Mutual Funds.docx

8/20/2019 Mutual Funds.docx

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Mutual Funds

All About Mutual FundsBefore we understand what is mutual fund, it’s very important to know the area in which

mutual funds works, the basic understanding of stocks and bonds.

Stocks : Stocks represent shares of ownership in a public company. Examples of public companies

include eliance, !"#$ and %nfosys. Stocks are considered to be the most common owned

investment traded on the market.

Bonds : Bonds are basically the money which you lend to the government or a company, and in

return you can receive interest on your invested amount, which is back over predetermined

amounts of time. Bonds are considered to be the most common lending investment traded on the

market. &here are many other types of investments other than stocks and bonds 'including


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annuities, real estate, and precious metals(, but the ma)ority of mutual funds invest in stocks and*or

bonds.

What Is Mutual Fund

+ mutual fund is )ust the connecting bridge or a financial intermediary that allows a group

of investors to pool their money together with a predetermined investment ob)ective. &he mutual

fund will have a fund manager who is responsible for investing the gathered money into specific

securities 'stocks or bonds(. hen you invest in a mutual fund, you are buying units or portions of

the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

-utual funds are considered as one of the best available investments as compare to others

they are very cost efficient and also easy to invest in, thus 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. But the biggest advantage to mutual funds is diversification, by minimiing risk /

maximiing returns.

&hus a -utual 0und 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. &he flow chart below describes broadly the working of a mutual fund

Unit Trust of India is the rst Mutual Fund set up under a separate

act, UTI Act in 1963, and started its operations in 1964 with the issue

of units under the scheme U!64"

Overview of existing schemes existed in mutual fund category

ide variety of -utual 0und Schemes exists to cater to the needs such as financial position,

risk tolerance and return expectations etc. &he table below gives an overview into the existing types

of schemes in the %ndustry.

y!e of Mutual Fund Schemes


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B" S#$%$#&

O!en &nded Schemes

+n open1end fund is one that is available for subscription all through the year. &hese do nothave a fixed maturity. %nvestors can conveniently buy and sell units at "et +sset 2alue '3"+23(

related prices. &he key feature of open1end schemes is li4uidity.

%lose &nded Schemes

+ closed1end fund has a stipulated maturity period which generally ranging from 5 to 67

years. &he fund is open for subscription only during a specified period. %nvestors 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. %n order to provide an exit route to the

investors, some close1ended funds give an option of selling back the units to the -utual 0und

through periodic repurchase at "+2 related prices. SEB% egulations stipulate that at least one of

the two exit routes is provided to the investor.

Interval Schemes

%nterval Schemes are that scheme, which combines the features of open1ended and close1ended schemes. &he units may be traded on the stock exchange or may be open for sale orredemption during pre1determined intervals at "+2 related prices.

B" 'A$#&

() &*uity fund+

&hese funds invest a maximum part of their corpus into e4uities holdings. &he structure of the

fund may vary different for different schemes and the fund manager’s outlook on different stocks.

&he E4uity 0unds are sub1classified depending upon their investment ob)ective, as follows:

• 8iversified E4uity 0unds

• -id1$ap 0unds

• Sector Specific 0unds


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• &ax Savings 0unds 'E9SS(

E4uity investments are meant for a longer time horion, thus E4uity funds rank high on the

risk1return matrix.

,) -ebt funds+

&he ob)ective of these 0unds is to invest in debt papers. #overnment authorities, private

companies, banks and financial institutions are some of the ma)or issuers of debt papers. By

investing in debt instruments, these funds ensure low risk and provide stable income to the

investors. 8ebt funds are further classified as:

• .ilt Funds: %nvest their corpus in securities issued by #overnment, popularly known as

#overnment of %ndia debt papers. &hese 0unds carry ero 8efault risk but are associated

with %nterest ate risk. &hese schemes are safer as they invest in papers backed by

#overnment.

• Income Funds: %nvest a ma)or portion into various debt instruments such as bonds,

corporate debentures and #overnment securities.

• MI/s: %nvests maximum of their total corpus in debt instruments while they take minimum

exposure in e4uities. %t gets benefit of both e4uity and debt market. &hese scheme ranks

slightly high on the risk1return matrix when compared with other debt schemes.

• Short erm /lans 0S/s1: -eant for investment horion for three to six months. &hese

funds primarily invest in short term papers like $ertificate of 8eposits '$8s( and

$ommercial apers '$s(. Some portion of the corpus is also invested in corporate

debentures.

• 2i*uid Funds: +lso known as -oney -arket Schemes, &hese funds provides easy

li4uidity and preservation of capital. &hese schemes invest in short1term instruments like

&reasury Bills, inter1bank call money market, $s and $8s. &hese funds are meant for

short1term cash management of corporate houses and are meant for an investment horion


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of 6day to 5 months. &hese schemes rank low on risk1return matrix and are considered to be

the safest amongst all categories of mutual funds.

3) Balanced funds+ +s the name suggest they, are a mix of both e4uity and debt funds. &hey invest

in both e4uities and fixed income securities, which are in line with pre1defined investment

ob)ective of the scheme. &hese schemes aim to provide investors with the best of both the worlds.

E4uity part provide growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz,

Each category of funds is backed by an investment philosophy, which is pre1defined in the

ob)ectives of the fund. &he investor can align his own investment needs with the funds ob)ective

and invest accordingly.

B" I'4&SM&' OB5&%I4&

• .rowth Schemes+ #rowth Schemes are also known as e4uity schemes. &he aim of these

schemes is to provide capital appreciation over medium to long term. &hese schemes


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normally invest a ma)or part of their fund in e4uities and are willing to bear short1term

decline in value for possible future appreciation.

• Income Schemes+ %ncome Schemes are also known as debt schemes. &he aim of these

schemes is to provide regular and steady income to investors. &hese schemes generally

invest in fixed income securities such as bonds and corporate debentures. $apital

appreciation in such schemes may be limited.

• Balanced Schemes+ Balanced Schemes aim to provide both growth and income by

periodically distributing a part of the income and capital gains they earn. &hese schemes

invest in both shares and fixed income securities, in the proportion indicated in their offer

documents 'normally 7;:7;(.

• Money Market Schemes: -oney -arket Schemes aim to provide easy li4uidity,

preservation of capital and moderate income. &hese schemes generally invest in safer, short1

term instruments, such as treasury bills, certificates of deposit, commercial paper and inter1

bank call money.

O6 S%6&M&S

• ax Saving Schemes+ &ax1saving schemes offer tax rebates to the investors under tax laws

prescribed from time to time.


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these funds are dependent on the performance of the respective sectors*industries. hile

these funds may give higher returns, they are more risky compared to diversified funds.

%nvestors need to keep a watch on the performance of those sectors*industries and must exitat an appropriate time.

y!es of returns

&here are three ways, where the total returns provided by mutual funds can be en)oyed by

investors:

•

%ncome is earned from dividends on stocks and interest on bonds. + fund pays out nearly allincome it receives over the year to fund owners in the form of a distribution.

• %f the fund sells securities that have increased in price, the fund has a capital gain. -ost

funds also pass on these gains to investors in a distribution.

• %f fund holdings increase in price but are not sold by the fund manager, the fund>s shares

increase in price. ?ou can then sell your mutual fund shares for a profit. 0unds will also

usually give you a choice either to receive a check for distributions or to reinvest the

earnings and get more shares.


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/ros 7 cons of investing in mutual funds+

0or investments in mutual fund, one must keep in mind about the ros and cons ofinvestments in mutual fund.

Advantages of Investing Mutual Funds+

() /rofessional Management 8 &he basic advantage of funds is that, they are professional

managed, by well 4ualified professional. %nvestors purchase funds because they do not have the

time or the expertise to manage their own portfolio. + mutual fund is considered to be relatively

less expensive way to make and monitor their investments.

,) -iversification 8 urchasing units in a mutual fund instead of buying individual stocks or bonds,

the investors risk is spread out and minimied up to certain extent. &he idea behind diversification

is to invest in a large number of assets so that a loss in any particular investment is minimied by

gains in others.

3) &conomies of Scale 8 -utual 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.

9) 2i*uidity 8 @ust like an individual stock, mutual fund also allows investors to li4uidate their

holdings as and when they want.

:) Sim!licity 8 %nvestments in mutual fund is considered to be easy, compare to other available

instruments in the market, and the minimum investment is small. -ost +-$ also have automatic

purchase plans whereby as little as s. A;;;, where S% start with )ust s.7; per month basis.


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-isadvantages of Investing Mutual Funds+

() /rofessional Management1 Some funds doesn’t 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 so1called professionals are any better than mutual fund or

investor himself, for picking up stocks.

,) %osts &he biggest source of +-$ income, is generally from the entry / exit load which they

charge from an investors, at the time of purchase. &he mutual fund industries are thus charging

extra cost under layers of )argon.

3) -ilution 1 Because funds have small holdings across different companies, high returns from a

few investments often don>t make much difference on the overall return. 8ilution is also the result

of a successful fund getting too big. hen money pours into funds that have had strong success, the

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

9) axes 1 when making decisions about your money, fund managers don>t consider your personal

tax situation. 0or example, when a fund manager sells a security, a capital1gain tax is triggered,

which affects how profitable the individual is from the sale. %t might have been more advantageous

for the individual to defer the capital gains liability.


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Mutual Funds Industry in India

&he origin of mutual fund industry in %ndia is with the introduction of the concept of mutual fund

by


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he ma;or !layers in the Indian Mutual Fund Industry are+

Ma;or /layers of Mutual Funds In India

/eriod 02ast7nbs!( Week1

#ank Scheme 'ame -ate 'A4

0#s)1

2ast (

Week

Since

Ince!tion

( @- $ore 66 0und 1 Series 6 1#rowth

-ar AD, A;;=

=.F7 7.6A 1CF.DF

, &ata %ndo1#lobal %nfrastructure0und 1 #rowth

-ar AD, A;;=

=.AD 7.;7 1F;.FA

3 &ata $apital Builder 0und 1#rowth

-ar AD, A;;=

6A.FF 7.;5 67.57

9 Standard $hartered EnterpriseE4uity 0und 1 #rowth

-ar AD, A;;=

6F.; 7 A;.CA

: 8BS $hola %nfrastructure 0und1 #rowth -ar AD, A;;= C.;6 F.D7 16.6

< %$%$% rudential 0usion 0und 1Series %%% 1 %nstitutional 1#rowth

-ar AD, A;;=

6;.A F.DA A5.DC

= 8S -errill 9ynch -icro $ap0und 1 egular 1 #rowth

-ar AD, A;;=

C.C5 F.7D 1;.=7

> %$%$% rudential 0usion 0und 1Series %%% 1 etail 1 #rowth

-ar AD, A;;=

6;.6C F.76 AA.5C

? 8BS $hola Small $ap 0und 1#rowth

-ar AD, A;;=

D.5D 5.7 1=6.=

(@ rincipal ersonal &axsaver -ar A7, A;;=

6AF.DD 5.FF AC.C

(( Benchmark Split $apital 0und 1lan + 1 referred


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(: &ata S% 0und 1 Series %% 1#rowth

-ar AD, A;;=

C.C5 6.7= 1;.CF

+ mutual fund is a professionally1managed firm of collective investments that pools money from

many investors and invests it in stocks, bonds, short1term money market instruments, and*or other

securities.in other words we can say that + -utual 0und is a trust registered with the Securities and

Exchange Board of %ndia 'SEB%(, which pools up the money from individual * corporate investors

and invests the same on behalf of the investors *unit holders, in e4uity shares, #overnment

securities, Bonds, $all money markets etc., and distributes the profits.

&he value of each unit of the mutual fund, known as the net asset value '"+2(, is mostly

calculated daily based on the total value of the fund divided by the number of shares currently

issued and outstanding.

&he value of all the securities in the portfolio in calculated daily. 0rom this,

all expenses are deducted and the resultant value divided by the number of units in the fund is the

fund’s "+2.

'A4 otal value of the fund)

'o) of shares currently issued and outstanding

Advantages of a MF

-utual 0unds provide the benefit of cheap access to expensive stocks

-utual funds diversify the risk of the investor by investing in a basket of assets

+ team of professional fund managers manages them with in1depth research inputsfrom investment analysts.

Being institutions with good bargaining power in markets, mutual funds have accessto crucial corporate information, which individual investors cannot access.

http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306http://www.mutualfundsindia.com/fundfactsheet1.asp?sname=TA306


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6istory of the Indian mutual fund industry+&he mutual fund industry in %ndia started in 6CD5 with the formation of


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6CC5 was the year in which the first -utual 0und egulations came into being, under which all

mutual funds, except


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%ategories of mutual funds+


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-utual funds can be classified as follow:

Based on their structure+

• !pen1ended funds: %nvestors can buy and sell the units from the fund, at any point of time.

• $lose1ended funds: &hese funds raise money from investors only once. &herefore, after the

offer period, fresh investments can not be made into the fund. %f the fund is listed on a

stocks exchange the units can be traded like stocks 'E.g., -organ Stanley #rowth 0und(.

ecently, most of the "ew 0und !ffers of close1ended funds provided li4uidity window on

a periodic basis such as monthly or weekly. edemption of units can be made during

specified intervals. &herefore, such funds have relatively low li4uidity.

Based on their investment ob;ective+

E4uity funds: &hese funds invest in e4uities and e4uity related instruments. ith fluctuating share

prices, such funds show volatile performance, even losses. However, short term fluctuations in the

market, generally smoothens out in the long term, thereby offering higher returns at relatively lower

volatility. +t the same time, such funds can yield great capital appreciation as, historically, e4uities

have outperformed all asset classes in the long term. Hence, investment in e4uity funds should be

considered for a period of at least 517 years. %t can be further classified as:

i1 %ndex funds1 %n this case a key stock market index, like BSE Sensex or "ifty is tracked. &heir portfolio mirrors the benchmark index both in terms of composition and individual stock weightages.


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ii1 E4uity diversified funds1 6;;G of the capital is invested in e4uities spreading across differentsectors and stocks.

iii1 8ividend yield funds1 it is similar to the e4uity diversified funds except that they invest incompanies offering high dividend yields.

iv1 &hematic funds1 %nvest 6;;G of the assets in sectors which are related through some theme.e.g. 1+n infrastructure fund invests in power, construction, cements sectors etc.

v1 Sector funds1 %nvest 6;;G of the capital in a specific sector. e.g. 1 + banking sector fund willinvest in banking stocks.

vi1 E9SS1 E4uity 9inked Saving Scheme provides tax benefit to the investors.

Balanced fund+ &heir investment portfolio includes both debt and e4uity. +s a result, on the risk1return

ladder, they fall between e4uity and debt funds. Balanced funds are the ideal mutual funds vehicle for

investors who prefer spreading their risk across various instruments. 0ollowing are balanced funds classes:

i( 8ebt1oriented funds 1%nvestment below D7G in e4uities.

ii( E4uity1oriented funds -%nvest at least D7G in e4uities, remaining in debt.

-ebt fund+

&hey invest only in debt instruments, and are a good option for investors averse to ideaof taking risk associated with e4uities. &herefore, they invest exclusively in fixed1income

instruments like bonds, debentures, #overnment of %ndia securitiesJ and money market instruments

such as certificates of deposit '$8(, commercial paper '$( and call money. ut your money into

any of these debt funds depending on your investment horion and needs.

i1 9i4uid funds1 &hese funds invest 6;;G in money market instruments, a large portion beinginvested in call money market.

ii1#ilt funds S&1 &hey invest 6;;G of their portfolio in government securities of and &1bills.

iii10loating rate funds 1 %nvest in short1term debt papers. 0loaters invest in debt instruments whichhave variable coupon rate.

iv1+rbitrage fund1 &hey generate income through arbitrage opportunities due to mis1pricing

between cash market and derivatives market. 0unds are allocated to e4uities, derivatives and


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money markets. Higher proportion 'around 7G( is put in money markets, in the absence of

arbitrage opportunities.

v1#ilt funds 9&1 &hey invest 6;;G of their portfolio in long1term government securities.

vi1 %ncome funds 9&1 &ypically, such funds invest a ma)or portion of the portfolio in long1term debt papers.

vii1 -%s1 -onthly %ncome lans have an exposure of ;G1C;G to debt and an exposure of 6;G15;G to e4uities.

viii10-s1 fixed monthly plans invest in debt papers whose maturity is in line with that of the

fund.

Investment strategies+

() Systematic Investment /lan+ under this a fixed sum is invested each month on a fixed date of a

month. ayment is made through post dated che4ues or direct debit facilities. &he investor gets

fewer units when the "+2 is high and more units when the "+2 is low. &his is called as the benefit

of upee $ost +veraging '$+(

,) Systematic ransfer /lan+ under this an investor invest in debt oriented fund and give

instructions to transfer a fixed sum, at a fixed interval, to an e4uity scheme of the same mutual

fund.

3) Systematic Withdrawal /lan+ if someone wishes to withdraw from a mutual fund then he can

withdraw a fixed amount each month.


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#is$ %&s" return'


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Working of a Mutual fund+


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&he entire mutual fund industry operates in a very organied way. &he investors, known as unit

holders,handover their savings to the +-$s under various schemes. &he ob)ective of the

investment should match with the ob)ective of the fund to best suit the investors’ needs. &he +-$s

further invest the funds into various securities according to the investment ob)ective. &he return

generated from the investments is passed on to the investors or reinvested as mentioned in the offer

document.


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Working

Of

Mutual Fund

Mutual Funds


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Before we understand what is mutual fund, it’s very important to know the area in which

mutual funds works, the basic understanding of stocks and bonds.

Stocks : Stocks represent shares of ownership in a public company. Examples of public companies

include eliance, !"#$ and %nfosys. Stocks are considered to be the most common owned

investment traded on the market.

Bonds : Bonds are basically the money which you lend to the government or a company, and in

return you can receive interest on your invested amount, which is back over predetermined

amounts of time. Bonds are considered to be the most common lending investment traded on themarket. &here are many other types of investments other than stocks and bonds 'including

annuities, real estate, and precious metals(, but the ma)ority of mutual funds invest in stocks and*or

bonds.

What Is Mutual Fund

+ mutual fund is )ust the connecting bridge or a financial intermediary that allows a group

of investors to pool their money together with a predetermined investment ob)ective. &he mutual

fund will have a fund manager who is responsible for investing the gathered money into specific

securities 'stocks or bonds(. hen you invest in a mutual fund, you are buying units or portions of

the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

-utual funds are considered as one of the best available investments as compare to others

they are very cost efficient and also easy to invest in, thus 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. But the biggest advantage to mutual funds is diversification, by minimiing risk /maximiing returns.


24/41

&hus a -utual 0und is the most suitable investment for the common man as it offers an opportunityto invest in a diversified, professionally managed basket of securities at a relatively low cost. &heflow chart below describes broadly the working of a mutual fund


25/41


26/41

Overview of existing schemes existed in mutual fund category

ide variety of -utual 0und Schemes exists to cater to the needs such as financial position,

risk tolerance and return expectations etc. &he table below gives an overview into the existing types

of schemes in the %ndustry.


27/41

y!e of Mutual Fund Schemes

B" S#$%$#&

O!en &nded Schemes+n open1end fund is one that is available for subscription all through the year. &hese do not have a

fixed maturity. %nvestors can conveniently buy and sell units at "et +sset 2alue '3"+23( related

prices. &he key feature of open1end schemes is li4uidity.

%lose &nded Schemes

+ closed1end fund has a stipulated maturity period which generally ranging from 5 to 67years. &he fund is open for subscription only during a specified period. %nvestors 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. %n order to provide an exit route to the

investors, some close1ended funds give an option of selling back the units to the -utual 0und

through periodic repurchase at "+2 related prices. SEB% egulations stipulate that at least one of

the two exit routes is provided to the investor.

Interval Schemes

%nterval Schemes are that scheme, which combines the features of open1ended and close1

ended schemes. &he units may be traded on the stock exchange or may be open for sale or

redemption during pre1determined intervals at "+2 related prices.


28/41

B" 'A$#&


29/41

() &*uity fund+

&hese funds invest a maximum part of their corpus into e4uities holdings. &he structure of the

fund may vary different for different schemes and the fund manager’s outlook on different stocks.

&he E4uity 0unds are sub1classified depending upon their investment ob)ective, as follows:


30/41

• 8iversified E4uity 0unds

• -id1$ap 0unds

• Sector Specific 0unds

• &ax Savings 0unds 'E9SS(

E4uity investments are meant for a longer time horion, thus E4uity funds rank high on the

risk1return matrix.

,) -ebt funds+

&he ob)ective of these 0unds is to invest in debt papers. #overnment authorities, private

companies, banks and financial institutions are some of the ma)or issuers of debt papers. By

investing in debt instruments, these funds ensure low risk and provide stable income to the

investors. 8ebt funds are further classified as:

• .ilt Funds: %nvest their corpus in securities issued by #overnment, popularly known as

#overnment of %ndia debt papers. &hese 0unds carry ero 8efault risk but are associated

with %nterest ate risk. &hese schemes are safer as they invest in papers backed by#overnment.

• Income Funds: %nvest a ma)or portion into various debt instruments such as bonds,

corporate debentures and #overnment securities.

• MI/s: %nvests maximum of their total corpus in debt instruments while they take minimum

exposure in e4uities. %t gets benefit of both e4uity and debt market. &hese scheme ranks

slightly high on the risk1return matrix when compared with other debt schemes.

• Short erm /lans 0S/s1: -eant for investment horion for three to six months. &hese

funds primarily invest in short term papers like $ertificate of 8eposits '$8s( and

$ommercial apers '$s(. Some portion of the corpus is also invested in corporate

debentures.


31/41

• 2i*uid Funds: +lso known as -oney -arket Schemes, &hese funds provides easy

li4uidity and preservation of capital. &hese schemes invest in short1term instruments like

&reasury Bills, inter1bank call money market, $s and $8s. &hese funds are meant forshort1term cash management of corporate houses and are meant for an investment horion

of 6day to 5 months. &hese schemes rank low on risk1return matrix and are considered to be

the safest amongst all categories of mutual funds.

3) Balanced funds + +s the name suggest they, are a mix of both e4uity and debt funds. &hey

invest in both e4uities and fixed income securities, which are in line with pre1defined investment

ob)ective of the scheme. &hese schemes aim to provide investors with the best of both the worlds.

E4uity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz,

Each category of funds is backed by an investment philosophy, which is pre1defined in the

ob)ectives of the fund. &he investor can align his own investment needs with the funds ob)ective

and invest accordingly.

Investors have to face the risk- return trade

off


32/41

B" I'4&SM&' OB5&%I4&

• .rowth Schemes+ #rowth Schemes are also known as e4uity schemes. &he aim of these

schemes is to provide capital appreciation over medium to long term. &hese schemes

normally invest a ma)or part of their fund in e4uities and are willing to bear short1term

decline in value for possible future appreciation.

• Income Schemes+ %ncome Schemes are also known as debt schemes. &he aim of these

schemes is to provide regular and steady income to investors. &hese schemes generally

invest in fixed income securities such as bonds and corporate debentures. $apitalappreciation in such schemes may be limited.

• Balanced Schemes+ Balanced Schemes aim to provide both growth and income by

periodically distributing a part of the income and capital gains they earn. &hese schemes

invest in both shares and fixed income securities, in the proportion indicated in their offer

documents 'normally 7;:7;(.

•

Money Market Schemes: -oney -arket Schemes aim to provide easy li4uidity, preservation of capital and moderate income. &hese schemes generally invest in safer, short1

term instruments, such as treasury bills, certificates of deposit, commercial paper and inter1

bank call money.

O6 S%6&M&S

• ax Saving Schemes+ &ax1saving schemes offer tax rebates to the investors under tax laws

prescribed from time to time.


33/41

• Sector S!ecific Schemes+ &hese are the funds*schemes which invest in the securities of

only those sectors or industries as specified in the offer documents. e.g. harmaceuticals,

Software, 0ast -oving $onsumer #oods '0-$#(, etroleum stocks, etc. &he returns inthese funds are dependent on the performance of the respective sectors*industries. hile

these funds may give higher returns, they are more risky compared to diversified funds.

%nvestors need to keep a watch on the performance of those sectors*industries and must exit

at an appropriate time.

y!es of returns+

&here are three ways, where the total returns provided by mutual funds can be en)oyed by

investors:

• %ncome is earned from dividends on stocks and interest on bonds. + fund pays out nearly all

income it receives over the year to fund owners in the form of a distribution.

• %f the fund sells securities that have increased in price, the fund has a capital gain. -ost

funds also pass on these gains to investors in a distribution.• %f fund holdings increase in price but are not sold by the fund manager, the fund>s shares

increase in price. ?ou can then sell your mutual fund shares for a profit. 0unds will also

usually give you a choice either to receive a check for distributions or to reinvest the

earnings and get more shares.


34/41

/ros 7 cons of investing in mutual funds+

0or investments in mutual fund, one must keep in mind about the ros and cons ofinvestments in mutual fund.

Advantages of Investing Mutual Funds+

() /rofessional Management 8 &he basic advantage of funds is that, they are professional

managed, by well 4ualified professional. %nvestors purchase funds because they do not have the

time or the expertise to manage their own portfolio. + mutual fund is considered to be relatively

less expensive way to make and monitor their investments.

,) -iversification 8 urchasing units in a mutual fund instead of buying individual stocks or bonds,

the investors risk is spread out and minimied up to certain extent. &he idea behind diversification

is to invest in a large number of assets so that a loss in any particular investment is minimied bygains in others.

3) &conomies of Scale 8 -utual 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.

9) 2i*uidity 8 @ust like an individual stock, mutual fund also allows investors to li4uidate their

holdings as and when they want.

:) Sim!licity 8 %nvestments in mutual fund is considered to be easy, compare to other available

instruments in the market, and the minimum investment is small. -ost +-$ also have automatic

purchase plans whereby as little as s. A;;;, where S% start with )ust s.7; per month basis.


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-isadvantages of Investing Mutual Funds+

() /rofessional Management1 Some funds doesn’t 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 so1called professionals are any better than mutual fund or

investor himself, for picking up stocks.

,) %osts &he biggest source of +-$ income, is generally from the entry / exit load which they

charge from an investors, at the time of purchase. &he mutual fund industries are thus charging

extra cost under layers of )argon.

3) -ilution 1 Because funds have small holdings across different companies, high returns from a

few investments often don>t make much difference on the overall return. 8ilution is also the resultof a successful fund getting too big. hen money pours into funds that have had strong success, the

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

9) axes 1 when making decisions about your money, fund managers don>t consider your personal

tax situation. 0or example, when a fund manager sells a security, a capital1gain tax is triggered,

which affects how profitable the individual is from the sale. %t might have been more advantageous

for the individual to defer the capital gains liability.


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.uidelines of the S&BI for Mutual Fund %om!anies +


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&o protect the interest of the investors, SEB% formulates policies and regulates the mutual

funds. %t notified regulations in 6CC5 'fully revised in 6CCD( and issues guidelines from time to

time.

SEB% approved +sset -anagement $ompany '+-$( manages the funds by making

investments in various types of securities. $ustodian, registered with SEB%, holds the securities

of various schemes of the fund in its custody.

+ccording to SEB% egulations, two thirds of the directors of &rustee $ompany or board of

trustees must be independent.

&he +ssociation of -utual 0unds in %ndia '+-0%( reassures the investors in units of mutualfunds that the mutual funds function within the strict regulatory framework. %ts ob)ective is to

increase public awareness of the mutual fund industry. +-0% also is engaged in upgrading

professional standards and in promoting best industry practices in diverse areas such as

valuation, disclosure, transparency etc.

-ocuments re*uired 0/A' mandatory1+

/roof of identity :

() hoto +" card

,) %n case of non1photo +" card in addition to copy of +" card any one of the following:

driving license*passport copy* voter id* bank photo pass book.

roof of address 'any of the following ( :latest telephone bill, latest electricity bill, assport,

latest bank passbook*bank account statement, latest 8emat account statement, voter id, driving

license, ration card, rent agreement.

Offer document+ +n offer document is issued when the +-$s make "ew 0und !ffer'"0!(.

%ts advisable to every investor to ask for the offer document and read it before investing. +n


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D$&SIO''AI#&

A study of !references of the investors for investment in mutual funds)

() /ersonal -etails+

'a(. "ame:1

'b(. +dd: 1 hone:1

'c(. +ge:1

'd(. Kualification:1

'e(. !ccupation. l tick 'L(

#ovt. Ser vt. Ser Business +griculture !thers

'g(. hat is your monthly family income approximatelyM l tick 'L(.


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,) hat kind of investments you have made so farM l tick 'L(. +ll applicable.

a. Saving account b. 0ixed deposits c. %nsurance d. -utual 0unde. ost !ffice1"S$, etc f. Shares*8ebentures g. #old* Silver h. eal Estate

3) hile investing your money, which factor will you preferM .

'a( 9i4uidity 'b( 9ow isk 'c( High eturn 'd( &rust

9) +re you aware about -utual 0unds and their operationsM l tick 'L(. ?es "o

:) %f yes, how did you know about -utual 0undM

a. +dvertisement b. eer #roup c. Banks d. 0inancial +dvisors

. %f yesE in which -utual 0und you have investedM l. tick 'L(. +ll applicable.

a. SB%-0 b.


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b. SB%-0 gives less return compared to the others.c. +gent’ +dvice

((. hen you plan to invest your money in asset management co. which +-$ will you preferM

+ssets -anagement $o.a. SB%-0

b.


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Mutual Funds.docx

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