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History of Mutual fund When three Boston securities executives pooled their money together in 1924 to create the

first mutual fund, they had no idea how popular mutualfunds would become.The idea of pooling money together for investing purposes started inEurope in the mid-1800s. The first pooled fund in the U.S. was created in1893 for the faculty and staff of Harvard University. On March 21st, 1924the first official mutual fund was born. It was called the Massachusettsinvestors trust.After one year, the Massachusetts investors trust grew from $50000 inassets in 1924 to $392000 in assets (with around 200 shareholders). Incontrast, there are over 10000 mutual funds in the U.S. today totaling around$7 trillion (with approximately 83 million individual investors) according tothe investment company institute.

Introduction of Mutual fund 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 isinvested by the fund manager in different types of securities depending uponthe objective of the scheme. These could range from shares to debentures tomoney market instruments. The income earned through these investmentsand the capital appreciation realized by the scheme are shared by its unitholders in proportion to the number of units owned by them (pro rata). Thusa Mutual Fund is the most suitable investment for the common man as itoffers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of aslittle as a few thousand rupees can invest in Mutual Funds. Each MutualFund scheme has a defined investment objective and strategy.A mutual fund is the ideal investment vehicle for todays complex andmodern financial scenario. Markets for equity shares, bonds and other fixedincome instruments, real estate, derivatives and other assets have becomemature and information driven. Price changes in these assets are driven byglobal events occurring in faraway places. A typical individual is unlikely tohave the knowledge, skills, inclination and time to keep track of events,understand their implications and act speedily. An individual also finds itdifficult to keep track of ownership of his assets, investments, brokeragedues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of thesefunctions on a full time basis. The large pool of money collected in the fundallows it to hire such staff at a very low cost to each investor. In effect, themutual fund vehicle exploits economies of scale in all three areas - research,investments and transaction processing. While the concept of individualscoming together to invest money collectively is not new, the mutual fund inits present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousandsof firms offering tens of thousands of mutual funds with different investmentobjectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.A draft offer document is to be prepared at the time of launching thefund. Typically, it pre specifies the investment objectives of the fund, therisk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as inmost countries, these sponsors need approval from a regulator, SEBI(Securities exchange Board of India) in our case. SEBI looks at track recordsof the sponsor and its financial strength in granting approval to the fund for commencing operations.A sponsor then hires an asset management

company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handleregistry work for the unit holders (subscribers) of the fund.In the Indian context, the sponsors promote the Asset ManagementCompany also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g.Birla Global Finance is the sponsor of the Birla Sun Life Asset ManagementCompany Ltd., which has floated different mutual funds schemes and alsoacts as an asset manager for the funds collected under the scheme.

10 W hat is Mutual Fund? Invest / Pool Profit/LossTheir money from Portfolio O f investmentsInvesting a Profit/Loss Number of from individualStocks/Bonds O f investments A Mutual Fund is a common pool of money in to which investors withcommon investment objective place their contributions that are to beinvested in accordance with the stated investment objective of the scheme.The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme.For example, an equity fund would invest equity and equity relatedinstruments and a debt fund would invest in bonds, debentures, gilts etc. Benefits of Mutual Funds:-

Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc.depending upon the investment objective of the scheme. An investor can buyin to a portfolio of equities, which would otherwise be extremely expensive.Each unit holder thus gets an exposure to such portfolios with an investmentas modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directlyin the stock market.

Diversification:The nuclear weapon in your arsenal for your fight against Risk. Itsimply means that you must spread your investment across differentsecurities (stocks, bonds, money market instruments, real estate, fixeddeposits etc.) and different sectors (auto, textile, information technologyetc.). This kind of a diversification may add to the stability of your returns,for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset theeffect of a slump in the equity markets. Similarly the information technologysector might be faring poorly but the auto and textile sectors might do welland may protect your principal investment as well as help you meet your return objectives.

V ariety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investorswith different needs and risk appetites; secondly, it offers an opportunity toan investor to invest sums across a variety of schemes, both debt and equity.For example, an investor can invest his money in a Growth Fund (equityscheme) and Income Fund (debt scheme) depending on his risk appetite andthus create a balanced portfolio easily or simply just buy a BalancedScheme.

Professional Management:Qualified investment professionals who seek to maximize returns andminimize risk monitor investor's money. When you buy in to a mutual fund,you are handing your money to an investment professional that hasexperience in making investment decisions. It is the Fund Manager's job to(a) find the best securities for the fund, given the fund's stated investmentobjectives; and (b) keep track of investments and changes in marketconditions and adjust the mix of the portfolio, as and when required.

Tax Benefits Any income distributed after March 31, 2002 will be subject to tax inthe assessment of all Unit holders. However, as a measure of concession toUnit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a confessional rate of 10.5%.In case of Individuals and Hindu Undivided Families a deduction uptoRs. 9,000 from the Total Income will be admissible in respect of incomefrom investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax andGift-Tax.

Regulations:Securities Exchange Board of India (SEBI), the mutual fundsregulator has clearly defined rules, which govern mutual funds. These rulesrelate to the formation, administration and management of mutual funds andalso prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors. Structure of Mutual Fund

Sponsor: Sponsor is the person who acting alone or in combination withanother body corporate establishes a mutual fund. Sponsor must contributeat least 40% of the networth of the Investment Managed and meet theeligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the MutualFund. SEBIAMCFund Manager Mutual FundSchemesInvestor Sponsor Trustee O perationsMarket/Sales Market/SalesDistributor


Trust: The Sponsor constitutes the Mutual Fund as a trust in accordance withthe provisions of the Indian Trusts Act, 1882. The trust deed is registeredunder the Indian Registration Act, 1908.

Trustee:Trustee is usually a company (corporate body) or a Board of Trustees(body of individuals). The main responsibility of the Trustee is to safeguardthe interest of the unit holders and inter alia ensure that the AMC functionsin the interest of investors and in accordance with the Securities andExchange Board of India (Mutual Funds) Regulations, 1996, the provisionsof the Trust Deed and the O ffer Documents of the respective Schemes. Atleast 2/3rd directors of the Trustee are independent directors who are notassociated with the Sponsor in any manner.

Asset Management Company (AMC):The Trustee as the Investment Manager of the Mutual Fund appointsthe AMC. The AMC is required to be approved by the Securities andExchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independentdirectors who are not associated with the Sponsor in any manner. The AMCmust have a networth of at least 10 crore at all times.

Registrar and Transfer Agent: The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes theapplication form, redemption requests and dispatches account statements tothe unit holders. The Registrar and Transfer agent also handlescommunications with investors and updates investor records.


Types of Mutual funds In the investment market, one can find a variety of investors withdifferent needs, objectives and risk taking capacities. MUTUAL FUND O n the basis of O n the basis of Execution and yield and investment O peration patternCloseO pen - Income Growth BalanceEnded Ended Fund Fund FundSpecialized Money TaxationFund Market Fund Mutual Fund schemes can broadly be classified into many types asgiven below: Close-ended Funds:The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with aninitial public offer (IP O ) with a stated maturity period after which the unitsare fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike openendedschemes, the unit capital in closed-ended schemes usually remainsunchanged. After an initial closed period, the scheme may offer directrepurchase facility to the investors. Closed-ended schemes are usually moreilliquid as compared to open-ended schemes and hence trade at a discount tothe NAV. This discount tends towards the NAV closer to the maturity dateof the scheme. Features : - The main features of the close-ended funds are: y The period and/or the target amount of the fund are definite and fixed beforehand.

y O nce the period is over and/or the target is reached, the door is closed for the investors. They cannot purchase any more units. y These units are publicly traded through stock exchange and generally,there is no repurchase facility by the fund. y The main objective of this fund is capital appreciation. y The whole fund is available for the entire duration of the scheme andthere will not be any redemption demands before its maturity.

19 y At the time of redemption, the entire investment pertaining to a closed-end scheme is liquidated and the proceeds are distributed among the unitholders. Open-ended Funds:An open-end fund is one that is available for subscription all throughthe year. These do not have a fixed maturity. Investors can conveniently buyand sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Features : - The main features of the O pen-ended funds are: y There is complete flexibility with regard to one's investment or disinvestment. y These units are not publicly traded but the Fund is ready to repurchasethem and resell them at any time. y The investor is offered install liquidity in the sense that the unit can besold on any working day to the Fund. y The main objective of this fund is income generation. The inventorsget dividend, right or bonuses as rewards for their investment. y

Generally, the listed prices are close to their Net Asset Value. TheFund fixes a different price for their purchases and sales. 20 On The Basis Of Income

Income Funds:The aim of income funds is to provide regular and steady income toinvestors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds areideal for capital stability and regular income. Features : - The main features of the Income funds are: y The investor is assured of regular income at periodic intervals, saysHalf- yearly or years and so on. y The main objective of this type fund is to declare regular dividendsand not capital appreciation. y The pattern of investment is oriented towards high and fixed incomeyielding securities like debentures, bonds etc. y This is best suited to the old and retired people who may not have anyregular income. y It concerns itself with short run gains only.


Growth Funds:The aim of growth funds is to provide capital appreciation over themedium to long- term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, haveoutperformed most other kind of investments held over the long term.Growth schemes are ideal for investors having a long-term outlook seekinggrowth over a period of time. Features : - The main features of the Growth funds are: y The Growth oriented fund aims at meeting the investors' needfor capital appreciation. y

The Investment strategy therefore, conforms to the Fundobjective by investing the fund predominantly on equities withhigh growth potential. y The Fund tries to get capital appreciation by taking much risk and investing on risk bearing equities and high growth equityshares. y The Fund may declare dividend, but its principal objective isonly capital appreciation. y This is best suited to salaried and business people who havehigh risk bearing capacity and ability to defer liquidity. Theycan accumulate wealth for future needs.

Balance Funds:The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning andinvest both in equities and fixed income securities in the proportionindicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the marketfalls. These are ideal for investors looking for a combination of income andmoderate growth.

Specialised Funds:-

Index schemes:-The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. AnIndex also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market ingeneral rather than investing in any specific fund. Such investors are happyto receive the returns posted by the markets. As it is not practical to invest ineach and every stock in the market in proportion to its size, these investorsare comfortable investing in a fund that they believe is a good representativeof the entire market. Index Funds are launched and managed for suchinvestors. An example to such a fund is the HDFC Index Fund.


Tax Saving schemes: Investors (individuals and Hindu Undivided Families HUFs) are being encouraged to invest in equity markets through Equity Linked SavingsScheme (ELSS) by offering them a tax rebate. Units purchased cannot beassigned / transferred/ pledged / redeemed / switched out until completionof 3 years from the date of allotment of the respective Units.

Money Market Funds:

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generallyinvest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on theseschemes may fluctuate depending upon the interest rates prevailing in themarket. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

Load Funds A Load Fund is one that charges a commission for entry or exit. Thatis, each time you buy or sell units in the fund, a commission will be payable.Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

No-Load Funds A No-Load Fund is one that does not charge a commission for entryor exit. That is, no commission is payable on purchase or sale of units in thefund. The advantage of a no load fund is that the entire corpus is put towork