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Mutual funds are a popular investment for many types of investors because they offer a
convenient, cost-effective and easy way to invest in the financial markets.


What is a Mutual Fund?

What is a mutual fund?
A mutual fund is a professionally managed investment company that combines the
money of many individuals and invests this “pooled” money in a wide variety of different
securities.
It is by pooling the money of many individuals that mutual funds are able to provide the
diversification and money management (along with many other advantages) that were
once reserved only for the wealthy.
Professional money managers take this pool of money and invest it in a wide variety of
stocks, bonds, or other securities depending on the investment objective, or goal, of the
particular fund. It is the investment objective of the fund that guides the manager in
selecting the various securities for the fund.
It is the investment objective of the mutual fund that also guides the investor on which
funds to invest in. Since different investors have different objectives, there are a number
of different kinds of mutual funds, i.e., some mutual funds may provide monthly income
while others seek long-term capital appreciation.
Mutual funds can be classified according to their investment objective. Some of the
classifications include money market funds, growth funds, balanced funds, income funds,
and many others.




A mutual fund company pools the money of many investors and invests it for them in a
collection of securities by purchasing stocks, bonds, money markets and/or other
securities. These securities are often referred to as holdings and all of the fund's
holdings combined make up the portfolio. The assets in a mutual fund's portfolio are
managed by a professional money manager(s) who decides which securities to buy and
sell based on the fund's investment objective, detailed in the fund's prospectus.

When you invest in a mutual fund, you are actually buying shares in the fund, which
means you own a small percentage of the fund's entire portfolio. These shares are a
fractional representation of the entire mutual fund's diversified holdings. The price of a
share at any time is called the fund's net asset value, or NAV. If you invest $1,000 in a
mutual fund with an NAV of $24.75, you will receive 40.40 shares of that fund. (Unlike
stocks, you can own fractional shares in a mutual fund). When the value of the portfolio
increases, the value of your investment also increases. If, however, the value of the fund
decreases, your investment value will decrease as well.
The primary asset categories found in mutual funds are money markets, bonds, and/or
stocks. Mutual funds may invest in a single asset class or a combination of all.
Maintaining the weight of each category and the decision on when to buy or sell is the
function of the mutual fund's manager(s). Typically, the fund category indicates the
primary investments (holdings) of the fund. For example, a fund that holds 85% stocks,
10% bonds and 5% cash equivalents is typically categorized as a stock fund.

CURRENT SCENARIO IN MF INDUSTRY

The Indian Mutual fund industry has witnessed considerable growth since its inception in
1963. The assets under management (AUM) have surged to Rs 4,173 bn in Mar-09 from
just Rs 250 mn in Mar-65. In a span of 10 years (from 1999 to 2009), the industry has
registered a CAGR of 22.3%, albeit encompassing some shortfalls in AUM due to
business cycles.

The impressive growth in the Indian Mutual fund industry in recent years can largely be
attributed to various factors such as rising household savings, comprehensive regulatory
framework, favourable tax policies, introduction of several new products, investor
education campaign and role of distributors.

In the last few years, household’s income levels have grown significantly, leading to
commensurate increase in household’s savings. Household financial savings (at current
prices) registered growth rate of around 17.4% on an average during the period FY04-
FY08 as against 11.8% on an average during the period FY99-FY03. The considerable
rise in household’s financial savings, point towards the huge market potential of the
Mutual fund industry in India.

Besides, SEBI has introduced various regulatory measures in order to protect the interest
of small investors that augurs well for the long term growth of the industry. The tax
benefits allowed on mutual fund schemes (for example investment made in Equity
Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the
Income Tax Act) also have helped mutual funds to evolve as the preferred form of
investment among the salaried income earners.

Besides, the Indian Mutual fund industry that started with traditional products like equity
fund, debt fund and balanced fund has significantly expanded its product portfolio.
Today, the industry has introduced an array of products such as liquid/money market
funds, sector-specific funds, index funds, gilt funds, capital protection oriented schemes,
special category funds, insurance linked funds, exchange traded funds, etc. It also has
introduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or
gold related instruments. Further, the industry has launched special schemes to invest in
foreign securities. The wide variety of schemes offered by the Indian Mutual fund
industry provides multiple options of investment to common man.


Impact of the Global Financial Crisis
Deepening of the global financial crisis during September 2008, which resulted in
liquidity crunch world-over, had dampening impact of the Indian Mutual fund industry.
With the drying up of credit inflows from banks and external commercial borrowings
route, mutual funds witnessed redemption pressure from corporates. Although the mutual
funds promised immediate redemption, their assets were relatively illiquid. Besides,
mutual funds faced problems such as maturity mismatches between assets & liabilities of
mutual funds, shift from mutual funds to bank deposits in view of the comparatively
higher interest rates being offered by banks and freezing up of money markets due to lack
of buyers for assets like certificates of deposits of private sector banks.

During Apr-Sep 08, net mobilisation of funds by mutual funds declined sharply by 97.7%
to Rs 24.8 bn due to uncertain conditions prevailing in the domestic stock markets. The
redemption pressures witnessed by mutual funds led to net outflows under both the
income/debt-oriented schemes and growth/equity-oriented schemes. Further, the AUM of
Mutual fund industry contracted by 20.7% from Rs 5,445.4 bn as on August 31, 2008 to
Rs 4,319.0 bn as on October 31, 2008. During the same period, liquid and debt schemes
which contribute more than 65% to the total AUM witnessed a decline of 19% in AUM.

In an endeavour to ease liquidity pressures in the system and restore stability in the
domestic financial markets, the RBI announced a slew of measures. The key measures
announced by the RBI include:

The RBI decided to conduct a special 14 day repo at 9% per annum for a notified amount
of Rs 200 bn from October 14, 2008 with a view to enable banks to meet the liquidity
requirements of mutual funds.
Scheduled Commercial Banks (SCBs) and All India term lending and refinancing
institutions were allowed to lend against and buy back CDs held by mutual funds for a
period of 15 days.
As a temporary measure, banks were allowed to avail of additional liquidity support
exclusively for the purpose of meeting the liquidity requirements of mutual funds to the
extent of up to 0.5% of their net demand and time liabilities (NDTL). Accordingly on
November 1, 2008, it was decided to extend this facility and allow banks to avail
liquidity support under the LAF through relaxation in the maintenance of SLR to the
extent of up to 1.5% of their NDTL. This relaxation in SLR was provided for the purpose
of meeting the funding requirements of NBFCs and mutual funds.
The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund) Regulations,
1996 was enhanced from 20% of net asset of the scheme to 40% of net asset of the
scheme to those mutual funds who approached SEBI. This enhanced borrowing limit was
made available for a period of six months and could be utilised for the purpose of
redemptions/ repurchase of units.
In order to moderate the exit from close ended debt schemes and in the interest of those
investors who choose to remain till maturity and with a view to ensure that the value of
debt securities reflects the current market scenario in calculation of NAV, the discretion
given to mutual funds to mark up/ mark down the benchmark yields for debt instruments
of more than 182 days maturity was enhanced from 150 basis points to 650 basis points.
The significant reduction in CRR & SLR, net injection of Rs 9,279 bn through the repo
window during Oct-08, the repurchase of MSS bonds worth Rs 200 bn along with the
earlier mentioned liquidity augmentation measures helped to ease liquidity pressures for
domestic mutual funds. The data reveals that about 18 mutual funds borrowed from
banks. Further, the increase of borrowing limits enabled the mutual funds to meet
redemption pressures without engaging in a large scale sale of assets which could have
caused systemic instability. As on November 10, 2008, 15 mutual funds had been
extended the enhanced borrowing limit as per their requests made to SEBI.

However, with some recovery in the Indian financial markets as well as improvement in
the liquidity conditions, the RBI in it’s Q2 FY10 review of monetary policy withdrew
some liquidity boosting measures that were introduced as a part of monetary stimulus in
FY09. The special term repo facility for SCBs, for funding to NBFCs, mutual funds, and
housing finance companies was terminated.


MUTUAL FUNDS 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?
(A) By Structure


Open-Ended Schemes
These do not have a fixed maturity.You deal 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, at any point of time.

close ended schemes.
Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called
close ended schemes. You can invest 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’sNAV 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 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 under the close ended schemes.


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.

(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 short term.

Income Schemes
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.



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.



Tax Saving Schemes (Equity Linked Saving Scheme - ELSS)
These schemes offer tax incentives to the investors under tax laws as prescribed from
time to time and promote long term investments in equities through Mutual
Funds.Eligible for deduction under section 80C .Lock in period three years

Ideal for:

Investors seeking tax incentives.


Special Schemes
This category includes index schemes that attempt to replicate the performance of a
particular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemes
which invest in specific sectors such as
Technology, Infrastructure, Banking, Pharma etc.Besides, there are also schemes which
invest exclusively in certain segments of the capital market, such as Large Caps, Mid
Caps, Small Caps, Micro Caps, 'A' group shares, shares issued through Initial Public
Offerings (IPOs), etc.


Index fund
Index fund schemes are ideal for investors who are satisfied with a return approximately
equal to that of an index.
Sectoral fund schemes
Sectoral fund schemes are ideal for investors who have already decided to invest in a
particular sector or segment.

Fixed Maturity Plan
Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are
close ended with a fixed tenure, the maturity period ranging from one month to three/five
years. These plans are predominantly debt-oriented, while some of them may have a
small equity component. The objective of such a scheme is to generate steady returns
over a fixed-maturity period and protect the investor against market fluctuations.
FMPs are typically passively managed fixed income schemes with the fund manager
locking into investments with maturities corresponding with the maturity of the plan.
FMPs are not guaranteed products.

ExchangeTraded Funds
Exchange Traded Funds are essentially index funds that are listed and traded on
exchanges like Index fund schemes are ideal for investors who are satisfied with a return
approximately equal to that of an index. Globally, ETFs have opened a whole new
panorama of investment opportunities to retail as well as institutional investors. ETFs
enable investors to gain broad exposure to entire stock markets as well as in specific
sectors with relative ease, on a real-time basis and at a lower cost than many other forms
of investing.
An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX
Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading
value is based on the net asset value of the underlying stocks that it represents. It can be
compared to a stock that can be bought or sold on real time basis during the market hours.
The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12,
2001 and listed on the NSE on January 8, 2002.

Capital Protection Oriented Schemes
Capital Protection Oriented Schemes are schemes that endeavour to protect the capital as
the primary objective by investing in high quality fixed income securities and generate
capital appreciation by investing in equity / equity related instruments as a secondary
objective. The first Capital Protection Oriented Fund in India, Franklin Templeton
Capital Protection Oriented Fund opened for subscription on October 31,
2006. Gold Exchange Traded Funds offer investors an innovative, cost-efficient and
secure way to access the gold market. Gold ETFs are intended to offer investors a means
of participating in the gold bullion market by buying and selling units on the Stock
Exchanges, without taking physical delivery of gold. The first Gold ETF in India,
Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE
on April 17, 2007.


Quantitative Funds
A quantitative fund is an investment fund that selects securities based on quantitative
analysis. The managers of such funds build computer based models to determine whether
or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell
is made by the model. However, there is a middle ground where
the fund manager will use human judgment in addition to a quantitative model. The first
Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on
October 25, 2007.


Funds Investing Abroad


With the opening up of the Indian economy, Mutual Funds have been permitted to invest
in foreign securities/ American Depository Receipts (ADRs) / Global Depository
Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while
others invest partly in foreign securities and partly in domestic
securities. While most such schemes invest in securities across the world there are also
schemes which are country specific in their investment approach.

Fund of Funds (FOFs)
Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of
these schemes comprise only of units of other mutual fund schemes and cash / money
market securities/ short term deposits pending
deployment. The first FOF was launched by Franklin Templeton Mutual Fund on
October 17, 2003. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme
specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific
e.g.Aggressive/ Cautious FOFs etc.




How Mutual Funds Work

Every mutual fund has a goal - either growing its assets (capital gains) and/or generating
income (dividends) for its investors. Distributions in the form of capital gains (short-term
and long-term) and dividends may be passed on (paid) to shareholders as income or
reinvested to purchase more shares. For tax purposes, keep track of your distributions
and cost basis of purchased/reinvested shares.

Like any business, mutual funds have risks and costs associated with returns. As a
shareholder, the risks of a fund and the expenses associated with fund's operation directly
impact your return.

Returns

As an investor, you want to know the fund's return-its track record over a specified period
of time. So what exactly is "return?"

A mutual fund's return is the rate of increase or decrease in its value over a specific
period of time usually expressed in the following increments: one, three, five, and ten
year, year to date, and since the inception of the fund. Since return is a common measure
of performance, you can use it to evaluate and compare mutual funds within the same
fund category. Generally expressed as an annualized percentage rate, return is calculated
assuming that all distributions from the fund are reinvested.

Since average returns can sometimes "hide" short-term highs and lows, you should
evaluate returns for a time period of several years-not just one year or less. A fund that
has a high return in one year may have experienced losses in other years-these
fluctuations may not be apparent in its average return. While a fund's return shows its
track record, keep in mind that past performance is no guarantee of future results.

When using returns to compare funds, always use net returns. Net returns are the true
returns of both load and no-load funds after deducting all costs and expenses.
Risk

Every type of investment, including mutual funds, involves risk. Risk refers to the
possibility that you will lose money (both principal and any earnings) or fail to make
money on an investment. A fund's investment objective and its holdings are influential
factors in determining how risky a fund is. Reading the prospectus will help you to
understand the risk associated with that particular fund.

Generally speaking, risk and potential return are related. This is the risk/return trade-off.
Higher risks are usually taken with the expectation of higher returns at the cost of
increased volatility. While a fund with higher risk has the potential for higher return, it
also has the greater potential for losses or negative returns. The school of thought when
investing in mutual funds suggests that the longer your investment time horizon is the
less affected you should be by short-term volatility. Therefore, the shorter your
investment time horizon, the more concerned you should be with short-term volatility and
higher risk.

How do the professionals manage risk? click here

Defining Mutual fund risk

Different mutual fund categories as previously defined have inherently different risk
characteristics and should not be compared side by side. A bond fund with below-average
risk, for example, should not be compared to a stock fund with below average risk. Even
though both funds have low risk for their respective categories, stock funds overall have a
higher risk/return potential than bond funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest price
stability but have yielded the lowest long-term returns. Bonds typically experience more
short-term price swings, and in turn have generated higher long-term returns. However,
stocks historically have been subject to the greatest short-term price fluctuations—and
have provided the highest long-term returns. Investors looking for a fund which
incorporates all asset classes may consider a balanced or hybrid mutual fund. These
funds can be very conservative or very aggressive. Asset allocation portfolios are mutual
funds that invest in other mutual funds with different asset classes. At the discretion of
the manager(s), securities are bought, sold, and shifted between funds with different asset
classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bond fund
faces interest rate risk and income risk. Bond values are inversely related to interest
rates. If interest rates go up, bond values will go down and vice versa. Bond income is
also affected by the change in interest rates. Bond yields are directly related to interest
rates falling as interest rates fall and rising as interest rise. Income risk is greater for a
short-term bond fund than for a long-term bond fund.
Similarly, a sector stock fund (which invests in a single industry, such as
telecommunications) is at risk that its price will decline due to developments in its
industry. A stock fund that invests across many industries is more sheltered from this risk
defined as industry risk.

Following is a glossary of some risks to consider when investing in mutual funds.

Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—
or call—its high-yielding bond before the bond's maturity date.

Country Risk. The possibility that political events (a war, national elections), financial
problems (rising inflation, government default), or natural disasters (an earthquake, a
poor harvest) will weaken a country's economy and cause investments in that country to
decline.

Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a
timely manner. Also called default risk.

Currency Risk. The possibility that returns could be reduced for Americans investing in
foreign securities because of a rise in the value of the U.S. dollar against foreign
currencies. Also called exchange-rate risk.

Income Risk. The possibility that a fixed-income fund's dividends will decline as a result
of falling overall interest rates.

Industry Risk. The possibility that a group of stocks in a single industry will decline in
price due to developments in that industry.

Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate
a fund's real inflation-adjusted returns.

Interest Rate Risk. The possibility that a bond fund will decline in value because of an
increase in interest rates.

Manager Risk. The possibility that an actively managed mutual fund's investment adviser
will fail to execute the fund's investment strategy effectively resulting in the failure of
stated objectives.

Market Risk. The possibility that stock fund or bond fund prices overall will decline over
short or even extended periods. Stock and bond markets tend to move in cycles, with
periods when prices rise and other periods when prices fall.

Principal Risk. The possibility that an investment will go down in value, or "lose money,"
from the original or invested amount.
Advantages

1Professional Investment Management.
By pooling the money of thousands of investors, mutual funds provide full-time, high-
level professional management that few individual investors can afford to obtain
independently. Such management can be important to achieving results in today's
complex markets.

2Diversification.
Mutual funds invest in a broad range of securities. This limits investment risk by
reducing the effect of a possible decline in the value of any one security. Mutual fund
shareowners can benefit from diversification techniques usually available only to
investors wealthy enough to buy significant positions in a wide variety of securities.

3Low Cost.
If you tried to create your own diversified portfolio of 50 stocks, you'd need at least
$100,000 and you'd pay thousands of dollars in commissions to assemble your portfolio.
A mutual fund lets you participate in a diversified portfolio for as little as $1,000, and
sometimes less.

4Convenience and Flexibility.
You own just one security rather than many, yet enjoy the benefits of a diversified
portfolio and a wide range of services. Fund managers decide what securities to trade,
clip the bond coupons, collect the interest payments and see that your dividends on
portfolio securities are received and your rights exercised. It's easy to purchase and
redeem mutual fund shares, either directly online or with a phone call.

5Quick, Personalized Service.
Most mutual funds now offer extensive websites with a host of shareholder services for
immediate access to information about your fund account. Or a phone call puts you in
touch with a trained investment specialist at a mutual fund company who can provide
information you can use to make your own investment choices, assist you with buying
and selling your mutual funds shares, and answer questions about your mutual fund
account status.

6Ease of Investing
You may open or add to your account and conduct transactions or business with the
mutual fund by mail, telephone or bank wire. You can even arrange for automatic
monthly investments by authorizing electronic fund transfers from your checking account
in any amount and on a date you choose.

7Total Liquidity, Easy Withdrawal
You can easily redeem your shares anytime you need cash by letter, telephone, bank wire
or check, depending on the fund. Your proceeds are usually available within a day or two.
8Life Cycle Planning
With no-load mutual funds, you can link your investment plans to future individual and
family needs -- and make changes as your life cycles change. You can invest in growth
funds for future college tuition needs, then move to income mutual funds for retirement,
and adjust your investments as your needs change throughout your life. With no-load
mutual funds, there are no commissions to pay when you change your investments.

9Market Cycle Planning
For investors who understand how to actively manage their portfolio, mutual fund
investments can be moved as market conditions change. You can place your funds in
equities when the market is on the upswing and move into money market mutual funds
on the downswing or take any number of steps to ensure that your investments are
meeting your needs in changing market climates. A word of caution: since it is
impossible to predict what the market will do at any point in time, staying on course with
a long-term, diversified investment view is recommended for most investors.

10Investor Information
Shareholders receive regular reports from the mutual funds, including details of
transactions on a year-to-date basis. The current net asset value of your shares (the price
at which you may purchase or redeem them) appears in the mutual fund price listings of
daily newspapers. You can also obtain pricing and performance results for the all mutual
funds at this site, or it can be obtained by phone from the mutual funds.


11Periodic Withdrawals
If you want steady monthly income, many funds allow you to arrange for monthly fixed
checks to be sent to you, first by distributing some or all of the income and then, if
necessary, by dipping into your principal.

12Dividend Options
You can receive all dividend payments in cash. Or you can have them reinvested in the
fund free of charge, in which case the dividends are automatically compounded. This can
make a significant contribution to your long-term investment results. With some funds
you can elect to have your dividends from income paid in cash and your capital gains
distributions reinvested.

13Automatic Direct Deposit
You can usually arrange to have regular, third-party payments -- such as Social Security
or pension checks -- deposited directly into your fund account. This puts your money to
work immediately, without waiting to clear your checking account, and it saves you from
worrying about checks being lost in the mail.

14Recordkeeping Service
With your own portfolio of stocks and bonds, you would have to do your own
recordkeeping of purchases, sales, dividends, interest, short-term and long-term gains and
losses. Mutual funds provide confirmation of your transactions and necessary tax forms
to help you keep track of your investments and tax reporting.

15Safekeeping
When you own shares in a mutual fund, you own securities in many companies without
having to worry about keeping stock certificates in safe deposit boxes or sending them by
registered mail. You don't even have to worry about handling the mutual fund stock
certificates; the fund maintains your account on its books and sends you periodic
statements keeping track of all your transactions.

16Retirement and College Plans
Mutual funds are well suited to Individual Retirement Accounts and most funds offer
IRA-approved prototype and master plans for individual retirement accounts (IRAs) and
Keogh, 403(b), SEP-IRA and 401(k) retirement plans. Funds also make it easy to invest
-- for college, children or other long-term goals. Many offer special investment products
or programs tailored specifically for investments for children and college.

17Online Services
The internet provides a fast, convenient way for investors to access financial information.
A host of services are available to the online investor including direct access to no-load
companies.

18Sweep Accounts
With many mutual funds, if you choose not to reinvest your stock or bond mutual funds
dividends, you can arrange to have them swept into your money market fund
automatically. You get all the advantages of both accounts with no extra effort.

19Asset Management Accounts
These master accounts, available from many of the larger fund groups, enable you to
manage all your financial service needs under a single umbrella from unlimited check
writing and automatic bill paying to discount brokerage and credit card accounts.

20Margin
Some mutual fund shares are marginable. You may buy them on margin or use them as
collateral to borrow money from your bank or broker. Call your fund company for
details.



Disadvantages
Disadvantage 1: Mutual Funds Have Hidden Fees
If fees were hidden, those hidden fees would certainly be on the list of disadvantages of
mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees.
While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the
mutual fund prospectus and can be found on the mutual funds’ web sites. Many mutual
funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual
fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of
mutual funds because they are not hidden and there are thousands of mutual funds that do
not charge 12b-1 fees.

Disadvantage 2: Mutual Funds Lack Liquidity
How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks
and closed-end funds? If you sell a mutual fund, you have access to your cash the day
after the sale. ETFs, stocks and closed-end funds require you to wait three days after you
sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a
myth. You can only find more liquidity if you invest in your mattress.

Disadvantage 3: Mutual Funds Have High Sales Charges
Should a sales charge be included in the disadvantages of mutual funds list? It’s difficult
to justify paying a sales charge when you have a plethora of no-load mutual funds. But,
then again, it’s difficult to say that a sales charge is a disadvantage of mutual funds when
you have thousands of mutual fund options that do not have sales charges. Sales charges
are too broad to be included on my list of disadvantages of mutual funds.

Disadvantage 4: Mutual Funds and Poor Trade Execution
If you buy or sell a mutual fund, the transaction will take place at the close of the market
regardless of the time you entered the order to buy or sell the mutual fund. I find the
trading of mutual funds to be a simple, stress-free feature of the investment structure.
However, many advocates and purveyors of ETFs will point out that you can trade
throughout the day with ETFs. If you decide to invest in ETFs over mutual funds because
your order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00
pm EST with mutual funds, I recommend that you sign up for the Stress Management
Weekly Newsletter at About.com.

Disadvantage 5: All Mutual Funds Have High Capital Gains Distributions
If all mutual funds sell holdings and pass the capital gains on to investors as a taxable
event, then we have a found a winner for the list of disadvantages of mutual funds list.
Oh well, not all mutual funds make annual capital gains distributions. Index mutual funds
and tax-efficient mutual funds do not make these distributions every year. Yes, if they
have the gains, they must distribute the gains to shareholders. However, many mutual
funds (including index mutual funds and tax-efficient mutual funds) are low-turnover
funds and do not make capital gains distributions on an annual basis.



Risks and Costs:

Changing market conditions can create fluctuations in the value of a mutual fund
investment.

There are fees and expenses associated with investing in mutual funds that do not usually
occur when purchasing individual securities directly.
As with any type of investment, there are drawbacks associated with mutual funds.

No Guarantees. The value of your mutual fund investment, unlike a bank deposit, could
fall and be worth less than the principle initially invested. And, while a money market
fund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. In
addition, mutual funds are not insured or guaranteed by an agency of the U.S.
government. Bond funds, unlike purchasing a bond directly, will not re-pay the principle
at a set point in time.

The Diversification "Penalty." Diversification can help to reduce your risk of loss from
holding a single security, but it limits your potential for a "home run" if a single security
increases dramatically in value. Remember, too, that diversification does not protect you
from an overall decline in the market.

Costs. In some cases, the efficiencies of fund ownership are offset by a combination of
sales commissions, 12b-1 fees, redemption fees, and operating expenses. If the fund is
purchased in a taxable account, taxes may have to be paid on capital gains. Keep track of
the cost basis of your initial purchase and new shares that are acquired by reinvesting
distributions. It's important to compare the costs of funds you are considering. Always
look at "net" returns when comparing fund performances. Net return is the bottom line;
an investment's true return after all costs are deducted.

Prospectuses will not contain all the costs that affect the net return on your investment.
This is why it is important to compare net returns whether or not the fund in a no-load or
load fund.




Expenses

Because mutual funds are professionally managed investments, there are management
fees and operating expenses associated with investing in a fund. These fees and expenses
charged by the fund are passed onto shareholders and deducted from the fund's return.

These expenses are typically expressed as the expense ratio - the percent of fund assets
spent (annually) on day-to-day operations. Expense ratios can vary widely among funds.
Expense ratios for mutual funds commonly range from 0.2% to 2.0%, depending on the
fund. Consult the fund's prospectus to determine the expense ratio for a specific fund.

Make yourself aware of all fees and expenses that impact the fund's return by reducing
gains and increasing losses.

Defining Mutual Fund costs
All mutual funds have costs, but some funds are more expensive to own than others. Be
conscious of the effect of seemingly minor cost differences which can significantly affect
the growth of your investment assets, especially over longer periods of time.


Mutual fund costs fall into two main categories: One-time fees and ongoing annual
expenses. Not all funds charge one-time fees, but all funds charge ongoing annual fees of
some sort.

One-Time Fees

Loads

Loads come in three forms:

Front-End Load

Charged when you purchase fund shares-usually class A shares, effectively reducing your
purchase amount.

May be charged on reinvested distributions.

Can be as high as 8.5%.

Back-End Load

Charged when you sell fund shares.

Usually assessed based on the length of time you have held your shares, and declines
over time.

Maximum allowed is 8.5%, but this is rarely seen. According to Lipper Inc., back-end
loads can be as high as 6% if you sell shares within one year.

Level Load

Deducted annually from fund assets as marketing and distribution costs.

Used to pay commissions to brokers and the fund's financial adviser, and is generally
reported as part of a fund's operating expenses.

Can be as high as 0.75% per year, according to Lipper Inc.

How to Reduce a front-end load on class A shares
Rights of Accumulation (ROI): Your current aggregate investment determines the initial
sales load you pay. You may qualify for reduced sales charges when the current market
value of holdings (shares at current offering price), plus new purchases, reaches a specific
break point determined by the individual fund.

Statement or Letter of Intention (SOI or LOI): You may obtain a reduced sales charge by
means of a written SOI/LOI which expresses your non-binding commitment to invest an
amount in the aggregate over a break point within a given period of time specified by
the fund.

Break Points: Sales charges are reduced when the amount of purchase exceeds a
specified dollar figure. The more money that is invested, the lower the sales charge will
be. Consult the individual fund's prospectus to determine a fund's break points.

Funds that have no sales charges are known as "no-load," while funds that charge loads
of 1% to 3% are called "low-load." Keep in mind, funds that have lower loads or no-
loads tend to have higher operating expenses. Again, read each fund's prospectus and
compare "net" returns.

Ongoing Annual Expenses

Management Fees

Distribution and Service Fees

Other Expenses

Underlying Fund Expenses

Other fees

In addition to sales loads, fund companies and brokerages may charge other fees when
you buy or sell fund shares.

A transaction fee is charged by some brokerage firms for purchasing or selling shares.
Transaction fees are sometimes referred to as commissions but are extra costs not
normally paid if you were to purchase your fund directly with the fund family.

Some fund companies and brokerages may charge a redemption fee if the fund is held for
less than a certain period of time, generally between 90 and 180 days. These charges are
intended to discourage short-term trading that can raise a fund's administrative costs. To
find out more about fees read the fund's prospectus and consult your broker.

Not all funds assess these "extra" fees. In fact, funds and brokerages may not charge a
sales load, transaction fees or redemption fees. When buying mutual funds, find out
about all of the fees that might be involved and when they are charged.
DEVELOPMNTS IN MF
The origin of mutual fund industry in India is with the introduction of the concept of
mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated
from the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both
qualitywise as well as quantitywise. Before, the monopoly of the market had seen an
ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector
entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it
reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is
less than the deposits of SBI alone, constitute less than 11% of the total deposits held by
the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept.
Hence, it is the prime responsibility of all mutual fund companies, to market the product
correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the
development of the sector. Each phase is briefly described as under.

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)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first 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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under
management.

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

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One
is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as
on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an
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
AUM 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.
As at the end of September, 2004, there were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.


MARKET TRENDS OF MF INVESTMENTS:
Today there are plenty of investment avenues open. Some of them include banks
deposits, bonds, stocks, mutual fund investments and corporate debentures. Investors may
invest money in banks, bonds and corporate debentures where the risk is low and so are
the returns. On the contrary, stocks of companies have high risk but the returns are also
proportionately high. The recent trends since last year clearly suggest that the average
investors have lost money in equities. People have now started opting for portfolio
managers who have the expertise in stock markets. There are many institutions in India
which provide wealth management services. An average investor has found refuge with
the mutual funds.

There have been a lot of changes in the mutual fund industry in past few years. Lots of
multinational companies have bought their professional expertise to manage funds
worldwide. In the past few months there has been consolidation going on in the mutual
fund industry. Mutual funds in India now offer a wide range of schemes to choose.

Mutual funds are turned to be the most preferred choice worldwide for both small and big
investors due to their numerous advantages. It's all about long term financial planning.
These benefits mainly include diversification, professional management, potential of
returns, efficiency and easy to use.


Mutual fund investments carry low risk because of their diversified nature. It is important
to understand the benefits of mutual funds before investing the money you really care
about.

The size of Indian mutual fund industry has grown in recent few years. India can now
boast of having dominance in this industry. The total Asset Under Management popularly
known as AUM has increased from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67,
601.98 crores in April 2008.

According to the Association of Mutual Funds in India, the growth of mutual fund
industry has been exceptional. This industry has indeed come a very long way with only
34 players in the market and more than 480 schemes.


One of the major factors contributing to the growth of this industry has been the booming
stock market with an optimistic domestic economy. Second most important reason for
this growth is a favorable regulatory regime which has been enforced by SEBI. This
regulatory board has improved the market surveillance to protect the investor's interest.

NAV is directly proportionately to the bearish trends of the market. Top mutual funds
also suffer because of the fluctuations in the market. The pooled money is invested in
shares, debentures and treasury bills and thus has high risk involved.

Indian mutual funds however reveal this multi-dimensional avenue and all the intricacies
in a highly fashionable manner. It provides a lot of scope to understand the scenario and
make some thoughtful investments for decent returns.

In order to invest in the best mutual funds, it is important to perform a comparative study.
It is important to study about the returns given by AMC Mutual Funds and perform a
comparative analysis. Remember, every problem has several researches involved in it,
each backed by study.

Some of the top mutual funds in India are:
* Reliance Mutual Fund
* UTI Mutual Fund
* Kotak Mutual Fund
* HDFC Mutual Fund
* Prudential ICICI Mutual Fund




Taxes and Fund Ownership

Since your goal as an investor is to keep as much as possible of what you earn from your
mutual fund investments, you can't overlook the inescapable reality that taxes take a big
bite out of bottom-line returns. One way to shelter yourself from taxes is to purchase
your funds in a retirement account.

As a fund shareholder, you can be taxed on:

Distributions (dividends & capital gains) maid by the fund while you own its shares.

Profits you make when you sell fund shares.

Taxes on Fund Distributions

A fund passes on to shareholders all the income or profits it earns from its investments.
Shareholders, in turn, are liable for any taxes due. The distributions made by a fund to
shareholders take two forms:

Income Dividends. The interest and dividends generated by a fund's investments.

Capital Gains. The profit a fund makes when it sells securities at a higher price than it
paid for them. The fund subtracts its capital losses from its capital gains to determine its
net capital gains, which it distributes to shareholders. (Net capital losses are not passed
through to shareholders; the fund retains those to offset future capital gains.)

Generally, all income dividend and capital gains distributions are subject to federal
income tax (and state and local taxes if applicable). Exceptions are:

Distributions received in tax-deferred accounts, such as 401(k) and 403(b)(7) plans,
individual retirement accounts, or variable annuities. Only withdrawals from such
accounts are subject to tax. (Withdrawals from a Roth IRA are exempt from taxes under
certain conditions.)

Income dividend distributions from municipal money market funds and municipal bond
funds. These distributions are exempt from federal and, in some cases, state taxes.
(Capital gains distributions from municipal bond funds are taxable, however.)
Apart from the exceptions noted above, you must pay taxes on distributions whether you
receive them in cash or reinvest them in additional shares.

Distributions of income dividends and short-term capital gains (gains on securities held
by the fund for one year or less) are taxed as ordinary income at your marginal tax rate,
which can range from 15% to 39.6% currently but can change. Distributions of long-
term capital gains (gains on securities held by the fund for more than one year) are taxed
at a maximum rate of 20% (10% for taxpayers in the lowest tax bracket) currently but can
change.

For higher-income taxpayers, effective marginal tax rates may be higher because of limits
on tax deductions and a "phase out" of personal exemptions. State and local taxes also
increase effective marginal tax rates.

Please remember that IRS tax rules can change. You should consult a tax adviser for
guidance on your specific tax situation.


Taxes on Profits From Shares You Sell

When you sell fund shares, the tax rate on any capital gains is determined by how long
you held the shares. Short-term gains are taxed as ordinary income at your marginal tax
rate, while long-term gains are taxed at a maximum rate of 20% (10% for taxpayers in the
lowest tax bracket).

Keep in mind that:

All capital gains from the sale of fund shares are taxable, even those from the sale of
shares of a tax-exempt fund.

Exchanging shares between funds is considered a sale, which may lead to capital gains.
(An exchange involves selling shares of one fund to buy shares in another.)

Writing a check against an investment in a fund with a fluctuating share price (generally
all funds except money market funds) also triggers a sale of shares and may expose you
to tax on any resulting capital gains.

The impact of expenses on return over time is why you should consider expenses when
you invest in mutual funds. Even though published return data is always reported net of
expenses, higher expenses will reduce your investment return.




What Fees do Load and No-Load Mutual Funds not have to Report in the Prospectus?
"...One ongoing expense that is not included in the expense ratio is brokerage costs
incurred by a fund as it buys and sells securities. These costs are listed separately in a
fund's annual report, sometimes as a percentage and sometimes as a dollar amount. Some
trading costs, however, are not included in this figure. The spread between the bid and
ask prices of over-the-counter stocks, for example, can be thought of as a trading
expense, but such costs are not reported by fund companies. The annual report also
includes any interest costs, which a fund will incur if it borrows money to buy securities."

"All of the expenses that we have mentioned so for can be thought of as coming out of
the portfolio's raw return, skimmed off the top, so to speak..." (MorningStar: Investing
101: Mutual Fund Expenses)

"...In addition, because mutual funds buy and sell securities, they incur brokerage costs.
Because these costs vary and are difficult to predict, they are not included in the fee table
in the front of the prospectus. However, they are included in any computations of a
fund's performance that appears in advertising." (ICI Investor Awareness Series: About
Mutual Fund Fees)

Again, when comparing fund returns, always look at the "net" return. This is the bottom
line.




Mutual fund categories

Mutual funds fall into the following categories: money market funds, bonds funds, stocks
funds, balanced funds, and asset allocation funds.

Stock funds

As the name implies, stock mutual funds invest mainly in common stocks. These stocks
may be sold on the New York Stock Exchange, the NASDAQ or other exchanges.

The objective of a stock fund is long-term capital appreciation versus generating income
(dividends) more common with bond funds. However, stock funds may generate modest
dividends from the stocks in the portfolio and from short-term cash investments. These
stock tend to be larger capitalized stocks versus smaller growth stocks.

There are four basic types of stock funds.

Stock Fund Types
Large Cap: Primarily invests in "Blue-chip" companies - large, well-known industrials,
utilities, technology, and financial services companies with large market capitalization.
Large cap stocks are perceived to be less risky than smaller capitalized companies.

Mid Cap: Primarily invests in companies whose market capitalization is smaller than
large caps but larger than small caps. Mid caps are generally considered more risky than
large cap stocks but have a higher return expectation.

Small Cap: Primarily invests in emerging companies, thought to have potential for future
growth and profit. Small caps are generally considered the riskiest stocks compared to
larger capitalized firms but carry the expectation of higher returns. Small cap funds are
subject to greater volatility than those in other asset categories.

International: Primarily invests in stocks traded on foreign exchanges but purchased in
the United States by U.S. fund companies. International funds are subject to additional
risks such as currency fluctuation, political instability and the potential for illiquid
markets.

Sector: Primarily invests in specific industry sectors such as technology, financials,
health, or energy. Since sector funds focus their investments on companies involved in a
specific industry sector, the funds may involve a greater degree of risk that an investment
in other mutual funds with greater diversification.

Many investors buy stock mutual funds because, historically, stocks have outperformed
other types of investments over the long term. However, the value of the stocks in the
fund's portfolio may go up or down as the market rises or declines. Remember, past
performance is no guarantee of future results.

Bond funds

Bond funds1 invest in various types of bonds - issued by corporations, municipalities,
and the U.S. government. Bond mutual funds are designed mostly to provide investors
with a steady stream of income2 versus capital gains.

Bond Funds:

Invest in bonds, which are debt securities, or IOUs, issued by corporations or
governments in exchange for money loaned to them. Generally, the issuer agrees to repay
the loan by a specific date and to make regular interest payments to the lender until then.

Are a basket of bonds with different durations, yields, credit quality, and values. Because
of this, bond funds never mature as would be the case with buying an individual bond.

Share value and dividends will fluctuate as interest rates fluctuate and new bonds are
purchased or others are sold or mature.
Produce profits that consist primarily of dividend distributions.

May generate modest capital gains.

Fluctuate in value, so it is possible to sell shares at a higher or lower price than you paid
for them.

Bond Fund Types:

Government: Primarily invest in bonds issued by the U.S. Department of Treasury as
well as various federal agencies. Government bonds are generally taxable.

Municipal: Primarily invest in municipal bonds issued by state and local governments
and their agencies to fund projects such as schools, streets, highways, hospitals, bridges,
and airports. Municipal bonds can be insured or non-insured securities. Income
generated from municipal bonds may be tax free at both the federal and state level
(consult the funds prospectus).

Corporate: Primarily invest in bonds issued by corporations to help fund business
activities. Income from corporate bonds is taxable.

1 Bond fund shares are not guaranteed and will fluctuate with market conditions and
interest rates and include a greater risk to principal than Certificates of Deposit. Shares,
when redeemed, may be worth more or less than their original cost.

2 Income may be subject to the Alternative Minimum Tax (AMT) and capital
appreciation from discounted bonds may be subject to state and local taxes.

Money market funds

Money market funds invest in short-term securities such as Treasury bills. Most money
market funds offer a higher rate of interest than bank savings accounts, and some are free
of federal or state taxes. But unlike bank savings accounts, money market funds are not
FDIC insured.

Money market mutual funds are designed to be more stable than stock or bond funds.
Money market funds are designed to provide steady dividend income on the investment
amount, although the yield may fluctuate daily.

Taxable: Invest in short-term obligations from corporations.

Tax-free: Invest in short-term obligations from government entities.

Balanced Funds:

Invest in stocks, bonds, and cash investments, in varying proportions.
Produce dividend and capital gain distributions and share price appreciation in proportion
to their allocation among the three major asset classes.

Asset Allocation Funds:

In an asset allocation fund, the manager will diversify the assets among each category:
cash, bonds, and stocks and weight them according to the portfolio strategy. The
manager will redistribute the weightings according to market conditions. Portfolio
strategies generally differ according to risk tolerance:

Aggressive Growth Strategy Portfolio

Growth Strategy Portfolio

Growth and Income Strategy Portfolio

Income Strategy Portfolio

Asset allocation funds are usually made up of a combination of other mutual funds within
the same fund family. As market conditions change, the manager has the discretion to
reduce exposure in one fund and increase it in another. Just about all mutual fund
families allow you to switch between funds in the same family and class (A, B, or C
shares) without incurring any costs.


Fund Management

Actively managed funds:

Mutual Fund managers are professionals. They are considered professionals because of
their knowledge and experience. Managers are hired to actively manage mutual fund
portfolios. Instead of seeking to track market performance, active fund management tries
to beat it. To do this, fund managers "actively" buy and sell individual securities. For an
actively managed fund, the corresponding index can be used as a performance
benchmark.

Is an active fund a better investment because it is trying to outperform the market? Not
necessarily. While there is the potential for higher returns with active funds, they are
more unpredictable and more risky. From 1990 through 1999, on average, 76% of large
cap actively managed stock funds actually under performed the S&P 500. (Source -
Schwab Center for Investment Research)

Actively managed fund styles:
Some active fund managers follow an investing "style" to try and maximize fund
performance while meeting the investment objectives of the fund. Fund styles usually fall
with in the following three categories.

Fund Styles:

Value: The manager invests in stocks believed to be currently undervalued by the market.

Growth: The manager selects stocks they believe have a strong potential for beating the
market.

Blend: The manager looks for a combination of both growth and value stocks.

To determine the style of a mutual fund, consult the prospectus as well as other sources
that review mutual funds. Don't be surprised if the information conflicts. Although a
prospectus may state a specific fund style, the style may change. Value stocks held in the
portfolio over a period of time may become growth stocks and vice versa. Other research
may give a more current and accurate account of the style of the fund.

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Mutual funds are a popular investment for many types of investors because they offer a convenient

  • 1. Mutual funds are a popular investment for many types of investors because they offer a convenient, cost-effective and easy way to invest in the financial markets. What is a Mutual Fund? What is a mutual fund? A mutual fund is a professionally managed investment company that combines the money of many individuals and invests this “pooled” money in a wide variety of different securities. It is by pooling the money of many individuals that mutual funds are able to provide the diversification and money management (along with many other advantages) that were once reserved only for the wealthy. Professional money managers take this pool of money and invest it in a wide variety of stocks, bonds, or other securities depending on the investment objective, or goal, of the particular fund. It is the investment objective of the fund that guides the manager in selecting the various securities for the fund. It is the investment objective of the mutual fund that also guides the investor on which funds to invest in. Since different investors have different objectives, there are a number of different kinds of mutual funds, i.e., some mutual funds may provide monthly income while others seek long-term capital appreciation. Mutual funds can be classified according to their investment objective. Some of the classifications include money market funds, growth funds, balanced funds, income funds, and many others. A mutual fund company pools the money of many investors and invests it for them in a collection of securities by purchasing stocks, bonds, money markets and/or other securities. These securities are often referred to as holdings and all of the fund's holdings combined make up the portfolio. The assets in a mutual fund's portfolio are managed by a professional money manager(s) who decides which securities to buy and sell based on the fund's investment objective, detailed in the fund's prospectus. When you invest in a mutual fund, you are actually buying shares in the fund, which means you own a small percentage of the fund's entire portfolio. These shares are a fractional representation of the entire mutual fund's diversified holdings. The price of a share at any time is called the fund's net asset value, or NAV. If you invest $1,000 in a mutual fund with an NAV of $24.75, you will receive 40.40 shares of that fund. (Unlike stocks, you can own fractional shares in a mutual fund). When the value of the portfolio increases, the value of your investment also increases. If, however, the value of the fund decreases, your investment value will decrease as well.
  • 2. The primary asset categories found in mutual funds are money markets, bonds, and/or stocks. Mutual funds may invest in a single asset class or a combination of all. Maintaining the weight of each category and the decision on when to buy or sell is the function of the mutual fund's manager(s). Typically, the fund category indicates the primary investments (holdings) of the fund. For example, a fund that holds 85% stocks, 10% bonds and 5% cash equivalents is typically categorized as a stock fund. CURRENT SCENARIO IN MF INDUSTRY The Indian Mutual fund industry has witnessed considerable growth since its inception in 1963. The assets under management (AUM) have surged to Rs 4,173 bn in Mar-09 from just Rs 250 mn in Mar-65. In a span of 10 years (from 1999 to 2009), the industry has registered a CAGR of 22.3%, albeit encompassing some shortfalls in AUM due to business cycles. The impressive growth in the Indian Mutual fund industry in recent years can largely be attributed to various factors such as rising household savings, comprehensive regulatory framework, favourable tax policies, introduction of several new products, investor education campaign and role of distributors. In the last few years, household’s income levels have grown significantly, leading to commensurate increase in household’s savings. Household financial savings (at current prices) registered growth rate of around 17.4% on an average during the period FY04- FY08 as against 11.8% on an average during the period FY99-FY03. The considerable rise in household’s financial savings, point towards the huge market potential of the Mutual fund industry in India. Besides, SEBI has introduced various regulatory measures in order to protect the interest of small investors that augurs well for the long term growth of the industry. The tax benefits allowed on mutual fund schemes (for example investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the Income Tax Act) also have helped mutual funds to evolve as the preferred form of investment among the salaried income earners. Besides, the Indian Mutual fund industry that started with traditional products like equity fund, debt fund and balanced fund has significantly expanded its product portfolio. Today, the industry has introduced an array of products such as liquid/money market funds, sector-specific funds, index funds, gilt funds, capital protection oriented schemes, special category funds, insurance linked funds, exchange traded funds, etc. It also has introduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or gold related instruments. Further, the industry has launched special schemes to invest in foreign securities. The wide variety of schemes offered by the Indian Mutual fund industry provides multiple options of investment to common man. Impact of the Global Financial Crisis
  • 3. Deepening of the global financial crisis during September 2008, which resulted in liquidity crunch world-over, had dampening impact of the Indian Mutual fund industry. With the drying up of credit inflows from banks and external commercial borrowings route, mutual funds witnessed redemption pressure from corporates. Although the mutual funds promised immediate redemption, their assets were relatively illiquid. Besides, mutual funds faced problems such as maturity mismatches between assets & liabilities of mutual funds, shift from mutual funds to bank deposits in view of the comparatively higher interest rates being offered by banks and freezing up of money markets due to lack of buyers for assets like certificates of deposits of private sector banks. During Apr-Sep 08, net mobilisation of funds by mutual funds declined sharply by 97.7% to Rs 24.8 bn due to uncertain conditions prevailing in the domestic stock markets. The redemption pressures witnessed by mutual funds led to net outflows under both the income/debt-oriented schemes and growth/equity-oriented schemes. Further, the AUM of Mutual fund industry contracted by 20.7% from Rs 5,445.4 bn as on August 31, 2008 to Rs 4,319.0 bn as on October 31, 2008. During the same period, liquid and debt schemes which contribute more than 65% to the total AUM witnessed a decline of 19% in AUM. In an endeavour to ease liquidity pressures in the system and restore stability in the domestic financial markets, the RBI announced a slew of measures. The key measures announced by the RBI include: The RBI decided to conduct a special 14 day repo at 9% per annum for a notified amount of Rs 200 bn from October 14, 2008 with a view to enable banks to meet the liquidity requirements of mutual funds. Scheduled Commercial Banks (SCBs) and All India term lending and refinancing institutions were allowed to lend against and buy back CDs held by mutual funds for a period of 15 days. As a temporary measure, banks were allowed to avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5% of their net demand and time liabilities (NDTL). Accordingly on November 1, 2008, it was decided to extend this facility and allow banks to avail liquidity support under the LAF through relaxation in the maintenance of SLR to the extent of up to 1.5% of their NDTL. This relaxation in SLR was provided for the purpose of meeting the funding requirements of NBFCs and mutual funds. The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund) Regulations, 1996 was enhanced from 20% of net asset of the scheme to 40% of net asset of the scheme to those mutual funds who approached SEBI. This enhanced borrowing limit was made available for a period of six months and could be utilised for the purpose of redemptions/ repurchase of units. In order to moderate the exit from close ended debt schemes and in the interest of those investors who choose to remain till maturity and with a view to ensure that the value of debt securities reflects the current market scenario in calculation of NAV, the discretion given to mutual funds to mark up/ mark down the benchmark yields for debt instruments of more than 182 days maturity was enhanced from 150 basis points to 650 basis points.
  • 4. The significant reduction in CRR & SLR, net injection of Rs 9,279 bn through the repo window during Oct-08, the repurchase of MSS bonds worth Rs 200 bn along with the earlier mentioned liquidity augmentation measures helped to ease liquidity pressures for domestic mutual funds. The data reveals that about 18 mutual funds borrowed from banks. Further, the increase of borrowing limits enabled the mutual funds to meet redemption pressures without engaging in a large scale sale of assets which could have caused systemic instability. As on November 10, 2008, 15 mutual funds had been extended the enhanced borrowing limit as per their requests made to SEBI. However, with some recovery in the Indian financial markets as well as improvement in the liquidity conditions, the RBI in it’s Q2 FY10 review of monetary policy withdrew some liquidity boosting measures that were introduced as a part of monetary stimulus in FY09. The special term repo facility for SCBs, for funding to NBFCs, mutual funds, and housing finance companies was terminated. MUTUAL FUNDS 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? (A) By Structure Open-Ended Schemes These do not have a fixed maturity.You deal 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, at any point of time. close ended schemes. Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close ended schemes. You can invest 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’sNAV 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 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 under the close ended schemes. Interval Schemes
  • 5. 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. (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 short term. Income Schemes 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. 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:
  • 6. Corporates and individual investors as a means to park their surplus funds for short periods or awaiting a more favourable investment alternative. Tax Saving Schemes (Equity Linked Saving Scheme - ELSS) These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.Eligible for deduction under section 80C .Lock in period three years Ideal for: Investors seeking tax incentives. Special Schemes This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemes which invest in specific sectors such as Technology, Infrastructure, Banking, Pharma etc.Besides, there are also schemes which invest exclusively in certain segments of the capital market, such as Large Caps, Mid Caps, Small Caps, Micro Caps, 'A' group shares, shares issued through Initial Public Offerings (IPOs), etc. Index fund Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Fixed Maturity Plan Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are close ended with a fixed tenure, the maturity period ranging from one month to three/five years. These plans are predominantly debt-oriented, while some of them may have a small equity component. The objective of such a scheme is to generate steady returns over a fixed-maturity period and protect the investor against market fluctuations. FMPs are typically passively managed fixed income schemes with the fund manager locking into investments with maturities corresponding with the maturity of the plan. FMPs are not guaranteed products. ExchangeTraded Funds Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Globally, ETFs have opened a whole new
  • 7. panorama of investment opportunities to retail as well as institutional investors. ETFs enable investors to gain broad exposure to entire stock markets as well as in specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing. An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading value is based on the net asset value of the underlying stocks that it represents. It can be compared to a stock that can be bought or sold on real time basis during the market hours. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8, 2002. Capital Protection Oriented Schemes Capital Protection Oriented Schemes are schemes that endeavour to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity / equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on October 31, 2006. Gold Exchange Traded Funds offer investors an innovative, cost-efficient and secure way to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007. Quantitative Funds A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007. Funds Investing Abroad With the opening up of the Indian economy, Mutual Funds have been permitted to invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes which are country specific in their investment approach. Fund of Funds (FOFs)
  • 8. Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprise only of units of other mutual fund schemes and cash / money market securities/ short term deposits pending deployment. The first FOF was launched by Franklin Templeton Mutual Fund on October 17, 2003. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g.Aggressive/ Cautious FOFs etc. How Mutual Funds Work Every mutual fund has a goal - either growing its assets (capital gains) and/or generating income (dividends) for its investors. Distributions in the form of capital gains (short-term and long-term) and dividends may be passed on (paid) to shareholders as income or reinvested to purchase more shares. For tax purposes, keep track of your distributions and cost basis of purchased/reinvested shares. Like any business, mutual funds have risks and costs associated with returns. As a shareholder, the risks of a fund and the expenses associated with fund's operation directly impact your return. Returns As an investor, you want to know the fund's return-its track record over a specified period of time. So what exactly is "return?" A mutual fund's return is the rate of increase or decrease in its value over a specific period of time usually expressed in the following increments: one, three, five, and ten year, year to date, and since the inception of the fund. Since return is a common measure of performance, you can use it to evaluate and compare mutual funds within the same fund category. Generally expressed as an annualized percentage rate, return is calculated assuming that all distributions from the fund are reinvested. Since average returns can sometimes "hide" short-term highs and lows, you should evaluate returns for a time period of several years-not just one year or less. A fund that has a high return in one year may have experienced losses in other years-these fluctuations may not be apparent in its average return. While a fund's return shows its track record, keep in mind that past performance is no guarantee of future results. When using returns to compare funds, always use net returns. Net returns are the true returns of both load and no-load funds after deducting all costs and expenses.
  • 9. Risk Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Reading the prospectus will help you to understand the risk associated with that particular fund. Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher risks are usually taken with the expectation of higher returns at the cost of increased volatility. While a fund with higher risk has the potential for higher return, it also has the greater potential for losses or negative returns. The school of thought when investing in mutual funds suggests that the longer your investment time horizon is the less affected you should be by short-term volatility. Therefore, the shorter your investment time horizon, the more concerned you should be with short-term volatility and higher risk. How do the professionals manage risk? click here Defining Mutual fund risk Different mutual fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return potential than bond funds. Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have yielded the lowest long-term returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuations—and have provided the highest long-term returns. Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset allocation portfolios are mutual funds that invest in other mutual funds with different asset classes. At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions. Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund.
  • 10. Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk. Following is a glossary of some risks to consider when investing in mutual funds. Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem— or call—its high-yielding bond before the bond's maturity date. Country Risk. The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Currency Risk. The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk. Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk. The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk. The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount.
  • 11. Advantages 1Professional Investment Management. By pooling the money of thousands of investors, mutual funds provide full-time, high- level professional management that few individual investors can afford to obtain independently. Such management can be important to achieving results in today's complex markets. 2Diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund shareowners can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 3Low Cost. If you tried to create your own diversified portfolio of 50 stocks, you'd need at least $100,000 and you'd pay thousands of dollars in commissions to assemble your portfolio. A mutual fund lets you participate in a diversified portfolio for as little as $1,000, and sometimes less. 4Convenience and Flexibility. You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, clip the bond coupons, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It's easy to purchase and redeem mutual fund shares, either directly online or with a phone call. 5Quick, Personalized Service. Most mutual funds now offer extensive websites with a host of shareholder services for immediate access to information about your fund account. Or a phone call puts you in touch with a trained investment specialist at a mutual fund company who can provide information you can use to make your own investment choices, assist you with buying and selling your mutual funds shares, and answer questions about your mutual fund account status. 6Ease of Investing You may open or add to your account and conduct transactions or business with the mutual fund by mail, telephone or bank wire. You can even arrange for automatic monthly investments by authorizing electronic fund transfers from your checking account in any amount and on a date you choose. 7Total Liquidity, Easy Withdrawal You can easily redeem your shares anytime you need cash by letter, telephone, bank wire or check, depending on the fund. Your proceeds are usually available within a day or two.
  • 12. 8Life Cycle Planning With no-load mutual funds, you can link your investment plans to future individual and family needs -- and make changes as your life cycles change. You can invest in growth funds for future college tuition needs, then move to income mutual funds for retirement, and adjust your investments as your needs change throughout your life. With no-load mutual funds, there are no commissions to pay when you change your investments. 9Market Cycle Planning For investors who understand how to actively manage their portfolio, mutual fund investments can be moved as market conditions change. You can place your funds in equities when the market is on the upswing and move into money market mutual funds on the downswing or take any number of steps to ensure that your investments are meeting your needs in changing market climates. A word of caution: since it is impossible to predict what the market will do at any point in time, staying on course with a long-term, diversified investment view is recommended for most investors. 10Investor Information Shareholders receive regular reports from the mutual funds, including details of transactions on a year-to-date basis. The current net asset value of your shares (the price at which you may purchase or redeem them) appears in the mutual fund price listings of daily newspapers. You can also obtain pricing and performance results for the all mutual funds at this site, or it can be obtained by phone from the mutual funds. 11Periodic Withdrawals If you want steady monthly income, many funds allow you to arrange for monthly fixed checks to be sent to you, first by distributing some or all of the income and then, if necessary, by dipping into your principal. 12Dividend Options You can receive all dividend payments in cash. Or you can have them reinvested in the fund free of charge, in which case the dividends are automatically compounded. This can make a significant contribution to your long-term investment results. With some funds you can elect to have your dividends from income paid in cash and your capital gains distributions reinvested. 13Automatic Direct Deposit You can usually arrange to have regular, third-party payments -- such as Social Security or pension checks -- deposited directly into your fund account. This puts your money to work immediately, without waiting to clear your checking account, and it saves you from worrying about checks being lost in the mail. 14Recordkeeping Service With your own portfolio of stocks and bonds, you would have to do your own recordkeeping of purchases, sales, dividends, interest, short-term and long-term gains and
  • 13. losses. Mutual funds provide confirmation of your transactions and necessary tax forms to help you keep track of your investments and tax reporting. 15Safekeeping When you own shares in a mutual fund, you own securities in many companies without having to worry about keeping stock certificates in safe deposit boxes or sending them by registered mail. You don't even have to worry about handling the mutual fund stock certificates; the fund maintains your account on its books and sends you periodic statements keeping track of all your transactions. 16Retirement and College Plans Mutual funds are well suited to Individual Retirement Accounts and most funds offer IRA-approved prototype and master plans for individual retirement accounts (IRAs) and Keogh, 403(b), SEP-IRA and 401(k) retirement plans. Funds also make it easy to invest -- for college, children or other long-term goals. Many offer special investment products or programs tailored specifically for investments for children and college. 17Online Services The internet provides a fast, convenient way for investors to access financial information. A host of services are available to the online investor including direct access to no-load companies. 18Sweep Accounts With many mutual funds, if you choose not to reinvest your stock or bond mutual funds dividends, you can arrange to have them swept into your money market fund automatically. You get all the advantages of both accounts with no extra effort. 19Asset Management Accounts These master accounts, available from many of the larger fund groups, enable you to manage all your financial service needs under a single umbrella from unlimited check writing and automatic bill paying to discount brokerage and credit card accounts. 20Margin Some mutual fund shares are marginable. You may buy them on margin or use them as collateral to borrow money from your bank or broker. Call your fund company for details. Disadvantages Disadvantage 1: Mutual Funds Have Hidden Fees If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds’ web sites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual
  • 14. fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b-1 fees. Disadvantage 2: Mutual Funds Lack Liquidity How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress. Disadvantage 3: Mutual Funds Have High Sales Charges Should a sales charge be included in the disadvantages of mutual funds list? It’s difficult to justify paying a sales charge when you have a plethora of no-load mutual funds. But, then again, it’s difficult to say that a sales charge is a disadvantage of mutual funds when you have thousands of mutual fund options that do not have sales charges. Sales charges are too broad to be included on my list of disadvantages of mutual funds. Disadvantage 4: Mutual Funds and Poor Trade Execution If you buy or sell a mutual fund, the transaction will take place at the close of the market regardless of the time you entered the order to buy or sell the mutual fund. I find the trading of mutual funds to be a simple, stress-free feature of the investment structure. However, many advocates and purveyors of ETFs will point out that you can trade throughout the day with ETFs. If you decide to invest in ETFs over mutual funds because your order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00 pm EST with mutual funds, I recommend that you sign up for the Stress Management Weekly Newsletter at About.com. Disadvantage 5: All Mutual Funds Have High Capital Gains Distributions If all mutual funds sell holdings and pass the capital gains on to investors as a taxable event, then we have a found a winner for the list of disadvantages of mutual funds list. Oh well, not all mutual funds make annual capital gains distributions. Index mutual funds and tax-efficient mutual funds do not make these distributions every year. Yes, if they have the gains, they must distribute the gains to shareholders. However, many mutual funds (including index mutual funds and tax-efficient mutual funds) are low-turnover funds and do not make capital gains distributions on an annual basis. Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. There are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.
  • 15. As with any type of investment, there are drawbacks associated with mutual funds. No Guarantees. The value of your mutual fund investment, unlike a bank deposit, could fall and be worth less than the principle initially invested. And, while a money market fund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. In addition, mutual funds are not insured or guaranteed by an agency of the U.S. government. Bond funds, unlike purchasing a bond directly, will not re-pay the principle at a set point in time. The Diversification "Penalty." Diversification can help to reduce your risk of loss from holding a single security, but it limits your potential for a "home run" if a single security increases dramatically in value. Remember, too, that diversification does not protect you from an overall decline in the market. Costs. In some cases, the efficiencies of fund ownership are offset by a combination of sales commissions, 12b-1 fees, redemption fees, and operating expenses. If the fund is purchased in a taxable account, taxes may have to be paid on capital gains. Keep track of the cost basis of your initial purchase and new shares that are acquired by reinvesting distributions. It's important to compare the costs of funds you are considering. Always look at "net" returns when comparing fund performances. Net return is the bottom line; an investment's true return after all costs are deducted. Prospectuses will not contain all the costs that affect the net return on your investment. This is why it is important to compare net returns whether or not the fund in a no-load or load fund. Expenses Because mutual funds are professionally managed investments, there are management fees and operating expenses associated with investing in a fund. These fees and expenses charged by the fund are passed onto shareholders and deducted from the fund's return. These expenses are typically expressed as the expense ratio - the percent of fund assets spent (annually) on day-to-day operations. Expense ratios can vary widely among funds. Expense ratios for mutual funds commonly range from 0.2% to 2.0%, depending on the fund. Consult the fund's prospectus to determine the expense ratio for a specific fund. Make yourself aware of all fees and expenses that impact the fund's return by reducing gains and increasing losses. Defining Mutual Fund costs
  • 16. All mutual funds have costs, but some funds are more expensive to own than others. Be conscious of the effect of seemingly minor cost differences which can significantly affect the growth of your investment assets, especially over longer periods of time. Mutual fund costs fall into two main categories: One-time fees and ongoing annual expenses. Not all funds charge one-time fees, but all funds charge ongoing annual fees of some sort. One-Time Fees Loads Loads come in three forms: Front-End Load Charged when you purchase fund shares-usually class A shares, effectively reducing your purchase amount. May be charged on reinvested distributions. Can be as high as 8.5%. Back-End Load Charged when you sell fund shares. Usually assessed based on the length of time you have held your shares, and declines over time. Maximum allowed is 8.5%, but this is rarely seen. According to Lipper Inc., back-end loads can be as high as 6% if you sell shares within one year. Level Load Deducted annually from fund assets as marketing and distribution costs. Used to pay commissions to brokers and the fund's financial adviser, and is generally reported as part of a fund's operating expenses. Can be as high as 0.75% per year, according to Lipper Inc. How to Reduce a front-end load on class A shares
  • 17. Rights of Accumulation (ROI): Your current aggregate investment determines the initial sales load you pay. You may qualify for reduced sales charges when the current market value of holdings (shares at current offering price), plus new purchases, reaches a specific break point determined by the individual fund. Statement or Letter of Intention (SOI or LOI): You may obtain a reduced sales charge by means of a written SOI/LOI which expresses your non-binding commitment to invest an amount in the aggregate over a break point within a given period of time specified by the fund. Break Points: Sales charges are reduced when the amount of purchase exceeds a specified dollar figure. The more money that is invested, the lower the sales charge will be. Consult the individual fund's prospectus to determine a fund's break points. Funds that have no sales charges are known as "no-load," while funds that charge loads of 1% to 3% are called "low-load." Keep in mind, funds that have lower loads or no- loads tend to have higher operating expenses. Again, read each fund's prospectus and compare "net" returns. Ongoing Annual Expenses Management Fees Distribution and Service Fees Other Expenses Underlying Fund Expenses Other fees In addition to sales loads, fund companies and brokerages may charge other fees when you buy or sell fund shares. A transaction fee is charged by some brokerage firms for purchasing or selling shares. Transaction fees are sometimes referred to as commissions but are extra costs not normally paid if you were to purchase your fund directly with the fund family. Some fund companies and brokerages may charge a redemption fee if the fund is held for less than a certain period of time, generally between 90 and 180 days. These charges are intended to discourage short-term trading that can raise a fund's administrative costs. To find out more about fees read the fund's prospectus and consult your broker. Not all funds assess these "extra" fees. In fact, funds and brokerages may not charge a sales load, transaction fees or redemption fees. When buying mutual funds, find out about all of the fees that might be involved and when they are charged.
  • 18. DEVELOPMNTS IN MF The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well as quantitywise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. 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) Entry of non-UTI mutual funds. SBI Mutual Fund was the first 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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. 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
  • 19. 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 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an 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 AUM 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. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. MARKET TRENDS OF MF INVESTMENTS: Today there are plenty of investment avenues open. Some of them include banks deposits, bonds, stocks, mutual fund investments and corporate debentures. Investors may invest money in banks, bonds and corporate debentures where the risk is low and so are the returns. On the contrary, stocks of companies have high risk but the returns are also proportionately high. The recent trends since last year clearly suggest that the average investors have lost money in equities. People have now started opting for portfolio managers who have the expertise in stock markets. There are many institutions in India which provide wealth management services. An average investor has found refuge with the mutual funds. There have been a lot of changes in the mutual fund industry in past few years. Lots of multinational companies have bought their professional expertise to manage funds
  • 20. worldwide. In the past few months there has been consolidation going on in the mutual fund industry. Mutual funds in India now offer a wide range of schemes to choose. Mutual funds are turned to be the most preferred choice worldwide for both small and big investors due to their numerous advantages. It's all about long term financial planning. These benefits mainly include diversification, professional management, potential of returns, efficiency and easy to use. Mutual fund investments carry low risk because of their diversified nature. It is important to understand the benefits of mutual funds before investing the money you really care about. The size of Indian mutual fund industry has grown in recent few years. India can now boast of having dominance in this industry. The total Asset Under Management popularly known as AUM has increased from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67, 601.98 crores in April 2008. According to the Association of Mutual Funds in India, the growth of mutual fund industry has been exceptional. This industry has indeed come a very long way with only 34 players in the market and more than 480 schemes. One of the major factors contributing to the growth of this industry has been the booming stock market with an optimistic domestic economy. Second most important reason for this growth is a favorable regulatory regime which has been enforced by SEBI. This regulatory board has improved the market surveillance to protect the investor's interest. NAV is directly proportionately to the bearish trends of the market. Top mutual funds also suffer because of the fluctuations in the market. The pooled money is invested in shares, debentures and treasury bills and thus has high risk involved. Indian mutual funds however reveal this multi-dimensional avenue and all the intricacies in a highly fashionable manner. It provides a lot of scope to understand the scenario and make some thoughtful investments for decent returns. In order to invest in the best mutual funds, it is important to perform a comparative study. It is important to study about the returns given by AMC Mutual Funds and perform a comparative analysis. Remember, every problem has several researches involved in it, each backed by study. Some of the top mutual funds in India are: * Reliance Mutual Fund * UTI Mutual Fund * Kotak Mutual Fund * HDFC Mutual Fund
  • 21. * Prudential ICICI Mutual Fund Taxes and Fund Ownership Since your goal as an investor is to keep as much as possible of what you earn from your mutual fund investments, you can't overlook the inescapable reality that taxes take a big bite out of bottom-line returns. One way to shelter yourself from taxes is to purchase your funds in a retirement account. As a fund shareholder, you can be taxed on: Distributions (dividends & capital gains) maid by the fund while you own its shares. Profits you make when you sell fund shares. Taxes on Fund Distributions A fund passes on to shareholders all the income or profits it earns from its investments. Shareholders, in turn, are liable for any taxes due. The distributions made by a fund to shareholders take two forms: Income Dividends. The interest and dividends generated by a fund's investments. Capital Gains. The profit a fund makes when it sells securities at a higher price than it paid for them. The fund subtracts its capital losses from its capital gains to determine its net capital gains, which it distributes to shareholders. (Net capital losses are not passed through to shareholders; the fund retains those to offset future capital gains.) Generally, all income dividend and capital gains distributions are subject to federal income tax (and state and local taxes if applicable). Exceptions are: Distributions received in tax-deferred accounts, such as 401(k) and 403(b)(7) plans, individual retirement accounts, or variable annuities. Only withdrawals from such accounts are subject to tax. (Withdrawals from a Roth IRA are exempt from taxes under certain conditions.) Income dividend distributions from municipal money market funds and municipal bond funds. These distributions are exempt from federal and, in some cases, state taxes. (Capital gains distributions from municipal bond funds are taxable, however.)
  • 22. Apart from the exceptions noted above, you must pay taxes on distributions whether you receive them in cash or reinvest them in additional shares. Distributions of income dividends and short-term capital gains (gains on securities held by the fund for one year or less) are taxed as ordinary income at your marginal tax rate, which can range from 15% to 39.6% currently but can change. Distributions of long- term capital gains (gains on securities held by the fund for more than one year) are taxed at a maximum rate of 20% (10% for taxpayers in the lowest tax bracket) currently but can change. For higher-income taxpayers, effective marginal tax rates may be higher because of limits on tax deductions and a "phase out" of personal exemptions. State and local taxes also increase effective marginal tax rates. Please remember that IRS tax rules can change. You should consult a tax adviser for guidance on your specific tax situation. Taxes on Profits From Shares You Sell When you sell fund shares, the tax rate on any capital gains is determined by how long you held the shares. Short-term gains are taxed as ordinary income at your marginal tax rate, while long-term gains are taxed at a maximum rate of 20% (10% for taxpayers in the lowest tax bracket). Keep in mind that: All capital gains from the sale of fund shares are taxable, even those from the sale of shares of a tax-exempt fund. Exchanging shares between funds is considered a sale, which may lead to capital gains. (An exchange involves selling shares of one fund to buy shares in another.) Writing a check against an investment in a fund with a fluctuating share price (generally all funds except money market funds) also triggers a sale of shares and may expose you to tax on any resulting capital gains. The impact of expenses on return over time is why you should consider expenses when you invest in mutual funds. Even though published return data is always reported net of expenses, higher expenses will reduce your investment return. What Fees do Load and No-Load Mutual Funds not have to Report in the Prospectus?
  • 23. "...One ongoing expense that is not included in the expense ratio is brokerage costs incurred by a fund as it buys and sells securities. These costs are listed separately in a fund's annual report, sometimes as a percentage and sometimes as a dollar amount. Some trading costs, however, are not included in this figure. The spread between the bid and ask prices of over-the-counter stocks, for example, can be thought of as a trading expense, but such costs are not reported by fund companies. The annual report also includes any interest costs, which a fund will incur if it borrows money to buy securities." "All of the expenses that we have mentioned so for can be thought of as coming out of the portfolio's raw return, skimmed off the top, so to speak..." (MorningStar: Investing 101: Mutual Fund Expenses) "...In addition, because mutual funds buy and sell securities, they incur brokerage costs. Because these costs vary and are difficult to predict, they are not included in the fee table in the front of the prospectus. However, they are included in any computations of a fund's performance that appears in advertising." (ICI Investor Awareness Series: About Mutual Fund Fees) Again, when comparing fund returns, always look at the "net" return. This is the bottom line. Mutual fund categories Mutual funds fall into the following categories: money market funds, bonds funds, stocks funds, balanced funds, and asset allocation funds. Stock funds As the name implies, stock mutual funds invest mainly in common stocks. These stocks may be sold on the New York Stock Exchange, the NASDAQ or other exchanges. The objective of a stock fund is long-term capital appreciation versus generating income (dividends) more common with bond funds. However, stock funds may generate modest dividends from the stocks in the portfolio and from short-term cash investments. These stock tend to be larger capitalized stocks versus smaller growth stocks. There are four basic types of stock funds. Stock Fund Types
  • 24. Large Cap: Primarily invests in "Blue-chip" companies - large, well-known industrials, utilities, technology, and financial services companies with large market capitalization. Large cap stocks are perceived to be less risky than smaller capitalized companies. Mid Cap: Primarily invests in companies whose market capitalization is smaller than large caps but larger than small caps. Mid caps are generally considered more risky than large cap stocks but have a higher return expectation. Small Cap: Primarily invests in emerging companies, thought to have potential for future growth and profit. Small caps are generally considered the riskiest stocks compared to larger capitalized firms but carry the expectation of higher returns. Small cap funds are subject to greater volatility than those in other asset categories. International: Primarily invests in stocks traded on foreign exchanges but purchased in the United States by U.S. fund companies. International funds are subject to additional risks such as currency fluctuation, political instability and the potential for illiquid markets. Sector: Primarily invests in specific industry sectors such as technology, financials, health, or energy. Since sector funds focus their investments on companies involved in a specific industry sector, the funds may involve a greater degree of risk that an investment in other mutual funds with greater diversification. Many investors buy stock mutual funds because, historically, stocks have outperformed other types of investments over the long term. However, the value of the stocks in the fund's portfolio may go up or down as the market rises or declines. Remember, past performance is no guarantee of future results. Bond funds Bond funds1 invest in various types of bonds - issued by corporations, municipalities, and the U.S. government. Bond mutual funds are designed mostly to provide investors with a steady stream of income2 versus capital gains. Bond Funds: Invest in bonds, which are debt securities, or IOUs, issued by corporations or governments in exchange for money loaned to them. Generally, the issuer agrees to repay the loan by a specific date and to make regular interest payments to the lender until then. Are a basket of bonds with different durations, yields, credit quality, and values. Because of this, bond funds never mature as would be the case with buying an individual bond. Share value and dividends will fluctuate as interest rates fluctuate and new bonds are purchased or others are sold or mature.
  • 25. Produce profits that consist primarily of dividend distributions. May generate modest capital gains. Fluctuate in value, so it is possible to sell shares at a higher or lower price than you paid for them. Bond Fund Types: Government: Primarily invest in bonds issued by the U.S. Department of Treasury as well as various federal agencies. Government bonds are generally taxable. Municipal: Primarily invest in municipal bonds issued by state and local governments and their agencies to fund projects such as schools, streets, highways, hospitals, bridges, and airports. Municipal bonds can be insured or non-insured securities. Income generated from municipal bonds may be tax free at both the federal and state level (consult the funds prospectus). Corporate: Primarily invest in bonds issued by corporations to help fund business activities. Income from corporate bonds is taxable. 1 Bond fund shares are not guaranteed and will fluctuate with market conditions and interest rates and include a greater risk to principal than Certificates of Deposit. Shares, when redeemed, may be worth more or less than their original cost. 2 Income may be subject to the Alternative Minimum Tax (AMT) and capital appreciation from discounted bonds may be subject to state and local taxes. Money market funds Money market funds invest in short-term securities such as Treasury bills. Most money market funds offer a higher rate of interest than bank savings accounts, and some are free of federal or state taxes. But unlike bank savings accounts, money market funds are not FDIC insured. Money market mutual funds are designed to be more stable than stock or bond funds. Money market funds are designed to provide steady dividend income on the investment amount, although the yield may fluctuate daily. Taxable: Invest in short-term obligations from corporations. Tax-free: Invest in short-term obligations from government entities. Balanced Funds: Invest in stocks, bonds, and cash investments, in varying proportions.
  • 26. Produce dividend and capital gain distributions and share price appreciation in proportion to their allocation among the three major asset classes. Asset Allocation Funds: In an asset allocation fund, the manager will diversify the assets among each category: cash, bonds, and stocks and weight them according to the portfolio strategy. The manager will redistribute the weightings according to market conditions. Portfolio strategies generally differ according to risk tolerance: Aggressive Growth Strategy Portfolio Growth Strategy Portfolio Growth and Income Strategy Portfolio Income Strategy Portfolio Asset allocation funds are usually made up of a combination of other mutual funds within the same fund family. As market conditions change, the manager has the discretion to reduce exposure in one fund and increase it in another. Just about all mutual fund families allow you to switch between funds in the same family and class (A, B, or C shares) without incurring any costs. Fund Management Actively managed funds: Mutual Fund managers are professionals. They are considered professionals because of their knowledge and experience. Managers are hired to actively manage mutual fund portfolios. Instead of seeking to track market performance, active fund management tries to beat it. To do this, fund managers "actively" buy and sell individual securities. For an actively managed fund, the corresponding index can be used as a performance benchmark. Is an active fund a better investment because it is trying to outperform the market? Not necessarily. While there is the potential for higher returns with active funds, they are more unpredictable and more risky. From 1990 through 1999, on average, 76% of large cap actively managed stock funds actually under performed the S&P 500. (Source - Schwab Center for Investment Research) Actively managed fund styles:
  • 27. Some active fund managers follow an investing "style" to try and maximize fund performance while meeting the investment objectives of the fund. Fund styles usually fall with in the following three categories. Fund Styles: Value: The manager invests in stocks believed to be currently undervalued by the market. Growth: The manager selects stocks they believe have a strong potential for beating the market. Blend: The manager looks for a combination of both growth and value stocks. To determine the style of a mutual fund, consult the prospectus as well as other sources that review mutual funds. Don't be surprised if the information conflicts. Although a prospectus may state a specific fund style, the style may change. Value stocks held in the portfolio over a period of time may become growth stocks and vice versa. Other research may give a more current and accurate account of the style of the fund.