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Chapter1

INTRODUCTION

Mutual Fund is a retail product designed to target small investors,
salaried people and others who are intimidated by the mysteries of stock
market but, nevertheless, like to reap the benefits of stock market
investing.

At the retail level, investors are unique and are a highly heterogeneous
group. Hence, their fund/scheme selection also widely differs. Investors
demand inter-temporal wealth shifting as he or she progresses through the
life cycle.

This necessitates the Asset Management Companies (AMCs) to
understand the fund/scheme selection/switching behaviour of the
investors to design suitable products to meet the changing financial needs
of the investors. With this background a survey was conducted among
350 Mutual Fund Investors in 10 Urban and Semi Urban centers to study
the factors influencing the fund/scheme selection behaviour of Retail
Investors.

This paper discusses the survey findings. It is hoped that it will have
some useful managerial implication for the AMCs in their product
designing and marketing.
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MUTUAL FUND CONCEPT :

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 then
invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and the
capital appreciation realised 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:






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History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of
Unit Trust of India, at the initiative of the Government of India and
Reserve Bank the. The history of mutual funds in India can be broadly
divided into four distinct phases
First Phase 1964-87:
Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned
under the Regulatory and administrative control of the Reserve Bank of
India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of
assets under management.
Second Phase 1987-1993 (Entry of Public Sector Funds):
1987 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 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund
(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90),
Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in
June 1989 while GIC had set up its mutual fund in December 1990.
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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):
With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice of
fund families. Also, 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.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The
industry now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry has
witnessed several mergers and acquisitions. As at the end of January
2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.
Fourth Phase since February 2003:
In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities. One is the Specified
Undertaking of the Unit Trust of India with assets under management of
Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The
Specified Undertaking of Unit Trust of India, functioning under an
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administrator and under the rules framed by Government of India and
does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB
and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in
March 2000 more than Rs.76,000 crores of assets under management and
with the setting up of a UTI Mutual Fund, conforming to the SEBI
Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth.












6



Phases of Mutual Fund in India:








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ADVANTAGES OF MUTUAL FUNDS:
The advantages of mutual funds are given below: -
Portfolio Diversification:
Mutual funds invest in a number of companies. This diversification
reduces the risk because it happens very rarely that all the stocks decline
at the same time and in the same proportion. So this is the main
advantage of mutual funds.
Professional Management:
Mutual funds provide the services of experienced and skilled
professionals, assisted by investment research team that analysis the
performance and prospects of companies and select the suitable
investments to achieve the objectives of the scheme.
Low Costs:
Mutual funds are a relatively less expensive way to invest as compare
to directly investing in a capital markets because of less amount of
brokerage and other fees.
Liquidity:
This is the main advantage of mutual fund, that is whenever an
investor needs money he can easily get redemption, which is not possible
in most of other options of investment. In open-ended schemes of mutual
fund, the investor gets the money back at net asset value and on the other
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hand in close-ended schemes the units can be sold in a stock exchange at
a prevailing market price.
Transparency:
In mutual fund, investors get full information of the value of their
investment, the proportion of money invested in each class of assets and
the fund managers investment strategy
Flexibility:
Flexibility is also the main advantage of mutual fund. Through this
investors can systematically invest or withdraw funds according to their
needs and convenience like regular investment plans, regular withdrawal
plans, dividend reinvestment plans etc.
Convenient Administration:
Investing in a mutual fund reduces paperwork and helps investors to
avoid many problems like bad deliveries, delayed payments and follow
up with brokers and companies. Mutual funds save time and make
investing easy.
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.
Well Regulated :
All mutual funds are registered with SEBI and they function with in
the provisions of strict regulations designed to protect the interest of
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investors. The operations of mutual funds are regularly monitored by
SEBI.

DISADVANTAGES OF MUTUAL FUNDS:
Mutual funds have their following drawbacks:
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 mutual fund runs the risk of losing
the money.
Fees and Commissions:
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 dont use a broker or other financial advisor, 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 you reinvest the money you made.
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Management Risk:
When you invest in mutual fund, you depend on fund manager to make
the right decisions regarding the funds 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. Of course, if you invest in index
funds, you forego management risk because these funds do not employ
managers.
















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Types of Mutual Fund

Mutual Funds can be divided into following broad categories:
1.Equity Funds invest in shares of common stocks.
2.Growth Funds invest in stocks for growth rather than current
income.
3.International/Global Funds seeks growth by investing in
securities around the world.
4.Fixed Income Funds these funds invest in corporate bonds
that have fixed rate of return.

5.Money Market Funds invest in highly liquid, virtually risk
free short term debt securities of agencies of the U.S.
govt.,banks & corporations.

6.Municipal Bond Funds generally invest in longer maturity
securities. Provide higher tax exempt income.
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7.Speciality/Sector Funds invest in securities of a specific
. industries or Sector of economy

1)Equity Fund:
These funds seek maximum growth of capital with secondary emphasis
on dividend or interest income. They invest in common stocks with a
high potential for rapid growth and capital appreciation.
Because they invest in stocks which can experience wide swings up or
down, these funds have a relatively low stability of principal. They often
invest in the stocks of small emerging growth companies and generally
provide low current income because these companies usually reinvest
their profits in their businesses and pay small dividends, if any.
Aggressive growth funds generally incur higher risks than growth funds
in an effort to secure more pronounced growth.
These funds may invest in a broad range of industries or concentrate on
one or more industry sectors. Some use borrowing, short-selling, options
and other speculative strategies to leverage their results.
2)Growth Funds:
Generally invest in stocks for growth rather than current income.
Growth funds are more likely to invest in well-established companies
where the company itself and the industry in which it operates are
thought to have good long-term growth potential.
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Growth funds provide low current income, but the investor's principal is
more stable than it would be in an aggressive growth fund. While the
growth potential may be less over the short term, many growth funds
have superior long-term performance records. They are less likely than
aggressive growth funds to invest in smaller companies which may
provide short-term substantial gains at the risk of substantial declines.
Although growth funds are more conservative than aggressive growth
funds, they are still relatively volatile. They are suitable for growth-
oriented investors but not investors who are unable to assume risk or
who are dependent on maximizing current income from their
investments.
3)International/Global Funds:
International funds seek growth through investments in companies
outside the United States. Global funds seek growth by investing in
securities around the world, including the United States. Both provide
investors with another opportunity to diversify their mutual fund
portfolio, since foreign markets do not always move in the same
direction as the U.S.
The best way to invest abroad is through mutual funds, rather than direct
investment in a foreign security. Most investors are unfamiliar with
foreign investment practices and currencies and may not have a clear
understanding of how economic or political events can affect foreign
securities. An investor in an international mutual fund doesn't have to
worry about trading practices, recordkeeping, time zones or other laws
and customs of a foreign country -- that is all handled by the fund's
money manager.
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International and global funds can invest in common stocks or bonds of
foreign firms and governments. Many international funds invest in a
particular country or region of the world.

While international and global funds offer opportunities for growth and
diversification, these types of funds do carry some additional risks over
domestic funds and should be carefully evaluated and selected according
to the investor's objectives, timeframe and risk profile. Because most
international and global funds are considered to be aggressive growth
funds or growth funds, investors must be willing to assume the risk of
potential loss in value in the hope of achieving substantial gains. They are
not suitable for investors who must conserve their principal or maximize
current income.

4)Fixed- Income Funds:
The goal of fixed income funds is to provide high current income
consistent with the preservation of capital. Growth of capital is of
secondaryimportance.

Income funds that invest primarily in common stocks are classified as
equity income funds (see next listing). Those that invest primarily in
bonds and preferred stocks are classified as fixed-income funds. These
funds invest in corporate bonds or government-backed mortgage
securities that have a fixed rate of return.
Since bond prices fluctuate with changing interest rates, there is some risk
involved despite the fund's conservative nature. When interest rates rise,
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the market price of fixed-income securities declines and so will the value
of the income funds' investments. Conversely, in periods of declining
interest rates, the value of fixed-income funds will rise and investors will
enjoy capital appreciation as well as income.

Fixed-income funds offer a higher level of current income than money
market funds, but a lower stability of principal. They are generally more
stable in price than funds that invest in stocks. Within the fixed-income
category, funds vary greatly in their stability of principal and in their
dividend yields. High-yield funds, which seek to maximize yield by
investing in lower-rated bonds of longer maturities, entail less stability of
principal than fixed-income funds that invest in higher-rated but lower-
yielding securities.
Some fixed-income funds seek to minimize risk by investing exclusively
in securities whose timely payment of interest and principal is backed by
the full faith and credit of the U.S. Government. These include securities
issued by the U.S. Treasury, the Government National Mortgage
Association ("Ginnie Mae" securities), the Federal National Mortgage
Association ("Fannie Maes") and Federal Home Loan Mortgage
Corporation ("Freddie Macs"). All are backed by pool of mortgage.

5)Money Market Funds:
For the cautious investor, these funds provide a very high stability of
principal while seeking a moderate to high current income. They invest in
highly-liquid, virtually risk-free, short-term debt securities of agencies of
the U.S. Government, banks and corporations and U.S. Treasury Bills.
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They have no potential for capital appreciation.Tax-exempt money
market funds invest in securities that provide safety of principal, liquidity
and income exempt from federal income taxes by investing in short-term,
high-rated municipal obligations.
Because of their short-term investments, money market mutual funds are
able to keep a constant share price; only the yield fluctuates. Therefore,
they are an attractive alternative to bank accounts. With yields that are
generally competitive with -- and usually somewhat higher than -- yields
on bank certificates of deposit (CDs), they offer several advantages:
Money can be withdrawn any time without penalty. Money market
funds also offer check writing privileges.
Although not insured by the FDIC or FSLIC, money market funds
invest only in highly-liquid, short-term, top-rated money market
instruments.
Money market funds are suitable for conservative investors who
want high stability of principal and moderate current income with
immediate liquidity.
Money market funds are suitable for conservative investors who want
high stability of principal and moderate current income with immediate
liquidity.

6)Municipal Bond Funds:
Muni" bond funds provide higher tax-exempt income than tax-exempt
money market funds by investing in longer-maturity (and often lower-
rated) securities, which generally offer higher yields than the short-term,
high-rated securities in which tax-exempt money market funds invest.
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Municipal bond funds vary greatly in the quality and maturity of the
municipal bonds they invest in. The longer the maturity, the higher the
yield. Also, the lower the credit rating of the issuer, the greater the risk
and the higher the yield.

While municipal bond funds generally provide lower yields than income
funds with debt obligations of similar maturities and ratings, for an
investor in a high marginal tax bracket the after-tax yields of municipal
bond funds will be higher. The price and yield of municipal bond funds
will fluctuate moderately with interest rates. As interest rates decline, the
value of principal increases while yield decreases; as rates increase, bond
prices decline but yields increase.
Suitable for investors in medium to higher tax brackets who want current
income free from federal income tax.

7)Speciality / Sector Funds:
These funds invest in securities of a specific industry or sector of the
economy such as health care, high technology, leisure, utilities or
precious metals.
Because such funds invest primarily in one sector, they do not offer the
element of downside risk protection found in mutual funds that invest in a
broad range of industries. However, the funds do enable investors to
diversify holdings among many companies within an industry, a more
conservative approach than investing directly in one particular company.
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Sector funds offer the opportunity for sharp capital gains in cases where
the fund's industry is "in favor" but also entail the risk of capital losses
when the industry is out of favor.

While sector funds restrict holdings to a particular industry, other
specialty funds such as index funds give investors a broadly-diversified
portfolio and attempt to mirror the performance of various market
averages. Index funds generally buy shares in all the companies
composing the S&P 500 Stock Index or other broad stock market indices.

Asset allocation funds move funds among a variety of markets and
instruments in response to the fund manager's view of relative market
prospects. They are broadly diversified and sometimes have higher
management fees since there may be a variety of securities in the
portfolio. These funds are suitable for investors who can tolerate a
moderate to high degree of risk, are seeking capital appreciation and to
whom dividend income is secondary in importance. And whatever the
instruments, social responsibility funds apply moral and ethical as well as
economic principles in the selection of securities.
Specialty funds are suitable for investors seeking to invest in a particular
industry who can monitor industry performance regularly and alter
investment strategies accordingly. Investors must be willing to assume
the risk of potential loss in value of their investment in the hope of
achieving substantial gains. They are not suitable for investors who must
conserve their principal or maximize current income.
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Different plans that Mutual Funds offer:

Growth Plan and Dividend Plan:
A growth plan is a plan under a scheme wherein the returns from
investments are reinvested and very few income distributions, if any, are
made. The investor thus only realises capital appreciation on the
investment. This plan appeals to investors in the high income bracket.
Under the dividend plan, income is distributed from time to time. This
plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan:
Dividend plans of schemes carry an additional option for reinvestment of
income distribution. This is referred to as the dividend reinvestment plan.
Under this plan, dividends declared by a fund are reinvested on behalf of
the investor, thus increasing the number of units held by the investors.
Automatic Investment Plan:
Under the Automatic Investment Plan (AIP) also called Systematic
Investment Plan (SIP), the investor is given the option for investing in a
specified frequency of months in a specified scheme of the Mutual Fund
for a constant sum of investment. AIP allows the investors to plan their
savings through a structured regular monthly savings program.
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Automatic Withdrawal Plan:
Under the Automatic Withdrawal Plan (AWP) also called Systematic
Withdrawal Plan (SWP), a facility is provided to the investor to withdraw
a pre-determined amount from his fund at a pre-determined interval
Risk vs Reward
The first thing that has to be kept in mind before investing is that when
you invest in mutual funds, there is no guarantee that the investor will end
up with more money when you withdraw your investment than what you
started out with. That is the potential of loss is always there. The loss of
value in your investment is what is considered risk in investing.
Even so, the opportunity for investment growth that is possible through
investments in mutual funds far exceeds that concern for most investors.

At the cornerstone of investing is the basic principal that the greater the
risk you take, the greater the potential reward. Or stated in another way,
you get what you pay for and you get paid a higher return only when
youre willing to accept more volatility.
Risk then, refers to the volatilitythe up and down activity in the
markets and individual issues that occurs constantly over time. This
volatility can be caused by a number of factorsinterest rate changes,
inflation or general economic conditions. It is this variability, uncertainty
and potential for loss, that causes investors to worry. We all fear the
possibility that a stock we invest in will fall substantially. But it is this
very volatility that is the exact reason that you can expect to earn a higher
long-term return from these investments than from a savings account.
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Different types of mutual funds have different levels of volatility or
potential price change, and those with the greater chance of losing value
are also the funds that can produce the greater returns for you over time.
So risk has two sides: it causes the value of your investments to fluctuate,
but it is precisely the reason you can expect to earn higher returns.


Fig. 1.2

Risk
Tolerance/Return
Expected
Focus Suitable Products
Benefits offered by
MFs
Low Debt
Bank/ Company FD, Debt
based Funds
Liquidity, Better Post-
Tax returns
Medium
Partially
Debt,
Partially
Equity
Balanced Funds, Some
Diversified Equity Funds
and some debt Funds, Mix
of shares and Fixed
Liquidity, Better Post-
Tax returns, Better
Management,
Diversification
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Deposits
High Equity
Capital Market, Equity
Funds (Diversified as well
as Sector)
Diversification,
Expertise in stock
picking, Liquidity, Tax
free dividends

Financial Planning
Financial planning is a process of managing your finances to help you
make the most of your money to achieve your goals. You may be
preparing for retirement or want to make sure you can cover the cost of
educating your children.
A financial planning is a process of money management that may include
any or all of several strategies, including budgeting, tax planning,
insurance, retirement.
The financial planning process consists of six steps that help you take a
"big picture" look at where you are financially. Using these six steps, you
can work out where you are now, what you may need in the future and
what you must do to reach your goals. These six steps are:
Establishing and defining the client-planner relationship.
The financial planner should clearly explain or document the services to
be provided to you and define both his and your responsibilities. The
planner should explain fully how he will be paid and by whom. You and
the planner should agree on how long the professional relationship should
last and on how decisions will be made.
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Gathering client data, including goals.
The financial planner should ask for information about your financial
situation. You and the planner should mutually define your personal and
financial goals, understand your time frame for results and discuss, if
relevant, how you feel about risk. The financial planner should gather all
the necessary documents before giving you the advice you need.
Analyzing and evaluating your financial status.
The financial planner should analyze your information to assess your
current situation and determine what you must do to meet your goals.
Depending on what services you have asked for, this could include
analyzing your assets, liabilities and cash flow, current insurance
coverage, investments or tax strategies.
Developing and presenting financial planning
recommendations and/or alternatives.
The financial planner should offer financial planning recommendations
that address your goals, based on the information you provide. The
planner should go over the recommendations with you to help you
understand them so that you can make informed decisions. The planner
should also listen to your concerns and revise the recommendations as
appropriate.
Implementing the financial planning recommendations.
You and the planner should agree on how the recommendations will be
carried out. The planner may carry out the recommendations or serve as
your "coach," coordinating the whole process with you and other
professionals such as attorneys or stockbrokers.
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Monitoring the financial planning recommendations.
You and the planner should agree on who will monitor your progress
towards your goals. If the planner is in charge of the process, she should
report to you periodically to review your situation and adjust the
recommendations, if needed, as your life changes.
Chapter 2

How Mutual Fund Works

A large number of people
with money to invest buy
shares/units in a Mutual Fund





Their pooled money has
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more buying power



The Fund Manager invests the money in
a collection of stocks, bonds or other securities




Successful investment adds
value to the fund


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Investors receive distributions

Most investment professionals agree that it's smarter to own a variety of
stocks and bonds than to gamble on the success of a few. But diversifying
can be tough because buying a portfolio of individual stocks and bonds
can be expensive. And knowing what to buy and when takes time
and concentration.
Mutual funds offer one solution: When you put money into a fund, it's
pooled with money from other investors to create much greater buying
power than you would have investing on your own. Since a fund can own
hundreds of different securities, its success isn't dependent on how one or
two holdings do. And the fund's professional managers keep constant tabs
on the markets, working to adjust the portfolio for the strongest possible
performance.






PAYING OUT THE PROFITS :





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A mutual fund makes money in two ways: by earning dividends
or interest on its investments and by selling investments that have
increased in price. The fund distributes, or pays out, its profits (minus
fees and expenses) to its investors.
Income distributions are from the money the fund earns on its
investments. Capital gain distributions are the profits from selling
investments. Different funds pay their distributions on different schedules
from once a day to once a year. Many funds offer investors the option
of reinvesting all or part of their distributions to buy more shares in
the fund. You pay taxes on the distributions you receive from the fund,
whether the money is reinvested or paid out in cash. But if a fund loses
more than it makes in any year, it can use the loss to offset future gains.
Until profits equal the accumulated losses, distributions aren't taxable,
although the share price may increase to reflect the profits.

CREATING A FUND
Mutual funds are created by investment companies (called
mutual fund companies), brokerage houses and banks. Each new fund has
a professional manager, an investment objective, and a plan, or
investment program, it follows in building its portfolio. The funds are
marketed to potential investors with ads in the financial press, through
direct mailings and press announcements, and in some cases with the
support of registered representatives who make commissions selling


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Frequently Used Terminology in Mutual Funds

1)Expense Ratio:
A measure of what it costs an investment company to operate a
mutual fund. An expense ratio is determined through an
annual calculation, where a fund's operating expenses are divided by the
average dollar value of its assets under management. Operating expenses
are taken out of a fund's assets and lower the return to a fund's investors.
Also known as "management expense ratio" (MER).
Depending on the type of fund, operating expenses vary widely. The
largest component of operating expenses is the fee paid to a fund's
investment manager/advisor. Other costs include recordkeeping, custodial
services, taxes, legal expenses, and accounting and auditing fees. Some
funds have a marketing cost referred to as a 12b-1 fee, which would also
be included in operating expenses. A fund's trading activity, the buying
and selling of portfolio securities, is not included in the calculation of the
expense ratio.
Costs associated with mutual funds but not included in operating
expenses are loads and redemption fees, which, if they apply, are paid
directly by fund investors.

2)Portfolio Manager:
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The person or persons responsible for investing a mutual, exchange-
traded or closed-end fund's assets, implementing its investment strategy
and managing the day-to-day portfolio trading
The portfolio manager is one of the most important factors to consider
when looking at fund investing. Portfolio management can be active or
passive (index tracking). Historical performance records indicate that
only a minority of active fund managers beat the market indexes.

3)Net Asset Value (NAV):
mutual fund's price per share or exchange-traded fund's per-share value.
In both cases, the per-share dollar amount of the fund is derived by
dividing the total value of all the securities in its portfolio, less any
liabilities, by the number of fund shares outstanding.
In terms of corporate valuations, the value of assets less liabilities equals
net asset value, or "book value".
In the context of mutual funds, net asset value per share is computed once
a day based on the closing market prices of the securities in the fund's
portfolio. All mutual fund buy and sell orders are processed at the NAV
of the trade date; however, investors must wait until the following day to
get the trade price.

4)Load:
A sales charge or commission charged to an investor when buying or
redeeming shares in a mutual fund. The fee may be a one-time charge at
the time the investor buys into the mutual fund (front-end load), when the
investor redeems the mutual fund shares (back-end load), or on an annual
basis as a 12b-1 fee.
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large number of mutual funds carry sales charges. These are paid directly
by the investor in the case of the front-end and back-end variety, and
indirectly through a deduction to the net assets of the investor's fund if of
the12b-1,orlevel-load,variety.

Oftentimes, these sales charges will be waived if a load mutual fund is
included as an investment option in an employer-sponsored retirement
plan.

Unlike 12b-1 fees, front-end and back-end loads are not included in the
calculation of a fund's operating expenses.

5)Asset Allocation:
An investment strategy that aims to balance risk and reward
by apportioning a portfolio's assets according to an individual's goals, risk
tolerance and investment horizon. The three main asset classes - equities,
fixed-income, and cash and equivalents - have different levels of risk and
return, so each will behave differently over time.
There is no simple formula that can find the right asset allocation for
every individual. However, the consensus among most financial
professionals is that asset allocation is one of the most important
decisions that investors make. In other words, your selection of individual
securities is secondary to the way you allocate your investment in stocks,
bonds, and cash and equivalents, which will be the principal determinants
of your investment results.

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Asset-allocation mutual funds, also known as life-cycle, or target-date,
funds, are an attempt to provide investors with portfolio structures that
address an investor's age, risk appetite and investment objectives with an
appropriate apportionment of asset classes. However, critics of this
approach point out that arriving at a standardized solution for allocating
portfolio assets is problematic because individual investors require
individual solutions.
6)Dividend:
A distribution of a portion of a company's earnings, decided by the board
of directors, to a class of its shareholders. The dividend is most often
quoted in terms of the dollar amount each share receives (dividends per
share). It can also be quoted in terms of a percent of the current market
price, referred to as dividend yield.Mandatory distributions of income and
realized capital gains made to mutual fund investors.Dividends may be in
the form of cash, stock or property. Most secure and stable companies
offer dividends to their stockholders. Their share prices might not move
much, but the dividend attempts to make up for this.High-growth
companies rarely offer dividends because all of their profits are
reinvested to help sustain higher-than-average growth. Mutual funds pay
out interest and dividend income received from their portfolio holdings as
dividends to fund shareholders. In addition, realized capital gains from
the portfolio's trading activities are generally paid out (capital gains
distribution) as a year-end dividend.

7)Back-End Load:
A fee (sales charge or load) that investors pay when selling mutual fund
shares within a specified number of years, which usually ranges between
five to ten years. The fee amounts to a percentage of the value of the
32

share being sold. The fee percentage is highest in the first year and
decreases yearly until the specified holding period ends, at which time
it dropsto zero.

Also known as a "contingent deferred sales charge or load
The back-end load is a type of sales charge that is used with mutual funds
that have share classes, which in this case are identified as Class B
shares. Class A shares charge a front-end load that is taken from an
investor's initial investment. Class C shares are considered to be a type of
level-load fund - no front-end and low back-end loads, but the fund's
operating expenses are high. In all cases, the load is paid to a financial
intermediary, and is not included in a fund's operating expenses.

In essence, funds with share classes carry sales charges (as opposed to
no-load funds). The class you choose is what determines how much and
when you pay them. In employer-sponsored retirement plans, the loads
are generally waived
8)Portfolio:
A grouping of financial assets such as stocks, bonds and cash equivalents,
as well as their mutual, exchange-traded and closed-fund counterparts.
Portfolios are held directly by investors and/or managed by financial
professionals.
Prudence suggests that investors should construct an investment portfolio
in accordance with risk tolerance and investing objectives. Think of an
investment portfolio as a pie that is divided into into pieces of varying
sizes representing a variety of asset classes and/or types of investments to
accomplish an appropriate risk-return portfolio allocation
33






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.
The following are the regulatory requirements and
accounting definitions laid down by SEBI
NAV = Net Assets of the Scheme / Number of units
outstanding
Market value of investments + Receivables + Other Accrued Income +
Other Assets Accured expenses Other Payables Other Liabilities
Number of units outstanding as at the NAV date
34


THE SIMPLE FORMULA THAT A NEW INVESTOR CAN USE TO
FIND OUT HIS EARNINGS IS :
NAV = Principle + Profit Cost(companies expenses)


Calculation of NAV
The most important part of the calculation is the valuation of
the assets owned by the fund. Once it is calculated, the NAV is simply the
net value of assets divided by the number of units outstanding. The
detailed methodology for the calculation of the asset value is given
below.

Asset value is equal to
Sum of market value of shares/debentures
Liquid assets/cash held, if any
Dividends/interest accrued Amount due on unpaid assets Expenses
accrued but not paid
Details on the above items
35

For liquid shares/debentures, valuation is done on the basis of
the last or closing market price on the principal exchange where the
security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the
value has to be estimated. For shares, this could be the book value per
share or an estimated market price if suitable benchmarks are available.
For debentures and bonds, value is estimated on the basis of yields of
comparable liquid securities after adjusting for illiquidity. The value of
fixed interest bearing securities moves in a direction opposite to interest
rate changes Valuation of debentures and bonds is a big problem since
most of them are unlisted and thinly traded. This gives considerable
leeway to the AMCs on valuation and some of the AMCs are believed to
take advantage of this and adopt flexible valuation policies depending on
the situation.
Interest is payable on debentures/bonds on a periodic basis say
every 6 months. But, with every passing day, interest is said to be
accrued, at the daily interest rate, which is calculated by dividing the
periodic interest payment with the number of days in each period. Thus,
accrued interest on a particular day is equal to the daily interest rate
multiplied by the number of days since the last interest payment date.
Usually, dividends are proposed at the time of the Annual
General meeting and become due on the record date. There is a gap
between the dates on which it becomes due and the actual payment date.
In the intermediate period, it is deemed to be accrued.
Expenses including management fees, custody charges etc.
are calculated on a daily basis.
36

A funds NAV is affected by four factors:
Purchase and sale of investment securities
Valuation of all securities held
Other assets and liabilities
Units sold or redeemed



REGULATORY MEASURES BY SEBI
Like Banking & Insurance up to the nineties of the last century, Mutual
Fund industry in India was set up and functioned exclusively in the state
monopoly represented by the Unit Trust of India. This monopoly was
diluted in the eighties by allowing nationalized banks and insurance
companies (LIC & GIC) to set up their institutions under the Indian
Trusts Act to transact mutual fund business, allowing the Indian investor
the option to choose between different service providers. Unit Trust was a
statutory corporation governed by its own incorporating act. There was
no separate regulatory authority up to the time SEBI was made a statutory
authority in 1992. but it was only in the year 1993, when a government
took a policy decision to deregulate Indian Economy from government
control and to transform it market oriented, that the industry was opened
to competition from private and foreign players. By the year 2000 there
came to be established in the market 34 mutual funds offerings a variety
of about 550 schemes.

37

SECURITIES AND EXCHANGE BOARD OF INDIA
(MUTUAL FUNDS) REGULATIONS, 1996
The fast growing industry is regulated by Securities and Exchange Board
of India (SEBI) since inception of SEBI as a statutory body. SEBI
initially formulated SECURITIES AND EXCHANGE BOARD OF
INDIA (MUTUAL FUNDS) REGULATIONS, 1993 providing detailed
procedure for establishment, registration, constitution, management of
trustees, asset management company, about schemes/products to be
designed, about investment of funds collected, general obligation of MFs,
about inspection, audit etc. based on experience gained and feedback
received from the market SEBI revised the guidelines of 1993 and issued
fresh guidelines in 1996 titled SECURITIES AND EXCHANGE
BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996. The
said regulations as amended from time to time are in force even today.
The SEBI mutual fund regulations contain ten chapters and twelve
schedules. Chapters containing material subjects relating to regulation
and conduct of business by Mutual Funds
Regulatory Aspects
Schemes of a Mutual Fund
The asset management company shall launch no scheme unless the
trustees approve such scheme and a copy of the offer document has
been filed with the Board.
Every mutual fund shall along with the offer document of each
scheme pay filing fees.
38

The offer document shall contain disclosures which are adequate in
order to enable the investors to make informed investment decision
including the disclosure on maximum investments proposed to be
made by the scheme in the listed securities of the group companies
of the sponsor A close-
ended scheme shall be fully redeemed at the end of the maturity
period. Unless a majority of the unit holders otherwise decide for
its rollover by passing a resolution.
The mutual fund and asset management company shall be liable to
refund the application money to the applicants,-
(i) If the mutual fund fails to receive the
minimum subscription amount referred to in
clause (a) of sub-regulation (1);
(ii) If the moneys received from the applicants
for units are in excess of subscription as
referred to in clause (b) of sub-regulation (1).
The asset management company shall issue to the
applicant whose application has been accepted, unit
certificates or a statement of accounts specifying the
number of units allotted to the applicant as soon as
possible but not later than six weeks from the date of
closure of the initial subscription list and or from the
date of receipt of the request from the unit holders in
any open ended scheme.
Rules Regarding Advertisement:
39

The offer document and advertisement materials shall
not be misleading or contain any statement or opinion,
which are incorrect or false.
Investment Objectives And Valuation Policies:
The price at which the units may be subscribed or sold and the price
at which such units may at any time be repurchased by the mutual
fund shall be made available to the investors.

General Obligations:
Every asset management company for each scheme shall keep and
maintain proper books of accounts, records and documents, for each
scheme so as to explain its transactions and to disclose at any point
of time the financial position of each scheme and in particular give a
true and fair view of the state of affairs of the fund and intimate to
the Board the place where such books of accounts, records and
documents are maintained.
The financial year for all the schemes shall end as of March 31 of
each year. Every mutual fund or the asset management company
shall prepare in respect of each financial year an annual report and
annual statement of accounts of the schemes and the fund as
specified in Eleventh Schedule.
Every mutual fund shall have the annual statement of accounts
audited by an auditor who is not in any way associated with the
auditor of the asset management company.

Procedure For Action In Case Of Default:
40

On and from the date of the suspension of the certificate or the
approval, as the case may be, the mutual fund, trustees or asset
management company, shall cease to carry on any activity as a
mutual fund, trustee or asset management company, during the
period of suspension, and shall be subject to the directions of the
Board with regard to any records, documents, or securities that may
be in its custody or control, relating to its activities as mutual fund,
trustees or asset management company.
Restrictions On Investments:
A mutual fund scheme shall not invest more than 15% of its NAV in
debt instruments issued by a single issuer, which are rated not below
investment grade by a credit rating agency authorized to carry out
such activity under the Act. Such investment limit may be extended
to 20% of the NAV of the scheme with the prior approval of the
Board of Trustees and the Board of asset management company.
A mutual fund scheme shall not invest more than 10% of its NAV in
unrated debt instruments issued by a single issuer and the total
investment in such instruments shall not exceed 25% of the NAV of
the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of asset
management company.
No mutual fund under all its schemes should own more than ten
per cent of any companys paid up capital carrying voting rights.
Such transfers are done at the prevailing market price for quoted
instruments on spot basis.
41

The securities so transferred shall be in conformity with the
investment objective of the scheme to which such transfer has been
made.
A scheme may invest in another scheme under the same asset
management company or any other mutual fund without charging
any fees, provided that aggregate interscheme investment made by
all schemes under the same management or in schemes under the
management of any other asset management company shall not
exceed 5% of the net asset value of the mutual fund.
The initial issue expenses in respect of any scheme may not exceed
six per cent of the funds raised under that scheme.
Every mutual fund shall buy and sell securities on the basis of
deliveries and shall in all cases of purchases, take delivery of
relative securities and in all cases of sale, deliver the securities and
shall in no case put itself in a position whereby it
has to make short sale or carry forward transaction or engage in
badla finance.
Every mutual fund shall, get the securities purchased or transferred
in the name of the mutual fund on account of the concerned scheme,
wherever investments are intended to be of long-term nature.
Pending deployment of funds of a scheme in securities in terms of
investment objectives of the scheme a mutual fund can invest the
funds of the scheme in short term deposits of scheduled commercial
banks.
No mutual fund scheme shall make any investment in;
i. Any unlisted security of an associate or group company of the
sponsor; or
42

ii. Any security issued by way of private placement by
an associate or group company of the sponsor; or
iii. The listed securities of group companies of the
sponsor which is in excess of 30% of the net assets [of
all the schemes of a mutual fund]
iv. No mutual fund scheme shall invest more than 10 per
cent of its NAV in the equity shares or equity related
instruments of any company. Provided that, the limit
of 10 per cent shall not be applicable for investments
in index fund or sector or industry specific scheme.
A mutual fund scheme shall not invest more than 5% of its NAV in
the equity shares or equity related investments in case of open-ended
scheme and 10% of its NAV in case of close-ended scheme









43











Banks v/s Mutual Funds
BANKS MUTUAL FUNDS
Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation
Minimum balance between 10
th
. & 30
th
. Of
every month
Everyday
44







Mutual Funds vs Fixed Deposit in India
I have seen lot of people including myself asking this question that in
India, which is better, Mutual Funds or Fixed Deposit. Lets say for one
year period, you get 7.5% interest rate on 1 lakh rupees than is it good or
should you take more risk and invest in mutual funds ?
I have invested money in both in the past and currently have 3 mutual
funds of ICICI, HDFC and SBI as well have money in fixed deposit too
in HDFC and ICICI banks, so from my experience this is what I can
suggest
If you are looking for No Risk
Go with fixed deposit option, 7.5% interest rate is not bad at all as on
average investing in property or stock market too gives same return
(assuming you have no time to spend and no knowledge about them) on
average. Having money in fixed deposit is the best option for you if you
dont want to lose even 10% of your money.

Small Rick Decent Return
If you are willing to take some risk and can look for 2+ year range, I will
Guarantee Maximum Rs.1 lakh on deposits None
45

advice you to go with mutual funds, Right now the stock market is at its
peak (BSE at 17600) so you wont get any return from mutual funds in
say next 3-6 months.
Mutual funds will always outperform fixed deposit in long run of 3 and
more years provided you trust the manager of fund and dont get
panicked when the market take deep dives. For example, a friend of
money had invested 3 lakh in Mutual fund in 2008 when the market was
its all time high (I am not sure why he did that ? probably was thinking it
to touch 25000), the market took a nose dive to 7000 and the value of his
mutual fund became 80,000 though after 2 years he has recovered all his
value.
High Risk High Return
If you are looking for high risk high return investment, you should stick
to Mutual funds or better, jump in stock market (but with very small
amount of money, say Rs 2000 or 5000, Never put big money), but again,
only invest in mutual funds if you can resist selling it for few years.

Mutual funds are better than fixed deposits

Do you find mutual funds attractive but don't invest in them due to the
risk factor? Its time you learn that mutual funds are a lucrative
investment, ensure higher returns, better tax benefits and carry
minimalistic risk.
In this article we will explain why Fixed Maturity Plans issued by mutual
funds are much more profitable than fixed deposits offered by banks.
The fact is that according to the SEBI rules, mutual funds are not allowed
to assure returns. The yield is indicated and not assured. However, for all
46

practical purposes, the indicated yield is almost exactly what the investor
gets at the time of maturity.
What is an FMP?
FMP stands for Fixed Maturity Plan. These are essentially close-ended
income schemes with a fixed maturity date ie that run for a fixed period
of time. This period could range from one month to as long as two-years
or more. When the fixed period comes to an end, the scheme matures, and
your money is paid back to you.
FMPs do not invest in equity. The portfolio is generally invested in debt
and money market instruments maturing in line with the tenure of the
scheme. The objective is to lock-in the investment at a specified rate of
return thereby immunizing the scheme against market fluctuations.
Liquidity
In most open-ended mutual fund schemes, one can redeem ones units
anytime. However, the structure of the FMP does not lend itself to this
kind of liquidity. One should invest the money that he is more or less sure
that he is not going to need it during the tenure of the plan. If you
withdraw before the scheme closes, generally a steep exit load is
imposed.
The reason for this steep load is to deter investors treating the FMP like a
normal income scheme. Though income schemes invest in similar
instruments as an FMP, being open-ended and not having a specific
tenure based investment strategy, these are subject to interest rate risk
leading to fluctuations in the NAV.
Lately the interest rates on bank deposits have increased leading many
investors to wonder whether a simple Bank Fixed Deposit (FD) would
serve better than having to go through the process of investing in an FMP.
47

Though Bank FDs and FMPs currently offer a similar rate of return; the
tax impact tilts the scales in favour of the FMP.
Interest on Bank FDs is fully taxable whereas the return from FMPs is
either subject to the Dividend Distribution Tax (for the dividend option)
or the capital gains tax rate (for the growth option). The Distribution Tax
rate @14.16 per cent or the capital gains tax rate @10 per cent are lower
than the income tax rate, especially in the case of investors in the higher
tax bracket. Tax directly eats into returns, which is why FMPs have the
edge over Bank FDs.

FMP 91 days v/s
Fixed Deposits
Dividend
Option
(Individuals)
Dividend
Option
(Corporates)
Fixed
Deposits
Investment Amount Rs.100,000 Rs.100,000 Rs.100,000
Post Expense
Indicative Yield
10.25% 10.25% 10.25%
Maturity Value 102,555 102,555 Rs 102,555
Gain=Maturity
Value - Investment
Amount
2,555 2,555 2,555
Tax Rate 14.16% 22.66% 33.99%
Tax Rs.317 Rs.472 Rs.869
Post Tax Gains Rs.2,239 Rs.2,083 Rs.1,687
Post Tax 9.29% 8.62% 6.94%
48

annualised returns
To illustrate this point, have a look at the following. It is assumed that
both, the Bank FD as well as the FMP yield the same rate of interest i.e.
10.25 per cent pa An investment of Rs. 1 lakh is made in an FMP of 91
days. The corresponding figures for the Bank FD appear alongside.

Are FMPs for you?
As I write this, markets are extremely choppy. Depending upon whom
you talk to, either a severe correction is round the corner or the market is
going to go up by a couple of thousand points more. Though no one has
seen what tomorrow will bring, common sense indicates that a post tax
yield of almost 9 per cent is too good to ignore.
If you are looking for a fixed income avenue that yields a reasonable
return with minimum risk, adequate liquidity and tax efficiency, FMPs
will provide you with an effective shelter.
Why FMPs are more lucrative than Bank FDs?
Lately the interest rates on bank deposits have increased leading many
investors to wonder whether a simple Bank Fixed Deposit (FD) would
serve better than having to go through the process of investing in an FMP.
Though Bank FDs and FMPs currently offer a similar rate of return; the
tax impact tilts the scales in favour of the FMP.
Interest on Bank FDs is fully taxable whereas the return from FMPs is
either subject to the Dividend Distribution Tax (for the dividend option)
or the capital gains tax rate (fthe growth


49







Some of the AMCs operating currently are:

Name of the AMC Nature of
ownership
Alliance Capital Asset Management (I) Private
Limited
Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company
Limited
Bank
Bank of India Asset Management Company Limited Bank
Canbank Investment Management Services Limited Bank
Cholamandalam Cazenove Asset Management
Company Limited
Private foreign
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company
Limited
Private foreign
50

Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institution
IDBI Investment Management Company Limited Institution
Indfund Management Limited Bank
ING Investment Asset Management Company
Private Limited
Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company
Limited
Private Indian
Kothari Pioneer Asset Management Company
Limited
Private Indian
Jeevan Bima Sahayog Asset Management Company
Limited
Institution
Morgan Stanley Asset Management Company Private
Limited
Private foreign
Punjab National Bank Asset Management Company
Limited
Bank
Reliance Capital Asset Management Company
Limited
Private Indian
State Bank of India Funds Management Limited Bank
Shriram Asset Management Company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company
Limited
Private foreign
51

Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private
Limited
Private foreign
Unit Trust of India Institution
Zurich Asset Management Company (I) Limited Private foreign


Fund Structure and Constituents
Special legal structure of mutual funds
Mutual funds have a unique structure not shared with
other entities such as companies or firms. It is important for employees
and agents to b aware of the special nature of this structure, because it
determines the rights and responsibilities of the funds constituents viz
sponsors trustees, custodians, transfer agent, the fund and the asset
management company.
Structure of mutual funds in India
Like other countries, India has a legal framework within
which mutual funds must be constituted. Unlike in the UK, where two
distinct trust and corporate structures are followed with separate
regulations, in India, open and close end funds operate under the same
regulatory structure, and are constituted along one unique structure as
unit trusts. A mutual fund in India is allowed to issue open end and closed
end schemes under a common legal structure. The structure which is
required to be followed by mutual funds in India is laid down under SEBI
52

( Mutual fund) regulations, 199A mutual fund is normally formed as a
Trust and is governed by a Board of Trustees - see diagram below. The
Trustees in turn appoint an investment advisor to manage the various
schemes launched by the mutual fund. This investment advisor is called
an Asset Management Company (AMC). The AMC is responsible for
marketing and selling the schemes, investing the funds collected by it and
servicing the investors. The AMC is responsible to the Trustees and has
to take their approval for all major actions taken in connection with the
mutual fund. To help the AMC in its daily activities, it appoints
specialists in different areas - a Registrar & Transfer (R&T) Agent , a
Custodian and one or more Banks

Fig . 2.2
The Fund Sponsor
Sponsor is defined under SEBI regulations as any person who, acting
alone or in combination with another body corporate, establishes a mutual
fund. The sponsor of a fund is akin to the promoter of a company as he
gets the funds registered with SEBI. The sponsor will form a trust and
appoint board of trustees. The sponsor will also generally appoint an asset
53

management company as fund managers. The sponsor either directly or
acting through the trustees, will also appoint a custodian to hold the fund
assets. All these appointments are made in accordance with SEBI
regulations.
As per the existing SEBI regulations, for a person to qualify as a sponsor,
he must contribute at least 40% of the net worth of the AMC and posses a
sound financial track record over five years prior to registra
Mutual Fund as Trusts
It should be understood that a mutual fund is just a pass through
vehicle. Under the Indian Trust Act, the Trust or the Fund has no
independent legal capacity itself, rather it is the trustee or the trustees
who have the legal capacity and therefore all acts in relation to the trust
are taken on its behalf by the trustees. The trustees hold the unitholders
money in fiduciary capacity i.e. the money belongs to the unit holders and
is entrusted to the fund for the purpose of investment. In legal parlance,
the investors or the unit holders are the beneficial owners of the
investment held by the trust, even as these investments are held in the
name of the trustees on a day to day basis. Being a public trusts,
mutual funds can invite any number of investors as beneficial owners in
their investment schemes.
Trustees
The trust the mutual fund- may be managed by a board of trustees- a
body of individuals, or a Trust company- a corporate body. Most of the
funds in India are managed by Board of Trustees. While the Board of
Trustees is governed by the provisions of the Indian Trusts Act, where the
Trustee is a corporate body, it would also be required to comply with the
54

provisions of the Companies Act, 1956. The trust is created through a
document called the Trust Deed that is executed by the Fund Sponsor in
favour of the trustees. Clauses in the trust deed, inter alia, deal with the
establishment of the trust, the appointment of the trustees, their powers
and duties, and the obligations of the trustees towards unit holders and the
AMC.
The trustees must ensure that the investors interest is safeguarded and
that the AMCs operations are along professional lines. They must also
ensure that the management of the fund is in accordance with SEBI
Regulations.
The Asset Management Company
The role of an AMC is to act as the Investment Manager of the Trust.
The sponsors or the trustees, if so authorized by the trust deed appoint the
AMC. The AMC so appointed is required to be approved by SEBI. The
AMC would, in the name of the trust, float and then manage the different
investment schemes as per the SEBI regulations and as per the
Investment Management Agreement it signs with the trustees. The AMC
of the mutual fund must have a net worth of at least Rs. 10 crores at all
times. The AMC cannot act as trustee of any other mutual fund. The
AMC must always act in the interest of the unit holders and report to the
trustees with respect to its activities.

Other fund constituents:
Custodian and depositories
55

Mutual funds are in the business of buying and selling of securities in
large volumes. Handling these securities in terms of physical delivery and
eventual safekeeping is therefore a specialized activity. The custodian is
appointed by the board of trustees for safeguarding of physical securities
or participating in any vlaering system through approved depository
companies on behalf of the mutual fund in case of dematerialized
securities. The custodian should be an entity independent of the sponsors
and is required to be registered with the SEBI.
Transfer agents
Transfer agents are responsible for issuing and redeeming units of the
mutual fund and provide other related services such as preparation of
transfer documents and updating investor records.
Bankers
Funds activities involve dealing with money on a continuous basis
primarily with respect to buying and selling units, paying for investment
made, receiving the proceeds on the sale of investments and discharging
its obligations towards operating expenses. A funds banker therefore
plays a crucial role with respect to its financial dealings by holdings its
bank accounts and providing it with remittance services.





56




TYPES OF RISK

All investments involve some form of risk. These common types of risk
need to be considered and evaluated against potential rewards when an
investor selects an investment.
Market Risk:
At times the prices or yields of all the securities in a particular market
rise or fall due to broad outside influences. When this happens, the stock
prices of both an outstanding, highly profitable company and a fledgling
corporation may be affected. This change in price is due to market risk.
Also known as systematic risk.
Inflation Risk:
Sometimes referred to as loss of purchasing power. Whenever inflation
rises forward faster than the earnings on investment, there is the risk that
investor actually be able to buy less, not more. Inflation risk also occurs
when prices rise faster than your returns.
Credit Risk:
In short, how stable is the company or entity to which an investor lends
his money when he invests? How certain are investors that they will be
57

able to pay the interest they promised, or repay their principal when the
investment matures?


Interest Rate Risk:
Changing interest rates affect both equities and bonds in many ways.
Investors are reminded that predicting which way rates will go is rarely
successful. A diversified portfolio can help in offsetting these changes.
Exchange risk:
A number of companies generate revenues in foreign currencies and may
have investments or expenses also denominated in foreign currencies.
Changes in exchange rates may, therefore, have a positive or negative
impact on companies which in turn would have an effect on the
investment of the fund.
Investment Risks:
The sectoral fund schemes, investments will be predominantly in equities
of select companies in the particular sectors. Accordingly, the NAV of
the schemes are linked to the equity performance of such companies and
may be more volatile than a more diversified portfolio of equities.
Changes in the Government Policy:
Changes in Government policy especially in regard to the tax benefits
may impact the business prospects of the companies leading to an impact
58

on the investments made by the fund.Effect of loss of key professionals
and inability to adapt business to the rapid technological change.
An industries key asset is often the personnel who run the business i.e.
intellectual properties of the key employees of the respective companies.
Given the ever-changing complexion of few industries and the high
obsolescence levels, availability of qualified, trained and motivated
personnel is very critical for the success of industries in few sectors.
It is, therefore, necessary to attract key personnel and also to retain them
to meet the changing environment and challenges the sector offers.
Failure or inability to attract/retain such qualified key personnel may
impact the prospects of the companies in the particular sector in which
the fund invests.










59





CONCLUSION:
A mutual fund brings together a group of people
and invests their money in stocks, bonds, and other
securities.
The advantages of mutuals are professional
management, diversification, economies of scale,
simplicity and liquidity.
The disadvantages of mutuals 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.
60