CHAPTER: 1

INTRODUCTION TO MUTUAL FUNDS

In the financial industry, the talk of the day is Mutual Funds. Of late, mutual funds
have become a hot favorite of millions of people all over the world. The driving force of mutual
funds is the safety of the principal guaranteed, plus the added an advantage of capital
appreciation together with the income earned in the form of interest or dividend. People prefer
mutual funds to bank deposits, life insurance and even bonds because with a little money, they
can get into the investment game Thus, mutual funds act a gateway to enter into big companies
hitherto inaccessible to an ordinary investor with his small investment.
The origin of the Indian mutual fund industry can be traced back to
1964 when the Indian Government, with a view to augment small savings
within the country and to channelize these savings to the capital markets,
set up the Unit Trust of India (UTI). The UTI was setup under a specific
statute, the Unit Trust of India Act, 1963. The Unit Trust of India launched its
first open-ended equity scheme called Unit 64 in the year 1964, which turned
out to be one of the most popular mutual fund schemes in the country. In
1987, the government permitted other public sector banks and insurance
companies to promote mutual fund schemes. Pursuant to this relaxation, six
public sector banks and two insurance companies viz. Life Insurance
Corporation of India and General Insurance Corporation of India launched
mutual fund schemes in the country.
Securities Exchange Board of India, better known as SEBI, formulated
the Mutual Fund (Regulation) 1993, which for the first time established a
comprehensive regulatory framework for the mutual fund industry. This
proved to be a boon for the mutual fund industry and since then several
mutual funds have been set up by the private sector as well as the joint
sector. Kothari Pioneer Mutual fund became the first from the private sector
1

to establish a mutual fund in association with a foreign fund. Since then

several private sector companies have established their own funds in the
country, making mutual fund industry one of the most followed sector by
critics and investors alike. The share of private sector mutual funds too has
gone up rapidly.

What are Mutual Funds?

To state in simple words, a mutual fund collects the savings from small investors, invest
them in government and other corporate securities and earn income through interest and
dividends, besides capital gains. It works on the principle of small drops of water make a big
ocean. For instance, if one has Rs.1, 000 to invest, it may not fetch very much on its own. But
when it is pooled with Rs.1, 000 each from a lot of other people, then, one could create a big
fund commanding scale and thus, to enjoy the economics of large scale operations. Hence,
mutual fund is nothing but a form of collective investment. It is formed by the coming together
of a number of investor s who transfers their surplus funds to a professionally qualified
organization to manage it. To get the surplus funds from investors, the fund adopts a simple
technique. Each fund is divided into a small fraction called units of equal value. Each investor
is allocated units in proportion to the size of his investment. Thus, every investor, whether big or
small, will have a stake in the fund and can enjoy the wide portfolio of the investment held by
fund. Hence, mutual funds enable millions of small and large investors to participate in and
derive the benefit of the capital market growth. It has emerged s a popular vehicle of creation of
wealth due to high return, lower cost and diversified risk.

DEFINITION OF MUTUAL FUNDS:

The Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 defines a
mutual fund as a a fund established in the form of a trust to raise money through the sale
of units to the public or a section of the public under one or more schemes for investing
in securities, including money market instruments.

An investment vehicle that is made up of a pool of funds collected from many

investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and similar assets. Mutual funds are operated by money
managers, who invest the fund's capital and attempt to produce capital gains and
income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.

One of the main advantages of mutual funds is that they give small investors
access to professionally managed, diversified portfolios of equities, bonds and
other securities, which would be quite difficult (if not impossible) to create with a
small amount of capital. Each shareholder participates proportionally in the gain
or loss of the fund. Mutual fund units, or shares, are issued and can typically be
purchased or redeemed as needed at the fund's current net asset value (NAV) per
share, which is sometimes expressed as NAVPS.

A mutual fund is a company that brings together money from many people and
invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds
or other assets the fund owns are known as its portfolio. Each investor in the fund
owns shares, which represent a part of these holdings.

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 defines a
mutual fund as a fund established in the form of a trust by a sponsor to raise monies by
the trustees through the sale of units to the public, under one or more schemes, for
investing in securities in accordance with these regulations.

STRUCTURE OF A MUTUAL FUND

A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, Asset Management
Company (AMC) and a Custodian. The trust is established by a sponsor or more
than one sponsor who is like a promoter of a company. The trustees of the
mutual fund hold its property for the benefit of the unit-holders. The AMC,
approved by SEBI, manages the funds by making investments in various
types of securities. The custodian, who is registered with SEBI, holds the
securities of various schemes of the fund in its custody. The trustees are
vested with the general power of superintendence and direction over AMC.
They monitor the performance and compliance of SEBI Regulations by the
mutual fund.

Sponsor

The sponsor is required, under the provisions of the Mutual Fund Regulations,
to have a sound track record, a reputation of fairness and integrity in all his
business transactions. Additionally, the sponsor should contribute at least
40% to the net worth of the AMC.

Trustees

The mutual fund is required to have an independent Board of Trustees, i.e.

two thirds of the trustees should be independent persons who are not
associated with the sponsors in any manner whatsoever. An AMC or any of its
officers or employees is not eligible to act as a trustee of any mutual fund. In
case a company is appointed as a trustee, then its directors can act as
trustees of any other trust provided that the object of such other trust is not
in conflict with the object of the mutual fund. Additionally, no person who is
appointed as a trustee of a mutual fund can be appointed as a trustee of any
other mutual fund unless he is an independent trustee and prior approval of
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the mutual fund of which he is a trustee has been obtained for such an
appointment.
The trustees are responsible for inter alia -ensuring that the AMC has all its
systems in place, all key personnel, auditors, registrars etc. have been
appointed prior to the launch of any scheme.

Asset Management Company

The sponsor or the trustees are required to appoint an AMC to manage the
assets of the mutual fund. Under the Mutual Fund Regulations, the applicant
must satisfy certain eligibility criteria in order to qualify to register with SEBI
as an AMC and other ongoing compliance requirements laid down in the
Mutual Fund Regulations, the AMC is required to observe the following
restrictions in its normal course of business. Any director of the AMC cannot
hold office of a director in another AMC unless such person is an independent
director and the approval of the board of the AMC of which such person is a
director, has been obtained; the AMC shall not act as a trustee of any mutual
fund.

Custodian

The mutual fund is required, under the Mutual Fund Regulations, to appoint a
custodian to carry out the custodial services for the schemes of the fund.
Only institutions with substantial organizational strength, service capability
in terms of computerization, and other infrastructure facilities are approved
to act as custodians. The custodian must be totally de-linked from the AMC
and must be registered with SEBI. Under the Securities and Exchange Board
of India (Custodian of Securities) Guidelines, 1996, any person proposing to

carry on the business as a custodian of securities must register with the SEBI
and is required to fulfill specified eligibility criteria.

CHAPTER: 2
TYPESOF MUTUAL FUNDS

OPEN END FUNDS

There is no limit on the number of shares the fund can issue.
CLOSE END FUNDS
Fixed numbers of shares outstanding.
INVESTMENT TRUSTS
Usually consist of corporate government.
LOAD OR NO LOAD
Load charges or commission when shares are (7 8 %)
No load no sales charges.
OTHER FEES AND COSTS.
Professional management fees.

TYPES OF MUTUAL FUNDS

There are wide varieties of Mutual Fund schemes that cater to investor needs, whatever the age,
financial position, risk tolerance and return expectations. The mutual fund schemes can be
classified according to both their investment objective (like income, growth, tax saving) as well
as the number of units (if these are unlimited then the fund is an open-ended one while if there
are limited units then the fund is close-ended).

Based on goals and investment horizon, Mutual Funds give you the option to invest your money
across various asset classes like equity, debt and gold. This allows you to diversify your
investments and strive to reduce your portfolio risk.

The different types of Mutual Funds are as follows

Equity Funds / Growth Funds: Funds that invest in equity shares are called equity funds.
They carry the principal objective of capital appreciation of the investment over a
medium to long-term investment horizon. Equity Funds are high risk funds and their
returns are linked to the stock markets. They are best suited for investors who are seeking
long term growth. There are different types of equity funds such as Diversified funds,
Sector specific funds and Index based funds.

Diversified Funds: These funds provide you the benefit of diversification by investing in
companies spread across sectors and market capitalization. They are generally meant for
investors who seek exposure across the market and do not want to be restricted to any
particular sector.

Sector Funds: These funds invest primarily in equity shares of companies in a particular
business sector or industry. While these funds may give higher returns, they are riskier as
compared to diversified funds. Investors need to keep a watch on the performance of
those sectors/industries and must exit at an appropriate time.

Index Funds: These funds invest in the same pattern as popular stock market indices like
CNX Nifty Index and S&P BSE Sensex. The value of the index fund varies in proportion
to the benchmark index. NAV of such schemes rise and fall in accordance with the rise

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and fall in the index. This would vary as compared with the benchmark owing to a factor
known as tracking error.

Tax Saving Funds: These funds offer tax benefits to investors under the Income Tax Act,
2961. Opportunities provided under this scheme are in the form of tax rebates under
section 80 C of the Income Tax Act, 1961. They are best suited for long investors seeking
tax rebate and looking for long term growth.

Debt Fund / Fixed Income Funds: These Funds invest predominantly in rated debt / fixed
income securities like corporate bonds, debentures, government securities, commercial
papers and other money market instruments. They are best suited for the medium to longterm investors who are averse to risk and seeking regular and steady income. They are
less risky when compared with equity funds.

Liquid Funds / Money Market Funds: These funds invest in highly liquid money market
instruments and provide easy liquidity. The period of investment in these funds could be
as short as a day. They are ideal for Corporate, institutional investors and business houses
who invest their funds for very short periods.

Gilt Funds: These funds invest in Central and State Government securities and are best
suited for the medium to long-term investors who are averse to risk. Government
securities have no default risk.

Balanced Funds: These funds invest both in equity shares and debt (fixed income)
instruments and strive to provide both growth and regular income. They are ideal for
medium- to long-term investors willing to take moderate risks.
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Open Ended Funds: These funds are sold at the NAV based prices, generally calculated
on every business day. These schemes have unlimited capitalization, open-ended schemes
do not have a fixed maturity - i.e. there is no cap on the amount you can buy from the
fund and the unit capital can keep growing. These funds are not listed on any exchange.
Open-ended funds are bringing in a revival of the mutual fund industry owing to
increased liquidity, transparency and performance in the new open-ended funds promoted
by the private sector and foreign players.

Close Ended Funds: Schemes that have a stipulated maturity period, limited capitalization
and the units are listed on the stock exchange are called close-ended schemes.
These schemes have historically seen a lot of subscription. This popularity is estimated to
be on account of firstly, public sector MFs having floated a lot of close-ended income
schemes with guaranteed returns and secondly easy liquidity on account of listing on the
stock exchanges.

Money Market Funds/Liquid Funds:For the cautious investor, these funds provide
a very high stability of principal while seeking a moderate to high current income.
They invest in highly liquid, virtually risk-free, short-term debt securities of
agencies of the Indian Government, banks and corporations and Treasury Bills.
Because of their short-term investments, money market mutual funds are able to
keep a virtually constant unit price; only the yield fluctuates.Therefore, they are
an attractive alternative to bank accounts. With yields that are generally
competitive with - and usually higher than -- yields on bank savings account, they
offer several advantages. Money can be withdrawn any time without penalty.
Although not insured, money market funds invest only in highly liquid, shortterm, top-rated money market instruments. Money market funds are suitable for
investors who want high stability of principal and current income with immediate
liquidity.
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CHAPTER: 3
13

ADVANTAGES AND DISADVANTAGES OF MUTUAL FUNDS

Basics of Mutual Funds

Why Invest through Mutual Funds?

A mutual fund is an entity that pools the money of many investors -- its unit-holders -- to invest
in different securities. Investments may be in shares, debt securities, money market securities or
a combination of these. Those securities are professionally managed on behalf of the unitholders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when
the securities are sold, but subject to any losses in value as well.

What are the benefits of investing through a mutual fund?

Professional Investment Management

Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as
they manage large pools of money. The managers have real-time access to crucial market
information and are able to execute trades on the largest and most cost-effective scale.
Diversification
Mutual funds invest in a broad range of securities. This limits investment risk by reducing the
effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit
from diversification techniques usually available only to investors wealthy enough to buy
significant positions in a wide variety of securities.
Low Cost

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A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000/-, and
sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
Convenience and Flexibility
You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a
wide range of services. Fund managers decide what securities to trade collect the interest
payments and see that your dividends on portfolio securities are received and their rights
exercised. It also uses the services of a high quality custodian and registrar in order to make sure
that your convenience remains at the top of their mind.
Personal Service
One call puts you in touch with a specialist who can provide you with information you can use to
make your own investment choices. They will provide you personal assistance in buying and
selling your fund units provide fund information and answer questions about your account status.
Their Customer service centers are at your service and their Marketing team would be eager to
hear your comments on their schemes.
Liquidity
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000/-, and
sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
Transparency
You get regular information on the value of your investment in addition to disclosure on the
specific investments made by the mutual fund scheme.

ADVANTAGES OF MUTUAL FUNDS

15

These are some of the benefits that come with investing in mutual funds.

Diversification Most financial professionals believe that diversification is one

of the best ways to enhance a portfolio's risk-adjusted return.

Low minimum investmentMutual funds make it possible for investors with

very little cash to own an undivided interest in a diversified portfolio.

Professional managementMutual funds give investors access to professional

managers whose required minimum account size would otherwise put their
services out of the reach of many.

A wide range of risk and reward trade-offsFunds are available with risk
levels ranging from the very conservative to the highly speculative.

ConvenienceThis is perhaps one of the most important advantages that mutual

funds offer. Conveniences can include 24-hour phone or Internet access to
account information, check-writing privileges and automatic investment plans that
deduct a specified amount each month from the investor's bank account.

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Inexpensive reallocationMost mutual funds are part of fund familiesa series

of funds all issued by the same parent company but with different investment
objectives. Most fund families allow their shareholders a reasonable number of
opportunities per year to switch their money among the various funds within the
family with low or no service charges applied. Because of this, mutual fund
investors can often reallocate their portfolios at a substantially lower cost than
others who invest directly in the underlying securities.

Asset allocation and retirement planning toolsAs a service to their

shareholders, many mutual fund companies offer free services, such as asset
allocation optimization software or retirement planning analyzers, that are
designed to help investors select the most appropriate funds for their needs.

A wide range of investment stylesWith literally thousands of mutual funds in

existence and more being created all the time, the odds are good that, no matter
what investment vehicle, style or approach you prefer, there is a mutual fund that
specializes in that sort of investment.

DISADVANTAGES OF MUTUAL FUNDS

17

Despite these many advantages, you are wise to approach any investment in a
mutual fund with an awareness of the following drawbacks.

Management turnoverMany investors select mutual funds based on their past

performance. Unfortunately, with the high rate of management turnover within the
asset management industry, the managers who were primarily responsible for a
particular fund's superior performance in the past may no longer be working for
that company. Therefore, investors should examine not only a fund's past
performance, but also who was responsible for that performance and whether the
same manager or team is still running the fund.

Investment style fluctuationsAn investor who wants to maintain a certain

asset allocation has to rely on the manager of the fund that he or she selects not to
deviate from the fund's stated investment styles. Any changes in priorities or
investment styles could override and defeat the investor's asset allocation.

Panic sellingDuring sharp market downturns, many investors have a tendency

to panic. When this happens, they look to sell their fund shares. Since the fund
managers must redeem the shares, they have no choice but to sell the underlying
securities at a time when there are few, if any, buyers. If not for the flood of
redemptions, the fund manager would likely not sell the underlying securities.

USE OF MUTUAL FUNDS

18

Mutual funds have a wide variety of uses for savings and investing. Their are
mutual funds that can be used for short-term savings and long-term savings. Most
are for long-term savings.
SAVINGS ACCOUNTS:
Short term - An example of a very short-term savings account ( 6 months-one
year), could be a money market mutual fund or income fund.

Midterm - An example of a mid- term savings account (2- 3 years) could be an

income -equity fund.

Long- term - An example of long-term (greater than 3 years) could be a growth or

growth and income mutual fund.

Very long-term - an example of very long term, (five years or more) are growth,
growth and appreciation, growth and income, and international funds.

RETIREMENT ACCOUNTS:

19

Retirement accounts are long-term accounts, so examples of mutual fund types

appropriate for these accounts would be growth, growth appreciation,
international, growth and income or a combination of these funds.

COLLEGE PLANS:
Hopefully you will have at least 10 years to invest for college, the longer the
better. If you don't have ten years do the best you can. The fund choices will be
similar to retirement funds. Use our financial calculators (College Funding
Calculator) to calculate funds needed for college. Many mutual fund companies
have specific college funds. It is best to start saving for college when your
children are babies.
You can also save for college in a ROTH IRA, funded with mutual funds. This is
also true with other investments.
Mutual funds work best when held long term.

COSTS OF FUNDS
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Typically funds are offered with several classes of shares, or they are no-load funds. Mutual fund
companies exist to make money. That money can come from any of several sources:

a.

A sales charge: incurred upon purchase of shares

b.

A deferred sales charge: incurred upon sale of shares

c.

Management fees: an on-going operating cost

d.

Distribution fees (12b-1 fees): on-going costs generally associated with

advertising

e.

Trading costs: costs charged by the broker for executing trades within the
fund. These can be high in finds with high turnover rates.

f.

Other expenses: another category of on-going expenses

g.

No load funds will typically have no sales charge and no deferred sales
charge, but will have the other fees listed.

h.

Load funds will offer different classes of shares such as A, B, or C shares.

These will be defined by different cost structures. An example of the impact of an
investment held for different periods of time will be included in the prospectus.

i.

The best deal for you is largely dependent on how long you hold the
shares. No-load funds held for several years can be more expensive than load
funds.

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CHAPTER 4
MUTUAL FUNDS IN INDIA

Despite being available in the market for over two decades now with assets under
management equaling Rs 7,81,71,152 Lakhs (as of 28 February 2010) (Source: Association of
Mutual Funds, India), less than 10% of Indian households have invested in mutual funds. A
recent report on Mutual Fund Investments in India published by research and analytics
firm, Boston Analytics, suggests investors are holding back from putting their money into mutual
funds due to their perceived high risk and a lack of information on how mutual funds work. This
report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as
of March 2010. There are 43 Mutual Funds recently

The primary reason for not investing appears to be correlated with city size. Among respondents
with a high savings rate, close to 40% of those who live in metros and Tier I cities considered
such investments to be very risky, whereas 33% of those in Tier II cities said they did not know
how or where to invest in such assets.

22

On the other hand, among those who invested, close to nine out of ten respondents did so
because they felt these assets were more professionally managed than other asset classes. Exhibit
2 lists some of the influencing factors for investing in mutual funds. Interestingly, while noninvestors cite "risk" as one of the primary reasons they do not invest in mutual funds, those who
do invest consider that they are "professionally managed" and "more diverse" most often as their
reasons to invest in mutual funds versus other investments.

A mutual fund is a type of professionally managed collective investment vehicle that pools
money from many investors to purchase securities.[1] While there is no legal definition of the
term "mutual fund", it is most commonly applied only to those collective investment vehicles
that are regulated and sold to the general public. They are sometimes referred to as "investment
companies" or "registered investment companies." Most mutual funds are "open-ended,"
meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered
a type of mutual fund.

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SEBI GUIDELINES FOR MUTUAL FUNDS

First, for New Fund Offers (NFOs): They will only be open for 15 days. (ELSS funds though
will continue to stay open for up to 90 days) It will save investors from a prolonged NFO period
and being harangued by advisors and advertisements.

NFOs can only be invested at the close of the NFO period. Earlier, Mutual funds would keep
an NFO open for 30 days, and the minute they received their first cheque, the money would be
directly invested in the market; creating a skewed accounting for those that entered later since
they get a fixed NFO price.

Dividends can now only be paid out of actually realized gains.Impact: it will reduce both the
quantum of dividends announced, and the measures used by MFs to garner investor money using
dividend as a carrot to entice new investors.

Equity Mutual funds have been asked to play a more active role in corporate governance of
the companies they invest in. This will help mutual funds become more active and not just that,
they must reveal, in their annual reports from next year, what they did in each vote.

Equity Funds were allowed to charge 1% more as management fees if the funds were no-load;
but since SEBI has banned entry loads, this extra 1% has also been removed.

SEBI has also asked Mutual Funds to reveal all commission paid to its sponsor or associate
companies, employees and their relatives.
Regarding the Fund-of-Fund (FOF)
24

The market regulator has stated that information documents that Asset Management Companies
(AMCs) have been entering into revenue sharing arrangements with offshore funds in respect of
investments made on behalf of Fund of Fund schemes create conflict of interest. Henceforth,
AMCs shall not enter into any revenue sharing arrangement with the underlying funds in any
manner and shall not receive any revenue by whatever means/head from the underlying fund.

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SIX CHANGES IN MUTUAL FUNDS RECENTLY

1. Higher expense Ratio allowed

Do you know that close to 45% of mutual funds money comes just from Mumbai? Around 87%
of AUM in mutual funds comes from top 15 cities in India, which means that only a minuscule
13% of the mutual funds money belongs to small cities in India. Penetration in other parts of
country is very, very small and not encouraging. Now SEBI has proposed to increase the
Expense ratio by 30 basis points (0.3%) if the mutual funds are able to increase their reach to
smaller towns in India and increase their contribution to 30%. In short, if a mutual funds is able
to get more than 30% of its AUM from other than top 15 cities in India, they can charge a 30
basis points expense ratio higher than its current expense ratio. Lower contribution means
proportionately lower expense ratios.

2. No internal limits in Expense Ratio

A very big change which goes in favor of AMCs is the removal of internal limits on the expense
ratio and for what it can be used. Earlier there was a limit on the AMC to charge up to 2.5%
expense ratio (up to 100 crores AUM), but it was allowed to charge only 1.25% as Fund
Management Charge and 0.5% as distribution charges. The rest was taken as their profits. So
earlier suppose a Mutual Fund charged 2.25% as the expense ratio, then they compulsorily had to
allocate 1.25% as Fund Management Charge and 0.5% for distribution.

3. Putting Exit Loads back into the scheme

You must be wondering what happened to exit loads earlier, where did it go? When an investor
got out of a mutual funds, he was charge an exit load if he quit before 1 year. That money was
not transferred back to mutual fund, nor was it the profit of the mutual fund. It was actually
transferred to a separate fund, which was used for sales, distribution and marketing. But now,
when investor exits prematurely, the entire exit load money will be credited back to the scheme
26

account and will not be treated as AMC profit. However an equal amount (capped at 20 basis
points) can be included in expense ratio back to compensate the AMC loss due to outgoing
investors, which means that overall, for the investors on one hand, the AUM gets increased
(NAV increased marginally because of exit load money coming back to them), while at the same
time theyre paying more in expense ratios, so the net effect of this would be, no gain no loss to
both the parties.

4. Direct Plans with lower expense ratio

SEBI has directed that for each mutual fund, there has to be a equivalent Direct Plan with a
lower expense ratio. So for every mutual fund XYZ, now you will see XYZ and XYZ-Direct
options. So XYZ will come with higher expense ratio, and XYZ-Direct will have lower expense
ratio. Many people who research mutual funds and like to buy it on their own directly from AMC
by passing agents and other online distributors, this option will be cheaper and makes sense.
However, many distributors are not happy with this move and think this will kill their business,
all because investors will then just invest into the direct options.
Note, SEBI has not yet clarified by how much lower, the expense ratio of the Direct plans will be
and if it will be mandatory for each and every plan or just some categories. Well need to wait for
the final circular, to find out.

5. Service Charge will be paid by Investors directly

Earlier the service tax was borne by mutual funds themselves. But now service tax can be passed
to investors and charged from the AUM of the Fund.

6. Financial Advisers and Distributors separation

27

Very soon, financial advisor regulation will come into effect. This means, now there will be some
minimum qualification, registration and guidelines for financial advisers. They will have to
register with SEBI and a separate body of regulators will soon be created for this. A financial
advisor is a professional who advises his clients on investments for a fee. The important
distinction being, he wont be able to earn any money from commissions by selling financial
products. If a person wants to sell financial products and earn commissions out of it, then he will
not be able to advise the clients. But CA, MBA, and several other professionals are kept out of
this rule and even mutual fund agents who have a valid ARN code are kept out of this rule
because their basic advice is seen as the extension of their work. There is still more clarity
required on this, so dont conclude anything yet.

CHAPTER 5

28

CONCLUSION

Since funds include securities, funds provide investors a return via dividends and distribution of
capital gains realized by the sale of individual securities by the fund.

In addition, the shares of the fund itself have a Net Asset Value (NAV). The NAV is the value of
all of the fund's holdings divided by the number of shares minus expenses. If the holdings of the
fund do well, the NAV will increase and the investor may chose to sell shares to take the gain or
to hold shares in the hope of even greater future gain. Most mutual funds are open-end funds and
the share price is the same as the NAV. The NAV is calculated nightly.

Mutual funds are a method for investors to diversify risk and to benefit from professional money
management. The prospectus identifies key information about the fund including its operating
boundaries and its costs. The fund manager operates within those boundaries and is a critical to
achieving strong results within those boundaries.

SUMMARY OF MUTUAL FUNDS

29

A mutual fund brings together a group of people and invests their money in stocks, bonds, and
other securities.
The advantages of mutual are professional management, diversification, economies of scale,
simplicity and liquidity.
The disadvantages of mutual are high costs, over-diversification, possible tax consequences, and
the inability of management to guarantee a superior return.
There are many, many types of mutual funds. You can classify funds based on asset class,
investing strategy, region, etc.
Mutual funds have lots of costs.
Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction
fees (loads).
The biggest problems with mutual funds are their costs and fees.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund company
or through a third party.
Mutual fund ads can be very deceiving.

30

BIBLIOGRAPHY

Financial Markets and Services by E.Gordon & K.Natrajan-Himalaya

Publications, Eighth Revised Edition: 2012.

http://portal.amfiindia.com/
http://content.icicidirect.com/
http://www.icicipruamc.com/mutual-fund.aspx
http://money.usnews.com/

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