interest rates and
prices of debt securities. If the interest rates rise, prices of existing debt securities fall, which in
turn brings down the NAV of a mutual fund scheme, which has invested in debt. On the other
hand, if the interest rates fall, existing debt securities become more precious and rise in value,
which in turn pushes up the NAV of a mutual fund, which has invested in debt.

 Inflation Risk:

Inflation causes money to decrease in value. Inflation risk occurs whether you invest or not.
Selecting investments that are able to outpace the inflation rate is the only way to build real
wealth.

DIVERSIFICATION

Diversification is one of the best ways to control risks.

Market Risks can best be controlled by investing in a basket of equity representing different
sectors, which are complementary to each other. In other words, if one sector is on a downturn,
the other sector should move up helping your portfolio to maintain a balance. This means your
portfolio will never experience all your equities losing value at the same time, which can result in
significant capital erosion. Diversified equity mutual funds offer such a portfolio. Before
investing, assess sectoral diversity of the portfolio.

Credit Risk can be controlled by investing in good quality credit-rated debt paper. To assess
whether the mutual fund has invested in such debt, check the credit rating of the debt
investments in the mutual fund’s portfolio. Ensure that debt paper invested in carry at least an ‘A’
rating.

Interest Rate Risk is best controlled by opting for floating rate mutual funds when interest
rates are on the rise. If you are expecting rates to fall, opt for medium-term debt funds to lock-in
at the existing higher rates.

The only way to mitigate inflation risk is to invest in securities that offer a higher return than
the inflation rate. Equity is one such investment option that has consistently given returns higher
than the inflation rate. If you prefer debt, opt for MIP schemes where a small portion is invested
in equity to help you get higher returns than pure debt schemes.

SELECTING FUNDS FOR PORTFOLIO

The chart below can be used to identify the types of funds best suited to investor’s particular
investment objectives. This table is formulated keeping in mind the objective of investor and what
are the best fund types he can invest. Also it gives the idea about the stocks in which funds of
different type invests. For e.g if investor wants his investment to get many folds in shortest period
of time, then his objective of investment is capital growth. As explained earlier the stock which
gives highest return are generally associated with high risk due to their vulnerability. For such
investors Growth funds and International funds are best suited because their rate of return is high
compare to others stocks.
 If Your You Want These Funds Potential Potential Potential
Basic The Invest Primarily Capital Current Risk
Objective Is Following In Appreciation Income
Fund Type
Common stocks
Aggressive with potential for
Maximum
Growth very rapid growth. High to
Capital Very High Very Low
May employ Very High
Growth
International certain aggressive
strategies
Growth

Common stocks
High Capital Specialty/ High to Very
with long-term Very Low High
Growth Sector High
growth potential

Common stocks
Current
with potential for
Income & Growth & Moderate
high dividends and Moderate Moderate
Capital Income to High
capital
Growth
appreciation
Both high-
Fixed Income
High Current dividend- High to Very Low to
Very Low
Income paying stocks and High Moderate
Equity Income
bonds
Current
Income & General Money Money market Moderate to
None Very Low
Protection of Market Funds instruments High
Principal
Tax-Free Tax-Exempt Short-term None Moderate to Low
Income & Money Market municipal notes High
Protection of
and bonds
Principal
Current
Income & Treasury and agency issues
Moderate
Maximum Government guaranteed by the None Low
to High
Safety of Money Market Government
Principal
Municipal
Bonds
Tax-Exempt A broad range of municipal Low to Moderate Low to
Income Double & bonds Moderate to High Moderate
Triple Tax-
Exempt

Mutual Fund Investing vs. Stock Investing

It seems strange to compare Mutual Funds to stocks since Mutual Funds are primarily
composed of stocks, but it is important to distinguish the two because there are some
notable advantages to using Mutual Funds.

Diversification
There is no greater advantage to using Mutual Funds than diversification. Most wealthy
investors purchase more than just a couple of stocks? If they are not using Mutual Funds
(many do), than they are purchasing a large number of stocks.

Smart investors diversify because it greatly reduces risk without sacrificing returns.

Professional Management
By purchasing Mutual Funds, you are essentially hiring a professional manager at an
especially inexpensive price. These managers have been around the industry for a long
time and have the academic credentials to back it up.

Efficiency
By pooling investors' money together, Mutual Fund companies can take advantage of
economies of scale. With large sums of money to invest, they often trade commission-
free and have personal contacts at the brokerage firms or financial institutions.

Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The
bookkeeping duties involved with stocks are much more complicated than owning a
Mutual Fund. It is easier to use because all the work your Fund Manager does and you
get the returns on your money without doing much.

Liquidity
If you find yourself in need of money in a short amount of time, Mutual Funds are highly
liquid. Simply put in your order during the day and when the market closes a check will
be sent to you or you can have it wired to a bank account. Stocks can be much more
difficult depending on what kinds of stocks you have invested in. CD's offer no liquidity
(not without a hefty fee) and bonds can be difficult, too. Some Mutual Funds also carry
check-writing privileges, which means you can actually write checks from the account,
similar to your checking account at the bank.

Cost
Mutual Funds are excellent for the new investors because you can invest small amounts
of money and you can invest at regular intervals with no trading costs. Stock investing,
however, carries high transaction fees making it difficult for the small investor to make
money.
Suppose, if an investor wanted to put in Rs. 100/- a month into stocks and the expenses
including brokerage Rs. 15/- per transaction, their investment is automatically down 15
percent every time they invest.
Wealthy stock investors get special treatment from brokers and wealthy bank account
holders get special treatment from the banks, but Mutual Funds are non-discriminatory. It
doesn't matter whether you have Rs. 500/- or Rs. 5,00,000/-, you are getting the exact
same manager, the same account access and the same investment.

Risk
In general, Mutual Funds carry much lower risk than stocks. This is primarily due to
diversification. Certain Mutual Funds can be riskier than individual stocks, but you have
to go out of your way to find them.
With stocks, one worry is that the company you are investing in goes bankrupt. With
Mutual Funds, that chance is next to nil. Since Mutual Funds typically hold anywhere
from 25-5000 companies, all of the companies that it holds would have to go bankrupt.

WHY INVEST IN MUTUAL FUNDS?

• Convenience

As an investor, you have to keep track of your investments, which takes time and effort.
When you invest in a Mutual Fund scheme, you pass on this function to a Fund Manager.
Moreover, you are relieved of nagging problems associated with capital market investing,
like bad deliveries, and non-receipt of share certificates and dividend warrants.

• Professional approach

Management of the fund by the professionals or experts is one of the key advantages of
investing through a mutual fund. They regularly carry out extensive research - on the
company, the industry and the economy – thus ensuring informed investment. Secondly,
they regularly track the market. Thus for many of us who do not have the desired
expertise and are too busy with our vocation to devote sufficient time and effort to
investing in equity, mutual funds offer an attractive alternative.

• Diversification

Another advantage of investing through mutual funds is that even with small amounts we
are able to enjoy the benefits of diversification. Huge amounts would be required for an
individual to achieve the desired diversification, which would not be possible for many of
us. Diversification reduces the overall impact on the returns from a portfolio, on account
of a loss in a particular company/sector.

• Returns

Over the medium and long-term, Mutual Funds have the potential to provide favorable
returns within the same risk category. After a brief period in the doldrums, the Mutual
Fund industry in India has performed credibly over the past year. According to a study
conducted by the Association of Mutual Funds in India, of the 118 equity schemes in the
market, 91 outperformed the benchmark Bombay Stock Exchange Sensex.

• Lower expenses

You have to bear several costs if you invest directly in the market. These include
brokerage, stamp duty and custodial charges, in addition to the expenses incurred in
tracking your share portfolio. Mutual Funds too have to bear these costs, but economies
of scale enable them to reduce procedural expenses like these.

• Reduced risk

It's not possible for investors having a small capital outlay to maintain a diversified
portfolio. However, Mutual Funds, with the advantage of pooling of resources, can. This
reduces the risk, as not all stocks go through a downtrend at the same time.

• Variety
Mutual Funds offer schemes to suit specific investment needs. For instance, there are
growth schemes for investors who are willing to bear a greater risk, gilt schemes for
investors who are risk-averse and retirement plans for those with an eye on the future.

• Flexibility

Some Mutual Funds offer products such as systematic investment plans, regular
withdrawal plans, monthly income plans and dividend reinvestment plans, which are
appropriate for retirement planning. These allow you to invest and withdraw funds as per
your needs.

• Liquidity

In case of open-ended schemes, a majority of Mutual Funds provide investors easy entry
and exit at prices related to the scheme's net asset value (NAV). They are also prompt in
meeting redemption demands.

In case of close-ended schemes, unit holders can sell their units on the stock exchange.
Some Mutual Funds also repurchase units at NAV-linked prices during certain periods.

• Market timing becomes irrelevant

One of the biggest difficulties in equity investing is WHEN to invest, apart from the other
big question WHERE to invest. While, investing in a mutual fund solves the issue of
‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined
investing irrespective of the state of the market. It thus makes the market timing totally
irrelevant. And today when the markets are high, it may not be prudent to commit large
sums at one go. With the next 2-3 years looking good from Indian Economy point of
view, one can expect handsome returns thru’ regular investing.

• Does not strain our day-to-day finances

Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as
against larger one-time investment required, if we were to buy directly from the market.
This makes investing easier as it does not strain our monthly finances. It, therefore,
becomes an ideal investment option for a small-time investor, who would otherwise not
be able to enjoy the benefits of investing in the equity market.

• Timely Decisions and Safety against Loss

The Fund Managers, being experienced and armed with the market scenario, can take
timely decisions about when to sell or buy the units. Timely buying or selling of units
reduces the loss that could have been incurred.

• Reduces the average cost

In SIP we are investing a fixed amount regularly. Therefore, we end up buying

more number of units when the markets are down and NAV is low and less number of
units when the markets are up and the NAV is high. This is called rupee-cost averaging.
Generally, we would stay away from buying when the markets are down. We generally
tend to invest when the markets are rising. SIP works as a good discipline as it forces us
to buy even when the markets are low, which actually is the best time to buy.

• Transparency

Mutual Funds send out periodic newsletters to unit holders, detailing the scheme's
portfolio, performance, investment strategy, and the outlook of the scheme and the fund
manager. You can also find information on websites and in newspapers or magazines.

• Regulation

The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the
years, introduced regulations, which ensure smooth and transparent functioning of the
mutual funds industry. This makes it safer and convenient for investors to invest through
the mutual funds.

DRAWBACKS OF MUTUAL FUNDS

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees:

No investment is risk free. If the entire stock market declines in value, the value of
mutual fund shares will go down as well, no matter how balanced the portfolio. Investors
encounter fewer risks when they invest in mutual funds than when they buy and sell
stocks on their own. However, anyone who invests through a mutual fund runs the risk of
losing money.

• Fees and commissions:

All funds charge administrative fees to cover their day-to-day expenses. Some funds also
charge sales commissions or "loads" to compensate brokers, financial consultants, or
financial planners. Even if you don't use a broker or other financial adviser, you will pay
a sales commission if you buy shares in a Load Fund.

• Taxes:

During a typical year, most actively managed mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If your fund makes a profit on its sales, you
will pay taxes on the income you receive, even if you reinvest the money you made.

• Management risk:

When you invest in a mutual fund, you depend on the fund's manager to make the right
decisions regarding the fund's portfolio. If the manager does not perform as well as you
had hoped, you might not make as much money on your investment as you expected. Of
course, if you invest in Index Funds, you forego management risk, because these funds
do not employ managers.

TRENDS IN MARKETING OF MUTUAL FUNDS IN INDIA

The changing marketing trends in the Mutual Fund industry in India can be easily linked
and traced to its history of growth. The changes in marketing strategies can be
characterized by 4 stages, which have evolved along with the growth and evolution of the
industry.

Product Focus

For the first three decades of the industry, from the setting up of UTI till the entry of
private sector players, the only focus of the marketing strategy was different product
offerings. UTI and various other public sector Mutual Funds focused on introducing an
array of products falling in different categories.

The categorization was primarily based on two factors: one was the way the schemes were
traded and the other through different composition of debt and equity securities in the
scheme.

By the way Schemes were traded:

Open-ended Schemes
Close-ended Schemes

In an open-ended scheme there are no limits on the total size of the corpus. Investors are
permitted to enter and exit the open-ended scheme at any point of time at a price that is
linked to the net asset value (NAV).

In case of close-ended schemes, the total size of the corpus is limited by the size of the
initial offer. The entry and exit of investors is possible by only trading on the stock
exchanges. Due to liquidity constraints posed by close-ended funds, they were soon
rendered obsolete and most of the prevailing schemes today are open-ended schemes.

By Composition of Debt and Equity in the Scheme:

 Growth Schemes
>Income Schemes
>Balanced Schemes
>Money Market Schemes

The products were also differentiated by the composition of equity and debt in various
schemes. Growth schemes invest predominantly in equities whereas Income schemes
invest mainly in fixed income debt securities. Balanced schemes try to derive the benefits
of both equity and debt by investing in both. Money market schemes invest in short term
liquid securities like money market instruments so that they serve as appropriate
products for investing short-term funds.

There were other niche schemes to fulfill specific needs, such as Tax Saving Schemes,
Sector Specific Schemes, Index Schemes (which are passively invested in a benchmark
Index) and so on.

In the Product Focus stage, the aim of the Mutual Fund companies was to introduce a
wide variety of products and due to oligopolistic competition; there was no dearth of
subscribers. The only parameter on which the selling was based was the relative
performance of the products.

Distribution Focus

Product focus continued for 2-3 years even after the entry of private sector players in
1993. Initially, the private sector companies introduced the same products available from
the pubic sector players and promised superior performance. When they realized that
they needed to differentiate on some other parameter as well, they focused on
distribution. As it was difficult and time consuming to replicate the wide-spread
distribution structure of Agents set up by UTI, they encouraged third-party distribution
companies to distribute their products all over India. Specialist distribution companies
emerged. Special focus was given to investor servicing so that investors could experience
superior servicing standards from private players. Some groups such as Birla Mutual
Fund even set up their own distribution companies (Birla Distribution).
While the focus on improved distribution and investor servicing did help the private
players establish themselves against large players like UTI, it had also resulted in a lot of
problems. In the rush to gain volumes and thereby commission incomes, the distribution
companies many a time sold the wrong product to the wrong customer. A growth product,
which invests primarily in risky instruments like equities was sold to old, retired people
looking for regular, steady income as pension. The ensuing dissatisfaction has thus paved
the way at last for the most critical area for marketing, the Customer Ownership Focus.

Customer Ownership Focus

Mutual Fund companies began to segment their target customers and position their
various products based on the target segment they proposed to address. The target
segment was broadly divided into institutional segment and individual investor segment.

The institutional segment consisted of treasury departments of Corporates, Trusts, etc.

and suitable products such as Institutional Income schemes and Money Market schemes
were targeted at them.

The individual investor was in turn divided into various segments such as Young Families
with small or no children, Middle-aged People saving for retirement and Retired People
looking for steady income.

Suitable products such as Growth and Balanced schemes for young families and Income
schemes for retired people were marketed.

By proper segmentation and by targeting the right product to the right customer, Mutual
Fund companies hoped to win the confidence of their customers and 'own' them for a
lifetime.

Specialized Product & Service Focus

If one observes the trends in the recent past, companies have been taking the above
customer focus further by designing and launching specialized products and services. As
awareness levels of individual investors go up, focus is on identifying one's investment
needs depending on one's financial goals, risk taking ability and time horizon. Investors
chose companies, which help them in the above through specialized products and
services. For example, a common financial goal is to save and invest for meeting the
education needs of children. A number of Mutual Funds such as Pru-ICICI Mutual Fund
and UTI Mutual Fund have launched products that are designed to serve this specific
need. A similar such need is planning for a comfortable retirement.

In addition, there is a need for specialized services that help investors assess their risk
taking ability and chose products accordingly. Some Mutual Fund companies are
launching a new product called 'Fund of Funds' which is a Scheme that merely invests in
a combination of other schemes (growth schemes, income schemes etc.), of that company
based on the investment objective and risk profile of the investor.

GLOSSARY

FREQUENTLY USED TERMS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The
per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.

Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include
a sales load.

Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a
back-end load. This is also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are NAV related.

Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load.
Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from the unit holders.