What is mutual fund? Mutual fund is a bunch portfolio of investment.

Investment Manager may use investment vehicles like stock, bond, index, money market, precious metal, etc so that they can gain profit and back to you. What is kind mutual? There are categories of mutual fund. There is open-end and close-end mutual fund and open-end mutual fund. There is also mutual fund various base on investment policy. There mutual funds are equity funds, fixed-income securities, balanced fund, index fund, money market fund, specialized sector, etc. These kind funds are suitable with different type investor. Can we invest in limited fund? Yes, you can. One of advantages they you can invest in limited fund. You can invest in variety investment like stock, bonds, index, market money, etc with limited money. For example, some mutual fund price is only $ 100. If you want buy stock, you need at least $ 10,000. Where can investor buy mutual funds? Mutual Fund Company will give exclusive right to other financial institution to sale mutual fund e.g. bank or insurance company. What is NAV? Net Asset Value (NAV) is share price of mutual fund. NAV price is similar with company stock price. Some Newspaper always announces NAV every day. You can buy mutual fund at price with NAV that effective that day. For example, information announces a mutual fund NAV is about $25 today so you can buy mutual fund for $25. What is mutual fund return? Mutual fund will give return from raising NAV. They give you dividend and interest rate too. Is there risk investment? Yes there is. There is also risk investing in mutual fund. Your NAV will descent anytime so that your assets will go down too. When you sell at low NAV meaning, you suffer financial loss. The volatility of NAV depends on your mutual fund portfolio. When all bonds price down, your fixedincome mutual fund will down too. Can we sell our mutual fund anytime?

Yes, investor could redeem anytime they want. Consequently, for open-end mutual funds, you must wait until their sponsor finish the count of NAV or in the afternoon. They must buy stock, bond index depend on your mutual fund. Is mutual fund manager a good manager? Yes, most of the investment manager in mutual funds is experienced investment manager but this is not guarantee that you always have return periodically. You must realize that manager is human too that can make mistakes. What are sponsor charges? Mutual funds will charge you with some fees. This fee is for funding operational company. There fee are Front-end load, Back-end load, 12b-1 and operating expenses. Sponsor will charge you frontend load when buy mutual fund. When you redeem mutual funds, you have to pay back-end load to sponsor. You must pay 12b-1 and operating expenses to sponsor

Until financial fitness is a class you have to take in school, many people will leave their younger years still as clueless about finances as they entered. It isnt until much later in life that people actually sit down and learn about them, but the earlier you start to learn, the better! Mutual funds can be confusing if youre not familiar with financial topics and investments, and not knowing about them seriously limits the possibilities you have for wise investment; here are five of the top questions people ask about them. 1. What are mutual funds? A financial institution such as a bank will start a mutual fund with a group of investors and a fund manager. Through pooling together the money from many people, the fund manager can invest more and have a lot more flexibility with how he invests than when managing just one individuals investments. Everyone in the fund benefits when there are gains in the opportunities the manager invests in, and everyone suffers when the manager makes poor choices, so the fund manager is motivated to do the best job possible at keeping your money safe, though this is no guarantee of safety, and people have lost sums of money before in mutual funds. 2. When and why should I invest in mutual funds? Mutual funds are a good bet, no matter what stage of life youre in. There is such a wide variety of choices that you can go for riskier, but potentially higher-earning funds when youre younger and have money to lose if necessary, or go for stable but lower-earning funds if youre close to retirement.

Some funds are set up to invest in certain markets or industries, while others are based on security or high earning potential; thorough research is necessary before choosing a mutual fund to invest in. They are a little safer than investing in stocks yourself, since the fund managers are experienced professionals who tend to do better at predicting which investment opportunities are profitable and which arent based on experience. Therefore, they are a fairly good investment for just about anyone. 3. How do I earn money with a mutual fund? Just like regular share-based investing, when the companies your fund is invested in make a profit, your fund receives money (called a dividend), which they divide between the investors in the fund. If your fund manager decides to sell the shares in the investment, you will receive a portion of the profits (or lose out if they were sold at a loss). Of course, its not guaranteed that youll earn money. The size of a fund means that rather than pouring all your money into one stock or opportunity, the manager is able to diversify the portfolio and insure against losing too much money with any one particular investment. If you dont already have professional experience investing in the markets you want to invest in, letting a fund manager do it for you can be a very good idea. 4. What are the downsides to mutual funds? Like any other type of investing, there are downsides and disadvantages to investing in mutual funds, which you should keep in mind before doing so. First, there is no one investor in control of the portfolio, so even if you think its bad idea to invest in a fund, you wont get very far. You have to trust in the ability of your fund manager to make money and invest wisely, and not all fund managers are equal! There may be fees associated with mutual funds, too the organization or institution that is organizing the fund will want to make a profit, and the fund manager must be paid. Often, these fees are passed to individual shareholders of mutual funds. 5. How do I invest and how much do I have to invest? Most mutual funds will require that you invest a certain amount of money to join the fund $500 to $2,000 is not uncommon, just to ensure that the managers arent dealing with how to repay some people a few pennies and others hundreds of dollars. The higher the limit, the more power your fund will have, of course. With more money from everyone else in the fund, your fund manager will be able to do much more with the portfolio, including diversifying it to find a few safe bets and a few possible high earners. Before you choose a fund to invest in, its a good idea to do a lot of research on it. Find out why it chooses the companies and opportunities it does, its strategy for earning (when it sells and

when it holds stocks), and who the fund is recommended for. If possible, meet the fund manager to talk about the opportunity or with a representative of the institution managing the fund. Its also a good idea to research the history of the fund manager and discover whether he or she is known for good sense or wild investments, how satisfied previous shareholders were with their investments, and any problems with the manager people have had. Before agreeing to invest in a fund, figure out what the fees to you will be, whether they are taken out of your initial investment or if you have to pay them every year or month, and so on. Setup fees can be between 1% and 3% or even more, and some funds charge an annual fee to all shareholders. Any fees should be in the contract or agreement you look through, so make a note of them before signing anything. If youre interested in mutual funds, keeping these things in mind can help give you a broad overview of how to invest in them, why they are a good idea and why they arent, and what to look out for in a mutual fund. Whether or not you choose to invest in mutual funds, knowledge is power; knowing how mutual funds work gives you the opportunity to invest in them.

Why have mutual funds in India performed so poorly?

Most investors associate mutual funds with Master gain, Monthly Equity Plans of SBI Mutual Fund, UTI and Canbank Mutual Fund and of course Morgan Stanley Growth Fund. This is so because these funds truly had participation from masses, with a fund like Morgan Stanley having more than 1 million investors. Investors feel that after 5 years, Morgan Stanley Growth Fund units still trade below the original IPO price of Rs.10. It is incorrect to think that all mutual funds have performed poorly. If one looks at some income funds, they have come with reasonable returns. It is only the performance of equity funds, which has been poor. Their poor performance has been amplified by the closed end discounts ie units of these funds quoting at sharp discounts to their NAV resulting in an even poorer return to the investor.

One must remember that a Mutual Fund does not provide assured returns and neither can it "manufacture" returns out of thin air. Returns provided by mutual funds are a function of the returns in the underlying asset class in which the fund invests. Good funds can beat returns in their asset class to some extent but thats all. E.g. take the case of a sector specific fund like a pharma fund which invests only in shares of pharmaceutical companies. If the Govt. comes with new regulation that severely restricts the pricing freedom of these companies resulting in negative outlook for the sector, the prices of all stocks in the sector could fall substantially resulting in a severe erosion in the NAV of the fund. No one can do anything about it. A good fund manager would probably sell part of the fund before prices fall too much and wait for an opportune time to reinvest at lower levels once the dust has settled. In that case, the NAV of the fund would fall to a lesser extent but fall it will. If the investor in the fund has invested in some stocks in the sector on his own, in all probability, his personal investments may have depreciated to a larger extent. Let us extend this example to an analysis of the investment climate in the last 7 years. The stock markets have done very badly in the last seven years. The BSE Sensex crossed 3000 for the first time in early 1992. Since then it has gone up and come down several times but has remained in the same range. Effectively, for a seven-year investment period, the total return has been almost zero. The prices of many leading stocks of yesteryear have fallen by more than 50% in these seven years. If one considers the fact that the sensex has been changed several times, with all the weak stocks having been weeded out, the effective returns on the old sensex, existing in 1992, have been substantially negative. The following table gives some of the prices of stocks considered "blue chips" in 1992, in 1994 and the prices prevailing at present. Price in Rupees
Name of the Company Tata Steel Grasim Industries Century Textiles Reliance Industries 1992 high 552 650 490 218 1994 high 336 793 550 213 Current price 99 137 28.6 149

Raymond Arvind Mills ICICI

250 353 290

263 290 197

71 27.65 55.4

It is quite obvious that if a fund had invested in any of these shares in 1992 or subsequently in the 1994 boom, and if it remained invested in the share, then it would be confronting a huge fall in NAV. This is exactly what has happened. A similar table for prices of shares of Public Sector Undertakings (PSUs) is given below. Price in Rupees
Name of the Company MTNL HPCL Indian Oil ONGC SAIL 1994 high 325 550 n/a n/a 83 Present price 161 188 251 134.5 5.05

Most mutual fund managers took some time to realize the changed circumstances wherein the open economy ushered in by the liberalization took the full impact of the global deflation in commodity prices. This problem was compounded further by the Asian crisis after which cheap imports from Asia caused severe pressure on profits. To add to this, most funds had invested some part of their portfolio in medium sized "growth" companies. Many of these companies have performed even worse than bigger ones and quite a few have seen share prices dip more than 90% from their 1994 highs. More important, funds could not sell these shares because of complete lack of liquidity with, at best, few hundred shares being traded every day. Meanwhile, shares of companies in sectors like consumer goods (FMCG) and software, were showing good growth and they went up rapidly in price. Most fund managers were unwilling to sell shares of erstwhile "blue chips" at low prices and

buy shares of emerging "blue chips" at high prices. This resulted in poor performance and negative returns. One more issue is that the fund managers in many funds were not "professionally qualified and experienced". This is especially true of some of the funds floated by nationalized banks. Some of these individuals were transferred from the parent organization and did not really know much about investment management. Lastly, investors would do well to have a look at the investments, which they made on their own. In most cases, they would have done much worse than the mutual funds. We have received numerous requests for advice from individual investors on what to do about their own investments. If that were any indicator, investors would have done really badly. Is it true that globally mutual funds under perform benchmark indices? Why are smart money managers unable to do as well as the market? Or is it that they are not smart at all? What are the limitations of mutual funds? It is 100% true that globally, most mutual fund managers under perform the asset class that they are investing in. It is not true that the fund managers are dumb; this under performance is largely the result of limitations inherent in the concept of mutual funds. These limitations are as follows: Entry and exit costs: Mutual funds are a victim of their own success. When a large body like a fund invests in shares, the concentrated buying or selling often results in adverse price movements ie at the time of buying, the fund ends up paying a higher price and while selling it realizes a lower price. This problem is especially severe in emerging markets like India, where, excluding a few stocks, even the stocks in the Sensex are not liquid, let alone stocks in the NSE 50 or the CRISIL 500. So, there is simply no way that a fund can beat the Sensex or any other index, if it blindly invests in the same stocks as those in the Sensex and in the same proportion. For obvious reasons, this problem is even more severe for funds investing in small capitalization stocks. However, given the large size of the debt market, excluding UTI, most debt funds do not face this problem

Wait time before investment: It takes time for a mutual fund to invest money. Unfortunately, most mutual funds receive money when markets are in a boom phase and investors are willing to try out mutual funds. Since it is difficult to invest all funds in one day, there is some money waiting to be invested. Further, there may be a time lag before investment opportunities are identified. This ensures that the fund under performs the index. For open-ended funds, there is the added problem of perpetually keeping some money in liquid assets to meet redemptions. Fund management costs: The costs of the fund management process are deducted from the fund. This includes marketing and initial costs deducted at the time of entry itself, called "load". Then there is the annual asset management fee and expenses, together called the expense ratio. Usually, the former is not counted while measuring performance, while the latter is. A standard 2% expense ratio means that, everything else being equal, the fund manager under performs the benchmark index by an equal amount. Cost of churn: The portfolio of a fund does not remain constant. The extent to which the portfolio changes is a function of the style of the individual fund manager ie whether he is a buy and hold type of manager or one who aggressively churns the fund. It is also dependent on the volatility of the fund size ie whether the fund constantly receives fresh subscriptions and redemptions. Such portfolio changes have associated costs of brokerage, custody fees, registration fees etc. which lowers the portfolio return commensurately. Change of index composition: World over, the indices keep changing to reflect changing market conditions. There is an inherent survivorship bias in this process, with the bad stocks weeded out and replaced by emerging blue chips. This is a severe problem in India with the Sensex having been changed twice in the last 5 years, with each change being quite substantial. Another reason for change index composition is Mergers & Acquisitions. The weightage of the shares of a particular company in the index changes if it acquires a large company not a part of the index.

Tendency to take conformist decisions: From the above points, it is quite clear that the only way a fund can beat the index is through investment of some part of its portfolio in some shares where it gets excellent returns, much more than the index. This will pull up the overall average return. In order to obtain such exceptional returns, the fund manager has to take a strong view and invest in some uncommon or unfancied investment options. Most people are unwilling to do that. They follow the principle "No fund manager ever got fired for investing in Hindustan Lever" i.e. if something goes wrong with an unusual investment, the fund manager will be questioned but if anything goes wrong with the blue chip, then you can always blame it on the "environment" or "uncontrollable factors" knowing fully well that there are many other fund managers who have made the same decision. Unfortunately, if the fund manager does the same thing as several others of his class, chances are that he will produce average results. This does not mean that if a fund manager takes "active" views and invests in heavily researched "uncommon" ideas, the fund will necessarily outperform the index. If the idea does not work, it will result in poor fund performance. But if no such view is taken, there is absolutely no chance that the fund will outperform the index.

Should an investor invest in a mutual fund despite its limitations or no?

Yes. Investor should invest some part or their investment portfolio in mutual funds. In fact some investors may be better off by putting their entire portfolio in mutual funds. This is on account of the following reasons: On their own, uninformed investors could perform much worse than mutual funds. Diversification of risks which is difficult for an investor to achieve with the small amount of funds at his disposal Possibility of investing in small amounts as and when the investor has funds to invest

Unquestioned service of transaction processing, tracking of investments, collecting dividends/interest warrants etc. Debt funds in India offer exposure to a diversified portfolio of bonds/debentures, which is possible, only if the investor is investing millions of rupees. Further, they offer easy liquidity and tax benefits. Debt funds thus offer a great proposition that is impossible for ordinary investors to replicate on their own. This proposition compares favorably against competing investments like small savings. Investors require analytical capability and access to research and information and need to spend an enormous amount of time to make investment decisions and keep monitoring them. Some people have the inclination and the time to make better decisions than fund managers do, but the vast majority does not. Those who can are advised to invest some part of their money into funds, especially debt funds, to diversify their risk. They may also note that one of the objectives of this site is to help them improve the odds in their favor.

Are mutual funds safe? Are returns on mutual funds guaranteed by Government of India, or Reserve Bank or any other government body?
Any mutual fund is as safe or unsafe as the assets that it invests in. There are two basic categories of mutual funds with others being variations or mixtures of these. Firstly, there are those that invest purely in equity shares (called equity funds or " growth funds") and secondly, there are those that invest purely in bonds, debentures and other interest bearing instruments called "income" or "debt" funds. The NAV of growth funds fluctuates in line with the fluctuation of the shares held by them. They can also witness face substantial erosion in value, which could be permanent in some cases. On the other hand, prices of debt instruments fluctuate to a much lesser degree and an income fund is extremely unlikely to face erosion in value especially of the permanent kind.

Most mutual funds have qualified and experienced personnel, who understand the risks of investing. But, nobody is immune from making mistakes. However, funds diversify the investment portfolio substantially so that default in any single investment (in the case of an income fund) will not affect the overall performance of a fund in a significant manner. In the event of default of a part of the portfolio, an income fund is extremely unlikely to face erosion in face value. Generally, mutual funds are not guaranteed by anybody. However, in the Indian context, some of the mutual funds have floated "guaranteed" or "assured" return schemes which guarantee a certain annual return or guarantee a buyback at a specified price after some time. Examples of these include funds floated by the UTI, Canbank Mutual Fund, SBI Mutual Fund, LIC Mutual Fund etc. Many of these funds have not earned returns that they promised and the asset management companies of the respective mutual funds or their sponsors have made good their promises. The biggest case pertains to the US 64, which never guaranteed any returns but is being bailed out by the Government due to the millions of individuals who have invested in it.

Can the foreign mutual funds operating in India take investors money outside the country?
A mutual fund and the company that manages it are 2 entirely different companies. Legally speaking, a mutual fund is a trust formed and registered under the Indian Trust Act. The sponsor asset management company is formally appointed by the trustees of the trust to manage money on their behalf e.g. DSP Merrill Lynch equity fund is a mutual benefit trust registered under the Indian Trust Act. The trustees have appointed DSP Merrill Lynch Asset Management Company Pvt. Ltd. to manage the funds in the trust and the company cannot touch one rupee from the trust except to the extent of the fees that it receives for managing the funds. Repatriation of money outside India comes under the purview of the Foreign Exchange Regulation Act, 1973 which specifies the situations in which money can

be remitted outside India. Under the act, banks that repatriate money on behalf of their clients have to ensure compliance with various legal formalities and ensure that the entity, which remits money, is entitled to do so. Any failure or violation leads to serious consequences for both the remitter and the bank. Money collected by a mutual fund domestically is not allowed to be remitted outside India.

Is mutual funds out performance always good?

Mutual fund performance of index may not always be a positive indicator. In several cases one notices that the funds performance is very lop sided and is driven by few scrips. In other words the fund manager has taken significantly higher risks and in the game of probability he would have made more money. But it is very likely that if his call had not been right, he would have under performed and lost badly. From an investors point of view, when he is looking at such outperformances in the past, he cannot derive confidence and comfort in the fund managers' ability to repeat the performance in future. As markets are not rational, there is no methodology in the world to scientifically predict stock prices. Therefore it is not possible for anyone to beat the market on a consistent basis and hence there is no guarantee that the fund manager would perform well all the while. How does one see through the marketing hype given out by mutual funds ? It is amazing how fund marketers can come up with statistics to show how their particular fund has done extremely well. Standard techniques include the following: Defined period returns: Some period is depicted in which the particular fund outperformed others or some benchmark. One should look very carefully at start and end dates they can always be chosen in a way that shows the fund in a favorable light

Out performance vs. performance: Sustained periods of low absolute performance are a cause for concern. It is all right to look at relative returns with respect to benchmark indices; but there is no sense if a particular fund produces absolute returns less than the deposit interest rates, even after a few years of existence. Promise of long term performance: Lack of performance is often explained away as temporary with promises of good performance in the long term. Few define what this "long term" is 1 or 2 or 5 or 10 years. Do not forget that the longer the period, the longer is the uncertainty in between in other words, would you want to wait for 10 years to get an uncertain 2% higher returns as compared to the certain returns that you get in say the Public Provident Fund. Rupee cost averaging: This is a term that has found its way into the marketing literature of all mutual funds. What it means is that if you put in a fixed amount of money every month in a fund, then, in months when the NAV is low, the investor gets more units which benefits him when the NAV rises. Do not forget the implicit assumption behind this that the NAV will rise eventually. If it does not, you are no better off than by not buying. Equities are the best bet in the long run: Ask this to any investor who put money in the Sensex in 1992. After a long run of 7 years, the investor is down on his investment by 50%. He would have been better off by investing in other investment.

What went wrong with US64 ?

Basically, for a period of 2-3 years, the UTI distributed more dividend to the unit holders of US 64 than the return earned from the investments in the scheme. This reduced the value of the residual investments in the scheme. This problem was compounded by the persistent fall in the prices of shares, especially the shares of companies in basic commodity industries like cement, steel, manmade fibers etc. and shares of public sector units. Throughout this period, when the NAV of US 64 was going down, UTI kept increasing the sale and repurchase

prices of US 64 units. The stock market collapse after the Pokhran II nuclear tests was the last straw, which resulted in the erosion of the schemes book reserves and a wide difference between the actual NAV and the sale/repurchase price. When this became known, it set a panic amongst investors of US 64. Many people felt that if there were large-scale redemptions, UTI would not be able to meet them without support of outside bodies like the RBI. Further, theoretically, if all investors wanted to redeem their US 64 units on the same day, the US 64 simply did not have the money to meet the redemptions on its own (due to the difference between NAV and the repurchase price).

What went wrong with Morgan Stanley ?

Morgan Stanley raised large corpus (more than Rs.10bn) in around early 1994. The entire exercise in fund raising was centered on the hype of the fund being was the first fund promoted by an internationally acclaimed asset management company. It was marketed like any other public issue and fund investors rushed to invest in the scheme hoping to get superior returns. No one bothered to explain to them that Morgan Stanley AMC was a service provider - providing them the service of investment advice and management. No one explained to them that they were not investing in a share of a company in fact the artificial gray market premium served to perpetrate this feeling. The IPO was a great success. It ensured that the name "Morgan Stanley" was now a part of the dreams of more than 1 million Indians. The fund raising exercise, unfortunately, coincided with the peak of stock market boom. Indian stock markets lack depth and are quite illiquid. The fund managers were compelled to invest in equities in a big hurry as a number of Foreign Institutional Investors were investing huge sums of money in the country resulting in a mad rush for equity stocks. The funds managers invested a considerable amount of money in smaller companies with low floating stock and low market capitalization, either through the secondary market or through

private placements. These companies had experienced the highest appreciation in prices in the immediate past. The market position started changing from late 1994. The boom in the market made it possible for many companies to raise equity capital and literally hundreds of public/rights issues opened for subscriptions every week, many of them at high issue prices. There were also massive private placements of equity shares and GDR issues at huge premiums. There were very few companies which did not wash their hands in this great gravy train. This deluge of paper soaked up money and reduced the amount available for fresh investment both from resident Indians, domestic mutual funds and from foreign institutional investors. At this time, the RBI commenced on its tight money policy in a bid to control inflation from raising its head. Money supply tightened and bond yields started increasing dramatically. High industrial growth and tight money created a shortage for credit and rates started going sky high. Many corporates and banks started redeeming their holdings in the Unit Trust of India and other mutual funds. This put major pressure on the market, which was already showing signs of weakness. What followed was the great crash. And in this crash, the biggest losers were the smaller capitalization stocks. Many of these stocks lost more than 90% of their peak prices. Morgan Stanley AMC restructured the funds portfolio at big losses. As the NAV went below par, investors confidence was shattered. Being a closed-ended scheme the Morgan Stanleys mutual fund unit is also listed on the stock markets. Crisis of confidence led to its price on the stock exchange crashing and it started quoting at a steep discount to its NAV. The fund started buying back units in order to reduce the discount and also to boost the NAV (buying back units at prices below the NAV results in a profit, which will reduce the NAV). Given its large corpus size no amount of buy back or otherwise support could help boost the investor confidence.

Since then the equity markets have gone nowhere with the index still below the level at which the fund was invested. Most of the stocks in the Sensex have performed poorly with markets punishing commodity companies and companies with non-transparent Indian managements. To top it, many erstwhile bluechips have reported disastrous financial performances. Consequently, the NAV of MSGF mirrors this gory saga of the Indian markets. In fact, the fund invested considerable amount of money in FMCG, pharmaceutical and software companies at the right time which improved the NAV from 1998 onwards. How important is an AMC (Asset Management Company) behind a mutual fund? AMC controls the operations and functioning of a mutual fund. It is very critical to the performance of a mutual fund as it decides on the style of functioning, people who are going to manage the funds, the commitment to service quality and overall supervision. The financial strength and the commitment of the AMC sponsors to the business are very key issues. This is because most AMCs lose money in the first few years of operations. In most cases, these losses are much more than the capital requirements stipulated by SEBI. Hence, a sponsor which is financially weak or which cannot capital to the business either because of its inability or unwillingness will result in an unhealthy operation. There will be a tendency to cut corners and unwillingness to spend money to expand operations. This is the last place where high quality persons would want to remain and work. The AMC then remains stunted and the sponsors lose interest. The worst affected are the investors. This is exactly what has happened with some AMCs promoted by Indian business houses. This is also a problem that has afflicted some of the AMCs floated by nationalized banks. In these organizations, the traditional thinking is prevalent which can be summarized as "money is power". Since mutual fund business did not have access to too much money, a posting in the AMC became punishment postings for some personnel who were not doing well in the parent organization

or who lost out in the organizational politics. The management of the banks also did not allow these AMCs to become independent viable businesses. The CEOs of the AMCs did not have any clue of the mutual fund business and neither were they interested in it the entire effort was spent in getting a posting back in the parent. The fund managers had no experience in the activity making a mockery of "professional management". The sad results are there to see. Some of the parents had to provide funds to bridge the gap in "assured return schemes". It looks extremely likely that some of these AMCs will no longer exist in a few years. How and against what should you benchmark the performance of a mutual fund ? All mutual funds have different objectives and therefore their performance would vary. A mutual funds performance should be benchmarked against mutual funds of similar type or India Infoline mutual fund index for a particular type. e.g. equity fund index, income fund index or balanced fund index or liquid fund index. One can also benchmark the fund against the Sensex or any other broad based index for the particular asset class. One has to be very careful about choosing the comparison period. Ideally, one should compare the performance of equity or an index fund over a 1-2 year horizon. Any comparison over a shorter period would be distorted by short term, volatile price movements. Comparisons over a longer period need to be interpreted carefully by looking at other factors such as change in individuals managing the fund, one time investment successes etc. Similarly, the ideal comparison period for a debt fund would be 6-12 months while that for a liquid/money market fund would be 1-3 months. Apart from the entire period, one should also compare the performance in smaller intervals within the same period say intervals of one month duration. To make comparison meaningful, one has to compare the average annual compounded rate of return. This adjusts for comparisons of differing period and also facilitates comparison across different classes. The return also incorporates dividend payouts. Thus, for example, one can say that ABC income fund has given a compounded annual growth rate (CAGR) of 13% p.a. including dividends

in the last 2 years while XYZ income fund has given a CAGR of 13.2% p.a. over the last 3 years.

Apart from NAV, what other parameters can be compared across different funds of the same category?
Apart from plain numerical comparison of NAVs, several other things can be checked, e.g. correlation of changes in NAV with changes in portfolio composition and appreciation/depreciation in valuation of individual items, increase in the size of the corpus etc. In debt funds, it is useful to compare the extent to which the growth in NAV comes from interest income and from changes in valuation of illiquid assets like bonds and debentures. It is also useful to compare expense ratios of funds e.g. Birla Income Plus has an expense ratio of 1.7% which is one of the lowest expense ratios of all income funds in the industry this means that, everything else being equal, the performance of that fund will be higher by 0.55% than other funds, which have an expense ratio of 2.25%. Last, but not the least, one has to compare the risk profile of two funds. For income funds, this could mean credit quality of the portfolio and the fluctuations in the NAV with periodic changes in the interest rate environment. For equity funds, it could mean the volatility of the NAV with the ups and downs in the market or the percentage exposure to smaller company shares etc.

How different are styles of different mutual funds?

Different mutual funds have very different investing styles. These styles are a function of the individuals managing the fund with the overall investment objectives and policies of the organization acting as a constraint. These are manifest in things like Portfolio turnover Buy and hold strategy versus frequent investment changes

Kind of investments made small versus large companies, multi baggers (investments which yield high gains) versus percentage players (investing in shares which will give small gains in line with the market), high quality low yield bonds versus low quality high yield bonds Asset allocations Varying percentage of cash depending on aggressive views on markets The following examples serve to illustrate a few styles of equity fund managers Some fund managers are passive value seekers and some are value creators. The former type buys undervalued assets and patiently waits for the market to discover the value. The latter aggressively promote the undervalued stocks that they have bought. Some fund managers restrict themselves to liquid stocks while some thrive on illiquid stocks which offer themselves easily to large price changes. Some fund managers are masters of the momentum game and seek to buy stocks that are in market fancy. They attach lesser importance to fundamentals and believe that a rising stock price and favorable momentum indicators imply that fundamentals are changing. In effect, they are following the philosophy, " The trend is my friend". Other fund managers go more by deep fundamental analysis completely ignoring price movements. They do not mind price going down and are in fact happy to buy more. Some fund managers are growth investors i.e. they buy stocks with a high P/E using the forecasted growth to justify the high valuation. Others are value investors who buy shares with low P/E or P/BV multiples - typically companies rich with undervalued assets.

When you buy a mutual fund unit what exactly do you buy?

When you buy a mutual fund unit you are buying a part of the equity or debt portfolio owned by the mutual fund. In other words you are buying a part ownership of various companies and when you buy a debt mutual fund you are buying a part right to title to debt securities. In other words you step into the shoes of owners or lenders indirectly. The value of your part of the assets will fluctuate in line with the value of the individual components of the portfolio on the stock or the bond market. In effect, you are buying a bundle of services as follows: Investment management which means investment advice and execution rolled into one Diversification of investment risk buying a larger basket of securities reduces the overall risk of investment Asset custody which means registration and physical custody of assets, ensuring corporate actions like payment of dividend and interest, bonus, rights entitlements etc Portfolio information which means calculating and disseminating ownership information like NAV, assets owned, etc on a periodic basis Liquidity Ability to speedily disinvest assets and obtain disinvestments proceeds The mutual fund exploits economies of scale in research, execution and transaction processing to provide the first three services at low costs. The pooling of money makes it possible to offer the fourth service (since all investors are unlikely to exit at the same time). In addition, one also gets benefits like special tax concessions. What you do not get is a guaranteed way of making money. There is no way that a mutual fund can insulate the investor from the vagaries of the market place and ensure that he always makes money. In addition, one is implicitly taking the risk

of bad service quality in any of the four elements above including investment management.

What are load and no-load funds? Why are loads charged?
Some asset management companies (AMCs) levy service charges for allowing subscribers entry into/exit from mutual fund schemes. The service charge is termed as entry/exit load and such schemes are called "load" schemes. In contrast, funds for which no entry/exit charge is levied are called no-load funds. The load is levied to cover the up-front cost incurred by the AMC in the process of marketing and selling the fund and other one-time transaction processing costs.

Why is the buy and sell price different for some mutual fund units and same for others?
Buying and selling prices are different for those mutual funds which have up front sales charges or entry loads. Usually, the selling price is the NAV while the buying price incorporates the service charge or the load. In case the fund is a noload fund, there is no difference between the buying and selling prices. We have a detailed section on the characteristics of all mutual fund schemes, which tells you the exact load charged by respective funds.

Where can one obtain information on the market price of specific mutual fund units?
Buying and selling prices for units of open-ended mutual funds are declared every day. You can obtain this information on our website. Check out the section on mutual funds.

Most closed-ended mutual funds are listed on the stock exchanges. The trading volume in some of the widely held mutual fund units is considerable. The latest NAV and market price information of closed-ended mutual funds is available on our website. All the above information is also available on the stock market page of popular newspapers.

The returns differ from year to year on account of the following reasons:
An income fund invests in instruments from which it earns two kinds of returns The first comes from interest income. The second comes from any increase in the market price of invested instruments. The second component could also be negative when there is a fall in the market value of the invested instruments. The rise and fall in market prices of debt instruments is a function of the prevailing interest rates. Thus changes in interest rate environment cause fluctuations in returns. Secondly, income mutual funds invest in an array of instruments with different maturity. Whenever any debt instrument in which the fund has invested is redeemed, the redemption proceeds have to be reinvested in a fresh instruments. This fresh investment would earn a rate of return depending on the prevailing interest rate which could be higher or lower than that prevailing in the earlier period. Accordingly, the overall return of the portfolio will change. A third reason can be active view taking by the fund manager e.g. a fund manager can take a view that interest rates are expected to rise. Accordingly, he would disinvest a large part of his holdings and convert them into cash so as to avoid loss in the value of his holdings. If this view is wrong, he may end up having a low return on a large part of his portfolio, since cash is invested in low yielding money market avenues. On the other hand, if the view is right, the cash can be deployed in higher yielding instruments after interest rates rise, thus improving the overall return and more important avoiding the loss.

There is a fourth reason, which is relevant only for open-ended income funds. Such funds have a fluctuating level of idle cash (depending on the level of fresh collections) which is typically invested in low yielding money market instruments. This causes change in the rate of return. Lastly, there is always the possibility of a credit loss for any income mutual fund ie losses arising out of default in any of the instruments in which the fund has invested. The fund will declare a low return in the period in which such losses show up.

What are the risks associated in investing in income mutual funds and how should one find out about these?
Income funds invest in a diversified portfolio of debt instruments which provide interest income. There is a possibility that some of these instruments are of low credit quality and the issuers of these instruments default in the payment of interest or principal. Such losses, called "credit losses", constitute an area of risk for income funds. The process of diversification mitigates this risk i.e. by the fund investing in a number of debt instruments. However, it should be noted that the funds returns could be eroded considerably if even 10% of the investments have credit quality problems. Also, the problem can be accentuated for investors who are investing for a short period if the losses show up in a particular period resulting in a short term decline in NAV. Investors can check the credit quality of the investment portfolio, which is published by most funds on a quarterly basis. The second area of risks comes from the fluctuations in the prices of the underlying instruments in which the fund invests. Any rise in interest rates will result in a fall in the value of the investments causing a dip in the NAV. The fall in value is maximum for longer dated instruments and negligible for short dated instruments. Hence, the risk is higher in a fund that has an investment portfolio with a higher average maturity. This can again be checked from the investment portfolio, which is published by the funds.

Even if interest rates rise by 2-3%, the fall in NAV for most mutual funds is unlikely to exceed 5%. Similarly, a portfolio with as high as 10% of poor quality instruments will result in a fall in NAV by 10%. Regular interest income will take care of the losses in a few months. Thus, there is unlikely to be permanent erosion of capital in most reasonable circumstances. Hence, debt or income funds have a much lower risk than equity funds, which can have permanent erosion in value. Todays environment is characterized by a deep industrial recession and consequent high level of defaults on loans provided by banking sector to industry. In such a scenario, it may be prudent to look at the credit quality aspect very carefully before investing in an income mutual fund.

What are the tax benefits available for investing in mutual funds?
The tax benefits for investing in mutual funds are as follows: Twenty percent of the amount invested in specified mutual funds (called equity linked savings schemes or ELSS and loosely referred to as "tax savings schemes") is deductible from the tax payable by the investor in a particular year subject to a maximum of Rs.2000 per investor. This benefit is available under section 88 of the I.T. Act. Investment of the entire proceeds obtained from the sale of capital assets for a period of three years or investment of only the profits for a period of 7 years, exempts the asset holder from paying capital gains tax. This benefit is available under section 54EA and 54EB of the I.T. Act. The mutual fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it. While this is a benefit to the fund, it is the indirect benefit of unit holders as well. This benefit is available to the mutual fund under section 10 (23D) of the I.T. Act.

A mutual fund has to pay a withholding tax of 10% on the dividends distributed by it under the revised provisions of the I.T. Act putting them on par with corporates. However, if a mutual fund has invested more than 50% of its assets into equity shares, then it is exempt from paying any tax on the dividend distributed by it, for a period of three years, by an overriding provision. This benefit is available under section 115R of the I.T. Act. The investor in a mutual fund is exempt from paying any tax on the dividend received by him from the mutual fund, irrespective of the type of the mutual fund. This benefit is available under section 10(33) of the I.T. Act. The units of mutual funds are treated as capital assets and the investor has to pay capital gains tax on the sale proceeds of mutual fund units sold by him. For investments held for less than one year the tax is equal to 30% of the capital gain. For investments held for more than one year, the tax is equal to 10% of the capital gains. The investor is entitled to indexation benefit while computing capital gains tax. Thus if a typical growth scheme of an income fund shows a rise of 12% in the NAV after one year and the investor sells it, he will pay a 10% tax on the selling price less cost price and indexation component. This reduces the incidence of tax considerably. This concession is available under section 48 of the I.T. Act. The following calculations show this in more detail: Purchase NAV = Rs.10 Sale NAV = Rs.11.2 Indexation component = 8% Capital gains = 11.2 10(1.08) = 11.2 10.8 = 0.4 Capital gains tax = 0.4*0.1 = 0.04.

If an investor buys a fresh unit in the closing days of March and sells it in the first week of April of the following year, he is entitled to indexation benefit for two financial years which close in the two March ending periods. This is termed as double indexation and lowers the tax even further especially for income funds. In the above example, the calculation would be as follows: Capital gains = 11.2 10(1.08)(1.08) = 11.2 11.7 = -0.5 Thus there would be no capital gains tax.

What is a Mutual Fund? The following are some of the more popular definitions of a Mutual Fund A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. What are the benefits of investing in a Mutual Fund? There are several benefits from investing in a Mutual Fund.

Small investments : Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance. Professional Fund Management : Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick good investment opportunities. Spreading Risk : An investor with a limited amount of fund might be able to to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk

by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs. Transparency and interactivity : Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor. Liquidity : Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they announce the repurchase. Choice : The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile. Regulations : All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.

TOP

A Mutual Fund is not an alternative investment option to stocks and bond; rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund : CONCEPT Mutual Fund Operation Flow Chart

What does a Mutual Fund do with investor's money? Anybody with an investible surplus of as little as a few hundred rupees can invest in mutual funds. The investors buy units of a fund that best suits their investment objectives and future needs. A Mutual Fund

invests the pool of money collected from the investors in a range of securities comprising equities, debt, money market instruments etc. after charging for the AMC fees. The income earned and the capital appreciation realised by the scheme, are shared by the investors in same proportion as the number of units owned by them. 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. How is investment in a Mutual Fund Different from a Bank Deposit? When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you. What are the types of returns one can expect from a Mutual Fund? Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution. Capital Appreciation : An increase in the value of the units of the fund is known as capital appreciation. As the value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit by selling the units at prices higher than the price at which he bought the units. Dividend Distribution : The profit earned by the fund is distributed among unit holders in the form of dividends. Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to the investor. How are Mutual Funds classified?

TOP

Why do Mutual Funds come out with different schemes? A Mutual Fund may not, through just one portfolio, be able to meet the investment objectives of all their Unit holders. Some Unit holders may want to invest in risk-bearing securities such as equity and some others may want to invest in safer securities such as bonds or government securities. Hence, the Mutual Fund comes out with different schemes, each with a different investment objective. Does investing in Mutual Funds mean investing in equities only? Mutual funds can be divided into various types depending on asset classes. They can also invest in debt instruments such as bonds, debentures, commercial paper and government securities apart from equity. Every mutual fund scheme is bound by the investment objectives outlined by it in its prospectus. The investment objectives specify the class of securities a mutual fund can invest in. What are sector funds? These are speciality mutual funds that invest in stocks that fall into a certain sector of the economy. Here the portfolio is dispersed or spread across the stocks in a particular sector.This type of scheme is ideal for the investor who has already made up his mind to confine his risk and return to one particular sector. Thus, a FMCG fund would invest in companies that manufacture fast moving consumer goods. What is the difference between Growth Plan and Dividend Reinvestment Plan? Under the Growth Plan, the investor realizes the capital appreciation of his/her investments while under the Dividend Reinvestment Plan, the dividends declared are reinvested automatically in the scheme.

What is a Portfolio? A portfolio of a mutual fund scheme is the basket of financial assets held by that scheme. It comprises of investments in a variety of securities and asset classes. This diversification helps reduces the overall risk. A mutual fund scheme states the kind of portfolio it seeks to construct as well as the risks involved under each asset class. What is Net Asset Value (NAV)? Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given business day. The NAV reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing it by number of units outstanding.

TOP

What is a load? The charge collected by a Mutual Fund from an investor for selling the units or investing in it. When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load. The entry load percentage is added to the NAV at the time of allotment of units. An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes. Some schemes do not charge any load and are called "No Load Schemes" What is a Sale Price? It is the price paid by an investor when investing in a scheme of a Mutual Fund. This price may include the sales or entry load. What is a Redemption/Repurchase Price? Redemption or Repurchase Price is the price at which an investor sells back the units to the Mutual Fund. This price is NAV related and may include the exit load. What is the Repurchase or Back End Load? It is the charge collected by the scheme when it buys back the units from the unit holders. What is a Switching Facility? Switching facility provides investors with an option to transfer the funds amongst different types of schemes or plans. Investors can opt to switch units between Dividend Plan and Growth Plan at NAV based prices. Switching is also allowed into/from other select open-ended schemes currently within the Fund family or schemes that may be launched in the future at NAV based prices. While switching between Debt and Equity Schemes, one has to take care of exit and entry loads. Switching from a Debt Scheme to Equity scheme involves an entry load while the vice versa does not involve an entry load.

What is the applicable NAV for switch? Switch requests are effected the day the request for switch is received. The Applicable NAV for the switch will be the NAV on the day that the request for switch is received What is an Account Statement? An Account Statement is a non-transferable document that serves as a record of transactions between the fund and the investor. It contains details of the investor, the units allotted or redeemed and the date of transaction. The Account Statement is issued every time any transaction takes place. Who is a Registrar? A Registrar accepts and processes unitholders' applications, carries out communications with them, resolves their grievances and despatches Account Statements to them. In addition, the registrar also receives and processes redemption, repurchase and switch requests. The Registrar also maintains an updated and accurate register of unitholders of the Fund and other records as required by SEBI Regulations and the laws of India. An investor can get all the above facilities at the Investor Service Centres of the Registrar. Who is a custodian? Custodian is the agency which will have the physical possession of all the securities purchased by the mutual fund.

TOP

How do I track the performance of the Fund? The NAVs are published in financial newspapers and also available on the AMFI website on a daily basis. Can the NAV of a debt fund fall? A debt fund invests in fixed-income instruments, where safety of capital and regular returns are assured. 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 fixed-income instruments - and hence, the NAV of a debt fund. Thus it is a misnomer that the debt fund's NAV does not fall. What is a Systematic Investment Plan? This is an investment technique where you deposit a fixed, small amount regularly into the mutual fund scheme (every month or quarter as per your convenience) at the then prevailing NAV (Net Asset Value), subject to applicable load. What is a Systematic Withdrawal Plan? The unitholder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units. 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 BENCHMARK OTHER SCHEMES An investor should not only look at the returns given by the scheme he has invested in but also compare it with benchmarks like BSE Sensex, S & P Nifty, T-bill index etc depending on the asset class he has invested in. For a true picture it is advised that the returns should also be compared with the returns given by the other funds in the same category. Thus it is prudent to consider all the above-mentioned factors while comparing funds and not rely on any one of them in isolation. This is important because as of today there is no standard method for evaluation of un-traded securities.

TOP

What is CDSC? Contingent Deferred Sales Charge (CDSC) is a charge imposed on unit holders exiting from the scheme within 4 years of entry. It is intended to enable the AMC to recover expenses incurred for promotion or propagation of the scheme. Or Sometimes the selling expenses of the fund are not charged to the fund directly but are recovered from the unit holders whenever they redeem their units. This load is called a CDSC and is inversely proportional to the period of unit holding. What is the difference between contigent defered sales load and an exit load? Contingent Deferred Sales charge (CDSC) is a charge imposed when the units of a fund are redeemed during the first few years of ownership. Under the SEBI Regulations, a fund can charge CDSC to unit holders exiting from the scheme within the first four years of entry. Exit load is a fee an investor pays to a fund whenever he redeems his/her units. As per SEBI regulations, the maximum exit load applicable is 7%. There is a further stipulation by SEBI that the entry load and exit load put together cannot exceed 7% of the sale price. Does out performance of a benchmark index always connote good performance? No, it is not necessary that out performance of a benchmark index always connotes good performance. The volatility does not permit the investor to rely on one factor only. The index performance is volatile and may be driven by a few scrips only, which may not be very reflective. So it is better to keep other factors like risk adjusted returns (volatility of returns) and NAV movement in mind while deciding to invest in a fund. Does higher return necessarily mean a better fund? Yes, on the face of it high return does connote good fund but there is also some a risk taken by the scheme to achieve these returns. Thus it is prudent to measure risk alsowhile considering returns to rank a scheme. Today there are a lot of statistical tools like Beta, Sharpe ratio, Alpha and Standard Deviation to measure this risk. A risk adjusted return is the best measure to use while judging a scheme. You can also refer to the ratings assigned by a reputed rating agency. What should one keep in mind while choosing a good mutual fund? Each individual has different financial goals, based on lifestyle, financial independence and family commitments and level of incomes and expenses and many other factors. Thus before investing your money you need to analyze the following factors :

Define the Investment objective Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of income and expenses among many other factors. Therefore, the first step should be to assess your needs. You can begin by defining the investment objectives, which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs. Also your risk appetite and cash flow requirements need to be taken into account. Choose the right Mutual Fund Once the investment objective is clear in your mind the next step is choosing the right Mutual Fund scheme. Before choosing a mutual fund the following factors need to be considered: o NAV performance in the past track record of performance in terms of returns over the last few years in relation to appropriate yardsticks and other funds in the same category. o Risk in terms of volatility of returns o Services offered by the mutual fund and how investor friendly it is. o Transparency, which is reflected in the quality and frequency of its communications.

Go for a proper combination of schemes Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. What is meant by recurring sales expenses? The Asset management Company may charge the fund a fee for operating its schemes, like trustee fee, custodian fee, registrar fee, transfer fee etc. This fee is called recurring expense and is expressed as a percentage of the scheme's average net assets. The recurring expenses are subject to certain limits as per the regulations of SEBI. WEEKLY AVERAGE NET ASSETS EQUITY SCHEMES DEBT SCHEMES RS. FIRST 100 CRORES 2.50% 2.25% NEXT 300 CRORES 2.25% 2.00% NEXT 300 CRORES 2.00% 1.75% BALANCE ASSETS 1.75% 1.50%

Debt Funds FAQs What are Money Markets and money market instruments? Money markets allow banks to manage their liquidity as well as provide the Central Bank means to conduct monetary policy. Money markets are markets for debt instruments with a maturity up to one year. The most active part of the money market is the call money market (i.e. market for overnight and term money between banks and institutions) and the market for repo transactions. The former is in the form of loans and the latter are sale and buyback agreements - both are obviously not traded. The main traded instruments are Commercial Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).

TOP

Commercial Paper A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India Corporates, Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can issue these notes.

It is generally companies with very good ratings which are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular duration is 90 days. Companies use CPs to save interest costs Certificates of Deposit These are issued by banks in denominations of Rs 5 lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year. Treasury Bills Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days and 364 days. Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate debentures, bills of exchange and promissory notes. What are debt markets and debt market instruments? Typically those instruments that have a maturity of more than a year and the main types are -

Government Securities (G-secs or Gilts)

Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years. Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations (OMO) . OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels The other types of Government Securities are o o o Inflation linked bonds Zero coupon bonds State Government Securities (State Loans) TOP

Bonds/Debentures What is the difference between bonds and debentures? World over, a debenture is a debt security issued by a corporation that is not secured by specific assets, but rather by the general credit of the corporation. Stated assets secure a corporate bond, unlike a debenture. But in India these are used interchangeably. A bond is a promise in which the issuer agrees to pay a certain rate of interest, usually as a percentage of the bond's face value to the investor at specific periodicity over the life of the bond. Sometimes interest is also paid in the form of issuing the instrument at a discount to face value and subsequently redeeming it at par. Some bonds do not pay a fixed rate of interest but pay interest that is a mark-up on some benchmark rate.

Typically bonds are issued by PSUs, Public Financial Institutions and Corporates. Another distinction is SLR (Statutory Liquidity Ratio) and non-SLR bonds. SLR bonds are those bonds which are approved securities by RBI which fall under the SLR limits of banks. Statutory liquidity ratio(SLR): It is the percentage of total deposits a bank has to keep in approved securities. What affects bond prices? Largely it will be the interest rates and credit quality of the issuer.

Interest Rates : The price of a debenture is inversely proportional to changes in interest rates that in turn is dependent on various factors. When the interest rates fall down, the existing bonds will become more valuable and the prices will move up until the yields become the same as the new bonds issued during the lower interest rate scenario(for a detailed explanation see "what affects interest rates"). Credit Quality : When the credit quality of the issuer deteriorates, market expects higher interest from the company and the price of the bond falls and vice versa.

Another factor that determines the sensitivity of a bond is the "Maturity Period" - a longer maturity instrument will rise or fall more than a shorter maturity instrument. What affects interest rates? The factors are largely macro-economic in nature -

Demand/Supply of money : When economic growth is high, demand for money increases, pushing the interest rates up and vice versa. Government Borrowing and Fiscal Deficit : Since the government is the biggest borrower in the debt market, the level of borrowing also determines the interest rates. On the other hand, supply of money is done by the Central Bank by either printing more notes or through its Open Market Operations (OMO). RBI : RBI can change the key rates (CRR, SLR and bank rates) depending on the state of the economy or to combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates and the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determines the availability of credit and the level of money supply in the economy. (CRR is the percentage of its total deposits a bank has to keep with RBI in cash or near cash assets and SLR is the percentage of its total deposits a bank has to keep in approved securities. The purpose of CRR and SLR is to keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, it increases the money available for credit in the system. This eases the pressure on interest rates and interest rates move down. Also when money is available and that too at lower interest rates, it is given on credit to the industrial sector that pushes the economic growth)

Inflation Rate : Typically a higher inflation rate means higher interest rates. The interest rates prevailing in an economy at any point of time are nominal interest rates, i.e., real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease in purchasing power of every rupee earned on account of interest in the future; therefore the interest rates must include a premium for expected inflation. In the long run, other things being equal, interest rates rise one for one with rise in inflation.

TOP

What is Yield Curve? The relationship between time and yield on securities is called the Yield Curve. The relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. A yield curve can be positive, neutral or flat.

A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This is as a result of people demanding higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. This occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long-term yield is lower than the short-term yield. It is not often that this happens and has important economic ramifications when it does. It generally represents an impending downturn in the economy, where people are anticipating lower interest rates in the future.

What is Yield to Maturity (YTM)? Simply put, the annualised return an investor would get by holding a fixed income instrument until maturity. It is the composite rate of return of all payouts and coupon. What is Average Maturity Period? It is a weighted average of the maturities of all the instruments in a portfolio. What are LIBOR and MIBOR? LIBOR : Stands for London Inter Bank Offered rate. This is a very popular benchmark and is issued for US Dollar, GB Pound, Euro, Swiss Franc, Canadian Dollar and the Japanese Yen. The British Bankers Association (BBA) asks 16 banks to contribute the LIBOR for each maturity and for each currency. The BBA weeds out the best four and the worst four, calculates the average of the remaining eight and the value is published as LIBOR. MIBOR : Stands for Mumbai Inter Bank Offered Rate and is closely modeled on the LIBOR. Currently there are two calculating agents for the benchmark - Reuters and the National Stock Exchange (NSE). The NSE MIBOR benchmark is the more popular of the two and is based on rates polled by NSE from a representative panel of 31 banks/institutions/primary dealers

TOP

Credit Ratings What is a credit rating ? Credit Rating is an exercise conducted by a rating organisation to evaluate the credit worthiness of the issuer with respect to the instrument being issued or a general ability to pay back debt over the specified period of time. The rating is given as an alphanumeric code that represents a graded structure or creditworthiness. Typically the highest credit rating is that of AAA and the lowest being D (for default).

Within the same alphabet class, the rating agency might have different grades like A, AA and AAA and within the same grade AA+, AA- where the "+" denotes better than AA and "-" indicates the opposite. For short term instruments of less than a year maturity, the rating symbol would be typically "P" (varies depending on the rating agency). In India, currently we have four rating agencies -

CRISIL ICRA CARE Fitch

What is the "SO" in a rating ? [AAA(SO)] Sometimes, debt instruments are so structured that in case the issuer is unable to meet repayment obligations, another entity steps in to fulfill these obligations. A bond backed by the guarantee of the Government of India may be rated AAA (SO) with the SO standing for structured obligation Forex Markets How is a currency valued? The floating exchange rate system is a confluence of various demand and supply factors prevalent in an economy like -

Current account balance : The trade balance is the difference between the value of exports and imports. If India is exporting more than it is importing, it would have a positive trade balance with USA, leading to a higher demand for the home currency. As a result the demand will translate into appreciation of the currency and vice versa. Inflation rate : Theoretically, the rate of change in exchange rate is equal to the difference in inflation rates prevailing in the 2 countries. So, whenever, inflation in one country increases relative to the other country, its currency falls down. Interest rates : The funds will flow to that economy where the interest rates are higher resulting in more demand for that currency Speculation : Another important factor is the speculative and arbitrage activities of big players in the forex market which determines the direction of a currency. In the event of global turmoil, investors flock towards perceived safe haven currencies like US dollar resulting in a demand for that currency.

What are the implications of currency fluctuations on debt markets? Depreciation of a currency affects an economy in two ways, which are in a way counter to each other. On the one hand, it makes the exports of a country more competitive, thereby leading to an increase in exports. On the other hand, it decreases the value of a currency relative to other currencies, and hence imports like oil become dearer resulting in an increase of deficit. What does one mean by a currency being over valued? What is Real Effective Exchange Rate (REER)? When RBI says that the rupee is overvalued, they mean that it has been appreciating against other major currencies due to their weakening against dollar which might impact the competitiveness of India's exports. REER is the change in the external value of the currency in relation to its main trading partners. It is

Rupee's value on a trade-weighted basis. It takes into account the Rupee's value not only in terms of dollar but also Euro, Yen and Pound Sterling. The exchange rates versus other major currencies are average weighted by the value of India's trade with the respective countries and are then converted into a single index using a base period which is called the nominal effective exchange rate. But the relative competitiveness of Indian goods increases even when the nominal effective exchange rate remains unchanged when the rate of price increases of the trading partner surpasses that of India's. Taking this into account, prices are adjusted for the nominal effective exchange rate and this rate is called the "Real Effective Exchange Rate." EQUITY FUNDS FAQS

What are equity assets ? How does an investor in equities make money? Why do stock prices move up and down? What are main approaches used for analyzing stocks and forecasting future movements? What are equity markets? What are bonus issues and stock splits? What is their impact? What are ADRs and GDRs? What is margin trading? What are derivatives? What are the derivative products that are currently allowed in India? What are index futures? What are Options?

What are equity assets ? Corporate can raise money in two ways; by either borrowing (debt instruments) or issuing stocks (equity instruments) that represent ownership and a share of residual profits. The equity instruments are in turn typically of two types - common stock and preferred stocks. Common stock (or a share) : This represents an ownership position and provides voting rights. Preferred stock : It is a "hybrid" instrument since it has features of both common stock and bonds. Preferred-stock holders get paid dividends which are stated in either percentage-of-par (the value at which the stock is issued) or rupee terms. If the preferred stock had a Rs.100 par value, then a Rs.6 preferred stock would mean that a Rs. 6 per share per annum in dividends will be paid out. This fixed dividend gives a bond-like characteristic to the preferred stock.

TOP

How does an investor in equities make money? Investors get returns on their investments in two ways - dividend and capital gains. The former depends on earning levels of the particular company and the decision of its management. The latter arises happens when the market price of the shares rises above the level at which the investment was made. Say, you invested Rs.10,000 by buying 100 shares of X company at a price of Rs.50 and sold all the 100 shares later at a price of Rs.100, you would have made a capital gain of Rs.5000.

Sale value of Shares (Rs.100 x 100) Rs.10,000 Value of original investment (Rs.50 x 100) Rs. 5,000 Capital gain Rs. Rs.5,000

Why do stock prices move up and down? The market price of a particular share is dependent on the demand/supply for that particular scrip. If the players in the market feel that a particular company has a track record of good performance or has the potential to do well in the future, the demand for the shares of the company increases and players are willing to pay higher prices to buy the share. And since the number of shares issued by the company is constant at a given point in time, any increase in demand would only increase the market price. Fluctuations in a stock's price occur partly because companies make or lose money. But that is not the only reason. There are many other factors not directly related to the company or its sector. Interest rates, for instance. When interest rates on deposits or bonds are high, stock prices generally go down. In such a situation, investors can make a decent amount of money by keeping their money in banks or in bonds. Money supply may also affect stock prices. If there is more money floating around, some of it may flow into stocks, pushing up their prices. Other factors that cause price fluctuations are the time of year and public sentiments. Some stocks are seasonal, i.e cyclical stocks; they do well only during certain parts of the year and worse during other parts. Publicity also affects stock prices. If a newspaper story reports that Xee Television has bought a stake in Moon Television, odds are that the price of Xee's stock will rise if the market thinks its a good decision. Otherwise it will fall. The price of Moon Television stocks may also go up because investors may feel that it is now in better hands. Thus, many factors affect the price of a stock. What are main approaches used for analyzing stocks and forecasting future movements? The behaviour of the price movement of a stock is said to predict its future movement. One such approach is called technical analysis and is based on the historical movements of the individual stocks as well as the indices. Their belief is that by plotting the price movements over time, they can discern certain patterns which will help them to predict the future price movements of the stocks. On the other hand we have "fundamental analysis", where the forecasting is done on the basis of economic, industry and company data. Technical analysis is used more as a supplement to fundamental analysis rather than in isolation. What are equity markets? These are markets for financial assets that have long or indefinite maturity i.e, stocks. Typically such markets have two segments - primary and secondary markets. New issues are made in the primary market and outstanding issues are traded in the secondary market (i.e., the various stock exchanges) There are three ways a company can raise capital in the primary market -

Public Issue : Sale of fresh securities to the public Rights Issue : This is a method of raising capital existing shareholders by offering additional securities to them on a pre-emptive basis. Private Placement : Issuers make direct sales to investor groups i.e., there is no public issue.

What are bonus issues and stock splits? What is their impact? Bonus Issues : Instead of cash dividends, investors receive dividends in the form of a stock. The investor receives more shares when a bonus issue is announced. For example, when there is a bonus issue in the ratio of 1:1, the number of shares owned by an investor would double in number. However, the market price of the share would decrease as well at times the decrease might not be proportionate to the extent of bonus because market players might push the price up if they view the bonus issue as a positive development. Some companies might announce bonus issues to bring the market price of its share to a more popular range and also promote active trading by increasing the number of outstanding shares.

Stock Splits : Whenever a stock split occurs, the company ends up with more outstanding shares which will not only have a lower market price but also lower par value. Stock splits are prompted when the company thinks its stock price has risen to a level that is out of the "popular trading range". For example, X corporation has 1 million outstanding shares. The par value is Rs.10 and the current market price is Rs.1000 per share. If the management feels this price is resulting in a decrease in trading volumes, they can declare a 1-for-1 split. By doing this, there will be 2 million outstanding shares with a par value of Rs.5 and a theoretical market price of Rs.500 per share. Sometimes when the market price is very low, the company might announce a "reverse split" which has the opposite effect of the normal stock split. In the case of splits, there is no change in the reserves and surplus of the company unlike the bonus issue.

TOP

What are ADRs and GDRs? American Depositary Receipt (ADR): A security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. ADRs are issued to offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. The first ADR was issued in 1927. ADRs are listed on the NYSE, AMEX, or NASDAQ. Global Depository Receipt (GDR) : Similar to the ADR described above, except the GDR is usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990. They are shares without voting rights. The ratio of one depository receipt to the number of shares is fixed per scrip but the quoted prices may not have strict correlation with the ratio. Any foreigner may purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right. What is margin trading? Securities can be paid for in cash or a mix of cash and some borrowed funds. Buying with borrowed funds permits the investors to buy a security at a good price at a good time. This act of borrowing money from a bank or a broker to execute a securities transaction is referred to as using "margin". As of now in India, only brokers are allowed to provide the margins. Traders can put up part of the payment. Brokers borrow the remaining funds from a moneylender with whom they would lodge the shares as collateral for the loan. The safety of this mechanism rests on the risk management capabilities of both the stockbroker and the lender. However, recently SEBI has proposed to RBI that banks could lend to exchanges on margin trading and the exchanges could provide assistance to brokers. When this happens, the volumes should increase in the markets making them more vibrant.

TOP

What are derivatives? s A derivative is an instrument whose value is derived from the value of one or more underlying security,

which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. What are the derivative products that are currently allowed in India? The index futures were introduced in June 2000. One year later, index options and stock options were introduced as SEBI banned the age-old badla system (which was a combination of both forward and margin trading). What are index futures? In a forward contract, two parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No money changes hands at the time the trade is agreed upon. Currently in India, index futures are allowed. These are nothing but future contracts with the underlying security being the cash market index. Index futures of different maturities would trade simultaneously on the exchanges. For instance, BSE may introduce three contracts on BSE sensitive index for one, two and three months maturities. These contracts of different maturities may be called near month (one month), middle month (two months) and far month (three months) contracts. The month in which a contract will expiry is called the contract month. For example, contract month of "Nov. 2001 contract" will be November, 2001. All these contracts will expire on a specific day of the month (expiry day for the contract) say on last Wednesday or Thursday or any other day of the month; this would be defined in the contract specification before introduction of trading. What are Options? Options give a buyer the right to buy a scrip and the seller the right to sell a scrip at a pre-determined price on a particular date. Unlike futures contract, there is no obligation only a "right" There are two types of Options:

Call Option : Here, the buyer decides to buy a scrip at a particular price on a particular date. For e.g the buyer takes a call Option on RIL @Rs.150 after 3 months. For this, he pays a premium which is determined by the demand-supply equation. For e.g, if a particular stock is in favour with investors, there would be more people willing to buy the stock at a future date, resulting in a higher premium. In this example, let us assume the premium is Rs.10. Put Option : This is used to manage downside risk. A seller today agrees to sell TISCO @Rs.130 after 3 months and pays the required premium. If the price of TISCO is in excess of Rs.130, he decides not to sell and loses the premium (which is the profit of the Option Writer). However, if the price is below Rs.130, he "calls" his right and cushions his loss.

The Option Buyer has the right to exercise his choice of buying or selling in the Call and Put Option respectively. The Option Writer or Seller has to meet his commitment based on the choice exercised by the Option Buyer. Options have finite maturities. The expiry date of the Option is the last day (which is pre-determined) when the owner can exercise his Option. What are the main differences between options and futures?

With futures, both parties are obligated to perform. With options only the seller (writer) is obligated to perform. With options, the buyer pays the seller (writer) a premium. With futures, no premium is paid by either party.

With futures, the holder of the contract is exposed to the entire spectrum of downside risk and has the potential for all the upside return. With options, the buyer limits the downside risk to the option premium but retains the upside potential. The parties to a futures contract must perform at the settlement date. They are not obligated to perform before that date. The buyer of an options contract can exercise any time prior to the expiration date.