Mutual Funds

A Mutual fund is an investment instrument where a large number of investors pool in their finances in a
single trust. This trust is managed by a team of financial experts (known as Asset Management
Company) who invest the accumulated capital in different financial assets like stocks, bonds and equities
etc. All the people who invest in this fund share a common investment goal and the dividends earned
from the investment is distributed in proportion to the capital invested.

Investing in Mutual Funds is a very sensible option for the following reasons
Professional management of your investments
With a larger pool of resources, investors do not have to fulfil minimum investment requirement
that they would have to in case of individual stocks
With a professional fund manager at the helm and a diversified portfolio in asset investment, one
can be sure that the risks involved in such investments is periodically tracked to achieve
aggressive financial growth and minimize the chances of any loss on investment.

Now to the intermediary that is the Asset Management Company. As the name suggests, Asset
management Companies have experts in their team who devise a list of industries and assets that have
the potential of financial appreciation in terms of investment. The list, called the Mutual Fund scheme, will
typically consist of 15-20 shares/securities. Each mutual fund scheme will have a Fund Manager who
tracks and regulates investments. With about 45 asset management companies in India at present, a
prospective mutual fund investor is really spoilt for choice.

All you need to do is to choose the suitable schemes offered by the asset management companies, fill up
a form and make the payment traditionally or online as per the modes available. The Investment
objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. They then
will invest your money proportionately in all the 15-20 shares/ securities specified in the mutual fund
scheme. You will get a folio number (account number) and periodic statements.
Based on pre-defined investment objectives, the Fund Managers themselves decide which stock they
need to buy and how much they need to pick. At the end of every month they publish the performance of
the fund and provide the list of stocks they have invested in. This information is called as fact sheet.
The asset management company charges an annual fee for managing your funds. This fee is called the
fund management fee and is based on a fixed percentage of the asset value of the mutual fund.
The management fee is directly charged from your investments and the fee is charged irrespective of
whether the scheme makes money or not.
Depending on investment objectives, an investor can invest in 3 types of Mutual Funds.
1. Equity funds: Equity funds invest predominantly in equities with a small portion in money market
securities. The objective is to generate potentially superior returns by taking on higher risk. As
these funds invest in stocks, returns do fluctuate thereby posing higher risk. Therefore, these
funds are not for risk-averse investors.
Equity funds can be further categorized as -
Diversified funds: These funds invest in equity of companies across market capitalizations (the
market value of a companys shares) and sectors. Equity Linked Savings Schemes (ELSS) and
the Rajiv Gandhi Equity Schemes (RGESS) are variants of these, offering tax benefit on the
investments. However, you need to keep in mind that you need to stay invested for three years to
be eligible for the tax benefit.
Sectorial funds: These funds invest in companies of a particular sector. For instance, an IT
sector fund will invest in just IT companies while a banking sector fund will invest only in banking
stocks. These funds are relatively of higher risk due to their sector concentration. And then there
are the thematic funds like infrastructure funds which invest in a particular investment theme.
Index funds: These invest in equities of companies forming part of a stock market index. The
fund invests in these companies in the same proportion as their weightage in the index. Thus,
returns offered by these funds largely match the returns generated by the underlying index,
subject to certain tracking error. For instance, an index fund which is based on the BSE Sensex
will invest in stocks forming part of the Sensex in the same proportion or ratio as the constituent
stocks in the Sensex.

Fixed Income funds: These funds invest in fixed income bearing instruments like corporate
bonds, debentures, government securities, commercial paper and other money market
instruments. These funds are relatively low-risk-low-return schemes. The returns from debt funds
include interest receipts and capital gains. If you desire relatively stable performance, these
schemes are right for you.
Debt funds can be further categorized into -
1. Money market or liquid income schemes: Liquid or money market funds invest in highly
liquid money market instruments for very short investment periods such as a few days.
These funds are suitable for parking surplus money for a very short period of time.
2. Gilt funds: Gilt funds invest in sovereign securities like central and state government bonds.
These carry no credit risk but are subject to interest rate risks. The prices of these securities
fluctuate with interest rate movements. These funds have varying investment periods to suit
investor needs.
3. Income funds: These funds invest in government securities, corporate bonds and
debentures apart from money market instruments. These funds carry a slightly higher risk
than gilt funds as they are exposed to credit risk. Income funds come with various
investment horizons like ultra-short term, short term, medium term and long term funds to
suit varying investor needs.
4. Fixed Maturity Plans (FMP): These have a fixed tenure like deposits, though no return is
promised or guaranteed. These funds invest in securities that mature in line with the funds
maturity.

3. Hybrid Funds
These funds invest in equities and debt investments in varying proportions. Balanced funds invest
predominantly (more than 65% of the corpus) in equities with the rest in debt. These are relatively
more stable than pure equity funds.
Monthly Income Plans (MIPs) invest about 75 to 80% of their corpus in debt and the rest in
equities. The objective is to aim for steady returns offered by debt with possible capital appreciation
offered by equity to provide a kicker to the returns.
And there are also funds called Asset Allocation funds that vary their equity exposure widely from
0% to 90% based on the market outlook. These funds do not have a fixed asset allocation.
Lets take an example to get better idea of what a mutual fund is all about, take a look at the Axis
Triple Advantage Fund. This fund invests in equity, Gold exchange traded funds and fixed income
assets. The investment percentage in gold is between 20-30% and works as an effective hedging
(risk minimization) asset. It is a fund meant for those who are looking to invest for 3 or more years
with the intent of long term income and getting stable returns.

Other types of funds
Exchange Traded Funds (ETF)
ETF is a fund whose units trade like a stock on the stock exchange. These could be based on a
stock index or any other underlying asset. These can be bought and sold only in the stock market
at real time prices which could be different from its unit NAV. These have lower expense ratios
when compared to index funds and other equity funds. You would need a demat account to invest
in these funds. These funds aim to closely mirror the returns generated by the underlying asset.

Gold ETFs
Gold ETFs are funds that are based on gold. You can bet on gold without buying physical gold by
investing in these gold ETFs. With these funds, you are not only relieved of the hassles of
safekeeping your gold but are also assured of purity since these funds invest in certified gold bars.
You are also spared of the wastage and making charges that you would typically incur when you
buy gold from jewellers. With certain forms of paper gold, you also get the option of converting it to
physical gold with select jewellers.

Fund of Funds (FoF)
FoFs invest in other mutual funds either of the same fund house or others. There are funds that
invest in mutual funds abroad. There are multi asset funds too that invest in units of debt, equity
and gold too. It is easy to achieve diversification and lower risk through FoF. However, you will
have to bear higher management expenses


On the basis of Time of closure of the scheme, Mutual Funds can be of two types:
1. Open Ended Schemes: These funds are always open for you to invest in or exit from. They have
no end date. These schemes offer you the convenience of buying or redeeming the units during
any business day at the prevailing Net Asset Value (NAV).

2. Close Ended Schemes: These funds are open for investment for only a short period of time
during their New Fund Offer (NFO) period. Once the offer closes, no new investments are
permitted. Besides, the scheme remains in existence for only a specific period of time after which
it closes down and all the money is returned to the investors. These schemes are listed on the
stock exchange so that if an investor wants to exit, he can sell his units through the exchange at
the market price. Some schemes start off as being close-ended and then become open-ended,
nearer to their redemption date.


Mutual funds offer you various types of schemes. Whether you are a risk-taking investor or a risk-
averse investor, you will find schemes suitable to your needs.


Advantage and convenience in investing in mutual fund:-
Is it possible to track over a thousand companies that are fairly liquid and traded? Suppose you have
invested in say 20 or 40 stocks; do you get enough time to track them? You will have to keep close tab on
companies that you hold in terms of operational and financial performance, future plans and so on.
Further, in case of the debt market, you have to follow trends in inflation and interest rates not only in the
domestic market but also the international markets.
For you and similarly for several other small and retail investors, time, resources, skills and expertise are
key constraints while investing in equities and debt. The simple solution to this problem is to take
the mutual fund
Advantage 1 well regulated and transparent
The mutual funds industry has a three-tiered structure sponsors, trustees and AMC which ensures
that your money is in safe hands. It is the trustees that set broad guidelines for fund managers. The
guidelines prevent the AMC or fund managers from undertaking any kind of mis-adventure with your
money. For instance, as a part of risk management and reduction, fund managers are not allowed to
invest in penny stocks. Penny stocks refers to stocks that trade below their face value or in single digits
with no or little information available about these companies.


Advantage2investment varieties
Mutual funds offer choices to investors on investment options there are primarily equity funds, debt
funds and balanced funds; there are also gold funds.

Advantage 3 choices on receiving income/profits
You have the option of either receiving dividends (dividend payout option), reinvesting the dividend
(dividend reinvestment option) or accumulating the dividend in the scheme (growth option). So if you
need cash, go for the dividend option; if you want to grow your investments, opt for the dividend
reinvestment or growth option. While in the case of dividend reinvestment, the dividend is declared and
reinvested at the current value (which gives you more units), in the growth option, no dividend is declared
and your existing units increase in value.

Advantage 4 professional money management services
A mutual fund is operated by professional managers having expertise in various areas like research,
investment, operational aspects of the market, economy and so on. The expertise, skills and knowledge
is what the professional managers make available to you. Due to this, it is possible to make informed
decisions. The fund managers are supported by subject experts who track happenings on a day-to-day
basis.

Advantage 5 affordable investment
You get professional money management services at an affordable cost. Mutual fund investors
collectively bear the management fees payable to the AMC. Thus, management cost per unit is very low.

Advantage 6 diversification with small values
Probably the biggest advantage for retail investors is that they can invest sums as modest as Rs 1000 or
Rs 5000 in mutual funds. Moreover, as mutual funds invest in a basket of stocks, diversification is easily
achieved which is otherwise impossible. For instance, the company Bosch is currently trading at around
Rs 9000; a sum of Rs 5000 cannot buy a single share of Bosch. But with the philosophy of collective
investment, it is possible through mutual funds.

Advantage 7 minimum paperwork
It is easy to invest in mutual funds. All you need to do is fill in the application form, make out a cheque for
your investment amount, offer your identity and address proof and submit it. You can invest directly or
through advisors or distributors.

Advantage 8 tax benefits
Equity linked savings schemes (ELSS) of mutual funds, which invest in equity offer income tax benefits
under section 80C of the Income Tax Act, 1961 up to Rs 1 lakh. Further, dividend distributed on mutual
fund investments is tax-free in the hands of investors.
If you are a first time equity investor, you can opt for investing under the RGESS (Rajiv Gandhi Equity
Savings Scheme) where you get a tax deduction under section 80CCG. The maximum investment under
this scheme is Rs 50,000 on which you get a 50% tax deduction i.e. if you invest Rs 50,000, Rs 25,000 is
reduced from your tax burden
.
Advantage 9 investment strategies
You can invest in mutual funds on a regular basis through SIP (systematic investment plan) which helps
to average out your cost of acquisition. Further, you can opt for STP (systematic transfer plan) wherein
you can invest a lump sum amount in one scheme and regularly transfer a pre-defined amount into
another scheme. This is usually done from a debt scheme into an equity scheme in order to use the SIP
route to equity investing.




Bank products
Indian banks provides number of products for different sector like personal, business,
agriculture and for NRI.
For personal product ranges
1. Account
a. Saving account:-This are mainly opened by salaried person or person having fixed
income. This facility is also given to student senior citizen, pensioner and so on.
Saving account are opened to encourage the people saving. In India saving account
can be opened with a minimum deposit of Rs 100 to Rs 10000.He can withdraw
money when he required .Bank give them interest on their saving account from 4% to
6% .
b. Current account:-current account are mainly open by business man as they have more
number of transaction in their account compare to saving account holder. Account
holder minimum deposit from Rs 5000 to Rs 250000. They dont get interest but they
get overdraft facility.
c. Salary account:-This is the normal account but in this customer salary or monthly
paycheck will be credited with additional facility like zero balance, overdraft etc.
d. Account portability:-This is the facality given by bank to customer who are shifting
from one place to another they can portable their account to where they are shifting.
2. Deposit
a. Fixed Deposit:- This is the deposit scheme in which customer will have to pay one
time investment of minimum of Rs 10000 and it should be for the period of 6
month ,1 year or more its mainly a long term investment. Customer can take loan
from their fixed deposit and can take back their money with in maturity time but that
will effect their interest rate. Interest rate are change from bank to bank but mainly
they give at 9% to 11%.

b. Recurring Deposit:-This are deposit that are done continuously for fixed number of
year customer will get interest compounded this also have interest rate from 9%
to11% but customer have to pay penalties if he not pay the amount in time.

c. Tax saver fund:- In the Finance Bill of 2006, the government had announced Tax
benefits to Bank Term Deposits which are of over 5 year tenure u/s 80C of IT Act,
1961 vide Notification Number 203/2006 and SO1220 (E) dated 28/07/2006.The
salient points of the scheme notification are; (a) Fixed tenure without premature
withdrawal. (b) Year is defined as a financial year. (c) Amount limited to Rs. 100
minimum and Rs. 100,000 maximum. (d) Bank will issue a Fixed Deposit Receipt
that shall be the basis of claiming tax benefit. (e) Term deposit under this scheme
cannot be pledged to secure a loan.


3. Loans
a. Home loan
b. Education loan
c. Loans against share
d. Loans against property
e. Car loan
f. Loan against gold
g. Loans against fixed deposit
4. Investment
a. Mutual funds
b. Demat account
c. PPF
d. Commodity investment
e. Bonds
5. Insurance
a. Health insurance
b. Life insurance
c. Motor insurance
d. Travel insurance
e. Business guard insurance