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Mutual Funds Learning Center

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  • 1. LEARNING CENTER Investment Options: Mutual Funds stand out Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Let us examine several of them: Banks Considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means to social development, banks in India have indeed played an important role in the rural upliftment. For an ordinary person though, they have acted as the safest investment avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and Fixed deposits have been effectively used by one and all. However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering little above 9 percent in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, the inflationary pressures in economy and you have a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at times, and this means that the value of money saved goes down instead of going up. This effectively mars any chance of gaining from the investments in banks. Post Office schemes Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So the two basic and most sought for features, those of return safety and quantum of returns were being handsomely taken care of. Though certainly not the most efficient systems in terms of service standards and liquidity, these have still managed to attract the attention of small, retail investors. However, with the government announcing its intention of reducing the interest rates in small savings options, this avenue is expected to lose some of the investors. Public Provident Funds act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered. Company Fixed Deposits Another oft-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their operations and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks in these. First of all, the danger of financial position of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, don’t reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have
  • 2. resulted in low confidence in this option. The options discussed above are essentially for the risk-averse, people who think of safety and then quantum of return, in that order. For the brave, it is dabbling in the stock market. Stock markets provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the options discussed above can generally generate, the risk is undoubtedly of the highest order. But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the process can endanger the hard-earned money. For those who are not adept at understanding the stock market, the task of generating superior returns at similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture. Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with reputed international firms. Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future. The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that we normally associate with them. Some of the other major benefits of investing in them are: Number of available options Mutual funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that is aimed for at the time of making investments. Money market funds offer the liquidity that is desired by big investors who wish to park surplus funds for very short-term periods. Balance Funds acter to the investors having an appetite for risk greater than the debt funds but less than the equity funds. The only pertinent factor here is that the fund has to be selected keeping the risk profile of the investor in mind because the products listed above have different risks associated with them. So, while equity funds are a good bet for a long term, they may not find favor with corporate or High Net worth Individuals (HNIs) who have short-term needs. Diversification Investments are spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because all stocks don’t move in the same direction at the same time. One can achieve this diversification through a Mutual Fund with far less money than one can on his own.
  • 3. Professional Management Mutual Funds employ the services of skilled professionals who have years of experience to back them up. They use intensive research techniques to analyze each investment option for the potential of returns along with their risk levels to come up with the figures for performance that determine the suitability of any potential investment. Potential of Returns Returns in the mutual funds are generally better than any other option in any other avenue over a reasonable period of time. People can pick their investment horizon and stay put in the chosen fund for the duration. Equity funds can outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the portfolio. Liquidity Fixed deposits with companies or in banks are usually not withdrawn premature because there is a penal clause attached to it. The investors can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In closed-end schemes, the units can be transacted at the prevailing market price on a stock exchange. Mutual funds also provide the facility of direct repurchase at NAV related prices. The market prices of these schemes are dependent on the NAVs of funds and may trade at more than NAV (known as Premium) or less than NAV (known as Discount) depending on the expected future trend of NAV which in turn is linked to general market conditions. Bullish market may result in schemes trading at Premium while in bearish markets the funds usually trade at Discount. This means that the money can be withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit loads for withdrawal within a period linked to Besides these important features, mutual funds also offer several other key traits. Important among them are: Well Regulated Unlike the company fixed deposits, where there is little control with the investment being considered as unsecured debt from the legal point of view, the Mutual Fund industry is very well regulated. All investments have to be accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this case and can impose penalties on the AMCs at fault. The regulations, designed to protect the investors’ interests are also implemented effectively. Transparency Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. This means that the investment strategy, outlooks of the market and scheme related details are disclosed with reasonable frequency to ensure that transparency exists in the system. This is unlike any other investment option in India where the investor knows
  • 4. nothing as nothing is disclosed. Flexible, Affordable and a Low Cost affair Mutual Funds offer a relatively less expensive way to invest when compared to other avenues such as capital market operations. The fee in terms of brokerages, custodial fees and other management fees are substantially lower than other options and are directly linked to the performance of the scheme. Investment in mutual funds also offers a lot of flexibility with features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or withdrawal of funds. Even the investors, who could otherwise not enter stock markets with low investible funds, can benefit from a portfolio comprising of high- priced stocks because they are purchased from pooled funds. As has been discussed, mutual funds offer several benefits that are unmatched by other investment options. Post liberalization, the industry has been growing at a rapid pace and has crossed Rs. 100000 crore size in terms of its assets under management. However, due to the low key investor awareness, the inflow under the industry is yet to overtake the inflows in banks. Rising inflation, falling interest rates and a volatile equity market make a deadly cocktail for the investor for whom mutual funds offer a route out of the impasse. The investments in mutual funds are not without risks because the same forces such as regulatory frameworks, government policies, interest rate structures, performance of companies etc. that rattle the equity and debt markets, act on mutual funds too. But it is the skill of the managing risks that investment managers seek to implement in order to strive and generate superior returns than otherwise possible that makes them a better option than many others. The above description is aimed at lay investors; people who wish to invest in mutual funds but do not understand the mechanics of their functioning. For more structured and formal definitions of terms related to mutual funds industry, please click here. The site has been designed to help investors like you to invest in mutual funds in India. There is ample scope of generating decent return by some thoughtful investments, which will require little bit of extra effort on your part in understanding the fund of your choice. You can visit various sections of the site and familiarize yourself with the contents and features. As you go on navigating the site, you will feel more comfortable about the mutual funds and will gradually turn into a savvy mutual fund investor. You can achieve more clarity about your concepts related to mutual funds by going through our section of Frequently Asked Questions. Mutual Fund - An Introduction
  • 5. 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 schemes 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 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. Types of Mutual Fund Schemes Mutual fund schemes may be classified on the basis of its structure and its investment objective. By Structure Open-end Funds An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Closed-end Funds A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
  • 6. By Investment Objective Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth over a period of time. Income Funds The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Balanced Funds The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Money Market Funds The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. Other Schemes Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds. Special Schemes
  • 7. • Industry Specific Schemes Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc. • Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50 • Sectoral Schemes Sectoral Funds are those which invest exclusively in a specified sector. This could be an industry or a group of industries or various segments such as 'A' Group shares or initial public offerings. Benefits of Investing in Mutual Funds Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital
  • 8. markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. How to invest in Mutual Fund Step One - Identify your Investment needs 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 is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements.
  • 9. Step Two - Choose the right Mutual Fund The important thing is to choose the right mutual fund scheme which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications. For selecting the right scheme as per your specific requirements, click here. Step Three - Select the ideal mix 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. Step Four - Invest regularly The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. You can also avail the systematic investment plan facility offered by many open end funds. Step Five- Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.
  • 10. Step Six - The final step All you need to do now is to Click here for online application forms of various mutual fund schemes and start investing. You may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking. Rights of a Mutual Fund Unit holder A unit holder in a Mutual Fund scheme governed by the SEBI (Mutual Funds) Regulations, is entitled to: 1. Receive unit certificates or statements of accounts confirming the title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date of request for a unit certificate is received by the Mutual Fund. 2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. 3. Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. 4. Vote in accordance with the Regulations to:- a. Approve or disapprove any change in the fundamental investment policies of the scheme, which are likely to modify the scheme or affect the interest of the unit holder. The dissenting unit holder has a right to redeem the investment. b. Change the Asset Management Company. c. Wind up the schemes. 5. Inspect the documents of the Mutual Funds specified in the scheme's offer document. Mutual Funds - A Globally Proven Investment All investments whether in shares, debentures or deposits involve risk. Share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy. Generally however, longer the term, lesser the risk. Companies may default in payment of interest and principal on their debentures/bonds/deposits. While risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales help them to build a diversified portfolio that minimizes risk and maximizes returns. Worldwide, the Mutual Fund, or Unit Trust as it is called in some parts of the world, have almost overtaken bank deposits and total assets of insurance funds. As of date, in the US alone there are over 5,000 Mutual Funds with total assets of over US $ 3 trillion (Rs.l00 lakh crores). In India there are 34 Mutual Funds and over 300 schemes with total assets of approximately Rs. 100,000 crores. All mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI)
  • 11. Investments in Mutual Fund Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor. With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider various factors before making an investment decision. Since not everyone has the time or inclination to invest and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors which are complex in nature affect us too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening in Asian market have a deep impact on the Indian stock market. Although it is not possible for an individual investor to understand Indian companies and investing in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset Management Company invests in research) provide an option of investing without getting lost in the complexities. Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option. Lastly, Evaluate past performance, look for stability and although past performance is no guarantee of future performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers. An investor can choose the fund on various criteria according to his investment objective, to name a few: • Thorough analysis of fund performance of schemes over the last few years managed by the fund house and its consistent return in the volatile market. • The fund house should be professional, with efficient management and administration. • The corpus the fund is holding in its scheme over the period of time. • Proper adequacies of disclosures have to seen and also make a note of any hidden charges carried by them. • The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return.
  • 12. NRI MONEY IN MUTUAL FUNDS RISING It's not just that Indians are only relying on India growth story; even others do, like our foreign partners so called NRI, FII, etc. As per latest data form central bank, foreigners, major chunk of investments has seen good amount of rising trend in the Indian mutual funds industry, since 2003. They hold around Rs 1,028 crore worth of units of Indian mutual funds in 2003. The figure has increased sharply to Rs 2,663 crore in 2004 and Rs 4,966 crore in 2005, as per central bank data. It is not clear which country contributed the most to the MF industry as most funds doesn’t disclosed country wise list, As a result, unspecified countries account for over 70%. NRIs - reason to invest The ever growing economy, with robust growth & well diversified industry, India seems to be a desired destination for NRI’s. It’s assumed that Indian external sector performance will continue to be good, thus one needs to look at the outsourcing revolutions that is taking place across the globe, in not only the services but also the manufacturing and research sectors. On the investment side, moderate rules and better and well regulated markets, with looking at investors sentiments which are drawing in capital to fund India's growth. 1. Dynamic policy by government It has been close to 2 decades since the reforms process has started, with the main push coming with the twin devaluations in 1991. During this period numerous developments have taken places that have contributed to the flexibility of the Indian economy. Key amongst these are the opening up of the Indian economy to foreign investment, strengthening of the domestic financial system, liberalization of imports, rationalization of interest and exchange rates, a more conducive environment for investing in industry, and of course, the people-intensive services sector. This resilience is clearly reflected in the fact that average economic growth rates have moved up and India has emerged as one of the fastest growing economies in the world. 2. Priority focusing agriculture, infrastructure In recent times there has been a renewed vision on two key but long ignored segments of the Indian economy – agriculture and infrastructure. The focus on agriculture and related activities, which supports approximately 65% of the Indian population, should provide a new thrust area for economic growth. 3. The global outsourcing boom Indian had become a major hub for business process outsourcing companies, but there is much more to this outsourcing boom than is commonly understood. Fortunately, India stands to benefit from it in a great measure. 4. Well equipped & regulated capital markets The Indian stock and debt markets, including banks and mutual funds are well regulated by the Securities and Exchange Board of India and the RBI, various measures are taken to protect investors’ sentiments & interest. In terms of infrastructure the Indian institutional framework is improving rapidly, backed by a strong financial system.
  • 13. NRI GUIDE BOOK FOR MUTUAL FUNDS 1. Who is a Non Resident Indian? A Non Resident Indian (NRI) is an Indian citizen or a person of Indian origin who stays abroad for employment/carrying on business or vocation outside India or stays abroad under circumstances indicating an uncertain duration of stay abroad. A person shall be deemed to be of Indian origin if he/she or either of his/her parents or grandparents were born in undivided India. 2. What is an Overseas Corporate Body (OCB)? An Overseas Corporate Body (OCB) includes overseas companies, partnership firms, societies and other corporate bodies owned predominantly by non-resident persons of Indian nationality or origin outside India. 3. Who is a Foreign Institutional Investor (FII)? A Foreign Institutional Investor (FII) is a corporate registered by Securities and Exchange Board of India. 4. Can NRI invest in mutual fund schemes? Yes, NRIs can invest in any mutual fund schemes. 5. How will an NRI invest in Indian MFs? To invest in Indian Mutual Funds, the NRI has to open any one of the following three kinds of accounts. He can open any of these accounts through the banks who provide the facility. The three types of accounts are as follows: Non-Resident (External) Rupee (NRE) accounts are Rupee accounts on a repatriable basis. They can be opened with either funds remitted from abroad or local funds, which can be remitted abroad. Ordinary Non-resident Rupee (NRO) accounts are Rupee accounts and can be opened with funds either remitted from abroad or generated in India. The amount in such accounts is non- repatriable. Fully Convertible Non-Rupee (FCNR) accounts are similar to the NRE account except that the funds are held in foreign currency like USD, GBP, etc. 6. Does NRI need any approvals from the Reserve Bank of India to invest in mutual fund schemes? Yes. Specific approval has to be taken from RBI. However, most of the AMCs have taken the permission for NRI investments in their schemes; hence no permission is required for investing in the schemes of those AMCs. Only OCBs and FIIs require prior approvals before investing in our schemes. 7. Can NRI invest in foreign currency? No. All investments have to be in Indian Rupees. A convenient way to invest would be through NRE account. 8. How to redeem funds? In case of open-ended mutual fund schemes, simply fill up the redemption slip and send it to our offices or Investor Service Centers of AMCs. The cheques are normally mailed to within 3 to
  • 14. TAX SLAB ON CAPITAL GAIN 1.Can NRI gift units of mutual fund schemes to their relatives in India? Yes 2.Is the indexation benefit available to NRIs? Yes, in case units are held for more than twelve months 3.What is the tax rate on short-term capital gain? In case of non-resident non-corporates - 30% plus In case of foreign companies - 40% plus 4.Tax slab on capital gain Tax Rates* under the Act TDS Rate* under the Act NRIs / PIOs / other Non FII Residents NRIs / PIOs FIIs Residents FIIs non- residents 30% without 30% for non Short indexation residents non Term benefit corporate, Units of a non Capital Taxable at normal rates of tax applicable to the equity oriented NIL 40% for non NIL Gain assessee fund resident (u/s 115AD) corporate, (u/s 195) units of an equity 10% on redemption of units where STT is payable on redemption Nil oriented fund (u/s 111A) 10% with no units of a non 10% without indexation, or 20% with indexation, 20% for non Long indexation equity oriented whichever is lower NIL residents (u/s NIL Term benefit fund 195) Capital (u/s 112) (u/s 115AD) Gain ** units of an equity Exempt in case of redemption of units where Nil Nil oriented fund STT is payable on redemption [u/s 10(38) ] *Plus surcharge as applicable: corporate, co-operative societies, firms and local authorities: 10%; Individuals/HUFs/BOIs/AOPs, with total income exceeding Rs.10, 00,000: 10%; Artificial juridical person: 10%. ** Capital Gains on redemption of units held for a period of more than 12 months from the date of allotment. *** As per section 111A of the Act, effective from 1/10/2004 short-term capital gains on equity oriented fund is chargeable to tax at a Lower rate of 10 percent. • Long Term Capital Gains arising from redemption of unit of a non equity oriented fund are exempt from tax, if gains are invested in specified bonds within 6 months from the date of redemption, under Section 54EC of the Act or if gains are invested in eligible equity issues within 6 months from the date of redemption, under Section 54ED of the Act. In order for the unit holder to obtain the benefit of a lower rate under the DTAA, an eligibility certificate from unit holder’s Assessing Officer should be provided to the Fund.
  • 15. 1. What is a Mutual Fund? A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets. 2. Which was the First Mutual Fund to be set up in India? Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64. 3. Who is the Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament. 4. What are the broad guidelines issued for a MF? SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds: (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds. 5. How do mutual funds diversify their risks? According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. 6. Can mutual funds assumed to be risk-free investments? No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. 7. What are the types risks involved in investing in mutual funds? A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
  • 16. Terms Description It is the document issued by the mutual fund, giving details of various transactions Account Statement and holdings of an investor in schemes of the fund. The Net Asset Value of a unit adjusting for all changes caused due to dividend Adjusted NAV (Total Return) declaration, bonus etc. assuming reinvestment of distributions made to the investors at the prevailing NAV. Age of Fund The time elapsed since the inception of the fund. Defined by Jenson in his portfolio evaluation model, it is the excess return of the fund above risk adjusted market return, given its level of risk as measured by beta. Alpha Coefficient An investment with a positive alpha indicates that the fund has performed better than expected and a negative alpha indicates that the fund has under performed, for the level of risk taken by it. It is the yearly record of a Mutual Fund's performance in an year. Under SEBI's Annual Report guidelines, it is distributed to investors and/or shareholders. The percentage change in net asset value of any fund over a horizon of one year, Annual Return assuming reinvestment of distribution such as dividend payment and bonuses. It is the absolute return over a period either greater or less than a year aggregated Annualized Returns to a period of one year. The applicable NAV, if the application is received before that cut-off time on a day as Applicable NAV set by the fund. All investments or redemptions are processed at that particular NAV. A different NAV holds if received thereafter. It is a means of diversifying the risk associated with a fund and refers to the Asset Allocation distribution of total funds available with the fund into instruments of various types such as stocks, bonds etc. based on the funds investment objective. It is the investment manager for the mutual fund. It is a company set up primarily for Asset Management Company managing the investment of mutual funds and makes investment decisions in (AMC) accordance with the scheme objectives, deed of Trust and other provisions of the Investment Management Agreement. A plan introduced in mutual funds that enables the investor to give the mandate of allotting fresh units at specified intervals (monthly, quarterly) against which the Automatic Investment Plan investor provides post-dated cheques. On the specified dates, the cheques are realized by the mutual fund and on realization, additional units are allotted to the investor at the prevailing NAV. An investment option available to mutual fund unit holders in which the proceeds Automatic reinvestment plan from either the fund's dividends, bonus etc. are automatically used to buy more units of the fund.
  • 17. Balance Maturity Tenure Of A It is defined In the case of close-ended schemes as the balance period till the Scheme redemption of the scheme. A class of mutual fund that aims at allocating the total assets with it in the portfolio mix Balanced Funds of debt as well as equity instruments. It is a period in market when investors are on a selling spree and the share prices are Bear Market going down. It is the platform or the parameter with which a scheme can be compared. For example, Benchmark the performance of an index fund can be benchmarked against the appropriate index specified by it. It is the measure of the relative sensitivity of a stock or mutual fund to the market. The market is assigned a beta of 1. The higher the beta, the more sensitive the stock or fund Beta is considered to be relative to the market as a whole. In other words, funds with beta more than 1 will react more to any fluctuations (whether upward or downward) in market than funds with beta less than 1. Usually a high priced scrip of a major corporation with a long, fairly stable record of Blue Chip Stock earnings and dividend payments and with good expected future growth... An interest-bearing promise to pay a specified sum of money due on a specific date in Bond the future (maturity date). Bonus is allocation of additional units to the investors on the basis of their existing Bonus holdings. Basically, there is a split of existing units into more than one unit resulting in the reduction of the NAV per unit. A broker is an intermediary who guides the investors on one or more investment Broker avenues available to an investor and facilitates the process of investment. It is the fee payable to a broker for acting as an intermediary in a transaction (normally a Brokerage buy transaction). For example, brokerage is paid by a fund to a broker for getting fresh investments from investors. A index reflecting the stock prices of 30 companies listed on the Bombay Stock BSE Index Exchange (BSE) which is taken to be representative of the stock market movement. It is usually considered as the benchmark for performance evaluation of equity funds. Period during which the prices of stocks in the stock market keep continuously rising for Bull Market a significant period of time on the back of sustained demand for the stocks.
  • 18. The profit realizations on sale of securities and certain other capital assets (including units of mutual funds) are called capital gains. The gains can be classified into long- Capital Gains term or short-term depending on the period of holding of the asset and are charged to tax at different rates. Gains on mutual fund units held for a period of 12 months or more are long-term gains. Certificate of Deposit (CD) is issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Bank CDs Certificates of Deposit (CD) have maturity of 91 days to one year, while those issued by DFIs have maturities between one and three years. These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net Close-Ended Schemes asset value (NAV) of the scheme on account of demand and supply situation, expectations of unit holder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. Commercial paper (CP) is a short term, unsecured instrument issued by corporate bodies (public & private) to meet short-term requirements of working capital. Maturity Commercial Paper varies between 3 months to 1 year. CP is issued at a discount. These can be issued to any He is the officer appointed by the AMC to comply with various regulatory requirements Compliance Officer and to redress investor grievances associated with the funds. It is the sales load charged by funds in the event of redemptions made within a pre- Contingent Deferred Sales Charge (CDSC) specified period of purchase. This charge is linked to the period of unit-holding and generally has an inverse relation with the holding period. Corpus The total amount of money invested by all the investors in a scheme. It refers to the costs associated with the churning (or changes made to the holdings) of the portfolio. Portfolio changes have associated costs of brokerage, custody fees, Cost Of Churning/Turnover cost transaction fees and registration fees, which lower the returns. The quantum depends on the management style of the fund manager. The annual rate of interest payable on a debt security, expressed as a percentage of Coupon Rate the face value of the instrument. It refers to the load structure applicable currently on any fund. Funds keep revising the Current Load load structures from time to time. The ratio of interest to the actual market price of the bond expressed as a percentage: Current Yield annual interest/ current market value = current yield
  • 19. Funds that invest in income bearing instruments such as corporate debentures, PSU Debt /Income Funds bonds, gilts, treasury bills, certificates of deposit and commercial papers. These funds are the least risky and are generally preferred by risk-averse investors. When the market price of a listed scheme is less than the actual NAV of the units, then Discount it is said to be trading at a discount. Spreading the risk; Mutual funds spread investments among a number of different Diversification securities to reduce the risk inherent in investing. A tax payable by a debt oriented mutual fund (a mutual fund that invests more than 50% of its portfolio in the debt market) before dividend is distributed to the unit holders. Dividend Distribution Tax The current Dividend Distribution Tax is 10% plus the 10% surcharge. There is no such tax applicable on open-end equity schemes. The periodicity of dividend payout of a scheme. This is especially valid in the case of Dividend Frequency an income/debt schemes like monthly income plans that normally have regularity in such distributions. Dividend History The track record of dividends declared by a fund till date. Total amount of dividend declared by a fund for a scheme divided by total number of Dividend Per Unit units issued to all the investors. In a dividend plan, the fund pays dividend from time to time as and when the dividend Dividend Plan is declared. In a dividend reinvestment plan, the dividend is reinvested in the scheme itself and is Dividend Reinvestment not paid out to the investors. That is, instead of receiving dividend in cash, the unit holders receive units allotted to them at the Ex-dividend NAV. It is an instrument issued by companies/ mutual funds to an investor for the purpose of Dividend Warrant payment of dividends. Dividend Yield It refers to the dividend earned per unit of a scheme at the prevailing per unit price. Mutual fund dividends are paid out of income from the scheme's investments and can be announced out of the realized gains only. While dividends in the hands of the Dividends investor are free from tax, mutual funds are now required to pay a "distribution tax" for dividends declared from debt-oriented schemes. It is an American index similar to the BSE Index. Here the basket comprises 30 blue Dow Jones Index chip American stocks whose prices are indicative of the health of the economy.
  • 20. It is the load charged by the fund when one invests into the fund. It increases the price Entry Load of the units to more than the NAV and is expressed as a percentage of NAV. A special product offered by mutual funds. These schemes invest in equity i.e. shares and generally have a lock-in period of three years. The primary advantage to investors Equity Linked Savings Scheme is the rebate under Section 80 c of the IT act, whereby a maximum of Rs 1 lakh invested in ELSS funds is not taxable. Schemes where more than 50% of the investments are done in equity shares of various Equity Schemes companies. Ex-Bonus NAV The NAV declared post record date in case of a bonus issue is the ex-bonus NAV. It is the effective date of a dividend distribution. When the dividend is paid, the NAV of Ex-Dividend Date the fund drops by the amount of the dividend. Ex-Dividend NAV The NAV declared post record date is the ex-dividend NAV. It is the load charged by the fund when one redeems the units from the fund. It reduces Exit Load the price of the units to less than the NAV and is expressed as a percentage of NAV. The Expenses of a mutual fund include management fees and all the fees associated Expense Ratio with the fund's daily operations. Expense Ratio refers to the annual percentage of fund's assets that is paid out in expenses. These are short to medium term interest bearing instruments issued by financial intermediaries and corporate. These bonds are issued for minimum amount of Rs. Floating Rate Bonds 10,000 and in multiples of Rs. 10,000 only. The typical maturity of these bonds is 3 to 5 years. A term used when mutual fund investors who have purchased load funds switch from Free Loading one fund family to another family of funds without having to pay another sales charge. Not all funds families have freeloading procedures. Face Value The original issue price of one unit of a scheme A commonly used mechanism for the taxation purpose of redeemed mutual fund First-In, First-Out (FIFO) shares, it is an accounting method which assumes that the units purchased first are the units sold first. Classification of a scheme depending on the type of assets in which the mutual fund Fund Category company invests the corpus. It could be a growth, debt, balanced, gilt or liquid scheme Fund Family All the schemes, which are managed by one mutual fund. Fund Management Costs The charge levied by an AMC on a mutual fund for managing their funds. Appointed by the AMC, he is the person who makes all the final decisions regarding Fund Manager investments of a scheme.
  • 21. Securities created and issued by the Central Government and/or a State Government, Gilts/Government Securities and may include securities unconditionally guaranteed by the Government Global Funds Mutual funds that invest in stocks of companies from all over the world These are medium to long term obligations issued by RBI on behalf of Government of Government Securities India and various state governments. The RBI decides the cut-off coupon on the basis of the bids received. These securities are issued by auction process. On certain issues Funds that invest only in government securities of different maturities. They offer lower Gilt funds returns as the credit risk is virtually absent and there are no chances of government defaulting on its payment obligations. This effectively reduces the yield on them. A scheme where investments are made in equity and convertible debentures. They Growth scheme normally aim to provide capital appreciation over a period of time. The return assured by the mutual funds as a minimum return in certain income plans. Guaranteed Returns The launch of plans offering guaranteed returns is now subject to certain restrictions imposed by the SEBI.
  • 22. Pay-out day is the designated day on which securities and funds are paid out to the Pay-out members by the clearing house of the Exchange. Premium When the market price of a unit is more than the NAV it is said to be trading at a premium. PSU Bonds are medium and long term obligations issued by public sector companies Public Sector Undertakings (PSU) where the government share-holding is generally greater than 51% or more. Some of the bonds PSU bonds carry tax exemptions also. Minimum maturity is 5 years for taxable bonds and 7 The price at which a mutual fund's units can be purchased. The asked or offering price Purchase Price or Offering Price means the current net asset value per unit plus sales charge, if any. Performance of an investment indicates the returns from an investment. The returns can Performance come by way of income distributions as well as appreciation in the value of the investment. Portfolio It refers to the total investment holdings of the fund. It refers to the changes made to the portfolio keeping in view the market conditions. It Portfolio Churning includes both buying and selling of holdings and is aimed at giving a better yield to the investor. Also known as the Fund Managers, they are the specialists employed by Mutual Portfolio Managers Fund/AMC to invest the pool of money in accordance with the fund's investment objectives. An offer document by which a mutual fund invites the public for subscribing to the units of Prospectus a scheme. This document contains information about the scheme and the AMC so as to enable a prospective investor make an informed decision. Terms Description The price at which a fund offers to sell one unit of its scheme to investors. This NAV is Sale price grossed up with the entry load applicable, if any. The purpose statement consisting of the goal and the avenues of investment released by Scheme Objective the fund. It refers to the portion of assets of a fund which is invested in a particular well-defined Sector Allocation segment of the economy, like Information Technology, pharmaceuticals, utilities, media, telecommunications, etc. Sector Funds are mutual funds that are established to focus and invest in the stocks of Sector Funds specific sectors of the economy, such as pharmaceuticals, chemicals, or information technology. This is normally specified in the offer document of the funds. Generally, an instrument evidencing debt of or equity in a corporation in which a person Security invests. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership. The Sharpe ratio measures the risk-adjusted return of a fund. Simply put, the ratio measures the variability of ' excess returns' (defined by returns of the fund over the 'risk
  • 23. Terms Description Stocks that are considered to be undervalued based upon such ratios as price-to-book or Value Stocks price-to-earnings (P/E). These stocks generally have lower price-to-book and price- earnings ratios, higher dividend yields and lower forecasted growth rates than growth Terms Description Distributions form investment income, usually expressed as a percentage of net asset value or market price. Unlike total return, yield has the single component of investment Yield income and does not include capital gains distributions or capital appreciation of underlying shares. The Yield Curve gives the relationship at a given point in time between yields on a group of fixed-income securities with varying maturities viz. treasury bills, notes, and bonds. The Yield Curve curve typically slopes upward since longer maturities normally have higher yields, although it can be flat or even inverted. Used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond is held to its maturity date. It takes into account purchase Yield To Maturity price, redemption value, time to maturity, coupon yield and the time between interest payments. Terms Description A bond where no periodic interest payments are made. The investor purchases the bond at a discounted price and receives one payment at maturity. The maturity value an Zero-Coupon Bond investor receives is equal to the principal invested plus interest earned compounded semi- annually at the original rate to maturity. Interest income from zero-coupon bonds is subject to taxes annually even though no payments will be made.