Please tell me about mutual funds?

MUTUAL FUND AGLOBALLYPROVENINVESTMENTAVENUE

Worldwide, Mutual Fund or Unit Trust as it is referred to in some parts of
the world, has a long and.successful history. The popularity of Mutual
Funds has increased manifold in developed financial markets, like the
United States. As at the end of March 2006, in the US alone there
were 8,002 mutual funds with total assets of over US$ 9.36 trillion
(Rs.427Iakh crores).
In India, the mutual fund industry started with the setting up of the Unit
Trust of India in 1964. Public sector banks and financial institutions
were allowed to establish mutual funds in 1987. Since 1993, private
sector andforeign institutions were permitted to set up mutualfunds.
In February 2003, following the repeal of the Unit Trust of India Act 1963
the erstwhile UTI was bifurcated into two separate entities viz.
The Specified Undertaking of the Unit Trust of India, representing
broadly, the assets of US 64 scheme, assured returns and certain other
schemes and UTI Mutual Fund conforming to SEBI Mutual Fund
Regulations.
As at the end of March 2006, there were 29 mutual funds, which
managed assets of Rs. 2,31,862 crores ( US $ 52 Billion) under 592
schemes.
This fast growing industry is regulated by the Securities and
Exchange Boardof India(SEBI).
Growth of Assets (Rs. In Crores)

What you should
expect from a Mutual
Fund depends on
what stage of life you
are in

WHATISA MUTUALFUND?
A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial
goal. Anybody with an investible surplus of as little
as a few thousand rupees can invest in Mutual Funds.
These investors buy units of a particular Mutual Fund
scheme that has a defined investment objective and
strategy.
The money thus collected is then invested by the
fund manager in different types of securities. These
could range from shares to debentures to money
market instruments, depending upon the scheme's
stated objectives. The income earned through these
investments and the capital appreciation realised by
the scheme 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.

TYPES OF MUTUAL FUND SCHEMES
There are a wide variety of Mutual Fund schemes
that cater to your needs, whatever your age, financial
position, risk tolerance and return expectations.
Whether as the foundation of your investment
programme or as a supplement, Mutual Fund
schemes can help you meet your financial goals.
(AI By Structure

Open-Ended Schemes

These do not have a fixed maturity. You deal directly
with the Mutual Fund for your investments and
redemptions. The key feature is liquidity. You can
conveniently buy and sell your units at Net Asset
Value ("NAV") related prices.

Close-Ended Schemes

Schemes that have a stipulated maturity period
(ranging from 2 to 15 years) are called close-ended
schemes. You can invest directly in the scheme at
the time of the initial issue and thereafter you can
buy or sell the units of the scheme on the stock
exchanges where they are listed. The market price
at the stock exchange could vary from the scheme's
NAV on account of demand and supply situation,
unitholders' expectations and other market factors.
One of the characteristics of the close-ended
schemes is that they are generally traded at a
discount to NAV; but closer to maturity, the discount
narrows.
Some close-ended schemes give you an additional
option of selling your units directly to the Mutual
Fund through periodic repurchase at NAV related
prices. SEBI Regulations ensure that at least one of
the two exit routes are provided to the investor.
Interval Schemes
These combine the features of open-ended and
close-ended schemes. They may be traded on the
stock exchange or may be open for sale or
redemption during predetermined intervals at NAV
related prices.
4

Starting out in life?
Invest in funds that will give
you lump sum returns after
a few years.
(B) By Investment Objective

Growth Schemes

Aim to provide capital appreciation over the medium
to long term. These schemes normally invest a
majority of their funds in equities and are willing to
bear short-term decline in value for possible future
appreciation.
These schemes are not for investors seeking regular
income or needing their money back in the shortterm.
..IdeInavl efosrt:ors in their prime earning years. Investors seeking growth over the long-term.
Income Schemes
Aim to provide regular and steady income to
investors. These schemes generally invest in fixed
income securities such as bonds and corporate
debentures.
Capital appreciation in such schemes may be limited.
Ideal for: .Retired people and others with a need for capital
.stability and regular income. Investors who need some income to supplement
their earnings.

Balanced Schemes

Aim to provide both growth and income by
periodically distributing a part of the income and
capital gains they earn. They invest in both shares
and fixed income securities in the proportion
indicated in their offer documents. In a rising stock
market. the NAV of these schemes may not normally
keep pace, or fall equally when the market falls.
Ideal for:
. Investors looking for a combination of income and
moderate growth.
5

Money Market/Liquid Schemes

Aim to provide easy liquidity, preservation of capital
and moderate income. These schemes generally
invest in safer, short-term instruments such as
treasury bills, certificates of deposit, commercial
paper and interbank call money.
Returns on these schemes may fluctuate, depending
upon the interest rates prevailing in the market.

Ideal for: .Corporates and individual investors as a means
to park their surplus funds for short periods or
awaiting a more favourable investment alternative.
Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors
under tax laws as prescribed from time to time. This
is made possible because the Government offers
tax incentives for investment in specified avenues.
For example, Equity Linked Savings Schemes (ELSS)
and Pension Schemes.
The details of such tax saving schemes are provided
in the relevant offer documents.
Ideal for:
. Investors seeking tax rebates.

Special Schemes

This category includes index schemes that attempt
to replicate the performance of a particular index
such as the SSE Sensex or the NSE 50, or industry
specific schemes (which invest in specific industries)
or sectoral schemes (which invest exclusively in
segments such as 'IXGroup shares or initial public
offerings).
Index fund schemes are ideal for investors who are
satisfied with a return approximately equal to that
of an index.
6

Married?
Invest in funds that will give
you regular income to
supplement your salary to
match your growing needs.
Sectoral fund schemes are ideal for investors who
have already decided to invest in a particular sector
or segment.
Keep in mind that anyone scheme may not meet all
your requirements for all time. You need to place your
money judiciously in different schemes to be able to
get the combination of growth, income and stability
that is right for you.
Remember, as always, higher the return you seek
higher the risk you should be prepared to take.
A few frequently used terms are explained here
below:
Net Asset Value ("NAV")

Net 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.
Sale Price
Is the price you pay when you invest in a scheme.
Also called Offer Price. It may include a sales load.
Repurchase Price
Is 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
Is the price at which open-ended schemes
repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are NAV
related.
Sales Load
Is a charge collected by a scheme when it sells the
units. Also called, 'Front-end' load. Schemes that do
not charge a load are called 'No Load' schemes.
Repurchase or 'Back-end' Load
Is achargecollected by ascheme when it buysback
the units from the unitholders.
7

WHY SHOULDYOUINVESTIN MUTUAL FUNDS?
The advantages of investing in a Mutual Fund are:
1.Professional Management:You avail of the
services of experienced and skilled professionals
who are backed by a dedicated investment research
team which analyses the performance and prospects
of companies and selects suitable investments to
achieve the objectives of the scheme.
2.Diversification: Mutual Funds invest in a number
of companies across a broad cross-section of
industries and sectors. This diversification reduces
the risk because seldom do all stocks decline at the
same time and in the same proportion. You achieve
this diversification through a Mutual Fund with far
less money than you can do on your own.
3.ConvenientAdministration: Investing 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.
4.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.
5.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.
6.Liquidity: In open-ended schemes, you can get
your money back promptly at net asset value related
prices from the Mutual Fund itself. With close-ended
schemes, you can sell your units on a stock exchange
at the prevailing market price or avail of the facility
of dir~ct repurchase at NAV related prices which
some close-ended and interval schemes offer you
periodically. '
7.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.
8
Parenthood?
Invest in funds that give
you growth now, and
regular income later in line
with your children's needs.
8.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.
9.Choice of Schemes: Mutual Funds offer a family
of schemes to suit your varying needs over a lifetime.
10.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.
UNDERSTANDINGAND 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 markets and the
economy; generally, however, longer the term, lesser
the risk; companies may default in payment of
interest/ principal on their debentures/bonds/
deposits; the rate of interest on an investment may
fall short of the rate of inflation reducing the
purchasing power.
While risk cannot be eliminated, skillful management
can minimise risk. Mutual Funds help 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
minimises risk and maximises returns.
HOWTO INVEST IN MUTUAL FUNDS.
Step One - Identify your investment needs.
Your financial goals will vary, based on your age,
lifestyle, financial independence, family
commitments, level of income and expenses among
many other factors. Therefore, the first step is to
assess your needs. Begin by asking yourself these
questions:
l.What are my investment objectives and needs?
Probable Answers: I need regular income or need to
buy a home or finance a wedding or educate my
9
children or a combination of all these needs.
2.How much risk am I willing to take?
Probable Answers: I can only take a minimum
amount of risk or Iam willing to accept the fact that
my investment value may fluctuate or that there may
be a short-term loss in order to achieve a long-term
potential gain.
3. What are my cash flow requirements?
Probable Answers: I need a regular cash flow or I
need a lump sum amount to meet a specific need
after a certain period or Idon't require a current cash
flow but I want to build my assets for the future.
By going through such an exercise, you will know
what you want out of your investment and can set
the foundation for a sound Mutual Fund investment
strategy.
Step Two - Choose the right Mutual Fund.
Once you have a clear strategy in mind, you now
have to choose which Mutual Fund and scheme you
want to invest in.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 performance over the last few
years in relation to the appropriate yardstick and
similar funds in the same category.
.how well the Mutual Fund is organised to provide
efficient, prompt and personalised service.
.degree of transparency as reflected in frequency
and quality of their communications.
Step Three - Select the ideal mix of Schemes.
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.
The following charts could prove useful in selecting
a combination of schemes that satisfy your needs.
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Children's higher aducation?
Invest in funds that will give
you lump sum returns when
your children enter co liege.
AGGRESSIVEPLAN
60-70%
T.his plan may suit: Investors in their prime earning years and willing
to take more risk.
.Investors seeking growth over a long-term
D GROWTH SCHEMES L...~J INCOME SCHEMES
D BALANCED SCHEMES D MONEY MARKET SCHEMES
AGGRESSIVE PLAN
20%
40-50%
30-40%
This plan may suit:
. Investors seeking income and moderate growth.
.Investors looking for growth and stability with
moderate risk.
D GROWTH SCHEMES D INCOME SCHEMES
D BALANCEDSCHEMES I~- _I MONEY MARKETSCHEMES
11
CONSERVATIVEPLAN
50-60%
20-30%
10% .
This plan may suit:
-Retired and other investors who need to preserve
capital and earn regular income.
~'j1GROWTHSCHEMES D INCOMESCHEMES
D BALANCEDSCHEMES t:J MONEYMARKETSCHEMES
Step Four- Invest regularly
For most of US,the approach that works best 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. With many
open-ended schemes offering systematic
investment plans, this regular investing habit is made
easy for you.
Step Five - Keep your taxes in mind
As per the current tax laws, Dividend/Income
Distribution made by mutual funds is exempt from
Income Tax in the hands of investor. Further, there
are other benefits available for investment in Mutual
Funds under the provisions of the prevailing tax
laws. You may therefore consult your tax advisor or
Chartered Accountant for specific advice to achieve
maximum tax efficiency by investing in Mutual Funds
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Ready to retire?
Invest in funds that will
supplement your pension.
Mutual Funds are truly
investments for a lifetime.
Step Six- 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 Seven -The final step
All you need to do now is to get in touch with a
Mutual Fund or your agent/broker and start investing.
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.
YOUR RIGHTS AS A MUTUAL FUND UNITHOLDER
As a unitholder in a Mutual Fund scheme coming
under the SEBI (Mutual Funds) Regulations, you are
entitled to:
1.Receive unit certificates or statements of accounts
confirming your title within 30 days from the date of
closure of the subscription under open-end schemes
or within 6 weeks from the date your request for a
unit certificate is received by the Mutual Fund;
2. Receive information about the investment policies,
investment objectives, financial position and general
affairs of the scheme;
3. Receive dividend within 30 days of their declaration
and receive the redemption or repurchase proceeds
within 10 days from the date of redemption or
repurchase;
4.Vote in accordance with the Regulations to:
a. change the Asset Management Company;
b. wind up the schemes.
5. To receive communication from the Trustee about
change in the fundamental attributes of any scheme
or any other changes which would modify the
scheme and affect the interest of the unitholders
and to have option to exit at prevailing Net Asset
Value without any exit load in such cases.
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6. Inspect the documents of the Mutual Funds
specified in the scheme's offer document.
In addition to your rights, you can expect the
following from Mutual Funds: .To publish their NAV, in accordance with the
regulations: daily in case of open-ended schemes
and once a week, in case of close-ended schemes;
. To disclose your schemes' entire portfolio twice a
year, unaudited financial results half yearly and
audited annual accounts once a year. In addition
many mutual funds send out newsletters periodically.
To adhere to a Code of Ethics which require that
investment decisions are taken in the best interests
of the unitholders.
This guide is available with all members of AMFI or can be
obtained directly from Association of Mutual Funds in India
at: 1218, 'a'Wing, DalamalTowers, Free Press Journal Marg,
Nariman Point, Mumbai - 400 021 E-mail:
amfi@bom5.vsnl.net.in. website: http:/wwwamfiindia.com
Produced by AMFI in association with Price Waterhouse LLP/
FIRE Project funded by USAID and Ogilvy & Mather. Financial
& Business Communications.
1st Edition 1997
2nd Edition 2001
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TEN ADVANTAGESOF INVESTING IN MUTUAL FUNDS
~ Professional Management
~ Diversification
~ Convenient Administration
~ Return Potential
~ Low Costs
~ Liquidity
~ Transparency
~ Flexibility
~ Choice of Schemes
~ Well Regulated