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ABCHLOR group of companies
MUTUAL FUNDS
Mutual Fund a Globally Proven Investment Avenue
Worldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the world, has a long and successful history. The popularity of Mutual Funds has increased manifold in developed financial markets, like the United States. As at the end of March 2006, in the US alone there were 8,002 mutual funds with total assets of over US$ 9.36 trillion (Rs.427lakh crores).
In India, the mutual fund industry started with the setting up of the Unit Trust of India in 1964. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, private sector and foreign institutions were permitted to set up mutual funds.
In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities viz. The Specified Undertaking of the Unit Trust of India , representing broadly, the assets of US 64 scheme, assured returns and certain other scheme and UTI Mutual Fund conforming to SEBI Mutual Fund Regulation.
As at the end of March 2007, there were 32 mutual fund, which managed assets of Rs.3,26,388 crores (US $ 76 Billion ) under 609 schemes.
This fast growing industry is regulated by the Securities and Exchange Board of India (SEBI).
What is a Mutual Fund?
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Fund. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy.
The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual Fund Operation Flow Chart
Types of Mutual Fund Scheme
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals.
(A) By Structure
Open- Ended Schemes :
These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The Key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value (“Nav”) related prices.
Close- Ended Schemes :
Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close- ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme’s NAV on account of demand and supply situation, unit holders’ expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.
Interval Schemes :
These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.
(B) By Investment Objective
Growth Schemes :
Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money back in the short-term.
Ideal for:
  • Investors in their prime earning years.
  • Investors seeking growth over the long-term.
Income Schemes :
Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Ideal for:
  • Retired people and others with a need for capital stability and regular income.
  • Investors who need some income to supplement their earnings.

Balanced Schemes :
Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls.
Ideal for :

  • Investors looking for a combination of income and moderate growth.

Money Market/ Liquid Schemes :
Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.
Ideal for:

  • Corporates and individual investors as a means to park their surplus funds for short periods or awaiting a more favourable investment alternative.
Other Schemes

Tax Saving Schemes :
These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and pension Schemes. The details of such tax saving schemes are provided in the relevant offer documents.
Ideal for :

  • Investors seeking tax rebates.
Special Schemes :
This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as ;A’ Group shares or initial public offerings).
Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment.
Keep in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you.
Remember, as always, higher the return you seek higher the risk you should be prepared to take.
A few frequently used terms are explained here below:
Net Asset Value (“NAV”)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’Load
Is a charge collected by a scheme when it buys back the units from the unitholders.
Why Should You Invest in Mutual Funds ?
The advantages of investing in a Mutual Fund are:

1. Professional Management: You avail of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the schemes.
2. Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion, you achieve this diversification through a Mutual Fund with far less money than you can do on your own.
3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
4. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
6. Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.
7. Transparency: you get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of asssets and the fund manager’s investment strategy and outlook.
8. Flexibility: Through feature such as regular investment plans, regular withdrawal plans and divided reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.
9. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
10. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of ‘investors. The operations of Mutual Funds are regularly monitored by SEBI.
Understanding And Managing Risk
All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally however, longer the term, lesser the risk; companies may default in payment of interest/ principal on their debentures /bonds/ deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power.
While risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and maximises returns.
How To Invest In Mutual Funds ?
Step One- Identify your investment needs.
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore the first step is to assess your needs. Begin by asking yourself these questions:
1. What are my investment objectives and needs? Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs.
2. How much risk am I willing to take? Probable Answer: I can only take a minimum amount of risk or I m willing to accept the fact that my investment value may fluctuate or that there may be a short-term loss in order to achieve a long-term potential gain.
3. What are my cash flow requirements? Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don’t require a current cash flow but I want to build my assets for the future.
By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund investment strategy.

Step Two- Choose the right Mutual Fund.
Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in .The offer document of the scheme tells you its objectives and provides supplementary details like the tracks record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular a particular Mutual Fund are:

  • The track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category.
  • How well the Mutual Fund is organized to provide efficient, prompt and personalized service.
  • Degree of transparency as reflected in frequency and quality of their communications.

Step Three- Select the ideal mix of Schemes.
Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.
The following charts could prove useful in selecting a combination of schemes that satisfy your needs.

AGGRESSIVE PLAN
  Growth Scheme
  Income Scheme
  Balanced Scheme
  Money Market Scheme

This plan may suit:

  • Investors in their prime earning years and willing to take more risk.
  • Investors seeking growth over a long- term.

MODERATE PLAN
  Growth Scheme
  Income Scheme
  Balanced Scheme
  Money Market Scheme

This plan may suit:

  • Investors seeking income and moderate growth.
  • Investors looking for growth and stability with moderate risk.

CONSERVATIVE PLAN
  Growth Scheme
  Income Scheme
  Balanced Scheme
  Money Market Scheme

This plan may suit:

  • Retired and other investors who need to preserve capital and earn regular income.
Step Four- Invest regularly
For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans this regular investing habits is made easy for you.

Step Five- Keep your taxes in mind
As per the current tax laws, Dividend / Income Distribution made by mutual funds is exempt from Income Tax in the hands of investor. Further, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant for specific advice to achieve maximum tax efficiency by investing in Mutual Funds

Step Six- Start early
It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more that if you wait and invest later. The power of compounding lets you earn income and your money multiplies at a compounded rate of return.

Step Seven- The final step
All you need to do now is to get in touch with a Mutual fund or your agent/broker and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor- whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.
Your Rights as a Mutual Fund Unit Holder
As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, you are entitled to:

1. Receive unit certificates or statements of accounts confirming your title within 30 days from the date of closure of the subscription under open-end schemes or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund.

2. Receive information about the investment policies, investment objective, financial position and general affairs of the schemes.

3. Receive divided within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.

4. Vote in accordance with the Regulations to:

  • Change the Asset Management Company.
  • Wind up the schemes.

5. To receive communication from the Trustee about change in the fundamental attributes of any scheme or any other changes which would modify the scheme and affect the interest of the unitholders and to have option to exit at prevailing Net Asset Value without any exit load in such cases.

6. Inspect the documents of the Mutual Funds specified in the scheme’s offer document.

In addition to your rights, you can expect the following from Mutual Funds:

  • To publish their NAV, in accordance with the regulations: daily in case of open-ended schemes and once a week, in case of close-ended schemes.
  • To disclose your schemes’ entire portfolio twice a year, unaudited financial results half yearly and audited annual accounts once a year. In addition many mutual funds send out newsletters periodically.

To adhere to a code of Ethics which require that investment decisions are taken in the best interests of the unitholders.
Ten Advantages of Investing in Mutual Funds
  • Professional Management
  • Diversification
  • Convenient Administration
  • Return Potential
  • Low Costs
  • Liquidity
  • Transparency
  • Flexibility
  • Choice of Schemes
  • Well Regulated