mutual funds. meaning a mutual fund is a professionally managed type of collective investment scheme...

MUTUAL FUNDSMUTUAL FUNDS

MeaningMeaning• A mutual fund is a professionally managed type of

collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities

• A diversified portfolio of securities invested on behalf of a group of investors and professionally managed. Individual investors own a percentage of the value of the fund represented by the number of units they purchased

and thus share in any gains or losses of the fund

• An investment company that pools the money of a large group of investors and purchases a variety of securities

to achieve a specific investment objective.

MeaningMeaning

• Mutual funds are investment companies whose job it is to handle their investors’ money by reinvesting it into stocks, bonds, or a combination of both. Mutual funds are divided into shares and can be bought much like stocks, allowing mutual funds to have a high liquidity

History of mutual fundsHistory of mutual funds

• In 1774, a Dutch merchant invited subscriptions from investors to set up an investment trust by the name Eendragt Maakt Magt.

• This means “unity creates strength” with the objective of providing diversification at low cost to small investors.


• The Foreign and Colonial Government Trust formed in London in 1868 promised “the investor of modest means the same advantages as the large capitalist by spreading the investment over a number of stocks.

• The formation of Massachusetts investors Trust in the US. In 1924 started a chain of events that brought mutual funds to the American homes.


• From 80 schemes in 1940 with $500 million in assets the mutual fund industry has multiplied to 160 schemes with $ 17 billion in 1960.

• 70’s saw introduction of various schemes.

• By the end of 70,s there were 524 schemes $ 95 billions in assets in the US.

Mutual funds - conceptMutual funds - concept

• 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.

Mutual funds - conceptMutual funds - concept

• The income earned through these investments and the capital appreciation realized 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.

Flow chart of mutual fundsFlow chart of mutual funds

History of mutual funds the Indian History of mutual funds the Indian perspectiveperspective

• 1963 UTI is India's first mutual fund.

• 1964 UTI launches US-64.

• 1971 UTI’s ULIP (Unit Linked Insurance Plan) is second scheme to be launched.

• 1986 UTI Mastershare, India’s first true mutual fund scheme launched.

• 1987 PSU banks and insurers allowed to float mutual funds., SBI the first of the block


• 1987 PSU banks and insurers allowed to float mutual funds., SBI the first of the block.

• 1992 the Harshad Mehta fuelled bull market arouses middle-class interest in shares and mutual funds.

• 1993 Private sector and foreign players allowed • Kothari Pioneer first private fund house to start.• SEBI set up to regulate industry.


• 1994 Morgan Stanley is the first foreign player.

• 1996 Sebi’s mutual fund rules and regulations came into force.

• 1998 UTI Master Index Fund is the country’s first index fund.

• 1999 the takeover of Century AMC by Zurich Mutual Fund is the first acquisition in the mutual fund industry.


• 2000 The industry’s assets under management crosses Rs.1,00,000 crore.

• 2001 US-64 scam leads to UTI overhaul.

• 2002 UTI bifurcated, comes under SEBI purview.


. Mutual fund distributors banned from giving commissions to investors.

• Debut of floating rate funds and foreign debt funds.

• AMFI certification made compulsory for new agents.


• March, 2004, 31 fund houses were managing Rs. 1,40,000 crore of investor money in India.

• Of this 80% was being managed by private funds.

• The US figures indicate that 91 million individuals have invested $ 7.4 trillion in mutual funds.


• Every second household has entrusted some savings to mutual funds than in banks.

• By comparison mutual funds acceptance in India is very poor.

• According to Sebi-NCAER survey in 2000-01, just 11.8 million households, 13.7% urban 3.8% of rural had invested in mutual funds


• Retail investors in India held nine times more money in bank deposits than in mutual funds.

Agencies behind the mutual fundAgencies behind the mutual fundsponsorsponsor

• What a promoter is to a company, a sponsor is to a mutual fund.

• The sponsor initiates the idea to set up a mutual fund.

• It could be a financial services company, a bank or a financial institution.

• It could be Indian or foreign.


• It could do it alone or through joint venture.• To open a mutual fund in India sponsor needs to

take license from sebi.• For this it has to satisfy certain conditions on:• capital and profits, • track record at least for last five years, • Default free dealings and • A general reputation for fairness.


• Like the company promoter, the sponsor takes major strategic decision leaving money management and other nitty gritty to the other constituents whom it appoints.

• The sponsor should inspire confidence in your and preferably be profitable.

• Financial muscle complimented by good fund management schemes helps because money then in not an impediment.


• This facilitates hiring of best talent , invest in technology and continuously offer high service standards to investors.

• In the days of assured return schemes, sponsors also had to fulfill return promises made to unit holders.

• This sometimes meant meeting shortfalls from their own pockets, as the government did for UTI>


• All things being equal one needs to choose sponsors who are good money managers, who have a reputation for fair business practices and who have deep pockets.

Agencies behind the mutual fundAgencies behind the mutual fundAsset management companyAsset management company

• An AMC is a legal entity formed by the sponsor to run a mutual fund.

• It is the AMC that employs fund managers and analysts and other personnel.

• It is the AMC that handles all operational matters of a mutual fund – from launching schemes to managing them to interacting with the investors.


• The people in the AMC who should matter the most to the investors are those who take investment decisions.

• There is the head of the fund house, generally referred to as the chief executive officer (CEO).

• Under him comes the chief investment officer (CIO) who shapes the funds investment philosophy.


• Under him also work fund managers who manage the scheme.

• The fund managers are assisted by a team of analysts who track markets, sectors and companies.


• Although these people are employed by AMC, it is the unit holder who pays their salaries partly or wholly.

• Each scheme pays the AMC an annual “fund management fee” which is resulted to the scheme size and results in corresponding drop in your return


• For example if a schemes corpus is Rs.100 crores.

• It pays 1.25% of the corpus a year.

• Above 100 crores it pay 1% of corpus..

• So if a fund house has two schemes with a corpus of Rs.100 crores and Rs.200 crores respectively,

• The AMC will earn Rs.3.25 croes as fund management fee for that year.


• If an AMC’s expenses for the year exceed what it earns as fund management fee from its schemes, the balance has to be met by the sponsor.

• A cash rich sponsor can easily pump in money to meet shortfalls, while a sponsor with less financial clout might force the AMC to cut costs.

• This may result into an exercise in cutting corners.

Agencies behind the mutual fundAgencies behind the mutual fundTrusteesTrustees

• Trustees are like internal regulators in a mutual fund.

• Their job is to protect the interests of unit holders.

• Trustees are appointed by sponsors.• They can be either individuals or corporate

bodies.• In order to ensure they are impartial and fair,

Sebi rules mandate that at least two thirds of the trustees are independent.


• In order to ensure they are impartial and fair, Sebi rules mandate that at least two thirds of the trustees are independent.

• That is they do not have any association with the sponsor.

• Trustees appoint the AMC, which subsequently seeks their approval for the work it does.


• The AMC periodically reports to the trustees about the state of affairs.

• Trustees float and market schemes and obtain necessary approvals.

• They check if AMC’s investments are within defined limits and whether the funds assets are protected.

• Trustees can be held accountable for financial irregularities in the mutual fund.

Agencies behind the mutual fundAgencies behind the mutual fundCustodianCustodian

• A custodian handles the investment back office of the mutual fund.

• Its responsibilities include:• Receipt and delivery of securities,• Collection of income,• Distribution of dividends and • Segregation of assets between schemes.

Agencies behind the mutual fundAgencies behind the mutual fundCustodianCustodian

• The sponsor of the mutual fund cannot act as custodian of the mutual fund.

• This condition, formulated in the interests of the investors, ensures that the assets of the mutual funds are not in the hands of the sponsor.

Agencies behind the mutual fundAgencies behind the mutual fundRegistrarRegistrar

• Registrars also known as transfer agents, handle all investor related services.

• This includes issuing and redeeming units, sending fact sheets and annual reports.

• This service can either be in house or can be outsourced.

Basic principlesBasic principlesopen/closed-ended schemesopen/closed-ended schemes

• Based on the accessibility they provide investors, mutual fund schemes can be classified into ‘open ended’ and ‘closed ended’.

• Open-ended schemes, as their name suggests, don’t have a fixed tenure and are always open for investment.

• One can invest in them any time and also withdraw at any time.


• This ease of entry and exit makes it a popular choice among both mutual funds and investors.

• Closed-end schemes, on the other hand, are of fixed tenure, which is stated at the time of their birth itself.

• Such schemes invite subscriptions only once during their lifetime, at the time of launch.


• Further you can sell your units in the market.

• Most closed ended schemes are listed on the stock exchanges.

• But it is unlikely that one will realize a fair price.


• It is due to the reason that most closed-end schemes trade at prices below their true value and have low liquidity.

• That is why closed ended schemes are dying .

Basic principlesBasic principlescorpuscorpus

• Investing in a scheme is a simple process.

• Just walk into any office of the mutual fund or that of its representative, fill up a short and simple form and hand over a cheque.

• Your money gets added to the pool already with the scheme, given to it by numerous other investors.

Basic principlesBasic principlescorpuscorpus

• The total money available with the scheme at any point of time is referred to as ‘corpus’.

• The mutual fund on the investors and other investors invests this corpus in various securities, in line with its stated objectives.

Basic principlesBasic principlesunitunit

• The mutual fund issues the investor ‘units’.

• A unit is the currency of a fund.

• What a share is to a company, a unit is to a fund.

Basic principlesBasic principlesnet asset value (NAV)net asset value (NAV)

• The investor is allotted units on the basis of the scientific pricing mechanism.

• This price, measure per unit, is called the net asset value (NAV) of the unit.

• Just as a share or a bond is bought at a price, the unit is bought and sold at NAV.


• For example one is to invest Rs.10,000 in a scheme when its NAV is Rs.10.

• The investor would be allotted 1000 units roughly.

• It is said roughly because the fund charges a nominal processing fee.

• The NAV of any scheme tells how much each unit of it is worth any point in time, and is therefore the simplest measure of how it is performing.


• A schemes NAV is its net assets.

• Net assets is the market value of the securities it owns minus whatever it owes.

• The net assets divided by the no. of units gives the NAV.

• A schemes NAV is a dynamic figure.


• The market value of a scheme’s portfolio changes from day to day, as prices of shares and bonds move up or down.

• The number of units outstanding also changes, as new investors come into the scheme and old ones leave.

• If the NAV of your scheme rises from Rs.10 to Rs.11 over a period of time, your scheme is said to be have generated a return of 10%


• Similarly, if its NAV falls from Rs.10 to Rs.9, it is said to have lost 10%.

• Fund houses have to calculate and disclose the NAVs of their schemes daily.

• Fund NAVs can be easily looked up.

• While the general dialies give a random listing of schemes, the financial papers are more exhaustive in their coverage.


• NAV information is also available on websites, of the mutual fund concerned and of independent data providers.

• When invested in a scheme, its NAV is the figure to track, as it quantifies its returns, and your purchase price and sales price will be based on it.

Basic principlesBasic principlesLoadLoad

• Although the NAV represents a scheme’s current market value, it is not the exact price at which the investor enters or exits the scheme.

• Fund houses levy a nominal charge, on most of their schemes to meet their processing costs and to discourage investors from leaving.


• This charge is referred to as ‘Load’ and it is the price one pays over and above the funds NAV when you buy or sell units.

• One pays ‘entry load’ at the time of buying and ‘exit load’ at the time of selling.

• Loads are always expressed as a percentage of the NAV, which places fewer units in your hands.


• An exit load decreases your NAV which reduces your sales proceeds.

• For example, a scheme has a NAV of Rs.10 and it levies an entry and exit load of 1%(10 paisa) each.

• Hence when one buys units, he will pay Rs.10.1 (10+0.10) per unit and not Rs.10.


• Similarly when one sells he will getRs.9.90 (10-0.10) per unit and not Rs.10

• Under SEBI rules the sum of entry and exit loads charged by a scheme cannot exceed 7 per cent.

Basic principlesBasic principlesExpensesExpenses

• Another entry that eats into the investors returns is ‘expenses’.

• This is what the fund charges the investor for managing his money.

• Fund managers have to be paid a fee, as do the other constituents managing your money.

• All this entails costs which the scheme recovers from the investor within limits.


• Every year, the funds charges to the scheme ‘s NAV, reducing the investors returns by that amount.

• SEBI rules allow equity schemes to charge a maximum of 2.5% of corpus as expenses every year.

• The corresponding figure for the debt schemes is 2.25%


• SEBI also decides what kind of expenses a fund can charge its unit holders and what it cannot.

• For example, the cost of running an ad campaign about a fund having won an award cannot be charged to investors.

Basic principlesBasic principlesDisclosuresDisclosures

• From time to time the fund house will share with the investor information relating to your scheme.

• It does this in various ways, in various degrees.

• Under Sebi rules, fund houses have to send to all unit holders annual reports, disclosing the complete portfolio of all their schemes and also publish half yearly results in newspapers.


• These documents shed light on your scheme’s performance over various time periods, and how it stands up, given market conditions.

• Some houses go beyond such mandatory information sharing.


• Whatever information is relevant to your investment, they send it to the investor on a quarterly basis through fact sheets and newsletters.

• Most fund houses update their scheme portfolios on their websites even quicker, the norm being on a monthly basis.

• This information enables the investor to make an informed decision about your investment in the scheme.

Basic principlesBasic principlesRedemptionRedemption

• Whenever the investor wants he can sell his units, partly or fully back to your fund.

• Although it is a sale from the investors point of view, in mutual fund parlance it is called ‘repurchase’ or ‘redemption’.

• The investor has to fill up another short and simple form.

• Your mutual fund will the investor the scheme’s NAV prevailing on that date minus the exit load and mail a cheque within three to five days.

Types of mutual fundsTypes of mutual fundsLarge cap fundsLarge cap funds

• Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth.

• Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalization in excess of Rs 1000 crore are known large cap companies.

• Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available.

Types of mutual fundsTypes of mutual fundsMid cap fundsMid cap funds

• Mid cap funds are those mutual funds, which invest in small / medium sized companies.

• As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies.

• Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized.


• Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially.

• Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market.


• Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.

• But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.

Types of mutual fundsTypes of mutual fundsequity mutual fundsequity mutual funds

• Equity mutual funds are also known as stock mutual funds.

• Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time.

• Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large.


• Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.

• Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios.

• Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies.


• Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole.

• Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks.

Debt Funds• Debt funds are those funds which primarily invest large

amount (i.e. greater than 75%) in fixed income investments.

• A debt fund may invest in short-term or long-term bonds, securities products, money market instruments or floating rate debt.

• Debt funds are comparatively less risky but returns are low.

• For short term Debt fund are better but people investing for long period having risk appetite should invest in Equity funds or balanced funds.

Types of Debt Funds• Debt funds are of three types:

Income/bonds: Income/bond schemes invest in long- and medium-term instruments like corporate bonds, debentures, fixed deposits.

Liquid/Money market: Invest in instruments having short-term period like treasury bills, commercial paper, call money and repos.

Gilts schemes: Invest in sovereign papers issued by the central government and the state governments. The maturity period in these funds are medium- and long- term depending upon an investor’s goals.

• There are other plans, too, like monthly income plans (MIPs) wherein every month a fixed amount is invested of which approximately 20% is allocated to equity and the remaining to debt.

• A fixed maturity plan (FMP) is a close-ended scheme, and has an exit load, if redeemed, before the maturity period. Such schemes can have a maturity period of three months to three years. It selects an instrument, which corresponds with its maturity period. For instance, if the maturity of a scheme is one year, then the scheme will invest in instruments having one-year maturity. As the instrument will have a fixed interest rate payable on quarterly/half-yearly basis, the NAV will be on interest accrual basis.

Why Debt?• Investments in the equity markets are fraught

with uncertainties and volatility• these factors nullify a constant flow of returns,

which debt schemes, to a certain extent, guarantee

• in order to secure the hard-earned money, the investment is protected through proper asset allocation of 60:40 between debt and equity

• And this also depends upon the investor’s goals and risk-taking capacity.

• Investing in debt funds will give a steady income without destroying the capital.

Types of mutual fundsTypes of mutual funds Balanced FundBalanced Fund

• Balanced fund is also known as hybrid fund.

• It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk.

• Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income).

Types of mutual fundsTypes of mutual funds Balanced FundBalanced Fund

• Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss.

• But on the flip side, balanced funds will

usually increase less than an all-stock fund during a bull market.

Types of mutual fundsTypes of mutual fundsGrowth fundsGrowth funds

• Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks.

• They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends.

• Growth funds tend to look for the fastest-growing companies in the market.

Types of mutual fundsTypes of mutual fundsGrowth fundsGrowth funds

• 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.

• In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets.

• Only aggressive investors, or those with enough time to make up for

short-term market losses, should buy these funds.

Types of mutual fundsTypes of mutual fundsNo-Load Mutual FundsNo-Load Mutual Funds

• Mutual funds can be classified into two types - Load mutual funds and No-Load mutual funds.

• Load funds are those funds that charge commission at the time of purchase or redemption.

• They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. Front-end load funds charge commission at the time of purchase and back-end load funds charge commission at the time of redemption.


• On the other hand, no-load funds are those funds that can be purchased without commission.

• No load funds have several advantages over load funds.

• Firstly, funds with loads, on average, consistently under perform no-load funds when the load is taken into consideration in performance calculations.


• Secondly, loads understate the real commission charged because they reduce the total amount being invested.

• Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had invested, as in a no-load fund, it would have been compounding over the whole time period.

•

Types of mutual fundsTypes of mutual fundsExchange traded fundsExchange traded funds

• Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an exchange.

• An exchange traded fund is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index.

• An ETF will invest in either all of the securities or a representative sample of the securities included in the index.

Types of mutual fundsTypes of mutual fundsExchange traded fundsExchange traded funds

• The investment objective of an ETF is to achieve the same return as a particular market index.

• Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios.

Types of mutual fundsTypes of mutual fundsValue fundsValue funds

• Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation.

• They invest in companies that the market has overlooked, and stocks that have fallen out of favor with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry.

Types of mutual fundsTypes of mutual fundsValue fundsValue funds

• Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends.

• Thus value funds produce current income (from

the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again).

• They tend to have more conservative and less volatile returns than growth funds.

Types of mutual fundsTypes of mutual fundsMoney market fundsMoney market funds

• A money market fund is a mutual fund that invests solely in money market instruments.

• Money market instruments are forms of debt that mature in less than one year and are very liquid.

• Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free.


• Money market funds are generally the safest and most secure of mutual fund investments.

• The goal of a money-market fund is to preserve principal while yielding a modest return.

• Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free.


• When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

Types of mutual fundsTypes of mutual fundsInternational mutual fundsInternational mutual funds

• International mutual funds are those funds that invest in non-domestic securities markets throughout the world.

• Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities.

Types of mutual fundsTypes of mutual fundsInternational mutual fundsInternational mutual funds

• If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining.

• However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.

Types of mutual fundsTypes of mutual fundsRegional Mutual FundRegional Mutual Fund

• Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region.

• A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area.

Types of mutual fundsTypes of mutual fundsRegional Mutual FundRegional Mutual Fund

• The objective is to take advantage of regional growth potential before the national investment community does.

• Regional funds select securities that pass geographical criteria.

• For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area.

Types of mutual fundsTypes of mutual fundsSector mutual fundsSector mutual funds

• Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy.

• These funds concentrate on one industry such as infrastructure, heath care, utilities, pharmaceuticals etc.

• The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

Types of mutual fundsTypes of mutual fundsSector mutual fundsSector mutual funds

• These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries.

• Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favor.

Types of mutual fundsTypes of mutual fundsIndex fundsIndex funds

• An index fund is a type of mutual fund that builds its portfolio by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market.

• The most popular index of stock index funds is the Standard & Poor's 500.

• An S&P 500 stock index fund owns 500 stocks-all the companies that are included in the index.

Types of mutual fundsTypes of mutual fundsIndex fundsIndex funds

• Investing in an index fund is a form of passive investing.

• Passive investing has two big advantages over active investing.

• First, a passive stock market mutual fund is much cheaper to run than an active fund.

• Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.

Types of mutual fundsTypes of mutual fundsFund of fundsFund of funds

• A fund of funds is a type of mutual fund that invests in other mutual funds.

• Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds.

• Fund of funds are designed to achieve greater diversification than traditional mutual funds.

Types of mutual fundsTypes of mutual fundsFund of fundsFund of funds

• But on the flipside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds.

• Also, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.

Mutual funds vs. other investments• From an investors' viewpoint mutual funds

have several advantages such as:

Professional management and research to select quality securities

Spreading risk over a larger quantity of stock whereas the investor has limited to buy only a hand full of stocks. The investor is not putting all his eggs in one basket

Ability to add funds at set amounts and smaller quantities such as $100 per month

Ability to take advantage of the stock market which has generally out performed other investment in the long run

Fund manager are able to buy securities in large quantities thus reducing brokerage fees

Disadvantages are:

• The investor must rely on the integrity of the professional fund manager

• Fund management fees may be unreasonable for the services rendered

• The fund manager may not pass

transaction savings to the investor

• The fund manager is not liable for poor judgment when the investor's fund loses value

Disadvantages contd..• There may be too many transactions in the fund

resulting in higher fee/cost to the investor - This is sometimes call "Churn and Earn"

• Prospectus and Annual report are hard to understand

• Investor may feel a lost of control of his investment dollars

• There may be restrictions on when and how an investor sells/redeems his mutual fund shares

Major mutual fund companies in Major mutual fund companies in IndiaIndia

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 sponsor 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 sponsorers, 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.


• 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.


• State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor 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.


• 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 sponsorers 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, investmenty 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 organisations. 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 focusing on a long-term capital appreciation.


• Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Excorts 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 sponsorer. 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 sponsorer 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.

Future of mutual funds in IndiaFuture of mutual funds in India

• December 2004, Indian mutual fund industry reached Rs 1,50,537 crore.

• It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.

• The annual composite rate of growth is expected 13.4% during the rest of the decade.

• In the last 5 years we have seen annual growth rate of 9%.

• According to the current growth rate, by year 2010, mutual fund assets will be double.

Aggregate deposits of scheduled Aggregate deposits of scheduled commercial banks in Indiacommercial banks in India

Rs.Lac.croresRs.Lac.croresMonth/year

Mar

98

Mar

00

Mar

01

Mar

02

Mar

03

Mar

04

Sep

04

Dec

04

deposits

6.1 8.5 9.9 11.3 12.8 - 15.7 16.2

% change

OLY

- 15 14 13 12 - 18 3

Mutual funds AMU’s growthMutual funds AMU’s growthRs.Lacs.CroresRs.Lacs.Crores

Month/year

Mar

98

Mar

00

Mar

01

Mar

02

Mar

03

Mar

04

Sep

04

Dec

04

deposits

0.7 0.9 0.8 0.9 0.8 1.4 1.5 1.5

% change

OLY

- 26 13 12 25 45 9 1

Some facts for the growth of mutual Some facts for the growth of mutual funds in Indiafunds in India

• 100% growth in the last 6 years.

• Number of foreign AMC's 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 canalizing these savings in mutual funds sector is required.

• We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

Some facts for the growth of mutual Some facts for the growth of mutual funds in Indiafunds in India

• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

• Mutual fund can penetrate rural 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.

How to choose a mutual fundHow to choose a mutual fund

• The first step to investing in Mutual Fund is to define the objective of investing.

• You should clearly lay down the purpose for which you desire to invest.

• There are several schemes tailor made to meet certain personal financial goals (children's education, marriage, retirement etc.) which can be availed of.

• You should define the tenure of investment and the risk appetite you have.

• Thereafter, you can select a fund type that best meets your need i.e. income schemes, liquid schemes, tax saving schemes, equity schemes etc.

• Given the plethora of fund options available to you, you can then choose the particular fund that you are comfortable with.


• You can choose the fund on various criteria but primarily these can be the following:

• The track record of performance of schemes over the last few years managed by the fund

• Quality of management and administration • Parentage of the Mutual Fund • Quality and adequacy of disclosures • Service levels • The price at which you can enter/exit (i.e. entry

load / exit load) the scheme and its impact on overall return


• The market price of the units of the scheme (where available) to see the discount/premium that the market assigns to the stated NAV of the scheme

• Independent rating of the schemes, if available • You could be investing in a mutual fund either at the

initial stage when the mutual fund approaches the market through an offer document route or at a subsequent stage.

• If you choose to invest at the initial stage, the offer document would detail the schemes being offered and the manner of investing. The manner is usually similar to that of investing any public issue of any security (equity/debt).


• If you are planning to purchase the units subsequently, then the following choices exist: – A close ended scheme. If the desired units are of a close-ended

scheme, then the investor would be able to purchase them at the stock exchange where the MF has listed them. This purchase would resemble the purchase of an equity share wherein the investor would pay the quoted price of the unit as well as a brokerage for the purchase transaction. In the case of a close ended scheme, the sale also is effected through the stock exchange mechanism and resembles the sale of equity share.The pricing for the transaction, as was mentioned earlier, is driven by the price the units quote. This is driven by the NAV ( Net Asset Value) of the scheme. The price, however, may be either at a discount or premium to the NAV.


– Purchasing a unit in a open-ended scheme is different as there is no exchange where these units are traded. Their price reflects the NAV of the scheme. The mutual fund in an open-ended scheme sells these units to the investor at the NAV (plus a sale / entry load).


• Selling units in an open-ended scheme is similar to the way they are purchased. It is the mutual fund that buys back the units and at a price based on the NAV. The actual price is the NAV less the exit load. The exit load is similar in concept to the entry load.

Advantages of mutual fundsAdvantages of mutual funds

• Benefits of Investing in Mutual Funds Professional Management

•Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.


• Convenient Administration

• Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

• Return Potential

• Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.


• Low Costs

• Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.


• Flexibility

• Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

• Affordability

• Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.


• Choice of Schemes

• Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

• Well Regulated

• All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors.

• The operations of Mutual Funds are regularly monitored by SEBI.


• Transparency

• You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.


• Diversification

• Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors.

• This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion.

• You achieve this diversification through a Mutual Fund with far less money than you can do on your own.


• Liquidity

• In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund.

• In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.

Limitations of mutual fundsLimitations of mutual funds

• 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

Strategies in selling mutual fundsStrategies in selling mutual funds

• Market segmentation

• Effective communication

• Educating the consumers

• Cross selling

• Effective distribution

• Value added services

Strategies in selling mutual fundsStrategies in selling mutual fundsDistribution StrategyDistribution Strategy

• Mutual funds offices• Intermediaries:• Agents:• The big agents are like one stop shop.• Agents score over mutual funds on convenience, choice

and quality of service• They operate from multiple locations with a army of

registered agents.• While a mutual fund offers its own products, on the other

hand agents/distributors offer all financial products.• SEBI has made passing on the commission to investors

as illegal.


• Banks:• Host of banks both private and the private and foreign

ones are into marketing of mutual funds.• Many of them not only market their own schemes but

also of the competitors.• Due to wide network of branches, banks are one of the

important source of reaching the masses.• In 1999 barely 10% of mutual funds were sold through

banks.• During 2003 various estimates indicate that roughly

between 30 to50% of mutual funds schemes are sold through banks.


• In 1999 barely 10% of mutual funds were sold through banks.

• During 2003 various estimates indicate that roughly between 30 to50% of mutual funds schemes are sold through banks.

• From servicing the customer, banks rank second to the agents selling financial services.


• Stock brokers:

• Big brokers combine the attributes of agents and banks.

• They serve as one stop shop coupled with efficient and effective service.


• Certified financial planners:

• These are independent professionals trained to advise you on personal financial matters.

• Along with being financial advisers, they also sell financial products.

• Unlike agents the CFP’s charge the investors for the services rendered.


• The Internet:

• At present around 3 to 5% of mutual funds are sold through internet.

• This figure is likely to increase with better net connectivity.

• The fund houses are tying up with more and more banks thereby bringing more and more investors into the net.


• At present some fund houses enable buying as well as selling on the following three platforms:

• Own websites:• As of December 2003 only Franklin

Templeton and Prudential ICICI made available the facility of buying and selling through websites.

• One needs to have a net banking account.


• You log on to the funds site.• Once you take the decision and place the

order through the website the amount is automatically debited to your back account.

• The transaction is also documented through the physical form.

• The banks send the paper documents for filling in and affixing the signature.


• Financial portals:• One can buy the mutual funds through

financial portals like myris.com, times of money.com, indiainfoline.com.

• The process and requirements are similar to that of buying through the funds website.

• However, most portals enable only purchases.


• Online trading portals:

• Share trading portals like ICICI Direct (icici direct.com) and Sharekhan (sharekhan.com) too offer a number of mutual funds on their platforms.

• Registered users can buy and sell units of the schemes on offer, just like stock-at no extra cost


• Stock exchange:

• One can buy and sell units of the fund schemes on the stock exchange.

Strategies in selling mutual fundsStrategies in selling mutual fundsvalue added servicesvalue added services

• Redemption over phone:

• All fund houses allow easy access-walk in, phone or over the net to investors.

• A few even have toll free numbers.

• In this order the next step is to allow transactions over the phone.

• Prudential ICICI, which launched its first phone service Instacall in June 2002


• Prudential ICICI unit holders can use this service to make a redemption request or switch between schemes over the phone which gets reflected in subsequent account statements.

• In addition the unit holders can use Instacall to register a change of address, find out their account balance and details of their last five transactions and ask for an account statement


• Triggers, alerts:

• If an individual invests in mutual funds and tends to forget, for such people triggers and alerts are great tools to inculcate some discipline.

• A trigger is an actionable facility that lets you pre-specify exit targets for your mutual fund investments.


• Broadly speaking triggers are based on value ( for example a 50% rise in NAV) or time (specific day like the annual budget or the financial year closing).

• The moment the target is reached, the trigger gets activated.

• The fund house then will by itself redeem your units, and mail you your cheque.


• Besides the buy and forget type of investors, triggers are also useful for investors who use funds to take a short-term exposure to the market.

• For such investors, the triggers serve as a proxy for timing the market-on the sell side.

• Even if you have signed on the trigger facility, you can sell your units any time before the trigger date regardless of whether or not your target has been met.


• Another facility on the same lines is the “Alert" option.

• With triggers your fund sells your unitsas and when the trigger gets activated.

• With alerts, though, the mutual fund will only intimate the activation of the trigger to you-by phone, post or e-mail.

• It is then up to you to sell your units or stay invested.


• If you wish to sell your units, you will have to instruct your fund house to do so.

• As of Feb.2004 Principal, IL&FS and UTI were offering the trigger and alert services on some of their shcemes.


• Cheque book facility:

• Typically fund houses take 3 to 5 days to issue cheques.

• Added to this is the time involved in mailing the cheques.

• Fund houses are trying to reduce the time typically where quick turnover of money is important for the investors.


• For example HDFC gives unit holders for its High Interest (an income fund) and Sovereign Gilt Fund (a gilt fund) the option to take redemption cheques worth 75% of their investment value, up to Rs. 2 lacs., at the time of investment itself.

• When one invests in these schemes, HDFC issues cheques proportionate to the value of ones investment.


• Whenever one wants to withdraw from the fund, deposit cheques worth the amount, which will save the time your mutual fund would have spent on processing your request and in transit.


• New Points of purchase:

• Technology is a great enabler and fund houses are constantly finding ways to use it to their benefit.


• Any time mutual fund:

• One can also buy the unit on the net.

• Prudential ICICI and Templeton sell units of their schemes online.

• To buy one needs to have net banking account.

mutual funds. meaning a mutual fund is a professionally managed type of collective investment scheme...

Documents

history of mutual funds

mutual fund industry

true mutual fund scheme

investors money

number of investors

block slide

investment trust

small investors