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MUTUAL FUND AND TYPES OF MUTUAL FUND a) What is a Mutual Fund?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme is 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 portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

b) Types of Mutual Funds

This section provides descriptions of the characteristics -- such as investment objective and potential for volatility of your investment -- of various categories of funds. These descriptions are organized by the type of securities purchased by each fund: equities, fixed-income, money market instruments, or some combination of these. Organization of fund types is done to show how aggressive or conservative they are and what is the investment objective. Because mutual funds have specific investment objectives such as growth of capital, safety of principal, current income or tax-exempt income, one can select one fund or any number of different funds to help investor meet her specific goals. In general mutual funds fall into these general categories: 1. Equity Funds invest in shares of common stocks. 2. Fixed-Income Funds invest in government or corporate securities which offer fixed rates of return. 3. Balanced Funds invest in a combination of both stocks and bonds. 4. Money Market Funds for high stability of principal, liquidity and income. 5. Bond Funds, both tax-exempt and taxable funds to generate income. 6. Specialty/Sector Funds to diversify holdings within an industry. Equity Funds i. Aggressive Growth Funds These funds seek maximum growth of capital with secondary emphasis on dividend or interest income. They invest in common stocks with a high potential for rapid growth and capital appreciation. Because they invest in stocks which can experience wide swings up or down, these funds have a relatively low stability of principal. They often invest in the stocks of small emerging growth companies and generally provide low current income because these companies usually reinvest their profits in their businesses and pay small dividends, if any. Aggressive growth funds generally incur higher risks than growth funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries

or concentrate on one or more industry sectors. Some use borrowing, short-selling, options and other speculative strategies to leverage their results. This type of mutual fund is suitable for investors who can assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income. ii) Growth Funds Generally invest in stocks for growth rather than current income. Growth funds are more likely to invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential. Growth funds provide low current income, but the investor's principal is more stable than it would be in an aggressive growth fund. While the growth potential may be less over the short term, many growth funds have superior long-term performance records. They are less likely than aggressive growth funds to invest in smaller companies which may provide short-term substantial gains at the risk of substantial declines. Although growth funds are more conservative than aggressive growth funds, they are still relatively volatile. They are suitable for growth-oriented investors but not investors who are unable to assume risk or who are dependent on maximizing current income from their investments. iii) International/Global Funds International funds seek growth through investments in companies outside India. Global funds seek growth by investing in securities around the world, including India. Both provide investors with another opportunity to diversify their mutual fund portfolio, since foreign markets do not always move in the same direction as India. The best way to invest abroad is through mutual funds, rather than direct investment in a foreign security. Most investors are unfamiliar with foreign investment practices and currencies and may not have a clear understanding of how economic or political events can affect foreign securities. An investor in an international mutual fund doesn't have to

worry about trading practices, recordkeeping, time zones or other laws and customs of a foreign country -- that is all handled by the fund's money manager. International and global funds can invest in common stocks or bonds of foreign firms and governments. Many international funds invest in a particular country or region of the world. While international and global funds offer opportunities for growth and diversification, these types of funds do carry some additional risks over domestic funds and should be carefully evaluated and selected according to the investor's objectives, timeframe and risk profile. Because most international and global funds are considered to be aggressive growth funds or growth funds, investors must be willing to assume the risk of potential loss in value in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income. iv) Growth and Income Funds Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed-income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks. Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income. 1. Fixed-Income Funds The goal of fixed income funds is to provide high current income consistent with the preservation of capital. Growth of capital is of secondary importance.

Income funds that invest primarily in common stocks are classified as equity income funds. Those that invest primarily in bonds and preferred stocks are classified as fixedincome funds. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Since bond prices fluctuate with changing interest rates, there is some risk involved despite the fund's conservative nature. When interest rates rise, the market price of fixedincome securities declines and so will the value of the income funds' investments. Conversely, in periods of declining interest rates, the value of fixed-income funds will rise and investors will enjoy capital appreciation as well as income. Fixed-income funds offer a higher level of current income than money market funds, but a lower stability of principal. They are generally more stable in price than funds that invest in stocks. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities. Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of Indian Government. These include securities like various Treasury bills, government dated securities, etc. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so. Again, carefully read the prospectus to learn if a fund's investment policy with respect to yield and risk coincides with your own objectives. 2. Balanced/Equity Income funds Equity income funds seek high current yield by investing primarily in equity securities of companies which pay high dividends. Unlike interest payments on bonds, dividends on equity securities can change as companies raise or lower their dividends. Since yieldoriented stocks are more volatile than comparably rated fixed-income securities, equity

income funds offer less stability of principal than fixed-income funds. Balanced funds are more evenly invested in equities and income securities. Balanced and equity income funds are suitable for conservative investors who want high current yield with some growth. 3. Money Market Funds For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly-liquid, virtually riskfree, short-term debt securities of agencies of the Government, banks and corporations and Treasury Bills. They have no potential for capital appreciation. Tax-exempt money market funds invest in securities that provide safety of principal, liquidity and income exempt from federal income taxes by investing in short-term, highrated municipal obligations. Because of their short-term investments, money market mutual funds are able to keep a constant share price; only the yield fluctuates. Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with -- and usually somewhat higher than -- yields on bank certificates of deposit (CDs), they offer several advantages: o Money can be withdrawn any time without penalty. Money market funds also offer check writing privileges. o Money market funds invest only in highly-liquid, short-term, top-rated money market instruments. o Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity. Money market funds are suitable for conservative investors who want high stability of principal and moderate current income with immediate liquidity. 4. Municipal Bond Funds

Municipal bond funds provide higher tax-exempt income than tax-exempt money market funds by investing in longer-maturity (and often lower-rated) securities, which generally offer higher yields than the short-term, high-rated securities in which tax-exempt money market funds invest. Municipal bond funds vary greatly in the quality and maturity of the municipal bonds they invest in. The longer the maturity, the higher the yield. Also, the lower the credit rating of the issuer, the greater is the risk and the higher the yield. While municipal bond funds generally provide lower yields than income funds with debt obligations of similar maturities and ratings, for an investor in a high marginal tax bracket the after-tax yields of municipal bond funds will be higher. The price and yield of municipal bond funds will fluctuate moderately with interest rates. As interest rates decline, the value of principal increases while yield decreases; as rates increase, bond prices decline but yields increase. Suitable for investors in medium to higher tax brackets who want current income free from federal income tax. 5. Double & Triple Tax-Exempt Bond Funds These bond funds provide the investor with an even greater tax advantage by investing in municipal bonds of a single state. Triple tax-exempt funds are exempt from income tax in a specific city. Thus they generate income exempt from not only federal income tax but also from state and/or city income tax for residents of those jurisdictions. Like all bond funds, the value of the shares will fluctuate with interest rates, as will the current yield. Also, the stability of principal and yield levels varies with the quality and maturity length of the bonds in which the funds invest. Lack of geographic diversification increases credit risk of these funds compared with national funds. These funds are suitable for investors in medium to high tax brackets in high tax states who want income with maximum exemption from taxes. 6. Specialty/Sector Funds These funds invest in securities of a specific industry or sector of the economy such as health care, high technology, leisure, utilities or precious metals. Because such funds invest primarily in one sector, they do not offer the element of downside risk protection found in mutual funds that

invest in a broad range of industries. However, the funds do enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company. Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly-diversified portfolio and attempt to mirror the performance of various market averages. Index funds generally buy shares in all the companies composing the S&P 500 Stock Index or other broad stock market indices. Asset allocation funds move funds among a variety of markets and instruments in response to the fund manager's view of relative market prospects. They are broadly diversified and sometimes have higher management fees since there may be a variety of securities in the portfolio. These funds are suitable for investors, who can tolerate a moderate to high degree of risk, are seeking capital appreciation and to whom dividend income is secondary in importance. And whatever the instruments, social responsibility funds apply moral and ethical as well as economic principles in the selection of securities. Specialty funds are suitable for investors seeking to invest in a particular industry who can monitor industry performance regularly and alter investment strategies accordingly. Investors must be willing to assume the risk of potential loss in value of their investment in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income. c) Types of Mutual Funds Best Suited to Particular Investment Objective.

Basic Objective

Fund Type

Funds Investment

Capital Appreciation

Potential Current Income

Potential Risk

Aggressive Growth Common stocks with Maximum Capital Growth International potential for very rapid growth. May employ certain aggressive Growth strategies Very High Very Low High to Very High

Specialty/ sector Common High Capital International Growth Growth & Income stocks with long-term growth potential High to Very High

Very Low

High

Common Current Income & Capital Growth Fixed Income stocks with potential for high dividends and capital appreciation Moderate Moderate Moderate to High

Equity Income High Current Income General Money Market Funds Both highdividendpaying stocks & bonds Very Low High to Very High Low to Moderate

Current Income & Protection of Principal

Tax-Exempt Money Market

Money market instruments

None

Moderate to High

Very Low

Tax-Free Income & Protection of Principal Current Income & Maximum Safety of Principal Government Money Market Municipal Bonds U.S.

Short-term municipal notes and bonds U.S. Treasury and agency issues guaranteed by the U.S. Government Low to A broad range Moderate Moderate to High Low to Moderate None Moderate to High Low None Moderate to High Low

Tax-Exempt Income

Double & Triple Tax-

Exempt

of municipal bonds

d) The Benefits of Mutual Funds 1. Professional Investment Management. By pooling the funds of thousands of investors, mutual funds provide full-time, high-level professional management that few individual investors can afford to obtain independently. Such management is vital to achieving results in today's complex markets. The fund managers interests are tied to investors interest, because their compensation is based not on sales commissions, but on how well the fund performs. These managers have instantaneous access to crucial market information and are able to execute trades on the largest and most cost-effective scale. In short, managing investments is a full-time job for professionals. 2. Diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund shareowners can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 3. Low Cost. If investor tries to create her own diversified portfolio of 50 stocks, she needs at least Rs.1,00,000 and pays thousands of rupees in commissions to assemble a portfolio. Mutual fund lets investor participate in a diversified portfolio for as little as Rs.1,000 and sometimes less. And if investor buys a no-load fund, then pays no sale charges to own them.

4. Conveniences and Flexibility. Investor owns just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, clip the bond coupons, collect the interest payments and see that dividends on portfolio securities are received

and investors are rights exercised. It's easy to purchase and redeem mutual fund shares, either directly online or with a phone call. 5. Quick, Personalized Service. Most funds now offer extensive websites with a host of shareholder services for immediate access to information about investors fund accounts. Or a phone call puts an investor in touch with a trained investment specialist at a mutual fund company who can provide information investor can use to make her own investment choices, assist her with buying and selling her fund shares, and answer questions about her account status. 6. Ease of Investing Investor may open or add to her account and conduct transactions or business with the fund by mail, telephone or bank wire. Investor can even arrange for automatic monthly investments by authorizing electronic fund transfers from her checking account in any amount and on a date she choose. Also, many of the companies allow account transactions online. 7. Total Liquidity, Easy Withdrawal Investor can easily redeem her shares anytime she needs cash by letter, telephone, bank wire or check, depending on the fund. Investors proceeds are usually available within a day or two. 8. Life Cycle Planning With no-load mutual funds, investor can link her investment plans to future individual and family needs -- and make changes as her life cycles change. Investor can invest in growth funds for future college tuition needs, then move to income funds for retirement, and adjust her investments as needs change throughout her life. With no-load funds, there are no commissions to pay when investor change her investments. 9. Market Cycle Planning For investors who understand how to actively manage their portfolio, mutual fund investments can be moved as market conditions change. Investor funds in equities when the market is on the upswing and move into money market funds on the downswing or take any number of steps to ensure that her investments are meeting her needs in changing market climates. Since it is

impossible to predict what the market will do at any point in time, staying on course with a longterm, diversified investment view is recommended for most investors. 10. Investor Information Shareholders receive regular reports from the funds, including details of transactions on a yearto-date basis. The current net asset value of investors shares (the price at which you may purchase or redeem them) appears in the mutual fund price listings of daily newspapers. Investor can also obtain pricing and performance results for the all mutual funds at this site, or it can be obtained by phone from the fund. 11. Periodic Withdrawals If investor wants steady monthly income, many funds allow her to arrange for monthly fixed checks to be sent to her, first by distributing some or all of the income and then, if necessary, by dipping into her principal. 12. Dividend Options Investor can receive all dividend payments in cash. Or investor can have them reinvested in the fund free of charge, in which case the dividends are automatically compounded. This can make a significant contribution to investors long-term investment results. With some funds investors can elect to have their dividends from income paid in cash and capital gains distributions reinvested. 13. Automatic Direct Deposit Investor can usually arrange to have regular, third-party payments -- such as Social Security or pension checks -- deposited directly into investors fund account. This puts investors money to work immediately, without waiting to clear her checking account, and it saves one from worrying about checks being lost in the mail. 14. Safekeeping When investor own shares in a mutual fund, she own securities in many companies without having to worry about keeping stock certificates in safe deposit boxes or sending them by registered mail. Investor doesnt even have to worry about handling the mutual fund stock

certificates; the fund maintains her account on its books and sends one periodic statements keeping track of all her transactions. 15. Online Services The internet provides a fast, convenient way for investors to access financial information. A host of services are available to the online investor including direct access to no-load companies.

17. Asset Management Accounts These master accounts, available from many of the larger fund groups, enable an investor to manage all her financial service needs under a single umbrella from unlimited check writing and automatic bill paying to discount brokerage and credit card accounts.