introduction to mutual fund

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Introduction to Mutual fund

Mut ua l f und i s a t r u s t t ha t poo l s t he s av i ngs o f a number o f

investors who share a common financial goal. This pool of money is

invested in accordance with a stated objective. The joint ownership of the

fund is thus Mutual, i.e. the fund belongs to all investors. The money thus

collected is then invested in capital market instruments such a s

s h a r e s , d e b e n t u r e s a n d o t h e r s e c u r i t i e s . T h e i n c o m e e a r

ned through these inves tments and the capi tal appreciat ionsrealized are shared by its unit holders in proportion the number of

un i t s owned by t hem. Thus , a Mut ua l Fund i s t he mos t s u i t ab l e

i nves t men t f o r t he common man as i t o f f e r s an oppor t un i t y t o

invest in a diversified, professionally managed basket of securities at

a relatively low cost.

A Mut ua l Fund i s an i nves t men t t oo l t ha t a l l ows s ma l l

i nves t o r s acces s t o a we l l d i ve r s i f i ed po r t f o l i o o f equ i t i e s ,

bonds and o t he r s ecu r i t i e s . E a ch s h a r e h o l d e r participates in

the gain or loss of the fund. Units are issued and can be redeemed as

needed. The funds Net Asset value (NAV) is determined each day. Investments in

securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all

stocks may not move in the same direction in the same proportion at the

same time. 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.

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

fallen down and are generally below the inflation rate. Therefore, keeping large


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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. 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

bonds with 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 collect funds from the public.

Definition:

Mutual fund is vehicle that enables a number of investors to pool their

money and has it jointly managed by a professional money manager.


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Origin of 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:

FIRSTPHASE

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-linkedfrom the RBI and the Industrial Development Bank of India (IDBI) took over the

regulatory and administrative control in place of RBI. At the end of 1988 UTI had

Rs.6, 700 cores of assets under management.

SECOND PHASE

1987-1993 (PUBLICSECTOR 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 June1989 while GIC had set up its mutual fund

in December 1990. At the end of 1993, the mutual fund industry had assets under

management of Rs 47000 cores.

THIRDPHASE

1993-2003 (PRIVATESECTOR 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


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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 of Rs. 1, 21,805 cores

FOURTH PHASE

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 cores as at the

end of January 2003.The second is the UTI Mutual Fund Ltd, sponsored by SBI,

PNB, BOB and LIC.

With the bifurcation of the UTI which had in March 2000more than Rs.76, 000

cores 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 end of September, 2004,

there were 29 funds, which manage assets of Rs.153108 cores under 421 schemes


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When an investor subscribes for the units of a mutual fund, he becomes part

owner of the assets of the fund in the same proportion as his contribution amount

put up with the corpus (the total amount of the fund). Mutual Fund investor is also

known as a mutual fund shareholder or a unit holder. Any change in the value of

the investments made into capital market instruments (such asshares, debentures etc)

is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market

value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme

is calculated by dividing the market value of scheme's assets by the total number

of units issued to the investors.
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Schemes of Mutual Fund

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:


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On the Basis of Flexibility

Open 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.

Close 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 stockexchange. 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 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.

Equity 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.


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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 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.

Index 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 weight ages. 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 invariablymimic 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 percent, the fund is said to have

a tracking error of 1 per cent.

Diversified Fund:

Funds that have the mandate to invest in the entire universe of stocks. Although

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


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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.

Tax 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 toELSS 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.

Sector 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 Parma,

most other industries alternate between periods of strong growth and bouts


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of slowdowns. The way to make money from sector funds is to catch these cycles

get 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.

Debt 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 are 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 intodebt market investments is not common among investors. 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.

Money Market Funds:

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


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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 Net worth

Individuals (HNI) money. It accounts for 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.

Guilt Fund:

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 debtinstruments 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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Balanced Fund/ Hybrid Fund:

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 debt normally 60:40 in

favor of equity. On the risk ladder, they fall somewhere between equity and debtfunds, depending on the funds debt-equity spilt the 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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Net Asset Value

(NAV) is a term used to describe the value of an entity's assets less the value of its

liabilities. The term is most commonly used in relation to open-ended or mutual

funds due to the fact that shares of such funds registered with the U.S. Securities

and Exchange Commission are redeemed at their net asset value. However, the

term may also be used as a synonym for book value or the equity value of a

business. Net asset value may represent the value of the total equity, or it may be

divided by the number of shares outstanding held by investors and, thereby,

represent the net asset value per share.Net asset values and other accounting and

recordkeeping activities are the result of the process of Fund Accounting,

sometimes called securities accounting, investment accounting and/or portfolioaccounting. Fund Accounting systems are sophisticated computerized systems

used to account for investor capital flows in and out of a fund, purchases and sales

of investments and related investment income, gains, losses and operating

expenses of the fund. The fund's investments and other assets are valued on a

regular basis such as daily, weekly or monthly, depending on the fund and

associated regulatory or sponsor requirements. There is no universal method

or basis of valuing assets and liabilities for the purposes of calculating net asset

value used throughout the world, and the criteria used for the valuation will

depend upon the circumstances, the purposes of the valuation and any regulatory

and/or accounting principles that may apply. For example, for US registered

open-ended funds, investments are commonly valued each day the New York

Stock Exchange is open, using closing prices (meant to represent fair

value),typically 4:00 PM Eastern Time. For US registered money market funds,

investments are often carried or valued at 'amortized cost' as opposed to market

value for expedience and other purposes, provided various requirements are

continually met.


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Definition:

The Net Asset Value, or NAV, is simply a measure of the current rupee

value of one share of a mutual fund. It's the fund's assets minus its liabilities

divided by the number of outstanding shares.NAVs are calculated at the end of each

trading day. If the NAV increases, then it means the value of your holdings increase (if

you are a shareholder).


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Structure of mutual fund in India

Like other countries, India has a legal framework within which mutual funds must be constituted.

In India, open and closed-end funds operate under the same regulatory structure, i.e. in India; all

mutual funds are constituted along one unique structure-as unit trust. A mutual fund in India is

allowed to issue open-end and close end schemes under a common legal structure. Therefore, a

mutual fund may have different schemes (open and closed-end) under it i.e. under one unit trust,

at any point of time. The structure, which is required to be followed by mutual funds in India, lay

down under SEBI (Mutual Fund) Regulations, 1996.


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The Fund Sponsor:'Sponsor" is defined under SEBI regulations as any person who, acting Alone or in combination

with another body corporate, establishes a, mutual fund. The sponsor of a fund is akin to the

promoter of companies he gets the fund registered with SEBI. The sponsor will form a Trust and

appoint a board of Trustees. The sponsor will also generally appoint 11 Asset management

Company (AMC) as fund managers. The sponsor ill also appoint a Custodian to hold the fund

assets. All these appointment are made in accordance with the SEBI regulations. Per the existing

SEBI regulations, for a person to qualify as a sponsor, must contribute at least 40% of the net

worth of the AMC and issues a sound financial track over five years prior to registration.

Mutual Funds as Trusts:

Mutual fund in India is constituted in the form of a Public Trust under the Indian Trusts Act

1882.The fund invites investors. Contribute their money in the common pool by subscribing to

units Issued by various schemes established by the trust as evidence of their beneficial interest in

the fund. The trust or fund has no legal capacity itself rather it is the Trustee(s) who have legal

capacity and therefore the trustees take all acts in relation to the trust on its behalf.

Trustees:

A board of trustees - a body of individuals, or a Trust company - a corporate body, may managethe Trust. Board of Trustees manages most of the funds inIndia.4, The Board or the Trustee

Company (body of individuals, corporate body, for managing the portfolio, appoints an Asset

Management Company. The Trust is created through a document called the Trust Deed that is

executed by the Fund Sponsor in favors of the trustees. They are the primary guardian of the unit

holder's funds and assets. They ensure that AMC's operations are along professional line.

Rights of Trustees:

Appoint the AMC with the prior approval of SEBI. Approve each of the schemes floated by the

AMC. Have the right to request any necessary information from the AMC concerning the

operations of various schemes managed by the AMC as Mutual Fund. Often as required, to

ensure that the AMC is in compliance with the Trust Deed and regulation. Direction of the

trustees. The AMC is required to be approved and registered with SEBI as an AMC; The


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Trustees are empowered to terminate the appointment of the AMC and may appoint new AMC

with the prior approval of the Board and holders.

The AMC floats and then manages the different investment schemes. The AMC of a mutual

Fund must have a net worth of at least 1O Chores at all the times. The AMC cannot act as a

trustee any other mutual fund. The AMC must report to the trustees with respect to its activities.

Obligations of Trustees

Must enter into an investment management agreement with the AMC inaccordance with the

Fourth Schedule of SEBI (MF) Regulations, 1996. Must ensure that the funds transactions

are in accordance with the Trust Deed. Are responsible for ensuring that the AMC has

proper systems and procedures in place and has appointed key personnel including Fund

Managers and a Compliance Officer besides other constituents such as the auditors and

registrar. Must ensure that the AMC is managing schemes independent of other activities and

that the interest of unit holders of one scheme is not compromised with those of other schemes.

Asset Management company:

Acts as an invest manager of the Trust under the Board Supervision and direction of the Trustees.

Has to be approved and registered with SEBI. Will float and manage the different investment

schemes in the name of Trust and in accordance with SEBI regulations. Acts in interest of the

unit-holders and reports to the trustees.

Obligations of the AMC and its Directors:

They must ensure that:

Investment of funds is in accordance with SEBI Regulations and the Trust Deed. Takeresponsibility for the act of its employees and others whose services it has procured They are

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

and compliance with SEBI Regulations If the AMC uses the services of a sponsor, associate or

employee, it must take appropriate disclosure to unit holders, including the amount of brokerage

or commission paid. Do not undertake any other activity conflicting with managing the fund.


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Right to ensure that, based on their quarterly review of the AMC's net worth, any shortfall is

made up.

Agents:

Transfer agents are responsible for issuing and redeeming units of the mutual lfund and provide

other related services such as preparation of transfer documents updating investors' records. A

fund may choose to out this activity in-house or by an outside transfer agent.

Distributors:

AMCs usually appoint Distributors or Brokers, who sell units on behalf of the fund. Some funds

require that all transactions to be routed through such brokers. In India, besides brokers,

independent individuals are appointed as agents for the purpose of selling the fund scheme to the

investors. While individuall constitute the largest segment in the category of mutual fund

distributors, other distributors include banks, NBFCs and corporate.

Bankers:

A fund's activities involve dealing with the money on a continuous basis primarily with respect to

buying and selling units, paying for investment made, receiving the proceeds on sale of

investment and discharging its obligations towards operating expenses. A funds banker therefore

plays a crucial role with respect to its financial dealings by holding its bank account and

providing it with remittance services.

Custodian and Depository:

The custodian is appointed by the Board of Trustees for safekeeping of securities in terms of

physical delivery and eventual safe keeping or participating in the clearing system through

approved depository companies on behalf of the mutual fund and must fulfill its responsibilities

in accordance with its agreement with the mutual fund. The Indian markets are moving away

from having physical certificates for securities, to ownership of these securities in dematerialized

form with a depository. Thus, a Depository Participant will hold a mutual funds dematerialized

securities holdings. A fund's physical securities will continue to be held by a custodian.


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Classification of Mutual fund

The two main asset classes are debt and equity. Popular perception is that equity is risky, while

debt is safe. However, it needs to be remembered that debt securities are susceptible to daily

change in values as equity securities. Further, the real returns on debt may or may not be positive.

Equity on the other hand, can be an effective hedge against inflation, particularly in situations of

normal inflation .Broadly mutual funds can be divided into two categories - equity-oriented and

debt-oriented. As the names suggest, equity-oriented mutual funds invest predominantly in

equities; diversified equity funds and balanced funds are the popular variants. Equity valuations,

on the other hand, vary with corporate performance and prospects, and the overall market

sentiment. Conversely, debt-oriented funds hold a significant portion of their portfolios in fixed

income instruments like government securities, corporate bonds, and treasury bills among others.

However this bifurcation fails to reveal the versatile nature of mutual funds. Let's take this

discussion a step further by discussing the various choices available to investors in each of the

aforementioned categories Different Mutual Funds are positioned differently depending on the

strategy they adopt for making investments. Any mutual fund has the main objective of earning

income and high returns for its investors, i.e., getting increased value of their investments. Most

Mutual Fund companies offer different schemes of investments depending on the requirements

of the target groups. The most efficient method of starting a classification or categorization of allschemes that are offered in the Mutual Fund Investments Market would be to group these into

two broad classifications: Portfolio Classification and Operational Classification.

Operational Classification:

Operational classification highlights the two main types of schemes, i.e., open-ended and close-

ended which are offered by the mutual funds.


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(a)Open Ended Schemes:As the name implies the size of the scheme (Fund)is open, and not specified or pre-

determined. Entry to the fund is always open to the investor who can subscribe at any

time. Such fund stands ready to buy or sell its securities at any time. The units are

normally not traded on the stock exchange but are repurchased by the fund at

announced rates. Open-ended schemes have comparatively better liquidity despite the

fact that these are not listed. No minute-to-minute fluctuations in rates haunt the

investors.

(b)Close Ended Schemes:Such schemes have a definite period after which their shares/ units are redeemed.

Unlike open-ended funds, these funds have fixed capitalization, i.e., their corpus

normally does not change throughout its life period. Their price is determined on the

basis of demand and supply in the market. A premium may exist only on account of

speculative activities.


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Mutual fund Portfolio Classification of Funds:

The portfolio classification of funds can be divided into 4 kinds.


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Return based classification

The investors of the mutual fund schemes are made to enjoy a good return in form of

regular dividends or capital appreciation or a combination of these both.

1. Income Funds:

: Income funds are floated for the interest of investors who want to maximize current income.

These funds distribute periodically the income earned by them, in the form of either a constant

income at relatively low risk or in the form of maximum income possible with higher risk by the

use of leverage.

2. Growth Funds:

: These Schemes have the objective to achieve an increase in the value of the underlying

investments through capital appreciation, and they invest in growth oriented securities.

3. Conservative Funds:These funds offer a blend of good average returns and reasonable capital appreciation. These

funds are very popular and are ideal for the investors who want both growth and income fromtheir investment

Investment Based Classification:

Mutual funds may also be classified on the basis of the kind of securities that they invest in

1. Equity Funds:Equities are a high risk-high return asset class; the same risk profile spills over to equity

funds as well. However investors must take not of the fact that a large number of

variations exist within the 'high risk' equity funds segment. For example a sector fund

would be on the relatively higher scale in the risk-return paradigm when compared to an

index fund, which simply tracks the movements in a chosen benchmark index. The

graph display show some of the variants from the equity funds segment rank in terms of


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the risk-return trade-off. Instead of adopting a "text-book" method and placing all equity

funds on a common platform, investors should appreciate the nuances of each category.

These are intricacies investors must be aware of in order to make an informed

investment decision.

These funds invest most of their investible shares in equity shares of companies and

undertake the risk associated with the investment in equity shares. The equity funds

category can be further differentiated as follows:

Market capitalization-based funds:

Market capitalization is defined as the number of shares issued by a company

multiplied by the price of each share. Companies are generally divided into the large

cap, mid cap and small cap segments respectively on the basis of their market

capitalization. Some diversified equity funds are launched with the mandate to invest in

stocks from one or more of the stated segments i.e. the company's market capitalization

becomes the governing force. For instance, Franklin India Blue chip Fund represents a

large cap diversified equity fund .

The sharp run up in stocks from the mid cap segment in the recent past can be credited

for the launch in funds of the mid cap and flexi cap (funds that invest in stocks across

market segments) varieties. Sundaram , S.M.I.L.E,. and HDFC Premier Multi-Cap

Fund are examples of flexi cap funds.

Opportunities funds:

Fund managers handling opportunities funds have perhaps the most flexible investment

mandates. Opportunities funds can invest in stocks across market segments, sectors and

some are even permitted to invest a significant portion of their corpus in debt. As the

name suggests, the idea is to seek opportunities for clocking gains from any

sector/market segment. However the agile management style also tends to enhance the

risk profile of these funds vis--vis a conventional diversified equity fund. DSP ML

Opportunities Fund and HSBC India Opportunities Fund fall under this category.


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Theme-based funds:

T h e m e - based funds are fairly similar to sector funds, however the differentiating

factor is the level of diversification they offer. Instead of concentrating on stocks from a

single sector/industry, their focus lies on specific theme like globally competitive Indian

companies or multinational corporations operating in India; for example Kotak Global

India Fund and Birla India Opportunities Fund. In terms of diversification and risk

profiles, these companies tread the path between a sector fund and a conventional

diversified equity fund. Some theme-based funds are positioned based on their stock-

picking strategy. Dividend yield funds are launched with the intention of investing in

stocks offering a dividend yield above a certain pre-determined level. For example,

Principal Dividend Yield Fund targets companies with a dividend yield higher than 1.5

times that of the NSE Nifty on the earlier trading day. Similarly value funds propagate

the value style of investing i.e. picking.

Index funds:

Index funds are launched with the mandate of tracking benchmark indices like the BSE

Sensex or S&P CNX Nifty. These funds invest in stocks from the index in the same

proportion as the benchmark, thereby offering investors the opportunity to capture the

growth in the chosen index. Index funds are generally more popular in developed

markets where actively managed funds find it difficult to outperform the benchmark

indices as markets are relatively better researched; also their expenses (fees, charges)

tend to be lower vise--versa inactively managed funds.

An offshoot of index funds is the index- plus funds category. Index-plus funds invest a

predetermined proportion of their total assets in index stocks and the balance in stocks

outside the index. HDFC Top200 Fund falls in this category of funds.

Fund of Funds:

A regular mutual fund invests in equities, bonds and fixed income securities depending

on its objective. Fund of Funds (FOF) extend this concept by investing in units of other

mutual fund schemes. By investing in more than one mutual fund they take


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diversification to a new level For example an FOF could invest in five top performing

equity funds and offer a highly diversified portfolio to the investor. Similarly others

could invest in equity and debt funds simultaneously, thereby offering a portfolio that is

diversified across asset classes. On the flipside, FOF investors must be wary of higher

expenses on account of overlapping of costs. FT India Life Stage Fund is the example of

an FOF.

2. Debt Funds:

These Funds have their portfolio comprising of bonds and debentures (Debt

Instruments). These funds are considered to be very secure with a steady income.

Long term debt funds:

Long-term debt funds are conventional debt/bond funds that have been inexistence for as

long as equity funds. Investors prefer to invest in debt funds for the same reasons they

choose to invest in equity funds viz. they get benefits of diversification across debt

instruments and the services of a professional fund manager. In fact, for retail investors,

debt funds are one of the most important avenues for investing in debt securities like

corporate bonds and government securities, chiefly because individual transactions in

debt are of a very high value (running in millions of rupees) and beyond most retail

investors. This is unlike equities for instance, where retail investors can invest on their

own in smaller lots. Debt funds invest across a range of debt/fixed income securities.

When these securities have a residual maturity of at least 12 months, they are classified

as long-term debt or longer-dated paper. Debt funds also invest in shorter-dated paper

like treasury bills, certificate of deposit (CDs) and commercial paper to name a few. In

addition to this, they also allocate a small part of assets to cash.

Sundaram Bond Saver is an example of a long-term debt fund. Given that a large chunk

of the fund's assets are in longer-dated paper, these funds are exposed to what is called as

'interest rate risk'. This means that in the event of volatility in debt markets, long-term debt

funds will witness above-average turbulence, as there is greater uncertainty associated


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with the longer tenure. On the other hand, shorter-dated paper is relatively well insulated

from instability in debt markets.

Short-term debt funds:

If you have understood how longer dated paper is different from shorter dated paper,

then you have a fairly good idea about what short-term debt funds have on offer for

investors. There is a category of investors who have two critical needs that short-term

debt funds help achieve. Onethey want to be invested for the short-term - less than 6

months. Two - over this time frame, they are looking at preserving capital with a return

that is superior to that of a fixed deposit of a comparable tenure. The reason why short-

term debt funds can preserve capital better than long term debt funds is because they are

invested in debt instruments of a shorter tenure. This category of debt instruments is not

as adversely affected by volatility in debt markets as longer dated paper. As a result,

prices of shorter-dated debt instruments are relatively stable and serve the needs of risk-

averse investors well. Templeton Income Short Term is an example of a short-term debt

fund. Investments in short-term debt funds should be made with a time frame of 1-6

months.

Liquid funds:

Liquid funds invest in very short-term debt instruments maturing in 30-45 days.

Typically this includes treasury bills and call money. Liquid funds serve needs quite

similar to that of short-term debt funds, only difference is that liquid fund investors have

an even shorter investment time frame, at times as short as one day. If investors are

looking at being invested for more than a month, they can consider short-term debt funds

for a marginally higher return. Grind lays Cash Fund is an example of a liquid fund.

Long-term gilt funds:

A long - term government securities fund invests primarily in government paper (gilt/g

sec) with a residual maturity of over 12 months. This is unlike conventional debt funds

that invest primarily in corporate bonds with gilt accounting for a smaller share of net


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assets. Given their 'investment bias' for a particular segment of the debt market, gilt

funds can be classified as 'sector funds'. Gilt funds have a higher risk profile than

conventional debt funds because their investments are limited to a particular segment of

the debt market and they cannot diversify across other segments like corporate bonds

for instance, In times of turbulence. The risk associated with gilt funds is

further compounded by the fact that gilts due to the higher liquidity are more volatile

than corporate bonds. Due to the liquidity, gilt prices are more closely linked to

developments in the economy. So any pessimism in debt markets linked to 'news' like

inflation, rising crude prices, global economic turbulence, is likely to have a greater

impact on gilt prices than corporate bond prices. Templeton G sec and Kotak Gilt are

examples of long-term gilt funds. Investments in long-term gilt funds should be made

with a time frame of at least 12 months.

Short-term gilt funds:

A short-term gilt fund invests primarily n gilts of a shorter tenure (less than 12months).

The rationale for investing in short-term gilt funds is similar o that of short-term debt

funds. Investors have a shorter investment time frame (less than6 months) and want to

clock a small gain with capital preservation being the more important objective. The

reason investors choose short-term gilt funds over short-term debt funds is because gilts

can provide a higher capital appreciation vis--vis bonds. As explained earlier, this is

because gilts, by virtue of liquidity, are more closely linked to 'economy-related news'

and the upside and downside of investing in gilts is markedly higher vis--vis corporate

bonds. Templeton G sec (Short Term) is an example of a short-term gilt fund.

Dynamic debt funds:

Dynamic debt funds attempt to combine the benefits of debt funds and gilt funds. They

can invest across corporate bonds and gilts without any restrictions .They are distinct

from conventional debt funds that invest in gilts and corporate bonds because these

funds usually maintain a cap on their gilt investments. Dynamic debt funds tend to

increase their gilt investments in times of economic stability as gilt prices tend to have a

more lucrative spread (i.e. difference between the buy and sell prices). Again spreads on


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gilt have an edge over spreads on corporate bonds because of higher liquidity in the

former. The fund manager will invest in corporate bonds and/or gilts depending on the

spread between the yields of the two instruments.

He will consider the comparative yields and the credit risks associated with the

instrument and invest accordingly. In this way dynamic debt funds try to maximize

returns for the investor at all times. Grind lays Dynamic Bond Fund is an example of a

dynamic debt fund. Investments in dynamic debt funds should be made with a time

frame of at least12 months.

Long-term floating rate funds:

Floating rate funds invest in debt instruments that have their coupon rates adjusted at

periodic intervals. These instruments are called 'floating rate instruments'. The floating

rate paper is benchmarked against a reference point like the MIBOR (Mumbai Inter-

bank Offered Rate) for instance. Changes in the MIBOR are a cue for the coupon rate

on the floating rate paper to be reset accordingly. As opposed to floating rate

instruments, you have conventional fixed rate instruments wherein the coupon rate is

fixed till maturity.

As the coupon rate on floating rate paper is reset periodically, there is lower pressure on

its price during interest rate volatility. That is why floating rate paper is less affected by

turbulence in debt markets vis--vis fixed rate paper. Consequently over the past two

years, floating rate funds have held their own in investors' portfolios, while

conventional debt funds have been adversely impacted by the instability in interest

rates.

Short-term floating rate funds:

Short-term floating rate funds work on the same lines as long-term floating rate funds

except that they invest in floating rate paper of shorter tenure (less than 12months). If

investors are looking to be invested across a shorter time frame of 1-6 months, short-

term floating rate funds should be preferred over their long term counterparts.

Templeton Floating Rate Fund (Short Term) is an example of a short-term floating rate

fund.


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Fixed maturity plans:

Fixed maturity plans (FMPs) are another 'invention' that became necessity to counter

interest rate instability, a problem that has become acute over the last two years.

Typically, FMPs are close-ended funds. They invest across debt instruments to arrive at

a pre-determined yield. Pre-determined because the yield is announced beforehand to

investors. So FMPs have defined investment tenure. If the investor's investment time-

frame matches that of the FMP, he can consider investing in it. The benefit of investing

in FMP is that the investor knows in advance the return that he will generate on his

investment. Knowing the return on your debt fund has assumed significance now when

conventional debt funds are operating in an uncertain interest rate environment, when

even negative returns have become a way of life. To understand how this workstake

an FMP, which at the IPO stage (initial public offering) announces that it will invest in

paper maturing in May 2006 yielding 5.25% interest.

(c) Sector Based Funds:There are funds that invest in a specified sector of economy and they specialize in the

said sector. However, they run the risk of not being able to diversify. Sector based funds

are aggressive growth funds which make investments on the basis of assessed bright

future for a particular sector. The specialty of sector funds rather oddly lies in the fact

that they go against the very grain of mutual fund investing i.e.holding a diversified

portfolio. That is why you will find some Asset Management Companies that swear

against sector funds.

Sector funds are launched with the intention of capitalizing on opportunities in a single

sector,for example the pharmaceutical industry, the software industry among others.

The fund invests in various stocks from the same industry thereby making it a high risk-

high return investment proposition. Unlike a conventional diversified equity fund, a

sector fund doesn't have the safety net of diversification (it is diversified, but only within

a sector) to fall back on if there is a change in fortunes of its chosen area of operations.


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Commodity Funds:

It will invest directly in commodities or through shares of the commodity companies or

through commodity futures contract .Most common example of such fund is precious-

metal fund, Gold funds invest in Gold, Gold futures or shares of gold mines

Exchange Traded Funds:

It combines the best features of open end and closed structure. It tracks a market index

and trades like a stock on the stock market. ETFs are not the index funds

Real Estate Funds:

It can invest in real estate, Fund real estate developers, Buy shares of housing finance

companies, Buy securitized assets.


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TAX BENEFITS OF MF

ELSS (Equity linked saving scheme).

3 year lock in period.

Minimum investment of 90% in equity markets at all times.

So ELSS investment automatically leads to investment in equity shares.

Open or closed ended.

Eligible under Section 80 C up to Rs.1 lakh allowed.

Dividends are tax free.

Benefit of Long term Capital gain taxation.


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Risk Associated With Mutual fund:

RISKRETURN TRADE OFF:

The most important relationship to understand is the risk-return trade-off. Higher the risk

greater the returns/loss and lower the risk lesser the returns/loss. Hence it is up to you, the

investor to decide how much risk you are willing to take. In order to do this you must

first be aware of the different types of risk involved with your investment decision.

MARKET RISK:

Sometimes prices and yields of all securities rise and fall. Broad outside influencesaffecting the market in general lead to this. This is true, may it be big corporations or

smaller mid-sized companies. This is known as Market Risk. A Systematic Investment

Plan ( SIP ) that works on the concept of Rupee Cost Averaging ( RCA ) might

help mitigate this risk.

CREDIT RISK:

The debt servicing ability (may it be interest payments or repayment of principal) of a

company through its cash flows determines the Credit Risk faced by you. This credit risk

is measured by independent rating agencies like CRISIL who rate companies and their

paper. A AAA rating is considered the safest whereas a D rating is considered poor

credit quality. A well-diversified portfolio might help mitigate this risk.

INFLATION RISK:

Things you hear people talk about:Rs. 100 today is worth more than Rs. 100

tomorrow.Remember the time when a bus ride costed 50 paisa?


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Mehangai Ka Jamana Hay. The root cause, Inflation. Inflation is the loss of

purchasing power over time. A lot of times people make conservative investment

decisions to protect their capital but end up with a sum of money that can buy less than

what the principal could at the time of the investment. This happens when inflation grows

faster than the return on your investment. A well-diversified portfolio with some

investment in equities might help mitigate this risk.

INTEREST RATE RISK:

In a free market economy interest rates are difficult if not impossible to predict. Changes

in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices

of bonds fall and vice versa. Equity might be negatively affected as well in a rising

interest rate environment. A well-diversified portfolio might help mitigate this risk.

POLITICAL RISK:

Changes in government policy and political decision can change the investment

environment. They can create a favorable environment for investment or vice versa.

LIQUIDITY RISK:

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.

Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well

as internal risk controls that lean towards purchase of liquid securities. It simply means

that you must spread your investment across different securities (stocks, bonds, money

market instruments, real estate, and fixed deposit etc.) and different sectors (auto, textile,

information technology etc.). This kind of a diversification may add to the stability of

your returns, for example during one period of time equities might underperform but

bonds and money market instruments might do well enough to offset the effect of a

Slump in the equity markets.


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Loads and types of loads:

A mutual fund is simply a large group of people who lump their money together

for a management company to invest. And, like most things in life, there are fees

and commissions involved.

Mutual funds come in two main flavors, categorized by how the fees are charged.

A load mutual fund charges you for the shares/units purchased plus an initial sales

fee. This charge is typically anywhere from 4% to 8% of the amount you are

investing or it can be a flat fee depending on the mutual fund provider. This is

added to your purchase as a sales fee. For example, if you invested $1,000 into a

5% load mutual fund, you would actually be investing only $950 with the

remaining $50 going to the company as a commission.

There are a couple different types of load funds out there. Back-end loads mean

the fee is charged when you redeem the mutual fund. A front-end load is the

opposite of a back-end load and means the fee is charged up front.

A no-load fund simply means that you can buy and redeem the mutual fund

units/shares at any time without a commission or sales charge. However, some

companies such as banks and broker-dealers may charge their own fees for the

sale and redemption of third-party mutual funds.

Most people recommend trying to avoid load funds altogether. Many studies have

shown that both types of mutual funds offer the same return - it's just that one

charges you a commission fee. One warning though, most no-load funds charge

fees if you redeem them early (usually within the first five years), but, if you are a

long-term investor, there is no need to worry.
http://www.investopedia.com/terms/m/mutualfund.asphttp://www.investopedia.com/terms/c/commission.asphttp://www.investopedia.com/terms/l/loadfund.asphttp://www.investopedia.com/terms/b/back-end-load.asphttp://www.investopedia.com/terms/r/redemption.asphttp://www.investopedia.com/terms/f/front-endload.asphttp://www.investopedia.com/terms/n/no-loadfund.asphttp://www.investopedia.com/terms/b/bank.asphttp://www.investopedia.com/terms/b/broker-dealer.asphttp://www.investopedia.com/terms/b/broker-dealer.asphttp://www.investopedia.com/terms/b/bank.asphttp://www.investopedia.com/terms/n/no-loadfund.asphttp://www.investopedia.com/terms/f/front-endload.asphttp://www.investopedia.com/terms/r/redemption.asphttp://www.investopedia.com/terms/b/back-end-load.asphttp://www.investopedia.com/terms/l/loadfund.asphttp://www.investopedia.com/terms/c/commission.asphttp://www.investopedia.com/terms/m/mutualfund.asp


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Entry Load:

W hen a cha r ge i s co l l ec t ed a t t he t i me o f en t e r i ng i n t o a

s ch eme i t i s called as entry load or front end load or sales load. The entry load

percentage is added to the NA at the time of allotment of units.

Exit Load:

An Ex i t l oad o r Back- end l oad o r r epur chas e l oad i s a cha r ge

t h a t i s collected at the time of redeeming or for transfer between schemes.

(Switch). The exit load percentage is deducted from the NAV at the time of redemption or

transfer between schemes.

Contingent Deferred Sales Load (CDSL):

The load amounts charged to units when recovered at various period of

time is called as deferred load. This load reduces the redemptionproceeds paid out to the outgoing investors. Depending on how many years the

investor stays with the fund, some funds may charge different mounts of loads to

the investor- the longer the investor stays with the fund, lesser is the

amount of exi t load charged to him. This i s cal led Cont ingent the


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FREQUENTLY USED TERMS AMC:

A Company formed under the Companies Act and registered with SEBI

to manage investors funds collected through different schemes. The trustee

delegates the task of floating schemes and managing the collected money

to a company of professionals, usually experts who are known for

smart stock picks. This is an Asset Management Company (AMC). AMC

charges a fee for the services it renders to the MF trust. Thus, the AMC acts as

the investment manager of the trust under the broad supervision and

direction of the trustees.

Unit:

A unit in a mutual fund scheme means one share in the assets of a particular

scheme. So, a person holding units in a scheme is referred to, as a unit holder.

Net Asset Value ( NAV):

The pe r f o r mance o f a pa r t i cu l a r s cheme o f a Mut ua l Fund i s

denoted by Net Asset Value (NAV). Mutual Funds invest the money

collected from the investors in securities markets. In simple words, NAV is the market

value of the securities held by the scheme. Since market value of the securities changes

every day, NAV of a scheme also varies on a day-to-day basis. The NAV per unit

is the market value of the securities of a scheme divided by the total number of

units of the scheme on any particular date. For e.g., if the market value of

securities of a mutual fund scheme is Rs. 300 lakhs and the mutual fund has

issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the

fund is Rs. 30. NAV is required to be disclosed by the mutual funds on a regular

basis-daily or weekly-depending on the type of scheme.


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Sale Price:

It is the price you pay when you invest in a scheme. It is also called as

Offer Price. It may include a Sales or Entry Load.

Repurchase Price:

It is the price at which an investor sells back the units to the Mutual Fund. This

price is NAV related and may include the exit load. When an investor

chooses to withdraw money from his investment in an open-ended fund

at any point of time, the units are sold at NAV (after deduction of the Exit

Load, if any) to the fund. When a close-ended fund completes tenure, it is

redeemed at the prevailing NAV and investors are paid the proceeds thereof. It is

also called as Bid Price.

Redemption Price:

It 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.

Statement of Account:

A Statement of Account is a document that serves as a record of transactions

between the fund and the investor. It contains details of the investor

with the various transactions executed during the period, i.e., sales,

repurchase, switch-over in, and switch-over out. The Statement of Account is

issued every time any transaction takes place.


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Mutual fund portfolio construction

Step One

Identify your investment needs:Your financial goals will vary, based on your age, lifestyle, financial

independence,f a m i l y c o m m i t m e n t s , l e v e l o f i n c o m e a n d e x

p e n s e s a m o n g m a n y o t h e r f a c t o r s . T h e r e f o r e , t h e f i r s t s t

e p i s t o a s s e s s y o u r n e e d s . B e g i n b y a s k i n g y o u r s e l f t h e

s e questions:

1. What are my investment objectives and needs?

Answers: I need regular income orneed to buy a home orfinance a wedding

oreducate my children ora combination of all these needs.

2. How much risk I am willing to take?

Answers: I can only take a minimum amount of risk or I am willing to accept the

fact that my investment value may fluctuate orthat there may be a short-term loss

in order to achieve a long-term potential gain.

3. What are my cash flow requirements?

Answers: I need a regular cash flow or I need a lump sum amount to meet a

specific need after a certain period orI don't require a current cash flow but

I want to build my assets for the future. By going through such an exercise, you

will know what you want out of your investment and can set the foundation for a

sound Mutual Fund investment strategy.


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Step Two:

Choose the right Mutual Fund:

Once you have a clear strategy in mind; you have to choose which

Mutual Fund and scheme you want to invest in. The offer document of the

scheme tells you its objectives and provides supplementary details like the track

record of other schemes managed by the same Fund Manager. Some factors to

evaluate before choosing a particular Mutual Fund are: 1) The track record of

performance over the last few years in rel ation to the appropriately

yardstick and similar funds in the same category.2) How well the Mutual

Fund is organized to provide efficient, prompt and

personal izedservice.3)Degree of transparency as reflected in frequency and

quality of their communications.

Step Three

Select the ideal mix of Schemes:

Investing in just one Mutual Fund scheme may not meet all your investment

needs. You may consider investing in a combination of schemes to achieve your

specific goals. The following tables could prove useful in selecting a

combination of schemes that satisfy your needs.

Step Four

Invest regularly:

For most of us, the approach that works best is to invest a fixed

amount at specific intervals, say every month. By investing a fixed sum

every month, you buy fewer units when the price is higher and more units

when the price is low, thus bringing down your average cost per unit.


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This is called rupee cost averaging and is a disciplined investment

strategy followed by investors all over the world. With many

open-ended schemes offering systematic investment plans, this regular

investing habit is made easy for you.

Step Five

Keep your taxes in mind:

If you are in a high tax bracket and have utilized fully the exemptions

under section 80Lof the Income Tax Act, investing in growth

funds that do not pay dividends might be more tax efficient and

improve your post-tax return. If you are in a low tax bracket and

have not utilized fully the exemptions available under Section 80L

of the Income Tax Act, selecting funds paying regular income could be

mor e t ax e f f i c i en t . Fu r t he r , t he r e a r e o t he r bene f i t s

available for investment in Mutual Funds under the provisions

of the prevailing tax laws. You may therefore, consult your tax advisor or

Chartered Accountant for specific advice.

Step Six

Start early:

It is desirable to start investing early and stick to a regular investment plan. If

you start now, you will make more than if you wait and invest later. The

power of compounding lets you earn income on income and your money

multiplies at the compounded rate of return.

Step Seven

The final step:


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All you need to do now is to get a touch with a Mutual Fund or your agent/broker

and start investing. Reap the rewards in the years to come. Mutual

Funds are suitab le for every kind of investor - whether starting a career or

retiring, conservative or risk-taking, growth oriented or income seeking.


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Structure of mutual Fund in India

Like other countries, India has a legal framework within which mutual

fundsmus t be cons t i tu ted . Unl ike in the UK, where two d i s t inc t

s t r uc t u r es - trust and corporate- are allowed with separate regulations,

depending on their nature- open end or closed end, in India, open end and closed

end funds are constituted along one unique structure- as unit trusts. A mutual fund

in India is allowed to issue open-end and closed-en d s che mes u nde r a

common l ega l s t r uc t u r e . Ther e f o r e , a mut ua l f und may have

several different schemes (open and closed-end) under it i.e; under one unit trust,

at any point of time. However, like the USA; all the funds and their open end and

closed end schemes are governed by the same regulations and the regulatory

body, the SEBI. The structure tha t is required to be followed by

mutual fund in India is laid down under SEBI (mutual fund) Regulations,

1996.

Some facts of the growth of mutual funds in India

100% growth in the last 6 years.

Numbers offoreign AMCs are in the queue to enter the Indian

markets like Fidelity Investments, US based, with over US $1trillion assets

under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing

these savings in mutual funds sector is required.

We have approximately 29 mutual funds which are much less than US

having more than 800. There is a big scope for expansion.


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' B ' a n d ' C ' c l a s s c i t i e s a r e g r o w i n g r a p i d l y . T o d a y m o s t

o f t h e m u t u a l f u n d s a r e concentrating on the 'A' class cities. Soon

they will find scope in the growing cities.

Mutual fund can penetrate rural areas like the Indian insurance industry with

simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.


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Reasons for slow growth of mutual fund

Social Fabric:

Indian society is represented by skewed income patterns. Rural India is far from

investible surplus. Whatever surplus a rural native may have, he is not

well informed about investible avenues and mutual funds. Most of the

resident s of rural area are unaware of stock market and economics. Mutual

funds awareness has a long way to go.

Government Players:

Private sector entities are aggressive in marketing and reach more people with

efforts. Indian mutual fund industry was with UTI and then with p ub l i c s ec t o r

fu nd s . Management of these state owned funds mostly vested with these ex-

bank managers and government account officials. They came on transfers or on

deputation from the sponsor banks. They did not have adequate specialized skills

to manage funds. Their performance was dismal in most cases and the

industry faced investor confidence crises for some years. UTIs US-64 burstalso added to the fears.

Protected Stock Market Environment:

In di an st oc k ma rk et wa s pr ot ec te d fo r several years. Reach and

visibility was much less to attract visitors. Physical shares, manual trust based

systems, absence of foreign capital flows, a scam per decade are some more

reasons for investors slow and cautious approach towards stock related

[including mutual funds investments.

.


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Regulatory Environment:

It improved slowly over the years and is now attracting more investors. Slow

growth is comparative. Compared to developed countries. Per se India has

progressed well. More than organic growth in mutual funds industry is

w i t nes s ed . No s pec i f i c b l ames t o be a t t r i bu t ed t o e i t he r

government players or regulators. In fact every entity has added to the

progress.


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ROLE OF SEBI IN MUTUAL FUND

Unit Trust of India was the first mutual fund set up in India in the year 1963. In

early 1990s, Government allowed public sector banks and institutions to set up

mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.

The objectives of SEBI areto protect the interest of investors in securities and

to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the

mutual funds to protect the interest of the investors. SEBI notified regulations for

the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector

entities were allowed to enter the capital market. The regulations were fully

revised in 1996 and have been amended thereafter from time to time. SEBI has

also issued guidelines to the mutual funds from time to time to protect the

interests of investors.

All mutual funds whether promoted by public sector or private sector entities

including those promoted by foreign entities are governed by the same set of

Regulations. There is no distinction in regulatory requirements for these mutual

funds and all are subject to monitoring and inspections by SEBI. The risks

associated with the schemes launched by the mutual funds sponsored by these

entities are of similar type. It may be mentioned here that Unit Trust of India

(UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).


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CONCLUSION

Mutual funds have become a preferred investment vehicle in todays times. This

is because they present an opportunity to the ordinary investor to

invest indirectly in the stock, bond and money markets. Investors on their own

have little or inclination to research individual stocks or sectors.

Professional fund managers employed by mutual funds do this job. Also a

single person cant diversify his portfolio and invest in multiple high -priced

stocks for the sole reason that he may not have the sufficient resources. Here

again, investing through MF route enables an investor to invest in many

good stocks and reap benefits even through a small investment. It is said that

almost everyone in America owns a mutual fund scheme. This proves the

popularity of mutual funds. Since mutual funds are capital market players they

come under the regulatory jurisdiction of SEBI. SEBI has laid down certain

guidelines for mutual funds that they are expected to follow. Thus , the set

up of a legal s tructure, which h as en ou gh te et h saf eg ua rd

inv es to rs in ter es t , ens ure s th at th e in ves tors are n ot cheated out

of their hard-earned money. As we have learned before, the investment goalsvary from person to person. While somebody wants securit y, othe rs

might give more weight age to returns alone. Somebody else might

want to plan for his childs education while somebody might be saving

for the prove rbial rainy day or even life afte r retirement. Indian MF

industry offers a plethora of schemes and deserves broadly all types of

investors. Thus one can say that the appeal of mutual

f unds cu t s ac r os s i nves t o r c l a s s es . I n o t he r

developed countr ies , Mutual funds at tract much more investments

as compared to the banking sector but in India the case is reverse.


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REFERENCES

Bibliography:

FINANCIAL MARKET AND SERVICE By GORDON.E ANDNATRAJAN.K

MUTUAL FUND AND HEDGE FUND by JOSHI D.R

WEBLIOGRAPHY:

www.investopedia.com www.Mutualfundsindia.com
http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/


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