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    Mutual funds are a popular investment for many types of investors because they offer a convenient Mutual funds are a popular investment for many types of investors because they offer a convenient Document Transcript

    • Mutual funds are a popular investment for many types of investors because they offer aconvenient, cost-effective and easy way to invest in the financial markets.What is a Mutual Fund?What is a mutual fund?A mutual fund is a professionally managed investment company that combines themoney of many individuals and invests this “pooled” money in a wide variety of differentsecurities.It is by pooling the money of many individuals that mutual funds are able to provide thediversification and money management (along with many other advantages) that wereonce reserved only for the wealthy.Professional money managers take this pool of money and invest it in a wide variety ofstocks, bonds, or other securities depending on the investment objective, or goal, of theparticular fund. It is the investment objective of the fund that guides the manager inselecting the various securities for the fund.It is the investment objective of the mutual fund that also guides the investor on whichfunds to invest in. Since different investors have different objectives, there are a numberof different kinds of mutual funds, i.e., some mutual funds may provide monthly incomewhile others seek long-term capital appreciation.Mutual funds can be classified according to their investment objective. Some of theclassifications include money market funds, growth funds, balanced funds, income funds,and many others.A mutual fund company pools the money of many investors and invests it for them in acollection of securities by purchasing stocks, bonds, money markets and/or othersecurities. These securities are often referred to as holdings and all of the fundsholdings combined make up the portfolio. The assets in a mutual funds portfolio aremanaged by a professional money manager(s) who decides which securities to buy andsell based on the funds investment objective, detailed in the funds prospectus.When you invest in a mutual fund, you are actually buying shares in the fund, whichmeans you own a small percentage of the funds entire portfolio. These shares are afractional representation of the entire mutual funds diversified holdings. The price of ashare at any time is called the funds net asset value, or NAV. If you invest $1,000 in amutual fund with an NAV of $24.75, you will receive 40.40 shares of that fund. (Unlikestocks, you can own fractional shares in a mutual fund). When the value of the portfolioincreases, the value of your investment also increases. If, however, the value of the funddecreases, your investment value will decrease as well.
    • The primary asset categories found in mutual funds are money markets, bonds, and/orstocks. Mutual funds may invest in a single asset class or a combination of all.Maintaining the weight of each category and the decision on when to buy or sell is thefunction of the mutual funds manager(s). Typically, the fund category indicates theprimary investments (holdings) of the fund. For example, a fund that holds 85% stocks,10% bonds and 5% cash equivalents is typically categorized as a stock fund.CURRENT SCENARIO IN MF INDUSTRYThe Indian Mutual fund industry has witnessed considerable growth since its inception in1963. The assets under management (AUM) have surged to Rs 4,173 bn in Mar-09 fromjust Rs 250 mn in Mar-65. In a span of 10 years (from 1999 to 2009), the industry hasregistered a CAGR of 22.3%, albeit encompassing some shortfalls in AUM due tobusiness cycles.The impressive growth in the Indian Mutual fund industry in recent years can largely beattributed to various factors such as rising household savings, comprehensive regulatoryframework, favourable tax policies, introduction of several new products, investoreducation campaign and role of distributors.In the last few years, household’s income levels have grown significantly, leading tocommensurate increase in household’s savings. Household financial savings (at currentprices) registered growth rate of around 17.4% on an average during the period FY04-FY08 as against 11.8% on an average during the period FY99-FY03. The considerablerise in household’s financial savings, point towards the huge market potential of theMutual fund industry in India.Besides, SEBI has introduced various regulatory measures in order to protect the interestof small investors that augurs well for the long term growth of the industry. The taxbenefits allowed on mutual fund schemes (for example investment made in EquityLinked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of theIncome Tax Act) also have helped mutual funds to evolve as the preferred form ofinvestment among the salaried income earners.Besides, the Indian Mutual fund industry that started with traditional products like equityfund, debt fund and balanced fund has significantly expanded its product portfolio.Today, the industry has introduced an array of products such as liquid/money marketfunds, sector-specific funds, index funds, gilt funds, capital protection oriented schemes,special category funds, insurance linked funds, exchange traded funds, etc. It also hasintroduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold orgold related instruments. Further, the industry has launched special schemes to invest inforeign securities. The wide variety of schemes offered by the Indian Mutual fundindustry provides multiple options of investment to common man.Impact of the Global Financial Crisis
    • Deepening of the global financial crisis during September 2008, which resulted inliquidity crunch world-over, had dampening impact of the Indian Mutual fund industry.With the drying up of credit inflows from banks and external commercial borrowingsroute, mutual funds witnessed redemption pressure from corporates. Although the mutualfunds promised immediate redemption, their assets were relatively illiquid. Besides,mutual funds faced problems such as maturity mismatches between assets & liabilities ofmutual funds, shift from mutual funds to bank deposits in view of the comparativelyhigher interest rates being offered by banks and freezing up of money markets due to lackof buyers for assets like certificates of deposits of private sector banks.During Apr-Sep 08, net mobilisation of funds by mutual funds declined sharply by 97.7%to Rs 24.8 bn due to uncertain conditions prevailing in the domestic stock markets. Theredemption pressures witnessed by mutual funds led to net outflows under both theincome/debt-oriented schemes and growth/equity-oriented schemes. Further, the AUM ofMutual fund industry contracted by 20.7% from Rs 5,445.4 bn as on August 31, 2008 toRs 4,319.0 bn as on October 31, 2008. During the same period, liquid and debt schemeswhich contribute more than 65% to the total AUM witnessed a decline of 19% in AUM.In an endeavour to ease liquidity pressures in the system and restore stability in thedomestic financial markets, the RBI announced a slew of measures. The key measuresannounced by the RBI include:The RBI decided to conduct a special 14 day repo at 9% per annum for a notified amountof Rs 200 bn from October 14, 2008 with a view to enable banks to meet the liquidityrequirements of mutual funds.Scheduled Commercial Banks (SCBs) and All India term lending and refinancinginstitutions were allowed to lend against and buy back CDs held by mutual funds for aperiod of 15 days.As a temporary measure, banks were allowed to avail of additional liquidity supportexclusively for the purpose of meeting the liquidity requirements of mutual funds to theextent of up to 0.5% of their net demand and time liabilities (NDTL). Accordingly onNovember 1, 2008, it was decided to extend this facility and allow banks to availliquidity support under the LAF through relaxation in the maintenance of SLR to theextent of up to 1.5% of their NDTL. This relaxation in SLR was provided for the purposeof meeting the funding requirements of NBFCs and mutual funds.The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund) Regulations,1996 was enhanced from 20% of net asset of the scheme to 40% of net asset of thescheme to those mutual funds who approached SEBI. This enhanced borrowing limit wasmade available for a period of six months and could be utilised for the purpose ofredemptions/ repurchase of units.In order to moderate the exit from close ended debt schemes and in the interest of thoseinvestors who choose to remain till maturity and with a view to ensure that the value ofdebt securities reflects the current market scenario in calculation of NAV, the discretiongiven to mutual funds to mark up/ mark down the benchmark yields for debt instrumentsof more than 182 days maturity was enhanced from 150 basis points to 650 basis points.
    • The significant reduction in CRR & SLR, net injection of Rs 9,279 bn through the repowindow during Oct-08, the repurchase of MSS bonds worth Rs 200 bn along with theearlier mentioned liquidity augmentation measures helped to ease liquidity pressures fordomestic mutual funds. The data reveals that about 18 mutual funds borrowed frombanks. Further, the increase of borrowing limits enabled the mutual funds to meetredemption pressures without engaging in a large scale sale of assets which could havecaused systemic instability. As on November 10, 2008, 15 mutual funds had beenextended the enhanced borrowing limit as per their requests made to SEBI.However, with some recovery in the Indian financial markets as well as improvement inthe liquidity conditions, the RBI in it’s Q2 FY10 review of monetary policy withdrewsome liquidity boosting measures that were introduced as a part of monetary stimulus inFY09. The special term repo facility for SCBs, for funding to NBFCs, mutual funds, andhousing finance companies was terminated.MUTUAL FUNDS SCHEMESThere are a wide variety of Mutual Fund schemes that cater to your needs, whatever yourage, financial position, risk tolerance and return expectations. Whether as the foundationof your investment programme or as a supplement, Mutual Fund schemes can help youmeet your financial goals?(A) By StructureOpen-Ended SchemesThese do not have a fixed maturity.You deal with the Mutual Fund for your investmentsand redemptions.The key feature is liquidity.You can conveniently buy and sell yourunits at Net Asset Value(NAV) related prices, at any point of time.close ended schemes.Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are calledclose ended schemes. You can invest in the scheme at the time of the initial issue andthereafter you can buy or sell the units of the scheme on the stock exchanges where theyare listed. The market price at the stock exchange could vary from the scheme’sNAV onaccount of demand and supply situation, unitholders’ expectations and other marketfactors. One of the characteristics of the close-ended schemes is that they are generallytraded at a discount to NAV; but closer to maturity, the discount narrows.Some close-ended schemes give you anadditional option of selling your units to the Mutual Fund through periodic repurchase atNAV related prices. SEBI Regulations ensure that at least one of the two exit routes areprovided to the investor under the close ended schemes.Interval Schemes
    • These combine the features of open-ended and close-ended schemes. They may be tradedon the stock exchange or may be open for sale or redemption during predeterminedintervals at NAV related prices.(B) By Investment ObjectiveGrowth SchemesAim to provide capital appreciation over the medium to long term. These schemesnormally invest a majority of their funds in equities and are willing to bear short termdecline in value for possible future appreciation.These schemes are not for investors seeking regular income or needing their money backin the short term.Income SchemesIncome Schemes Aim to provide regular and steady income to investors. These schemesgenerally invest infixed income securities such as bonds and corporate debentures. Capital appreciation insuch schemes may be limited.Ideal for:Retired people and others with a need for capital stability and regular income.Investors who need some income to supplement their earnings.Balanced SchemesAim to provide both growth and income by periodically distributing a part of the incomeand capital gains they earn. They invest in both shares and fixed income securities in theproportion indicated in their offer documents. In a rising stock market, the NAV of theseschemes may not normally keep pace or fall equally when the market falls.Ideal for:Investors looking for a combination of income and moderate growth.Money Market / Liquid SchemesAim to provide easy liquidity, preservation of capital and moderate income. Theseschemes generally invest in safer, short term instruments such as treasury bills,certificates of deposit, commercial paper and interbank call money. Returns on theseschemes may fluctuate, depending upon the interest rates prevailing in the market.Ideal for:
    • Corporates and individual investors as a means to park their surplus funds for shortperiods or awaiting a more favourable investment alternative.Tax Saving Schemes (Equity Linked Saving Scheme - ELSS)These schemes offer tax incentives to the investors under tax laws as prescribed fromtime to time and promote long term investments in equities through MutualFunds.Eligible for deduction under section 80C .Lock in period three yearsIdeal for:Investors seeking tax incentives.Special SchemesThis category includes index schemes that attempt to replicate the performance of aparticular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemeswhich invest in specific sectors such asTechnology, Infrastructure, Banking, Pharma etc.Besides, there are also schemes whichinvest exclusively in certain segments of the capital market, such as Large Caps, MidCaps, Small Caps, Micro Caps, A group shares, shares issued through Initial PublicOfferings (IPOs), etc.Index fundIndex fund schemes are ideal for investors who are satisfied with a return approximatelyequal to that of an index.Sectoral fund schemesSectoral fund schemes are ideal for investors who have already decided to invest in aparticular sector or segment.Fixed Maturity PlanFixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and areclose ended with a fixed tenure, the maturity period ranging from one month to three/fiveyears. These plans are predominantly debt-oriented, while some of them may have asmall equity component. The objective of such a scheme is to generate steady returnsover a fixed-maturity period and protect the investor against market fluctuations.FMPs are typically passively managed fixed income schemes with the fund managerlocking into investments with maturities corresponding with the maturity of the plan.FMPs are not guaranteed products.ExchangeTraded FundsExchange Traded Funds are essentially index funds that are listed and traded onexchanges like Index fund schemes are ideal for investors who are satisfied with a returnapproximately equal to that of an index. Globally, ETFs have opened a whole new
    • panorama of investment opportunities to retail as well as institutional investors. ETFsenable investors to gain broad exposure to entire stock markets as well as in specificsectors with relative ease, on a real-time basis and at a lower cost than many other formsof investing.An ETF is a basket of stocks that reflects the composition of an index, like S&P CNXNifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETFs tradingvalue is based on the net asset value of the underlying stocks that it represents. It can becompared to a stock that can be bought or sold on real time basis during the market hours.The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12,2001 and listed on the NSE on January 8, 2002.Capital Protection Oriented SchemesCapital Protection Oriented Schemes are schemes that endeavour to protect the capital asthe primary objective by investing in high quality fixed income securities and generatecapital appreciation by investing in equity / equity related instruments as a secondaryobjective. The first Capital Protection Oriented Fund in India, Franklin TempletonCapital Protection Oriented Fund opened for subscription on October 31,2006. Gold Exchange Traded Funds offer investors an innovative, cost-efficient andsecure way to access the gold market. Gold ETFs are intended to offer investors a meansof participating in the gold bullion market by buying and selling units on the StockExchanges, without taking physical delivery of gold. The first Gold ETF in India,Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSEon April 17, 2007.Quantitative FundsA quantitative fund is an investment fund that selects securities based on quantitativeanalysis. The managers of such funds build computer based models to determine whetheror not an investment is attractive. In a pure "quant shop" the final decision to buy or sellis made by the model. However, there is a middle ground wherethe fund manager will use human judgment in addition to a quantitative model. The firstQuant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription onOctober 25, 2007.Funds Investing AbroadWith the opening up of the Indian economy, Mutual Funds have been permitted to investin foreign securities/ American Depository Receipts (ADRs) / Global DepositoryReceipts (GDRs). Some of such schemes are dedicated funds for investment abroad whileothers invest partly in foreign securities and partly in domesticsecurities. While most such schemes invest in securities across the world there are alsoschemes which are country specific in their investment approach.Fund of Funds (FOFs)
    • Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio ofthese schemes comprise only of units of other mutual fund schemes and cash / moneymarket securities/ short term deposits pendingdeployment. The first FOF was launched by Franklin Templeton Mutual Fund onOctober 17, 2003. Fund of Funds can be Sector specific e.g. Real Estate FOFs, Themespecific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specifice.g.Aggressive/ Cautious FOFs etc.How Mutual Funds WorkEvery mutual fund has a goal - either growing its assets (capital gains) and/or generatingincome (dividends) for its investors. Distributions in the form of capital gains (short-termand long-term) and dividends may be passed on (paid) to shareholders as income orreinvested to purchase more shares. For tax purposes, keep track of your distributionsand cost basis of purchased/reinvested shares.Like any business, mutual funds have risks and costs associated with returns. As ashareholder, the risks of a fund and the expenses associated with funds operation directlyimpact your return.ReturnsAs an investor, you want to know the funds return-its track record over a specified periodof time. So what exactly is "return?"A mutual funds return is the rate of increase or decrease in its value over a specificperiod of time usually expressed in the following increments: one, three, five, and tenyear, year to date, and since the inception of the fund. Since return is a common measureof performance, you can use it to evaluate and compare mutual funds within the samefund category. Generally expressed as an annualized percentage rate, return is calculatedassuming that all distributions from the fund are reinvested.Since average returns can sometimes "hide" short-term highs and lows, you shouldevaluate returns for a time period of several years-not just one year or less. A fund thathas a high return in one year may have experienced losses in other years-thesefluctuations may not be apparent in its average return. While a funds return shows itstrack record, keep in mind that past performance is no guarantee of future results.When using returns to compare funds, always use net returns. Net returns are the truereturns of both load and no-load funds after deducting all costs and expenses.
    • RiskEvery type of investment, including mutual funds, involves risk. Risk refers to thepossibility that you will lose money (both principal and any earnings) or fail to makemoney on an investment. A funds investment objective and its holdings are influentialfactors in determining how risky a fund is. Reading the prospectus will help you tounderstand the risk associated with that particular fund.Generally speaking, risk and potential return are related. This is the risk/return trade-off.Higher risks are usually taken with the expectation of higher returns at the cost ofincreased volatility. While a fund with higher risk has the potential for higher return, italso has the greater potential for losses or negative returns. The school of thought wheninvesting in mutual funds suggests that the longer your investment time horizon is theless affected you should be by short-term volatility. Therefore, the shorter yourinvestment time horizon, the more concerned you should be with short-term volatility andhigher risk.How do the professionals manage risk? click hereDefining Mutual fund riskDifferent mutual fund categories as previously defined have inherently different riskcharacteristics and should not be compared side by side. A bond fund with below-averagerisk, for example, should not be compared to a stock fund with below average risk. Eventhough both funds have low risk for their respective categories, stock funds overall have ahigher risk/return potential than bond funds.Of all the asset classes, cash investments (i.e. money markets) offer the greatest pricestability but have yielded the lowest long-term returns. Bonds typically experience moreshort-term price swings, and in turn have generated higher long-term returns. However,stocks historically have been subject to the greatest short-term price fluctuations—andhave provided the highest long-term returns. Investors looking for a fund whichincorporates all asset classes may consider a balanced or hybrid mutual fund. Thesefunds can be very conservative or very aggressive. Asset allocation portfolios are mutualfunds that invest in other mutual funds with different asset classes. At the discretion ofthe manager(s), securities are bought, sold, and shifted between funds with different assetclasses according to market conditions.Mutual funds face risks based on the investments they hold. For example, a bond fundfaces interest rate risk and income risk. Bond values are inversely related to interestrates. If interest rates go up, bond values will go down and vice versa. Bond income isalso affected by the change in interest rates. Bond yields are directly related to interestrates falling as interest rates fall and rising as interest rise. Income risk is greater for ashort-term bond fund than for a long-term bond fund.
    • Similarly, a sector stock fund (which invests in a single industry, such astelecommunications) is at risk that its price will decline due to developments in itsindustry. A stock fund that invests across many industries is more sheltered from this riskdefined as industry risk.Following is a glossary of some risks to consider when investing in mutual funds.Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem—or call—its high-yielding bond before the bonds maturity date.Country Risk. The possibility that political events (a war, national elections), financialproblems (rising inflation, government default), or natural disasters (an earthquake, apoor harvest) will weaken a countrys economy and cause investments in that country todecline.Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in atimely manner. Also called default risk.Currency Risk. The possibility that returns could be reduced for Americans investing inforeign securities because of a rise in the value of the U.S. dollar against foreigncurrencies. Also called exchange-rate risk.Income Risk. The possibility that a fixed-income funds dividends will decline as a resultof falling overall interest rates.Industry Risk. The possibility that a group of stocks in a single industry will decline inprice due to developments in that industry.Inflation Risk. The possibility that increases in the cost of living will reduce or eliminatea funds real inflation-adjusted returns.Interest Rate Risk. The possibility that a bond fund will decline in value because of anincrease in interest rates.Manager Risk. The possibility that an actively managed mutual funds investment adviserwill fail to execute the funds investment strategy effectively resulting in the failure ofstated objectives.Market Risk. The possibility that stock fund or bond fund prices overall will decline overshort or even extended periods. Stock and bond markets tend to move in cycles, withperiods when prices rise and other periods when prices fall.Principal Risk. The possibility that an investment will go down in value, or "lose money,"from the original or invested amount.
    • Advantages1Professional Investment Management.By pooling the money of thousands of investors, mutual funds provide full-time, high-level professional management that few individual investors can afford to obtainindependently. Such management can be important to achieving results in todayscomplex markets.2Diversification.Mutual funds invest in a broad range of securities. This limits investment risk byreducing the effect of a possible decline in the value of any one security. Mutual fundshareowners can benefit from diversification techniques usually available only toinvestors wealthy enough to buy significant positions in a wide variety of securities.3Low Cost.If you tried to create your own diversified portfolio of 50 stocks, youd need at least$100,000 and youd pay thousands of dollars in commissions to assemble your portfolio.A mutual fund lets you participate in a diversified portfolio for as little as $1,000, andsometimes less.4Convenience and Flexibility.You own just one security rather than many, yet enjoy the benefits of a diversifiedportfolio and a wide range of services. Fund managers decide what securities to trade,clip the bond coupons, collect the interest payments and see that your dividends onportfolio securities are received and your rights exercised. Its easy to purchase andredeem mutual fund shares, either directly online or with a phone call.5Quick, Personalized Service.Most mutual funds now offer extensive websites with a host of shareholder services forimmediate access to information about your fund account. Or a phone call puts you intouch with a trained investment specialist at a mutual fund company who can provideinformation you can use to make your own investment choices, assist you with buyingand selling your mutual funds shares, and answer questions about your mutual fundaccount status.6Ease of InvestingYou may open or add to your account and conduct transactions or business with themutual fund by mail, telephone or bank wire. You can even arrange for automaticmonthly investments by authorizing electronic fund transfers from your checking accountin any amount and on a date you choose.7Total Liquidity, Easy WithdrawalYou can easily redeem your shares anytime you need cash by letter, telephone, bank wireor check, depending on the fund. Your proceeds are usually available within a day or two.
    • 8Life Cycle PlanningWith no-load mutual funds, you can link your investment plans to future individual andfamily needs -- and make changes as your life cycles change. You can invest in growthfunds for future college tuition needs, then move to income mutual funds for retirement,and adjust your investments as your needs change throughout your life. With no-loadmutual funds, there are no commissions to pay when you change your investments.9Market Cycle PlanningFor investors who understand how to actively manage their portfolio, mutual fundinvestments can be moved as market conditions change. You can place your funds inequities when the market is on the upswing and move into money market mutual fundson the downswing or take any number of steps to ensure that your investments aremeeting your needs in changing market climates. A word of caution: since it isimpossible to predict what the market will do at any point in time, staying on course witha long-term, diversified investment view is recommended for most investors.10Investor InformationShareholders receive regular reports from the mutual funds, including details oftransactions on a year-to-date basis. The current net asset value of your shares (the priceat which you may purchase or redeem them) appears in the mutual fund price listings ofdaily newspapers. You can also obtain pricing and performance results for the all mutualfunds at this site, or it can be obtained by phone from the mutual funds.11Periodic WithdrawalsIf you want steady monthly income, many funds allow you to arrange for monthly fixedchecks to be sent to you, first by distributing some or all of the income and then, ifnecessary, by dipping into your principal.12Dividend OptionsYou can receive all dividend payments in cash. Or you can have them reinvested in thefund free of charge, in which case the dividends are automatically compounded. This canmake a significant contribution to your long-term investment results. With some fundsyou can elect to have your dividends from income paid in cash and your capital gainsdistributions reinvested.13Automatic Direct DepositYou can usually arrange to have regular, third-party payments -- such as Social Securityor pension checks -- deposited directly into your fund account. This puts your money towork immediately, without waiting to clear your checking account, and it saves you fromworrying about checks being lost in the mail.14Recordkeeping ServiceWith your own portfolio of stocks and bonds, you would have to do your ownrecordkeeping of purchases, sales, dividends, interest, short-term and long-term gains and
    • losses. Mutual funds provide confirmation of your transactions and necessary tax formsto help you keep track of your investments and tax reporting.15SafekeepingWhen you own shares in a mutual fund, you own securities in many companies withouthaving to worry about keeping stock certificates in safe deposit boxes or sending them byregistered mail. You dont even have to worry about handling the mutual fund stockcertificates; the fund maintains your account on its books and sends you periodicstatements keeping track of all your transactions.16Retirement and College PlansMutual funds are well suited to Individual Retirement Accounts and most funds offerIRA-approved prototype and master plans for individual retirement accounts (IRAs) andKeogh, 403(b), SEP-IRA and 401(k) retirement plans. Funds also make it easy to invest-- for college, children or other long-term goals. Many offer special investment productsor programs tailored specifically for investments for children and college.17Online ServicesThe 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-loadcompanies.18Sweep AccountsWith many mutual funds, if you choose not to reinvest your stock or bond mutual fundsdividends, you can arrange to have them swept into your money market fundautomatically. You get all the advantages of both accounts with no extra effort.19Asset Management AccountsThese master accounts, available from many of the larger fund groups, enable you tomanage all your financial service needs under a single umbrella from unlimited checkwriting and automatic bill paying to discount brokerage and credit card accounts.20MarginSome mutual fund shares are marginable. You may buy them on margin or use them ascollateral to borrow money from your bank or broker. Call your fund company fordetails.DisadvantagesDisadvantage 1: Mutual Funds Have Hidden FeesIf fees were hidden, those hidden fees would certainly be on the list of disadvantages ofmutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees.While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in themutual fund prospectus and can be found on the mutual funds’ web sites. Many mutualfunds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual
    • fund that does not charge the fee. Hidden fees cannot make the list of disadvantages ofmutual funds because they are not hidden and there are thousands of mutual funds that donot charge 12b-1 fees.Disadvantage 2: Mutual Funds Lack LiquidityHow fast can you get your money if you sell a mutual fund as compared to ETFs, stocksand closed-end funds? If you sell a mutual fund, you have access to your cash the dayafter the sale. ETFs, stocks and closed-end funds require you to wait three days after yousell the investment. I would call the “lack of liquidity” disadvantage of mutual funds amyth. You can only find more liquidity if you invest in your mattress.Disadvantage 3: Mutual Funds Have High Sales ChargesShould a sales charge be included in the disadvantages of mutual funds list? It’s difficultto justify paying a sales charge when you have a plethora of no-load mutual funds. But,then again, it’s difficult to say that a sales charge is a disadvantage of mutual funds whenyou have thousands of mutual fund options that do not have sales charges. Sales chargesare too broad to be included on my list of disadvantages of mutual funds.Disadvantage 4: Mutual Funds and Poor Trade ExecutionIf you buy or sell a mutual fund, the transaction will take place at the close of the marketregardless of the time you entered the order to buy or sell the mutual fund. I find thetrading of mutual funds to be a simple, stress-free feature of the investment structure.However, many advocates and purveyors of ETFs will point out that you can tradethroughout the day with ETFs. If you decide to invest in ETFs over mutual funds becauseyour order can be filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00pm EST with mutual funds, I recommend that you sign up for the Stress ManagementWeekly Newsletter at About.com.Disadvantage 5: All Mutual Funds Have High Capital Gains DistributionsIf all mutual funds sell holdings and pass the capital gains on to investors as a taxableevent, then we have a found a winner for the list of disadvantages of mutual funds list.Oh well, not all mutual funds make annual capital gains distributions. Index mutual fundsand tax-efficient mutual funds do not make these distributions every year. Yes, if theyhave the gains, they must distribute the gains to shareholders. However, many mutualfunds (including index mutual funds and tax-efficient mutual funds) are low-turnoverfunds and do not make capital gains distributions on an annual basis.Risks and Costs:Changing market conditions can create fluctuations in the value of a mutual fundinvestment.There are fees and expenses associated with investing in mutual funds that do not usuallyoccur when purchasing individual securities directly.
    • As with any type of investment, there are drawbacks associated with mutual funds.No Guarantees. The value of your mutual fund investment, unlike a bank deposit, couldfall and be worth less than the principle initially invested. And, while a money marketfund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. Inaddition, mutual funds are not insured or guaranteed by an agency of the U.S.government. Bond funds, unlike purchasing a bond directly, will not re-pay the principleat a set point in time.The Diversification "Penalty." Diversification can help to reduce your risk of loss fromholding a single security, but it limits your potential for a "home run" if a single securityincreases dramatically in value. Remember, too, that diversification does not protect youfrom an overall decline in the market.Costs. In some cases, the efficiencies of fund ownership are offset by a combination ofsales commissions, 12b-1 fees, redemption fees, and operating expenses. If the fund ispurchased in a taxable account, taxes may have to be paid on capital gains. Keep track ofthe cost basis of your initial purchase and new shares that are acquired by reinvestingdistributions. Its important to compare the costs of funds you are considering. Alwayslook at "net" returns when comparing fund performances. Net return is the bottom line;an investments true return after all costs are deducted.Prospectuses will not contain all the costs that affect the net return on your investment.This is why it is important to compare net returns whether or not the fund in a no-load orload fund.ExpensesBecause mutual funds are professionally managed investments, there are managementfees and operating expenses associated with investing in a fund. These fees and expensescharged by the fund are passed onto shareholders and deducted from the funds return.These expenses are typically expressed as the expense ratio - the percent of fund assetsspent (annually) on day-to-day operations. Expense ratios can vary widely among funds.Expense ratios for mutual funds commonly range from 0.2% to 2.0%, depending on thefund. Consult the funds prospectus to determine the expense ratio for a specific fund.Make yourself aware of all fees and expenses that impact the funds return by reducinggains and increasing losses.Defining Mutual Fund costs
    • All mutual funds have costs, but some funds are more expensive to own than others. Beconscious of the effect of seemingly minor cost differences which can significantly affectthe growth of your investment assets, especially over longer periods of time.Mutual fund costs fall into two main categories: One-time fees and ongoing annualexpenses. Not all funds charge one-time fees, but all funds charge ongoing annual fees ofsome sort.One-Time FeesLoadsLoads come in three forms:Front-End LoadCharged when you purchase fund shares-usually class A shares, effectively reducing yourpurchase amount.May be charged on reinvested distributions.Can be as high as 8.5%.Back-End LoadCharged when you sell fund shares.Usually assessed based on the length of time you have held your shares, and declinesover time.Maximum allowed is 8.5%, but this is rarely seen. According to Lipper Inc., back-endloads can be as high as 6% if you sell shares within one year.Level LoadDeducted annually from fund assets as marketing and distribution costs.Used to pay commissions to brokers and the funds financial adviser, and is generallyreported as part of a funds operating expenses.Can be as high as 0.75% per year, according to Lipper Inc.How to Reduce a front-end load on class A shares
    • Rights of Accumulation (ROI): Your current aggregate investment determines the initialsales load you pay. You may qualify for reduced sales charges when the current marketvalue of holdings (shares at current offering price), plus new purchases, reaches a specificbreak point determined by the individual fund.Statement or Letter of Intention (SOI or LOI): You may obtain a reduced sales charge bymeans of a written SOI/LOI which expresses your non-binding commitment to invest anamount in the aggregate over a break point within a given period of time specified bythe fund.Break Points: Sales charges are reduced when the amount of purchase exceeds aspecified dollar figure. The more money that is invested, the lower the sales charge willbe. Consult the individual funds prospectus to determine a funds break points.Funds that have no sales charges are known as "no-load," while funds that charge loadsof 1% to 3% are called "low-load." Keep in mind, funds that have lower loads or no-loads tend to have higher operating expenses. Again, read each funds prospectus andcompare "net" returns.Ongoing Annual ExpensesManagement FeesDistribution and Service FeesOther ExpensesUnderlying Fund ExpensesOther feesIn addition to sales loads, fund companies and brokerages may charge other fees whenyou buy or sell fund shares.A transaction fee is charged by some brokerage firms for purchasing or selling shares.Transaction fees are sometimes referred to as commissions but are extra costs notnormally paid if you were to purchase your fund directly with the fund family.Some fund companies and brokerages may charge a redemption fee if the fund is held forless than a certain period of time, generally between 90 and 180 days. These charges areintended to discourage short-term trading that can raise a funds administrative costs. Tofind out more about fees read the funds prospectus and consult your broker.Not all funds assess these "extra" fees. In fact, funds and brokerages may not charge asales load, transaction fees or redemption fees. When buying mutual funds, find outabout all of the fees that might be involved and when they are charged.
    • DEVELOPMNTS IN MFThe origin of mutual fund industry in India is with the introduction of the concept ofmutual fund by UTI in the year 1963. Though the growth was slow, but it acceleratedfrom the year 1987 when non-UTI players entered the industry.In the past decade, Indian mutual fund industry had seen a dramatic imporvements, bothqualitywise as well as quantitywise. Before, the monopoly of the market had seen anending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sectorentry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, itreached the height of 1,540 bn.Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it isless than the deposits of SBI alone, constitute less than 11% of the total deposits held bythe Indian banking industry.The main reason of its poor growth is that the mutual fund industry in India is new in thecountry. Large sections of Indian investors are yet to be intellectuated with the concept.Hence, it is the prime responsibility of all mutual fund companies, to market the productcorrectly abreast of selling.The mutual fund industry can be broadly put into four phases according to thedevelopment of the sector. Each phase is briefly described as under.First Phase - 1964-87Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set upby the Reserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and theIndustrial Development Bank of India (IDBI) took over the regulatory and administrativecontrol in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At theend of 1988 UTI had Rs.6,700 crores of assets under management.Second Phase - 1987-1993 (Entry of Public Sector Funds)Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by CanbankMutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian BankMutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets undermanagement.Third Phase - 1993-2003 (Entry of Private Sector Funds)With the entry of private sector funds in 1993, a new era started in the Indian mutual fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was theyear in which the first Mutual Fund Regulations came into being, under which all mutual
    • funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer(now merged with Franklin Templeton) was the first private sector mutual fund registeredin July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand revised Mutual Fund Regulations in 1996. The industry now functions under theSEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual fundssetting up funds in India and also the industry has witnessed several mergers andacquisitions. As at the end of January 2003, there were 33 mutual funds with total assetsof Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets undermanagement was way ahead of other mutual funds.Fourth Phase - since February 2003This phase had bitter experience for UTI. It was bifurcated into two separate entities. Oneis the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (ason January 2003). The Specified Undertaking of Unit Trust of India, functioning under anadministrator and under the rules framed by Government of India and does not comeunder the purview of the Mutual Fund Regulations.The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores ofAUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI MutualFund Regulations, and with recent mergers taking place among different private sectorfunds, the mutual fund industry has entered its current phase of consolidation and growth.As at the end of September, 2004, there were 29 funds, which manage assets ofRs.153108 crores under 421 schemes.MARKET TRENDS OF MF INVESTMENTS:Today there are plenty of investment avenues open. Some of them include banksdeposits, bonds, stocks, mutual fund investments and corporate debentures. Investors mayinvest money in banks, bonds and corporate debentures where the risk is low and so arethe returns. On the contrary, stocks of companies have high risk but the returns are alsoproportionately high. The recent trends since last year clearly suggest that the averageinvestors have lost money in equities. People have now started opting for portfoliomanagers who have the expertise in stock markets. There are many institutions in Indiawhich provide wealth management services. An average investor has found refuge withthe mutual funds.There have been a lot of changes in the mutual fund industry in past few years. Lots ofmultinational companies have bought their professional expertise to manage funds
    • worldwide. In the past few months there has been consolidation going on in the mutualfund industry. Mutual funds in India now offer a wide range of schemes to choose.Mutual funds are turned to be the most preferred choice worldwide for both small and biginvestors due to their numerous advantages. Its all about long term financial planning.These benefits mainly include diversification, professional management, potential ofreturns, efficiency and easy to use.Mutual fund investments carry low risk because of their diversified nature. It is importantto understand the benefits of mutual funds before investing the money you really careabout.The size of Indian mutual fund industry has grown in recent few years. India can nowboast of having dominance in this industry. The total Asset Under Management popularlyknown as AUM has increased from Rs.1, 01, 565 crores in January 2000 to Rs.5, 67,601.98 crores in April 2008.According to the Association of Mutual Funds in India, the growth of mutual fundindustry has been exceptional. This industry has indeed come a very long way with only34 players in the market and more than 480 schemes.One of the major factors contributing to the growth of this industry has been the boomingstock market with an optimistic domestic economy. Second most important reason forthis growth is a favorable regulatory regime which has been enforced by SEBI. Thisregulatory board has improved the market surveillance to protect the investors interest.NAV is directly proportionately to the bearish trends of the market. Top mutual fundsalso suffer because of the fluctuations in the market. The pooled money is invested inshares, debentures and treasury bills and thus has high risk involved.Indian mutual funds however reveal this multi-dimensional avenue and all the intricaciesin a highly fashionable manner. It provides a lot of scope to understand the scenario andmake some thoughtful investments for decent returns.In order to invest in the best mutual funds, it is important to perform a comparative study.It is important to study about the returns given by AMC Mutual Funds and perform acomparative analysis. Remember, every problem has several researches involved in it,each backed by study.Some of the top mutual funds in India are:* Reliance Mutual Fund* UTI Mutual Fund* Kotak Mutual Fund* HDFC Mutual Fund
    • * Prudential ICICI Mutual FundTaxes and Fund OwnershipSince your goal as an investor is to keep as much as possible of what you earn from yourmutual fund investments, you cant overlook the inescapable reality that taxes take a bigbite out of bottom-line returns. One way to shelter yourself from taxes is to purchaseyour funds in a retirement account.As a fund shareholder, you can be taxed on:Distributions (dividends & capital gains) maid by the fund while you own its shares.Profits you make when you sell fund shares.Taxes on Fund DistributionsA fund passes on to shareholders all the income or profits it earns from its investments.Shareholders, in turn, are liable for any taxes due. The distributions made by a fund toshareholders take two forms:Income Dividends. The interest and dividends generated by a funds investments.Capital Gains. The profit a fund makes when it sells securities at a higher price than itpaid for them. The fund subtracts its capital losses from its capital gains to determine itsnet capital gains, which it distributes to shareholders. (Net capital losses are not passedthrough to shareholders; the fund retains those to offset future capital gains.)Generally, all income dividend and capital gains distributions are subject to federalincome tax (and state and local taxes if applicable). Exceptions are:Distributions received in tax-deferred accounts, such as 401(k) and 403(b)(7) plans,individual retirement accounts, or variable annuities. Only withdrawals from suchaccounts are subject to tax. (Withdrawals from a Roth IRA are exempt from taxes undercertain conditions.)Income dividend distributions from municipal money market funds and municipal bondfunds. These distributions are exempt from federal and, in some cases, state taxes.(Capital gains distributions from municipal bond funds are taxable, however.)
    • Apart from the exceptions noted above, you must pay taxes on distributions whether youreceive them in cash or reinvest them in additional shares.Distributions of income dividends and short-term capital gains (gains on securities heldby the fund for one year or less) are taxed as ordinary income at your marginal tax rate,which can range from 15% to 39.6% currently but can change. Distributions of long-term capital gains (gains on securities held by the fund for more than one year) are taxedat a maximum rate of 20% (10% for taxpayers in the lowest tax bracket) currently but canchange.For higher-income taxpayers, effective marginal tax rates may be higher because of limitson tax deductions and a "phase out" of personal exemptions. State and local taxes alsoincrease effective marginal tax rates.Please remember that IRS tax rules can change. You should consult a tax adviser forguidance on your specific tax situation.Taxes on Profits From Shares You SellWhen you sell fund shares, the tax rate on any capital gains is determined by how longyou held the shares. Short-term gains are taxed as ordinary income at your marginal taxrate, while long-term gains are taxed at a maximum rate of 20% (10% for taxpayers in thelowest tax bracket).Keep in mind that:All capital gains from the sale of fund shares are taxable, even those from the sale ofshares of a tax-exempt fund.Exchanging shares between funds is considered a sale, which may lead to capital gains.(An exchange involves selling shares of one fund to buy shares in another.)Writing a check against an investment in a fund with a fluctuating share price (generallyall funds except money market funds) also triggers a sale of shares and may expose youto tax on any resulting capital gains.The impact of expenses on return over time is why you should consider expenses whenyou invest in mutual funds. Even though published return data is always reported net ofexpenses, higher expenses will reduce your investment return.What Fees do Load and No-Load Mutual Funds not have to Report in the Prospectus?
    • "...One ongoing expense that is not included in the expense ratio is brokerage costsincurred by a fund as it buys and sells securities. These costs are listed separately in afunds annual report, sometimes as a percentage and sometimes as a dollar amount. Sometrading costs, however, are not included in this figure. The spread between the bid andask prices of over-the-counter stocks, for example, can be thought of as a tradingexpense, but such costs are not reported by fund companies. The annual report alsoincludes any interest costs, which a fund will incur if it borrows money to buy securities.""All of the expenses that we have mentioned so for can be thought of as coming out ofthe portfolios raw return, skimmed off the top, so to speak..." (MorningStar: Investing101: Mutual Fund Expenses)"...In addition, because mutual funds buy and sell securities, they incur brokerage costs.Because these costs vary and are difficult to predict, they are not included in the fee tablein the front of the prospectus. However, they are included in any computations of afunds performance that appears in advertising." (ICI Investor Awareness Series: AboutMutual Fund Fees)Again, when comparing fund returns, always look at the "net" return. This is the bottomline.Mutual fund categoriesMutual funds fall into the following categories: money market funds, bonds funds, stocksfunds, balanced funds, and asset allocation funds.Stock fundsAs the name implies, stock mutual funds invest mainly in common stocks. These stocksmay be sold on the New York Stock Exchange, the NASDAQ or other exchanges.The objective of a stock fund is long-term capital appreciation versus generating income(dividends) more common with bond funds. However, stock funds may generate modestdividends from the stocks in the portfolio and from short-term cash investments. Thesestock tend to be larger capitalized stocks versus smaller growth stocks.There are four basic types of stock funds.Stock Fund Types
    • Large Cap: Primarily invests in "Blue-chip" companies - large, well-known industrials,utilities, technology, and financial services companies with large market capitalization.Large cap stocks are perceived to be less risky than smaller capitalized companies.Mid Cap: Primarily invests in companies whose market capitalization is smaller thanlarge caps but larger than small caps. Mid caps are generally considered more risky thanlarge cap stocks but have a higher return expectation.Small Cap: Primarily invests in emerging companies, thought to have potential for futuregrowth and profit. Small caps are generally considered the riskiest stocks compared tolarger capitalized firms but carry the expectation of higher returns. Small cap funds aresubject to greater volatility than those in other asset categories.International: Primarily invests in stocks traded on foreign exchanges but purchased inthe United States by U.S. fund companies. International funds are subject to additionalrisks such as currency fluctuation, political instability and the potential for illiquidmarkets.Sector: Primarily invests in specific industry sectors such as technology, financials,health, or energy. Since sector funds focus their investments on companies involved in aspecific industry sector, the funds may involve a greater degree of risk that an investmentin other mutual funds with greater diversification.Many investors buy stock mutual funds because, historically, stocks have outperformedother types of investments over the long term. However, the value of the stocks in thefunds portfolio may go up or down as the market rises or declines. Remember, pastperformance is no guarantee of future results.Bond fundsBond funds1 invest in various types of bonds - issued by corporations, municipalities,and the U.S. government. Bond mutual funds are designed mostly to provide investorswith a steady stream of income2 versus capital gains.Bond Funds:Invest in bonds, which are debt securities, or IOUs, issued by corporations orgovernments in exchange for money loaned to them. Generally, the issuer agrees to repaythe loan by a specific date and to make regular interest payments to the lender until then.Are a basket of bonds with different durations, yields, credit quality, and values. Becauseof this, bond funds never mature as would be the case with buying an individual bond.Share value and dividends will fluctuate as interest rates fluctuate and new bonds arepurchased or others are sold or mature.
    • Produce profits that consist primarily of dividend distributions.May generate modest capital gains.Fluctuate in value, so it is possible to sell shares at a higher or lower price than you paidfor them.Bond Fund Types:Government: Primarily invest in bonds issued by the U.S. Department of Treasury aswell as various federal agencies. Government bonds are generally taxable.Municipal: Primarily invest in municipal bonds issued by state and local governmentsand their agencies to fund projects such as schools, streets, highways, hospitals, bridges,and airports. Municipal bonds can be insured or non-insured securities. Incomegenerated from municipal bonds may be tax free at both the federal and state level(consult the funds prospectus).Corporate: Primarily invest in bonds issued by corporations to help fund businessactivities. Income from corporate bonds is taxable.1 Bond fund shares are not guaranteed and will fluctuate with market conditions andinterest rates and include a greater risk to principal than Certificates of Deposit. Shares,when redeemed, may be worth more or less than their original cost.2 Income may be subject to the Alternative Minimum Tax (AMT) and capitalappreciation from discounted bonds may be subject to state and local taxes.Money market fundsMoney market funds invest in short-term securities such as Treasury bills. Most moneymarket funds offer a higher rate of interest than bank savings accounts, and some are freeof federal or state taxes. But unlike bank savings accounts, money market funds are notFDIC insured.Money market mutual funds are designed to be more stable than stock or bond funds.Money market funds are designed to provide steady dividend income on the investmentamount, although the yield may fluctuate daily.Taxable: Invest in short-term obligations from corporations.Tax-free: Invest in short-term obligations from government entities.Balanced Funds:Invest in stocks, bonds, and cash investments, in varying proportions.
    • Produce dividend and capital gain distributions and share price appreciation in proportionto their allocation among the three major asset classes.Asset Allocation Funds:In an asset allocation fund, the manager will diversify the assets among each category:cash, bonds, and stocks and weight them according to the portfolio strategy. Themanager will redistribute the weightings according to market conditions. Portfoliostrategies generally differ according to risk tolerance:Aggressive Growth Strategy PortfolioGrowth Strategy PortfolioGrowth and Income Strategy PortfolioIncome Strategy PortfolioAsset allocation funds are usually made up of a combination of other mutual funds withinthe same fund family. As market conditions change, the manager has the discretion toreduce exposure in one fund and increase it in another. Just about all mutual fundfamilies allow you to switch between funds in the same family and class (A, B, or Cshares) without incurring any costs.Fund ManagementActively managed funds:Mutual Fund managers are professionals. They are considered professionals because oftheir knowledge and experience. Managers are hired to actively manage mutual fundportfolios. Instead of seeking to track market performance, active fund management triesto beat it. To do this, fund managers "actively" buy and sell individual securities. For anactively managed fund, the corresponding index can be used as a performancebenchmark.Is an active fund a better investment because it is trying to outperform the market? Notnecessarily. While there is the potential for higher returns with active funds, they aremore unpredictable and more risky. From 1990 through 1999, on average, 76% of largecap actively managed stock funds actually under performed the S&P 500. (Source -Schwab Center for Investment Research)Actively managed fund styles:
    • Some active fund managers follow an investing "style" to try and maximize fundperformance while meeting the investment objectives of the fund. Fund styles usually fallwith in the following three categories.Fund Styles:Value: The manager invests in stocks believed to be currently undervalued by the market.Growth: The manager selects stocks they believe have a strong potential for beating themarket.Blend: The manager looks for a combination of both growth and value stocks.To determine the style of a mutual fund, consult the prospectus as well as other sourcesthat review mutual funds. Dont be surprised if the information conflicts. Although aprospectus may state a specific fund style, the style may change. Value stocks held in theportfolio over a period of time may become growth stocks and vice versa. Other researchmay give a more current and accurate account of the style of the fund.