Mutual Funds Primer

Index:
What is a Mutual Fund? History of Mutual Funds in India List of Mutual Funds in India & their AUM data Formation of Mutual Fund Why invest in Mutual Funds? What are the disadvantages of Mutual Funds investing? What are the types of Mutual funds? What are the different categories in Mutual Funds? Risk and return profile of equity oriented funds Risk and return profile of debt oriented funds Types of mutual funds based on management style How to choose mutual funds? Basic terms in Mutual Funds Performance of Mutual funds How to calculate Return? How to measure Risk? How to invest in mutual funds? What are the documents required to invest in mutual funds? Myth Busters FAQs Tax Implications in Mutual Fund How to read Scheme Information Document (SID) or (OD)?

What is a Mutual Fund?

Mutual Fund is a pool of money collected from investors by professional entities with an aim to invest in financial markets (as described by the SEBI) to achieve certain objectives. The amount collected is managed by the expert team on behalf of the unit-holders and then the profits or losses from the investment are distributed to the investors in proportion to their investments. Investments in securities are spread across a wide cross-section of asset classes, industries and sectors and thus the risk is reduced. History of Mutual Funds in India: Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64. In the year 1987 Public Sector banks like State Bank of India, Punjab National Bank, Indian Bank, Bank of India, and Bank of Baroda have set up mutual funds. Apart from these above mentioned banks Life Insurance Corporation [LIC] and General Insurance Corporation [GIC] too have set up mutual funds. With the entry of Private Sector Funds a new era has started in Mutual Fund Industry [eg:- Reliance Mutual Fund, Deutsche Mutual Fund, ICICI Mutual Fund, HDFC Mutual Fund etc]. The Indian Mutual fund industry has witnessed considerable growth since its inception in 1963. The assets under management (AUM) have surged to Rs 8,684 bn in June 13 from just Rs 250 mn in Mar 65. In a span of 48 years, the industry has registered a CAGR of 24%. The impressive growth in the Indian Mutual fund industry in recent years can largely be attributed to various factors such as rising household savings, comprehensive regulatory framework, favourable tax policies, introduction of several new products, investor education campaign and role of distributors. During last decade, the household income levels have grown significantly, lead to commensurate increase in household savings. The considerable rise in households financial savings pointed towards the huge market potential of the Mutual fund industry in India.

The share of Mutual Fund in households Gross Financial Savings (%):

10 8 6
4.8 7.7

4 2 0 -2
FY 01 FY 02 FY 03 FY 04 FY 05
1 .8 1 .3 1 .3 1 .2 0.4

3.6

3.3

-1 .4

-1 .2

-1 .1

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY 12

Besides, SEBI has introduced various regulatory measures in order to protect the interest of small investors that augurs well for the long term growth of the industry. The tax benefits allowed on mutual fund schemes (for example investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the Income Tax Act) also have helped mutual funds to evolve as the preferred form of investment among the salaried income earners. Besides, the Indian Mutual fund industry that started with traditional products like equity fund, debt fund and balanced fund has significantly expanded its product portfolio. Today, the industry has introduced an array of products such as liquid, Ultra Short Term, Short term income, sector-specific funds, index funds, gilt funds, capital protection oriented schemes, special category funds, insurance linked funds, exchange traded funds, etc. It also has introduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or gold related instruments. Further, the industry has launched special schemes to invest in foreign securities. The wide variety of schemes offered by the Indian Mutual fund industry provides multiple options of investment to common man. At present, there are 43 AMCs participating in the Indian mutual fund industry, out of which HDFC, Reliance, ICICI, Birla Sun Life and UTI mutual funds are the top 5 AMCs in terms of holding largest AUM (as of May 2013). HDFC, Reliance, UTI, ICICI and SBI are the top 5 AMCs in Indian MF industry in terms of holding largest equity AUM. The AUM of the Indian mutual fund industry stood at Rs. 8.68 lakh crore (as of June 2013). Given the last one year period, Axis, IDFC, ICICI, HDFC and UTI are the top five mutual funds saw largest appreciated in their equity AUM while JP Morgan, L&T, Kotak Mahindra, IDFC and ICICI are the top five mutual funds saw largest appreciated in their debt AUM. AUM: Category wise break up (as of June 2013):
Inco me

Equity

FOF Overseas Other ETFs Go ld ETFs ELSS - Equity Gilt Liquid B alanced

Growth of Indian MF Industry over a decade (Rs Crs):

900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

List of Mutual Funds in Indian mutual fund industry & their AUM data (data as of June 2013) (Rs Crs):
AMC Name AXIS Mutual Fund Baroda Pioneer Mutual Fund Birla Sun Life Mutual Fund BNP Paribas Mutual Fund BOI AXA Mutual Fund Canara Robeco Mutual Fund Daiwa Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund Franklin Templeton Mutual Fund Goldman Sachs Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund IIFL Mutual Fund Indiabulls Mutual Fund ING Mutual Fund JM Financial Mutual Fund JP Morgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC NOMURA Mutual Fund Mirae Asset Mutual Fund Morgan Stanley Mutual Fund Motilal Oswal Mutual Fund Peerless Mutual Fund PineBridge Mutual Fund Pramerica Mutual Fund PRINCIPAL Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Religare Invesco Mutual Fund Sahara Mutual Fund SBI Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Union KBC Mutual Fund UTI Mutual Fund Incorporation Date Jan-09 Nov-92 Sep-94 Nov-03 Aug-07 Mar-93 May-07 Mar-02 May-96 Aug-07 Dec-95 Oct-95 Mar-08 Dec-99 Dec-01 Jun-93 Jan-10 Dec-99 Mar-10 Apr-08 Apr-98 Jun-94 Sep-06 Aug-94 Apr-96 Apr-94 Nov-06 Oct-93 Nov-08 Apr-09 Oct-06 Sep-08 Nov-91 Sep-05 Feb-95 May-05 Aug-95 Feb-92 Feb-96 Mar-94 Jul-93 Dec-09 Nov-02 AUM 12790.52 7646.52 81986.09 4007.80 783.03 6873.19 128.75 19166.24 33124.03 241.72 255.67 43591.99 4331.71 104421.61 6313.72 94953.60 5381.13 48449.25 334.55 3286.49 1338.60 7249.27 16279.09 40258.54 13149.07 5643.75 517.72 3163.78 526.82 4957.05 1294.01 2477.75 4695.93 309.85 102986.30 15923.85 258.10 62860.71 14902.67 22031.05 4595.83 2331.55 77146.19 Equity Value 1748.88 315.44 10177.14 302.50 94.80 1762.19 19.89 192.39 9678.16 52.90 10.27 12577.53 783.16 38595.44 1370.89 15811.71 214.12 5007.78 47.37 5.45 200.54 461.99 319.78 2865.08 4484.45 692.72 441.51 1482.16 259.09 41.30 201.50 96.18 1538.36 152.74 24709.72 541.70 59.79 13895.60 5613.60 4086.90 336.62 180.00 22885.92 Debt Value 8500.47 6052.10 65047.02 3682.37 638.36 4485.51 108.87 17103.88 21589.19 188.41 244.56 28781.35 613.30 59387.07 4750.21 71635.44 4907.00 41458.86 287.18 3181.03 649.99 6428.28 14928.37 33349.46 8266.66 4927.92 35.08 1589.16 135.23 4903.59 993.19 2368.57 2945.56 83.47 66474.95 14108.08 198.31 44748.82 8884.42 16266.50 4254.81 1841.72 49336.75 Cash & Others 2541.16 1278.99 6761.93 22.93 49.86 625.49 0.00 1869.96 1856.68 0.41 0.85 2233.11 2935.24 6439.10 192.62 7506.45 260.02 1982.61 0.00 100.01 488.07 359.00 1030.95 4043.99 397.96 23.11 41.14 92.47 132.50 12.16 99.32 13.00 212.01 73.64 11801.63 1274.07 0.00 4216.30 404.66 1677.65 4.40 309.82 4923.52

Sep-12

Mar-13

Formation of Mutual Fund: The domestic mutual fund industry is governed by the Securities and Exchange Board of India, Mutual Fund regulations and the Indian Trusts Act, 1882. A mutual fund is constituted as a public trust created under the Indian Trusts Act, 1882 and has a three tier structure, in order to prevent potential conflicts of interest. The three main entities are the Sponsor, the Board of Trustees and the Asset Management Company (AMC). Regulatory Body: Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. The Sponsor: Sponsor is the person who either alone or in association with another corporate body, establishes a mutual fund. The sponsor must contribute at least 40% of the net worth of the investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the schemes beyond the initial contribution made by it towards setting up of the mutual fund. Trust: The mutual fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the sponsor. The trust deed is registered under the Indian Registration Act, 1908. The Trustees: The Board of Trustees is responsible for protecting investors interests and ensuring that the fund operates within the regulatory framework. The trustees appoint bankers, custodians and depositories, transfer agents and lastly, and most importantly, the AMC (if authorized by the Trust Deed) that plays a very critical role when it comes to achieving the objectives of the mutual fund. The trustees are responsible for ensuring that the AMC has proper systems and procedures in place and has appointed key personnel including Fund Managers and Compliance Officer. The AMC: The trustee, as the investment manager of the mutual fund, appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual fund. At least 50% of the directors of the AMC are independent directors who are not associated with the sponsor in any manner. The AMC must have a net worth of at least Rs. 10 crore at all times. Custodians and Depositories: The custodian is an independent entity which is entrusted with the physical possession of all securities purchased by the mutual fund. This entity undertakes the responsibility for handling and safekeeping of the securities, collection of benefits, etc. Bankers. The bankers play a crucial role with respect to the financial dealings of a mutual fund by holding its bank accounts and providing it with remittance services. Transfer Agents: Transfer Agents are responsible for issuing and redeeming units of the mutual fund and provide other related services, such as preparation of transfer documents and updating investors records. Mutual Fund Distributors: The distributors sell mutual funds to investors. They leverage their well spread out network to market and sell schemes and charge commissions for their services. They also facilitate redemptions, solve investor grievances, advise clients on asset allocation, etc. The distributors are paid commissions for the services rendered in facilitating subscriptions by the fund houses. The commission paid is upfront and can also be on a trailing basis.

Why invest in Mutual Funds? Professional Management and Informed Decision Making: The biggest advantage that mutual funds offer is greater expertise on the markets, be it the stock market or debt market. The AMC, with its well organized and structured pool of talent, tracks the economy, companies and stock market happenings on a day-to-day basis, and investment decisions are made on the basis of this research. It would be far more difficult for a retail investor to undertake research of the same magnitude. They have better access to information than individual investors. Investment Flexibility: Mutual fund houses offer various categories of schemes (equity, debt, hybrid etc) with a good number of options such as growth, regular income and so on. You can pick and choose as per your risk appetite; return expectations and overall investment objective.

Affordability and Liquidity: To start with, one can invest just Rs. 500-1000 to buy a mutual fund scheme. Further, systematic investment plans allow investors to invest even with as low as Rs. 50, Rs. 100 or Rs. 500. Likewise, Mutual funds are easy to redeem. You can redeem your liquid fund within 24 hours and other funds upto three days. Diversification: With a comparatively small capital investment in a mutual fund scheme, you can gain exposure to a large variety of instruments. In fact, some instruments which form part of a mutual funds portfolio, especially in the debt segment, are totally out of the reach of a retail investor due to the high threshold investment limits. Hence the Mutual Funds make investments in a number of stocks and sectors, the resultant diversification reduces risk. Transparency and Safety and well regulated: No mutual fund guarantees returns but they are transparent in their operations, since they are subject to stringent disclosure norms. SEBI regulates all mutual funds operating in India, setting uniform standards for all funds. In addition, thanks to its three tier structure clear cut demarcation between sponsors, trustees and AMCs, conflict of interests can be promptly checked. Lastly, the Association of Mutual Funds in India works towards promoting the interests of mutual funds and unit holders. It also launches Investor Awareness Programs aimed at educating investors about investing in mutual funds. Tax Benefits: Generally, income earned by any mutual fund registered with SEBI is exempt from tax. However, income distributed to unit holders by a debt fund is liable to a dividend distribution tax. Capital gains tax is also applicable in the hands of the investor, depending on the type of scheme and the period of holding (See section Tax Benefits and implications of investing in mutual funds).

What are the disadvantages of Mutual Funds investing? Impact Cost: Operationally, mutual funds buy and sell in large volumes and voluminous buying or selling of shares often results in adverse price movements. Funds which buy in large volumes end up inflating the prices and when funds sell in large quantities, they tend to depress prices. This could result in high prices while buying and low prices while selling is called impact cost. Lead Time: The mutual funds cannot remain fully invested all times due to various reasons. Firstly, they must maintain some part of their corpus in cash, in order to meet redemption pressures. Then there could be a time lag between identification of investment opportunities and actual investment. And finally, it is not possible for a fund house to deploy money in the market immediately after receiving it from investors. This lead time when cash is lying idle with mutual funds results in lower overall returns on the corpus. Marketing and Fund management costs or Expense Ratio: In the case of most mutual funds, there is an entry and/or exit load (fee) applicable while buying and/or selling mutual fund units, respectively. These loads, which are a certain percentage of the value of units held, are applied to cover marketing and other costs. In addition to this, the AMC charges annual asset management fees and expenses, that are captured in the expense ratio. Further, investors have to pay the fund manager irrespective of profit or loss. Cost of churning or Turnover Ratio: Some schemes tend to churn their portfolio very often, in keeping with the investment philosophy of the fund manager, i.e., whether he/she believes in long term or short term returns. This means higher transaction costs (brokerage, custody fees etc) and consequently, lower returns. Underperformance Research proves that 48% of schemes perennially underperform vis--vis the benchmarks. Hence selecting the fund and the fund manager is important.

What are the types of Mutual funds? There are three types of mutual funds are there. There are open-ended, closed-ended and Interval funds. In open-ended mutual funds, investors are permitted to enter and exit from the fund at any point of time at a price that is linked to the net asset value (NAV).

In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer. Investors are restricted with enter and exit from the funds during ongoing periods. FMPs are the best examples for close ended funds. Investors should not confuse between close ended funds and funds with lock in features. Funds with lock in feature are ELSS schemes wherein the investors are not allowed to redeem the invested amount in the three years from the date of allotment. On the other hand, Interval funds combine the characteristics of both closed-end and open-ended funds. They are the scheme whose units can be bought and sold only during a specified time interval, say, 15 days or even three months or any other time period, which is predetermined by the fund house. What are the different categories in Mutual Funds? Mutual funds are classified broadly as Equity funds, Hybrid Funds and Debt Funds based on their portfolio allocation. They are explained below. A. Equity Funds: Equity funds invest maximum of their assets (minimum of 65% to maximum of 100% of the assets) in shares of companies that are listed on the stock exchanges. Dividend and capital appreciation are the major revenue streams for equity funds. They are normally called as high risk high return products. The schemes are suitable for investors who are ready to take on some amount of risk to receive good returns. Within equity, there are various categories of products that come with their own risk and return attributes. They are, Equity Diversified funds: They are equity mutual funds that allocate and diversify their assets across stocks and sectors. This diversification strategy tries to mitigate the risks that are involved in equity market. Based on the allocation to market capitalization, these funds are further classified as Large cap, Mid cap, Small cap and Multi cap . The Large cap funds allocate maximum assets into blue chip stocks while the Mid cap and Small cap funds allocate maximum assets into mid cap and Small cap companies respectively. Likewise, Multi cap funds invest across stocks and industries irrespective of the market capitalization. The risk in Large cap funds is low among equity diversified sub categories while Mid cap funds generate comparatively higher returns over long run. Thematic funds: Thematic funds are also called as semi diversified equity funds are based on particular themes. They invest selectively in particular sectors as specifies in their scheme objectives. Examples are Infrastructure funds, MNC funds, Shariah funds etc. In most of the cases Dividend yield and Contra funds are also considered as semi diversified funds. Sector funds: Sector funds invest in companies belonging to specific sector mentioned in the offer document. They are concentrated bets. The sectoral equity funds dedicated to industries like technology, bank, pharmaceuticals, etc. Index and ETFs: They are passively managed equity funds that replicate selected indexes, such as the Nifty 50 or the Sensex, etc., by investing in the same stocks that comprise the index. ETFs are more convenient over index funds as they are traded on the exchanges like regular shares. ELSS: Equity Linked Saving Schemes are tax planning schemes which investment strategy is similar to Equity diversified funds. They provide tax benefit as they are locked into three years periods. That means investors can not redeem their investment within three years from the date of allotment.

Risk and return profile of equity oriented funds:

Turn Over Ratio (%) Exp Ratio (%) Corpus (Rs Crs) Mar-13 Range of returns delivered by the categories (Rolling Returns) (Absolute %) 1 Yr 3 Yr 5 Yr

Category

Portfolio composition

Risk

Invest in

SD

Remarks

Sectoral Equity companies engaged in the in the transportation and logistics sector concentrated bets. suitable for high risk appetite investors Banking stocks are high beta stocks. suitable for high risk appetite investors FMCG are defensive bets. suitable for medium to high risk appetite investors concentrated bets. suitable for high risk appetite investors concentrated but defensive bets. suitable for medium to high risk appetite investors concentrated bets. suitable for high risk appetite investors Semi diversified bets. MNCs are are considered rich in fundamentals. Suitable for medium to high risk appetite investors Infra sectors are reeling under many hardships. suitable for very high risk profile investors who believe on infra sctors Semi diversified bets. suitable for medium to

Equity - Auto

concentrated

Very High

11

2.5

49

15%

13%

1%

0.78

Equity Banking

concentrated

Very High

companies engaged in the Banking & Financial sectors

100

2.78

2583

23% 33%

2% 26%

16% 27%

1.13

Equity FMCG

concentrated

Very High

companies in the FMCG sector

48

2.75

403

23%

8% 21%

4% 22%

0.79

Equity Infotech

concentrated

Very High

technology and technology dependant companies

41

2.86

351

12% 20%

2% 19%

16% 23%

1.26

Equity Pharma

concentrated

Very High

Pharma and associated companies

44

2.64

817

15% 28%

10% 26%

9% 24%

0.71

Equity Media

concentrated

Very High

media & entertainment and other associated companies

45

3.02

134

10% 20%

1% 14%

9%

1.12

Thematic Equity

Equity MNC

Semi Diversified

Very High

multi-national companies

10

2.64

611

17% 20%

3% 18%

19% 22%

0.53

Equity Infrastructure

Semi Diversified

Very High

companies engaged in infrastructure and infrastructure related sectors

53

2.57

9912

-14% +24%

-16% +27%

-17% +24%

0.87

Equity - PSU

Semi Diversified

Very High

domestic public sector undertakings

44

2.8

581

-0.07

0.01

0.88

high risk appetite investors Contra funds have adopted similar strategy that of diversified funds. Suitable for high risk profile investors who believe in outof-favour sectors High dividend yield stocks tend to withstand corrections better and in bull runs participate to a lesser extent. This helps the schemes to generate stable returns in all the cycles. Large-cap funds invest in established blue-chip stocks having more potential of earnings growth. They are meant for lower volatility due to the stability in the revenue and are less vulnerable to adverse changes in the macro economic environment as compared to smaller companies. Historical performance shows that the Mid & small cap outperformed other equity oriented categories over long run despite carrying higher risk. Suitable for high risk appetite investors.

Equity Diversified Contra

Semi Diversified

Very High

undervalued stocks which may currently be out of favour but are likely to show attractive growth in the long term

77

2.6

2622

9% 19%

8% 21%

4% 22%

0.75

Equity Diversified Dividend Yield

Semi Diversified

High

high dividend yield stocks.

59

2.53

5070

6% 19%

2% 16%

2% 18%

0.73

Diversified Equity

Equity Diversified Large Cap

Diversified

High

companies having a large market capitalization.

85

2.52

59849

-1% +24%

-1% +25%

-7% +30%

0.79

Equity Diversified Mid & Small Cap

Diversified

Very High

Small and Mid Capitalization companies.

70

2.6

29876

-9% +30%

-5% +27%

-1% +35%

0.74

Equity Diversified Multi Cap

Diversified

High

equity and equity-related securities across all market capitalisations

72

2.61

30016

-6% +27%

-2% +25%

-4% +28%

0.77

Index

Diversified

High

investing in the securities comprising an index to replicate the performance of the index

1.35

1246

-2% +19%

2% 19%

1% 20%

0.82

Equity ETFs

Diversified

High

investing in the securities comprising an index to replicate the performance of the index. They are traded like equity shares in the exchanges.

0.74

852

-14% +29%

3% 20%

5% 19%

1.00

Multi-cap funds allocate their assets across the entire universe of stocks and sectors. This dynamic nature helps out the category to do well in all the market conditions. suitable for medium to high risk profile investors. Index funds are passively managed mutual funds that invest in the securities comprising an underlying index in a proportion which the securities are present in that index. The basic objective of such schemes to replicate the performance of index which they track so that there is no fund manager risk. ETFs are passively managed mutual fund schemes that are like Index funds investing in the securities comprising an index to replicate the performance of the index. They are listed and traded on stock exchanges, hence these units can be bought and sold on the real time basis like equity shares.

Tax Planning

Diversified

High

equities across all market capitalisations with the lockin of 3 years hence eligible for tax benefits.

75

2.55

22992

-2% +21%

-2% +24%

-1% +28%

0.77

ELSS offer multiple advantages of providing equity returns along with tax benefit on investment with a short lock in period of 3 years. They provide tax benefit to the investors for investments up to overall limit of Rs. 1,00,000 under Section 80 C of the Income tax Act. Hence depending on the applicable tax rate, the returns earned can be calculated on the net-oftax-benefit investment and hence are superior.

ELSS - Explained: Equity Linked Saving Schemes (ELSS) offer multiple advantages of providing equity returns along with tax benefit on investment in a short lock in period of 3 years. The lock-in period applicable to ELSS is 3 years, while it is 6 years in the case of National Savings Certificates and 15 years in the case of PPF. Opting for the dividend option in the ELSS allows investors to realise some gains even during the lockin period. They provide tax benefit to the investors for investments up to overall limit of Rs. 1,00,000 under Section 80 C of the Income tax Act. Investors get a deduction of the amount invested from their taxable income. The tax payer straightaway saves to the extent of tax applicable on the invested amount. Hence depending on the applicable tax rate, the returns earned can be calculated on the net-of-tax-benefit investment and hence are superior. ELSS are equity linked products which allow investors to participate in equity markets and provide higher return potential (on the flip side, risk is also higher but the tax benefit acts as a buffer). Since the investments in equity over long-term delivers better returns, the lock-in period of 3 years allows the fund managers of ELSS to build a portfolio for the long term without worrying about early redemptions. This helps the investors to boost their wealth to achieve their long term goals. B. Hybrid or Balanced Mutual Funds: The Hybrid or Balanced Schemes invest in equities as well debt instruments. The key objective here is to blend advantages of equity and debt mutual funds steady returns with moderate capital appreciation. Accordingly, the risk and return profile is somewhere between debt and equity funds. They are classified as further, Hybrid Equity Oriented (which invest minimum in 60% in equity and the rest in debt), Hybrid Debt Oriented (which invest close to 35% in equity and the rest in debt), Monthly Income Plan (which invest 15% to 30% in equity and the rest in debt).

C. Debt Funds: Debt oriented schemes cater to more conservative investors as they invest all portion of their corpus in various debt instruments, such as company bonds and debentures, treasury bills, government securities, etc. The income of such funds comes from the interest that the debt instruments held in the portfolio deliver. In the case of debt instruments that are traded, income could be accrued in the form of capital appreciation on traded debt paper. Interest rate movements are the biggest risk factor for debt funds. There are various types of debt funds, key among them include; Gilt Funds: The Gilt Funds invest most of their corpus in sovereign securities, i.e. central and state government securities. Such schemes can further be further categorized into short term and long term gilt funds depending on the types of instruments that they invest in. Although these funds are almost risk free, they are subject to interest rate volatility. Whenever the interest rates are showing a declining trend, they will fetch higher returns due to appreciation in value of the Gilt portfolio. But in case of an increasing trend in interest rates, Gilt funds can give low or negative returns. Income Funds: These funds invest in long term debt instruments which typically offer the highest returns since the durations are long and there is a direct relationship between the duration of a bond and its returns. Although these funds could offer greater returns than any other debt fund on the maturity spectrum, they are open to both credit risks (the risk that the market value of the bond will fall below the price at which it was purchased, which in turn will cause the NAV of such funds to fall) and interest rate risks (if interest rates rise, the prices of bonds fall, as these two factors are inversely related). Short term Income, Ultra short term Income and Liquid Funds: They are classified as shortterm funds as their portfolios contain instruments that have a maturity of up to one year such as treasury bills, certificates of deposit, commercial paper, reverse repo, etc.. The main objective of these funds is to offer investors a liquid investment avenue that also offers scope for good returns, unlike a bank fixed deposit which offers low fixed returns. Short Term income funds invest in upto three years residual maturity debt papers. Ultra Short term income funds allocate their assts to the debt securities maturing in a year while Liquid funds invest only in the debt securities which maturity periods up to 91 days.

Risk and return profile of debt oriented funds

Particular Risk Invest in Debt securities with a residual maturity of less than 91 days. having residual maturity less than 1 year having residual maturity less than 18 Months with 2 to 3 years of residual maturity. whose average maturity over the 3 years Category Average Maturity (Months) Category Expense ratio (%) Category Standard Deviation (Daily) Does well in Range of returns delivered by the categories (Rolling Returns) (Absolute %) Last 3 Last 6 Last 1 months months Year 2% 2.5% 3.5% 5% 7% 10.5% Exit Load

Liquid

Very Low

1.47

0.43

0.02

High interest rate scenario High interest rate scenario

No Exit Load Yes. From Nil to 1% for 1 day to 75 days. Yes. From Nil to 2% for 1 day to 1 year. Yes. From Nil to 3% for 1 day to 1 year. Yes. From Nil to 2% for 1 day to 1 year.

Ultra Short Term

Very Low (Higher compared to liquid)

4.47

0.67

0.02

2% 2.5%

4% 5%

8% 10%

Floating Rate - ST

Very Low (Higher compared to liquid)

6.07

0.66

0.03

High interest rate scenario

2% 2.6%

4% 5.3%

8% 10.6%

Floating Rate - LT

Low (Higher compared to liquid)

7.25

0.73

0.03

High interest rate scenario

1.9% 2.5%

3.8% 5%

8% 11%

Short term Income

Low (Higher compared to liquid)

17.61

0.99

0.04

High interest rate scenario

1.8% 2.8%

3.7% 5.5%

7.4% 11%

Gilt ST

Income

Low to Medium (Higher compared to Short Term Income) Medium (Higher compared to Floating Rate - LT) Medium (Higher compared to Floating Rate - LT) Medium to High (Higher compared to Income Funds)

G Secs whose average maturity over the 3 years with more than 5 years of residual maturity. invest in all debt securities with no cap on average maturity. invest in G secs with no cap on average maturity.

45.11

1.05

0.09

Falling interest rate scenario

1.7% 3%

3.5% 6.3%

7% 11.6%

Yes. From Nil to 0.5% for 1 day to 6 Months. Yes. From Nil to 3% for 1 day to 1 year. Yes. From Nil to 2% for 1 day to 1 year. Yes. From Nil to 1% for 1 day to 1 year.

43.56

1.42

0.08

Falling interest rate scenario

2% 3%

4% 6%

7% 13%

Dynamic Income

45.40

1.25

0.08

Falling interest rate scenario

2% 3%

4.3% 5.7%

8% 12%

Gilt LT

82.94

1.46

0.13

Falling interest rate scenario

1% 3.6%

1% 7%

1% 14%

Arbitrage Funds: Arbitrage schemes are equity oriented schemes and reap the benefit from the arbitrage opportunities between the cash and the futures markets. They are considered as best alternates for liquid and other short-term income categories, since they provide limited steady returns for shorter period. Investors with low risk appetite can invest and hold for one year and more. Fund of Funds: Fund of Funds is a mutual fund which invests in other mutual fund schemes. Where a traditional mutual fund comprises of a portfolio of shares, a Fund of Funds comprises of a portfolio of different mutual fund schemes. Investing in a FoF scheme provides the investor greater diversification. New or first time investors, who do not have a large capital for a diversified portfolio, could now diversify from among thousands of funds and stocks, with a small amount of money. However, Expense fees and management costs are higher than normal mutual funds, as the cost structure will include the fees of the underlying mutual funds, as well as the FoF. Gold ETF: Exchange Traded Funds ("ETFs") are open-ended funds that trade on a stock exchange just like the shares of an individual company. Unlike the share of a company, each unit of an ETF represents a portfolio of stocks. So it is similar to a unit of an open-ended mutual fund but with a big difference. Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion having 99.5% purity. They are listed on the stock exchanges for trading with an intention to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. These are designed to provide returns that closely correspond to the returns provided by domestic price of Gold. Gold Fund of Funds (FoF) are mutual fund schemes (not an ETF) investing primarily in units of gold ETFs. They seek to provide returns that closely correspond to returns provided by the Gold ETF. They are passively managed funds which enable an investor to save in the form of gold in a convenient manner either through lump sum investment or through systematic investment. The face value of the gold funds is at Rs. 10. Gold ETFs have more advantages compared to actively managed funds. They are as follows; Small denomination: Retail investors, who want exposure to gold in small amounts, can opt for Gold ETFs. It allows investors to buy one unit, which is buying 0.5 - 1 gram of gold depending on the scheme. Liquidity: Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange. This makes it a liquid investment instrument. Transparent Pricing: The price of ETFs is quoted on the stock exchange and there is a bid/ask during market hours enabling you to buy/sell at market prices. Thus you do not have to pay a

premium while you purchase or a sell at a discount as in the case of jewellery or even sometimes in coins and bars. Safety: Gold ETFs is essentially buying gold in paper form. So the investor does not have to take the trouble of safe keeping of the gold. The custodian appointed by the AMC has the responsibility of taking care of the gold. Purity: Mutual funds are governed by SEBI and SEBI regulations require the purity of underlying gold in Gold ETFs to be 99.5% fineness and above. This spares investors the trouble of finding a reliable source to buy gold. Tax Efficient: Gold ETFs do not attract wealth tax. Besides, the investment is categorized as long term if it held for more than a year unlike physical gold where the period is 3 years.

Global Funds: There are 34 schemes, coming under Global funds category, investing predominantly in overseas markets either directly or fund of fund routes. The category is considered as good alternate asset class as they provide a range of geographical diversification, offer an opportunity to take part in the worlds booming economies and growing stock markets. However, given the global uncertainty, investors can take a call based on their risk profile on schemes that provide better geographical as well as market diversifications. Types of mutual funds based on management style: Actively managed and Passively managed funds: Another distinction that is important for the investor is the difference between active and passive funds. This distinction is based on how the fund manager views his role. Active funds: Active funds are those that aim to beat the market benchmark. Fund managers of active funds believe that they have the ability to select stocks and time the market in a manner that makes the returns on their portfolio higher than what the market (in the form of the benchmark) gives over a specific period of time. Passively Managed Funds: The funds which reflect the exact returns of a particular Market Index are called as Passively Managed Funds. Index and ETF are the example for passively managed funds. The Fund Managers of these funds have less work and not taking any decision regarding the investment of funds. They just invest in those stocks which forms part of the Index. Index funds are best suited for investors those who are new to equity market. There are few advantages for investor who invests in index fund. To begin, expenses are lower as compared to an actively managed fund. Secondly, investor at the time of investment as well as throughout the investment horizon knows exactly which kind of stocks are going to be there in the portfolio and in what proportion. Thirdly, is it is very easy to track the performance of an index fund because it is tracking a particular benchmark index.

How to choose mutual funds: Selecting a mutual fund for investing is a very important step in the financial planning. The most important first step is to have an investment goal. A fantastic fund selection done without having an investment goal is completely useless. Investors should know the reason for the investment, how long they can be in the investment, at what stage they will re-allocate and how much is their risk appetite, etc before making investment in Mutual funds. There are two way of investing in the mutual funds such as Lumpsum or SIP which will help the investors to achieve their financial goals on right time. Basic terms in Mutual Funds: NAV: AMCs disclose NAV for each mutual fund schemes to denote the realizable value of per unit of a scheme in a particular day. Buying and selling into funds is done on the basis of NAV prices. It includes the gains it realizes in the market, dividend income, interest income it earns from the underlying scrips, less expenses it incurs and losses, if any. Since entry loads now stand abolished, a funds NAV is the price at which you get to buy mutual fund units. When you sell these units, you get to see them at NAV plus a

nominal mark-up, known as exit load, if applicable. Most equity funds go no-load after about a year. Some debt funds carry no exit loads. Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing by number of units outstanding. How often is the NAV declared: Mutual Funds declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment or any monthly income scheme (which is mandatory requirement to be listed on a stock exchange) may be published at monthly or quarterly intervals. Entry load: SEBI banned Entry loads on all mutual funds on 1st August 2009. Exit Load: Mutual funds charge certain percentage which ranging from nil to 3% of the investment while redeeming or switching out the schemes. That Exit load is applicable for a specific period from the time of purchase and beyond this period, no exit load is applicable on redemptions. The fund uses this charge to meet its marketing and distribution expenses. Liquid funds do not charge any exit load while other debt funds charges nil to 3%. In case of Equity oriented funds, most of the funds charge 1% of exit load if the units are redeemed with in a year. There is one more term used in mutual funds CDSE i.e, Contingent Deferred Sales Charge which is the exit fee charged by a no load mutual fund. The CDSC is a reducing charge. Cut-off time: Cut-off timing is the time before which an investor has to submit their application for redemption or purchase. In order to get the NAV of the current day you would have to transact before the cut-off time of the scheme. If you place any order after the said cut-off time, you would be eligible for NAV of the next day. The cutoff time for accepting orders in Non-liquid funds is 3 pm and in Liquid funds it is 12 pm (the cut off time for liquid funds vary among mutual funds from 12 pm to 2 pm). Growth or Dividend options: These are the options available for investors to opt the mutual funds based on their financial needs. Investors those who do not need of any periodical income and feel let the investment to grow for a specified time can choose Growth option while the investors who want periodical income can choose Dividend option. The Dividend option is further divided into Dividend pay out option and Dividend re-investment option. While filling the form, if you forget to choose one, your fund will allot you the default option, which may not be the one you really want. Mutual funds pay dividends whenever your investments earn a profit that they can pay out. When a fund declares dividend, its net asset value (NAV) comes down by that extent. The options are linked with tax benefits also. Dividends from equity-oriented funds, which invest at least 65% in equities, are currently tax free. Dividends from all types of debt funds, including liquid funds are taxed at 28.325%, including surcharge and cess. On the other hand in Growth option, if the investment is kept in it one year and so, then that is eligible for capital gain tax. Benchmark: According to Sebi, Indian mutual funds need to measure the performance of their schemes against an index. This is enable investors to judge their schemes performance and compare it with another instrument (in this case, an index) to ascertain whether its meeting the ir financial goals. Equity funds are free to choose the benchmark index they feel consists an appropriate universe of stocks that it aims to invest in. But debt funds are mandated to use specific indices. Crisil Ltd and ICICI Securities Ltd create these indices and maintain them. Investors can look out for their schemes performance against the index in funds monthly factsheet. Expense ratio: The Asset Management Company charges an annual fee, or expense ratio that covers administrative expenses, advertising expenses, custodian fees, etc. Such expense ratio is calculated periodically but is charged daily on the NAV. SEBI has a cap on the maximum amount that a fund can charge as expense. For instance, it is a maximum of 2.5 per cent (will additional allowance 0.3 per cent given for selling in Tier II and Tier III cities) for active equity funds. It is lower for debt funds and index funds to the maximum of 2% and 1.5% respectively. A fund's expense ratio is typically linked to the size of the funds under management and not to the returns

earned. Normally, expense ratio does not matter to Indian investors where funds have comfortably managed double digit returns, especially in equity funds. Investors should look at the comparative performance of the particular fund versus others in its category. Direct plan: The direct plan option enables investors to buy schemes directly from the fund house and benefit from that purchase by paying a lower expense. The Securities and Exchange Board of India (Sebi) made it mandatory for all asset management companies (AMCs) to offer separate direct plans for open-end schemes; this was made effective 1 January 2013. Since, the investor approaches the AMC directly and there is no marketing or distribution expense, the direct plan net asset value (NAV) accounts for a lower expense. As a result the direct plan NAV is higher than the normal plans NAV to the extent of the difference in expense ratio which can be around 0.5- 0.75% annually. Turn over ratio: The rate at which the fund's portfolio securities are changed each year. If a fund's assets total Rs 100 crore and the fund bought and sold Rs 100 crore worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds which invest for the long term. High portfolio turnover rates generally add to the expenses of a fund. Performance of Mutual funds: Return: Investors have to look into the return part before investing in the mutual funds. Returns are the key indicators of their investment performance and are calculated from the historical NAVs. These returns of the schemes should be compared with the peer schemes in the same category or the corresponding benchmarks so that the investor will get the fair idea about the fund whether it is suitable for achieving his financial goals. To calculate the returns, one can either consider point-to-point returns or rolling returns. In mutual funds, NAV is the basic element used in calculating the returns because it keeps varying from one point of time to other. Thus, the purchase and sale value of investment is derived by multiplying the units purchased with NAV for respective period i.e. purchase date and sale date. For a layman, surplus earned over and above the principal is often termed as returns. Returns are often termed in value and % change, for instance, investment of Rs.10,000 appreciates to Rs.15,000 during the term of 3 year of value. It means that principal has appreciated by Rs. 5,000, while in terms of percentage change, its 50% appreciation. But, can we term this % change as the only method to gauge the performance of mutual fund investments. Point to point returns: These returns are calculated by considering the NAVs at two points in time-entry date and exit date. The absolute returns are very easy to calculate as it measures the value of investment at one point of time with other. This is the most common method to interpret the investment performance. To know how your investment has grown on an annual basis, you'll need to check the compounded annual growth rate (CAGR). Though CAGR can be calculated for any time period, a simple point-to-point return is preferred when the holding period is less than one year and CAGR is ideal for longer holding periods. Rolling Return: Though it's easy to calculate the point-to-point return and is extensively used to analyse fund performance, be warned that it's not a fool-proof method. It fails to determine the consistency of the historical returns. Rolling returns come to the existence to measure the consistency of the returns that are generated by the funds. In rolling return, returns are calculated on a continuous basis for each defined interval, which can be days, weeks, months, quarters, even years. The maximum/minimum rolling return of a scheme not only helps determine the consistency of a fund's performance, but also assess its best and worst periods (years, months, quarters) in terms of returns. Rolling returns can be calculated for any interval. XIRR: XIRR is a excel calculation method which is used to measure the SIP performance of the schemes.

Risk: Mutual fund investments are not totally risk free. Further, they do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures and deposits. All these investments involve an element of risk. A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management. The following are the some of the risks that are mainly involved with mutual fund investment. They are Industry risk, Credit Risk, Inflation risk, Interest rate risk, Fund Manager Risk, Country risk, Currency Risk, etc. Measuring Mutual Fund Risk: Investors need to evaluate the risk involved in mutual fund schemes before investing. There are some statistical tools that help to measure the risk involved in the mutual funds. Risk in mutual fund means volatility is nothing but the fluctuation of the Net Asset Value. The higher the volatility the greater the fluctuation of the NAV. Generally, past volatility is taken as an indicator of future risk and for the task of evaluating a mutual fund this is an adequate. There are many ways in which you can determine how risky a fund is. The following risk measures are commonly used. Standard Deviation: Standard deviation is probably used more often than any other measure to gauge a funds risk. It measures the fluctuation in periodic returns of a scheme in relation to its own average return. Investors like using standard deviation because it provides a precise measure of how varied a funds returns have been over a particular time frame - both on the upside and the down side. With this information, you can judge the range of returns your find is likely to generate in the future. Beta: This measure compares a mutual fund's volatility with that of a benchmark and is supposed to give some sense of how far you can expect a fund to fall when the market takes a dive, or how high it might climb if the bull is running hard. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 -- it has a history of fluctuating 15% more than the benchmark If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more. Sharpe Ratio: This formula, worked by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to the risk it takes. Take a fund's returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed considering its riskiness. Alpha: Alpha was designed to take beta one step further. It looks at the relationship between a fund's historical beta and its current performance, or the difference between the return beta would lead you to expect and the return a fund actually gets. An alpha of 0 simply means that the fund did as well as expected, considering the risks it took. So if that fund with the beta of 1.15 beat the market by 15% (or underperformed it by 15% when the market was down), it would have a 0 alpha. If your fund has a positive alpha, that means it returned more than its beta predicted. A negative alpha means it returned less.

Ways to invest in/redeem from in Mutual Funds: Apart from lumpsum investment and lumpsum withdrawal, in order to help investors to simplify the decision of when to invest and disinvest and make it as beneficial as possible, mutual funds offer Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plans (STP). Systematic Investment Plans: SIPs involve making investments of fixed sums of money in a particular scheme at predetermined periodical intervals of time (monthly, quarterly or annually). As this technique results in buying more units when the price is low and less units when the price is high, it has been found to lower the average cost per unit purchased, irrespective of whether the market is climbing, falling or generally volatile. Further, in addition to sparing you from the need to time the market, it makes investing relatively simple as fund houses allow you to invest using post dated cheques, ECS transfers, etc.

Systematic Withdrawal Plans: SWPs can be used to regularly disinvest either fixed amounts or some or all of the appreciation that is generated from your investment in the scheme. This allows you to receive a regular income from your investment in a scheme or simply invest the gains from the scheme elsewhere. All you have to do to utilize this facility is fill in a form that is available with the fund house, intimating them about your preferences (fixed or appreciation withdrawal). Systematic Transfer Plans: Through STPs you can transfer fixed amounts of money at regular intervals (monthly or quarterly) from one scheme to another. You can activate this facility by giving your fund house one-time standing instructions to execute such transfers. These plans effectively automate both the processes of investing and disinvesting.

How to invest in mutual funds: There are five different channels through which you can invest directly into a mutual fund either via their online/ mobile platform or in physical form, through an independent financial adviser (IFA), through your bank, through your online broker or your online fund adviser and through your wealth management firm. Investment in Mutual Funds has got even easier with HDFC securities. You can buy mutual funds units through your trading account and the units will get credited to your demat account. Traditionally, Mutual fund investments were about submitting physical applications to the AMC. Now, you can purchase & redeem mutual funds through NSE (MFSS) / BSE (BSE StAR MF) just like a company stock. To avail this facility, do a one-time online registration with NSE & BSE. Demat holding: Mutual funds offer investors the option to hold units in demat (short for dematerialised) form. Investors can buy/sell mutual fund units electronically and track all their capital market investments in a single statement. You can convert mutual fund units into demat form by submitting a conversion request form which you can get from your broker or depository (NSDL or CDSL). There is no physical way to hold mutual fund units. Mutual fund units are held by RTAs and the investor gets account statements. The investor does not get a physical unit or any other certificate. What are the documents required to invest? Application Form: This is the most basic requirement. If you wish to start a systematic investment plan (SIP), you need to fill in two forms. One to open an account with the mutual fund and the other to specify your SIP details such as frequency, monthly instalment amount, and so on. If you are investing afresh in a mutual fund (MF) scheme, both the above mentioned forms are necessary. For instance, if you are invested in Franklin India Bluechip Fund (FIBF) and now wish to start an SIP in Franklin India Prima Plus (FIPP), you will need both the forms; one form to open your account in FIPP and another one to start an SIP. If, however, you wish to start an SIP in only FIBF, you only need to fill in the SIP form since you are already invested in it. KYC and PAN Card: Effective January 2012, Sebi further simplified the KYC process with the introduction of centralized KYC registration agencies (KRAs). Central Depository Services (India) Ltd (CDSL) facilitates and carries out KYC procedure on behalf of all mutual fund houses. As an investor, you have to undergo the KYC process only once and the details will get shared with other intermediaries. This will cover market intermediaries such as mutual funds, portfolio managers, stock brokers, depository participants and collective investment schemes among others. What you need to do is get the KYC form either from a mutual fund website or branch or from any other service centre detailed on the Association of Mutual Funds in India website (www.amfiindia.com) or the CDSL website (www.cvlindia. com), fill it in and submit once again at one of the above locations. Along with the KYC form, you will have to take some original documents for verification and their copies for submission; these include, proof of identity, proof of address, passport copy and passport-size photograph. You no longer need to submit copies of your Permanent Account Number (PAN) card since your KYC-compliance proves that you already have PAN. If you are an existing investor, this KYC will hold good. However, for new investors there is an additional requirement of inperson verification at the time of submitting forms. Blank Cheque: Typically, a blank cancelled cheque is not mandatory when you start your SIP these days. But if you wish to start an SIP straightaway without investing the minimal amount, its best that you give a cancelled blank cheque to facilitate an electronic clearing system (ECS) mandate. This is to ensure that your cheque details like the magnetic ink character recognition (MICR) code, Indian Financial System Code

(IFSC), apart from your account number and others are appropriately captured. This is required for opening an SIP. However, if you are investing an amount by giving a cheque and wish to start an SIP starting from the next month, your first investment cheque is enough, even if you give both the forms together. For Minors: If you wish to invest in the name of a minor, you need to fill in a third-party declaration form. Only parents are allowed to invest on behalf of their children. Documents that establish the parents relationship with the child should be submitted; for example, a passport. If the child has no parents in case of an eventuality, then a court-appointed guardian can invest if necessary documentary proof is submitted to establish the relationship between the minor child and the guardian. List of mandatory documents to be submitted for other investors is mentioned below
Types entity: of Documentary requirements 1. Copy of the balance sheets for the last 2 financial years (to be submitted every year) 2. Copy of latest share holding pattern including list of all those holding control, either directly or indirectly, in the company in terms of SEBI 3. takeover Regulations, duly certified by the company secretary/Whole time director/MD(to be submitted every year) 4. Photograph, POI, POA, PAN and DIN numbers of whole time directors/two directors in charge of day to day operations 5. Photograph, POI, POA, PAN of individual promoters holding control either directly or indirectly 6. Copies of the Memorandum and Articles of Association and certificate of incorporation 7. Copy of the Board Resolution for investment in securities market 8. Authorised signatories list with specimen signatures 1. Certified true copy of the passport 2. Certified true copies of proof of overseas address and permanent address 3. If any of the documents (including attestations / certifications) towards proof of identity or proof of address specified above are in a foreign language, they have to be translated into English before submission. 1. Copy of the balance sheets for the last 2 financial years (to be submitted every year) 2. Certificate of registration (for registered partnership firms only) 3. Copy of partnership deed 4. Authorised signatories list with specimen signatures 5. Photograph, POI, POA, PAN of Partners 1. Copy of the balance sheets for the last 2 financial years (to be submitted every year) 2. Certificate of registration (for registered trust only).Copy of Trust deed 3. List of trustees certified by managing trustees/CA 4. Photograph, POI, POA, PAN of Trustees 1. PAN of HUF 2. Deed of declaration of HUF/List of coparceners 3. Bank pass-book/bank statement in the name of HUF 4. Photograph, POI, POA, PAN of Karta 1. Proof of Existence/Constitution document 2. Resolution of the managing body & Power of Attorney granted to transact business on its behalf 3. 1. 2. 1. 2. Authorized signatories list with specimen signatures Copy of the constitution/registration or annual report/balance sheet for the last 2 financial years Authorized signatories list with specimen signatures Copy of SEBI registration certificate Authorized signatories list with specimen signatures

Corporate:

NRI

Partnership firm

Trust

HUF Unincorporate d Association or a body of individuals Banks/Instituti onal Investors Foreign Institutional Investors (FII) Army/Govern ment Bodies Registered Society

1. Self-certification on letterhead 2. Authorized signatories list with specimen signatures 1. Copy of Registration Certificate under Societies Registration Act 2. List of Managing Committee members 3. Committee resolution for persons authorised to act as authorised signatories with specimen signatures 4. True copy of Society Rules and Bye Laws certified by the Chairman/Secretary

Myth Busters: Myth 1: New Fund Offerings (NFOs) offer a better deal than existing funds. It is better to buy units in a new fund offering at Rs 10 than an existing fund at a higher NAV. Reality: The performance of the mutual fund whether existing or new scheme solely depends on factors like the skills and investment strategies adopted by the fund managers, quality of the portfolio, exposure to various industries and so on. In fact, when it comes to investment there is no difference between new schemes selling at par value or existing schemes selling at higher price. The return, as a percentage of the capital which you have invested, will determine which investment was a better choice. Myth 2: Shares generate higher returns. The stock market is more exciting and direct investing in shares generates higher returns than mutual funds. Reality: The returns the mutual funds generate depend on the type of mutual fund scheme you select. That goes for shares too; the return you receive could be good or bad depending on the stock that you choose. For instance, index funds usually report returns that are in sync with the index which they try to mirror while pure equity funds can outperform the index by a wide margin. Myth 3: Investing in mutual funds is an expensive proposition. Mutual funds charge various expenses such as entry and exit loads, annual asset management fees and other expenses. Reality: Though mutual funds levy various fees they are not an expensive proposition. When you invest directly too there are certain expenses that you will have to bear. In fact, the additional charges that you pay towards fund management, etc., end up benefiting you since it results in investment decisions which are better researched and more meticulous monitoring of the performance of your investments on a continuous basis. Myth 4: Mutual funds guarantee returns. Some mutual funds assure their investors a certain level of returns. Reality: Mutual funds are subject to market risks and do not guarantee any kind of returns to unit holders. The performance of mutual fund schemes should be compared with benchmark indices and judged accordingly. It is quite possible that even the best of fund managers may not be able to deliver consistent returns over the years. Myth 5: Lower NAVs translate into better investment opportunities Mutual funds with lower NAVs can generate better returns. Reality: Low NAVs do not mean a cheap investment opportunity. You need to look at the long term returns generated by the scheme in question. Here, returns mean capital appreciation and dividend paid, if applicable. The track record of the fund manager and the composition of the portfolio of the schemes are also critical factors which you should consider while choosing the right scheme. FAQs: Are investments in mutual fund units safe? No stock market related investments can be termed safe with certainty; they are inherently risky. However, funds have varying risk profiles, as stated in their objective. Funds, which categorise themselves as low risk, invest generally in debt, which is less risky than equity. Mutual funds are, however, always safer than direct investments in the stock markets as they have access to the services of expert fund managers. How are mutual fund issues different from initial public offerings (IPOs)? Company IPOs may open at prices that are lower or higher price than the issue price, depending on market sentiment and investor perceptions. However, in the case of mutual funds, the par value of units is unlikely to rise or fall immediately after allotment. Mutual fund schemes require time to invest in securities. The value of securities in which the scheme deploys its funds will drive the schemes NAV. Can investors appoint nominees for their investments in mutual fund units? Yes. Nominations may be made by individuals applying for or holding units on their own behalf, either singly or jointly. Non-individuals including societies, trusts, corporate bodies, partnership firms, Kartas of Hindu undivided families, or holders of power of attorney cannot nominate.

Can I switch between funds? You may switch all or part of your investments in one fund to another available fund. AMCs do not charge fees for such switches. To process a switch, you need to provide clear instructions, by completing a form and submitting it on any business day at an investor service centre, or the office of registrar or transfer agent. An account statement reflecting the new holdings will be sent to you within three days of completion of transaction. Are mutual fund schemes suitable for small investors? Mutual funds are meant specifically for small investors. Although small investors may not be able to carefully monitor and analyse investments in the stock markets, mutual funds are usually equipped to carry out thorough analysis and thus, ensure superior returns to investors. Are mutual funds insured? No. Unlike certain types of savings accounts and certificates of deposit, mutual fund units are not insured by the government, or any government agency, and do not have any other type of insurance. There is no guarantee that when you sell your shares, you will receive what you paid for them.

Tax Implications in Mutual Fund: Mutual Funds investments provide better tax benefit to unit holders. Tax is imposed at the time when you withdraw your money from mutual funds. Dividend distribution tax (DDT): Dividends are tax free in your hands. However, debt funds pay a dividend distribution tax (DDT) of 28.325% (including surcharge and cess) of the dividend amount that they distribute. Though dividends are tax free in your hands, the DDT comes out of the dividend to be distributed, so in effect its you who end up paying the tax. Dividends from equity-oriented funds are completely tax free. Tax on distributed income (payable by the scheme) rates:
DDT charges Equity oriented schemes Debt schemes Individual/ HUF Nil 28.33% Domestic Company Nil 33.99% NRI Nil 28.33%

Capital Gains: Investment in growth option of mutual funds attracts capital gain tax. They are short term and long term capital gains. Income from the sale of mutual funds units after one year attract long term capital gain tax while the units that are sold within one year period attracts short term capital gain tax. Long Term Capital Gain: There is no capital gain tax applicable for equity mutual funds. On the other hand, if you withdraw from debt funds after a year, you pay 10% tax without indexation or 20% with indexation.
Long Term Capital Gains (units held for more than 12 months) Individual/ HUF Domestic Company Nil Nil 10% without indexation 10% without indexation Other than equity oriented schemes or 20% with indexation or 20% with indexation whichever is lower whichever is lower Capital Gains Taxation Equity oriented schemes NRI Nil 10% without indexation or 20% with indexation whichever is lower

Short Term Capital Gains (units held for 12 months or less): If you withdraw from an equity fund before one year, you pay 15% tax on your capital gains (selling price minus cost price). Withdrawals from debt funds are taxed at income tax rates if you withdraw your debt fund units before one year.
Short Term Capital Gains (units held for 12 months or less) Capital Gains Taxation Individual/ HUF Domestic Company Equity oriented schemes 15% 15% Other than equity oriented schemes As per the tax bracket As per the tax bracket NRI 15% As per the tax bracket

How to read Mutual Fund Scheme Information Document (SID) or Offer Document (OD): Scheme Information Document (SID) or Offer Document (OD) is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies

directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites. Important Things to Read in an Offer Document: Date of issue: First, verify that you have received an up-to-date edition of the SID. SID must be updated at least annually. Minimum investments: Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. Investment objectives: The goal of each fund should be clearly defined from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective. Investment policies: SID will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification. Risk factors: Every investment involves some level of risk. In SID, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. Past Performance data: SIDs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in SID are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals. They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account. Fees and expenses: Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs these all add up over time. The SID lists the limits on these fees and also shows the impact these have had on the fund investment historically. Key Personnel: This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style. Tax benefits information: Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close

reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns. Investor services: Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the SID, usually near the back of the publication, will describe these services and how one can take advantage of them.