Mutual Funds - Concept

A Mutual Fund is a trust that pools the

savings of a number of investors who
Share a common financial goal. The money
thus collected is then invested in capital
market instruments such as shares,
debentures and other securities. The
income earned through these investments
and the capital appreciation realized are
shared by its unit holders in proportion to
the number of units owned by them. Thus a
Mutual Fund is the most suitable investment
for the common man as it offers an
opportunity to invest in a diversified,
professionally managed basket of securities
at a relatively low cost. The flow chart below
describes broadly the working of a mutual
fund:
Mutual Fund Operation Flow Chart
Mutual Funds Industry in India
The origin of mutual fund industry in India is
with the introduction of the concept of
mutual fund by UTI in the year 1963.
Though the growth was slow, but it
accelerated from the year 1987 when non-
UTI players entered the industry.

In the past decade, Indian mutual fund

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

Putting the AUM of the Indian Mutual Funds

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

The main reason of its poor growth is that

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

The mutual fund industry can be broadly put

into four phases according to the
development of the sector. Each phase is
briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on
1963 by an Act of Parliament. It was set up
by the Reserve Bank of India and
functioned under the Regulatory and
administrative control of the Reserve Bank
of India. In 1978 UTI was de-linked from the
RBI and the Industrial Development Bank of
India (IDBI) took over the regulatory and
administrative control in place of RBI. The
first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had
Rs.6,700 crores of assets under
management.

Second Phase - 1987-1993 (Entry of

Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual

Fund was the first followed by Canbank
Mutual Fund (Dec 87), Punjab National
Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92).
LIC in 1989 and GIC in 1990. The end of
1993 marked Rs.47,004 as assets under
management.

Third Phase - 1993-2003 (Entry of Private

Sector Funds)

With the entry of private sector funds in

1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a
wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund
Regulations came into being, under which
all mutual funds, except UTI were to be
registered and governed. The erstwhile
Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector
mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations

were substituted by a more comprehensive
and revised Mutual Fund Regulations in
1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on

increasing, with many foreign mutual funds
setting up funds in India and also the
industry has witnessed several mergers and
acquisitions. As at the end of January 2003,
there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of
India with Rs.44,541 crores of assets under
management was way ahead of other
mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It

was bifurcated into two separate entities.
One is the Specified Undertaking of the Unit
Trust of India with AUM of Rs.29,835 crores
(as on January 2003). The Specified
Undertaking of Unit Trust of India,
functioning under an administrator and
under the rules framed by Government of
India and does not come under the purview
of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd,

sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under
the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in
March 2000 more than Rs.76,000 crores of
AUM and with the setting up of a UTI Mutual
Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking
place among different private sector funds,
the mutual fund industry has entered its
current phase of consolidation and growth.
As at the end of September, 2004, there
were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.

The major players in the Indian Mutual

Fund Industry are:
 GROWTH IN ASSETS UNDER
MANAGEMENT

Note:
Erstwhile UTI was bifurcated into UTI
Mutual Fund and the Specified Undertaking
of the Unit Trust of India effective from
February 2003. The Assets under
management of the Specified Undertaking
of the Unit Trust of India has therefore been
excluded from the total assets of the
industry as a whole from February 2003
onwards.
Performance of Mutual Funds in India
Let us start the discussion of the performance
of mutual funds in India from the day the
concept of mutual fund took birth in India. The
year was 1963. Unit Trust of India invited
investors or rather to those who believed in
savings, to park their money in UTI Mutual
Fund.

For 30 years it goaled without a single second

player. Though the 1988 year saw some new
mutual fund companies, but UTI remained in a
monopoly position.

The performance of mutual funds in India in the

initial phase was not even closer to satisfactory
level. People rarely understood, and of course
investing was out of question. But yes, some
24 million shareholders was accustomed with
guaranteed high returns by the begining of
liberalization of the industry in 1992. This good
record of UTI became marketing tool for new
entrants. The expectations of investors
touched the sky in profitability factor. However,
people were miles away from the
praparedness of risks factor after the
liberalization.

The Assets Under Management of UTI was Rs.

67bn. by the end of 1987. Let me concentrate
about the performance of mutual funds in India
through figures. From Rs. 67bn. the Assets
Under Management rose to Rs. 470 bn. in
March 1993 and the figure had a three times
higher performance by April 2004. It rose as
high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in

India declined when stock prices started falling
in the year 1992. Those days, the market
regulations did not allow portfolio shifts into
alternative investments. There were rather no
choice apart from holding the cash or to further
continue investing in shares. One more thing to
be noted, since only closed-end funds were
floated in the market, the investors disinvested
by selling at a loss in the secondary market.

The performance of mutual funds in India

suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of
course the lack of transparent rules in the
whereabout rocked confidence among the
investors. Partly owing to a relatively weak
stock market performance, mutual funds have
not yet recovered, with funds trading at an
average discount of 1020 percent of their net
asset value.

The supervisory authority adopted a set of

measures to create a transparent and
competitve environment in mutual funds. Some
of them were like relaxing investment
restrictions into the market, introduction of
open-ended funds, and paving the gateway for
mutual funds to launch pension schemes.
The measure was taken to make mutual funds
the key instrument for long-term saving. The
more the variety offered, the quantitative will be
investors.

At last to mention, as long as mutual fund

companies are performing with lower risks and
higher profitability within a short span of time,
more and more people will be inclined to invest
until and unless they are fully educated with
the dos and donts of mutual funds.

Mutual Fund Companies in India

ABN AMRO Mutual Fund | Birla Sun Life
Mutual Fund | Bank of Baroda Mutual Fund
(BOB Mutual Fund) | HDFC Mutual Fund |
HSBC Mutual Fund | ING Vysya Mutual
Fund | Prudential ICICI Mutual Fund |
Sahara Mutual Fund | State Bank of India
Mutual Fund (SBI) | Tata Mutual Fund.

The concept of mutual funds in India dates

back to the year 1963. The era between 1963
and 1987 marked the existance of only one
mutual fund company in India with Rs. 67bn
assets under management (AUM), by the end
of its monopoly era, the Unit Trust of India
(UTI). By the end of the 80s decade, few other
mutual fund companies in India took their
position in mutual fund market.

The new entries of mutual fund companies in

India were SBI Mutual Fund, Canbank Mutual
Fund, Punjab National Bank Mutual Fund,
Indian Bank Mutual Fund, Bank of India Mutual
Fund.

The succeeding decade showed a new horizon

in indian mutual fund industry. By the end of
1993, the total AUM of the industry was Rs.
470.04 bn. The private sector funds started
penetrating the fund families. In the same year
the first Mutual Fund Regulations came into
existance with re-registering all mutual funds
except UTI. The regulations were further given
a revised shape in 1996.

Kothari Pioneer was the first private sector

mutual fund company in India which has now
merged with Franklin Templeton. Just after ten
years with private sector players penetration,
the total assets rose up to Rs. 1218.05 bn.
Today there are 33 mutual fund companies in
India.

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April

15, 2004 with ABN AMRO Trustee (India) Pvt.
Ltd. as the Trustee Company. The AMC, ABN
AMRO Asset Management (India) Ltd. was
incorporated on November 4, 2003. Deutsche
Bank A G is the custodian of ABN AMRO
Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture

of Aditya Birla Group and Sun Life Financial.
Sun Life Financial is a golbal organisation
evolved in 1871 and is being represented in
Canada, the US, the Philippines, Japan,
Indonesia and Bermuda apart from India. Birla
Sun Life Mutual Fund follows a conservative
long-term approach to investment. Recently it
crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual

Fund)

Bank of Baroda Mutual Fund or BOB Mutual

Fund was setup on October 30, 1992 under the
sponsorship of Bank of Baroda. BOB Asset
Management Company Limited is the AMC of
BOB Mutual Fund and was incorporated on
November 5, 1992. Deutsche Bank AG is the
custodian.
HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30,

2000 with two sponsorers nemely Housing
Development Finance Corporation Limited and
Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27,

2002 with HSBC Securities and Capital
Markets (India) Private Limited as the sponsor.
Board of Trustees, HSBC Mutual Fund acts as
the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on

February 11, 1999 with the same named
Trustee Company. It is a joint venture of Vysya
and ING. The AMC, ING Investment
Management (India) Pvt. Ltd. was incorporated
on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with
Prudential Plc. of America, one of the largest
life insurance companies in the US of A.
Prudential ICICI Mutual Fund was setup on
13th of October, 1993 with two sponsorers,
Prudential Plc. and ICICI Ltd. The Trustee
Company formed is Prudential ICICI Trust Ltd.
and the AMC is Prudential ICICI Asset
Management Company Limited incorporated
on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18,

1996 with Sahara India Financial Corporation
Ltd. as the sponsor. Sahara Asset
Management Company Private Limited
incorporated on August 31, 1995 works as the
AMC of Sahara Mutual Fund. The paid-up
capital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first

Bank sponsored Mutual Fund to launch offshor
fund, the India Magnum Fund with a corpus of
Rs. 225 cr. approximately. Today it is the
largest Bank sponsored Mutual Fund in India.
They have already launched 35 Schemes out
of which 15 have already yielded handsome
returns to investors. State Bank of India Mutual
Fund has more than Rs. 5,500 Crores as AUM.
Now it has an investor base of over 8 Lakhs
spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the

Indian Trust Act, 1882. The sponsorers for
Tata Mutual Fund are Tata Sons Ltd., and Tata
Investment Corporation Ltd. The investment
manager is Tata Asset Management Limited
and its Tata Trustee Company Pvt. Limited.
Tata Asset Management Limited's is one of the
fastest in the country with more than Rs. 7,703
crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company
(KMAMC) is a subsidiary of KMBL. It is
presently having more than 1,99,818 investors
in its various schemes. KMAMC started its
operations in December 1998. Kotak Mahindra
Mutual Fund offers schemes catering to
investors with varying risk - return profiles. It
was the first company to launch dedicated gilt
scheme investing only in government
securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private

Limited, established in Jan 14, 2003, manages
the UTI Mutual Fund with the support of UTI
Trustee Company Private Limited. UTI Asset
Management Company presently manages a
corpus of over Rs.20000 Crore. The sponsor of
UTI Mutual Fund are Bank of Baroda (BOB),
Punjab National Bank (PNB), State Bank of
India (SBI), and Life Insurance Corporation of
India (LIC). The schemes of UTI Mutual Fund
are Liquid Funds, Income Funds, Asset
Management Funds, Index Funds, Equity
Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established

as trust under Indian Trusts Act, 1882. The
sponsor of RMF is Reliance Capital Limited
and Reliance Capital Trustee Co. Limited is the
Trustee. It was registered on June 30, 1995 as
Reliance Capital Mutual Fund which was
changed on March 11, 2004. Reliance Mutual
Fund was formed for launching of various
schemes under which units are issued to the
Public with a view to contribute to the capital
market and to provide investors the
opportunities to make investments in
diversified securities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up

on March 13, 2000 sponsored by Standard
Chartered Bank. The Trustee is Standard
Chartered Trustee Company Pvt. Ltd. Standard
Chartered Asset Management Company Pvt.
Ltd. is the AMC which was incorporated with
SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Frnaklin Templeton Investments is

a California (USA) based company with a
global AUM of US$ 409.2 bn. (as of April 30,
2005). It is one of the largest financial services
groups in the world. Investors can buy or sell
the Mutual Fund through their financial advisor
or through mail or through their website. They
have Open end Diversified Equity schemes,
Open end Sector Equity schemes, Open end
Hybrid schemes, Open end Tax Saving
schemes, Open end Income and Liquid
schemes, Closed end Income schemes and
Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial

services company and its leading in the market
in securities, investmenty management and
credit services. Morgan Stanley Investment
Management (MISM) was established in the
year 1975. It provides customized asset
management services and products to
governments, corporations, pension funds and
non-profit organisations. Its services are also
extended to high net worth individuals and
retail investors. In India it is known as Morgan
Stanley Investment Management Private
Limited (MSIM India) and its AMC is Morgan
Stanley Mutual Fund (MSMF). This is the first
close end diversified equity scheme serving the
needs of Indian retail investors focussing on a
long-term capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15,

1996 with Escorts Finance Limited as its
sponsor. The Trustee Company is Escorts
Investment Trust Limited. Its AMC was
incorporated on December 1, 1995 with the
name Escorts Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on
December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as
sponsored. The Trustee is ACAM Trust
Company Pvt. Ltd. and AMC, the Alliance
Capital Asset Management India (Pvt) Ltd. with
the corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June

12, 2001 with Niche Financial Services Pvt.
Ltd. as the sponsorer and Benchmark Trustee
Company Pvt. Ltd. as the Trustee Company.
Incorporated on October 16, 2000 and
headquartered in Mumbai, Benchmark Asset
Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund

Canbank Mutual Fund was setup on December

19, 1987 with Canara Bank acting as the
sponsor. Canbank Investment Management
Services Ltd. incorporated on March 2, 1993 is
the AMC. The Corporate Office of the AMC is
in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of

Cholamandalam Investment & Finance
Company Ltd. was setup on January 3, 1997.
Cholamandalam Trustee Co. Ltd. is the
Trustee Company and AMC is Cholamandalam
AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC

Mutual Fund on 19th June 1989. It contributed
Rs. 2 Crores towards the corpus of the Fund.
LIC Mutual Fund was constituted as a Trust in
accordance with the provisions of the Indian
Trust Act, 1882. . The Company started its
business on 29th April 1994. The Trustees of
LIC Mutual Fund have appointed Jeevan Bima
Sahayog Asset Management Company Ltd as
the Investment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General
Insurance Corporation of India (GIC), a
Government of India undertaking and the four
Public Sector General Insurance Companies,
viz. National Insurance Co. Ltd (NIC), The New
India Assurance Co. Ltd. (NIA), The Oriental
Insurance Co. Ltd (OIC) and United India
Insurance Co. Ltd. (UII) and is constituted as a
Trust in accordance with the provisions of the
Indian Trusts Act, 1882.
Future of Mutual Funds in India

Wide variety of Mutual Fund Schemes exist to

cater to the needs such as financial position,
risk tolerance and return expectations etc. The
table below gives an overview into the existing
types of schemes in the Industry.
TYPES OF MUTUAL FUND SCHEMES
• By Structure
o Open - Ended Schemes
 o Close - Ended Schemes
o Interval Schemes
• By Investment Objective
o Growth Schemes

o Income Schemes

o Balanced Schemes

o Money Market Schemes

• Other Schemes
o Tax Saving Schemes

o Special Schemes

 Index Schemes

 Sector Specfic Schemes

Mutual Funds – Organisation

There are many entities involved and the

diagram below illustrates the
organisational set up of a mutual fund:
Organisation of a Mutal Fund
Association of Mutual Funds in India
(AMFI).

With the increase in mutual fund players in

India, a need for mutual fund association in
India was generated to function as a non-profit
organisation. Association of Mutual Funds in
India (AMFI) was incorporated on 22nd August,
1995.

AMFI is an apex body of all Asset Management

Companies (AMC) which has been registered
with SEBI. Till date all the AMCs are that have
launched mutual fund schemes are its
members. It functions under the supervision
and guidelines of its Board of Directors.
Association of Mutual Funds India has brought
down the Indian Mutual Fund Industry to a
professional and healthy market with ethical
lines enhancing and maintaining standards. It
follows the principle of both protecting and
promoting the interests of mutual funds as well
as their unit holders.

The objectives of Association of Mutual

Funds in India

The Association of Mutual Funds of India

works with 30 registered AMCs of the country.
It has certain defined objectives which
juxtaposes the guidelines of its Board of
Directors. The objectives are as follows:
• This mutual fund association of India
maintains a high professional and ethical
standards in all areas of operation of the
industry.
• It also recommends and promotes the top
class business practices and code of
conduct which is followed by members and
related people engaged in the activities of
 mutual fund and asset management. The
agencies who are by any means connected
or involved in the field of capital markets
and financial services also involved in this
code of conduct of the association.
• AMFI interacts with SEBI and works
according to SEBIs guidelines in the mutual
fund industry.
• Association of Mutual Fund of India do
represent the Government of India, the
Reserve Bank of India and other related
bodies on matters relating to the Mutual
Fund Industry.
• It develops a team of well qualified and
trained Agent distributors. It implements a
programme of training and certification for
all intermediaries and other engaged in the
mutual fund industry.
• AMFI undertakes all India awarness
programme for investors inorder to promote
proper understanding of the concept and
working of mutual funds.
• At last but not the least association of
 mutual fund of India also disseminate
informations on Mutual Fund Industry and
undertakes studies and research either
directly or in association with other bodies.
The sponsorers of Association of Mutual
Funds in India

Bank Sponsored
• SBI Fund Management Ltd.
• BOB Asset Management Co. Ltd.
• Canbank Investment Management
Services Ltd.
• UTI Asset Management Company Pvt. Ltd.
Institutions
• GIC Asset Management Co. Ltd.
• Jeevan Bima Sahayog Asset Management
Co. Ltd.
Private Sector

Indian:-
• BenchMark Asset Management Co. Pvt.
Ltd.
 • Cholamandalam Asset Management Co.
Ltd.
• Credit Capital Asset Management Co. Ltd.
• Escorts Asset Management Ltd.
• JM Financial Mutual Fund
• Kotak Mahindra Asset Management Co.
Ltd.
• Reliance Capital Asset Management Ltd.
• Sahara Asset Management Co. Pvt. Ltd
• Sundaram Asset Management Company
Ltd.
• Tata Asset Management Private Ltd.
Predominantly India Joint Ventures:-
• Birla Sun Life Asset Management Co. Ltd.
• DSP Merrill Lynch Fund Managers Limited
• HDFC Asset Management Company Ltd.
Predominantly Foreign Joint Ventures:-
• ABN AMRO Asset Management (I) Ltd.
• Alliance Capital Asset Management (India)
Pvt. Ltd.
• Deutsche Asset Management (India) Pvt.
Ltd.
• Fidelity Fund Management Private Limited
 • Franklin Templeton Asset Mgmt. (India)
Pvt. Ltd.
• HSBC Asset Management (India) Private
Ltd.
• ING Investment Management (India) Pvt.
Ltd.
• Morgan Stanley Investment Management
Pvt. Ltd.
• Principal Asset Management Co. Pvt. Ltd.
• Prudential ICICI Asset Management Co.
Ltd.
• Standard Chartered Asset Mgmt Co. Pvt.
Ltd.
Association of Mutual Funds in India
Publications

AMFI publices mainly two types of bulletin.

One is on the monthly basis and the other is
quarterly. These publications are of great
support for the investors to get intimation of the
knowhow of their parked money.
The mailing address of Association of
Mutual Funds in India

Association of Mutual Funds in India

106, Free Press House,
Free Press Journal Marg,
Nariman Point,
Mumbai - 400 021,
India.
Telephone : 91-22-5637 39 07 / 5637 39 08
Fax : 91-22-5637 3909
Advantages of Mutual Funds
The advantages of investing in a Mutual Fund
are:
• Diversification: The best mutual funds
design their portfolios so individual
investments will react differently to the
same economic conditions. For example,
economic conditions like a rise in interest
rates may cause certain securities in a
diversified portfolio to decrease in value.
Other securities in the portfolio will respond
to the same economic conditions by
increasing in value. When a portfolio is
balanced in this way, the value of the
overall portfolio should gradually increase
over time, even if some securities lose
value.
• Professional Management:Most mutual
funds pay topflight professionals to manage
their investments. These managers decide
what securities the fund will buy and sell.
• Regulatory oversight: Mutual funds are
subject to many government regulations
 that protect investors from fraud.
• Liquidity: It's easy to get your money out
of a mutual fund. Write a check, make a
call, and you've got the cash.
• Convenience: You can usually buy mutual
fund shares by mail, phone, or over the
Internet.
• Low cost: Mutual fund expenses are often
no more than 1.5 percent of your
investment. Expenses for Index Funds are
less than that, because index funds are not
actively managed. Instead, they
automatically buy stock in companies that
are listed on a specific index
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits
• Well regulated
Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may

not be for everyone:
• No Guarantees: No investment is risk free.
If the entire stock market declines in value,
the value of mutual fund shares will go
down as well, no matter how balanced the
portfolio. Investors encounter fewer risks
when they invest in mutual funds than
when they buy and sell stocks on their own.
However, anyone who invests through a
mutual fund runs the risk of losing money.
• Fees and commissions: All funds charge
 administrative fees to cover their day-to-
day expenses. Some funds also charge
sales commissions or "loads" to
compensate brokers, financial consultants,
or financial planners. Even if you don't use
a broker or other financial adviser, you will
pay a sales commission if you buy shares
in a Load Fund.
• Taxes: During a typical year, most actively
managed mutual funds sell anywhere from
20 to 70 percent of the securities in their
portfolios. If your fund makes a profit on its
sales, you will pay taxes on the income you
receive, even if you reinvest the money you
made.
• Management risk: When you invest in a
mutual fund, you depend on the fund's
manager to make the right decisions
regarding the fund's portfolio. If the
manager does not perform as well as you
had hoped, you might not make as much
money on your investment as you
expected. Of course, if you invest in Index
Funds, you forego management risk,
because these funds do not employ
managers.
Mutual Funds – FAQs

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.
Mutual Fund

The Mutual Fund was the Massachusetts

Investors Trust introduced in 1924. At the end of
it's first
year, the fund had 200 investors with $63,600 in
assets. At the end of 1995, the fund grew to
73,500
investors with assets totalling $1.8 billion! Now
there are over 7000 different mutual funds
available
You may be wondering why you should choose
a mutual fund. Simple - a mutual fund offers 2
large
benefits over owning the stocks individually.
Those benefits are diversification with
professional
management without having to invest a lot of
money.

Diversification is important because it helps to

reduce the risk. By owning shares of multiple
companies, the fund's share value is not
devastated if an individual company has a poor
performance.

Selecting which securities to buy, the allocation

of cash and securities, and when to purchase is
all
done by the fund manager or the management
team. The fund manager has the training, time
and the
resources to make the best informed investment
decisions.

Also, he fund may be part of a family of funds

where the investor can switch between funds at
no
additional cost, including switching in and out of
a money market funds. Most mutual funds
include
some degree of check writing privileges and
may offer automatic transfer of funds on a
periodic basis
like monthly for those who want to regularly
invest a set dollar amount. This type of
investment tis
called dollar cost averaging.

Types of Mutual Funds Available:

• Domestic Equity Funds - These mutual
funds mainly focus on stocks offered by
different U.S.
companies. With this type of fund there is a
wide range of offerings that takes into
consideration
the size of the company, the stability of the
company, growth and the potential valueof the

company.
• Global/International Funds - Global or

International mutual funds mainly allow the

investor to
include foreign equities into their investments.
Although deemed slightly riskier their values
do
tend to go up when domestic equities drop,
offering a balance to the investors portfolio.
• Sector Funds - sector funds give the

investor a way to focus on specific parts of the

business
world. For example, niches like real estate,
precious metals or financials. If an investor is
able to
tolerate an amount of risk, they may end up
benefiting from investing in this way.
Particularly if
the investor knows something about that
market segment.
• Fixed Income Funds - fixed income mutual

funds tend to be less volatile. This is the right

fund
for an investor who is looking for income.
Fixed mutual funds for the most part are made
up of
bonds, CD's and money market funds. Yes,
they do fluctuate with interest rates, still are a
sound investment for someone looking for an
income generating portforlio.
• Hybrid Funds - Hybrid mutual funds are

generally made up of different investment

sectors in
one mutual fund. For example, a usual mix
may be the pairing of equities with bonds or
blue
chip stocks with riskier ones.
• Index Funds - Index mutual funds imitate

the selections and amounts of specified market

indexes like the S&P 500. They are generally

unmanaged keeping costs down.
• Enhanced Index Funds - Enhanced index

funds are actively managed funds applying a

portion
of their resources to outperform their
benchmark indces.
• Asset Allocation Funds - Asset allocation

funds target investors who want a single

product
solution. They are designed to invest across
the primary asset classes including equities,
fixed
income securities and money market. Each
fund is allocated among different asset classes
according to their risk tolerances.
 • Conservative Allocation Funds -
Conservative allocation mutual funds are
usually for
investors with a minimum five-year
investment timeframe.

How to Select a Mutual Fund

Unfortunately, there's no one size fits all strategy
when it comes to any type of investing. You
need to
take into consideration what your needs are and
what your future financial goals are. Everyone's
situation is unique. We encourage you to talk
with your financial advisor to find out which
mutual funds
would best complement your portfolio. When
choosing a mutual fund you should first get a
prospectus
then, call the fund company. In many cases, the
prospectus is available right on the company's
website.
Also, Morningstar rates mutual funds. Each year
end, many financial publications list the year's
best
performing mutual funds. Naturally, very eager
investors will rush out to purchase shares of last
year's
top performers. That's a big mistake. Remember,
changing market conditions make it rare that last

year's top performer repeats that ranking for the

current year. Mutual fund investors would be
well
advised to consider the fund prospectus, the fund
manager, and the current market conditions.
Never
rely on last year's top performers.

The Prospectus
A prospectus for a mutual fund is a publication
that has all the information that is required by
the
Securities Exchange Commission (SEC). The
funds propectus includes objectives and policies,
roles,
services, fees, and major features of the fund.

The prospectus also defines the boundaries

within which the fund manager can operate.
Using a
hypothetical example, we will assume that the
prospectus of the Chicken Farms Mutual Fund
says "the
fund will only invest in chicken farms in the
USA that have shown a profit for at least the last
two
years." The fund manager would have the
freedom to buy stock in any chicken farm
meeting that
criteria. However, the fund could not buy any
chicken farm shares anywhere else other than
the U.S.
The prospectus also tells you the costs of the
fund.

Costs of Mutual Funds

Usually, mutual funds are offered with several
classes of shares, or they are no-load funds.
Mutual
fund companies exist to make money. That
money can come from many different sources:
• A sales charge: incurred upon purchase of
shares
• A deferred sales charge: incurred upon the

sale of shares
 • Management fees: an on going operating
cost
• Distribution fees: on-going costs usually

associated with advertising

• Trading costs: costs charged by the broker

for executing trades within the fund. These can

be
high in funds that have high turnover rates.
• Other expenses: another category for on

going expenses
• No load funds will typically have no sales

charge and no deferred sales charge, but will

have the
other fees listed.

Load funds will offer different classes of shares

such as A, B, or C shares. These will be defined
by
varied cost structures. An example of the impact
of an investment which is held for different time
periods will also be included in the prospectus.
The best deal for you primarily depends on how
long
you hold the shares. No-load funds that are held
for many years can be more expensive than load
funds.

In conclusion, mutual funds are a way for

investors to diversify their risk and still benefit
from
professional money management. The
prospectus identifies key information about the
mutual fund
including its operating boundaries and its costs.
The fund manager operates within those
boundaries
and is important in order to achieve good results
within those boundaries. Do your research, then
talk
to a professional investment advisor about
mutual fund investing.

Global Direct Investment Guide provides access

to free Mutual Funds information.