MUTUAL FUNDS

INTRODUCTION TO MUTUAL FUNDS

Mutual funds, as the name indicates is the fund where in numerous investors come together to invest in various schemes of mutual fund. Mutual funds are dynamic institution, which plays a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. A mutual fund is an institution that invests the pooled funds of public to create a diversified portfolio of securities. Pooling is the key to mutual fund investing. Each mutual fund has a specific investment objective and tries to meet that objective through active portfolio management. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as Unit holders.

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Investors who invest in mutual funds are provided with units to participate in stock markets. These units are investment vehicle that provide a means of participation in the stock market for people who have neither the time, nor the money, nor perhaps the expertise to undertake the direct investment in equities. On the other hand they also provide a route into specialist markets where direct investment often demands both more time and more knowledge than an investor may possess. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities market before it can collect funds from the public. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally & efficiently managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio entitled to any profits when the securities are sold, but subject to any losses in value as well. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. The price of units in any mutual fund is governed by the value of underlying securities. The value of an investors holding in a unit can therefore, like an investment in share, can go down as well as up. Hence it is said that mutual funds are subjected to market risk. Mutual fund cannot guarantee a fixed rate of return. It depends on the market condition. If the particular scheme is performing well then more return can be expected. It also depends on the fund manager expertise knowledge. It is also seen that people invest in particular funds depending on who the fund manager is. But every rose must have a thorn and with moneymaking comes RISK!! Investors may put their money to work in various ways. Some of them may be able to eliminate the risk factor but may not be able to provide the extra money all are looking for. Others may be able to do so but may also have a very high risk factor. Most investors today face this universal paradox of risk and return.

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Most small investors face a number of similar problems while investing:

Limited resources in the hands of investors quite often take them away from stock market transactions. Lack of funds forbids investors to have a balanced and diversified portfolio. Lack of professional knowledge associated with investment business disables investors from operating gainfully in the market. Also, small investors can hardly afford to have ex-pensive investment consultations. To buy shares, investors have to engage share brokers who are the members of stock exchange and have to pay their brokerage. They hardly have access to price sensitive information in time. And most importantly an average investor spends most of his rare free time either investing or thinking about his investment

Hence, comes into the picture the institution called MUTUAL FUNDS! 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 portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

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DEFINITION
Mutual fund is vehicle that enables a number of investors to pool their money and have it jointly managed by a professional money manager. A mutual fund is an investment that pools your money with the money of an unlimited number of other investors. In return, you and the other investors each own shares of the fund. The fund's assets are invested according to an investment objective into the fund's portfolio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds.

WHAT IS MUTUAL FUNDS..???

A Mutual Fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Mutual Fund companies are known as asset management companies. They offer a variety of diversified schemes. Mutual Fund acts as investment companies. They pool the savings of investors and invest them in a well-diversified portfolio of sound investments.

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WORKING OF MUTUAL FUND:-

Thus a mutual fund is the most suitable investment for the common person as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Since small investors generally do not have adequate time, knowledge, experience & resources for directly accessing the capital market, they have to rely on an intermediary, which undertakes informed investment decisions & provides consequential benefits of professional expertise. A collected corpus can be used to procure a diversified portfolio indicating greater returns has also create economies of scale through cost reduction. This principle has been effective worldwide as more & more investors are going the mutual fund way. This portfolio diversification ensures risk minimization. The criticality such a measure comes in when you factor in the fluctuations that characterize stock markets. The interest of the investors is protected

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by the SEBI, which acts as a watchdog. Mutual funds are governed by SEBI (Mutual Funds) regulations, 1996.

FEATURES OF A MUTUAL FUND

VARIETY There are 5 basic type of mutual funds namely equity, bond, hybrid, money market and GILT. So investor has a wide variety of schemes to choose from according to its convenience such as risk and return factor etc .Investor also gets a variety in time as well for how much period he would like to invest if he is a short term investor he would invest in money market funds or if he is a long term investor he would invest in other diversified funds. LIQUIDITY Some mutual funds are required by law to redeem shares on a daily basis, fund shares are very liquid investment. Most mutual funds also continually offer new shares to investors, and many fund companies allows shareholders to transfer money or make exchanges from one fund to another within the same fund family. Mutual funds process sales, redemptions, and exchanges as a normal part of daily business activity. ACCESSIBILITY AND AFFORDABILITY Mutual fund shares are available through a variety of sources. Investors can purchase fund shares either with the help of an investment professionals such as broker, financial planner, bank representatives etc. Many Mutual funds can be purchased directly from fund companies but in this case investor is required to do their own research to determine which funds meet their need. Mutual funds offer their many benefits and services at affordable prices even a small investor can purchase it and make huge profit.

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OTHER FEATURES: A mutual fund actually belongs to the investors who have pooled their funds. A mutual fund is managed by investment professionals and other service providers, who earn a fee for their services, from the fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by units. The value of the units changes with change in the portfolios value, every day.

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ADVANTAGES OF MUTUAL FUNDS

PROFESSIONAL MANAGEMNTThe basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

DIVERSIFICATIONPurchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

ECONOMIES OF SCALEMutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

LIQUIDITYJust like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want

SIMPLICITYInvestments in mutual fund are considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have

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automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

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

TRANSPARENCY Investors 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.

WELL REGULATED All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

CONVENIENT ADMINISTRATION

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

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

UNDERSTANDING AND MANAGING RISK All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital market and the economy; generally, however longer the term, lesser the risk; companies may default in payment of interest/principal on their deposits/bonds debentures; the rate of interest on investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimize risk. Mutual fund helps to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales help them to build a diversified portfolio that minimize risk and maximizes returns.

TAX BENEFITS Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. This reduces your tax liability. Whats more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can

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avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year.

DISADVANTAGES OF MUTUAL FUNDS

PROFESSIONAL MANAGEMENTSome funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.

COSTSThe biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. DILUTIONBecause funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had

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strong success, the manager often has trouble finding a good investment for all the new money.

TAXESWhen making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

MYTHS AND FACTS ABOUT MUTUAL FUNDS-

MYTHS ABOUT MUTUAL FUND

1. Mutual Funds invest only in shares. 2. Mutual Funds are prone to very high risks/actively traded. 3. Mutual Funds are very new in the financial market. 4. Mutual Funds are not reliable and people rarely invest in them. 5. The good thing about Mutual Funds is that you dont have to pay attention to them.

FACTS ABOUT MUTUAL FUNDS

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1. Equity Instruments like shares form only a part of the securities held by mutual funds. Mutual funds also invest in debt securities which are relatively much safer. 2. The biggest advantage of Mutual Funds is their ability to diversify the risk. 3. Mutual Funds are there in India since 1964. Mutual Funds market is very evolved in U.S.A and is there for the last 60 years. 4. Mutual Funds are the best solution for people who want to manage risks and get good returns 5. The truth is as an investor you should always pay attention to your mutual funds and continuously monitor them. There are various funds to suit investor needs, both as a long term investment vehicle or as a very short term cash management vehicle.

RISK INVOLVED IN MUTUAL FUND INVETMENTS

Market risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. Credit Risk: The debt servicing ability of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate

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companies and their paper. An AAA rating is considered the safest whereas a D rating is considered poor credit quality Inflation Risk: Things you hear people talk about: "Rs. 100 today is worth more than Rs. 100 tomorrow." "Remember the time when a bus ride costed 50 paisa. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happens when inflation grows faster than the return on your investment Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa. Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

Systematic risk: The systematic risk affects the entire market. The economic conditional, political situations, sociological changes affect the entire market in turn affecting the company and even the stock market. These situations are uncontrollable by the corporate and inves tor. Unsystematic risk:

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The unsystematic risk is unique to industries. It differs from industry to industry. Unsystematic risk stems from managerial inefficiency, technological change in the production process, availability of raw materials, changes in the consumer preference, and labor problems. The nature and magnitude of above mentioned factors differ from industry to industry and company to company.

STRUCTURE OF MUTUAL FUNDS

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The structure of mutual funds in India is governed by the SEBI Regulations, 1996. These regulations make it mandatory for mutual funds to have a 3-tier structure of Sponsors-TrusteeAMC (Asset Management Company).

Sponsor :
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Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute atleast 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.

Trustee :
A Board of Trustees a body of individuals, or a trust company a corporate body, may manage the Trust. Board of Trustees manages most of the funds in India. The Trust is created through a document called the Trust Deed that is executed by the Fund Sponsor in favors of the trustees. They are the primary guardian of the unit holders funds and assets. They ensure that AMCs operations are along professional lines. The mutual fund is required to have an independent Board of Trustees, i.e. two thirds of the trustees should be independent persons who are not associated with the sponsors in any manner whatsoever.

Right of Trustees : o Appoint the AMC with the prior approval of SEBI o Approve each of the schemes floated by the AMC o Have the right to request any necessary information from the AMC concerning the operations of various schemes managed by the AMC o Trustees review and ensure that net worth of the AMC is according to stipulated norms, every quarter.
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What are the obligations of the Trustees? Trustees must ensure that the transactions of the mutual fund are in accordance with the trust deed. Trustees must ensure that the AMC has systems and procedures in place, and that all the fund constituents are appointed. Trustees must ensure due diligence on the part of AMC in the appointment of constituents and business associates. Trustees must furnish to SEBI, on half-yearly basis, a report on the activities of the AMC. Trustees must ensure that the activities of the mutual fund are in compliance with the SEBI regulations.

Asset Management Company (AMC) :

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. 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 10 Crores at all times. The role of the AMC is to manage investors money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service providers. As can be seen, it is the AMC that does all the operations. All activities by the AMC are done under the name of the Trust, i.e. the mutual fund. The AMC charges a fee for
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providing its services. SEBI has prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a percentage of the schemes net assets. An important point to note here is that this fee is included in the overall expenses permitted by SEBI. There is a maximum limit to the amount that can be charged as expense to the scheme, and this fee has to be within that limit. Thus regulations ensure that beyond a certain limit, investors money is not used for meeting expenses.

Who appoints the AMC and defines its functions? The trustees, on the advice of the sponsors, usually appoint the AMC. The trust deed authorizes the trustees to appoint the AMC. The AMC Is usually a private limited company, in which the sponsors and their associates or joint venture partners are shareholders. The AMC has to be a SEBI registered entity, and should have a minimum net worth of Rs. 10 crore. The trustees sign an investment management agreement with their AMC, which spells out the functions of the AMC. The investment management agreement has to be in accordance with Chapter IV of the SEBI regulations.

What are the restrictions on the AMCs? AMCs cannot launch a fund scheme without the prior approval of trustees. AMCs have to provide full details of investments by employees and Board members, in all cases where such investments exceed of Rs. 1 lakh. AMCs cannot take up any activity that is in conflict with the activities of the mutual fund.

Registrar and Transfer Agent :

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The Registrars & Transfer Agents(R & T Agents) are responsible for the investor servicing function, as they maintain the records of investors in mutual funds. They process investor applications; record details provide by the investors on application forms; send out to investors details regarding their investment in the mutual fund; send out periodical information on the performance of the mutual fund; process dividend payout to investor; incorporate changes in information as communicated by investors; & keep the investor record up-to-date, by recording new investors & removing investors who have withdrawn their funds. Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor records.

Custodian :
A custodians role is safe keeping of physical securities and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested. The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities. In India today, securities (and units of mutual funds) are no longer held in physical form but mostly in dematerialized form with the Depositories. The holdings are held in the Depository through Depository Participants (DPs). Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities.

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Depository:
Indian capital markets are moving away from having physical certificates for securities, to ownership of these securities in dematerialized form with a Depository. Sponsor hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be custodian of the assets of the funds and perhaps a third one to handle registry work for holders (subscribers) of the funds. In the Indian context, the sponsors promote the Asset Management Company also in which it holds majority stake. In many cases a sponsor can hold a 100% stake in Asset Management Company (AMC). This has floated different mutual funds schemes and also acts as an assets manager for the funds collected under the scheme.

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SEBI NORMS FOR MUTUAL FUNDS

The AMC will be authorized by SEBI on the basis of the criteria indicated in the guidelines. SEBI regulations clearly state that all funds and schemes operational under them would be bound by their regulations. SEBI has recently taken following steps for the regulation of mutual funds:

Formation:
Certain structural changes have also been made in the mutual fund industry, as part of which, mutual funds are required to set up asset management companies with fifty percent independent directors, separate board of trustee companies, consisting of a minimum fifty percent of independent trustees and to appoint independent custodians. This is to ensure an arm's length relationship between trustees, fund managers and custodians, and is in contrast with the situation prevailing earlier in which all three functions were often performed by one body which was usually the sponsor of the fund or a subsidiary of the sponsor . Thus, the process of forming and floating mutual funds has been made a tripartite exercise by authorities. The trustees, the asset management companies (AMCs) and the mutual fund shareholders form the three legs. SEBI guidelines provide for the trustees to maintain an arm's length relationship with the AMCs and do all those things that would secure the right of investors.

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With funds being managed by AMCs and custody of assets remaining with trustees, an element of counter-balancing of risks exists as both can keep tabs on each other.

Registration:
In January 1993, SEBI prescribed registration of mutual funds taking into account track record of a sponsor, integrity in business transactions and financial soundness while granting permission. This will curb excessive growth of the mutual funds and protect investor's interest by registering only the sound promoters with a proven track record and financial strength. In February 1993, SEBI cleared six private sect9r mutual funds viz. 20th Century Finance Corporation, Industrial Credit& Investment Corporation of India, Tata Sons, Credit Capital Finance Corporation, Ceat Financial Services and Apple Industries.

Documents:
The offer documents of schemes launched by mutual funds and the scheme particulars are required to be vetted by SEBI. A standard format for mutual fund prospectuses is being formulated.

Investment of funds mobilized:

In November 1992, SEBI increased the time limit from six months to nine months within which the mutual funds have to invest resources raised from the latest tax saving schemes. The guideline was issued to protect the mutual funds from the disadvantage of investing funds in the bullish market at very high prices and suffering from poor NAV thereafter.

Assurance on returns:
SEBI has introduced a change in the Securities Control and Regulations Act governing the mutual funds. Now the mutual funds were prevented from giving any assurance on the land of returns they would be providing. However, under pressure from the mutual funds, SEBI revised the guidelines allowing assurances on return subject to certain conditions. Hence, only

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those mutual funds which have been in the market for at least live years are allowed to assure a maximum return of 12 per cent only, for one year. With this, SEBI, by default, allowed public sector mutual funds an advantage against the newly set up private mutual funds. As per basic tenets of investment, it can be justifiably argued that investments in the capital market carried a certain amount of risk, and any investor investing in the markets with an aim of making profit from capital appreciation, or otherwise, should also be prepared to bear the risks of loss.

Minimum corpus:
The current SEBI guidelines on mutual funds prescribe a minimum s art-up corpus of Rs.50 crore for a open-ended scheme, and Rs.20 crore corpus :or closed-ended scheme, failing which application money has to be refunded. The idea behind forwarding such a proposal to SEBI is that in the past, the minimum corpus requirements have forced AMCs to solicit funds from corporate bodies, thus, reducing mutual funds into quasi-portfolio management outfits. In fact, the Association' of Mutual Funds in India (AMFI) has repeatedly appealed to the regulatory authorities for scrapping the minimum corpus requirements,

Investment in money market:

SEBI guidelines say that mutual funds can invest a maximum of 25 per cent of resources mobilized into money-market instruments in the first six months after closing the funds and a maximum of 15 per cent of the corpus after six months to meet short term liquidity requirements. Private sector mutual funds, for the first time, were allowed to invest in the call money market after this year's budget.

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As SEBI regulations limit their exposure to money markets, mutual funds are not major players in the call money market. Thus, mutual funds do not have a significant impact on the call money market. SEBI also conclude that mutual funds were not responsible for the unprecedented shooting up of call money rates. Some funds exceeded their limits in an effort to improve their sagging net asset values (NAVs), usually, funds can early only about 9-12 per cent. Thus, the prospect of earning more than 40 per cent may have been tempting,

Valuation of investment:
SEBI should work in tandem with the Institute of Chartered Accountants of India (ICAI) to take up a fresh look at mutual fund regulations enacted in 1993. The valuation of investments, a key aspect of fund accounting, as on balance sheet date, needs review, SEBI regulations 1993, give discretionary powers to the fund managers as far as the valuation of the investment portfolio on the balance sheet date is concerned, There are no accounting standards or guidelines prescribed by the ICAI for the valuation of a mutual fund's investment portfolio. The mutual funds are clearly taking advantage of this situation and valuing the portfolio at cost of acquisition. The subsequent depreciation or appreciation in the investment portfolio is not accounted for. Thus, the mutual funds may be able to show profits in the balance sheet even if there is severe erosion in the value of the investment portfolio. This erosion in the values of the investment portfolios is clearly seen in the net asset values (NAV) as on the balance sheet

date. But the accounts of the mutual funds do not reveal the same. The objective of the accounting in case of a mutual fund should be besides showing details of income, expenses, assets and liabilities, has to reveal the true value of the fund. The value of the fund is already reflected in, its NAV and the balance sheet is expected to be in consonance with this value. This requires that the investment portfolio be calculated at market values, providing for any depreciation or appreciation. . The transparent and well understood declaration or Net Asset Values (NAVs) of mutual fund schemes is an important issue in providing investors with information as to the performance of

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the fund. SEBI had warned some mutual funds earlier of unhealthy market practices, and is currently working on a common format for calculating the net asset values (NAVs) of mutual funds, which are done in various ways by them at present.

Inspection:
SEBI inspect mutual funds every year. A full SEBI inspection of all f the 27 mutual funds were proposed to be done by the March 1996 to streamline their operations and protect the investor's interests. Mutual funds are monitored and inspected by SEBI to ensure compliance with the regulations.

Underwriting:
In July 1994, SEBI permitted mutual funds to take up underwriting of primary issues as a part of their investment activity. This step may assist the mutual funds in diversifying the business.

REGULATION OF MUTUAL FUNDS

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds , primary dealers etc. to transact

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through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. The primary authority for regulating Mutual Funds in India is SEBI. SEBI requires all Mutual Funds to be registered with it. The SEBI (Mutual Funds) Regulations, 1996 outlined the broad framework of authorization process and selection criteria. Accordingly, the authorization for the mutual fund will be granted in two steps. The first step will involve approval and eligibility of each of the constituents of the mutual fund viz. sponsors, trustees, asset management company (AMC) and custodian. For this purpose the interested parties would be required to submit necessary information only in on prescribed formats). The second stage will involve formal authorization of the mutual funds for business. For this purpose the sponsor or the AMC would be required to apply to SEBI in an application form for authorization along with an application fee to be specified later. The authorization shall be granted subject to conditions as may be considered necessary by SEBI and payment of auth9risation fee as may be specified. It shall be SEBI's endeavor to advise an applicant within 10 to 15 working days of receipt of his letter / application form regarding status of his application. The eligibility of the sponsor will be examined with respect to the following: Sponsor could be a registered company, scheduled bank or all India or State level financial institution; More than one registered company can also act as sponsor for a mutual fund; Joint sponsorship with any of the entities in (a) above will also be eligible, and Sponsoring registered companies could be private or public limited companies either listed or unlisted. Sponsor and where there is more than one sponsor, each of the sponsoring entities, must have a sound track record as evidenced by Audited balance sheet and profit and loss .account for last five years;

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A positive net worth and consistent record of profitability and a good financial standing during the last five years; Good credit record with banks and financial institutions; General reputation in the market; Organization and management, and Fairness in business transactions.
Sponsor or more than one sponsor put together should have at least a 40 per cent stake in the

paid-up equity of the AMC.

DIFFERENT TYPES OF MUTUAL FUNDS

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ON THE BASIS OF FLEXIBILITY

OPEN ENDED FUNDS CLOSE ENDED FUNDS EQUITY FUNDS

MUTUAL FUNDS

DEBT FUNDS ON THE BASIS OF OBJECTIVES MONEY MARKET FUNDS GILT FUNDS

HYBRID FUNDS

ON THE BASIS OF FLEXIBILITY 1. OPEN-ENDED FUNDS

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All mutual funds fall into one of two broad categories: open-end funds and closed-end funds. Most mutual funds are open-end. The reason why these funds are called "open-end" is because there is no limit to the number of new shares that they can issue. New and existing shareholders may add as much money to the fund as they want and the fund will simply issue new shares to them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine the value of a share in an open-end fund at any time, a number called the Net Asset Value is used. You purchase shares in open-end mutual funds from the mutual fund itself or one of its agents; they are not traded on exchanges. ADVANTAGES Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption (sell) request processed promptly, and receive your proceeds by check in 3-4 days. Open funds range in risk depending on their investment strategies and objectives, but still provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, youre likely to feel amore considerable loss.

2. CLOSE-ENDED FUNDS

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Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds are not obligated to issue new shares or redeem outstanding shares.

The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). Since you must take into consideration not only the fund's net asset value but also the discount or premium at which the fund is trading, closed-end funds are considered to be more suitable for experienced investors. You can purchase shares in a closed-end fund through a broker, or agents.

ADVANTAGES The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead.

Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So, one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount.

ON THE BASIS OF OBJECTIVE

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1. EQUITY FUNDS The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes.

At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:

INDEX FUNDS:

These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Investing through index funds is a passive investment strategy, as a funds performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, there is a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund
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charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unit holders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent.

DIVERSIFIED FUNDS:

Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund managers picks languish, the returns will be far lower. The crux of the matter is that your returns from a diversified fund depend a lot on the fund managers capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practiced by your fund manager. Understand that a portfolio concentrated in a few sectors or companies is a high risk, high return proposition. If you dont want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance.

TAX-SAVING FUNDS

Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you wont get the Section 88 benefits for the amount in

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excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.

SECTOR FUNDS

The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector funds NAV will zoom if the sector performs well; however, if the sector languishes, the schemes NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cyclesget in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds.

2) DEBT FUNDS:

Debt funds are funds which invest money in debt instruments such as short and long term bonds, government securities, t-bills, corporate paper, commercial paper, call money etc. The fees in debt funds are lower, on average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund are usually preservation of CapitaLand generation of income. Performance against a benchmark is considered to be a secondary consideration. Investments in the equity markets are considered to be fraught with uncertainties and volatility. These factors may have an impact on constant flow of returns. This is why debt schemes, which are considered to be safer and less volatile, have attracted investors. Debt markets in India are wholesale in nature and hence retail investors generally
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find it difficult to directly participate in the debt markets. Not many understand the relationship between interest rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt market investments is not common among investors. Investors can however participate in the debt markets through debt mutual funds. One must understand the salient features of a debt paper to understand the debt market. Debt paper is issued by Government, corporate and financial institutions to meet funding requirements. A debt paper is essentially a contract which says that the borrower is taking some money on loan and after sometime the lender will get the money back as well as some interest on the money lent.

3) MONEY MARKET FUNDS

These funds are also known as liquid funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

By far the biggest contributor to the Mutual Fund industry, Liquid Funds attract a lot of institutional and High Net worth Individuals (HNI) money. It accounts for approximately 40% of industry AUM. Less risky and better returns than a bank current account are the two plus points of Liquid Funds.

Money Market instruments have maturities not exceeding 1 year. Hence Liquid Funds have portfolios having average maturities of less than or equal to 1 year. Thus such schemes normally do not carry any interest rate risk. Liquid Funds do not carry Entry/ Exit Loads. Other recurring expenses associated with Liquid Schemes are also kept to a bare minimum.

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The period of investment could be as short as a day in these funds. They have emerged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporate, institutional investors and business houses that invest their funds for very short periods

4) GILT FUNDS

Gilt funds are mutual funds that predominantly invest in Central and State Government securities Unlike conventional debt funds that invest in debt instruments across the board, gilt funds target just a given category of debt instruments i.e. G-Securities. Being sovereign paper, they do not expose investors to credit risk. Since the market for G-Securities (as is the case with most debt instruments) is largely dominated by institutional investors, Gilt funds offer retail investors a convenient means to invest in G-Securities. Depending on their investment horizon, investors can choose between short-term and long-term gilt funds.

The repayment of principal and periodic payment of interest is assured by the government in these funds. So, unlike income funds, they dont face the problem of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds.

a) MEDIUM-TERM GILT FUNDS: They aim to provide steady returns with low risk and highest possible safety by investing primarily in Government Securities. The average maturity of the securities in the portfolio would be over three years. b) SHORT-TERM GILT FUNDS: They are dedicated gilt schemes, which seek to generate reasonable returns with investments in Government Securities. The securities invested in are of short to medium term residual maturities.

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5) HYBRID FUNDS-QUASI EQUITY/QUASI DEBT

Many mutual funds mix the different types of securities in their portfolios. Thus, most funds, equity or debt, always have some money market securities in their portfolios as these securities offer the much needed liquidity. However, money market holdings will constitute a lower proportion in the overall portfolios of debt or equity funds. There are funds that, however, seek to hold a relatively balanced holding of debt and equity securities in their portfolios. Such funds are termed as Hybrid Funds as they have a dual equity/ bond focus.

Some of the funds in this category are as follows: a) BALANCED FUNDS

A balanced fund is one that has a portfolio comprising debt instruments, convertible securities, preference shares and equity shares. Their assets are generally held in more or less equal proportions between debt/ money market securities and equities. By investing in a mix of this nature, balanced fund seek to attain the objectives of income, moderate capital appreciation and preservation of capital, and are ideal for investors with a conservative approach and long term orientation.

B) GROWTH-&-INCOME FUNDS

Unlike the income-focused or growth-focused funds, these funds seek to strike a balance between capital appreciation and income for the investor. The portfolios are mix between companies with good dividend paying records and those with potential for capital appreciation. These funds would be less risky than pure growth funds, though more risky than income funds.
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METHODS OF INVESTING IN MUTUAL FUND

ONE TIME PAYMENT
In onetime payment, the investor needs to invest a fixed amount to buy a particular number of units. For example, at the time of the initial public issue the shares may be of value Rs.10 per unit. Thus, if the investor decides to invest Rs.20000/- to that fund, he can buy 2000 units of that particular fund.

SYSTEMATIC INVESTMENT PLAN

An SIP is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly. The Systematic Investment Plan (SIP) is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over long term period. The plan aims at a better future for its investors as an SIP investor gets good rate of returns compared to a one time investor. SIP ensures averaging of rupee cost as consistent investment ensures that average cost per unit fits in the lower range of average market price. An investor can either give post dated cheques or ECS instruction and the investment will be made regularly in the mutual fund desired for the required amount.

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Benefits of SIP
1. Regular saving habit: Perhaps the best benefit of setting up a SIP is that it forces you to set apart some money every month and enforces saving discipline on you. You could argue that this can be done without a SIP also, and you are right, just that automation enforces a little more rigor. 2. Protects you from timing the market: If you have already committed money to a SIP you will most likely continue to invest regardless of a big fall or huge gains in the market. This in turn will enable you to invest regularly rather than try to time the market, which not many small investors can do successfully.

Non benefits of SIPs

1. Tax planning: Yes, setting up a SIP in a tax planning mutual fund will help you reduce taxes, but if you invest the same amount at one go in the same mutual fund you will get the same tax benefit. Tax benefit is not something exclusive to a SIP. 2. Sip lead to building wealth: Good saving and investing habits are more likely to help you accumulate wealth in the long run, but there is no guarantee that you will end up doing so. Especially, if you invest in equity mutual funds. 3. Ignore the spreadsheets: I came across more than a couple of websites that had examples of how a person could accumulate more units because of regular investing when compared with someone who buys in bulk. These calculations are just based on the assumptions the respective authors make, and there is no guarantee that you will accumulate more units if you bought units regularly. A lot depends on market gyrations and nothing can be said with certainty.

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SYSTEMATIC WITHDRAWAL PLAN

SWP stands for Systematic Withdrawal Plan. Here the investor invests a lump sum amount and withdraws some money regularly over a period of time. This results in a steady income for the investor while at the same time his principal also gets drawn down gradually. Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this money over a 20 year period, he can withdraw Rs. 20, 00,000/ 20 = Rs. 1, 00,000 per annum. This translates into Rs. 8,333 per month. (The investor will also get return on his investment of Rs. 20 lakh, depending on where the money has been invested by the mutual fund). In this example we have not considered the effect of compounding. If that is considered, then he will be able to either draw some more money every month, or he can get the same amount of Rs. 8,333 per month for a longer period of time. The conceptual difference between SWP and MIP is that SWP is an investment style whereas MIP is a type of scheme. In SWP the investors capital goes down whereas in MIP, the capital is not touched and only the interest is paid to the investor as dividend.

SYSTEMATIC TRANSFER PLANIn SIP investors money moves out of his savings account into the scheme of his choice. Lets say an investor has decided to invest Rs 5,000 every month, such that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the month. This means that the Rs. 5000, which will get invested in stages till 25th will remain in the savings account of the investor for 25 days and earn Interest @ 3.5%. If the investor moves this amount of Rs. 5000 at the beginning of the month to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice, then not only will he get the benefit of SIP, but he will earn slightly higher interest as well in the Liquid Funds as compared to a bank FD. As the money is being invested in a Liquid Fund, the risk level associated is also minimal. Add to this the fact that liquid funds do not have any exit loads. This is known as STP.

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CONCEPTS OF MUTUAL FUNDS-

NET ASSET VALUENet Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Thus, NAV of a mutual fund unit is nothing but the 'book value.' How NAV is calculated NAV = the total market of all the securities in the mutual fund divided by the number of units in the mutual fund. Example: Units = slices of pie and Mutual fund = total pie. Say you have one or more units, you bought 10 units of the mutual fund at 10 per unit = 100 total. Value per unit is now 16, Total = 160 (10 units x 16 per unit). Profit = 60% (16 divided by 10) plus any distributions (cash) you received over you holding period.

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NAV and its impact on the returns It is often felt that MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV. Say, you have Rs 10,000 to invest. Say one Fund A has an NAV of Rs 10 and another Fund B has NAV of Rs 50. You will get 1000 units of Fund A or 200 units of Fund B. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund A and Rs 62.50 for Fund B. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund A and 200*62.5 = Rs 12,500 for Fund B. Thus your returns would be same irrespective of the NAV. An FMCG company share at, say, Rs 1,000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (Rs 1000 may basically be over or under priced, which will not be the case with MF NAV).

ENTRY/ EXIT LOAD

A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as No Load Fund. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.

For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units. The units are allotted to an investor based on the amount invested.

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Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

FUND OFFER DOCUMENT:

A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. That way, before you put in your money, you're well aware of the risks etc involved. This has to be designed in accordance with the guidelines stipulated by SEBI.

The prospectus must disclose following details: Investment objectives. Risk factors and special considerations. Summary of expenses. Constitution of the fund. Guidelines on how to invest. Organization and capital structure. Tax provisions related to transactions. Financial information.

NEW FUND OFFERA new fund offer is similar to an initial public offering. Both represent attempts to raise capital to further operations. New fund offers are often accompanied by aggressive marketing campaigns, created to entice investors to purchase units in the fund. However, unlike an initial public offering (IPO), the price paid for shares or units is often close to a fair value. This is because the

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net asset value of the mutual fund typically prevails. Because the future is less certain for companies engaging in an IPO, investors have a better chance to purchase undervalued shares. Once the 3 tier structure is in place, the AMC launches new schemes, under the name of the Trust, after getting approval from the Trustees and SEBI. The launch of a new scheme is known as a New Fund Offer (NFO). We see NFOs hitting markets regularly. It is like an invitation to the investors to put their money into the mutual fund scheme by subscribing to its units. When a Scheme is launched; the distributors talk to potential investors and collect money from them by way of cheques or demand drafts. Mutual funds cannot accept cash. (Mutual funds units can also be purchased on-line through a number of intermediaries who offer on-line purchase / redemption facilities). Before investing, it is expected that the investor reads the Offer Document (OD) carefully to understand the risks associated with the scheme.

MARKETING OF MUTUAL FUNDS

Individual Agents
Use of agents has been the most widely prevalent practice for distribution of funds over the years. By definition, an agent acts on behalf of a principal in this case the mutual fund. An agent is essentially a broker between a fund and the investor. In India, we also have a unique system whereby a broker has a number of sub brokers working under him. The vast sub broker network ensures a larger geographic coverage than otherwise. According to AMFI, there are nearly 100,000 agents selling mutual funds and other financial products. Of this number, 8085000 are UTI agents Indian Mutual Fund giant.

Distribution Companies
Availing of the services of established distribution companies is a practice accepted by mutual funds internationally. This practice evolved with a view to circumvent the huge

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administrative mechanism required to support a large agent force. Instead of having to deal with several agents, a fund can interact with a distribution company which has several employees or sub brokers under it. A distribution company usually manages distribution of several funds simultaneously and receives commission for its services. Many private funds have preferred to adopt this practice because of its sophisticated nature and because they benefit from specialist knowledge and established client contacts of these marketing firms. In India, there are about 10 major distribution companies in addition to few hundred smaller ones. Few firms are Karvy Consultancy, JP Morgan, Morgan Stanley, SBI Capital etc.

Banks & NBFCs (Non Banking Financial Companies)

In developed countries, banks are important marketing vehicle for mutual funds, given that banks themselves have a large depositor/client base of their own. We can see the opening up of this new channel in India also. Several banks, particularly private and foreign banks are involved in the fund distribution by providing similar to those of distribution companies, on a commission basis. Some NBFCs are also providing such services. All funds do not yet use this channel, nor have all banks yet taken up the fund distributors work/job. But increasingly use of banks networks for mutual fund distribution is almost a certain development.

Direct Marketing
Direct marketing means that the mutual funds sell their own products without the use of any intermediaries. Usually, this takes the form of the sales officers and employees of the AMC who approach the investors and accept their contributions directly. However in India, independent agents can be treated as a direct marketing channel, in the same sense that they do not form a well knit, independent and organized single entity and act more like fund employees. Other channels like the distribution companies or banks or even stock brokers are clearly distinct and independent intermediaries.

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Direct marketing by the funds themselves accounts very small percentage of mutual fund sales. In case of UTI only 5 to 6 % of total sales come through direct channels. Many private sector funds require that invests into any of their schemes be routed only through registered brokers and they do not accept direct subscriptions from investors.

Regular Meetings with distributors:

Most of the funds conduct monthly/bi-monthly meetings with their distributors. The objective is to hear their complaints regarding service aspects from funds side and other queries related to the market situation. Sometimes, special training programs are also conducted for the new agents/ distributors. Training involves giving details about the products of the fund, their present performance in the market, what the competitors are doing and what they can do to increase the sales of the fund.

Advertising and sales promotion

By their very nature, mutual funds require higher advertisement and sales promotion expenses than any consumer product offering measurable performance. Different kinds of advertising and sales promotion exercises are required to serve the needs of different classes of investors. For instance, an aggressive push marketing strategy is required for retail markets, where investors are not adequately aware of the product and do not have specialized skill in financial market, in contrast with pull marketing strategies for the wholesale market. There are certain issues with reference to advertisement, publicity literature and offer documents, which deserve attention. Most of the mutual fund advertisements look similar, focusing on scheme features, returns and incentives. An investor exposed to the increasing number of mutual fund products finds that all the available brands are rather identical, and cannot appreciate any distinction.

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The present form of application, brochures and other literature is generally lengthy, cumbersome and at times complicated leading to higher emphasis on advertisement. One of the limiting factors is the regulatory framework governing advertisements of mutual fund products. For instance, in the offer documents, mutual funds are required to mention the fund objectives in clear terms. Immediately thereafter, the first risk factor that has to be mentioned is that there is no certainty whether the objectives of the fund will be achieved or not. Some more relaxations in these may facilitate bringing more novelty in advertisements, within a broad framework, without luring investors through false promises, and will certainly improve the situation. Birla Mutual fund, which spent Rs. 1 crore on advertising in the year 2000-01 plans to double that amount. In the words of Mr. Rajiv, vice president marketing, Templeton Asset Management (India) Pvt. Ltd., The industry has discovered that advertising in the changed climate today, when investors are most receptive to mutual funds, can perk up sales by anywhere between 20-40 percent. PIAMC managing director Ajay Srinivasan gives his rationale for stepping up marketing spends: we believe that the brand is an important part of the consumers decision to invest in a category that is not yet clearly understood by people. According to the mutual fund marketers, advertising helps bring recall when consumers are looking at investment opportunities. Srinivasan says that tactical advertising has raised PIAMCs brand awareness from five percent in June 1993 to 34 percent now, as per a recent IMRB survey. Rules Regarding Advertisement The advertisement for each scheme shall disclose investment objective for each scheme.

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An advertisement shall be truthful, fair and clear and shall not contain a statement, promise or forecast which is untrue or misleading. Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. All advertisements issued by a mutual fund or its sponsor or asset management company, shall state "all investments in mutual funds and securities are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market". The advertisement shall not compare one fund with another, implicitly or explicitly, unless the comparison is fair and all information relevant to the comparison is included in the advertisement. The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false.

PHASES OF MUTUAL FUNDS IN INDIA-

THE EVOLUTIONThe formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases:

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Phase 1.
ESTABLISHMENT AND GROWTH OF UTI (1964-1967)Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (Indias first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 Crores.

Phase II.
ENTRY OF PUBLIC SECTOR FUNDS (1987-1993)The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Can bank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual

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Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 Crores. However, UTI remained to be the leader with about 80% market share. Assets Under Management 38,247 8,757 47,004 Mobilization as % of gross Domestic Savings 5.2% 0.9% 6.1%

1992-93 UTI Public Sector Total

Amount Mobilized 11,057 1,964 13,021

Phase III.
EMERGENCE OF PRIVATE SECTOR FUNDS (1993-1996)The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investorservicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IVGROWTH AND SEBI REGULATION (1996-2004)-

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The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds.

Inventors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organized into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilization of funds from investors and assets under management which is supported by the following data:

GROSS FUND MOBILISATION (RS. CRORES) FROM TO UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL

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01-April-98 01-April-99 01-April-00 01-April-01 01-April-02 01-Feb.-03 01-April-03 01-April-04 01-April-05

31-March-99 31-March-00 31-March-01 31-March-02 31-Jan-03 31-March-03 31-March-04 31-March-05 31-March-06

11,679 13,536 12,413 4,643 5,505 * -

1,732 4,039 6,192 13,613 22,923 7,259* 68,558 1,03,246 1,83,446

7,966 42,173 74,352 1,46,267 2,20,551 58,435 5,21,632 7,36,416 9,14,712

21,377 59,748 92,957 1,64,523 2,48,979 65,694 5,90,190 8,39,662 10,98,158

ASSETS UNDER MANAGEMENT (RS. CRORES) AS ON 31-March-99 UTI 53,320 PUBLIC SECTOR 8,292 PRIVATE SECTOR 6,860 TOTAL 68,472

Phase V.
GROWTH AND CONSOLIDIATION 2004 ONWARDS-

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The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

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MUTUAL FUNDS

CONLUSION
The Global market is fast growing in investment business. Countries like US, whole of Europe spread their investment in different investment alternatives with the help of advisory services to recommend investor. In Indian scenario the investments are spread over Bank Deposits, Savings Certificate, Post Office, Equity Markets and the latest Mutual Fund. Since Mutual Funds are subject to market risk the investor take help of advisory services for financial planning which helps the investor to take calculated risk. It was in 1995, the scenario got changed when depository act was passed and PAN card details and Demat account was made compulsory for all those investor who are investing a heavy amount. So as to protect the interest of the investors, From July 2 of 2007 it has been made mandatory to have PAN card details, this will enhance the faith of investors in stock market and many investor would come forward to invest in mutual fund. The mutual fund industry today needs to develop products to fulfill customer needs and help customers understand how its products cater to their needs. No doubt, watching the value of investments go down day after day can be pretty tough. However, the pain becomes more bearable if one follows a proper investment plan and invests for the long term. Having a well diversified portfolio as well as a plan to rebalance it from time to time also helps a great deal. No wonder, Mutual fund is considered to be the best way to invest in the stock market. The mutual fund industry has gained a higher growth in the recent years. There are around 34 Asset Management Companies which are currently operating and the numbers of Mutual Funds are over 630 funds, so it is difficult to analyze each and every fund in order to known their riskiness and return. Some tools are used to find risk & return of the fund, which helps an investor to find out their risk. Lastly, I can conclude that MUTUAL FUND ARE SUBJECT TO MARKET RISKS AND THERE IS NO ASSURANCE OR GUARANTEE THAT THE OBJECTIVES OF THE MUTUAL FUND WILL BE ACHIEVED.

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