CHAPTER 1

INTRODUCTION
A mutual fund is simply a financial intermediary that allows a group
of investors to pool their money together with a predetermined investment
objective. The mutual fund will have a fund manager who is responsible for
investing the pooled money into specific securities (usually stocks or bonds).
When one invests in a mutual fund, he is buying shares (or portions) of the
mutual fund and becoming shareholder of the fund.
The income earned through these investments and the capital
appreciations realized are shared by its unit holders in proportion to the
number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low
cost. The flow chart below describes broadly the working of a mutual fund.

While the concept of individuals coming together to invest money

collectively is not new, the mutual fund in its present form is a 20th century
phenomenon. In fact, mutual funds gained popularity only after the Second
World War. A draft offer document is to be prepared at the time of
launching the fund. Typically, it pre specifies the investment objectives of
the fund, the risk associated, the costs involved in the process and the broad
rules for entry into and exit from the fund and other areas of operation.

In India, as in most countries, these sponsors need approval from a

regulator, SEBI (Securities exchange Board of India) in our case. SEBI
looks at track records of the sponsor and its financial strength in granting
approval to the fund for commencing operations. A sponsor then hires an
asset management company to invest the funds according to the investment
1|Page

objective. It also hires another entity to be the custodian of the assets of the
fund and perhaps a third one to handle registry work for the unit holders
(subscribers) of the fund.

2|Page

STRUCTURE OF THE INDIAN MUTUAL FUND

INDUSTRY
The Indian mutual fund industry is dominated by the Unit Trust of
India which has a total corpus of Rs700bn collected from more than 20
million investors. The UTI has many funds/schemes in all categories i.e.
equity, balanced, income etc. with some being open-ended and some being
closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which
is a balanced fund, is the biggest scheme with a corpus of about Rs200bn.
UTI was floated by financial institutions and is governed by a special act of
Parliament. Most of its investors believe that the UTI is government owned
and controlled, which, while legally incorrect, is true for all practical
purposes.

The second largest category of mutual funds is the ones floated by

nationalized banks. Canara bank Asset Management floated by Canara Bank
and SBI Funds Management floated by the State Bank of India are the
largest of these. GIC AMC floated by General Insurance Corporation and
JeevanBimaSahayog AMC floated by the LIC are some of the other
prominent ones. The aggregate corpus of funds managed by this category of
AMCs is about Rs150bn.

The third largest categories of mutual funds are the ones floated by the
private sector and by foreign asset management companies. The largest of
these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate
corpus of assets managed by this category of AMCs is in excess of Rs250bn.

3|Page

RECENT TRENDS IN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive
expansion of the foreign owned mutual fund companies and the decline of
the companies floated by nationalized banks and smaller private sector
players. Many nationalized banks got into the mutual fund business in the
early nineties and got off to a good start due to the stock market boom
prevailing then. These banks did not really understand the mutual fund
business and they just viewed it as another kind of banking activity. Few
hired specialized staff and generally chose to transfer staff from the parent
organizations.

The performance of most of the schemes floated by these funds was

not good. Some schemes had offered guaranteed returns and their parent
organizations had to bail out these AMCs by paying large amounts of money
as the difference between the guaranteed and actual returns .The service
level were also very bad. Most of these AMCs have not been able to retain
staff, float new schemes etc. and it is doubtful whether, barring a few
exceptions, they have serious plans of continuing the activity in a major
way.

The experience of some of the AMCs floated by private sector Indian

companies was also very similar. They quickly realized that the AMC
business is a business, which makes money in the long term and requires
deep-pocketed support in the intermediate years. Some have sold out to
foreign owned companies, some have merged with others and there is
general restructuring going on. The foreign owned companies have deep
pockets and have come I here with the expectation of a long haul.

4|Page

CHAPTER2
TYPES OF MUTUAL FUNDS
The growing popularity of Canadian mutual funds has resulted in an increase
in both the number and type of mutual funds available, ranging from the
more conservative, such as most money market funds, to the more
aggressive, such as most growth/equity funds.
The large number of Canadian mutual funds available to today's investors
provides them with more investment choices than ever before. While choice
may be a good thing, it can sometimes be daunting.
Below is a description of some of the different types of mutual funds
available in today's Canadian marketplace:
Money Market Mutual Funds
Money market mutual funds invest in short-term, interest-bearing
instruments, such as treasury bills, thus providing a steady, secure source of
interest income. Money market mutual funds make an ideal investment
alternative to bank accounts or term deposits.
Money market mutual funds may concentrate on domestic markets or
diversify into foreign money markets. Foreign money market mutual funds
also provide investors with the potential of currency appreciation. Investors
usually purchase money market mutual funds at a fixed net asset value,
usually at $10 a unit. Performance is measured on the average annual yield
rather than compound rates of return.
With money market mutual funds, income is credited daily and paid monthly
at rates that are competitive with other short-term investments.
5|Page

Fixed Income Mutual Funds

Fixed income mutual funds concentrate on generating current income. Most
fixed income mutual funds invest in high-quality bonds issued by
governments, provinces and corporations either domestic or foreign.
There are two main types of fixed income mutual funds those that invest in
long-term bonds to provide investors with regular income, and those that
actively trade the bond portfolio to provide a high total return that combines
interest and capital gains.
While fixed income mutual funds are among the most secure investments,
they do experience price fluctuations in response to interest rate movements.
Interest income is paid either monthly or quarterly, and capital gains are paid
annually.
Dividend Mutual Funds
Dividend mutual funds invest in high-yielding, dividend-paying preferred
and common shares. These funds are attractive to investors who seek a
steady stream of income and who want to take advantage of the dividend tax
credit for Canadian companies to increase their after-tax return. Dividend
mutual funds have minimal capital gains potential.
Growth/Equity Mutual Funds
Equity mutual funds, often called growth funds, provide investors with a
good hedge against inflation. Equity mutual funds invest mainly in common
stocks. The primary investment objective is growth of capital, but the
investment style often differs from fund to fund.

6|Page

Mutual funds with a conservative, long-term growth strategy invest

primarily in established, "blue chip" companies. A fund with a more
aggressive strategy might focus on smaller capitalized companies or junior
companies expected to grow quickly. Some equity mutual funds combine
both strategies.
There are also equity mutual funds that specialize in a particular industry
sector, geographic region or country. Investors who wish to invest in a
particular country can purchase a mutual fund that focuses primarily on that
country. For investors who want broader diversification outside Canada,
mutual funds that focus on global markets or a specific region (such as the
Far East or Europe) may be more attractive.
Balanced Mutual Funds
Balanced mutual funds usually invest in a combination of equities, bonds
and short-term money-market instruments. Balanced mutual funds are an
ideal type of fund for investors who want long-term capital growth
combined with the security of interest income.
As opportunities arise or conditions change, balanced mutual fund managers
adjust the weighting of assets in the mutual fund to help maximize
performance.
Index Funds
These mutual funds generally mirror the performance of a particular index,
such as the NASDAQ, TSX, or S&P/TSX 60. These are generally
considered to be "passively managed" funds because there is no active
selection of the securities held within the fund. Because of the low volume
of trading activity and the lack of active securities analysis and selection, the
7|Page

management expense ratios (MERs) of index funds are generally lower than
other funds.
Labour-Sponsored Investment Funds
Labour-Sponsored Investment Funds (LSIFs) may also be known as LabourSponsored Venture Capital Corporations (LSVCCs). They typically invest in
small, private firms that are not listed on the public markets. LSIFs also offer
other benefits, such as tax credits. Investments in LSIFs are not suitable for
all investors LSIFs are considered to be relatively high-risk investments,
and must be held for a minimum of eight years to avoid repaying the tax
credits.
Closed End Mutual Funds
In addition to open-end mutual funds, there are also closed-end mutual funds
which invest in a portfolio of securities but have only a fixed number of
shares (or units) available for purchase.
The shares of closed-end funds are bought and sold on the various stock
exchanges. The market value of closed-end shares is not directly tied to the
value of the underlying assets in the mutual fund portfolio, as is the case
with open-ended funds.
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
exchanges 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 Fund through periodic repurchase at NAV related prices. SEBI

8|Page

Regulations stipulate that at least one of the two exit routes is provided to
the investor.

Open-ended Funds
An open-end 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.

Interval Funds
Interval funds combine the features of open-ended and close-ended
schemes. They are open for sale or redemption during pre-determined
intervals at NAV related prices.
By Investment Objective

Income Funds
The aim of income funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities such as
bonds, corporate debentures and Government securities. Income Funds are
ideal for capital stability and regular income.

Load Funds
A Load 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.

9|Page

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.

10 | P a g e

CHAPTER3
MUTUAL FUND: POPULARITY,RISK,AND
TERMINOLOGIES

This is the first article in a four-part series dedicated to buying mutual

funds. In this first installment, we're going to discuss the popularity of
mutual funds, their risks, and some of the terminology an investor will
encounter.
GROWING POPULARITY OF MUTUAL FUNDS:
The prospects of low interest rates on Certificates of Deposits and money
market funds have caused investors to seek the higher returns on investment
traditionally offered by the stock market. Unfortunately, picking individual
stocks is a complex matter, and not very appealing to a lot of "beginner
investors."
Fortunately, mutual funds provide such Additional Resources
investors with several benefits, especially if
Buying Mutual Funds Part II
they are cautious. They also offer the
opportunity to create a bundle or portfolio of Buying Mutual Funds Part III
Buying Mutual Funds Part IV
stocks, which helps to explain the popularity
of these investments. In fact, according to Mutual Fund Rating
Mutual Fund Research
the Investment Company Institute, the mutual
fund market consisted of $30.8 trillion in Mutual Fund Performance
assets under management worldwide (Q1,
2014).

11 | P a g e

A fund of funds is a collection of existing mutual funds, carefully chosen

and combined into a single new mutual fund. We know from academic
research and our own experience that one of the most important things for
investors to get right is the overall asset mix of their portfolio. This is the
decision that generally has the greatest impact on both risk and potential
returns. Once you have decided on this asset mix, you can go out and find
mutual funds or other investments that can fill out your portfolio, if you
wanted to take on this process yourself. However, with thousands of mutual
funds to choose from across a multitude of management styles, asset classes,
geography and risk level, this task can be daunting for many investors. It can
also be a challenge for many investors to evaluate their holdings on a regular
basis, re-balance regularly, or track how they are doing across a collection of
what could be eight or 10 different funds. A fund of funds is designed to do
all this for you: combine a series of existing mutual funds, which together
can meet your funds overall investment objective - without requiring the
investor to take on the complexity of managing, tracking and re-balancing
their holdings
Mutual funds become a lot more attractive when you think of them as
models of excellence. Each mutual fund is, in fact, a market-tested model
consisting of an expert mix of stocks and bonds and other assets nurtured by
a dedicated management team that understands market forces and how to
take advantage of them. So when you invest in a mutual fund, you invest in a
proven investment plan designed to smooth out the natural volatility of the
marketplace. Special advisor to Scotiabank and #1 international best-selling
financial author, David Bach, believes that mutual funds have many valuable
benefits for investors, whether youre an experienced investor or youre just
starting out. Mutual funds provide:

12 | P a g e

1. Instant diversification. Even if you are saving as little as $50 per month,
you can immediately enjoy a stake in an entire portfolio that could include
hundreds of different stocks and bonds. It would require much more money
to diversify to that extent outside of a mutual fund2. Professional money
management. Few of us feel equipped to analyze the countless number of
stocks and bonds that are available on the market today. A professional fund
manager knows the market. Full- time professional managers do your
research and analysis for you and manage the investments on your behalf.
3. Choice. There are lots of mutual funds to choose from to suit your
investment objectives. The way to make a choice that is right for you is to
find out what kind of investor you are. Your financial advisor can help you
determine your investment profile and the investments that best suit your
profile.
4. Efficiency. Mutual funds pool money from many investors so that each
investor can participate in a diversified portfolio of fixed income, stocks and
other equities. In addition, the cost of trading these equities is minimal when
compared with individuals making their own trades.
5. Liquidity. You can buy and sell units in most mutual funds easily. This
means if your investment profile changes or your investment goals change,
youre able to adjust your portfolio to your investment strategy.
6. Low minimum investment requirements. You dont need a large amount
to invest in a mutual fund. For example, you can invest in the Scotia
Balanced Fund with as little as $500.
7. Reduced volatility. Mutual funds are expertly diversified and usually
dont fluctuate in price as much as individual stocks or bonds. David
Bachconsiders this lack of volatility boring. But he insists boring

13 | P a g e

investments are usually the best for smoothing out the ups and downs of
market volatility compared to stocks.
There are many types of mutual funds - balanced, money market, growth
and more each based on achieving a specific investment goal. There are
even mutual funds made up of other mutual funds, called fund of funds, for
investors who dont have the time to search for and evaluate individual
mutual funds.
Each of these fund collections has variations designed for different
investment profiles and goals. Probably the most important thing you can do
before choosing a fund of funds is to identify what kind of investor you are,
that is, what your comfort level is with market fluctuations and what your
investment goals are. Once you know all this, you can choose an investment
solution that fits your profile and meets your long-term investment needs. Of
course, its always best to ask your investment advisor to help you make that
choice
RISK OF MUTUAL FUNDS:
Everyone that invests in the stock market assumes two types of risk:

Individual Stock Risk: this is the risk that a single company underperforms
versus expectations, or experiences some kind of downturn in their outlook.

Market Risk: even though an investor is buying stock in a single company,

the investor is also exposed to market risk, or industry risk. This risk
involves macro-economic factors, and all stocks are exposed to market risk.
For example, rising interest rates make the cost of borrowing more
expensive for all companies.

14 | P a g e

Since mutual funds consist of a portfolio of stocks, this diversification of

investment dollars lowers the exposure to individual stock risk. This is one
reason mutual funds are popular with individuals that are new to investing.
TERMS OF MUTUAL FUNDS:
Choosing the right fund is going to take research. Before going to that step,
there needs to be a fundamental understanding of the terms encountered
when researching a mutual fund. Listed below are some of the more
common, and important, terms appearing on a website or in a prospectus.
12b-1 fee
The 12b-1 fees are deducted from the earnings of a mutual fund to cover
expenses associated with the sales and marketing of the fund.
Annual Report
An annual report is a document detailing performance of a mutual fund over
the last twelve months.
Annual Return
The annual return for a fund is the change in a mutual fund's net asset value
(NAV) over a 12 month period of time. The annual return takes into account
factors such as dividend payments, capital gains, and the reinvestment of
these distributions.
Beta Value
Beta values are the measure of a fund's volatility relative to the entire stock
market. The lower the beta value of a fund, the less relative risk involved
with a fund.
15 | P a g e

Capital Gains
Capital gains are the profits an investor realizes when securities are sold.
Closed End Funds
Closed-end funds have shares traded on an exchange in the same way stocks
are traded. With closed-end funds, the price per share doesn't always equal
the net asset value of a share.
Distributions
Distributions are usually dividends and capital gains paid by mutual fund
companies directly to their shareholders.
Dividends
Dividends are one form of profits that a mutual fund distributes to its
shareholders.
Front-End Loads
A front-end load is a sales commission that an investor pays for the right to
purchase shares of a mutual fund.
Fund Advisor
The person or entity responsible for making the actual mutual fund
investment decisions is called a fund advisor. This can also be an
organization hired by the mutual fund to provide advice on the fund's
investments and asset management approach.

16 | P a g e

Management Fees
The fees paid to individuals responsible for managing the mutual fund are
called management fees.
Net Asset Value
The net asset value, or NAV, of a mutual fund is the value of each share of a
fund's investment. Net asset value is sometimes referred to simply as the
share price.
No-Load Mutual Funds
Mutual funds that are sold without a sales commission are known as no-load
mutual funds.
Open-End Fund
An open-end fund is one that permits the ongoing purchase, and redemption,
of shares in that fund. Most mutual funds are open-end funds.
Prospectus
A prospectus is a legal document disclosing information the Securities and
Exchange Commission believes investors need in order to make an informed
purchase decision for a mutual fund.
Risk
Risk is simply the chance an investor takes that an undesired outcome will
result. When investing in mutual funds, risk should be balanced with
reward. This relationship is sometimes referred to as an individual's risk
tolerance.
17 | P a g e

S&P 500 Index

The S&P 500 Index is a composite of 500 large companies, deemed to be
representative of the overall stock market and economic conditions. Most
mutual funds are judged in terms of how frequently they are able to "beat"
the S&P 500 Index. In other words, can the mutual fund's management team
outperform the stock market?
Specialty Funds
The growing popularity of mutual funds has resulted in a sharp rise in the
number of specialty funds. A specialty mutual fund is a fund that invests in
one specific sector of the economy or industry.
Total Return
The total return for a mutual fund is the calculated return on an investment
that includes the reinvestment of all distributions.

18 | P a g e

CHAPTER4
ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund
association in India was generated to function as a non-profit organization.
Association of Mutual Funds in India (AMFI) was incorporated on 22nd
August, 1995.

Association of Mutual Funds India has brought down the Indian Mutual
Fund Industry to a professional and healthy market with ethical lines
enhancing and maintaining standards. It follows the principle of both
protecting and promoting the interests of mutual funds as well as their unit
holders.
THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN
INDIA
The AMFI works with 30 registered AMCs of the country. It has certain
defined objectives which juxtaposes the guidelines of its Board of Directors.

The Objectives Are As Follows:This mutual fund association of India maintains a high professional
and ethical standard in all areas of operation of the industry. It also
recommends and promotes the top class business practices and code of
conduct which is followed by members and related people engaged in the
activities of mutual fund and asset management. The agencies who are by
any means connected or involved in the field of capital markets and financial
services also involved in this code of conduct of the association.
AMFI interacts with SEBI and works according to SEBIs guidelines
in the mutual fund industry. AMFI does represent the Government of India,
the Reserve Bank of India and other related bodies on matters relating to the
19 | P a g e

Mutual Fund Industry. It develops a team of well qualified and trained Agent
distributors. It implements a programme of training and certification for all
intermediaries and other engaged in the mutual fund industry.
AMFI undertakes all India awareness programme for investors in
order to promote proper understanding of the concept and working of mutual
funds. At last but not the least association of mutual fund of India also
disseminate information on Mutual Fund Industry and undertakes studies
and research either directly or in association with other bodies.

THE SPONSOR OF ASSOCIATION OF MUTUAL FUNDS IN INDIA

Bank Sponsored
SBI Fund Management Ltd.
BOB Asset Management Co. Ltd.
Canbank Investment Management Services Ltd.
UTI Asset Management Company Pvt. Ltd.

Institutions
GIC Asset Management Co. Ltd.
JeevanBimaSahayog Asset Management Co. Ltd

PRIVATE SECTOR.
Indian:BenchMark Asset Management Co. Pvt. Ltd.
Cholamandalam Asset Management Co. Ltd.
Credit Capital Asset Management Co. Ltd.
Escorts Asset Management Ltd.
JM Financial Mutual Fund
Kotak Mahindra Asset Management Co. Ltd.
20 | P a g e

Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.
Tata Asset Management Private Ltd.
Predominantly India Joint Ventures:Birla Sun Life Asset Management Co. Ltd.
DSP Merrill Lynch Fund Managers Limited
HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.
Deutsche Asset Management (India) Pvt. Ltd.
Fidelity Fund Management Private Limited
Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.
HSBC Asset Management (India) Private Ltd.
ING Investment Management (India) Pvt. Ltd.

THE THREE BASIC FEATURES OF MUTUAL FUNDS

A. All mutual funds chargeexpenses. Whether they be marketing,

management or brokerage fees, fund expenses are generally passed
back to the investors.
B. Investors exercise no control over what securities the fund buys or
sells.
C. The buying and selling of securities within the mutual fund portfolio
generates capital gains and losses which are passed back to investors
even if they have not sold any of their mutual fund shares.
21 | P a g e

CHAPTER 5
PROCEDURE OF INVESTMENT IN MUTUAL
FUND
Steps One - Identify Your Investment Needs:Your financial goals will vary, based on your age, lifestyle, financial
independence, family commitments, and level of income and expenses
among many other factors. Therefore, the first step is to assess your needs.
You can begin by defining your investment objectives and needs which
could be regular income, buying a home or finance a wedding or educate
your children or a combination of all these needs, the quantum of risk you
are willing to take and your cash flow requirements.

Step Two-Choose The Right Mutual Fund:The important thing is to choose the right mutual fund scheme which
suits your requirements. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of other
schemes managed by the same Fund Manager. Some factors to evaluate
before choosing a particular Mutual Fund are the track record of the
performance of the fund over the last few years in relation to the appropriate
yardstick and similar funds in the same category. Other factors could be the
portfolio allocation, the dividend yield and the degree of transparency as
reflected in the frequency and quality of their communications for selecting
the right scheme as per your specific requirements.

22 | P a g e

Step Three:-

Investing in just one Mutual Fund scheme may not meet all your
investment needs. You may consider investing in a combination of schemes
to achieve your specific goals.

Step Four -Invest regularly:-

The best approach is to invest a fixed amount at specific intervals, say

every month. By investing a fixed sum each month, you buy fewer units
when the price is higher and more units when the price is low, thus bringing
down your average cost per unit. This is called rupee cost averaging and is a
disciplined investment strategy followed by investors all over the world.
You can also avail the systematic investment plan facility offered by many
open end funds.

Step Five- Start Early:It is desirable to start investing early and stick to a regular investment
plan. If you start now, you will make more than if you wait and invest later.
The power of compounding lets you earn income on income and your
money multiplies at a compounded rate of return.

Step Six -The Final Step:All you need to do now is to click for online application forms of
various mutual fund schemes and start investing. You may reap the rewards
in the years to come. Mutual Funds are suitable for every kind of investor whether starting a career or retiring, conservative or risk taking, growth
oriented or income seeking.

23 | P a g e

CHAPTER 6:
ADVANTAGES OF MUTUAL FUND
Professional Management
The idea behind a mutual fund is that individual investors generally
lack the time, the inclination or the skills to manage their own investment.
Thus mutual funds hire professional managers to manage the investments for
the benefit of their investors in return for a management fee.
The organization that manages the investment is the Asset
Management Company (AMC). Employees of the AMC who perform this
role of managing investments are the fund managers.

Diversification
The best mutual funds design their portfolios so individual
investments will react differently to the same economic conditions. For
example, economic conditions like a rise in interest rates may cause certain
securities in a diversified portfolio to decrease in value. Other securities in
the portfolio will respond to the same economic conditions by increasing in
value. When a portfolio is balanced in this way, the value of the overall
Portfolio should gradually increase over time, even if some securities lose
value.

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

24 | P a g e

Low cost
Mutual fund expenses are often no more than 1.5 percent of your
investment. Expenses for Index Funds are less than that, because index funds
are not actively managed. Instead, they automatically buy stock in
companies that are listed on a specific index.
A mutual fund can, and typically does have several schemes to cater
to different investors preferences. The individual could choose to hire a
professional manager to manage his money as per his investment and risk
preferences. Such personal treatment often referred to as Portfolio
Management Scheme (PMS).

Liquidity
Open-end schemes offer liquidity through on-going sale and re-purchase
facility. Thus, the investor does not have to worry about finding a buyer for
his investment a risk normally associated with direct investment in the
securities market.

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

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

25 | P a g e

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

26 | P a g e

CHAPTER 7:
LIMITATONS OF MUTUAL FUNDS
No Guarantees
No investment is risk free. If the entire stock market declines in value,
the value of mutual fund shares will go down as well, no matter how
balanced the portfolio. Investors encounter fewer risks when they invest in
mutual funds than when they buy and sell stocks on their own. However,
anyone who invests through a mutual fund runs the risk of losing money.

Fees and commission

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

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

Management risk
When you invest in a mutual fund, you depend on the fund's manager
to make the right decisions regarding the fund's portfolio. If the manager
does not perform as well as you had hoped, you might not make as much
money on your investment as you expected.

27 | P a g e

CHAPTER 8:
PARTIES INVOLVED IN MUTUAL FUND DEALINGS
INVESTORS
Investors are the people who actually invest their money into the
market. Every investor, given his financial position and personal disposition,
has a certain inclination to take risk. The hypothesis is that by taking an
incremental risk, it would be possible for the investor to earn an incremental
return.
Mutual Fund is a kind of solution for investors who lack the time, the
inclination or the skills to actively manage their investment risk in individual
securities. Investing through a mutual fund would make economic sense for
an investor, if he fetches a return that is higher than what he would otherwise
have earned by investing directly

TRUSTEES
Trustees are the people within a mutual fund organization who are
responsible for ensuring that investors interests in a scheme are properly
taken care of. In return for their services, they are paid trustee fees, which
are normally charged to the scheme.

ASSET MANAGEMENT COMPANY

AMCs manage the investment portfolios of schemes. An AMCs
income comes from the management fees it charges the schemes it manages.
The management fee is calculated as a percentage of net assets managed. An
AMC has naturally to employ people and bear all the establishment costs
that are related to its activity out of its management fee earned.

28 | P a g e

CHAPTER 9 :
FREQUENTLY USED TERMS
NET ASSET VALUE (NAV)
The net asset value of the fund is the cumulative market value of the
assets fund net of its liabilities. In other words, if the fund is dissolved or
liquidated, by selling off all the assets in the fund, this is the amount that the
shareholders would collectively own. This gives rise to the concept of net
asset value per unit, which is the value, represented by the ownership of one
unit in the fund. It is calculated simply by dividing the net asset value of the
fund by the number of units. However, most people refer loosely to the NAV
per unit as NAV, ignoring the "per unit". We also abide by the same
convention.

SALE PRICE
The price you pay when you invest in a scheme. Also called Offer
Price. It may include a sales load.

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

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

SALES LOAD

29 | P a g e

An AMC may decide that investors should pay more than NAV for
their investment in each unit of the scheme. This incremental amount is also
called, Front-end load or Entry load. Schemes that do not charge a load
are called No Load schemes. Therefore, the amount that needs to be paid
is,

Sale Price = NAV + Entry Load

REPURCHASE OR BACK-END LOAD
An AMC may decide that sellers would recover less than NAV for the
units they sell in a scheme. This shortfall, borne by existing investors, is
called the Exit load or Back-end load. Thus the amount will be,
Sale Price = NAV Exit Load

SYSTEMATIC INVESTMENT PLAN (SIP)

SIP refers to the practice of investing a constant amount
regularly, generally every month. When the market goes up, then the money
invested in that period gets translated into a fewer number of units for the
investor. If the market goes down, then the same money invested gets
translated into more units. This investment style is also called rupee cost
averaging.

SYSTEMATIC WITHDRAWAL PLAN (SWP)

Under SWP, the investor would withdraw constant amount
periodically. The investor can temper gains and losses, though it does not
prevent losses.

SYSTEMATIC TRANSFER PLAN (STP)

30 | P a g e

Investors exposure to different types of securities, whether debt or

equity, should flow from their risk profile or risk appetite which is a function
of their financial position and personal disposition. Through STP between
plans, it is possible to maintain a target mix of debt and equity in ones
portfolio.

EQUITY LINKED SAVING SCHEMES (ELSS)

Equity-Linked Savings Schemes are by far the most exciting of all the
tax-saving schemes. Nomination facility is available with ELSS. The units
can be easily transferred by filling out a transfer form.

31 | P a g e

CHAPTER 10

PLANS OF MUTUAL FUNDS

There are two types of plans. Those are:

Growth Plan
Dividend plan

Growth plan
A mutual fund whose aim is to achieve capital appreciation by
investing in growth stocks. They focus on companies that are experiencing
significant earnings or revenue growth, rather than companies that pay out
dividends. The hope is that these rapidly growing companies will continue to
increase in value, thereby allowing the fund to reap the benefits of large
capital gains. In general, growth funds are more volatile than other types of
funds, rising more than other funds in bull markets and falling more in bear
markets.

Dividend Plan
Again dividend plan is sub divided into two parts:

Dividend reinvestment plan (DRIP)

An investment plan offered by some corporations enabling

shareholders to automatically reinvest cash dividends and capital gains
distributions, thereby accumulating more stock without paying brokerage
commissions.

32 | P a g e

Many DRIPs also allow the investment of additional cash from the
shareholder, known as an optional cash purchase. Unlike with a Direct Stock
Purchase Plan, with a DRIP the investor must purchase the first share in the
company through a brokerage. After that, the company will take whatever
dividends it would normally send as a check and instead it will reinvest them
to purchase more shares in the company for you, all without charging a
commission. The only drawback is that the investor has no control over
when his/her money from the dividends is used to purchase new stock in the
company, which means he/she might be buying new shares at sub-optimal
times. Also called Dividend Reinvestment Programs.

The ex-dividend date was created to allow all pending transactions to

be completed before the record date. If an investor does not own the stock
before the ex-dividend date, he or she will be ineligible for the dividend
payout. Further, for all pending transactions that have not been completed by
the ex-dividend date, the exchanges automatically reduce the price of the
stock by the amount of the dividend. This is done because a dividend payout
automatically reduces the value of the company (it comes from the
company's cash reserves), and the investor would have to absorb that
reduction in value (because neither the buyer nor the seller are eligible for
the dividend).

33 | P a g e

CHAPTER 11
FUTURE OF MUTUAL FUNDS IN INDIA
By December 2004, Indian mutual fund industry reached Rs
1,50,537crore. It is estimated that by 2010 March-end, the total assets of all
scheduled

commercial

banks

should

be

Rs

40,

90,000

crore.

The annual composite rate of growth is expected 13.4% during the rest of
the decade. In the last 5 years we have seen annual growth rate of 9%.
According to the current growth rate, by year 2010, mutual fund assets will
be

double.

Let us discuss with the following table:

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03

Deposits

Change

Mar04

605410 851593 989141 1131188 1280853 -

Sep-04

4-Dec

1567251 1622579

in

% over last

15

14

13

12

18

yr

34 | P a g e

Mutual Fund AUMs Growth

Month/Year
MF AUM's
Change in %
over last yr

Mar- Mar- Mar- Mar- Mar98

00

01

02

03

Mar-04 Sep-04 4-Dec

68984 93717 83131 94017 75306 137626 151141 149300

26

13

12

25

45

35 | P a g e

Some facts for the growth of mutual funds in India :

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets
like Fidelity Investments, US based, with over US$1trillion assets under
management worldwide.
Our saving rate is over 23%, highest in the world. Only channelizing
these savings in mutual funds sector is required.
We have approximately 29 mutual funds which is much less than US having
more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds
are concentrating on the 'A' class cities. Soon they will find scope in the
growing cities.
Mutual fund can penetrate rurals like the Indian insurance industry
with simple and limited products.
SEBI allowing the MF's to launch commodity mutual funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices.
Introduction of Financial Planners who can provide need based advice.
Here's the standard suggestion that goes with the above analysis:
Determine ones risk level. Invest in a diversified basket of securities that
matches that risk level--some split of stocks and short-term bonds. Either
ignore the long-run historical data, or bet against it. In theory it's possible to
increase ones return by preferring those stocks and markets that have been
falling in value or doing worse than average, the opposite of the
conventional advice. But realize when one does this that this means picking
out companies and markets that are in trouble--one gets the higher return
only by increasing the risk you take.

36 | P a g e

CHPTER 12
RECOMMENDATION
As per my observation here I recommend unit holder in a Mutual Fund
schemes that:
1. They should receive unit certificates or statements of accounts confirming
the title within 6 weeks from the date of closure of the subscription or within
6 weeks from the date of request for a unit certificate is received by the
Mutual Fund.

2. They should receive information about the investment policies,

investment objectives, financial position and general affairs of the scheme.

3. They should Receive dividend within 42 days of their declaration and

receive the redemption or repurchase proceeds within 10 days from the date
of redemption or repurchase.

Vote in accordance with the Regulations to:4. Approve or disapprove any change in the fundamental investment policies
of the scheme, which are likely to modify the scheme or affect the interest of
the unit holder. The dissenting unit holder has a right to redeem the
investment.

5. Change the Asset Management Company. Wind up the schemes. Inspect

the documents of the Mutual Funds specified in the scheme's offer
document.

37 | P a g e

6. Mutual fund investment is subject to market risk investors should read all
the offer related documents carefully before investment.

38 | P a g e

CHAPTER 13
CONCLUSION

Mutual fund brings together a group of people and invests their

money in stocks, bonds, and other securities.

The

advantages

of

mutual

are

professional

management,

diversification, economies of scale, simplicity and liquidity.

The disadvantages of mutual are high costs, over-diversification,

possible tax consequences, and the inability of management to
guarantee a superior return.

There are many, many types of mutual funds. You can classify funds
based on asset class, investing strategy, region, etc.

Mutual funds have lots of costs.

Costs can be broken down into ongoing fees (represented by

the expense ratio) and transaction fees (loads).

The biggest problems with mutual funds are their costs and fees.

Mutual funds are easy to buy and sell. You can either buy them
directly from the fund company or through a third party.

Mutual fund ads can be very deceiving.

39 | P a g e

CHAPTER 14
BIBLIOGRAPHY
MUTUAL FUNDS IN INDIA D.V.INGLE

WEBLIOGRAPHY
www.amfiindia.com
www.bseindia.com
www.mutualfundsindia.com
www.sebi.gov.in

40 | P a g e