Introduction Of Mutual Fund

There are a lot of investment avenues available today in the financial gmarket for an investor withan investable surplus. He can invest in bank deposits, corporate debentures, and bonds where there is low risk but low return. He may invest in stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the stock market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds.

Concept Of Mutual FundA mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or mutual; the fund belongs to all investors. A single investors ownership of the fund is in the same proportion as the same amount of the contribution made by him or her bears to the total amount of the fund. Mutual funds are trusts, which accept savings from investors and invest the same in diversified financial instruments in terms of objectives set out in the trust deed with the view to reduce the risk and maximize the income and capital appreciation for distribution for the members. A mutual fund is a corporation and the fund managers interest is to professionally manage the funds provided by the investors and provide a return on them after deducting reasonable management fees. The objective sought to be achieved by mutual fund is to provide an opportunity for lower income groups to acquire without much difficulty financial assets. They cater mainly to the needs of the needs of the individual investor whose means are small and to manage investors portfolio in a manner that provides a regular income, growth, safety, liquidity and diversification opportunities.

MUTUAL FUND FLOWCHART

DefinitionMutual funds are collective savings and investments vehicles where savings of small (or sometimes big) investors are pooled together to invest for their mutual benefits and returns distributed proportionately. A mutual fund is an investment that pools your money with the money of an unlimited number of other investors, in return, you and the other investors each own shares of the fund. The funds assets are invested accordingly to an investment objective into the funds portfolio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds.

Why select mutual fund?

The risk return trade- off indicates that if investor is willing to take higher risk then correspondingly he can except higher return and vice versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected fund and

the profit- bond that gives out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as mutual funds provide professionals management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

HIGHER RISK MODERRATE RETURNS Venture Capital

HIGHER RISK HIGHIER RETURNS

Equity

Bank FD Mutual Funds Postal Savings LOWER RISK LOWER RETURNS LOWER RISK HIGHER RETURNS

History Of Mutual Funds In IndiaThe mutual fund industry in India started in 1963 with the formation of Unit Trust Of India, at the initiative of the Goverment Of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases:

FIRST PHASE 1964-87:

Unit Trust Of India (UTI) was established on 1963 by an Act Of Parliament. It was set up by the Reserve Bank Of India and functional under the regulatory and administrative control of the Reserve Bank Of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank Of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under management.

SECOND PHASE -1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS):

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation Of India (LIC) and General Insurance Corporation Of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank Of India (Jun 90), Bank Of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993 , the mutual fund industry had asset under management of Rs. 47,004 crores.

THIRD PHASE 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS):

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations

came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. In 1993 SEBI (Mutual Fund) Regulation were substituted by a more comprehensive and revised Mutual Fund Regulation in 1996. The industry now function under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003,there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust Of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.

FOURTH PHASE SINCE FEBRUARY 2003:

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 O f India with assets under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 schemes, assured return and certain other schemes. The Specified Undertaking Of Unit Trust Of India, functioning under an administrator and under the rules framed by Government Of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd. Sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulation and with recent merges 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. 1,53,108 crores under 421 schemes.

The graph indicates the growth of assets under management over the years.

GROWTH IN ASSETS UNDER MANAGEMENT

Advantages Of Mutual Funds:

If mutual funds are emerging as the favourite investment vehicle, it is because of the many advantages they have over other forms and the avenues of investing, particularly for the investor who has limited resources available in terms of capital and the ability to carry out detailed research and market monitoring. The following are the major advantages offered by mutual funds to all investors.

1. Portfolio Diversification:
Each investor in the fund is a part owner of all the funds assets, thus enabling him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.

2. Professional Management:
Even if an investor has a big amount of capital available t him, he benefits from the professional management skills brought in by the fund in the management of the investors portfolio. The investment management skills, along with the needed research into available investment options, ensures a much better return than what an investor can manage on his own. Few investors have the skills and resources of their own to succeed in todays fast moving, global and sophisticated markets.

3. Reduction / Diversification Of Risk:

When an investor invests directly, all the risk of potential loss is his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his own or in any other form. While investing in the pool of funds with investors, the potential losses are also shared with other investors. The risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund. 4. Reduction of transaction costs: What is true of risk as also true of the transactions costs. The investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors.

5. Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When they invest in the units of a fund, they can generally cash their investments any time, by selling their units to the fund if openended, or selling them in the market if the fund is close-end. Liquidity of investment is clearly a big benefit. 6. Convenience and flexibility: Mutual fund management companies offer many investors services that a direct market investors cannot get. Investors can easily transfer their holdings from one scheme to the other, get updated market information and so on. 7. Tax benefits: Any income distributed after March 31, 2002 will be subject to tax in the assessment of all unit holders. However, as a measure of concession to Unit holder of open-ended equity-oriented funds, income distribution for the year ending March 31, 2003, will be taxed at concessional rates of 10.5%. In case of Individuals and Hindu Undivided Families a deduction upto Rs.9000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth- Tax and Gift- Tax. 8. Choice of Schemes: Mutual Funds offer a family of schemes to suit varying needs over a lifetime. 9. 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. 10.Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your schemes, the proportion invested in each class of assets and the fund managers investment strategy and outlook.

DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS: 1. No Control over Costs: An investor in a mutual fund has no control of the overall costs of investing. The investor pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even if the value of the investments is declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investing. However, this shortcoming only means that there is a cost to obtain the mutual fund services. 2. No Tailor- Made Portfolio: Investors who invest on their own can build their own portfolios of shares and bonds and other securities. Investing through fund means be delegates this decision to the fund managers. The veryhigh-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual fund managers help investors overcome this constraint by offering families of funds- a large number of different schemeswithin their own management company. An investor can choose from different investment plans and constructs a portfolio to his choice. 3. Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objective, quite similar to the situation when he has individual shares or bonds to select. 4. No control: Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody elses car. 5. Dilution: Mutual funds generally have such small holdings of so many different stocks that insanely great performance by a funds top holdings still doesnt make much of a difference in a mutual funds total performance. 6. Buried Costs: Many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to their clients.

TYPES OF MUTUAL FUNDS SCHEMES IN INDIA Wide variety of Mutual Fund Sehcemes exists to cater to the needs such as financial position, risk tolerance and returns expectations etc. thus mutual funds has Variety of flavours. Being a collection of many stocks, an investors cash go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

A) BY STRUCTURE 1. Open- Ended Schemes: An open- ended fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices. The key feature of open- end schemes is liquidity. 2. Close- Ended Schemes: A close-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchange where they are listed. In order to provide an exit route to the investors, some close- ended funds give an option of selling back the units to the Mutual Funds through periodic repurchase at NAV related prices. SEBI Regulations

stipulate that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open- ended and close- ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. B) BY NATURE: 1. Equity Fund: These funds invest a maximum part of their corpus into equity holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid- Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk- return matrix. 2. Debt Funds: The objective of these funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as: 1. Gilt Funds: Invest their corpus in securities issued by Government, popurlarly known as Government of India debt papers. These funds carry zero Default risk but are associated with interest rate risk. These schemes are sager as they invest in papers backed by Government.

2. Income Funds: Invest a major portion into various debt instruments such as bonds, Corporate debentures and Government securities. 3. MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. 4. Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter- bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1 day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. 3. Balanced Funds: As the name suggest they are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

C) BY INVESTMENT OBJECTIVE: Growth Schemes: Growth schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Income Schemes:

Income schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). Money Market Schemes: Money market schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes invest in safer, short-term instruments, such as treasury bills, certificates of deposits, commercial paper and inter-bank call money. Loan Funds: A loan fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds: A no-load fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work. OTHER SCHEMES Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec. 88 of the Income Tax Act, contributions made to any Equity Linked Saving Scheme (ELSS) are eligible for rebate. Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. Sector Specific Schemes: These are the funds/ schemes which invest in the securities of only those sectors or industries as specified in the offer documents. eg- Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/ industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/ industries and must exit at an appropriate time.

NET ASSET VALUE (NAV): Since each owner is a part owner of a mutual fund, it is necessary to establish the value of his part. In other words, each share or unit that an investor holds needs to be assigned a value. Since the units held by investor evidence the ownership of the funds assets, the value of the total assets of the fund when divided by the total number of units issued by the mutual fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one share. The value of an investors part ownership is thus determined by the NAV of the number of units held. Calculation of NAV: Let us see an example: If the value of a funds assets stands at Rs. 100 and it has 10 investors who have bought 10 units each, the total numbers of units issued are 100, and the value of one units Rs. 10 (1000/100). If a single investor in fact owns 3 units, the value of his ownership of the fund will be Rs. 30(1000/100*3). Note that the value of the funds investments will keep fluctuating with the market-price movements, causing the Net Asset Value also to fluctuate. For example, if the value of our funds asset increased from Rs. 1000 to 1200, the value of our investors holding of 3 units will now be (1200/100*3) Rs. 36. The investment value can go up or down, depending on the markets value of the funds assets.

MUTUAL FUND FEES AND EXPENSES Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual funds. Running a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors in a number of ways. 1. TRANSACTION FEES I. Purchase Fee: It is a type of fee that some funds charge their shareholders when they buy shares. Unlike a front-end sales load, a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the funds costs associated with the purchase. II. Redemption Fee: It is another type of fee that some funds charge their shareholder when they sell or redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund (not to a broker) and is typically used to defray fund costs associated with a shareholders redemption. III. Exchange Fee: Exchange fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group or family of fund. 2. PERIODIC FEES I. Management Fee: Management fees are fees that are paid out of fund assets to the funds investment adviser for investment portfolio management, any other management fees payable to the funds investment adviser or its affiliates and administrative fees payable to the investment adviser that are not

included in the Other Expenses category. They are also called maintenance fees. II. Account Fee: Account fees are fees that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount. 3. OTHER OPERATING EXPENSES Transaction Costs: These cost are incurred in the trading of the funds assets. Funds with a high turnover ratio, or investing in liquid or exotic markets usually face higher transaction costs. Unlike the total expense ratio these costs are usually not reported.

LOADS Definition of a load: Load funds exhibits a Sales Load with a percentage charge levied on purchase or sale of shares. A load is a type of commission (remuneration). Depending on the type of load a mutual fund exhibits, charges may be incurred at time of purchase, time of sale, or a mix of both. The different types of loads are outlined below. Front-end load: