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MAKING
MUTUAL
FUNDS
WORK
FOR YOU
A. P. KurianChairmanJune 19, 2008
1
Association of Mutual Funds in India (AMFI)is the umbrella body of all the Mutual Funds registered with SEBI. It
is a non-profit organisation committed to develop the Indian Mutual FundIndustry on professional, healthy and ethical lines and to enhance andmaintain standards in all areas with a view to protecting and promotingthe interests of Mutual Funds and their unitholders. Mutual Fund bothconceptually and operationally is different from other savingsinstruments.Mutual Funds invest in instruments of capital markets whichhave different risk-return profile. It is very necessary that the investorsunderstand properly the conceptual framework of Mutual Fund and itsoperational features. AMFI therefore thought it appropriate to produce abooklet in the form of an investor’s concise guide that will explain insimple language the concept and working of Mutual Funds.
The then Chairman Mr.G.A.Shenai constituted a special committee withme as the Chairman and with Mr. Vivek Reddy, Mr. K. N. Atmaramani,Mr. S. K. Mitra, Mr. Ajai Kaul and Mr. A. N. Palwankar as members. Thiscommittee with the help of Price Waterhouse LLP/Financial InstitutionsReform and Expansion (FIRE) Project funded by USAID brought out thisbooklet in April 1997.
This guide on the concept, operations and advantages of Mutual Fundsand the rights of the Mutual Fund unitholders, is intended purely as aguide and does not solicit investment in any specific Mutual Fund. It is nota legal or regulatory document. It is recommended that you read therelevant offer document and if necessary, consult your investmentadvisor before making an investment decision.
incorporated in August1995,
So far we have distributed more than fifteen lakh copies of this bookletall over the country. This is the third edition with updated infor-mation and I hope this revised edition will be equally useful to thereaders.
PREFACE
MUTUAL FUND – A GLOBALLY PROVENINVESTMENT AVENUE
Worldwide, Mutual Fund or UnitTrust as it is referred toin some parts of the world, has a long and successfulhistory.The popularity of Mutual Funds has increasedmanifold in developed financial markets, like theUnited States. As at the end of March 2008, in the USalone there were 8,064 mutual funds with total assetsof about US$ 11.734 trillion (Rs.470 lakh crores)*.
In India, the mutual fund industry started with thesetting up of the erstwhile Unit Trust of India in 1963.Public sector banks and financial institutions wereallowed to establish mutual funds in 1987.Since 1993,private sector and foreign institutions were permittedto set up mutual funds.
In February 2003, following the repeal of the Unit Trustof India Act 1963 the erstwhile UTI was bifurcated intotwo separate entities viz.The Specified Undertaking ofthe UnitTrust of India, representing broadly, the assetsof US 64 scheme, schemes with assured returns andcertain other schemes and UTI Mutual Fundconforming to SEBI Mutual Fund Regulations.
As at the end of March 2008, there were 33 mutualfunds, which managed assets of Rs. 5,05,152 crores(US $ 126 Billion)* under 956 schemes.
This fast growing industry is regulated by theSecurities and Exchange Board of India (SEBI).
2
1989 1994 1999 2004 2005 2006 2007 2008
Assets
600000
400000
100000
0
13
45
5
61
02
8
68
47
2
13
96
16
14
95
54
Growth of Assets (Rs. in Crores)
23
18
62
200000
300000
500000
32
63
88
50
51
52
200
400
600
800
1000
NUMBER OF SCHEMES
0
21
756
277167
403 451
592
956
Schemes
1989 1994 1999 2004 2005 2006 2007 2008
*US $ = Rs. 40.02
WHAT IS A MUTUAL FUND?
A Mutual Fund is a trust that pools the savings of anumber of investors who share a common financialgoal.Anybody with an investible surplus of as little as afew hundred rupees can invest in Mutual Funds.Theseinvestors buy units of a particular Mutual Fundscheme that has a defined investment objective andstrategy.
The money thus collected is then invested by thefund manager in different types of securities. Thesecould range from shares to debentures to moneymarket instruments, depending upon the scheme’sstated objectives. The income earned through theseinvestments and the capital appreciation realised bythe scheme are shared by its unit in proportionto the number of units owned by them. Thus a MutualFund is the most suitable investment for the commonman as it offers an opportunity to invest in a diversified,professionally managed basket of securities at arelatively low cost.
holders
INVESTORS
Passedback to
Pool theirmoney with
THE MUTUAL FUND OPERATION FLOW CHART
RETURNS
Generate
SECURITIES
FUNDSMANAGERS
Invest in
3
What you shou ldexpect from a MutualFund depends on whatstage of life you are in.
TYPES OF MUTUAL FUND SCHEMES
There are a wide variety of Mutual Fundschemes that cater to your needs, whatever yourage, financial position, risk tolerance and returnexpectations. Whether as the foundation of yourinvestment programme or as a supplement,Mutual Fund schemes can help you meet yourfinancial goals?
These do not have a fixed maturity.You deal withthe Mutual Fund for your investments andredemptions.The key feature is liquidity.You canconveniently buy and sell your units at Net AssetValue(NAV) related prices, at any point of time.
Schemes that have a stipulated maturity period(ranging from 2 to 15 years) are called close-ended schemes.You can invest in the scheme atthe time of the initial issue and thereafter you canbuy or sell the units of the scheme on the stockexchanges where they are listed. The marketprice at the stock exchange could vary from thescheme’s NAV on account of demand and supplysituation, unitholders’ expectations and othermarket factors. One of the characteristics of theclose-ended schemes is that they are generallytraded at a discount to NAV; but closer tomaturity, the discount narrows.
Some close-ended schemes give you anadditional option of selling your units to theMutual Fund through periodic repurchase atNAV related prices. SEBI Regulations ensurethat at least one of the two exit routes areprovided to the investor under the close endedschemes.
(A) By Structure
Open-Ended Schemes
Close-Ended Schemes
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5
Interval Schemes
Growth Schemes
Income Schemes
These combine the features of open-ended andclose-ended schemes. They may be traded onthe stock exchange or may be open for sale orredemption during predetermined intervals atNAV related prices.
Aim to provide capital appreciation over themedium to long term. These schemes normallyinvest a majority of their funds in equities and arewilling to bear short term decline in value forpossible future appreciation.
These schemes are not for investors seekingregular income or needing their money back inthe short term.
Ideal for:
Investors in their prime earning years.
Investors seeking growth over the long term.
Aim to provide regular and steady income toinvestors. These schemes generally invest infixed income securities such as bonds andcorporate debentures.
Capital appreciation in such schemes may belimited.
Ideal for:
Retired people and others with a need forcapital stability and regular income.
Investors who need some income tosupplement their earnings.
(B) By Investment Objective
�
�
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Starting out in life?Invest in funds that will giveyou lump sum returns aftera few years.
6
Balanced Schemes
Money Market / Liquid Schemes
Tax Saving Schemes (Equity Linked SavingScheme - ELSS)
Aim to provide both growth and income byperiodically distributing a part of the income andcapital gains they earn. They invest in bothshares and fixed income securities in theproportion indicated in their offer documents. In arising stock market, the NAV of these schemesmay not normally keep pace or fall equally whenthe market falls.
Ideal for:
Investors looking for a combination of incomeand moderate growth.
Aim to provide easy liquidity, preservation ofcapital and moderate income. These schemesgenerally invest in safer, short term instrumentssuch as treasury bills, certificates of deposit,commercial paper and interbank call money.
Returns on these schemes may fluctuate,depending upon the interest rates prevailing inthe market.
Ideal for:
Corporates and individual investors as ameans to park their surplus funds for shortperiods or awaiting a more favourableinvestment alternative.
These schemes offer tax incentives to theinvestors under tax laws as prescribed from timeto time and promote long term investments inequities through Mutual Funds.
Ideal for:
Investors seeking tax incentives.
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�
Other Schemes
Special Schemes
This category includes index schemes thatattempt to replicate the performance of aparticular index such as the BSE Sensex, theNSE 50 (NIFTY) or sector specific schemeswhich invest in specific sectors such asTechnology, Infrastructure, Banking, Pharmaetc.
Besides, there are also schemes which investexclusively in certain segments of the capitalmarket, such as Large Caps, Mid Caps, SmallCaps, Micro Caps, 'A' group shares, sharesissued through Initial Public Offerings (IPOs),etc.
Fixed Maturity Plans (FMPs) are investmentschemes floated by mutual funds and are close-ended with a fixed tenure, the maturity periodranging from one month to three/five years.These plans are predominantly debt-oriented,while some of them may have a small equitycomponent.
The objective of such a scheme is to generatesteady returns over a fixed-maturity period andprotect the investor against market fluctuations.FMPs are typically passively managed fixed-income schemes with the fund manager lockinginto investments with maturities correspondingwith the maturity of the plan. FMPs are notguaranteed products.
Exchange Traded Funds are essentially indexfunds that are listed and traded on exchanges like
Index fund schemes are ideal for investors whoare satisfied with a return approximately equal tothat of an index.
Sectoral fund schemes are ideal for investorswho have already decided to invest in a particularsector or segment.
Fixed Maturity Plans
ExchangeTraded Funds (ETFs)
7
Married ?invest in funds that will giveyou regular income tosupplement your salary tomatch your growing needs.
stocks. Globally, ETFs have opened a whole newpanorama of investment opportunities to retail aswell as institutional investors. ETFs enableinvestors to gain broad exposure to entire stockmarkets as well as in specific sectors with relativeease, on a real-time basis and at a lower cost thanmany other forms of investing.
An ETF is a basket of stocks that reflects thecomposition of an index, like S&P CNX Nifty, BSESensex, CNX Bank Index, CNX PSU Bank Index,etc. The ETF's trading value is based on the netasset value of the underlying stocks that itrepresents. It can be compared to a stock that canbe bought or sold on real time basis during themarket hours. The first ETF in India, BenchmarkNifty Bees, opened for subscription on December12, 2001 and listed on the NSE on January 8,2002.
Capital Protection Oriented Schemes areschemes that endeavour to protect the capital asthe primary objective by investing in high qualityfixed income securities and generate capitalappreciation by investing in equity / equity relatedinstruments as a secondary objective. The firstCapital Protection Oriented Fund in India,Franklin Templeton Capital Protection OrientedFund opened for subscription on October 31,2006.
Gold Exchange Traded Funds offer investors aninnovative, cost-efficient and secure way toaccess the gold market. Gold ETFs are intendedto offer investors a means of participating inthe gold bullion market by buying and sellingunits on the Stock Exchanges, without takingphysical delivery of gold. The first Gold ETF inIndia, Benchmark GETF, opened for subscriptionon February 15, 2007 and listed on the NSE onApril 17, 2007.
Capital Protection Oriented Schemes
Gold ExchangeTraded Funds (GETFs)
8
Quantitative Funds
Funds Investing Abroad
Fund of Funds (FOFs)
A quantitative fund is an investment fund thatselects securities based on quantitative analysis.The managers of such funds build computer-based models to determine whether or not aninvestment is attractive. In a pure "quant shop"the final decision to buy or sell is made by themodel. However, there is a middle ground wherethe fund manager will use human judgment inaddition to a quantitative model. The first Quantbased Mutual Fund Scheme in India, Lotus AgileFund opened for subscription on October 25,2007.
With the opening up of the Indian economy,Mutual Funds have been permitted to invest inforeign securities/ American DepositoryReceipts (ADRs) / Global Depository Receipts(GDRs). Some of such schemes are dedicatedfunds for investment abroad while others investpartly in foreign securities and partly in domesticsecurities. While most such schemes invest insecurities across the world there are alsoschemes which are country specific in theirinvestment approach.
Fund of Funds are schemes that invest in othermutual fund schemes. The portfolio of theseschemes comprise only of units of other mutualfund schemes and cash / money marketsecurities/ short term deposits pendingdeployment. The first FOF was launched byFranklin Templeton Mutual Fund on October 17,2003.
Fund of Funds can be Sector specific e.g. RealEstate FOFs, Theme specific e.g. Equity FOFs,Objective specific e.g. Life Stages FOFs or Stylespecific e.g.Aggressive/ Cautious FOFs etc.
Please bear in mind that any one scheme maynot meet all your requirements for all time. You
9
Before investing inMutual Fund Schemes,you should know whichscheme sui ts yourrequirements.
need to place your money judiciously in differentschemes to be able to get the combination ofgrowth, income and stability that is right for you.
Remember, as always, higher the return you seekhigher the risk you should be prepared to take.
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A few frequently used terms are explained herebelow:
Net Asset Value is the market value of theassets of the scheme minus its liabilities. Theper unit NAV is the net asset value of thescheme divided by the number of unitsoutstanding on the valuation date.
Is the price you pay when you invest in ascheme. Also called Offer Price. It may includea sales load.
Is the price at which units under open-endedschemes are repurchased by the Mutual Fund.Such prices are NAV related.
Is the price at which close-ended schemesredeem their units on maturity. Such prices areNAV related.
Is a charge collected by a scheme when it sellsthe units. Also called, ‘Front-end’ load. Schemesthat do not charge a load are called ‘No Load’schemes.
Is a charge collected by a scheme when it buysback the units from the unitholders.
Net AssetValue (NAV)
Sale Price
Repurchase Price
Redemption Price
Sales Load
Repurchase or‘Back-end’Load
WHY SHOULD YOU INVEST IN MUTUALFUNDS?
The advantages of investing in a Mutual Fundare:
You avail ofthe services of experienced and skilledprofessionals who are backed by a dedicatedinvestment research team which analyses theperformance and prospects of companies andselects suitable investments to achieve theobjectives of the scheme.
Mutual Funds invest in anumber of companies across a broad cross-section of industries and sectors. Thisdiversification reduces the risk because seldomdo all stocks decline at the same time and in thesame proportion.You achieve this diversificationthrough a Mutual Fund with far less money thanyou can do on your own.
Investing in aMutual Fund reduces paperwork and helps youavoid many problems such as bad deliveries,delayed payments and unnecessary follow upwith brokers and companies. Mutual Funds saveyour time and make investing easy andconvenient.
Over a medium to long-term, Mutual Funds have the potential to providea higher return as they invest in a diversifiedbasket of selected securities.
Mutual Funds are a relatively lessexpensive way to invest compared to directlyinvesting in the capital markets because thebenefits of scale in brokerage, custodial andother fees translate into lower costs for investors.
In open-ended schemes, you canget your money back promptly at AssetValue(NAV) related prices from the Mutual Fund itself.With close-ended schemes, you can sell your
1. Professional Management:
2. Diversification:
3. Convenient Administration:
4. Return Potential:
5. Low Costs:
6. Liquidity:Net
11
Before committing to investin any Mutua l Fundscheme, understand theadvantages of investmentin Mutual Funds.
units on a stock exchange at the prevailingmarket price or avail of the facility of repurchasethrough Mutual Funds at NAV related priceswhich some close-ended and interval schemesoffer you periodically.
You get regular information onthe value of your investment in addition todisclosure on the specific investments made byyour scheme, the proportion invested in eachclass of assets and the fund manager’sinvestment strategy and outlook.
7. Transparency:
8. Flexibility:
9. Choice of Schemes:
10. Well Regulated:
Through features such asSystematic Investment Plans (SIP), SystematicWithdrawal Plans (SWP) and dividendreinvestment plans, you can systematicallyinvest or withdraw funds according to your needsand convenience.
Mutual Funds offer avariety of schemes to suit your varying needsover a lifetime.
All Mutual Funds areregistered with SEBI and they function within theprovisions of strict regulations designed toprotect the interests of investors.The operationsof Mutual Funds are regularly monitoredby SEBI.
All investments whether in shares, debentures ordeposits involve risk: share value may go downdepending upon the performance of thecompany, the industry, state of capital marketsand the economy; generally, however, longer theterm, lesser the risk; companies may default inpayment of interest/principal on their debentures/bonds/ deposits; the rate of interest on aninvestment may fall short of the rate of inflationreducing the purchasing power.
While risk cannot be eliminated, skillfulmanagement can minimise risk. Mutual Funds
UNDERSTANDING AND MANAGING RISK
12
help to reduce risk through diversification andprofessional management. The experience andexpertise of Mutual Fund managers in selectingfundamentally sound securities and timing theirpurchases and sales, help them to build adiversified portfolio that minimises risk andmaximises returns.
- Identify your investment needs.
Your financial goals will vary, based on your age,lifestyle, financial independence, familycommitments, level of income and expensesamong many other factors. Therefore, the firststep is to assess your needs. Begin by askingyourself these questions:
Probable Answers: I need regular income orneed to buy a home or finance a wedding oreducate my children or a combination of all theseneeds.
Probable Answers: I can only take a minimumamount of risk or I am willing to accept the factthat my investment value may fluctuate or thatthere may be a short term loss in order to achievea long term potential gain.
Probable Answers: I need a regular cash flow or Ineed a lump sum amount to meet aspecific need after a certain period or I don’trequire a current cash flow but I want to build myassets for the future.
By going through such an exercise, you will knowwhat you want out of your investment and can setthe foundation for a sound Mutual FundInvestment strategy.
Step One
1. What are my investment objectives andneeds?
2.How much risk am I willing to take?
3.What are my cash flow requirements?
HOWTO INVEST IN MUTUAL FUNDS
13
Parenthood?Invest in funds that giveyou growth now andregular income later in linewith your children’s needs.
StepTwo
StepThree
- Choose the right Mutual Fund.
Once you have a clear strategy in mind, you nowhave to choose which Mutual Fund and schemeyou want to invest in. The offer document of thescheme tells you its objectives and providessupplementary details like the track record ofother schemes managed the same FundManager. Some factors to evaluate beforechoosing a particular Mutual Fund are:
the track record of performance over the lastfew years in relation to the appropriateyardstick and similar funds in the samecategory.
how well the Mutual Fund is organised toprovide efficient, prompt and personalisedservice.
degree of transparency as reflected infrequency and quality of their communications.
- Select the ideal mix of Schemes.
Investing in just one Mutual Fund scheme maynot meet all your investment needs. You mayconsider investing in a combination of schemes toachieve your specific goals.
The following charts could prove useful inselecting a combination of schemes that satisfyyour needs.
by
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15
Childen’s higher aducation ?Invest in funds that will giveyou lump sum returns whenyour children enter college.
MODERATE PLAN
This plan may suit:
� Investors looking for growth and stability withmoderate risk.
GROWTH SCHEMES
BALANCED SCHEMES
INCOME SCHEMES
MONEY MARKET SCHEMES
10%
20%
40-50%
30-40%
AGGRESSIVE PLAN
This plan may suit:� Investors in their prime earning years and willing
to take more risk.� Investors seeking growth over a long term.
GROWTH SCHEMES
BALANCED SCHEMES
INCOME SCHEMES
MONEY MARKET SCHEMES
10-15%
10-20%
60-70%
5%
� Investors seeking income and moderate growth.
16
-
-
Step Four
Step Five
Invest regularly
For most of us, the approach that works best is toinvest a fixed amount at specific intervals, sayevery month. By investing a fixed sum eachmonth, you get fewer units when the price is highand more units when the price is low, thusbringing down your average cost per unit. This iscalled rupee cost averaging and is a disciplinedinvestment strategy followed by investors all overthe world. With many open-ended schemesoffering systematic investment plans, this regularinvesting habit is made easy for you.
Keep your taxes in mind
As per the current tax laws, Dividend/IncomeDistribution made by mutual funds is exemptfrom Income Tax in the hands of investor.However, in case of debt schemes Dividend/Income Distribution is subject to DividendDistribution Tax. Further, there are other benefits
CONSERVATIVE PLAN
This plan may suit:
10%
50-60%
20-30%
10%
� Retired and other investors who need topreserve capital and earn regular income.
GROWTH SCHEMES
BALANCED SCHEMES
INCOME SCHEMES
MONEY MARKET SCHEMES
available for investment in Mutual Funds underthe provisions of the prevailing tax laws.You maytherefore consult your tax advisor or CharteredAccountant for specific advice to achievemaximum tax efficiency by investing in mutualfunds.
- Start early
It is desirable to start investing early and stick to aregular investment plan. If you start now, you willmake more than if you wait and invest later. Thepower of compounding lets you earn income onincome and your money multiplies at acompounded rate of return.
-The final step
All you need to do now is to get in touch with aMutual Fund or your advisor and start investing.Reap the rewards in the years to come. MutualFunds are suitable for every kind of investor-whether starting a career or retiring, conservativeor risk taking, growth oriented or income seeking.
As a unitholder in a Mutual Fund scheme comingunder the SEBI (Mutual Funds) Regulations, youare entitled to:
1. Receive unit certificates or statements ofaccounts confirming your title within 30 days fromthe date of closure of the subscription underopen-ended schemes or within 6 weeks from thedate your request for a unit certificate is receivedby the Mutual Fund.
2. Receive information about the investmentpolicies, investment objectives, financial positionand general affairs of the scheme.
3. Receive dividend within 30 days of theirdeclaration and receive the redemption orrepurchase proceeds within 10 working daysfrom the date of redemption or repurchase.
Step Six
Step Seven
YOUR RIGHTS AS A MUTUAL FUNDUNITHOLDER
17
Ready to retire?Invest in funds that willsupplement your pension.
Mutual Funds are trulyinvestments for a lifetime.
1st Edition 19972nd Edition 20013rd Edition 2008
Produced by AMFI in association with Price Waterhouse LLP/FIRE Project funded by USAID and Ogilvy & Mather, Financial& Business Communications.
This guide can be obtained directly from:Association of Mutual Funds in India7
E-mail:[email protected]: http://www.amfiindia.com
09, Raheja Centre, Free Press Journal Marg, Nariman Point,Mumbai 400 021.
4.Vote in accordance with the Regulations to:
a.change the Asset Management Company;
b.wind up the schemes.
5. Receive communication from the Trusteesabout change in the fundamental attributes ofany scheme or any other changes which wouldmodify the scheme and affect the interest of theunitholders and to have option to exit atprevailing Net Asset Value without any exit loadin such cases.
6. Inspect the documents of the Mutual Fundsspecified in the scheme’s offer document.
In addition to your rights, you can expect thefollowing from Mutual Funds:
To publish their NAV, in accordance withthe regulations: daily, in case of open-endedschemes and once a week, in case of close-ended schemes.
To disclose your schemes’ entire portfoliotwice a year, unaudited financial results halfyearly and audited annual accounts once a year.In addition many mutual funds send outnewsletters periodically.
To adhere to a Code of Ethics which requirethat investment decisions are taken in the bestinterest of the unitholders.
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TEN ADVANTAGES OF INVESTING IN MUTUAL FUNDS
� Professional Management
� Diversification
� Convenient Administration
� Return Potential
� Low Costs
� Liquidity
� Transparency
� Flexibility
� Choice of Schemes
� Well Regulated
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