Mutual Fund Basics

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, its 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. TOP

Working of Mutual Fund

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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. TOP

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. TOP

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). TOP

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 predetermined 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 doesnt 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 managers outlook on different stocks. The Equity Funds are subclassified 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, interbank 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. TOP

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. TOP

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 doesnt 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.

A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund's prospectus. A mutual fund allows investors to pool their money, then the fund invests it on their behalf.
Unlike individual stocks, whose value fluctuates minute by minute, mutual funds are priced at the end of each day the market is open, based on what the securities in the portfolio are worth. The price per share, or net asset value (NAV).

What is NAV?
Basically, this is the investment company's best assessment of the value of a portfolio holdings in their fund, and is what you see listed in the paper. They use the daily closing price of all securities held by the fund, subtract some amount for liabilities, divide the result by the number of outstanding units in the fund and Poof! you have the NAV. The fund company will sell you units at that price (don't forget about any sales charge) or will buy back your units at that price (possibly less some fee). Net Asset Value (NAV) = (Value Of All Securities Held By The Fund - Expenses And Liabilites Of The Fund) % Value Of Outstanding Units In The Fund

What are different types of Mutual Funds?

Mutual funds can be classified based on the structure and investment objective. By Structure
Closed-End Fund
A closed-end fund looks much like a stock of a publically traded company: it's traded on some stock exchange, you buy or sell shares in the fund through a broker just like a stock (including paying a

commission), the price fluctuates in response to the fund's performance and (very important) what people are willing to pay for it. Also like a publically traded company, only a fixed number of shares are available. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.

Open-End Fund
An open-end fund is the most common variety of mutual fund. Both existing and new investors may add any amount of money they want to the fund. In other words, there is no limit to the number of shares in the fund. Investors buy and sell shares usually by dealing directly with the fund company, not with any exchange. The price fluctuates in response to the value of the investments made by the fund, but the fund company values the shares on its own; investor sentiment about the fund is not considered. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.

By Investment Objective
Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.

Income Funds
The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.

Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market. Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of Money Market Funds is 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. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to specific sector(s) / industry (ies).

What are the different plans that mutual funds offer?

To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include:

Growth Option
Dividend is not paid-out under a Growth Option and the investor realises only the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option

Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment Option

Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or reinvesting the same.

Retirement Pension Option

Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporates participate for their employees.

Insurance Option
Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit.

Systematic Investment Plan (SIP)

Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP)

As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

Are returns from mutual funds guaranteed?

Generally, Mutual Funds do not offer guaranteed returns to investors. Although, SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum. The name of the guarantor and the manner in which the guarantee shall be met must be disclosed in the offer document by the Mutual Fund. Investments in mutual funds are not guaranteed by the Government of India, the Reserve Bank of India or any other government body.

What is a Mutual Fund? A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets TOP. Which was the First Mutual Fund to be set up in India? Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64
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Which are the other institutions that have floated Mutual Funds in India? Currently public sector banks like SBI, Canara Bank, Bank of India, institutions like IDBI, GIC, LIC Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra etc. have floated their own mutual funds
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How many Mutual Funds are there in India currently? Presently there are 33 Mutual Funds in India and close to 400 mutual fund schemes. We will very soon be putting up detailed analysis of major schemes operating in India.
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Why has the concept of mutual funds taken so long to pick up in India? Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up.
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What is the total size of the mutual fund sector in India? Currently the total funds under mutual fund management in India are a little over Rs.100,000 crore. Out of this UTI accounts for nearly 70 percent while the private funds account for around 22 percent. The balance 8 percent is managed by mutual funds floated by public sector banks and financial institutions.
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What is the Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
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Why should I choose to invest in a mutual fund? For a retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because: Mutual Funds provide the benefit of cheap access to expensive stocks Mutual funds diversify the risk of the investor by investing in a basket of assets A team of professional fund managers manages them with in-depth research inputs from investment analysts. Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
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How do mutual funds diversify their risks? Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
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If that is the case then why has Morgan Stanley Fund given such poor returns? A very important factor that determines the returns on a fund is the timing of the funds launch. Morgan Stanley Fund was launched when the equity markets were at their peak and then saw a sustained downtrend for close to 5 years. That is the reason the fund has taken such a long time to appreciate.
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Can mutual funds be viewed as risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
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What are the risks involved in investing in mutual funds? A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
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What are open-ended and closed-ended mutual funds? In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
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Do both open-ended and closed-ended funds come out with an initial offering? Yes. But the only difference is that in case of open-ended funds, a month after the initial offer closes the continuous offer period starts when the investor can enter and exit the fund at a price linked to the NAV
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Is the purchase and redemption in case of open-ended funds done at the NAV? Generally every fund levies either an entry load or an exit load or both to provide for administrative and other routine costs. The purchase price will be higher than the NAV to the extent of the entry load and the redemption price will be lower than the NAV to the extent of the exit load.
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What is the investors exit route in case of a closed-ended fund? According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
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How do I invest money in Mutual Funds? One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
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Can Karvy arrange to send me a form for investing in mutual funds? For schemes marketed by Karvy we can definitely arrange an application form for you. All you need to do is to visit www.karvy.com and click on the Mutual Fund Monitor. Go to the respective scheme analysis and click on the request form icon. Our marketing department will arrange to send the form to your specified address.
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Can I download the application form directly from the Karvy website?

Yes. For the benefit of our valued investors, we are putting up downloadable application forms in the Mutual Fund Monitor. Just print the form fill it up and submit it as advised.
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What are the parameters on which a Mutual Fund scheme should be evaluated? Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
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As a lay investor, how do I go about analyzing the mutual fund scheme? As a service to the investing community, Karvy does it for you. The Mutual Fund Monitor on www.karvy.com features incisive analysis of forthcoming mutual fund schemes. Our research team evaluates each scheme based on primary as well as secondary information and presents an unbiased report which will help you to take a decision on whether a fund is worth investing or not
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What are the different funds we currently have in India? Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary
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What are the different types of plans that any mutual fund scheme offers? That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
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Which plan should I choose? It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-income youngster is most likely to opt for growth plan.
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What is a Systematic Investment Plan and how does it operate? A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
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What are the benefits of s Systematic Investment Plan? A systematic investment plan (SIP) offers 2 major benefits to an investor: It avoids lump sum investment at one point of time In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupeecost averaging. This means that at lower prices you end up getting more units for the same investment
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What is NAV and how it is calculated?

NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary
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What proportion of my investment should be invested in mutual funds? Once again this decision will depend on factors like your income, risk aversion and tax status. We at www.karvy.com are shortly putting up a personal portfolio analyzer where based on your income, expenditure, investments, tax status etc. we will advice you on the proportion you need to allocate to mutual funds.
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Like IPOs, can there be any situation wherein I am not allotted the units applied for in the initial offer? In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.
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How do I get the information regarding the forthcoming schemes of different mutual funds? For the guidance of the investors our web site is giving a detailed analyses of the forthcoming schemes of different mutual funds .You can visit www.karvy.com and click on the Mutual Fund Monitor to get such information on forthcoming scheme openings.
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Can a Mutual Fund assure fixed returns? As per Sebi Regulations, mutual funds are not allowed to assure returns. However, funds floated by AMCs of public sector banks and financial institutions were permitted to assure returns to the unitholders provided the parent sponsor was willing to give an explicit guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed returns to their investors.
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How much return can I expect by investing in mutual funds? Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.
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What is the difference between mutual funds and portfolio management schemes? While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
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How does the concept of entry load work in case of unit purchases? An entry load is an additional cost that an investor pays at the point of entry. Assume that your proposed investment is Rs.10,000/-. Also assume that the current NAV of the fund is Rs.12.00 and that the entry load is Rs.0.50. Then you will receive 10000/12.50 = 800 units. For detailed explanation of entry load, refer our mutual fund glossary.
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How does the concept of exit load work in case of unit redemptions? An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200. For detailed explanation of exit load, refer our mutual fund glossary.
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Can an investor redeem part of the units? Yes. One can redeem part units also.
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Say I redeem and buy and do likewise several times then, how do I keep track of my portfolio? The moment you buy or get allotted the units, a passbook will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.
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Nowadays, I see lot of advertisements of Infotech funds. Do you advise to invest in them? As an investor you need to exercise caution in two areas : Most funds while advertising tend to annualize their monthly returns which is arithmetically correct but technically wrong because usually such returns are not sustainable. The fund must have a sound strategy for analyzing and investing in infotech companies
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What are the broad guidelines issued for a MF? SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. The net worth of the AMCs should be at least Rs.5 crore. AMCs and Trustees of a MF should be two separate and distinct legal entities. The AMC or any of its companies cannot act as managers for any other fund. AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. All MF schemes should be registered with SEBI. MFs should distribute minimum of 90% of their profits among the investors.

There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
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Am I eligible for rebate on income tax by investing in a MF? Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20 percent of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
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Do investments in mutual funds offer tax benefit on capital gains?

Yes. If the capital gains earned by you during a financial year is invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act. For more details on scheme specific exemptions visit our Mutual Fund Monitor at www.karvy.com.
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What is the difference between Section 54EA and Section 54EB as far as capital gains tax exemptions are concerned? Under Section 54EA the net Consideration (total sale consideration relevant expenses) arising out of sale of Long Term capital assets need to be invested in specified in specified mutual funds with a lock-in period of 3 years. Under Section 54EB just the capital gains are re-invested but the lock-in period is 7 years. Please note that in the latest budget this exemption is being withdrawn for investments in mutual funds and is being restricted only to bonds issued by NABARD and by the NHAI.
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Can I claim tax exemption under Section 88 and Section 54 for the same investment? No. You cannot. You can either exempt your income from tax under Section 88 or exempt your capital gains from tax under Section 54.
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Do mutual fund investments attract wealth tax? No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.
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If I gift mutual fund units, does it attract gift tax? No. With effect from 1 October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
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Is my income from mutual funds exempt from income tax? Yes. Your income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50 percent of the portfolio is invested in equities. Please note that in the current Union Budget 2000, the tax on debt funds has been increased from 10 percent to 20 percent.
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What are my major rights as a unitholder in a mutual fund? Some important rights are mentioned below: Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. They are entitled to receive redemption cheques within 10 working days from the date of redemption. 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.

75% of the unit holders can pass a resolution to wind-up the scheme.
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FAQ What is a Mutual Fund ? Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Each scheme of a mutual fund can have different character and objectives. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund. What is the difference between an open ended and close ended scheme? Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds can not issue new units except in case of bonus or rights issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other

way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only. How are mutual funds different from portfolio management schemes? In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from

each other. What does Net Asset Value (NAV) of a scheme signify and what is the basis of its calculation? Net asset value on a particular date reflects the realisable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing by number of units outstanding. Can I get fixed monthly income by investing in mutual fund units? Yes, there are a number of mutual fund schemes which give you fixed monthly income. Further, you can also get monthly income by making a single investment in an open ended scheme and

redeeming fix value of units at regular intervals. What are the tax benefits for investing in mutual fund units? Dividend income from mutual fund units will be exempt from income tax with effect from July 1, 1999. Further, investors can get rebate from tax under section 88 of Income Tax Act, 1961 by investing in Equity Linked Saving Schemes of mutual funds. Further benefits are also available under section 54EA and 54EB with regard to relief from long term capital gains tax in certain specified schemes. As my dividend receipts from mutual fund units were tax free under section 80 L, will I loose because of the new budget provision whereby my mutual fund will pay 10% tax on total dividend

distributed and indirectly even I will end up paying the tax? The above statement is partially true. 10% tax on dividend paid is not applicable for funds which have invested more than 50% in equity for next three years. Hence, if you have invested in an equity scheme, you will not loose out for the time being. However, in case of debt funds, your statement is true. Are investments in mutual fund units safe? No stock market related investments can be termed safe with certainty as they are inherently risky. However, different funds have different risk profile which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as

mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets. How do I find out about a scheme which suits my individual requirements? You have to define your individual requirements and then simply go to Choose a Scheme icon on the home page of this web site. You can select your defined parameters and get a list of schemes which would fit the needs. As mutual fund schemes invest in stock markets only, are they suitable for a small investor like me? Mutual funds are meant only for a small investor like you. The prime reason is that successful investments in stock markets require careful

analysis of scrips which is not possible for a small investor. Mutual funds are usually fully equipped to carry out thorough analysis and can provide superior
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. The corpus of the fund is then deployed in investment alternatives (these could be equities, debentures / bonds or money market instruments.) that help to meet predefined investment objectives. The income earned through these investments are shared by its unit holders in proportion to the number of units they own.
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Why should you invest in a Mutual Fund? Investor who dont have the time to study and monitor the market constantly, or the deep understanding of the financial market, a Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a

relatively low cost.

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What are the benefits of investing in a mutual fund? Professional Management: Your money is managed by experienced fund managers using who are experts in their field, after much solid research and indepth study. Constant monitoring: Your investments are monitored on an ongoing basis for best returns. Research: A through study is made before investing. Market conditions, global trends, industry growth predictions, sector future, Company profile, financials, growth potential everything is considered. Liquidity: Openended mutual funds are priced daily and are always willing to buy back units from investors. This means that investors can sell their investments in mutual fund anytime without worrying about finding a buyer at the right price. Diversification: Mutual funds aim to minimize risk through diversification by investing in a

number of companies across a broad section of industries and sectors. Through Mutual Funds, you can achieve diversification that would have otherwise not been possible. Tax Efficiency* The dividends are tax-free in the hands of the investor. . Also Investments for over 12 months qualify for longterm capital gains, which are currently exempt from tax. For Resident Indians there is no TDS on redemption of the units under the Indian Income Tax Act, 1961. Transparency: Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available. Regulated industry: Mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.
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What are the different types of Mutual Funds? Mutual fund schemes are normally classified on the basis of their structure and

their investment objective. By Structure Open-ended Funds An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can buy and sell units of the schemes at Net Asset Value (NAV) prices anything they want. Close-ended Funds A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public Offering and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed. By Investment Objective Growth Funds Growth funds aim to provide capital appreciation over the medium to long term. Growth schemes normally invest a majority of their corpus in equities. Income Funds Income Funds aim to provide regular and

steady income to investors. Income schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Balanced Funds Balanced Funds aim to provide both growth and regular income. Balanced schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. Money Market Funds Money Market Funds aim to provide easy liquidity, preservation of capital and moderate income. Money Market Funds schemes generally invest in safer shortterm instruments such as Treasury Bills, Certificates of Deposit, InterBank Call money and Commercial Paper Other Equity Related Schemes Tax Saving Schemes These schemes offer tax rebates to investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investments in specified

avenues. Sectoral Schemes Sectoral Funds are those which invest exclusively in specified sector(s) such as IT, entertainment, Pharmaceuticals, FMCG, etc. Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.
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What are the different options that mutual funds offer? Investors have varying investment needs. To meet this, Mutual Funds offer various investment plans like. Growth Option Dividend is not paid-out under a Growth Plan and the investor realises only the capital appreciation on the investment. Dividend Payout Option Dividends are paid-out to investors under a Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout. Dividend Reinvestment Plan

The dividend accrued on mutual funds is automatically reinvested in purchasing additional units in open-ended funds. Insurance Plan These schemes offer insurance cover as part of the investment to investors. Systematic Investment Plan (SIP) Investors are given the option of giving postdated cheques (or a direct debit of the bank account) in favour of the fund. The investor is allotted units on a pre-determined date specified in the Offer Document at the applicable NAV. Systematic Encashment Plan (SEP) The Systematic Encashment Plan allows the investor the facility to withdraw a predetermined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.
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What are the Tax Saving Options? An investor can save on taxes by investing under the following sections of the

Income Tax Act, 1961

Section 80C (Investment avenues are discussed below in detail) Section 80D (Health Insurance premium etc.) Section 80E (Educational loan) Section 80G (Donation to specified institutions) Section 80U (deduction for handicapped person) Section 24 (Housing loan interest)
Under Section 80C for tax deduction an individual could invest up to a maximum limit of Rs 1 lakh in one or more of the following options put together: (a) PPF (Public Provident Fund) under this scheme the maximum investment permissible in a financial year is Rs 70,000 (b) EPF ( Employees Provident Fund) (c) Life Insurance Premium (d) Pension Plan premium (under Sec 80CCC) (e) ULIP

(f) ELSS (Equity Linked Saving Scheme) - offered by Mutual Funds (g) NSC (National Savings Certificate) (h) 5 yrs Bank Fixed Deposit (i) 5 yrs Post Office Time Deposit (j) Infrastructure Bonds / NABARD Rural Bonds (k) NPS - New Pension Scheme (under Sec 80CCD)
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How is the ELSS offered by MFs? How is the return in the ELSS compared to other schemes like PPF and NSC? The Equity Linked Savings Scheme (ELSS) could be open-ended or close-ended in nature. Majority of the ELSS schemes are open-ended. This means that they are open for subscription on all business days. As the name suggests, the scheme primarily invests in equity market by buying equity stocks of companies listed on the stock exchanges. The units of the scheme are offered at the NAV (net asset value). The NAV is announced for all business days and keeps changing primarily depending upon the movement in the prices of stocks held in the

portfolio of the scheme. Equity as an asset class has given a higher return over the long term. ELSS has the potential to give substantially higher returns as compared to that from PPF or NSC over the longterm. The returns from PPF or NSC are in the range of 8% and at times may not beat the inflation. Returns from ELSS could fluctuate depending upon the performance of the equity market and also the stock selection criteria of the particular fund manager. Returns from ELSS could even be negative in the short to medium term. As on 31st December, 2009, the average compounded annualized growth rate (CAGR) over 3 and 5 years period by the ELSS category of Funds was 8.2% & 20.1% respectively. Taurus Tax Shield is the best performing ELSS over 3 years period. It has given a CAGR of 23.6% and 18.3% over 3 & 5 years respectively. ELSS also scores over other tax saving schemes since it offers tax free return (longterm capital gains and dividends are

totally tax free as per the current tax structure). Only PPF offers tax free return but it has a maturity period of 15 years.
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What is the lock-in period for ELSS? There is a lock-in period of 3 years from the date of allotment. This means that after investing in the Scheme, the investor can not redeem or withdraw the invested amount for a period of 3 years. But, this is one of the major advantages of ELSS since it has the lowest lock-in period as compared to the other tax saving instruments like PPF, NSC and Bank Deposits etc. Investors who want periodic dividends can consider the dividend payout option under the ELSS category, wherein the dividends received are also tax free. In fact, this is the only investment option under Section 80C which provides interim cash flow during the lock-in period.
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What should be the criteria for choosing an ELSS offered by the different MF

schemes? The investor should apply the following criteria while selecting an ELSS for an investment:

The track record of the fund at least over the last 2 to 3 years. One should not attach too much importance to the recent 1 month or 3 months performance. The dividend history of the fund. It is not necessary that the investor should select an ELSS based on its large size. The discerning investor could also look at the portfolio of the scheme to ensure that it is well diversified across market caps. If the investment amount is more than Rs 20,000, then probably the Investor could select two ELSS funds instead of one - one could be

an established name while the other could be an upcoming fund.

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How to start an ELSS account? The investor can use the services of a mutual fund distributor or directly approach the fund house for making investment in the ELSS. The distributor would provide the application form or one could download it from the website of the Fund House. The investment could be made in a single name or one could add second and/or third applicant. For investing in ELSS or for that matter in any scheme of a Mutual Fund the investor should have a PAN card. If he or she wishes to invest Rs 50,000 or more he or she should be Know Your Client (KYC) compliant. These criteria would also be applicable for all the joint applicants. The duly filled-in application form along with the cheque and other documents need to be submitted at the Investor Service Centre of the Fund House on any business day before the cut-off time of 3.00 p.m. to get the units allotted at the NAV of that

day. The Fund House normally sends the Account Statement within 3 to 4 working days. If the investor provides the e-mail ID in the application form, the account statement could be sent by e-mail. Many Fund Houses also offer the facility of investing in the Fund online through their websites. Recently, the regulator has also allowed the registered stock brokers to offer the facility of investing in Mutual Fund Schemes to their clients through the stock exchange mechanism.
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How much one should invest in ELSS? The amount that needs to be invested in ELSS would depend on the other investments already committed towards PPF, EPF, Insurance etc. An young investor could use the entire limit of Rs 1 lakh for investing in ELSS if he is not investing in other tax saving instruments under Section 80C whereas an aged investor could decide on a mix of three or four investment options. But, an investor should

not ignore the ELSS option because this is the only option which has the potential of delivering a higher return.
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Which fund houses offer ELSS? Can an investor combine it with SIP? Most of the fund houses offer ELSS. Yes, ELSS funds offer the facility of SIP. Ideally, a salaried investor should start his SIP in an ELSS fund in the month of April itself so that he gets the benefit of rupee cost averaging and he need not have to worry about the cash flow problem at the end of the financial year.
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What are the other benefits of ELSS fund? An ELSS fund should definitely figure in the tax saving list of every tax payer. Tax saving is not only about investing for saving taxes but it should also have the potential for wealth creation in the long run. Among all the tax saving instruments only ELSS offers this potential for wealth creation. Even though ELSS fund has lock-in period of 3 years it does not mean that the

investor should necessarily redeem his holdings after completion of 3 years. It could happen that at that given point of time the equity markets may be down and consequently the NAV of the ELSS fund could also be low. One could allow it to remain in the Fund for a much longer period. One should think of redeeming only if he or she are genuinely in need of funds or the ELSS, where the investor has invested, has underperformed the peer group.
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What is 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.
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What is Load? Load is a charge collected by a mutual fund when it sells units. It can be levied as an entry load* (i.e., the charge is collected when an investor buys the units) and as an exit load (i.e, the charge is collected when

the investor sells back the units). Schemes that do not charge any load are called No Load Schemes.
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What is purchase (sale) price ? Purchase price is the price paid by a customer to purchase a unit of the fund. What is Repurchase price? Repurchase price is the price at which a closeended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.
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What is Redemption Price? Redemption price is the price received by the customer on selling units of an open-ended scheme to the fund.
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What is Switching? Mutual Funds provide investors with an option to shift their investments from one scheme to another within that fund. Switching enables investors to move his investment from one scheme to another to meet his investment needs.
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What is an Asset Management Company (AMC) ? Every Mutual Fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for managing the investments for the various schemes operated by the Mutual Fund. The Trust oversees the performance of the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and a registrar. AMCs are obliged to make investments in compliance with SEBI regulations.
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Are mutual funds allowed to indulge in speculation/day trading ? No, Mutual funds are not permitted to speculate.
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Are returns from mutual funds guaranteed ? Mutual Funds do not offer guaranteed returns to investors. While SEBI regulations allow Mutual Funds to offer guaranteed returns subject to

the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum.
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Can the NAV of a debt fund fall? A debt fund invests in fixedincome instruments. These include Commercial Paper, Certificates of Deposit, debentures and bonds. While the rate of interest on these instruments stays the same throughout their tenure, their market value keeps changing, depending on how the interest rates in the economy move. A debt fund's NAV is the market value of its portfolio holdings at a given point in time. As interest rates change, so do the market value of fixedincome instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that the debt fund's NAV does not fall.
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Besides the NAV, are there any other parameters which can be compared across different funds of the same category? Besides Net Asset Value, the following parameters should be considered while comparing the funds: AVERAGE RETURNS An investor should look at the returns given by the fund over a period of time. Care should be taken to see whether all dividends and bonuses have been accounted for. The higher and more consistent the returns the better is the fund. VOLATILITY In addition to the returns one should also look at the volatility of the returns given by the fund. Volatility is essentially the fluctuation of the returns about the mean return over a period of time. A fund giving consistent returns is better than a fund whose returns fluctuate a lot. CORPUS SIZE A Large corpus is generally considered good because large funds have lower costs, as expenses are spread over large

assets but at the same time a large corpus has some inefficiencies too. A large corpus may become unwieldy and thus difficult to manage. PERFORMANCE VIS A VIS BENCHMARKS / OTHER SCHEMES Investors should not only look at the returns given by the scheme they have invested in, but also compare it with benchmarks like the BSE Sensex, Nifty, etc.

returns.