MUTUAL FUNDS

WHAT IS A MUTUAL FUND?

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 collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the schemes stated objectives. 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.

First Phase 1963-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase-1987-1993 (Entry of Public Sector Funds) marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase-1993-2003(Entry of Private Sector Funds)

1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the SEBI Mutual Fund Regulations

REGULATIONS

Governed by SEBI (Mutual Fund) Regulation 1996 All MFs registered with it, constituted as trusts ( under Indian Trusts Act, 1882)

Bank operated MFs supervised by RBI too

AMC registered as Companies registered under Companies Act, 1956

SEBI- Very detailed guidelines for disclosures in offer document, offer period, investment guidelines etc. NAV to be declared everyday for open-ended, every week for closed ended Disclose on website, AMFI, newspapers Half-yearly results, annual reports Select Benchmark depending on scheme and compare

MUTUAL FUND OPERATION FLOW CHART

ORGANIZATION OF A MUTUAL FUND

10 REASONS TO INVEST IN MUTUAL FUNDS

Expert on your side: When you invest in a mutual fund, you buy into the experience and skills of a fund manager and an army of professional analysts Limited risk: Mutual funds are diversification in action and hence do not rely on the performance of a single entity. More for less: For the price of one blue chip stock for instance, you could get yourself a number of units across a number of companies and industries when you invest in a fund! Easy investing: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing in a monthly savings plan. Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet.

Investor protection: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests. Quick access to your money: It's good to know that should you need your money at short notice, you can usually get it in four working days. Transparency: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook. Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out costeffective brokerage transactions. Tax benefits: Over the years, tax policies on mutual funds have been favorable to investors and continue to be so.

TERMINOLOGIES DEMYSTIFIED

Asset Allocation

Diversifying investments in different assets such as stocks, bonds, real estate, cash in order to minimize risk.

Fund Manager

The individual responsible for making portfolio decision for a mutual fund, in line with funds objective.

Fund Offer Document

Document with investment objectives, risk factors, expenses summary, how to invest etc.

Dividend Profits given to the investor from time to time. Growth Profits ploughed back into scheme. This causes the NAV to rise.

TERMINOLOGIES CONTD

NAV Market value of assets of scheme minus its liabilities. Per unit NAV = Net Asset Value No. of Units Outstanding on Valuation date

Entry Load/Front-End Load (1%-2%) The commission charged at the time of buying the fund. To cover costs for selling, processing Exit Load/Back- End Load (0.25-2.00%) The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage withdrawals May reduce to zero as holding period increases. Sale Price/ Offer Price Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than NAV) Re-Purchase Price/ Bid Price Price at which close-ended scheme repurchases its units Redemption Price Price at which open-ended scheme

RISK FACTORS IN MUTUAL FUNDS

TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Investment Objective Special Schemes

Structure Open Ended Funds Close Ended Funds

Growth Funds Income Funds

Industry Specific Schemes Index Schemes Sectoral Schemes

Interval Funds

Balanced Funds Money Market Funds

TYPES OF MUTUAL FUND SCHEMES

By Structure

Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.

By Investment Objective

Equity (Growth) only in Stocks Long Term (3 years or more) Debt (Income) only in Fixed Income Securities (3-10 months) Liquid/Money Market (including gilt) Short-term Money Market (Govt.) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)

Other Schemes

Tax Saving Schemes Special Schemes

ULIP

WHAT IS A SYSTEMATIC INVESTMENT PLAN?

An investment plan to invest a fixed amount regularly at a specified frequency say, monthly or quarterly.

SIP is a simple method of investing used across the world as a means to creating wealth

Benefits of SIP
Regular
Investments happen every month unfailingly

Power Of Compounding Rupee Cost Averaging Forced saving

Helps you overpower the temptation to spend fully Helps you build for the future

Automated
Completely automated process No hassles of writing cheque every month

Light on the wallet

Investment amount can be so small that you do not even feel the pinch of it being directly deducted, yet the small amount is powerfully working towards your financial security

PORTFOLIO DECISION

The right asset allocation

Age = % in debt instruments Reality= different financial position, different allocation Younger= Riskier

Selecting the right fund/s

Based on schemes investment philosophy . Long-term, appetite for risk, beat inflation.

TRAPS TO AVOID

IPO Blur

Begin with existing schemes (proven track record) and then new schemes

AMFI & SEBI

AMFI is a trade body of all the mutual funds in India. It was incorporated in August 1995 as a non-profit organization to promote and protect the interests of mutual funds and their unit holders. Define and maintain high ethical and professional standards and enhance public awareness of mutual funds. All mutual funds in India are members of the association. AMFI works through committees and working groups. All mutual funds are required to be registered with SEBI before they launch any scheme. Asset Management Company (AMC) who manages the funds by making investments in various types of securities have to be approved by SEBI .

BUYING MUTUAL FUNDS

Contacting the Asset Management Company directly

Web Site Request for agent Locate one on AMFI site Bajaj Capital etc.

Agents/Brokers

Financial planners Insurance agents Banks

Net-Banking Phone-Banking

ATMs ICICI Direct Motilal Oswal, Indiabulls- Send agents

Online Trading Account

KEEPING TRACK
Filling

up an application form and writing out a cheque= end of the story NO! evaluate performance of your funds

Periodically

Fact sheets and Newsletters Websites Newspapers Professional advisor