CHAPTER I- ABOUT MUTUAL FUNDS

AN INTRODUCTION TO MUTUAL FUNDS

Over the past decade, American investors increasingly have turned to mutual fund
s to save for retirement and other financial goals. Mutual funds can offer the a
dvantages of diversification and professional management. But, as with other inv
estment choices, investing in mutual funds involves risk. And fees and taxes wil
l diminish a fund's returns. It pays to understand both the upsides and the down
sides of mutual fund investing and how to choose products that match your goals
and tolerance for risk. It is an ideal investment vehicle for a common man in co
mplex and modern financial scenario.

DEFINITION OF MUTUAL FUNDS

Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, m
anaged by an investment company with the financial objective of generating high
Rate of Returns. These asset management or investment management companies colle
cts money from the investors and invests those money in different Stocks, Bonds
and other financial securities in a diversified manner. Before investing they ca
rry out thorough research and detailed analysis on the market conditions and mar
ket trends of stock and bond prices. These things help the fund mangers to specu
late properly in the right direction.
TEEN ANALYST ADVICE:
Mutual funds are great because they offer regular investors a chance to diversif
y their portfolios, which is something they may not be able to do on their own.
Consider this, if you want to build a diversified portfolio of 30 stocks, you w
ould probably need $30,000 to get started ($1000 per stock...which is usually th
e norm). Or you could open up an account with a mutual fund for just $1000.
A mutual fund is a professionally managed type of collective
investment scheme that pools money from many investors and invests it in stocks,
bonds, short-term money market instruments, and/or other securities. The mutual
fund will have a fund manager that trades the pooled money on a regular basis.
The net proceeds or losses are then typically distributed to the investors annua
lly.

CONCEPT OF MUTUAL FUNDS

A mutual fund, by its very nature, is diversified -- its assets are invested in
many different securities. The investments by the Mutual Funds are made in equit
ies, bonds, debentures, call money etc., depending on the terms of each scheme f
loated by the Fund. The current value of such investments is now a day is calc
ulated almost on daily basis and the same is reflected in the Net Asset Value (N
AV) declared by the funds from time to time. This NAV keeps on changing with th
e changes in the equity and bond market. Any change in the value of the investme
nts made into capital market instruments (such as shares, debentures etc) is ref
lected in the Net Asset Value (NAV) of the scheme.
FOR EXAMPLE:
If the market value of the assets of a fund is Rs. 100,000
The total number of units issued to the investors is equal to 10,000.
Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
Now if an investor 'X' owns 5 units of this scheme
Then his total contribution to the fund is Rs. 50 (i.e. Number of units held mul
tiplied by the NAV of the scheme).
Therefore, the investments in Mutual Funds is not risk free, but a good managed
Fund can give you regular and higher returns than when you can get from fixed de
posits of a bank etc.

SOME OF THE DISTINGUISHING CHARACTERISTICS OF MUTUAL FUNDS INCLUDE THE FOLLOWING

:
Investors purchase mutual fund shares from the fund itself (or through a broker
for the fund) instead of from other investors on a secondary market, such as the
New York Stock Exchange or NASDAQ Stock Market.
The price that investors pay for mutual fund shares is the fund's per share net
asset value (NAV) plus any shareholder fees that the fund imposes at the time of
purchase (such as sales loads).
Mutual fund shares are "redeemable," meaning investors can sell their shares bac
k to the fund (or to a broker acting for the fund).
Mutual funds generally create and sell new shares to accommodate new investors.
In other words, they sell their shares on a continuous basis, although some fund
s stop selling when, for example, they become too large.
The investment portfolios of mutual funds typically are managed by separate enti
ties known as "investment advisers" that are registered with the SEC.

HISTORY OF MUTUAL FUNDS

The origin of mutual fund industry in India is with the introduction of the conc
ept of mutual fund by UTI in the year 1963. Though the growth was slow, but it a
ccelerated from the year 1987 when non-UTI players entered the industry. The mut
ual fund industry can be broadly put into four phases according to the developme
nt of the sector. Each phase is briefly described as under.
FIRST PHASE - 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It wa
s set up by the Reserve Bank of India and functioned under the Regulatory and ad
ministrative control of the Reserve Bank of India. In 1978 UTI was de-linked fro
m the RBI and the Industrial Development Bank of India (IDBI) took over the regu
latory and administrative control in place of RBI. The first scheme launched by
UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets u
nder management.
SECOND PHASE - 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS)
Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mu
tual 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 under m
anagement.

THIRD PHASE - 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS)

1993 was the year in which the first Mutual Fund Regulations came into being, un
der which all mutual funds, except UTI were to be registered and governed. The e
rstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first priv
ate sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regul
ations were substituted by a more comprehensive and revised Mutual Fund Regulati
ons in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations
1996.As at the end of January 2003, there were 33 mutual funds with total asset
s of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of asset
s under management was way ahead of other mutual funds.
FOURTH PHASE - SINCE FEBRUARY 2003
This phase had bitter experience for UTI. It was bifurcated into two separate en
tities. One is the Specified Undertaking of the Unit Trust of India with AUM of
Rs.29,835 crores (as on January 2003).The second is the UTI Mutual Fund Ltd, spo
nsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under
the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had
in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UT
I Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent m
ergers taking place among different private sector funds, the mutual fund indust
ry has entered its current phase of consolidation and growth. As at the end of S
eptember, 2004, there were 29 funds, which manage assets of Rs.153108 crores und
er 421 schemes.
STRUCTURE OF MUTUAL FUND
Every MF will comprise a sponsor, trustee, AMC, custodian and registrar, and is
regulated by SEBI .The structure of mutual fund is discussed in detail.
• SPONSOR
The company that sets up the MF is called the sponsor. It is typically a financi
al institution, bank, investment house or even an individual that contributes at
least 40 per cent to the net worth of the asset management company (AMC) .The s
ponsor initiates the fund's activities by appointing the trustees, the AMC and c
ustodians.
• TRUSTEE
The trustee monitors the operations of the various schemes and safeguards invest
or interests. The trustees can also review the AMC’s operations and transactions,
including contracts with various agencies such as custodians and registrars.
• ASSET MANAGEMENT COMPANY.
The AMC seeks to multiply the invested money in the fund in line with the scheme
s investment objective. It should have a networth of at least Rs 10 crore. The
AMC is a key player in the MF game and does everything to make the most of your
investment. It launches new schemes, manages them, and employs the fund manageme
nt team, including the fund manager. The sponsor appoints the AMC and the truste
es review its operations.
• CUSTODIAN.
An MF needs to store and record transactions, for which it relies on banks or fi
nancial institutions that are designated custodians. The custodian maintains cus
tody of the securities in which the scheme invests (as distinct from the registr
ar who tracks the investment by investors in the scheme).The custodian also foll
ows up on various corporate actions, such as rights, bonus and dividends declare
d by investor companies.
• R&T AGENTS
Registrars and transfer agents (R&T agents) handle all paperwork involving inves
tor servicing. Their services include processing initial public offerings, dispa
tch of certificates, account statements, annual reports and dividend warrants.
GROWTH OF MUTUAL FUNDS IN INDIA
Over the years not only the new types of mutual funds emerged, the way, in which
mutual funds were sold also changed. But, the Growth of Mutual Funds has not st
opped. It is continuing to evolve to a better future, where investors will get n
ewer opportunities. In March 2006, mutual funds were net buyers worth Rs.4,041.8
8 crores, gross purchases being Rs.14889.15 crore and gross sales Rs.10847.27 cr
ore making March the most active month for the mutual fund industry in India. Ma
y of year 2005 was considered the most active month when mutual funds were net b
uyers of worth Rs.3,334.99 crores.
THE GRAPH INDICATES THE GROWTH OF ASSETS OVER THE YEARS:

SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN INDIA

100% growth in the last 6 years.
Number of foreign AMC s are in the que to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide
.
Our saving rate is over 23%, highest in the world. Only channelizing these savin
gs in mutual funds sector is required.
We have approximately 29 mutual funds which is much less than US having more tha
n 800. There is a big scope for expansion.
B and C class cities are growing rapidly. Today most of the mutual funds are
concentrating on the A class cities. Soon they will find scope in the growing
cities.
Mutual fund can penetrate rural like the Indian insurance industry with simple a
nd limited products.
SEBI allowing the MF s to launch commodity mutual funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices.
Introduction of Financial Planners who can provide need based advice.
SCOPE OF MUTUAL FUNDS IN INDIA.
In today’s world, Scope of Mutual Funds has become so wide, that people sometimes
take long time to decide the mutual fund type; they are going to invest in. Seve
ral Investment Management Companies have emerged over the years who offer variou
s types of Mutual Funds, each type carrying unique characteristics and different
beneficial features. In March 2006, mutual funds were net buyers worth Rs.4,041
.88 crores, gross purchases being Rs.14889.15 crore and gross sales Rs.10847.27
crore making March the most active month for the mutual fund industry in India.
May of year 2005 was considered the most active month when mutual funds were net
buyers of worth Rs.3,334.99 crores The mutual fund industry is expected to grow
at a rate of 13.4% over the next 10 years. It is estimated that by 2010 March-e
nd, the total assets of all scheduled commercial banks should be Rs 40,90,000 cr
ore. The annual composite rate of growth is expected 13.4% during the rest of th
e decade. In the last 5 years we have seen annual growth rate of 9%. According t
o the current growth rate, by year 2010, mutual fund assets will be double.
With this growth rate, the mutual fund investment
s have become one of the most popular modes of investments. Many foreign players
entered the Indian Mutual Fund Industry eying the opportunities. Among them the
US Mutual Funds companies played an important role in the development of the se
ctor.
US COMPANIES INVESTING IN MUTUAL FUNDS
FRANKLIN TEMPLETON INDIA MUTUAL FUND
MORGAN STANLEY MUTUAL FUND
ALLIANCE CAPITAL MUTUAL FUND
PRUDENTIAL ICICI MUTUAL FUND
STEPS TO CHOOSE RIGHT MUTUAL FUND FOR YOURSELF
If you decide to invest in mutual funds, be sure to obtain as much information a
bout the fund before you invest. And don t make assumptions about the soundness
of the fund based solely on its past performance or its name. Here, some steps a
re made out which help in selecting right mutual fund for you. Follow these step
s:
SET LONG-TERM GOALS.
It s important to know what your timeline is. If you don t need the money for 2
0 years, you can afford to be more aggressive in your fund choice. You could pot
entially invest in a more risky sector like emerging markets. A shorter time hor
izon means you ll want to stick with a more conservative fund.

IDENTIFY THE TYPES OF FUNDS YOU NEED (E.G., GROWTH) TO REACH YOUR GOALS.
Getting started will be easier if you first focus your search on a specific type
of fund with a specific investing objective. Eventually, your goal should be to
build a portfolio that includes both stock and bond funds with various investme
nt objectives and investment styles for maximum diversity.
DO MORE READING.
Visit the library or buy some specialized books on mutual fund investing that wi
ll build on what you have learned from this unit. Some useful references are: Mu
tual Funds for Dummies by Eric Tyson, (For Dummies, 2007), Morningstar Guide to
Mutual Funds: Five-Star Strategies for Success (Wiley, 2007) and Common Sense on
Mutual Funds: New Imperatives for the Investor by John C. Bogle (Wiley, 2000).
LOOK FOR A WELL-MANAGED FUND.
There will be plenty of information available on the fund you plan on investing
in. You can order a prospectus and read the Web site. Cut through the marketing
lingo and focus on three important factors: performance, management and consiste
ncy. Also check with independent research companies that cover mutual funds. Mor
ningstar, www.morningstar.com, a mutual fund rating and data firm, is a great re
source.
GET SOURCES OF INFORMATION :PROSPECTUS:
The prospectus is the fund s selling document and contains valuable information,
such as the fund s investment objectives or goals, principal strategies for ach
ieving those goals, principal risks of investing in the fund, fees and expenses,
and past performance. The prospectus also identifies the fund s managers and ad
visers and describes how to purchase and redeem fund shares. While they may seem
daunting at first, mutual fund prospectuses contain a treasure trove of valuabl
e information.
 STATEMENT OF ADDITIONAL INFORMATION ("SAI")
Also known as "Part B" of the registration statement, the SAI explains a fund s
operations in greater detail about the history of the fund, fund policies on bor
rowing and concentration, the identity of officers, directors, and persons who c
ontrol the fund, investment advisory and other services, brokerage commissions,
tax matters, and performance such as yield and average annual total return infor
mation.
SHAREHOLDER REPORTS
A mutual fund also must provide shareholders with annual and semi-annual reports
within 60 days after the end of the fund s fiscal year and 60 days after the fu
nd s fiscal mid-year. These reports contain a variety of updated financial infor
mation, a list of the fund s portfolio securities, and other information.
PAST PERFORMANCE
A fund s past performance is not as important as you might think. Advertisements
, rankings, and ratings often emphasize how well a fund has performed in the pas
t. But studies show that the future is often different. This year s "number one"
fund can easily become next year s below average fund.

LOOKING BEYOND A FUND S NAME

Don t assume that a fund called the "XYZ Stock Fund" invests only in stocks or t
hat the "Martian High-Yield Fund" invests only in the securities of companies he
adquartered on the planet Mars. The SEC requires that any mutual fund with a nam
e suggesting that it focuses on a particular type of investment must invest at l
east 80% of its assets in the type of investment suggested by its name. But fund
s can still invest up to one-fifth of their holdings in other types of securitie
s — including securities that you might consider too risky or perhaps not aggressi
ve enough.
DETERMINE YOUR SELECTION CRITERIA AND ELIMINATE FUNDS.
You can whittle down the over 8,000 fund universe to a manageable list in short
order by using a few criteria to help with the elimination process. For example,
suppose you are looking for a stock fund to invest for retirement. Right there,
you have cut the number to a little over 5,000 funds by eliminating all the bon
d and money market funds. Perhaps you will toss out all funds that have a sales
commission, all stock funds with an expense ratio over 1.4%, funds that have an
investment minimum over $3,000, any fund where the manager’s tenure is less than 5
years, and all funds that have not outperformed 60% of comparable funds over th
e last 3 and 5 five years, etc. Applying these criteria as you research your fav
orites, pay most attention to performance, cost to invest, and risk.
CHECK FOR CONSISTENCY
Pick a mutual fund that has yielded good returns year after year. That indicates
the fund can be successful under a variety of conditions.
KNOW THE RISKS
Mutual funds are not thought of as extremely risky investments, mainly because t
hey invest in hundreds of stocks. But this is no reason to go into a fund blind.
Make sure to read the part of the prospectus that talk about risk. Some sectors
of the market can perform badly even when the majority of stocks are going up.
Be aware of what sector or sectors the fund invests in, and what can go wrong wi
th these areas.
AVOID SALES CHARGES
Also known as loads or commissions, these charges may be incurred for buying (fr
ont-end load) or selling the fund (back-end load, deferred sales or redemption f
ees). Stay away from them.
LOOK FOR LOW EXPENSE RATIOS
These ratios represent the annual fees that mutual funds charge and include man
agement fees, administrative costs, distribution fees and some operating expense
s. If possible, these fees should be under one percent annually.
CONSIDER THE MANAGER
Managers determine when a fund s stock or bond should be bought or sold. Look fo
r one who has longevity with the fund and company.
ASK THE EXPERTS
Search the Internet for financial planners, investment advisors and mutual fund
companies. You also can access information on all varieties of mutual funds and
what experts consider being the top picks.
CALL OR WRITE FOR A PROSPECTUS
A prospectus for a mutual fund is the selling document legally required to be di
stributed to mutual fund investors. It describes the fund’s investment strategy as
well as the risks and costs of an investment.
MAKE YOUR PURCHASE
While you can always do business by mail, and in some cases, at a local investme
nt center, most mutual fund groups offer a toll-free number for telephone assist
ance. Of course, if you are buying a fund with a sales commission, the broker or
financial planner executes your order.
CONTINUALLY BUY MORE SHARES
One of the best ways to grow your investments is to use a dollar-cost averaging
strategy—investing a fixed number of dollars (e.g., $50) in a mutual fund(s) at pe
riodic intervals, usually monthly or quarterly. When the price of the fund is lo
w, your dollars buy more shares. When the fund’s NAV moves higher, you will buy fe
wer shares.
REVIEW PERIODICALLY
After you have selected your mutual fund, set up a regular review schedule—general
ly at the end of the year—to ensure its performance remains consistent with your i
nvestment objectives and level of investment risk. Look at a fund s track record
and portfolio. Don t obsess over a mutual fund s double-digit return. Review th
e fund company s prospectus before investing. You ll learn the goals and its str
ategy for achieving them. Seek the advice of an accountant and/or a tax expert r
egarding the implications of your investment before you buy. Who Can Help

HOW TO FILL UP THE APPLICATION FORM OF A MUTUAL FUND SCHEME?

An investor must mention clearly his name, address, number of units applied for
and such other information as required in the application form. He must give his
bank account number so as to avoid any fraudulent encashment of any cheque/draf
t issued by the mutual fund at a later date for the purpose of dividend or repur
chase. Any changes in the address, bank account number, etc at a later date shou
ld be informed to the mutual fund immediately.