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CHAPTER 1

INTRODUCTION

A mutual fund is simply a financial intermediary that allows a group

of investors to pool their money together with a predetermined investment

objective. The mutual fund will have a fund manager who is responsible for

investing the pooled money into specific securities (usually stocks or bonds).

When one invests in a mutual fund, he is buying shares (or portions) of the

mutual fund and becoming shareholder of the fund.

The income earned through these investments and the capital

appreciations realized are shared by its unit holders in proportion to the

number of units owned by them. Thus a Mutual Fund is the most suitable

investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low

cost. The flow chart below describes broadly the working of a mutual fund.

While the concept of individuals coming together to invest money

collectively is not new, the mutual fund in its present form is a 20th century

phenomenon. In fact, mutual funds gained popularity only after the Second

World War. A draft offer document is to be prepared at the time of

launching the fund. Typically, it pre specifies the investment objectives of

the fund, the risk associated, the costs involved in the process and the broad

rules for entry into and exit from the fund and other areas of operation.

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

regulator, SEBI (Securities exchange Board of India) in our case. SEBI

looks at track records of the sponsor and its financial strength in granting

approval to the fund for commencing operations. A sponsor then hires an

asset management company to invest the funds according to the investment

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objective. It also hires another entity to be the custodian of the assets of the

fund and perhaps a third one to handle registry work for the unit holders

(subscribers) of the fund.

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STRUCTURE OF THE INDIAN MUTUAL FUND

INDUSTRY

The Indian mutual fund industry is dominated by the Unit Trust of

India which has a total corpus of Rs700bn collected from more than 20

million investors. The UTI has many funds/schemes in all categories i.e.

equity, balanced, income etc. with some being open-ended and some being

closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which

is a balanced fund, is the biggest scheme with a corpus of about Rs200bn.

UTI was floated by financial institutions and is governed by a special act of

Parliament. Most of its investors believe that the UTI is government owned

and controlled, which, while legally incorrect, is true for all practical

purposes.

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

nationalized banks. Canara bank Asset Management floated by Canara Bank

and SBI Funds Management floated by the State Bank of India are the

largest of these. GIC AMC floated by General Insurance Corporation and

JeevanBimaSahayog AMC floated by the LIC are some of the other

prominent ones. The aggregate corpus of funds managed by this category of

AMCs is about Rs150bn.

The third largest categories of mutual funds are the ones floated by the

private sector and by foreign asset management companies. The largest of

these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate

corpus of assets managed by this category of AMCs is in excess of Rs250bn.

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RECENT TRENDS IN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive

expansion of the foreign owned mutual fund companies and the decline of

the companies floated by nationalized banks and smaller private sector

players. Many nationalized banks got into the mutual fund business in the

early nineties and got off to a good start due to the stock market boom

prevailing then. These banks did not really understand the mutual fund

business and they just viewed it as another kind of banking activity. Few

hired specialized staff and generally chose to transfer staff from the parent

organizations.

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

not good. Some schemes had offered guaranteed returns and their parent

organizations had to bail out these AMCs by paying large amounts of money

as the difference between the guaranteed and actual returns .The service

level were also very bad. Most of these AMCs have not been able to retain

staff, float new schemes etc. and it is doubtful whether, barring a few

exceptions, they have serious plans of continuing the activity in a major

way.

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

companies was also very similar. They quickly realized that the AMC

business is a business, which makes money in the long term and requires

deep-pocketed support in the intermediate years. Some have sold out to

foreign owned companies, some have merged with others and there is

general restructuring going on. The foreign owned companies have deep

pockets and have come I here with the expectation of a long haul.

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CHAPTER2

TYPES OF MUTUAL FUNDS

The growing popularity of Canadian mutual funds has resulted in an increase

in both the number and type of mutual funds available, ranging from the

more conservative, such as most money market funds, to the more

aggressive, such as most growth/equity funds.

The large number of Canadian mutual funds available to today's investors

provides them with more investment choices than ever before. While choice

may be a good thing, it can sometimes be daunting.

Below is a description of some of the different types of mutual funds

available in today's Canadian marketplace:

Money Market Mutual Funds

Money market mutual funds invest in short-term, interest-bearing

instruments, such as treasury bills, thus providing a steady, secure source of

interest income. Money market mutual funds make an ideal investment

alternative to bank accounts or term deposits.

Money market mutual funds may concentrate on domestic markets or

diversify into foreign money markets. Foreign money market mutual funds

also provide investors with the potential of currency appreciation. Investors

usually purchase money market mutual funds at a fixed net asset value,

usually at $10 a unit. Performance is measured on the average annual yield

rather than compound rates of return.

With money market mutual funds, income is credited daily and paid monthly

at rates that are competitive with other short-term investments.

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Fixed Income Mutual Funds

Fixed income mutual funds concentrate on generating current income. Most

fixed income mutual funds invest in high-quality bonds issued by

governments, provinces and corporations – either domestic or foreign.

There are two main types of fixed income mutual funds – those that invest in

long-term bonds to provide investors with regular income, and those that

actively trade the bond portfolio to provide a high total return that combines

interest and capital gains.

While fixed income mutual funds are among the most secure investments,

they do experience price fluctuations in response to interest rate movements.

Interest income is paid either monthly or quarterly, and capital gains are paid

annually.

Dividend Mutual Funds

Dividend mutual funds invest in high-yielding, dividend-paying preferred

and common shares. These funds are attractive to investors who seek a

steady stream of income and who want to take advantage of the dividend tax

credit for Canadian companies to increase their after-tax return. Dividend

mutual funds have minimal capital gains potential.

Growth/Equity Mutual Funds

Equity mutual funds, often called growth funds, provide investors with a

good hedge against inflation. Equity mutual funds invest mainly in common

stocks. The primary investment objective is growth of capital, but the

investment style often differs from fund to fund.

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

primarily in established, "blue chip" companies. A fund with a more

aggressive strategy might focus on smaller capitalized companies or junior

companies expected to grow quickly. Some equity mutual funds combine

both strategies.

There are also equity mutual funds that specialize in a particular industry

sector, geographic region or country. Investors who wish to invest in a

particular country can purchase a mutual fund that focuses primarily on that

country. For investors who want broader diversification outside Canada,

mutual funds that focus on global markets or a specific region (such as the

Far East or Europe) may be more attractive.

Balanced Mutual Funds

Balanced mutual funds usually invest in a combination of equities, bonds

and short-term money-market instruments. Balanced mutual funds are an

ideal type of fund for investors who want long-term capital growth

combined with the security of interest income.

As opportunities arise or conditions change, balanced mutual fund managers

adjust the weighting of assets in the mutual fund to help maximize

performance.

Index Funds

These mutual funds generally mirror the performance of a particular index,

such as the NASDAQ, TSX, or S&P/TSX 60. These are generally

considered to be "passively managed" funds because there is no active

selection of the securities held within the fund. Because of the low volume

of trading activity and the lack of active securities analysis and selection, the

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management expense ratios (MERs) of index funds are generally lower than

other funds.

Labour-Sponsored Investment Funds

Labour-Sponsored Investment Funds (LSIFs) may also be known as Labour-

Sponsored Venture Capital Corporations (LSVCCs). They typically invest in

small, private firms that are not listed on the public markets. LSIFs also offer

other benefits, such as tax credits. Investments in LSIFs are not suitable for

all investors – LSIFs are considered to be relatively high-risk investments,

and must be held for a minimum of eight years to avoid repaying the tax

credits.

Closed End Mutual Funds

In addition to open-end mutual funds, there are also closed-end mutual funds

which invest in a portfolio of securities but have only a fixed number of

shares (or units) available for purchase.

The shares of closed-end funds are bought and sold on the various stock

exchanges. The market value of closed-end shares is not directly tied to the

value of the underlying assets in the mutual fund portfolio, as is the case

with open-ended funds.

The fund is open for subscription only during a specified period.

Investors can invest in the scheme at the time of the initial public issue and

thereafter they can buy or sell the units of the scheme on the stock

exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to

the Mutual Fund through periodic repurchase at NAV related prices. SEBI

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

the investor.

Open-ended Funds

An open-end fund is one that is available for subscription all through

the year. These do not have a fixed maturity. Investors can conveniently buy

and sell units at Net Asset Value ("NAV") related prices. The key feature of

open-end schemes is liquidity.

Interval Funds

Interval funds combine the features of open-ended and close-ended

schemes. They are open for sale or redemption during pre-determined

intervals at NAV related prices.

By Investment Objective

Income Funds

The aim of income funds is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such as

bonds, corporate debentures and Government securities. Income Funds are

ideal for capital stability and regular income.

Load Funds

A Load Fund is one that charges a commission for entry or exit. That

is, each time you buy or sell units in the fund, a commission will be payable.

Typically entry and exit loads range from 1% to 2%. It could be worth

paying the load, if the fund has a good performance history.

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No-Load Funds

A No-Load Fund is one that does not charge a commission for entry

or exit. That is, no commission is payable on purchase or sale of units in the

fund. The advantage of a no load fund is that the entire corpus is put to

work.

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CHAPTER3

MUTUAL FUND: POPULARITY,RISK,AND

TERMINOLOGIES

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

funds. In this first installment, we're going to discuss the popularity of

mutual funds, their risks, and some of the terminology an investor will

encounter.

GROWING POPULARITY OF MUTUAL FUNDS:

The prospects of low interest rates on Certificates of Deposits and money

market funds have caused investors to seek the higher returns on investment

traditionally offered by the stock market. Unfortunately, picking individual

stocks is a complex matter, and not very appealing to a lot of "beginner

investors."

Fortunately, mutual funds provide such

investors with several benefits, especially if

they are cautious. They also offer the

opportunity to create a bundle or portfolio of

stocks, which helps to explain the popularity

of these investments. In fact, according to

the Investment Company Institute, the mutual

fund market consisted of $30.8 trillion in

assets under management worldwide (Q1,

2014).

Additional Resources

Buying Mutual Funds Part II

Buying Mutual Funds Part III

Buying Mutual Funds Part IV

Mutual Fund Rating

Mutual Fund Research

Mutual Fund Performance

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

and combined into a single new mutual fund. We know from academic

research and our own experience that one of the most important things for

investors to get right is the overall asset mix of their portfolio. This is the

decision that generally has the greatest impact on both risk and potential

returns. Once you have decided on this asset mix, you can go out and find

mutual funds or other investments that can “fill out” your portfolio, if you

wanted to take on this process yourself. However, with thousands of mutual

funds to choose from across a multitude of management styles, asset classes,

geography and risk level, this task can be daunting for many investors. It can

also be a challenge for many investors to evaluate their holdings on a regular

basis, re-balance regularly, or track how they are doing across a collection of

what could be eight or 10 different funds. A fund of funds is designed to do

all this for you: combine a series of existing mutual funds, which together

can meet your fund’s overall investment objective - without requiring the

investor to take on the complexity of managing, tracking and re-balancing

their holdings

Mutual funds become a lot more attractive when you think of them as

“models of excellence.” Each mutual fund is, in fact, a market-tested model

consisting of an expert mix of stocks and bonds and other assets nurtured by

a dedicated management team that understands market forces and how to

take advantage of them. So when you invest in a mutual fund, you invest in a

proven investment plan designed to smooth out the natural volatility of the

marketplace. Special advisor to Scotiabank and #1 international best-selling

financial author, David Bach, believes that mutual funds have many valuable

benefits for investors, whether you’re an experienced investor or you’re just

starting out. Mutual funds provide:

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1. Instant diversification. Even if you are saving as little as $50 per month,

you can immediately enjoy a stake in an entire portfolio that could include

hundreds of different stocks and bonds. It would require much more money

to diversify to that extent outside of a mutual fund2. Professional money

management. Few of us feel equipped to analyze the countless number of

stocks and bonds that are available on the market today. A professional fund

manager knows the market. Full- time professional managers do your

research and analysis for you and manage the investments on your behalf.

3. Choice. There are lots of mutual funds to choose from to suit your

investment objectives. The way to make a choice that is right for you is to

find out what kind of investor you are. Your financial advisor can help you

determine your investment profile and the investments that best suit your

profile.

4. Efficiency. Mutual funds pool money from many investors so that each

investor can participate in a diversified portfolio of fixed income, stocks and

other equities. In addition, the cost of trading these equities is minimal when

compared with individuals making their own trades.

5. Liquidity. You can buy and sell units in most mutual funds easily. This

means if your investment profile changes or your investment goals change,

you’re able to adjust your portfolio to your investment strategy.

6. Low minimum investment requirements. You don’t need a large amount

to invest in a mutual fund. For example, you can invest in the Scotia®

Balanced Fund with as little as $500.

7. Reduced volatility. Mutual funds are expertly diversified and usually

don’t fluctuate in price as much as individual stocks or bonds. David

Bachconsiders this lack of volatility boring. But he insists boring

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investments are usually the best for smoothing out the ups and downs of

market volatility compared to stocks.

There are many types of mutual funds - balanced, money market, growth

and more – each based on achieving a specific investment goal. There are

even mutual funds made up of other mutual funds, called fund of funds, for

investors who don’t have the time to search for and evaluate individual

mutual funds.

Each of these fund collections has variations designed for different

investment profiles and goals. Probably the most important thing you can do

before choosing a fund of funds is to identify what kind of investor you are,

that is, what your comfort level is with market fluctuations and what your

investment goals are. Once you know all this, you can choose an investment

solution that fits your profile and meets your long-term investment needs. Of

course, it’s always best to ask your investment advisor to help you make that

choice

RISK OF MUTUAL FUNDS:

Everyone that invests in the stock market assumes two types of risk:

Individual Stock Risk: this is the risk that a single company underperforms

versus expectations, or experiences some kind of downturn in their outlook.

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

the investor is also exposed to market risk, or industry risk. This risk

involves macro-economic factors, and all stocks are exposed to market risk.

For example, rising interest rates make the cost of borrowing more

expensive for all companies.

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

investment dollars lowers the exposure to individual stock risk. This is one

reason mutual funds are popular with individuals that are new to investing.

TERMS OF MUTUAL FUNDS:

Choosing the right fund is going to take research. Before going to that step,

there needs to be a fundamental understanding of the terms encountered

when researching a mutual fund. Listed below are some of the more

common, and important, terms appearing on a website or in a prospectus.

12b-1 fee

The 12b-1 fees are deducted from the earnings of a mutual fund to cover

expenses associated with the sales and marketing of the fund.

Annual Report

An annual report is a document detailing performance of a mutual fund over

the last twelve months.

Annual Return

The annual return for a fund is the change in a mutual fund's net asset value

(NAV) over a 12 month period of time. The annual return takes into account

factors such as dividend payments, capital gains, and the reinvestment of

these distributions.

Beta Value

Beta values are the measure of a fund's volatility relative to the entire stock

market. The lower the beta value of a fund, the less relative risk involved

with a fund.

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Capital Gains

Capital gains are the profits an investor realizes when securities are sold.

Closed End Funds

Closed-end funds have shares traded on an exchange in the same way stocks

are traded. With closed-end funds, the price per share doesn't always equal

the net asset value of a share.

Distributions

Distributions are usually dividends and capital gains paid by mutual fund

companies directly to their shareholders.

Dividends

Dividends are one form of profits that a mutual fund distributes to its

shareholders.

Front-End Loads

A front-end load is a sales commission that an investor pays for the right to

purchase shares of a mutual fund.

Fund Advisor

The person or entity responsible for making the actual mutual fund

investment decisions is called a fund advisor. This can also be an

organization hired by the mutual fund to provide advice on the fund's

investments and asset management approach.

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Management Fees

The fees paid to individuals responsible for managing the mutual fund are

called management fees.

Net Asset Value

The net asset value, or NAV, of a mutual fund is the value of each share of a

fund's investment. Net asset value is sometimes referred to simply as the

share price.

No-Load Mutual Funds

Mutual funds that are sold without a sales commission are known as no-load

mutual funds.

Open-End Fund

An open-end fund is one that permits the ongoing purchase, and redemption,

of shares in that fund. Most mutual funds are open-end funds.

Prospectus

A prospectus is a legal document disclosing information the Securities and

Exchange Commission believes investors need in order to make an informed

purchase decision for a mutual fund.

Risk

Risk is simply the chance an investor takes that an undesired outcome will

result. When investing in mutual funds, risk should be balanced with

reward. This relationship is sometimes referred to as an individual's risk

tolerance.

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S&P 500 Index

The S&P 500 Index is a composite of 500 large companies, deemed to be

representative of the overall stock market and economic conditions. Most

mutual funds are judged in terms of how frequently they are able to "beat"

the S&P 500 Index. In other words, can the mutual fund's management team

outperform the stock market?

Specialty Funds

The growing popularity of mutual funds has resulted in a sharp rise in the

number of specialty funds. A specialty mutual fund is a fund that invests in

one specific sector of the economy or industry.

Total Return

The total return for a mutual fund is the calculated return on an investment

that includes the reinvestment of all distributions.

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CHAPTER4

ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund

association in India was generated to function as a non-profit organization.

Association of Mutual Funds in India (AMFI) was incorporated on 22nd

August, 1995.

Association of Mutual Funds India has brought down the Indian Mutual

Fund Industry to a professional and healthy market with ethical lines

enhancing and maintaining standards. It follows the principle of both

protecting and promoting the interests of mutual funds as well as their unit

holders.

THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN

INDIA

The AMFI works with 30 registered AMCs of the country. It has certain

defined objectives which juxtaposes the guidelines of its Board of Directors.

The Objectives Are As Follows:-

This mutual fund association of India maintains a high professional

and ethical standard in all areas of operation of the industry. It also

recommends and promotes the top class business practices and code of

conduct which is followed by members and related people engaged in the

activities of mutual fund and asset management. The agencies who are by

any means connected or involved in the field of capital markets and financial

services also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines

in the mutual fund industry. AMFI does represent the Government of India,

the Reserve Bank of India and other related bodies on matters relating to the

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Mutual Fund Industry. It develops a team of well qualified and trained Agent

distributors. It implements a programme of training and certification for all

intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awareness programme for investors in

order to promote proper understanding of the concept and working of mutual

funds. At last but not the least association of mutual fund of India also

disseminate information on Mutual Fund Industry and undertakes studies

and research either directly or in association with other bodies.

THE SPONSOR OF ASSOCIATION OF MUTUAL FUNDS IN INDIA

Bank Sponsored

SBI Fund Management Ltd.

BOB Asset Management Co. Ltd.

Canbank Investment Management Services Ltd.

UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd.

JeevanBimaSahayog Asset Management Co. Ltd

PRIVATE SECTOR.

Indian:-

BenchMark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.

Credit Capital Asset Management Co. Ltd.

Escorts Asset Management Ltd.

JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.

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Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.

Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:-

Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Fidelity Fund Management Private Limited

Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

THE THREE BASIC FEATURES OF MUTUAL FUNDS

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

management or brokerage fees, fund expenses are generally passed

back to the investors.

B. Investors exercise no control over what securities the fund buys or

sells.

C. The buying and selling of securities within the mutual fund portfolio

generates capital gains and losses which are passed back to investors

even if they have not sold any of their mutual fund shares.

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CHAPTER 5

PROCEDURE OF INVESTMENT IN MUTUAL

FUND

Steps One - Identify Your Investment Needs:-

Your financial goals will vary, based on your age, lifestyle, financial

independence, family commitments, and level of income and expenses

among many other factors. Therefore, the first step is to assess your needs.

You can begin by defining your investment objectives and needs which

could be regular income, buying a home or finance a wedding or educate

your children or a combination of all these needs, the quantum of risk you

are willing to take and your cash flow requirements.

Step Two-Choose The Right Mutual Fund:-

The important thing is to choose the right mutual fund scheme which

suits your requirements. The offer document of the scheme tells you its

objectives and provides supplementary details like the track record of other

schemes managed by the same Fund Manager. Some factors to evaluate

before choosing a particular Mutual Fund are the track record of the

performance of the fund over the last few years in relation to the appropriate

yardstick and similar funds in the same category. Other factors could be the

portfolio allocation, the dividend yield and the degree of transparency as

reflected in the frequency and quality of their communications for selecting

the right scheme as per your specific requirements.

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Step Three:-

Investing in just one Mutual Fund scheme may not meet all your

investment needs. You may consider investing in a combination of schemes

to achieve your specific goals.

Step Four -Invest regularly:-

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

every month. By investing a fixed sum each month, you buy fewer units

when the price is higher and more units when the price is low, thus bringing

down your average cost per unit. This is called rupee cost averaging and is a

disciplined investment strategy followed by investors all over the world.

You can also avail the systematic investment plan facility offered by many

open end funds.

Step Five- Start Early:-

It is desirable to start investing early and stick to a regular investment

plan. If you start now, you will make more than if you wait and invest later.

The power of compounding lets you earn income on income and your

money multiplies at a compounded rate of return.

Step Six -The Final Step:-

All you need to do now is to click for online application forms of

various mutual fund schemes and start investing. You may reap the rewards

in the years to come. Mutual Funds are suitable for every kind of investor -

whether starting a career or retiring, conservative or risk taking, growth

oriented or income seeking.

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CHAPTER 6:

ADVANTAGES OF MUTUAL FUND

Professional Management

The idea behind a mutual fund is that individual investors generally

lack the time, the inclination or the skills to manage their own investment.

Thus mutual funds hire professional managers to manage the investments for

the benefit of their investors in return for a management fee.

The organization that manages the investment is the Asset

Management Company (AMC). Employees of the AMC who perform this

role of managing investments are the fund managers.

Diversification

The best mutual funds design their portfolios so individual

investments will react differently to the same economic conditions. For

example, economic conditions like a rise in interest rates may cause certain

securities in a diversified portfolio to decrease in value. Other securities in

the portfolio will respond to the same economic conditions by increasing in

value. When a portfolio is balanced in this way, the value of the overall

Portfolio should gradually increase over time, even if some securities lose

value.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid

many problems such as bad deliveries, delayed payments and follow up with

brokers and companies. Mutual Funds save your time and make investing

easy and convenient

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Low cost

Mutual fund expenses are often no more than 1.5 percent of your

investment. Expenses for Index Funds are less than that, because index funds

are not actively managed. Instead, they automatically buy stock in

companies that are listed on a specific index.

A mutual fund can, and typically does have several schemes to cater

to different investors preferences. The individual could choose to hire a

professional manager to manage his money as per his investment and risk

preferences. Such personal treatment often referred to as Portfolio

Management Scheme (PMS).

Liquidity

Open-end schemes offer liquidity through on-going sale and re-purchase

facility. Thus, the investor does not have to worry about finding a buyer for

his investment –a risk normally associated with direct investment in the

securities market.

Transparency

You get regular information on the value of your investment in

addition to disclosure on the specific investments made by your scheme, the

proportion invested in each class of assets and the fund manager's

investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular withdrawal

plans and dividend reinvestment plans, you can systematically invest or

withdraw funds according to your needs and convenience.

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Affordability

Investors individually may lack sufficient funds to invest in high-

grade stocks. A mutual fund because of its large corpus allows even a small

investor to take the benefit of its investment strategy.

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CHAPTER 7:

LIMITATONS OF MUTUAL FUNDS

No Guarantees

No investment is risk free. If the entire stock market declines in value,

the value of mutual fund shares will go down as well, no matter how

balanced the portfolio. Investors encounter fewer risks when they invest in

mutual funds than when they buy and sell stocks on their own. However,

anyone who invests through a mutual fund runs the risk of losing money.

Fees and commission

All funds charge administrative fees to cover their day-to-day

expenses. Some funds also charge sales commissions or "loads" to

compensate brokers, financial consultants, or financial planners. Even if you

don't use a broker or other financial adviser, you will pay a sales commission

if you buy shares in a Load Fund.

Taxes

During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios. If your

fund makes a profit on its sales, you will pay taxes on the income you

receive, even if you reinvest the money you made.

Management risk

When you invest in a mutual fund, you depend on the fund's manager

to make the right decisions regarding the fund's portfolio. If the manager

does not perform as well as you had hoped, you might not make as much

money on your investment as you expected.

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CHAPTER 8:

PARTIES INVOLVED IN MUTUAL FUND DEALINGS

INVESTORS

Investors are the people who actually invest their money into the

market. Every investor, given his financial position and personal disposition,

has a certain inclination to take risk. The hypothesis is that by taking an

incremental risk, it would be possible for the investor to earn an incremental

return.

Mutual Fund is a kind of solution for investors who lack the time, the

inclination or the skills to actively manage their investment risk in individual

securities. Investing through a mutual fund would make economic sense for

an investor, if he fetches a return that is higher than what he would otherwise

have earned by investing directly

TRUSTEES

Trustees are the people within a mutual fund organization who are

responsible for ensuring that investors’ interests in a scheme are properly

taken care of. In return for their services, they are paid trustee fees, which

are normally charged to the scheme.

ASSET MANAGEMENT COMPANY

AMCs manage the investment portfolios of schemes. An AMC’s

income comes from the management fees it charges the schemes it manages.

The management fee is calculated as a percentage of net assets managed. An

AMC has naturally to employ people and bear all the establishment costs

that are related to its activity out of its management fee earned.

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CHAPTER 9 :

FREQUENTLY USED TERMS

NET ASSET VALUE (NAV)

The net asset value of the fund is the cumulative market value of the

assets fund net of its liabilities. In other words, if the fund is dissolved or

liquidated, by selling off all the assets in the fund, this is the amount that the

shareholders would collectively own. This gives rise to the concept of net

asset value per unit, which is the value, represented by the ownership of one

unit in the fund. It is calculated simply by dividing the net asset value of the

fund by the number of units. However, most people refer loosely to the NAV

per unit as NAV, ignoring the "per unit". We also abide by the same

convention.

SALE PRICE

The price you pay when you invest in a scheme. Also called “Offer

Price”. It may include a sales load.

REPURCHASE PRICE

The price at which a close-ended scheme repurchases its units and it

may include a back-end load. This is also called “Bid Price”.

REDEMPTION PRICE

The price at which a close-ended scheme repurchases its units and it

may include a back-end load. This is also called “Bid Price”.

SALES LOAD

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An AMC may decide that investors should pay more than NAV for

their investment in each unit of the scheme. This incremental amount is also

called, “Front-end” load or “Entry load”. Schemes that do not charge a load

are called ‘No Load’ schemes. Therefore, the amount that needs to be paid

is,

Sale Price = NAV + Entry Load

REPURCHASE OR ‘BACK-END’ LOAD

An AMC may decide that sellers would recover less than NAV for the

units they sell in a scheme. This shortfall, borne by existing investors, is

called the “Exit load” or “Back-end load”. Thus the amount will be,

Sale Price = NAV – Exit Load

SYSTEMATIC INVESTMENT PLAN (SIP)

SIP refers to the practice of investing a constant amount

regularly, generally every month. When the market goes up, then the money

invested in that period gets translated into a fewer number of units for the

investor. If the market goes down, then the same money invested gets

translated into more units. This investment style is also called “rupee cost

averaging”.

SYSTEMATIC WITHDRAWAL PLAN (SWP)

Under SWP, the investor would withdraw constant amount

periodically. The investor can temper gains and losses, though it does not

prevent losses.

SYSTEMATIC TRANSFER PLAN (STP)

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Investors’ exposure to different types of securities, whether debt or

equity, should flow from their risk profile or risk appetite which is a function

of their financial position and personal disposition. Through STP between

plans, it is possible to maintain a target mix of debt and equity in one’s

portfolio.

EQUITY LINKED SAVING SCHEMES (ELSS)

Equity-Linked Savings Schemes are by far the most exciting of all the

tax-saving schemes. Nomination facility is available with ELSS. The units

can be easily transferred by filling out a transfer form.

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CHAPTER 10

PLANS OF MUTUAL FUNDS

There are two types of plans. Those are:

Growth Plan

Dividend plan

Growth plan

A mutual fund whose aim is to achieve capital appreciation by

investing in growth stocks. They focus on companies that are experiencing

significant earnings or revenue growth, rather than companies that pay out

dividends. The hope is that these rapidly growing companies will continue to

increase in value, thereby allowing the fund to reap the benefits of large

capital gains. In general, growth funds are more volatile than other types of

funds, rising more than other funds in bull markets and falling more in bear

markets.

Dividend Plan

Again dividend plan is sub divided into two parts:

Dividend reinvestment plan (DRIP)

An investment plan offered by some corporations enabling

shareholders to automatically reinvest cash dividends and capital gains

distributions, thereby accumulating more stock without paying brokerage

commissions.

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Many DRIPs also allow the investment of additional cash from the

shareholder, known as an optional cash purchase. Unlike with a Direct Stock

Purchase Plan, with a DRIP the investor must purchase the first share in the

company through a brokerage. After that, the company will take whatever

dividends it would normally send as a check and instead it will reinvest them

to purchase more shares in the company for you, all without charging a

commission. The only drawback is that the investor has no control over

when his/her money from the dividends is used to purchase new stock in the

company, which means he/she might be buying new shares at sub-optimal

times. Also called Dividend Reinvestment Programs.

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

be completed before the record date. If an investor does not own the stock

before the ex-dividend date, he or she will be ineligible for the dividend

payout. Further, for all pending transactions that have not been completed by

the ex-dividend date, the exchanges automatically reduce the price of the

stock by the amount of the dividend. This is done because a dividend payout

automatically reduces the value of the company (it comes from the

company's cash reserves), and the investor would have to absorb that

reduction in value (because neither the buyer nor the seller are eligible for

the dividend).

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CHAPTER 11

FUTURE OF MUTUAL FUNDS IN INDIA

By December 2004, Indian mutual fund industry reached Rs

1,50,537crore. It is estimated that by 2010 March-end, the total assets of all

scheduled commercial banks should be Rs 40, 90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of

the decade. In the last 5 years we have seen annual growth rate of 9%.

According to the current growth rate, by year 2010, mutual fund assets will

be double.

Let us discuss with the following table:

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

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

04 Sep-04 4-Dec

Deposits 605410 851593 989141 1131188 1280853 - 1567251 1622579

Change in

% over last

yr

15 14 13 12 - 18 3

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Mutual Fund AUM’s Growth

Month/Year Mar-

98

Mar-

00

Mar-

01

Mar-

02

Mar-

03 Mar-04 Sep-04 4-Dec

MF AUM's 68984 93717 83131 94017 75306 137626 151141 149300

Change in %

over last yr 26 13 12 25 45 9 1

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Some facts for the growth of mutual funds in India :

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets

like Fidelity Investments, US based, with over US$1trillion assets under

management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing

these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having

more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds

are concentrating on the 'A' class cities. Soon they will find scope in the

growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry

with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Here's the standard suggestion that goes with the above analysis:

Determine one’s risk level. Invest in a diversified basket of securities that

matches that risk level--some split of stocks and short-term bonds. Either

ignore the long-run historical data, or bet against it. In theory it's possible to

increase one’s return by preferring those stocks and markets that have been

falling in value or doing worse than average, the opposite of the

conventional advice. But realize when one does this that this means picking

out companies and markets that are in trouble--one gets the higher return

only by increasing the risk you take.

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CHPTER 12

RECOMMENDATION

As per my observation here I recommend unit holder in a Mutual Fund

schemes that:

1. They should receive unit certificates or statements of accounts confirming

the title within 6 weeks from the date of closure of the subscription or within

6 weeks from the date of request for a unit certificate is received by the

Mutual Fund.

2. They should receive information about the investment policies,

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

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

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

of redemption or repurchase.

Vote in accordance with the Regulations to:-

4. Approve or disapprove any change in the fundamental investment policies

of the scheme, which are likely to modify the scheme or affect the interest of

the unit holder. The dissenting unit holder has a right to redeem the

investment.

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

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

document.

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6. Mutual fund investment is subject to market risk investors should read all

the offer related documents carefully before investment.

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CHAPTER 13

CONCLUSION

Mutual fund brings together a group of people and invests their

money in stocks, bonds, and other securities.

The advantages of mutual are professional management,

diversification, economies of scale, simplicity and liquidity.

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

possible tax consequences, and the inability of management to

guarantee a superior return.

There are many, many types of mutual funds. You can classify funds

based on asset class, investing strategy, region, etc.

Mutual funds have lots of costs.

Costs can be broken down into ongoing fees (represented by

the expense ratio) and transaction fees (loads).

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

Mutual funds are easy to buy and sell. You can either buy them

directly from the fund company or through a third party.

Mutual fund ads can be very deceiving.

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CHAPTER 14

BIBLIOGRAPHY

MUTUAL FUNDS IN INDIA – D.V.INGLE

WEBLIOGRAPHY

www.amfiindia.com

www.bseindia.com

www.mutualfundsindia.com

www.sebi.gov.in