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Understanding Mutual Funds

What is a Mutual Fund?

A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several
investors and invests this in stocks, bonds, money market instruments and other types of securities.

Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional
share of the fund’s gains, losses, income and expenses.
Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about
the fund, its history, its officers and its performance.

Some popular objectives of a mutual fund are -

Fund Objective What the fund will invest in

Equity (Growth) Only in stocks
Debt (Income) Only in fixed-income securities
Money Market (including Gilt) In short-term money market instruments (including government securities)
Balanced Partly in stocks and partly in fixed-income securities,
in order to maintain a 'balance' in returns and risk
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes
with similar or varied investment objectives.

The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are
clearly spelt out in the prospectus.

In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests,
rather than the AMC’s.

The Basics of Mutual Funds

Net Asset Value or NAV
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every
business day.
How is NAV calculated?
The value of all the securities
in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the
number of units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses,
brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under
management.

A fund's expense ratio is typically to the size of the funds under management and not to the returns earned.
Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund,
the lower should be its expense ratio.
Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution
costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-ended Funds
At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund
units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.

2) Close-Ended Funds
Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed
on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and
the shareholder reports (normally quarterly).

Benefits of Investing Through Mutual Funds

Professional Money Management

Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund.
Fund managers monitor market and economic trends and analyze securities in order to make informed investment
decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds
offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their
investments within a short time period (normally three- to five-days).
Affordability

The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).

Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and
the automatic reinvestment of interest and dividends.

Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily
monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by
using our Mutual Funds section in Investor’s Mall.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest
growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that
combine stocks and bonds in the samefund.
Tax benefits on Investment in Mutual Funds
1) 100% Income Tax exemption on all Mutual Fund dividends
2) Equity Funds - Short term capital gains is taxed at 15%. Long term capital gains is not applicable.
Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term capital
gains tax to be lower of –10% on the capital gains without factoring indexation benefit and
20% on the capital gains after factoring indexation benefit.
3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are
exempt from the payment of dividend tax for a period of 3 years from 1999-2000.

Note: Equity Funds are those where the investible funds are invested in equity shares in domestic companies to
the extent of more than 65% of the total proceeds of such funds.
Mutual Fund Investing Checklist

Using the checklist below should help you to extract the most from your mutual fund investment process. We
assume that you will be investing largely through mutual funds to meet your targeted asset allocation plan.
1. Draw up your asset allocation
You can use moneycontrol’s Asset Allocator for this. Take a printout of your suggested asset allocation plan
so that you can use that to plan your investments across mutual funds.

2. Identify funds that fall into your Buy List

How do you do this? Simple. Just go to the Investor’s Mall Find-A-Fund and run a query specifying the
parameters you are seeking.

3. Obtain and read the offer documents

You could do this by either asking your broker or the asset management companies. You might also find
some of these documents if you go to our Request-A-Form service.
4. Match your objectives
Read through the offer documents and check to see whether the mutual funds identified meet your
investment needs in terms of equity share and bond weightings, downside risk protection, tax benefits
offered, dividend payout policy, sector focus and other parameters of relevance to you. For ease in short
listing, you can use our Find-A-Fund query module.

5. Check out past performance

Make sure you do this. There is no other indicator that you can use as effectively to select funds for
investment. Yet again (we won’t tire of saying this), for ease you can use our Find-A-Fund query module to
find out your selected funds’ performance over various time periods.

6. Don't forget the index funds

Index funds offer you probably the ideal hedge against varying performance across sectors and across fund
managers over longer-periods of time. moneycontrol recommends that you have atleast some part of your
assets in index mutual funds (you would have seen this in your recommended asset allocation plan also if you
have used moneycontrol’s Asset Allocator).

7. Think hard about investing in sector funds

Investing in specific sector funds is recommended for aggressive investors. However, if you are not in close
touch with the developments in the sector or do not review your portfolio regularly, we would not recommend
investing in sector funds.

8. Look for `load' costs

Management fees, annual expenses of the fund and sales loads can take away a significant portion of your
returns. As a general rule, 1% towards management fees and 0.6% towards annual expenses should be
acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record
of being a top-performer. You can also define this parameter in the Find-A-Fund query module.

9. Does the fund change fund managers often?

Since you will be giving past track record a consideration, you are inadvertently relying on the continuity of the
fund manager. Stay away from mutual funds whose fund managers change often.

10. Look for size and credentials

As far as possible avoid investing in funds with an asset base of less than Rs25 crores. Which means that we
are recommending you invest in funds only after they have established a track record. And unless it is a really
exciting new (theme) fund that fits into your asset allocation plan, try and avoid new funds.

11. Customer Service

Check out the customer service delivery mechanism of the mutual fund you choose. Can you get in touch
with them easily? How long do they take to disburse payments? How often do they send you portfolio
updates? And investor newsletters? These questions are important to address because shortcomings on any
of these factors could affect your overall returns.

12. Diversify, but not too much

Do not hold just one fund in each asset category. Its good to diversify your risk between different funds, but
do not overdo it. moneycontrol recommends two, or maybe three funds in each asset category.

13. Style, not returns matter first in the long-term

Don't let a top performing fund veer you away from a disciplined approach. Stick to your chosen asset
allocation plan.

14. Monitor regularly and review

Try to review your mutual fund holdings atleast once a quarter. If you follow the same principles to review as
you did to identify the mutual funds you invested in, you will be able to take `sell decisions' very easily. You
can read more about this approach by clicking Step 3: Invest Monitor and Review.

15. Invest regularly, choose the M-I-P

Try to make mutual fund investing an integral part of your savings and wealth-building plan. The monthly
investment plan option offered by some mutual funds is a strongly recommended approach for you to execute
this process (you can read more about the benefits of this approach in Dollar Cost Averaging). However, don’t
let the availability of this option override your fund selection criteria.

By now you would have identified your list of mutual funds that you want to invest in. List them down with
reasons for your intended purchase. Next, you can fill in the application forms for these funds. You can easily
obtain application forms for most of the mutual funds from moneycontrol’s Request-A-Form service.
 Investing in Mutual Funds

Why Choose Mutual Funds?

Mutual funds are investment vehicles, and you can use them to invest in asset classes such as equities or fixed
income. moneycontrol recommends that you use the mutual fund investment route rather than invest yourself,
unless you have the required temperament, aptitude and technical knowledge (take our Investment IQ Quiz to
evaluate how you score on each of these parameters).

In this article we discuss why and how you should choose mutual funds. If you would like to familiarise yourself
with the basic concepts and workings of a mutual fund, Understanding Mutual Funds would be a good place to
start.

We are not all investment professionals

We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual funds are
investment vehicles managed by professional fund managers. And unless you rate highly on the Investment IQ
Quiz, we recommend you use this option for investing. Mutual funds are like professional money managers,
however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse
and evaluate their track record.
Investing is becoming more complex
There was a time when things were quite simple - the market went up with the arrival of the first monsoon showers
and every year around Diwali. Since India started integrating with the world (with the start of the liberalisation
process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian
currency or default on its debt by the Russian government, have started having an impact on the Indian stock
market.

Although it is possible for an individual investor to understand Indian companies (and investing) in such an
environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to
understand these issues and whose asset management company invests in research) provide an option of
investing without getting lost in the complexities.
Mutual funds provide risk diversification
Diversification of a portfolio is amongst the primary tenets of portfolio structuring (see The Need to Diversify). And
a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well
qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a
professional. Mutual funds represent one such option.
Selecting a mutual fund
Having made an investment in a mutual fund, you should monitor it to see whether its management and performance
is in line with stated objectives and also whether its performance exceeds or lags your expectations. Unlike individual
stocks and bonds, mutual fund reviews are required less frequently, once in a quarter should be sufficient.

A review of the fund’s performance should be carried out with the objective of holding or selling your investment in
the mutual fund. You might need to sell your investment in a mutual fund if any of the events below apply –
You change your investment plan.
For example, as you grow older you might adopt a more conservative investment approach, pruning some of your
riskier (equity-oriented) funds.
A fund changes its strategy.
A fund that alters its investment objective or approach might no longer fit your strategy.
The fund's poor results persist.
If a fund regularly trails other funds that invest in similar securities, consider replacing it. The poor performance is
more often than not a reflection on the relative expertise of the asset management company.

By now you would have realized that investing in mutual funds is not just a decision but is more a
process.moneycontrol's Mutual Fund Investing Checklist can help make this process easier and more efficient.
FAQ

# Do mutual funds offer a periodic investment plan?

Most private sector funds provide you the convenience of periodic purchase plans (through a
Systematic Investment Plan), automatic withdrawal plans and the automatic reinvestment of
dividends. You would basically need to give post-dated cheques (monthly or quarterly, periodic date
of the cheque is fixed by the Asset Management Company). Most funds allow a monthly investment of
as little as Rs500 with a provision of giving 4-6 post-dated cheques and follow up later with more.
Regular monthly investments are a good way to build a long-term portfolio and add discipline to your
investment process.

# Do any mutual funds invest in both stocks and bonds?

Yes, balanced funds invest in a combination of stocks and bonds, a typical mix is 60:40 in favour of
stocks. Returns from balanced funds are normally lower than pure equity mutual funds when markets
are rising, however if the market declines, the losses are also normally lower. Balanced funds are best
suited for investors who do not plan their asset allocation and yet want to invest in equities. Buying
separate equity and income funds for your portfolio also achieves the same results as buying a
balanced fund. The advantage with the former option is that you can choose your own split (between
stocks and bonds i.e fixed income) rather than let the fund manager decide the same.

# What are the time-tested investment strategies that work?

• Start investing as early as possible - the power of compounding is the single most important
reason for you to start investing right now as even a relatively small amount invested early will
grow over the course of your working life into a substantial nest egg. Remember, every day
that your money is invested, is a day that your money is working for you.
• Buy stocks or equity mutual funds and hold long-term – historically, world over, and even in
India, stocks have outperformed every other asset class over the long run.
• Invest regularly – use the Dollar Cost Averaging approach – this will help you to adopt a
disciplined approach to investing and works equally well for both buying and selling decisions.
Importantly, it increases your potential gains when acting against the market trend, reduces
risk when you are playing the market trend and relieves you from the pressures of forecasting
tops and bottoms. Dollar Cost Averaging can effectively convert a regular savings plan into a
regular investing approach.

And, Diversify your investment - by diversifying across assets, you can reduce your risk without
necessarily having to reduce your returns. To get the maximum benefit of reducing your risk through
diversification spread your portfolio across different assets whose returns are not 100% correlated.

# What are the different types of Mutual Funds?

Mutual Funds are classified by structure in to:

• Open - Ended Schemes

• Close-Ended Schemes
• Interval Schemes

and by objective in to

• Equity (Growth) Schemes

• Income Schemes
• Money Market Schemes
• Tax Saving Schemes
• Balanced Schemes
• Offshore funds

• Special Schemes like index schemes etc

# How significant are fund costs while choosing a scheme?

The cost of investing through a mutual fund is not insignificant and deserves due consideration,
especially when it comes to fixed income funds. Management fees, annual expenses of the fund and
sales loads can take away a significant portion of your returns. As a general rule, 1% towards
management fees and 0.6% towards other annual expenses should be acceptable. Carefully examine
the fee a fund charges for getting in and out of the fund. Again, you can query on entry and exit loads
under our Find-A-Fund query module or get a pre-defined shortlist of funds on the load specification
structure through the Mutual Fund Directory section.
# Ideally how many different schemes should one invest in?
Don't just zero in on one mutual fund (to avoid the risk of being overly dependent on any one fund).
Pick two, preferably three mutual funds that would match you investment objective in each asset
allocation category and spread your investment. We recommend a 60:40 split if you have shortlisted 2
funds and a 40:30:30 split if you have short-listed 3 funds for investment.

New to Mutual Funds? Tips for a beginner

First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by
uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market
timing.

First things first..

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In
other words, to decide the right asset allocation. Asset allocation is a method that determines how you
invest your money in different investments with the proper mix of various asset classes. Remember, the
type or class of security you own i.e. equity, debt or money market, is much more important than the particular
security itself.

The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that
percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his
investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial
position for each individual may require different allocation. Portfolio variable is another factor that one needs to
understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually
the younger you are, the more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and
consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your
needs, consider following:

•Determine what your financial goals are.

•Are you investing for retirement? A child’s education? Or for current income?
Fund Candy • Consider your time frame. Do you need money in three
months time or three years? The longer your time horizon,
the more risk you may be able to take.
• Diversified equity funds • How do you feel about risk? Are you in a position to
• Index funds tolerate the ups and downs of the stock market for the
• Opportunity funds possibility of higher returns? It is necessary to know your
own risk tolerance. It can be a guide for choosing the right
• Mid-cap funds schemes. Remember, regardless of the potential returns,
• Equity-linked savings if you are not comfortable with a particular asset class,
schemes you should consider other options.
• Sector funds like Auto,
Health Care, FMCG, IT, Remember, all these factors will have a direct impact on the fund
Banking etc. you choose and the return that you can expect to get. If you are a
• Balanced funds for those long-term investor with some appetite for risk and are looking for
who are not comfortable returns to beat inflation, equity funds are your best bet. MFs offer a
with 100% exposure to variety of equity and equity-oriented schemes (See table ‘Fund
equity Candy’). For a beginner, it makes sense to begin with a diversified
fund and gradually have some exposure to sector and specialty
If selected properly, these equity funds.
and equity-oriented funds have the
potential to deliver returns that
could be far superior to other asset
classes.
Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid.

Keeping track..

Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep
an eye on how your investments are performing. While having a qualified and professional advisor helps both in
terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself
with a little help from these sources:

Fact sheets and Newsletters:

MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the
fund manager and performance statistics on the schemes managed by it.

Websites:
MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press
clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical
NAVs, and other scheme.

Newspapers:
Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes
besides other analysis and reports.

Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to
understand and analyze the information to enhance the chances of success. Even if you spend one percent of
the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional
advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

The author is Hemant Rustagi CEO, Wiseinvest Advisors Pvt. Ltd.

Demystifying NAV myths

The NAV of a mutual fund has not been correctly understood by a large section of the investing
community.

This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their
New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact,
investors sold their existing investments and invested in NFOs. This switch makes no sense, unless
the new fund has something different and better to offer.

Misconception about NAV

This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100.
However, this perception is totally wrong and investors would be much better off once they appreciate
this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.

Why people carry this perception is because they assume that NAV of a MF is similar to the market
price of an equity share. This, however, is not true.

Definition of NAV
Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio
including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a
mutual fund unit is nothing but the ‘book value’.

NAV vs Price of an equity share

In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the
fundamentals, is also dependent on the perception of the company’s future performance and the
demand-supply scenario. And hence the market price is generally different from its’ book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we
are buying at book value. And since we are buying at book value, we are paying the right price of the
assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price.

NAV & it’s impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception
about NAV. An example will make it clear that returns are independent of the NAV.

Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the
portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs
50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have
grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for
Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for
Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the
NAV.

It is quality of fund, which would make a difference to your returns. In fact for equity shares also
broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say
a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute
industry (of course Rs 1000 may ‘fundamentally’ be over or under priced, which will not be the case
with MF NAV).

Is it time to say Goodbye to your fund?

Many investors are still to fully understand the concept of a mutual fund. They continue to treat it
similar to investing in shares. Therefore, they tend to buy mutual funds for wrong reasons - low NAV
of a fund; dividend announced by a MF; New Fund Offer etc.
The same misconception is seen in selling too. One of the most common instances of selling a mutual
fund has been to invest in a New Fund Offer. This is under the false impression that a fund at Rs.10/-
is cheap and an excellent opportunity to invest. Many investors have been misled by distributors into
this kind of switching. (Also read - Invest wisely and get rich with equity MFs)
Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is the
job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking profits by
selling overvalued stocks Therefore, by selling a MF from a profit booking perspective, we may
actually be selling off a fairly valued portfolio - with a good long-term potential.
Therefore, what could be the possible situations for selling a MF?

Financing a need
A very obvious reason to sell would be when you need money. We all invest money with a view to
finance some need or a desire in the future.
Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to take
a vacation abroad. All this would require you to liquidate some of your investment. (Also read -
Trading tricks that've stood the test of time)
However, proper choice is essential in deciding which fund(s) to sell. You could either sell those
funds, whose performance has not been encouraging; or those where the tax impact is minimal; or
those where the amounts are not very significant; etc. Or sometimes, possibly it may be better to
borrow rather than sell a good investment.

Poor performance
There are more than 200 equity funds and their number is growing. The returns from practically all
funds have been comparatively quite good, given the current bull-run. Even the worst performing
funds have given 30-35% returns in last 1 year. In absolute terms these are excellent returns. But
when compared to the top performers with 110-115% returns, these look extremely poor.
However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both the
benchmark index and other funds in the peer group. In the short term there could be a genuine reason
for under-performance. Some of the investments may be from a long-term perspective; certain sectors
may have been under-performers; contrarian investments take time to catch market fancy, etc. (Also
read - The Investors biggest Dilemma)
But if the performance of the fund continues to be consistently below par over long periods of time,
then it may be worthwhile considering switching over a better performing fund. If possible, one should
also try and assess the reasons for poor performance. This will give a good insight into the market.

Rebalancing the portfolio

We all have a certain asset allocation across various investment options such as debt, equity, real-
estate, gold etc.
A change in your financial position may require you to rebalance your portfolio. Suppose you are
presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take much
higher exposure in equity MFs. But with marriage and kids your responsibilities may increase, which
would require you to reduce you equity risk to more manageable levels.
Or the portfolio balance changes with time, due to different assets growing at different rates. Your
equity portion may have appreciated much faster than your debt, distorting the original balance.
Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also read -
Mutual Funds: Your best personal Portfolio Manager)
Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund -
and you want to take advantage of it. Thus you may have to sell a part of your existing investment and
re-invest in this new asset class.

Change in taxation policy...

A change in the tax policy could become a reason to sell and reinvest somewhere else. (Also read -
How to optimize your tax using mutual funds?)
Suppose our risk profile is such that we can take around 50:50 equity to debt exposure. Thus we had
invested in the balanced funds. But, in the recent budget, the tax laws have been changed wherein a
fund would classify as an equity fund only if the equity component is more than 65%. Therefore, the
balanced funds would have to increase the equity component to 65% so that they can continue to
enjoy the lower tax applicable to equity funds. But with 65% equity it becomes riskier. Hence, it could
be time to exit.

Change in Fund-Style or Objective

We invest in a fund with a particular objective or style in mind. Suppose, we already have exposure in
mid-cap funds and in order to diversify our portfolio, we choose a large-cap fund. However, after some
time we observe that the fund is taking exposure in mid-cap sector too. This increases our overall
exposure to mid-cap. Thus it may be time to sell and move to a truly large-cap fund. (Also read - 5
corners of a sound Investing Strategy)
Or say, we choose a fund for its' passive style of investing. But later the fund manager starts following
an aggressive style with frequent churning. If this style does not suit our risk profile, it may be the time
to say goodbye to such a fund.
Or take the case of some technology funds. These came at the time of tech boom and subsequently
fared very badly. However, at Rs.4-5 NAV these looked quite attractive from a long-term perspective
and some investors, confident of recovery in the tech sector, invested in these funds. But in the
meantime, the AMCs in their anxiety to improve the performance of such funds, changed the
investment objectives. This defeated the very purpose with which some investors had taken exposure
in these funds; and hence had to consider exiting.
Change in the Fund Manager
When investing, one of the criteria is to evaluate the expertise, knowledge, experience and past
performance of the fund manager.
However, while the fund manager is a key player in managing our money, one should not forget the
contribution of the research team, the investment committee, the top management and AMC's
investment philosophy.
Therefore, a change the fund manager need not necessarily mean exiting the fund. But it may be
worthwhile keeping the fund under a close watch. If there is a perceptible decline in the performance,
one could consider selling.

Change in the Fund's Size

Sometime the size of the fund starts affecting the returns. As we have also recently seen that certain
mid-caps funds took a voluntary step to stop accepting fresh money into the fund, when the size
became too large to manage. This is because (i) the mid-cap space is limited (ii) even small purchase
of such stocks sent their prices soaring and (iii) too large a holding in such stocks will be difficult to
offload when required. (Also read - Investing situations that cause Panic)
Here, of course the funds took a proactive step to protect the returns of the existing investors. But if
the funds themselves do not take such a step, we investors should keep track of the fund sizes.
The moment they become too large to manage or say too small to capture new investment
opportunities, it may be time to exit.
There could, of course, be other reasons to sell, more specific to one's circumstances. The basic idea
is to define, beforehand, certain rules for oneself for selling one's investments. This would reduce the
day-to-day dilemma and ad-hoc decision-making, thereby make investing more scientific and
unemotional.

10 must-reads in an MF offer document

You would have come across this line in all Mutual Fund advertisements, “Mutual Fund investments
are subject to market risks. Please read the offer document carefully before investing.” It’s an open
secret that this 80 to 100 page bulky document is not simple to read and the legal information it
contains is not easy to understand for most investors.

However, Sebi has made the investor’s job easier by evolving an abridged form, the Key Information
Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and
standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide
of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what
are the 10 Most Important Things to Read in an Offer Document for investors.

What is a Mutual Fund Offer Document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of
funds, as well as the finer points of the fund's past performance, managers and financial information.
You can obtain these documents from fund companies directly, through mail, e-mail or phone. You
can also get them from a financial planner or advisor. All fund companies also provide copies of their
ODs on their websites.

10 Most Important Things to Read in an Offer Document:

Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least
annually.

Minimum investments
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent
investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid
Plans may stipulate Rs 10 crore as the minimum balance. (Also read - How to reduce risk while
investing?)
Investment objectives
The goal of each fund should be clearly defined — from income, to long -term capital appreciation.
The investors need to be sure the fund's objective matches their objective.

Investment policies
An OD will outline the general strategies the fund managers will implement. You'll learn what types of
investments will be included, such as government bonds or common stock. The prospectus may also
include information on minimum bond ratings and types of companies considered appropriate for a
fund. Be sure to consider whether the fund offers adequate diversification.

Risk factors
Every investment involves some level of risk. In an OD, investors will find descriptions of the risks
associated with investments in the fund. These help investors to refer to their own objectives and
decide if the risk associated with the fund's investments matches their own risk appetite and
tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of
risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be
familiar with what distinguishes the different kinds of risk, why they are associated with particular
funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office
Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund
MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate
capital appreciation, which is passed on to customers as monthly income, subject to availability of
distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and
were caught by surprise when the MIPs gave low/negative returns. (Also read - Fear interest rate
risk? Here is the solution)

Past Performance data

ODs contain selected per-share data, including net asset value and total return for different time
periods since the fund's inception. Performance data listed in an OD are based on standard formulas
established by Sebi and enable investors to make comparisons with other funds. Investors should
keep in mind the common disclaimer, "past performance is not an indication of future performance".
They must read the historical performance of the fund critically, looking at both the long and short-
term performance. When evaluating performance, investors must look at the track record of a fund
over a time period that matches their own investment goals.

They must check that the benchmark chosen by the fund to compare its relative performance is
appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind
that many of the returns presented in historical data don't account for tax. They must look at any fine
print in these sections, as they should say whether or not taxes have been taken into account.

Fees and expenses

“Mutual funds have two goals: to make money for themselves and for you, usually in that order.”-
Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses,
management fees, investor servicing costs…these all add up over time. The OD lists the limits on
these fees and also shows the impact these have had on the fund investment historically. (Also read -
How to build your MF portfolio?)

Key Personnel esp Fund Managers

This section details the education and work experience of the key management of the fund company,
including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the
management team. For example, investors need to watch out for the fund that has been in operation
significantly longer than the fund manager has been managing it. The performance of such a fund can
be credited not to the present manager, but to the previous ones. If the current manager has been
managing the fund for only a short period of time, investors need to look into his or her past
performance with other funds with similar investment goals and strategies. Only then can they get a
better gauge of his or her talent and investment style.

Tax benefits information

Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds
enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax
benefits available to the fund investors will enable them to plan their taxes better and to enhance their
post tax returns. (Also read - How to ride the rising interest rate tide?)

Investor services
Shareholders may have access to certain services, such as automatic reinvestment of dividends and
systematic investment/withdrawal plans. This section of the OD, usually near the back of the
publication, will describe these services and how one can take advantage of them.

Conclusion

After reading the sections of the OD outlined above, investors will have a good idea of how the fund
functions and what risks it may pose. Most importantly, they will be able to determine if it is right for
their portfolio. If investors need more information beyond what the prospectus provides, they can
consult the fund's annual report, which is available directly from the fund company or through a
financial planner.

This investment of time and effort would prove very beneficial to investors.

Mutual Funds - The Logic behind Investing in Them

Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its
shares on a continuous basis and use the capital thus raised to invest in securities of different companies. This
article helps you to know in depth on:
• Is it possible to diversify investment if invested in mutual funds?

• Find more on the working of mutual fund

• Know more about the legal aspects in relation to the mutual funds

At the beginning of this millennium, mutual funds out numbered all the listed securities in New York Stock
Exchange. Mutual funds have an upper hand in terms of diversity and liquidity at lower cost in comparison to
bonds and stocks. The popularity of mutual funds may be relatively new but not their origin which dates back to
18th century. Holland saw the origination of mutual funds in 1774 as investment trusts before spreading to Anglo-
Saxon countries in its current form by 1868.

We will discuss now as to what are mutual funds before going on to seeing the advantages of mutual funds.
Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its
shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The
stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net
asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the
earnings are distributed among the share holders.

A Brief of How Mutual Funds Work

Mutual funds can be either or both of open ended and closed ended investment companies depending on their
fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in
retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited
number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of various
economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the
dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a
discount to the current NAVs (net asset values).

Are Mutual Funds Risk Free and What are the Advantages?
One must not forget the fundamentals of investment that no investment is insulated from risk. Then it becomes
interesting to answer why mutual funds are so popular. To begin with, we can say mutual funds are relatively risk
free in the way they invest and manage the funds. The investment from the pool is well diversified across
securities and shares from various sectors. The fundamental understanding behind this is not all corporations
and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly
then the possible losses from that would be balanced by the returns from other shares.

This logic has seen the mutual funds to be perceived as risk free investments in the market. Yes, this is not
entirely untrue if one takes a look at performances of various mutual funds. This relative freedom from risk is in
addition to a couple of advantages mutual funds carry with them. So, if you are a retail investor and planning an
investment in securities, you will certainly want to consider the advantages of investing in mutual funds.
• Lowest per unit investment in almost all the cases

• Your investment will be diversified

• Your investment will be managed by professional money managers

What are the Laws Governing Mutual Funds?

Mutual funds are governed under various laws in US and elsewhere. Basically all these laws are formulated with
the protection of the investing community in view. In US Securities and Exchange Commission sets forth
numerous requirements for registration and regulation of mutual funds. The primary regulation that governs the
mutual funds is the Investment Company Act of 1940 and various rules and forms of registration adopted under
them. The other important acts mutual funds are subjected to are the Securities Act of 1933 and Securities
Exchange Act of 1934.

These laws are enacted in order to foster investment culture among general public and protect them from natural
and artificial risks. These laws provide basis for their conduct and transaction in a fair and legitimate way. The
advantages of mutual funds are mostly exempted from tax deductions.

If You Want To Invest In Mutual Funds

If you have made the decision, mutual funds are one of good investments. Look for various types of funds to
begin with. There are three types if investment companies.
1. Open end investment companies

2. Closed end investment companies and finally

3. Unit Investment Trusts

Secondly, look for their portfolio after weighing down their past performance and experience of their fund
managers (past performance is not a guarantee of projected returns). Look for various fees/loads and ways to
exit such as redemption and selling in the open market. Don't over rule taking advices from a professional
especially when you are new and confused.

Will Mutual Funds Definitely Work in Your Favor?

Mutual funds have gained in popularity with the investing public especially in the last two decades following what
is now known as the longest bull run of twenty years. Mutual funds have created wealth for retirees and general
safe financial players with the rise in stock prices. This article throws light on:
• What are the factors that prompt investors to invest in mutual funds?

• What are the risks involved in investing in mutual funds?

• Who regulates mutual funds?

Any one who is aware of stock market is not new to mutual funds. Mutual funds have gained in popularity with
the investing public especially in the last two decades following what is now known as the longest bull run of
twenty years. At the out set mutual funds have created wealth for retirees and general safe financial players with
the rise in stock prices. But why invest in mutual funds and why is investing in mutual funds a popular option?
How beneficial are they and what are the risk factors involved in mutual funds investing? After all they are also a
kind of instruments of investments.

Why Invest In Mutual Funds?

If you are considering investing in stock market and are afraid of its some what unpredictable fluctuations, you
can definitely consider investing in mutual funds. Some of the reasons that go strongly in favor of mutual funds
are their lowest risk factors owing to diversification of assets in to various sectors and scrips or instruments
within. As with the risk, the costs of unit share too are spread across making them affordable by almost any one.
If you are looking at open end funds you can always purchase them from the company at the NAV minus some
loads or expenses. The closed end funds give you the flexibility of independent stocks while combining the best
of the features of mutual funds.
How Mutual Funds Manage To Reduce Their Risk?
Fund managers allocate available funds in a specified proportion among various instruments of investments.
Consider a fund being well diversified across the spectrum of exchange listed stocks and bonds which yield a
guaranteed return in addition to being invested in money markets and real estates. While bonds and money
market investments provide a low but steady return, other instruments are of high yielding character in a short
period. The higher risk of high yielding portfolio is compensated for by the investments in bonds in events of
adverse market behavior.

The portfolio will be constantly reviewed and adjusted to variations in order to maximize returns and minimize
risks. This means, fund managers buy or sell stocks or bonds as per the dictates of the fund and market pulls.
For example an investment in a perceived risky instrument will be sold immediately and reinvested in a
prospective media of the time.

Thinking of Mutual fund? Here are the tips!!!

Investing in mutual funds requires that you have a fair amount of knowledge of securities market, economy and
the law governing mutual funds apart from an all-round knowledge and a bit of street smartness. This article
makes you aware of:

• What are the points that help you to arrive at a decision while investing in mutual funds?

• Learn how mutual funds can be a better option

• How to invest in mutual funds?

Investing in mutual funds requires that you have a fair amount of knowledge of securities market, economy and
the law governing mutual funds apart from an all-round knowledge and a bit of street smartness. When you buy
mutual funds you are actually investing in the shares of a certain corporation which is an investment company or
a trust. Such corporations share the dividend earned on their investments among all the investors. Thus the fruit
of some of the finest money management is eaten by all the investors. We will briefly see how mutual funds work
before proceeding on to explore ways of investing in mutual funds.

How Do Mutual Funds Work and How To Buy Mutual Funds?

Mutual funds work on the principle of pooling money from countless number of investors and investing in various
instruments such as bonds, stocks and money market in short term instruments. This means investors who do
not or were not able to buy shares from other buyers or from exchanges can buy shares/units of mutual funds
that have purchased the same shares. Principally a fund trades, invests and redeems its holding of shares to
maximize the returns on its investment and dividends. The entire earnings are shared among the share holders
of a particular fund whose names are recorded in the books of the mutual fund on a given date (record date)
though some funds have a different ways of sharing the dividends.

Buying mutual fund actually means investing in mutual funds and to a certain degree you can rest assured that
you are safe at the hands of the best money managers. However even on your part, you need top make an
investment decision when you buy shares of a particular mutual fund.

Here is a brief check list that helps you arrive at a decision.

1. Decide on the amount of money you can set aside to investing in mutual funds

2. Decide for your self whether you can wait till a new fund is launched and you can buy at their IPO or buy
from the secondary market or from the company it self (IPO's generally do not charge any loads/fees)

3. Open end funds have greater liquidity in comparison to closed end funds which have a limited number
of shares. Pick your investment from these.
 4. The important decision is when you have to pick an instrument to invest in. There are many funds with
very good performance records. They will have invested in particular genre and sector of securities.
Consider the following:

a. Funds invested on short term money market instruments return higher returns but carry a
greater element of risk than funds invested on bonds and G-Secs.

b. Though Index Funds are a volatile lot, they all the more follow the same curve as the index;
you can derive higher returns depending on your timing of entry and exit.

c. Industry experts recommend funds which returned stable and increasing income over various
periods to short term high returning funds. You can consider funds that returned consistently
and considerably for three years.

5. Double check on mutual funds that invest in stocks of non public companies and derivatives or real
estate and mortgages. Non public companies and others here are not at obligation to publish financial
results and so you have no way of knowing the performance of your investment tied to these companies

6. Do not forget to check on the history and experience of the mutual funds you have short listed.

How Do You Say Mutual Funds are a Better Investment

Option?
There are times when every one of us has thought to invest in all opportunities. One striking reason for not doing
so is the lack of relevant knowledge. As opposed to this think of some mutual funds that have expert
professionals who are knowledgeable of the market and economy too apart from maximizing returns and
minimizing risks. With mutual funds you can invest in smaller amounts of money while you spread it among
securities you will not even realize you have minimized your risk of loss of capital. Now, if your answer is a NO to
'whether you can do the same thing buying index scrip or a real estate with a similar amount of money' you have
answered right. Mutual funds are for real a better investment option.

Is the time ripe to buy mutual funds?

Buying mutual funds have never been difficult even considering the complexities involved in it. Mutual funds
market has grown big enough in the last decade or so that it has almost always out performed the stock market.
This article throws light on:

• How to pick a mutual fund from the huge pool of existing funds?

• When you can sell the mutual funds?

• How much you can earn from mutual funds?

Those of you who are looking to investing money in order that higher returns can be made must have concluded
stock market is too hot for you especially so when you are a new and a novice investor. But sulking that you are
loosing out on action while others are walking to their banks merrily is not necessary. Take a look at the world of
mutual funds. Mutual funds market has grown big enough in the last decade or so that it has almost always out
performed the stock market. Yes, there is big money to be made in mutual fund investment too provided you
played your cards with aplomb.

How to Buy Mutual Funds?

Buying mutual funds have never been difficult even considering the complexities involved in it. You can buy
mutual funds as easily as 1-2-3. Here are the typical steps involved when you want to buy mutual funds
 • You can buy mutual funds when mutual fund companies make initial public offerings. At this time you
will usually have to pay the basic face value and not the market dictated price that includes a premium
as in many cases. Filling out an application form with a payment of some initial deposit is all it takes.

• Buying mutual funds called closed end funds is from stock exchanges. Closed end funds are initially
sold by fund companies in limited numbers and they are listed in a stock exchange to facilitate trading
by investors. These will be usually at premium prices or as dictated by demands in the market (higher
demands for various reasons attract higher premiums).

• Buying mutual funds called closed end funds is from stock exchanges. Closed end funds are initially
sold by fund companies in limited numbers and they are listed in a stock exchange to facilitate trading
by investors. These will be usually at premium prices or as dictated by demands in the market (higher
demands for various reasons attract higher premiums).

• You can also buy mutual funds (open end funds - funds purchasable perpetually from the company).
Here the price at which you buy will be a figure called as NAV in the industry circles. This term stands
for net asset value, a figure that denotes the current value of a share of the company after adding the
earnings and deducting the expenses and taxes equally amongst all the number of shares.

• How do you mutual funds online? Most companies and banks that are in the mutual funds business
facilitate online buying of mutual funds to their customers. They need you to have a trading as well as a
demat account and connect your bank account to this. You can log on to a broker's or the company's
own trading internet portal to be able to buy online. Once online you can choose from the array of
exchange traded mutual funds (ETF) and open end funds too. Your trades will be either credited or
debited to your demat account (an account to hold dematerialized shares - electronic form of shares)
instantaneously. This is some what like you can transfer funds from your bank account.

What Kind of Funds to Buy and how to pick From a Huge Pool of
Existing funds?
Well. It is not easy to pick from a really huge pool of funds. Add to it the spate of new public offers every now and
then, to make things worse. But you have your objectives in place. If it is making money, you sure would not want
to go to money market funds in a big way.

Stock Funds for Growth

You can bet a good chunk of your money on growth funds such as index funds and sector funds. These are also
called as stock funds in a broader sense. Stock funds come in different varieties like index funds that invest and
track specific index (S&P, DOWJONES etc) and sector specific funds that invest and track for example
automotive sector. Do not pool your entire money in any one fund as it deprives you of growth benefits of other
funds.

401 (k) Plans

For retirement plans you can choose from many of the 401 (k) plans. These funds appreciate in value over long
periods and carry lesser risk compared to growth funds. It is a tailor made fund for those looking for safer
investment for retirement. The advantage here is your employer makes an equal contribution to yours and your
contribution is from your before-tax salary. Your account will not be taxed until you withdraw thus paving way for
faster growth.

Balanced Funds
Balanced Funds or Managed Funds allocate assets in predetermined proportions among government securities
(bonds, T-Bills) for safety and in stocks for rapid growth. Investment in stocks grow rapidly (rapid and higher
growth are associated with risks too) while government securities give a sort of cushion with their definite but
slow growth. Most funds let you switch allocation for a small fee. Exercise the switch over option when growth
falls behind your expectation.
Best guide for selecting the right mutual funds
Selecting best mutual funds mean a lot more than deciding by indices and their past performances. However,
you need to remember one thing that there is no quick gratification in investments of any kind. This article tells
you regarding:
• How can you select a mutual fund for investment?

• Is it important to pick up companies that are performing above average?

• Is it advisable to compare mutual funds across category?

When your investment purpose is for saving for retirement, then risk minimization should be your mantra. And
one of the best avenues for you to invest now is mutual funds as they have an average of 50 stocks in each
portfolio for diversification and cushioning the risks. Selecting best mutual funds mean a lot more than deciding
by indices and their past performances. However, you need to remember one thing that there is no quick
gratification in investments of any kind.

Let us discuss the dos and don'ts of selecting the best mutual funds. These points should serve as guidelines for
making decision on whether your pick is among the best in the industry or not.

Dos In Selecting the Best Mutual Fund

1. Draw down your investment objective. There are various schemes suitable for different needs. For
example retirement plan, capital growth etc. Also get clear about your time frame for investment and
returns. Equity funds are not advisable for short term because of their long term nature. You can
consider money market and floating rate funds for short term gains. This equals asking - What kind of
mutual fund is right for me?

2. Once you have decided on a plan or a couple of them, collect as much information as possible on them
from different sources offering them. Funds' prospectus and advisors may help you in this.

3. Pick out companies consistently performing above average. Mutual funds industry indices are helpful in
comparing different funds as well as different plans offered by them. Some of the industry standard fund
indices are Nasdaq 100, Russel 2000, S&P fund index and DSI index with the latter rating the Socially
Responsible Funds only. Also best mutual funds draw good results despite market volatility.

4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all your short listed funds
and how they affect your returns. Best mutual funds have lower cost out go.

5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe Ratio explains
whether a fund is risk free based on its expected returns compared against a risk free money market
fund.

6. Some funds have the advantage of low minimum initial investments. You can start investing even with
$250 a month. This is advisable for building asset bases over a long period with small regular
investments.

Best Tips to do an Analysis of Mutual Funds

Before investing in mutual funds a proper analysis is required. While all analyses' efforts are aimed at maximizing
returns and minimizing risks, it is the latter that gains importance as the single most fundamental criterion to
compare mutual funds. This article makes you aware of:
 • How can you do a mutual fund analysis?

• important is the risk factor analysis?

• Why is it important to track the record of mutual fund companies?

Investing in mutual funds is not a child's play unless one does a mutual funds' analysis. At least it is not as easy
as picking top performers going by indices and investing in them. While all analyses' efforts are aimed at
maximizing returns and minimizing risks, it is the latter that gains importance as the single most fundamental
criterion to compare mutual funds.

Fundamental Objectives of Investment

To begin with our mutual funds' analysis you need to be clear about the investment objectives you have, that is
whether the objective is growth of capital or regular income. Whatsoever be the case, the basics of objective of
investment are not to be forgotten.

Tips To Do Mutual Fund Analysis

It is needless to say that you need to have some rudimentary knowledge of investing in stocks and securities
apart from street smartness to research mutual funds. Here are a few tips for analysis before investing mutual
funds. We will begin our exercise from the point you have collected all the relevant information about competing
funds.

Look At The Portfolio of Your Pick of Funds

Most of the plans will have invested in multiple stocks or securities for diversification. Critical point here is in what
proportion they have invested in different stocks. Giving a higher weightage to a high returning stock leaves less
opportunity for broader allocation and may back fire when market is bearish (plummeting steadily). Also higher
returning stocks carry high element of risk.

The Optimum Portfolio Size

What should be the optimum portfolio size (assortment investments under one plan) for your pick of fund? Well,
opinions are divided about this, but it is crucial to look into the specifics of stock bets and sectors you will be
exposed to. Higher exposure to specific sectors may see you loosing out on broad based rallies in the bourses
(stock markets). Optimally 65 % to 85% may be allocated in stocks from different sectors for diversification plus
growth and the balance being in typical bond and money market instruments.

Is Your Pick of Funds Really Diversified

Notice that the competing plans, though from different fund companies, perform almost on par as if they have a
correlation. They indeed have. So, does it mean you have diversified by spreading your money amongst them?
Well, think again. Similar plans have similar pattern of their holdings of stocks and with a similar portfolio. This
means, in actual effect you are not diversifying. They all go up and down almost as if they do it in tandem. For
clear diversification, pick those with different portfolios though they are similar plans (ex: growth, index or
dividend paying etc).

Learn the Types before Investing in Mutual Funds

There is no one method of classifying mutual funds risk free or advantageous. However we can do the same by
way of classifying mutual funds as per their functioning and the type of funds they offer to investors. This article
makes you aware on:
• What are the reasons that make the close ended mutual finds more attractive?

• What are the factors that determine the prices of exchange traded funds?
 • Find out the features of open ended mutual funds

There is no one method of classifying mutual funds risk free or advantageous. However we can do the same by
way of classifying mutual funds as per their functioning and the type of funds they offer to investors. If we took
the middle path and classify broadly we get the following list.

Open End Mutual Funds

All mutual funds by default and by definition are open end funds. Here an investor can buy the shares at any
point of time and exit from it at any time of his choice. Both buying and selling will be at the current NAV subject
to load factors where ever applicable. Though this is a very broad category, one can easily say this is the most
popular of the lot looking at the ease with which one can liquidate his holding (exit from position by selling or
redemption to the trust/fund). Affordability is another key factor that decides the popularity of open end funds.
Those who can not afford high initial prices can buy with low dollar values and even on a monthly basis.

Closed End Mutual Funds

Selling off of a specified and limited number of shares by the mutual funds at an initial public offering is known as
closed end mutual fund. However one important difference between open end fund and closed end mutual fund
is that the price of the latter is decided by demand and supply of the stock in the market and not by NAVs unlike
in the former case. The pooled funds are utilized as per the mandate of the fund and Securities and Exchange
Commission's regulations. They are traded more like the general stocks. Some of the reasons to invest in this
category
• Prices are determined by market demands and thus closed end funds trade at lower than the offer price
more often than not which is a perfect time for buying (at discounted prices)

• Like in the open end funds there are wide options for you to choose from. Like stock funds, balanced
funds that give full asset allocation benefit and thirdly the bond funds.

Exchange Traded Funds

The Exchange Traded Funds are a basket of stocks and trade like a normal security on exchanges tracking index
much like index funds. The prices of the ETFs are determined by market forces and thus no NAVs can be fixed.
The advantages of ETFs include buying and selling like you can do with any stock traded on the exchange not
excluding short selling while you enjoy the diversification of an index fund. There no fees/loads on these funds
other than the commission you pay to the broker. There are many popular funds in this class and one of them is
SPDR that tracks S&P 500 index.

Other Types of Mutual Funds That Invest In Multiple

Sectors
There are funds that invest in multiple sectors of tradable securities including government securities. Though
most of these are open end mutual funds closed end funds are not entirely new to this. Some of these types are:

Money Market Funds

A conservative and short term allocation of funds that yield moderate returns but the funds emphasize on
preservation of capital.

Balanced and Growth Funds

A relatively aggressive fund that focuses on higher returns and capital appreciation. Another important feature of
this type of funds is they are highly diversified reducing market risks.
Index Funds
Goal of index funds is to match the market performance by investing on index heavy weights. This can be a bond
index fund or a stock index fund. For the latter type Dow Jones is an example and they follow the 30 stock index.
Low expenses are the advantage.

Combination Funds
There are a number of combination funds available in the market. For income you have income funds that invest
in mainly government bonds and some times in private sector debt instruments too. These are also called as
bond mutual funds. The aim of such funds is to provide a guaranteed regular income to investors. The values of
units/shares are determined by the fluctuating rates of interest. Higher the rate of interest on the bond
instruments higher is the price of shares. There is a whole host of options in the category with multiple
combinations to choose from.

Pure Stock Funds

The main type of funds under this category are aggressive ones and the first concentrates on growth by investing
in such companies that have potential to an explosive growth. You should not forget that other side of high
growth potential is high risk element. These funds do not usually pay dividends at all. Buying them is at your risk
of going bankrupt of the entire fund. The other types include, funds invested in large caps stocks, mid stocks
where in their share value is stable or the fluctuation is minor. On the flip side the dividends paid by such
companies are not usually attractive.

Growth Funds and Growth and Income Funds

Growth funds concentrate on bigger growth potential but keeping an eye on the dividend income too. The asset
allocation in growth funds is spread on both but with skewness in favor of instruments of high returns. Certain
safety factors are in built in to the allocation mechanism here. This is recommendable depending on your risk
exposure limit. On the other hand growth and income funds emphasize more on appreciation of the capital
employed and dividend income than investing in high growth companies. This is recommendable when your
objective is not high returns in a short term but a steady income and a growth in the principle over a period of
time.

Load and No-Load Funds

Some funds charge you fees called as loads to cover their expenses to manage your asset/investment. These
loads appear to be small but work out to be a very high amount over a long period. Certain funds do charge fees
even while claiming they are no load funds. It is important to check out the repercussions of this on your returns
after deduction of tax and fees.

Tips To Choose a Right Fund for Your Need

There is no better guide to investment than your objective. There is a fund to suit every need and picking one
should not be a difficult decision. A few points on this:

• Decide on the amount you can put aside

• Write down your objectives like steady growth, steady income or faster growth etc

• Optimize your theoretical returns as opposed to investments and expenses considered

• If your objective is stability and income G-SEC bond funds are your best bet

• Don't forget to cross check the credibility and experience of the funds.
Basics of mutual funds

The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to
explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it
can serve as an investment tool.
Getting Started

Before we move to explain what is mutual fund, it’s very important to know the area in which mutual funds works,
the basic understanding of stocks and bonds.

Stocks

Stocks represent shares of ownership in a public company. Examples of public companies include Reliance,
ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds

Bonds are basically the money which you lend to the government or a company, and in return you can receive
interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to
be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real estate, and
precious metals), but the majority of mutual funds invest in stocks and/or bonds.

Working of Mutual Fund

Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified
regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public
or by private sector entities including one promoted by foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types
of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be
independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual
funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual
fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse
areas such as valuation, disclosure, transparency etc.

What is a Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool
their money together with a predetermined investment objective. The mutual fund will have a fund manager who
is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a
mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or
unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost
efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase
stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to
mutual funds is diversification, by minimizing risk & maximizing returns.

Diversification

Diversification is nothing but spreading out your money across available or different types of investments. By
choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up
to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then
adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you
purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in
a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade
corporate bonds, etc).

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and
return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors
can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose
from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: 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:

These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the
initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the
initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges
where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the
scheme on account of demand and supply situation, expectations of unitholder and other market factors.
Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual
Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units
during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the
investor.

3. Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The
units may be traded on the stock exchange or may be open for sale or redemption during pre-determined
intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect
higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns.
For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves
ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as
compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional
management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free.
This is because the money that is pooled in are not invested only in debts funds which are less riskier but are
also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund
involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

1. Equity fund:

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary
different for different schemes and the fund manager’s outlook on different stocks. 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)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

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. These Funds carry zero Default risk but are associated with Interest Rate risk. These
schemes are safer as they invest in papers backed by Government.

• Income Funds: Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.

• MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in
equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-
return matrix when compared with other debt schemes.

• Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily
invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some
portion of the corpus is also invested in corporate debentures.
 • Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank
call money market, CPs and CDs. These funds are meant for short-term cash management of corporate
houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-
return matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced funds:

As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income
securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide
investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in
returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund.
The investor can align his own investment needs with the funds objective and invest accordingly.

By 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. These schemes normally invest a major part
of their fund in equities and are willing to bear short-term decline in value for possible future
appreciation.

• Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is 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.

• 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.

Other 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. While these funds may give higher returns, they are more risky compared
to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.

Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it
receives over the year to fund owners in the form of a distribution.

• If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass
on these gains to investors in a distribution.

• If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice
either to receive a check for distributions or to reinvest the earnings and get more shares.

Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, they are professional managed, by well
qualified professional. Investors purchase funds because they do not have the time or the expertise to manage
their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their
investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors
risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large
number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and
when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in
the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as
little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not
dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or
not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an
investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns from a few investments
often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too
big. When money pours into funds that have had strong success, the manager often has trouble finding a good
investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation.
For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable
the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains
liability

Investments in Mutual Fund

Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that
investing in mutual funds provide like diversification, professional management, the ease of investment process
has proved to be a major enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs
to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment
objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider
various factors before making an investment decision. Since not everyone has the time or inclination to invest
and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed
market, and has started integrating with the world markets, external factors which are complex in nature affect us
too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening
in Asian market have a deep impact on the Indian stock market. Although it is not possible for an individual
investor to understand Indian companies and investing in such an environment, the process can become fairly
time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset
Management Company invests in research) provide an option of investing without getting lost in the complexities.

Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary
tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder.
Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and
hence would be better off leaving that to a professional. Mutual funds represent one such option.

Lastly, Evaluate past performance, look for stability and although past performance is no guarantee of future
performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated
objectives and peer group. A good way to do this would be to identify the five best performing funds (within your
selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three
years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus
demonstrated their ability to be not only good but also, consistent performers.

An investor can choose the fund on various criteria according to his investment objective, to
name a few:

• Thorough analysis of fund performance of schemes over the last few years managed by the fund house
and its consistent return in the volatile market.
• The fund house should be professional, with efficient management and administration.
• The corpus the fund is holding in its scheme over the period of time.
• Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by
them.
• The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall
return.