A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with reputed international firms. Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future. The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that we normally associate with them. Some of the other major benefits of investing in them are: Number of available options Mutual funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, there are equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that is aimed for at the time of making investments. Money market funds offer the liquidity that is desired by big investors who wish to park surplus funds for very short-term periods. Balance Funds cater to the investors having an appetite for risk greater than the debt funds but less than the equity funds. The only pertinent

factor here is that the fund has to be selected keeping the risk profile of the investor in mind because the products listed above have different risks associated with them. So, while equity funds are a good bet for a long term, they may not find favour with corporates or High Networth Individuals (HNIs) who have short-term needs. Diversification Investments are spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because all stocks dont move in the same direction at the same time. One can achieve this diversification through a Mutual Fund with far less money than one can on his own. Professional Management Mutual Funds employ the services of skilled professionals who have years of experience to back them up. They use intensive research techniques to analyze each investment option for the potential of returns along with their risk levels to come up with the figures for performance that determine the suitability of any potential investment. Potential of Returns Returns in the mutual funds are generally better than any other option in any other avenue over a reasonable period of time. People can pick their investment horizon and stay put in the chosen fund for the duration. Equity funds can outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the portfolio. Liquidity

Fixed deposits with companies or in banks are usually not withdrawn premature because there is a penal clause attached to it. The investors can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In closed-end schemes, the units can be transacted at the prevailing market price on a stock exchange. Mutual funds also provide the facility of direct repurchase at NAV related prices. The market prices of these schemes are dependent on the NAVs of funds and may trade at more than NAV (known as Premium) or less than NAV (known as Discount) depending on the expected future trend of NAV which in turn is linked to general market conditions. Bullish market may result in schemes trading at Premium while in bearish markets the funds usually trade at Discount. This means that the money can be withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit loads for withdrawal within a period linked to

Besides these important features, mutual funds also offer several other key traits. Important among them are: Well Regulated Unlike the company fixed deposits, where there is little control with the investment being considered as unsecured debt from the legal point of view, the Mutual Fund industry is very well regulated. All investments have to be accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this case and can impose penalties on the AMCs at fault. The regulations, designed to protect the investors interests are also implemented effectively. Transparency Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. This means that the

investment strategy, outlooks of the market and scheme related details are disclosed with reasonable frequency to ensure that transparency exists in the system. This is unlike any other investment option in India where the investor knows nothing as nothing is disclosed.. In addition to this,you get regular information on the value of your investment.

Flexible, Affordable and a Low Cost affair Mutual Funds offer a relatively less expensive way to invest when compared to other avenues such as capital market operations. The fee in terms of brokerages, custodial fees and other management fees are substantially lower than other options and are directly linked to the performance of the scheme. Investment in mutual funds also offers a lot of flexibility with features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or withdrawal of funds. Even the investors, who could otherwise not enter stock markets with low investible funds, can benefit from a portfolio comprising of high-priced stocks because they are purchased from pooled funds.

Tax benefits:
equity-oriented funds (where equity is 65 percent or more) are exempt from long-term capital gains tax and DDT. All income distributed by them also stays tax free.

DISADVANTAGES OF MUTUAL FUNDS FLUCTUATING RETURNS Mutual funds are like many other investments without a guaranteed

return. Thereis always the possibility that the value of your mutual fund will depreciate. Unlike fixedincome products, such as bonds and Treasury bills, mutual f unds experience pricefluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar. DIVERSIFICATION: Although diversification is one of the keys to successful investing, many mutualfund investors tend to over diversify. The idea of diversification is to reduce the risks a s s o c i a t e d wi t h h o l d i n g a s i n g l e s e c u r i t y ; o v e r d i v e r s i f i c a t i o n ( a l s o k n o w n a s diworsification) occurs when investors acquire many funds that are highly related and so don't get the risk reducing benefits of diversification..A t t h e o t h e r e x t r e m e , j u s t b e c a u s e y o u o w n m u t u a l f u n d s d o e s n ' t m e a n y o u a r e automatically diversified. For example, a fund that invests only in a particular industry or region is still relatively risky. CASH Mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolio as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous. COSTS Mutual funds provide investors with professional management; however, it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds the fees are classified into two categories: shareholder fees and

annual fund-operating fees.The shareholder fees, in the forms of loads and redemption fees, are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. in years when the fund doesn't make money these fees only magnify losses. MISLEADING ADVERTISEMENTS The misleading advertisements of different funds can guide investors down thewrong path. Some funds may be incorrectly labeled as growth funds, while others areclassified as small-cap or income. The SEC requires funds to have at least 80% of assetsin the particular type of investment implied in their names. The remaining assets areunder the discretion solely of the fund manager.The different categories that qualify for the required 80% of the assets, however, may bevague and wide-ranging. A fund can therefore manipulate prospective investors by usingnames that are attractive and misleading. Instead of labeling itself a small cap, a fundmay be sold under the heading growth fund. Or, the "Congo High-Tech Fund" could besold with the title "International High-Tech Fund". EVALUATING FUNDS Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another?

How to invest in Mutual Fund Step 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 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.

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 Good investment option: Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.