MUTUAL FUNDSA Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.The money thus collected is then invested in instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them

ADVANTAGES OF MUTUAL FUNDS Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

DisadvantagesNo tailor made fundExpenses deducted from returnsNo guarantee of returnsToo many funds to choose from

STRUCTURE IN INDIAMutual Funds in India follow a 3-tier structureSponsorTrusteesAsset Management Company

Types of Mutual Funds Schemes in India

BY STRUCTURE

1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes:A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

Types of Mutual Funds Schemes in IndiaBY NATURE1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) 2. Debt funds:The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. Liquid Funds: Also known as Money Market Schemes. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. 3. Balanced funds:As the name suggest they, are a mix of both equity and debt funds.

Types of Mutual Funds Schemes in IndiaBY INVESTMENT OBJECTIVE:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).Money Market Schemes: Money Market 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 inter-bank call money.

Types of Mutual Funds Schemes in IndiaOTHER SCHEMES

Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries.

Other SchemesMonthly Income Plans (MIPs)Fixed Maturity Plans (FMPs)Exchange Traded Funds (ETFs)Capital Protection Oriented SchemesGold Exchange Traded Funds (GETFs)Quantitative FundsArbitrage FundsP/ E Ratio FundContra FundsFunds Investing AbroadFund of Funds (FOFs)

FREQUENTLY USED TERMS

Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

FREQUENTLY USED TERMS

Redemption PriceIs the price at which open-ended schemes repurchase their units. Such prices are NAV related.Sales Load Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.Repurchase or Back-endLoadIs a charge collected by a scheme when it buys back the units from the unit holders.

FREQUENTLY USED TERMSThe launch of a new scheme is known as a New Fund Offer (NFO).

Assets Under Management (AUM) represents the money which is managed by a mutual fund in a scheme. AUM is calculated by multiplying the Net Asset Value of a scheme by the number of units issued by that scheme.

Expense RatioExpense Ratio is defined as the ratio of expenses incurred by a scheme to its Average Weekly Net Assets. It means how much of investors money is going for expenses and how much is getting invested. This ratio should be as low as possible.The annual expenses incurred by the fund includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee.

The regulations permit equity funds to charge 2.5 per cent for average net assets of up to Rs 100 crore, 2.25 per cent for the next Rs 300 crore and 2 per cent for the next Rs 300 crore. For the rest of the assets, the maximum limit is 1.75 per cent. In case of debt funds, the maximum limit is reduced by 0.25 per cent for each of the above slots as they have a lower risk-return profile than equity funds

Expense RatioAssume that a scheme has average weekly net assets of Rs 100 cr. and the scheme incurs Rs. 1 cr as annual expenses, then the expense ratio would be 1/ 100 = 1%. In case this schemes expense ratio is comparable to or better than its peers then this scheme would qualify as a good investment, based on this parameter only.

If this scheme performs well and its AUM increases to Rs. 150 cr in the next year whereas its annual expenses increase to Rs. 2 cr, then its expense would be 2/ 150 = 1.33%.

History of the Indian Mutual Fund Industry

First Phase 1964-87 - Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. The first scheme launched by UTI was Unit Scheme 1964

Second Phase 1987-1993 (Entry of Public Sector Funds)- SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987

Third Phase 1993-2003 (Entry of Private Sector Funds)-First Mutual Fund Regulations came into being. (The industry now functions under the SEBI (Mutual Fund) Regulations 1996). The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993

Fourth Phase since February 2003- In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities; The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India; 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.

FormulaeNAV = (Market Value of Investments + Receivables + Accrued Income-Liabilities -Accrued Expenses)/Number of units outstanding

For Load FundsSale price = NAV (1 + Entry Load%)Repurchase price = NAV (1 - Exit Load%)

Mutual Funds EvaluationTotal ReturnTR= (Dividend + Change in NAV) / NAV at Beginning of the PeriodExpense Ratio

Portfolio Turnover Rate

Size of the Fund

Cash flow

Analyzing fund management (Comparison to Benchmark)

Sharpe Portfolio Performance MeasureRisk premium earned per unit of total risk

Treynor Portfolio Performance MeasureThe expression is the risk premium return per unit of systematic riskThis assumes a completely diversified portfolio leaving systematic risk as the relevant riskIt was developed to analyze returns in relation to how much risk is added to a well diversified portfolio. It is used to compare different funds to determine which fund to include in already existing well-diversified portfolio.

Jensen Portfolio Performance MeasureBased on CAPMExpected return on any security or portfolio is

Where: E(Rj) = the expected return on securityRFR = the one-period risk-free interest ratej= the systematic risk for security or portfolio jE(Rm) = the expected return on the market portfolio of risky assets

It is an absolute measureAlpha = Return on portfolio Return as per CAPMThe alpha represents the ability of the fund manager to achieve a return that is above what is expected given the risk in the fund.

Sharpe vs. TreynorFor a well diversified portfolio, total risk is equal to systematic risk.A poorly diversified portfolio could have a high ranking on the basis of the Treynor measure but a much lower ranking on the basis of Sharpe measure.If a fund is the entire risky portfolio, Sharpe ratio will be relevantIf a fund is just one part of a broader risky portfolio, Jensens Alpha or Treynor measure could be used.

RegulationA mutual fund is required to be registered with SEBI. SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. The industry functions under the SEBI (Mutual Fund) Regulations 1996.All mutual funds whether promoted by public sector / private sector / foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirement and all are subject to monitoring and inspections by SEBI.In addition, the mutual funds have an Association of Mutual Funds in India (AMFI), which also looks into proper functioning of the mutual fund industry.

Tax benefits in Mutual Funds

Dividends declared by Mutual Funds are tax-free in the hands of the investor.While there is no Dividend Distribution Tax for Equity schemes, the mutual funds have to pay Dividend Distribution Tax while declaring dividend in debt funds (20% for companies; 12.5% for individuals)On selling the units, the investor is liable to pay the necessary Capital Gains Tax. There is, however, no tax on long-term capital gains from equity / balanced funds (equity > 65%). For debt funds the tax payable is 20% without indexation and 10% with indexationShort term capital gains tax on equity schemes is 15% and for debt schemes, normal rate applicable on income is levied.

MalpracticesObscenely high commissions (at times as high as 6%) paid by AMCs to mutual fund distributors/agents

Giving the benefit of the previous days net asset value for large investors. Often a high value cheque is received today and the previous days NAV benefit is given to Big Daddy. Not only this, the cheque is not realized that day but the next day. In fact, the large investor is getting the benefit of two additional days return.

Charging different load to small and large investors (1 per cent entry load on IL&FS Index Fund would not be applicable to investments of over Rs 10 lakh)

MalpracticesBack to back investment i.e. the cash rich companies put money with the mutual fund and in turn the mutual fund invests an equal amount in the shares of the company

The distributor gets the investor to redeem his investments in an existing scheme and then gets him invested in another scheme (usually both are equity-oriented scheme), for no valid reason. The reason for conducting this exercise - the distributor earns exorbitant commissions from fund houses on the fresh investments vis--vis what he would have earned had the investor simply stayed invested.

Cash incentives or gifts are given to big investors indirectly out of the distributors own funds. Investors should make their decisions on the basis of objective information and not based on cash incentives

Mutual Fund Houses in IndiaBANK SPONSORED(i) Joint Ventures - Predominantly IndianCanara Robeco Asset Management Co. Ltd.SBI Funds Management Pvt. Ltd.(ii) Joint Ventures - Predominantly ForeignBaroda Pioneer Asset Management Company Limited(ii) OTHERSUTI Asset Management Company Ltd.

INSTITUTIONSLIC Mutual Fund Asset Management Co. Ltd.

Mutual Fund Houses in IndiaPRIVATE SECTOR(i) INDIANBenchmark Asset Management Co. Pvt. Ltd.DBS Cholamandalam Asset Management Ltd.Deutsche Asset Management (India) Private Ltd.Edelweiss Asset Management LimitedEscorts Asset Management Ltd.IDFC Asset Management Company Private Limited.J.M.Financial Asset Management Pvt. Ltd.Kotak Mahindra Asset Management Co. Ltd.Quantum Asset Management Co. Pvt. Ltd.Reliance Capital Asset Management Ltd.Religare Asset Management Company Private Limited.Sahara Asset Management Co. Pvt. Ltd.Tata Asset Management Ltd.Taurus Asset Management Co. Ltd.

Mutual Fund Houses in India(ii) FOREIGN AIG Global Asset Management Company (India) Private Ltd.FIL Fund Management Private Ltd.Fortis Investment Management (India) Pvt. Ltd.Franklin Templeton Asset Management (India) Private Ltd.Mirae Asset Global Investment (India) Private Ltd.

(iii)JOINT VENTURES - PREDOMINANTLY INDIAN Birla Sun Life Asset Management Co. Ltd. DSP BlackRock Investment Managers Ltd.HDFC Asset Management Co. Ltd.ICICI Prudential Asset Management Co. Ltd.Sundaram BNP Paribas Asset Management Co. Ltd.

Mutual Fund Houses in India(iv) JOINT VENTURES - PREDOMINANTLY FOREIGNBharti AXA Investment Managers Private LimitedHSBC Asset Management (India) Private Ltd.ING Investment Management (India) Pvt. Ltd.JPMorgan Asset Management (India) Private Ltd.Morgan Stanley Investment Management Pvt. Ltd.Principal PNB Asset Management Co. Pvt. Ltd.

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