A PROJECT ON

“MUTUAL FUND”
BACHELOR OF MANAGEMENT STUDIES
SEMESTER V
(2016-2017)

SUBMITTED BY
RAJAT I. JAIN
ROLL NO. 23

VIDYAVARDHINI’S
A.V. COLLEGE OF ARTS, K.M. COLLEGE OF
COMMERCE & E.S.A. COLLEGE OF SCIENCE
VASAI ROAD (W) DIST. PALGHAR, MAHARASHTRA
- 401202
 A PROJECT ON
MUTUAL FUND
BACHELOR OF MANAGEMENT STUDIES
SEMESTER V

SUBMITTED
IN PARTIAL FULLFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF DEGREE OF BACHELOR OF
MANAGEMENT STUDIES
By,
RAJAT I. JAIN
ROLL NO. 23

VIDYAVARDHINI’S
A.V. COLLEGE OF ARTS, K.M. COLLEGE OF
COMMERCE
& E.S.A. COLLEGE OF SCIENCE
VASAI ROAD (W) DIST. PALGHAR, MAHARASHTRA-
401202

VIDHYAVARDHINIS A.V. COLLEGE OF ARTS, K.M. COLLEGE

OF COMMERCE
 & E.S.A. COLLEGE OF SCIENCE

VASAI ROAD (W), DIST. – THANE, MAHARASHTRA – 401 202

CERTIFICATE

This is to certify that Mr. RAJAT I. JAIN Roll NO. 23 of

BACHELOR OF MANAGEMENT STUDIE (BMS) Semester V
(2016-2017) have successfully completed the project on
“MUTUAL FUND” under the guidance of MR. AMAR MADIA.

_____________ ______________ _________

Principal In charge Co-ordinator

________________ ______________ ___________

Project In charge Internal Examiner External

Examiner

DECLARATION
 I RAJAT I. JAIN the student of BACHELOR OF
MANAGEMENT STUDIES Semester v (2016-17) hereby
declare that I have completed the Project on MUTUAL FUND

The information is submitted is true and original to the best of my

knowledge.

Signature of student:
Name of student: RAJAT I. JAIN
Roll No. 23

ACKNOWLEDGEMENT
“It is not possible to prepare this project report without the assistance &
encouragement of other people. This one is certainly no exception.”

First of all I would like to thank our college

“VIDYAVARDHINI’S K.M. COLLEGE OF COMMERCE” and the
Principal of the college Dr. K.N. GHORUDE for the continuous faith and the
University of Mumbai who has given this opportunity to do this project in this
curriculum. I would also like thank our BBI Incharge DR. ARVIND UBALE
and our co- ordinator “PROF. BHAVNA CHAUHAN LAD” and my project
guide PROF. CA. AMAR MADIA for being very supportive and helped me
to complete this project. I would also like to thank our librarian for providing
with the books I needed.

I would also like to express my gratitude to my friends and my college who

have been supported in my efforts to explore this study.

Last but not the least I gratefully acknowledge the immense motivation that I
received from my parents.

-RAJAT I. JAIN

EXECUTIVE SUMMARY
 A mutual fund is a scheme in which several people invest their money for a
common financial cause. The collected money invests in the capital market and the
money, which they earned, is divided based on the number of units, which they hold.

The mutual fund industry started in India in a small way with the UTl Act creating
what was effectively a small savings division within the RBI. Over a period of 25
years this grew fairly successfully and gave investors a good return, and therefore in
1989, as the next logical step, public sector banks and financial institutions were
allowed to float mutual funds and their success emboldened the government to allow
the private sector to foray into this area.

The advantages of mutual fund are professional management, diversification,

economies of scale, simplicity, and liquidity. The disadvantages of mutual fund are
high costs, over-diversification, possible tax consequences, and the inability of
management to guarantee a superior return.

The biggest problems with mutual funds are their costs and fees it include Purchase
fee, Redemption fee, Exchange fee, Management fee, Account fee & Transaction
Costs. There are some loads which add to the cost of mutual fund. Load is a type of
commission depending on the type of funds.

Mutual funds are easy to buy and sell. You can either buy them directly from the
fund company or through a third party. Before investing in any funds one should
consider some factor like objective, risk, Fund Manager’s and scheme track record,
Cost factor etc.

There are many, many types of mutual funds. You can classify funds based
Structure (open-ended & close-ended), Nature (equity, debt, balanced), Investment
objective (growth, income, money market) etc.

A code of conduct and registration structure for mutual fund intermediaries, which
were subsequently mandated by SEBI. In addition, this year AMFI was involved in a
number of developments and enhancements to the regulatory framework.
 The most important trend in the mutual fund industry is the aggressive expansion
of the foreign owned mutual fund companies and the decline of the companies floated
by nationalized banks and smaller private sector players.

INDEX
CHAPTER TOPICS PAGE NO.
1 INTRODUCTION
2 GROWTH
3 CHARACTERISTICS
4 STRUCTURE
5 FACTORS TO CONSIDER
6 TYPES
7 ADVANTAGES & DISADVANTAGES
8 HOW TO PURCHASE
9 COST
10 HOW TO MAKE MONEY
11 CALCULATION
12 WHY INVEST IN MUTUAL FUND
13 AMFI
14 SEBI
15 MUTUAL FUND & CAPITAL MARKET
16 TAX BENEFIT FROM MUTUAL FUND
CONCLUSION
BIBLOGRAPHY
 CHAPTER 1

INTRODUCTION

The Indian financial system based on four basic components like Financial
Market, Financial Institutions, Financial Service, Financial Instruments. All are play
important role for smooth activities for the transfer of the funds and allocation of the
funds. The main aim of the Indian financial system is that providing the efficiently
services to the capital market. The Indian capital market has been increasing
tremendously during the second generation reforms. The first generation reforms
started in 1991 the concept of LPG. (Liberalization, privatization, Globalization)Then
after 1997 second generation reforms was started, still the it’s going on, its include
reforms of industrial investment, reforms of fiscal policy, reforms of ex- imp policy,
reforms of public sector, reforms of financial sector, reforms of foreign investment
through the institutional investors, reforms banking sectors. The economic
development model adopted by India in the post-independence era has been
characterized by mixed economy with the public sector playing a dominating role and
the activities in private industrial sector control measures emaciated form time to
time. The last two decades have been a phenomenal expansion in the geographical
coverage and the financial spread of our financial system. The spared of the banking
system has been a major factor in promoting financial intermediation in the economy
and in the growth of financial savings with progressive liberalization of economic
policies, there has been a rapid growth of capital market, money market and financial
services industry including merchant banking, leasing and venture capital, leasing,
hire purchasing. Consistent with the growth of financial sector and second generation
reforms its need to fruition of the financial sector. It’s also need to providing the
efficient service to the investor mostly if the investors are supply small amount, in
that point of view the mutual fund play vital for better service to the small investors.
The main vision for the analysis for this study is to scrutinize the performance of five
 star rated mutual funds, given the weight of risk, return, and assets under
management, net assets value, book value and price earnings ratio.

The SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds)

REGULATIONS, 1996 defines a mutual as a “a fund establishment 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”.
Mutual Funds have been a significant source of investments in both government and
corporate securities. It has been for the decades the monopoly of the state with UTI being
the key player with invested funds exceeding Rs.300 Bn. (US$ 10 Bn.). The state owned
insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds
exist, including private and foreign companies. Banks mainly state owned too have
established Mutual Funds (MFs). Foreign participation in mutual funds and asset
management companies permitted on a case by case basis.

WHAT IS A MUTUAL FUND?

Mutual fund is the pool of the money, based on the trust who invests the savings of a
number of investors who shares a common financial goal, like the capital appreciation
and dividend earning. The money thus collect is then invested in capital market
instruments such as shares, debenture, and foreign market. Investors invest money and
get the units as per the unit value which we called as NAV (net assets value). Mutual
fund is the most suitable investment for the common man as it offers an opportunity to
invest in diversified portfolio management, good research team, professionally managed
Indian stock as well as the foreign market, the main aim of the fund manager is to taking
the scrip that have under value and future will rising, then fund manager sell out the
stock. Fund manager concentration on risk – return trade off, where minimize the risk and
maximize the return through diversification of the portfolio. The most common features
of the mutual fund unit are low cost. The below I mention the how the transactions will
done or working with mutual fun

Definition:

A mutual fund is an investment vehicle 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.

“Mutual funds are collective savings and investment vehicles where savings of small
(sometimes big) investors are pooled together to invest for their mutual benefit and
returns distributed proportionately”.

ARE RETURNS FROM MUTUAL FUNDS GURANTED?

Generally, mutual funds do not offer guaranteed returns to investors. Although SEBI
regulations allow mutual funds to offer guaranteed returns subject to the fund meeting
certain conditions, most funds do not offer such guarantees. In case of a guaranteed
minimum return scheme, the sponsor of the AMC, guarantees a minimum level of
return and makes good the difference if the actual returns are less than the guaranteed
minimum. The name of the guarantor and in the manner in which the guarantee shall
be met must be disclosed in the offer document by the mutual fund. Investments in
mutual funds are not guaranteed by the government of India, the Reserve bank of
India or any other government body
HISTORY OF MUTUAL FUND IN INDIA

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The history
of mutual funds in India can be broadly divided into four distinct phases. Each phase is
briefly described as under:

First phase: - 1964-1987

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up
by the Reserve Bank of India and functioned under the Regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory 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 cores of assets under management.

Second phase: - 1987-1993 (Entry of Public Sector Funds)

Entry of non UTI mutual fund. In the year 1987 marked the entry of non- UTI, public
sector mutual funds set up by public sector banks and Life Insurance Corporation of India
(LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first
non- UTI Mutual Fund established in June 1987 followed by Canada bank Mutual Fund
(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its
mutual fund in June 1989 while GIC had setup its mutual fund in December 1990. At the
end of 1993, the mutual fund industry had assets under management of Rs.47, 004 cores.

Third Phase: - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rest. 1,21,805 cores. The Unit Trust of India with Rs.44, 541 cores of assets under
management was way ahead of other mutual funds.

Fourth Phase: – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29, 835 cores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored 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 cores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes
ORIGIN OF MUTUAL FUND IN INDIA

The history of mutual funds dates backs to 19th century when it was introduced in
Europe, in Particular, Great Britain. Robert Fleming set up in 1968 the first investment
trust called Foreign and Colonial Investment Trust which promised to manage the
finances of the Moneyed classes of Scotland by spreading the investment over a number
of different stocks.
This investment trust and other investments trusts which were subsequently set up in
Britain and the US, resembled today’s close – ended mutual funds. The first mutual in the
U.S., Massachustsettes investor’s Trust, was set up in March 1924. This was the open –
ended Mutual fund. The stock market crash in 1929, the Great Depression, and the
outbreak of the Second World War slackened the pace of mutual fund industry,
innovations in products and services Increased the popularity of mutual funds in the
1990s and 1960s. The first international Stock mutual fund was introduced in the U.S. in
1940. In 1976, the first tax – exempt Municipal bond funds emerged and in 1979, the first
money market mutual funds were Created. The latest additions are the international bond
fund in 1986 and arm funds in 1990.
This industry witnessed substantial growth in the eighties and nineties when there was
a Significant increase in the number of mutual funds, schemes, assets, and shareholders.
In the US, the mutual fund industry registered a ten – fold growth the eighties. Since
1996, mutual Fund assets have exceeded bank deposits. The mutual fund industry and the
banking industry Virtually rival each other in size.
 CHAPTER 2

GROWTH OF MUTUAL FUND INDUSTRY

The history of mutual funds dates support to 19th century when it was introduced in
Europe, in particular, Great Britain. Robert Fleming set up in 1868 the first investment
trust called Foreign and colonial investment trust which promised to manage the finances
of the moneyed classes of Scotland by scattering the investment over a number of
different stocks. This investment trust and other investment trusts which were afterward
set up in Britain and the U.S., resembled today’s close – ended mutual funds. The first
mutual fund in the U.S., Massachusetts investor’s trust, was set up in March 1924. This
was the open – ended mutual fund.

The stock market crash in 1929, the Great Depression, and the outbreak of the Second
World War slackened the pace of growth of the mutual fund industry. Innovations in
products and services increased the popularity of mutual funds in the 1950s and 1960s.
The first international stock mutual fund was introduced in the US in 1940. In 1976, the
first tax – exempt municipal bond funds emerged and in 1979, the first money market
mutual funds were created. The latest additions are the international bond fund in 1986
arm funds in 1990. This industry witnessed substantial growth in the eighties and nineties
when there was a Significant increase in the number of mutual funds, schemes, assets,
and shareholders. In the US the mutual fund industry registered s ten – fold growth the
eighties. Since 1996, mutual fund assets have exceeds bank deposits. The mutual fund
industry and the banking industry virtually rival each other in size.

A Mutual fund is type of Investment Company that gathers assets form investors and
collectively invests in stocks, bonds, or money market instruments. The investment
company concepts date to Europe in the late 1700s, according to K. Geert Rouwenhost in
the Origins Mutual Funds, when “a Dutch Merchant and Broker Invited subscriptions
from investor with limited means.” The materialization of “investment pooling “in
England in the 1800s brought the concept closer to U.S. shores. The enactment of two
British Laws, the Joint Stock Companies Acts of 1862 and 1867, permitted investors to
share in the profits of an investment enterprise, and limited investor liability to the
amount of investment capital devoted to the enterprise.

May be more outstandingly, the British fund model established a direct link with U.S.
Securities markets, serving finance the development of the post – Civil War U.S.
economy. The Scottish American Investment Trust, Formed on February1, 1873 by fund
pioneer Robert Fleming, invested in the economic potential of the United States, Chiefly
through American railroad bonds. Many other trusts followed that not only targeted
investment in America, but led to the introduction of the fund investing concept on U.S.
shores in the late 1800 and early 1900s.

Nov. 1925. All these funds were open – ended having redemption feature. Similarly,
they had almost all the features of a good modern Mutual Funds – like sound investment
policies and restrictions, open end ness, self – liquidating features, a publicized portfolio,
simple capital structure, excellent and professional fund management and diversification
etc…….and hence they are the honored grand – parents of today’s funds. Prior to these
funds all the initial investment companies were closed – ended companies. Therefore, it
can be said that although the basic concept of diversification and professional fund
management, Were picked by U.S.A. from England Investment Companies “The Mutual
Fund is an American Creation.”Because of their exclusive feature, open – ended Mutual
Funds rapidly became very popular.

By 1929, there were 19 open – ended Mutual Funds in USA with total assets of $ 140
millions. But the 1929 Stock Market crash followed by great depression of 1930 ravaged
the U.S. Financial Market as well as the Mutual Fund Industry. This necessitated stricter
regulation for mutual funds and for Financial Sectors. Hence, to protect the interest of the
common investors, U.S. Government passed various Acts, such a Securities Act 1933,
Securities Exchange Act 1934 and the Investment Companies Act 1940. A committee
called the National Committee of Investment Company (Now, Investment Company
Institute), was also formed to co – operate with the Federal Regulatory Agency and to
keep informed of trends in Mutual Fund Legislation.

As a result of this measure, the Mutual Fund Industry began to develop speedily and
the total net assets of the Mutual Funds Industry increased from $ 448 million in 1940 to
$ 2.5 billion in 1950. The number of shareholder’s accounts increased from 296000, to
more than one Million during 1940 – 1951. “As a result of renewed interest in Mutual
Fund Industry they grew at 18% annual compound rate reaching peak of their rapid
growth curve in the late 1960s.”Recession.

RECENT TRENDS IN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got
off to a good start due to the stock market boom prevailing the. These banks did not
really understand the mutual fund business and they just viewed it as another kind of
banking activity. Few hired specialized staff and generally chose to transfer staff from the
parent organizations. The performance of most of the schemes floated by these funds was
not good. Some schemes had offered guaranteed returns and their parent organization had
to bail out these AMCs by paying large amounts of money as the difference between the
guaranteed and actual returns. The service levels were also very bad. Most of these
AMCs have not been able to retain staff, float new schemes etc. and it is doubtful
whether, barring a few exceptions, they have serious plans of continuing the activity in a
major way.

The experience of some of the AMCs floated by private sector Indian companies was
also very similar. They quickly realized that the AMC business is a business, which
makes money in the long term and requires deep pocketed support in the intermediate
years. Some have sold out to foreign owned companies, some have merged with others
and there is general restructuring going on.

They can be credited with introducing many new practices such as new product
innovation, sharp improvement in service standards and disclosure, usage of technology,
broker education and support etc. In fact, they have forced the industry to upgrade itself
and service levels of organization like UTI have improved dramatically in the last few
years in response to the competition provided by these.

PERFORMANCE OF MUTUAL FUND IN INDIA

Let us start the discussion of the performance of mutual funds in India from the day
the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India
invited investors or rather to those who believed in savings, to park their money in UTI
mutual funds. The performance of mutual funds in India in the initial phase was not even
closer to satisfactory level. People rarely understood, and of course investing was out of
question. But yes, some 24 million shareholders were accustomed with guaranteed high
returns by the beginning of liberalization of the industry in 1992. This good record of
UTI became marketing tool for new entrants. The expectations of investors touched the
sky in profitability factor. However, people were miles away from the preparedness of
risks factor after the liberalization.

The net asset value of mutual funds in India declined when stock prices started falling
in the year 1992. Those days, the market regulations did not allow portfolio shifts into
alternative investments. There was rather no choice apart from holding the cash or to
further continue investing in shares. One more thing to be noted, since only closed end
funds were floated in the market, the investors disinvested by selling at a loss in the
secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock
market scandal, the losses by disinvestments and of course the lack of transparent rules in
the whereabouts rocked confidence among the investors. Partly owing to a relatively
weak stock market performance, mutual funds have not yet recovered, with funds trading
at an average discount of 1020 percent of their net asset value. The measure was taken to
make mutual funds the key instrument for long term saving. The more the variety offered,
the quantitative will be investors. At last to mention, as long as mutual fund companies
are performing with lower risks and higher profitability within a short span of time, more
and more people will be inclined to invest until and unless they are fully educated with
the dos and don’ts of mutual funds.
 CHAPTER 3

CHARACTERISTICS OF FUNDS

Some of the traditional, 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 back 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, it sells its shares on a continuous basis, although
some funds stop selling when, for example, they become too large.

➣ The investment portfolios of mutual funds typically are managed by separate

entities known as “investment advisers” that are registered with the SEC.
 CHAPTER 4

ORGANIZATION STRUCTURE OF MUTUAL FUNDS

A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, and 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.

A typical mutual fund structure in India can be graphically represented as follows:

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.
However, if any person holds 40% or more of the net worth of an AMC shall be deemed
to be a sponsor and will be required to fulfill the eligibility criteria specified in the
Mutual Fund Regulations. The sponsor or any of its directors or the principal officer
employed by the mutual fund should not be guilty of fraud, not be convicted of an
offence involving moral turpitude or should have not been found guilty of any economic
offence.

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 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. It is also
the responsibility of the trustees to ensure that the AMC does not act in a manner that is
favorable to its associates such that it has a detrimental impact on the unit holders, or that
the management of one scheme by the AMC does not compromise the management of
another scheme. The trustees are also required to ensure that an AMC has been diligent in
empanelling and monitoring any securities transactions with brokers, so as to avoid any
undue concentration of business with any broker. The Mutual Fund Regulations further
mandates that the trustees should prevent any conflicts of interest between the AMC and
the unit holders in terms of deployment of net worth.

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

• The sponsor must have at least 40% stake in the AMC

• The directors of the AMC should be persons having adequate professional experience in
finance and financial services related field and not found guilty of moral turpitude or
convicted of any economic offence or violation of any securities laws

• The AMC should have and must at all times maintain, a minimum net worth of Rs.

10 Crores

• The board of directors of such AMC has at least 50% directors, who are not associates
of or associated in any manner with, the sponsor or any of its subsidiaries or the trustees
• The Chairman of the AMC is not a trustee of any mutual fund.

In addition to the above eligibility criteria 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; the AMC cannot undertake any
other business activities except activities in the nature of portfolio management services,
management and advisory services to offshore funds, pension funds, provident funds,
venture capital funds, management of insurance funds, financial consultancy and
exchange of research on commercial basis if any of such activities are not in conflict with
the activities of the 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. Additionally, a custodian
in which the sponsor or its associates holds 50% or more of the voting rights of the share
capital of the custodian or where 50% or more of the directors of the custodian represent
the interest of the sponsor or its associates cannot act as custodian for a mutual fund
constituted by the same sponsor or any of its associate or subsidiary company.
MUTUAL FUND OPERATIONAL CHART
 A mutual fund company collects money from several investors, and invests it in
various options like stocks, bonds, etc. This fund is managed by professionals who
understand the market well, and try to accomplish growth by making strategic
investments. Investors get units of the mutual fund according to the amount they have
invested. The Asset Management Company is responsible for managing the investments
for the various schemes operated by the mutual fund. It also undertakes activities such
like advisory services, financial consulting, customer services, accounting, marketing and
sales functions for the schemes of the mutual fund.

CHAPTER 5
FACTORS TO CONSIDER

Today, with over 3,500 mutual schemes available in the market the task of picking the
right mutual fund can be rather mind boggling. Moreover with a tendency amongst
investors to fall for the "Rs 10" investment proposition - offered by New Fund Offerings
(NFOs), the task of picking the right ones can be even more daunting. While many
investors also do feel that 'any' mutual fund can help them achieve their desired goals, let
us apprise you that each mutual fund scheme is unique and caters to a certain risk profile.
Moreover, selecting winning mutual funds involves a rigorous process, where both
quantitative and qualitative parameters are considered, as it is imperative to have
consistent performers in your portfolio; those who can stand by you in sickness and
health.

Thus while there are host of factors to be studied, while picking a good mutual fund
(which may not be everyone's cup of tea to evaluate), we recommend that one can
broadly look at the following 10 points, which can enable in selecting the right one:

1. A fund sponsor with integrity

Fund sponsor are individuals who think of starting a mutual fund house. They approach
the capital market regulator - Securities and Exchange Board of India (SEBI), who then
provide them approval to enter the mutual fund business (after having ascertained their
credentials). After having given the approval by SEBI, the sponsors then establish a
Trust under the Indian Trust Act, 1882, and the trustees of which appoint an Asset
Management Company (AMC), who then manages investors' money.

It is vital for you investors to recognise this 3 - tier structure of a mutual fund house, as
the linkage of the same will help you understand who the promoters are, their record in
the financial services domain and the experience which carry along with them. While
SEBI would grant a permission to start a mutual fund only to a person of integrity, with
significant experience in the financial sector and a certain minimum net worth; it
imperative for you to be satisfied (by your own judgement) on these aspects. We believe
these background checks are necessary be it sponsors from India or abroad.
2. Experience of the fund management team

While the trustees assign the job of managing investors' money to the Asset Management
Company (AMC), a check over the experience of the fund management team may ensure
that you give your hard earned money in competent and deserving hands.

While many investors' often get impressed seeing more number of schemes managed by
the fund manager (of a respective fund houses); in our view this is rather worrisome since
it reflects transcending pressure on the fund manager while managing investors' hard
earned money. It may so happen that he may simply replicate the portfolio, and in the
bargain defeat the unique mandate of each scheme managed by him. In our view, ideally,
a fund manager should not be managing more than 5 schemes; as such a "funds-to-fund
manager ratio" can help in bringing in efficiency while managing your hard earned
money.

Also we think that one should not merely invest in a respective mutual fund scheme of a
fund house, just because it is managed by a star fund manager. Many mutual fund
distributors / agents / relationship managers may persuade you to invest in mutual fund
scheme managed by a star fund manager; but then you need to ask relevant questions on
track record of performance of all the mutual fund schemes managed by the star fund
manager (which your mutual fund distributor / agent / relationship manager has high
regards), where you need to check the following:

Returns of the respective mutual fund schemes

Risk investors are exposed to (as revealed by the Standard Deviation)

Risk investors are exposed to (as revealed by the Standard Deviation)

Risk- adjusted returns achieved by the fund (as revealed by the Sharpe Ratio)

Portfolio churning (as revealed by the Portfolio Turnover Ratio)

Moreover, as a litmus test you also need to ascertain how the respective mutual fund
schemes managed by the star fund manager has sailed during various market cycles (i.e.
during bull and bear phases of the markets). Mind you, while your mutual fund
distributor / agent / relationship manager may have everything to boast about the star
fund manager during the bull phases, the true test of the fund manager (he's promoting)
lies during the bear phase. This is because the respective mutual fund schemes managed
by the star fund manager must display limited downside risk during the turbulence of the
equity markets, thereby attempting to protect wealth erosion. And indeed if the fund
manager has delivered a luring performance, then you got to ponder over the question of
what should you do if the fund manager leaves the organisation (for better career
prospects, or even when he retires). While this may sound a bit too much of long- term
thinking, in our opinion it is imperative if the mutual fund house is not process and
systems driven, whereby the fund manager has been given the leeway to manage a
mutual fund scheme based on his individual fund management traits.

3. Investment philosophy, processes and systems followed at the fund house

After having done an evaluation on the fund manager and his team's experience, what is
the broader investment philosophy at the fund house should be well recognized.
Moreover, you also need to assess whether investment processes and systems have been
well laid down by the respective mutual fund house. It is noteworthy that prudent
investment processes and systems have a major impact of individual mutual fund
schemes perform, and moreover tend to sail well during the turbulence of the equity
markets and also when the fund manager quits or retires from his job. This is because
everything is well defined through an investment process and system (along with a
mandate which a respective fund follows), and is not left to the fund manager's whims
and fancies. It is noteworthy that getting a fund house following strong investment
processes and systems is the first, right and very important step in making a prudent
investment decision in mutual fund investing. Hence it is important for you as investors
to delve a little deeper in understanding all these aspects before entrusting your hard
earned money to a respective fund house

4. Investment objective

Every mutual fund scheme, irrespective of the category - whether equity or debt has an
investment objective. It is this investment objective which entails them to invest in
various asset classes in defined proportions. As investors it is imperative to check the
investment objective of the respective mutual fund scheme, and thereby see whether it
suits your objective of investing as well. For example, if you have an objective of capital
appreciation with a long-term investment horizon in mind and is willing to take high risk,
then you should be looking at equity oriented mutual funds. Similarly if you are a risk-
averse investor, you should be looking at suitable debt mutual fund schemes (depending
upon your investment time horizon).

5. Investment style

Further depending upon your risk appetite, you can also structure your mutual fund
portfolio as per market capitalization bias (i.e. large cap, mid cap, small & micro-cap,
multi cap and flexi cap) and fund management style (i.e. opportunities style, value style,
growth style and blend style). While one may argue over how the layman can judge
which market cap bias and investment style the mutual fund scheme follows; we would
like to apprise you that it's all there in the mutual fund scheme's offer document, which
you ought to read well before parking your hard earned money before parking your hard
earned money.

6. Fund performance

The past performance of a mutual fund scheme is important in analyzing a mutual fund.
But remember that, past performance is not everything, as it may or may not be sustained
in future and therefore should not be used as the only parameter to select winning mutual
funds. While during good times your mutual fund distributor in pomp, may exhibit you
performance charts and tables, you also need to evaluate them in context to:

Risk they have exposed you to

Risk-adjusted returns clocked

Portfolio which they held (and its characteristics)

How often the fund has churned its portfolio

Moreover, merely studying these numbers in isolation can do no good to you. On the
contrary a comparative study on these, along with analyzing performance across market
cycles can help you in picking the good ones.

While one may say why not invest in star rated funds if such vigorous process has to be
followed, we would like to acquaint you that merely relying on star ratings (which are
illustrated taking into account only quantitative parameters) may not enable you to have
rock stars or winning mutual fund schemes in your portfolio. This is because when
quantitative parameters (on which they are rated) undergo a change, mutual fund schemes
would also play musical chairs. A fund which is "5 star" rated today, may become "3
star" in the ensuing year. The financial crisis of 2008 has shown that credit rating
agencies were happy to sell their star system to those who offered them money. The
saddest part is that, this completely misled the investors.

7. Expense ratio

Like any other organization, a mutual fund house also incurs annual expenses (such as
administrative costs, management fees, etc.) to run it business. Expense Ratio is the
percentage of assets that go towards these expenses. Every time the fund manager churns
his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form
of an Expense Ratio. It is noteworthy that, higher churning not only leads to higher risk,
but also higher cost to the investor for all the brokerage charges and taxes incurred on
every trade. Costs are always there and are deducted immediately, but the returns and a
higher NAV are a hope for all investors. Hence it is always recommend to select a mutual
fund scheme, which has got a low expense ratio as compared to its peers.

8. Exit load

Likewise, you should also be checking the exit load which a respective mutual fund
scheme would charge. An exit load is levied when you sell your units of a mutual fund
within a particular tenure; most funds charge if the units are sold within a year from date
of purchase. As exit load is a fraction of the NAV, it eats into your investment value.
Thus it is imperative that you invest in a fund with a low exit load, and more importantly
stay invested for the long-term.

9. Investor service and transparency

Services offered by mutual fund houses may vary across funds. Some fund houses are
more investor friendly than others, and offer information at regular intervals. For
instance, fact sheets of some mutual fund schemes are not disclosed in entirety, where the
undisclosed portfolio holds a large composition, thus making one wonder in which
securities is the money parked by the fund house.

Thus while investing, it important to delve a little detail and assess whether the fund
house and the respective mutual fund scheme adopts good disclosure norms, thus making
you exude confidence in them and take a prudent investment decision.

10. The tax implications

Many a times investors go by the word of their mutual fund distributor / agent /
relationship manager and invest in mutual funds. While we arena€™t debating about
quality of the advice they provide (on a respective mutual fund scheme per se), we think
that it is necessary for you to be aware of the tax implications of a respective mutual fund
schemes.

Apart from being aware of tax status for Equity Linked Savings Schemes (ELSS) - where
you are entitled to a deduction under section 80C of the Income Tax Act, 1961 for the
investment made upto a sum of Rs 1 lakh; through experience we can say that many
investors arena aware of the other tax implications of investing in equity and debt mutual
fund schemes.

It is noteworthy that in equity mutual funds, if you have opted for the dividend option
(for the reason that you want cash inflows to be managed through dividends), then the
dividends which you received under the scheme is completely exempt from tax under
section 10(35) of the Income Tax Act, 1961.

If you are caught in the wrong habit of short-term (period of less than 12 months) trading,
then you got to forgo your profits/capital gains, if any, in the form of Short Term Capital
Gains (STCG) tax. STCG are subject to taxation @ 15% plus a 3% education cess.
However, if you are the one who deploys money for the long-term (over a period of 12
months) and thus subscribe to a good habit of long-term investing, then there is no tax
liability towards any Long Term Capital Gain (LTCG). Moreover, at the time of
redeeming your units you will also have to bear a Securities Transaction Tax (STT) @
0.25%.

Similarly in debt mutual fund schemes too, if you have opted for the dividend option (to
manage your cash inflows), then the dividend which the scheme declares will be subject
to an additional tax on income distributed. Hence, in such a case you as an investor are
actually paying the tax indirectly.

Unlike equity funds, in debt funds, you are liable to pay a tax on their Long Term Capital
Gains (LTCG) tax, which is 10% without the benefit of indexation and 20% with the
benefit of indexation. However in case of Short Term Capital Gains (STCG), you will be
taxed at the marginal rate of taxation i.e. to simply put, in accordance to your tax slab. As
far as STT is concerned, debt mutual fund investors do not have any liability to defray the
same. Thus you got to be aware of all these tax implications, which in turn would help
you making a wise investment decision. It always important to remember that investing is
a serious business; and thus it is vital that you adopt enough prudence before you invest
your hard earned money. Moreover, a disciplined approach to investing can help you to
create wealth in the long run

CHAPTER 6

TYPES OF MUTUAL FUNDS

1. Based on the Constitution

Open ended fund

An open-ended fund is a fund that is available for subscription and can be redeemed on
a continuous basis. It is available for subscription throughout the year and investors can
buy and sell units at NAV related prices. These funds do not have a fixed maturity date.
The key feature of an open-ended fund is liquidity.
 
Close-Ended Fund
Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are
called close-ended schemes. Investors can invest directly in the scheme at the time of the
initial issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where they are listed. The market price at the stock exchange could vary from
the scheme's NAV on account of demand and supply situation, unit holders' expectations
and other market factors.
One of the characteristics of the close-ended schemes is that they are generally traded at a
discount to NAV; but closer to maturity, the discount narrows. Some close-ended
schemes give them an additional option of selling their units directly to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least
one of the two exit routes is provided to the investor.

Interval fund
These combine the features of open-ended and close- ended schemes. They may be
traded on the stock exchange or may be open for sale or redemption during pre-
determined intervals at NAV related prices.

2. Based on investment objectives

Equity/Growth funds
Equity/Growth funds invest a major part of its corpus in stocks and the investment
objective of these funds is long-term capital growth. When you buy shares of an equity
mutual fund, you effectively become a part owner of each of the securities in your fund’s
portfolio. Equity funds invest minimum 65% of its corpus in equity and equity related
securities. These funds may invest in a wide range of industries or focus on one or more
industry sectors. These types of funds are suitable for investors with a long-term outlook
and higher risk appetite.
 

Debt/Income Funds
Debt/ Income funds generally invest in securities such as bonds, corporate debentures,
government securities (gilts) and money market instruments. These funds invest
minimum 65%
of its corpus in fixed income securities. By investing in debt instruments, these funds
provide low risk and stable income to investors with preservation of capital. These funds
tend to be less volatile than equity funds and produce regular income. These funds are
suitable for investors whose main objective is safety of capital with moderate growth.

Balanced Funds
Balanced funds invest in both equities and fixed income instruments in line with the pre-
determined investment objective of the scheme. These funds provide both stability of
returns and capital appreciation to investors. These funds with equal allocation to equities
and fixed income securities are ideal for investors looking for a combination of income
and moderate growth. They generally have an investment pattern of investing around
60% in Equity and 40% in Debt instruments.

Money Market/ Liquid Funds

Money market/ Liquid funds invest in safer short-term instruments such as Treasury
Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days. The
aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital
and moderate income. These funds are ideal for corporate and individual investors
looking for moderate returns on their surplus funds.

Gilt Funds
Gilt funds invest exclusively in government securities. Although these funds carry no
credit risk, they are associated with interest rate risk. These funds are safer as they invest
in government securities.
 
Other Schemes
Tax-Saving (Equity linked Savings Schemes) Funds
Tax-saving schemes offer tax rebates to investors under specific provisions of the Income
Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities. Like
an equity scheme, they largely suit investors having a higher risk appetite and aim to
generate capital appreciation over medium to long term.

Index Funds
Index schemes replicate the performance of a particular index such as the BSE Sensex or
the S&P CNX Nifty. The portfolio of these schemes consist of only those stocks that
represent the index and the weight age assigned to each stock is aligned to the stock’s
weight age in the index. Hence, the returns from these funds are more or less similar to
those generated by the Index.
Sector-specific Funds
Sector-specific funds invest in the securities of only those sectors or industries as
specified in the Scheme Information Document. The returns in these funds are dependent
on the performance of the respective sector/industries for example FMCG, Pharma, IT,
etc. The funds enable investors to diversify holdings among many companies within an
industry. Sector funds are riskier as their performance is dependent on particular sectors
although this also results in higher returns generated by these funds.

DIFFERENT PLANS OFFERED BY MUTUAL FUND

 To earlier to different investment needs, mutual fund offers various investment
options. Some of the important investment options include:

Growth option
Dividend is not paid-out under a growth option and the investor realizes only the capital
appreciations on the investment – by an increase in NAV.

Dividend payout option

Dividends are paid out to the investor under the Dividend Payout Option. However, the
NAV of the mutual fund scheme fails to the extent of the dividend payout.

Dividend Re-investment option

Here the dividend accrued on the mutual funds is automatically reinvested in purchasing
additional units in open-ended funds. In most cases mutual fund offers the investor an
option of collecting dividends of reinvesting the same.

Retirement pension option

Some schemes are linked with retirement pension. Individuals particulars in these option
for themselves and corporate participate for their employees.

Insurance options
Certain mutual fund offer schemes that provided insurance cover to investors as an added
benefit.

Systematic Investment Plan-SIP

Here the investor is given the option of preparing a pre-determined number of post-dated
cheques in favor of the fund. The investor is allotted units on a predetermined date
specified in the offer document at the applicable NAV.
Systematic Withdrawal Plan-SWP
As opposed to the systematic Investment plan, the systematic withdrawal plan allows the
investors the facility to withdrawn pre-determined amount/units from his fund at a pre-
determined interval. The investors units will be redeemed at the applicable NAV as on
the day.

 
DIFFERENT CLASSES OF MUTUAL FUND SHARES

Mutual funds may be divided into classes depending on the loads, or sales charges.
There are two types of loads, front-end and back-end. Front-end loads are commissions
charged at purchase of the fund; they directly reduce the amount of money invested by
the amount of the load. Back end loads are sales charges to compensate the sales force for
selling the fund.
While there are differences of opinion as to the choice of load versus no-load funds,
research has found that the performance of load funds and no-load funds is generally
identical over the periods analyzed. However, when the sales charges are included in the
calculation of returns, no load funds significantly outperform load funds.
While there are differences in classes of shares among investment management
companies which charge loads, they generally include the following.

Class A shares commonly have a front-end or back-end load to compensate for the sales
person’s commissions. Because of the high loads, they usually have lower management
fees.

Class B shares commonly have a back-end load that is paid when the shares are sold. The
amount of this back-end load traditionally declines over time. Class B shares generally
have higher expense ratios when compared to Class A shares.
Class C shares generally have lower front- and back-end load fees but higher
management fees.

Class R shares are generally for retirement purposes. Check the loads and management
fees, which may be substantial.
No-load shares are sold without a commission or sales charge. Generally, this type of
mutual fund share is distributed directly by the investment management company instead
of through a sales channel. These shares may have higher management fees to
compensate for the lack of a front- or back-end load.

Class Y shares have very high minimum investments (i.e., $500,000) but have lower
management fees and waived or limited load charges. These are generally for
institutional investors.

Class Z shares are only available for employees of the fund management company.

CHAPTER 7

ADVANTAGES OF MUTUAL FUND

 Mutual funds have designed to provide maximum benefits to investors, and fund
manager have research team to achieve schemes objective. Assets Management Company
has different type of sector funds, which need to proper planning for strategic investment
and to achieve the market return.

1. Professional Management: Investors avail the services of experienced and

skilled professionals who are backed by a dedicated investment research team,
which analyses the performance and prospects of companies and selects suitable
investments to achieve the objectives of the scheme.

2. 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 declare at the same time and in the same proportion.
Investors achieve this diversification through a Mutual Fund with far less money
than they can do on their own.

3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and

helps to avoid many problems such as bad deliveries, delayed payments and
unnecessary follow up with brokers and companies. Mutual Funds saves time and
make investing easy and convenient.

4. 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.

5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared
to directly investing in the capital markets because the benefits of scale in
brokerage, custodial and other fees translate into lower costs for investors.

6. Liquidity: In open-ended schemes, Investors can get their money back promptly
at net asset value related prices from the Mutual Fund itself. With close-ended
 schemes, they can sell their units on a stock exchange at the prevailing market
price or avail of the facility of direct repurchase at NAV related prices which
some close-ended and interval schemes offer periodically.

7. Transparency: Investors get regular information on the value of their investment

in addition to disclosure on the specific investments made by the scheme, the
proportion invested in each class of assets and the fund manager's investment
strategy and outlook.

8. Flexibility: Through features such as regular investment plans, regular

withdrawal plans and dividend reinvestment plans, Investors can systematically
invest or withdraw funds according to their needs and convenience.

9. Choice of Schemes: Mutual Funds offer a family of schemes to suit the varying
needs over a lifetime of their Investors.

10. 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.

11. Less Risk: Investors acquire a diversified portfolio of securities even with a small
investment in a Mutual Fund. The risk in a diversified portfolio is lesser than
investing in merely 2 or 3 securities.

12. Convenience: When you own a mutual fund, you don’t need to worry about
tracking the dozens of different securities in which the fund invests; rather, all you
need to do is to keep track of the fund’s performance. It’s also quite easy to make
monthly contributions to mutual funds and to buy and sell shares in them.

13. Regulations: Mutual funds are regulated by the government under the Investment
Company Act of 1940. This act requires that mutual funds register their securities
 with the Securities and Exchange Commission. The act also regulates the way that
mutual funds approach new investors and the way that they conduct their internal
operations. This provides some level of safety to you, although you should be
aware that the investments are not guaranteed by anyone and that they can decline
in value.

14. Additional services: Some mutual funds offer additional services to their
shareholders, such as tax reports, reinvestment programs, and automatic
withdrawal and contribution plans.

15. Safety: Mutual Fund industry is part of a well-regulated investment environment

where the interests of the investors are protected by the regulator. All funds are
registered with SEBI and complete transparency is forced.
 

DRAWBACKS OF MUTUAL FUND

The mutual fund not just advantage of investor but also has disadvantages for the funds.
The fund manager not always made profits but might creates loss for not properly
managed. The fund have own strategy for investment to hold, to sell, to purchase unit at
particular time period. The different drawbacks of mutual funds are as follows:

1. No Guarantees: No investment is risk free. If the entire stock market declines in

value, the value of mutual fund shares will go down as well, no matter how
balanced the portfolio. Investors encounter fewer risks when they invest in mutual
funds than when they buy and sell stocks on their own. However, anyone who
invests through a mutual fund runs the risk of losing money.

2. Fees and commissions: All funds charge administrative fees to cover their day to
day expenses. Some funds also charge sales commissions or “loads” to
compensate brokers, financial consultants, or financial planners. Even if you don’t
 use a broker or other financial adviser, you will pay a sales commission if you buy
shares in a Load fund.

3. Taxes: During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If your fund makes a
profit on its sales, you will pay taxes on the income you receive, even if you
reinvest the money you made.

4. Management risk: When you invest in a mutual fund, you depend on the fund’s
manager to make the right decisions regarding the fund’s portfolio. If the manager
does not perform as well as you had hoped, you might not make as much money
on your investment as you expected. Of course, if you invest in Index Funds, you
forego management risk, because these funds do not employ managers.
 
5. Misleading Advertisements: The misleading advertisements of different funds
can guide investors down the wrong path. Some funds may be incorrectly labeled
as growth funds, while others are classified as small-cap or income. The SEC
requires funds to have at least 80% of assets in the particular type of investment
implied in their names. The remaining assets are under the discretion solely of the
fund manager. The different categories that qualify for the required 80% of the
assets, however, may be vague and wide-ranging. A fund can therefore
manipulate prospective investors by using names that are attractive and
misleading. Instead of labeling itself a small cap, a fund may be sold under the
heading growth fund. Or, the "Congo High-Tech Fund" could be sold with the
title "International High-Tech Fund".

6. Cash, Cash and More Cash: As you know already, mutual funds pool money
from thousands of investors, so everyday investors are putting money into the
fund as well as withdrawing investments. To maintain liquidity and the capacity
to accommodate withdrawals, funds typically have to keep a large portion of their
 portfolio as cash. Having ample cash is great for liquidity, but money sitting
around as cash is not working for you and thus is not very advantageous.

REASONS FOR DRAWBACKS

1. Mutual funds slowly emerging from FII dominance: If FII selling is blamed
for the carnage in the last one year, increased buying by domestic mutual fund
houses has been the Indian equity market bounce back recently. Between March
12 and 23, mutual fund houses net bought equities worth Rs.1093 crores by
foreign institutional investors. In the same period, the sensex has risen to 9424
from 8343. However, the MFs may be trying to shore up their balance they had
been sitting on cash for too long. Given the expansion of mutual fund industry,
domestic fund houses can play a vital role in driving the market in the next five
years, experts feel.

2. Mutual funds identify promising sectors for next recovery: Amidst the
ongoing recession and the specters of deflation, mutual fund houses are trying to
identify potential sectors to invest in. Asset Management companies are looking
at sectors, which can sustain growth momentum and emerge as key drivers in the
next market recovery. These sectors include FMCG, banking, healthcare,
pharmaceuticals, oil and gas, infrastructure, capital goods, cement and
automobile. Inflation dips to a historic low. Inflation fell further during current
period, below the previous period annual rise even as prices of some essential
commodities like cereals and vegetables rose during the period. This will give
room to the RBI to take further monetary steps to spur the economy. Inflation has
fallen sharply as commodity prices plunged after the global economic and
financial crisis deepened. Some analysts expect negative readings by mid 2009.
 
3. Mutual funds push fixed maturity plans: Fixed maturity plans (FMP), once a
hot Favorite with investors, are back in action. major mutual fund houses have
lined up their FMP offerings just before the financial year ends. However,
financial advisors say, FMP’S are unlikely to regain their lost glory, as investors
won’t find the returns very attractive. Investors may also be vary of these schemes
due to the notoriety they earned last year, forcing the market regulator to change
the rules of the game. This typically happens every march. MF companies are
launching one-year plus products to benefit from double indexation benefit. If you
hold on to your investment in FMP’s for over a year, the tax effectiveness of the
product goes up. That is what used to make FMP’s a huge with investors earlier.

4. Mutual fund now takes derivatives option to gain from savings: The request
to minimize losses or even make profits in the turbulent market conditions is
compelling equity fund managers to look beyond conventional investment
methods. As a part of such an attempt, they are increasingly trading in equity
derivatives to benefit from short-term movements in stocks or indices. This is in
stark contrast to their earlier investment strategy, wherein money managers
bought and held stocks for a longer period before booking a profit.
Government says spending may jump to counter global crunch India said
government spending may have to jump later this year to shield the economy
from a global slump and stem job losses. The fiscal deficit will rise to 6 percent of
gross domestic product in 2008/2009; it’s highest in nearly seven years, from a
planned 2.5 percent. While number was not a surprise, investors are worried gap
could spiral out of control.
 CHAPTER 8

HOW TO PURCHASE A MUTUAL FUND

There are five steps to buying a mutual fund:
1. Determine your investment objectives and key principles.
2. Choose an appropriate investment benchmark.
3. Identify funds that meet your objectives.
4. Evaluate the funds.
5. Make the purchase.

Step 1: Determine Your Investment Objectives

The first step is to determine your investment objectives. What is the ultimate purpose of
the funds you will be investing? Before you can decide on the funds you will invest in,
you must know your budget and your financial goals. Understand where you are currently
in your investment program and determine which key principles of investing will help
you reach your financial goals.

Step 2: Choose an Appropriate Investment Benchmark

The second step is to choose an appropriate investment benchmark. The benchmark you
choose is very important because it will help you determine how well your mutual fund is
performing over time. Before choosing a benchmark, you must decide which asset class
you want to invest in and the way you want your fund to perform. Choose the benchmark
that most closely matches the performance you are seeking. Do you want your
benchmark to be broadly based (i.e., have more constituents) or narrowly based (i.e.,
have fewer constituents)? Generally, a more broadly based benchmark is better because it
is more diversified, and the returns will be less influenced by the poor performance of a
single security. I recommend choosing a benchmark with as many constituents as
possible.
Step 3: Identify Funds That Meet Your Objectives
The third step is to identify funds that meet your objectives. One of the easiest ways to
identify mutual funds that will meet your needs is to use resources such as financial
publications or financial services. Another resource you can use to identify mutual funds
that meet your needs is online databases. After you have input your objectives, a database
will generate a list of funds that fit your criteria. Examples of these databases include
Morningstar Mutual Funds and Schwab One Source. These databases can help you learn
about a mutual fund’s performance, size, fees, investment style, and objectives.

Step 4: Evaluate the Funds

The fourth step is to evaluate the funds. To effectively evaluate a mutual fund, you must
understand a number of characteristics that differ among funds. The following tips will
help you evaluate mutual funds:
Compare funds with the same objectives.
It makes no sense to compare funds with different objectives. Funds that are trying to
accomplish different goals will have different return and risk characteristics. Make sure
you are comparing funds with similar objectives.
Evaluate the fund’s long-term performance versus the long-term performance of its
corresponding benchmark. The difference between the fund’s return and the
benchmark’s return is known as the fund’s tracking error. Research the reasons a
particular fund has done well. If the fund has performed well because it has made good
security selections, this is a good sign; however, make sure the fund has not inflated its
returns by buying outside of its asset class, such as a large-cap U.S. mutual fund buying
securities from Mexico or Brazil. Try to determine whether the fund has a record of good
performance over many years or if the fund has only performed well during a single year.
Examine the history of returns during both up markets and down markets. If the fund has
historically underperformed as compared with its benchmark and similar funds, avoid the
fund. It is easier to spot funds that are performing badly than funds that are performing
well.

Look at portfolio managers. How long has the manager been managing the fund? Was
he or she managing the fund during periods of good performance? After a fund has
performed well, good managers will sometimes leave a company to start their own
mutual fund company, and new managers will be assigned to manage the fund. Look at
how long the managers have been managing the fund. If they have not been managing the
fund for very long, you may want to consider other funds.

Examine the size of the fund. How much has the fund grown or shrunk in the last
month,
quarter, or year? If a fund is shrinking, it generally sells its liquid assets first. After this
liquidation, investors who still have investments in the fund are stuck with illiquid stocks,
which cannot be sold or must be sold at a substantial discount.

Research the fund’s history. How long has the fund existed? Has it changed its style?
How did it perform under previous names and managers? Mutual fund companies
sometimes rename a poorly performing fund and change the fund’s investment objectives
to mask poor performance. Be on the lookout for these changes.

Identify the fund’s fee structure. Sometimes funds will add additional fees or impose
back-end loads on investors to reduce the mutual fund company’s costs. One example of
an additional fee is the 12-b1 fee, which is a marketing fee paid by shareholders to cover
the cost of marketing the fund to other investors. Avoid funds that charge 12b-1 fees.
Generally, I recommend purchasing only no-load mutual funds. Although you cannot
control returns, you can control costs.
Once you have selected a few funds you are interested in, read each fund’s prospectus careful
The prospectus should explain the fund’s goals, the fund’s investment strategy, any investment
limitations the fund has (asset class constraints), any tax considerations that will be of
importance to investors, the minimum account size, the investment and redemption process of
buying and selling shares in the fund, fees the investor is responsible for paying, and the fund
annual turnover ratio. Turnover is particularly important, as it is an indication of how tax
efficient the mutual fund is. Funds with high turnover ratios generally cause investors to pay
more taxes than funds with low turnover ratios, as each sell generates a taxable event.

Consult other sources of information. There are many different sources of financial
information that can help you choose a good mutual fund. Printed sources (many of which ha
online sources as well) include The Wall Street Journal, Morningstar Mutual Funds, Forbes,
Business Week, Kiplinger’s Personal Finance, Smart Money, and Consumer Reports. A good
electronic source is the Motley Fool website at www.fool.com.

Step 5: Make the Purchase

Once you have selected the fund that is right for you, you are ready to make the purchase.
THERE are three ways to purchase a mutual fund: (1) you can make the purchase directly
through the mutual fund company, (2) you can work through a financial professional, or (3) you
can use a mutual fund supermarket.

Buying through the mutual fund company: If you do this, the mutual fund will likely be a
load fund without annual custody fees. You will have access to many or all of the mutual fund
company’s services, including a toll-free number and Internet account access. Some mutual fu
companies’ systems are also compatible with major money-management software, such as In
Quicken or Microsoft Money.

Buying through a financial professional: If do this, you will likely be charged a load on the
sale (a load is similar to a sales commission). The financial professional will likely sell you a
class of shares (called R shares), which will rebate the financial professional a commission, of the
financial professional will charge you an annual custody fee. Many mutual funds have
multiple classes of shares, each with different loads and management fees. Research has show
that, on average, individuals who invest in load funds do not gain higher returns than individual
who invest in no-load funds.
If you decide to purchase your mutual fund through a financial professional, you will still
have access to all the services offered by the mutual fund company. Whether you buy directly
from the mutual fund company or through a financial professional, you should check to make
sure will be able to access your account through Intuit Quicken, Microsoft Money, or other
software programs. Keep in mind that not all mutual funds can be accessed through software
programs Also, be sure that the amount you are willing to invest is larger than the minimum
account size.

Buying through a mutual fund supermarket: If you do this, you will still receive all the
benefits offered by the mutual fund company. If you work with one of these companies,
you will have access to a wide range of mutual fund companies. Mutual fund companies
“give back” a portion of their management fees to the mutual fund supermarkets, such as
Fidelity Funds Network or Charles Schwab, each month to compensate the supermarkets
for bringing in new customers; therefore, mutual fund supermarkets usually charge you
less for their services. Minimum account balances and management fees vary from fund
to fund, but a custody fee is not generally charged on funds purchased through a mutual
fund supermarket.

HOW TO INVEST IN A SCHEME OF A MUTUAL FUND?

Mutual funds normally come out with an advertisement in newspaper publishing the
agents and distributors of mutual funds who are spread all over the country for necessary
information and application forms. Forms can be deposited who provided such services.
Now –A-Days post offices and banks also distribute the units of mutual funds. The only
role of banks and post offices is to help in distribution of mutual funds schemes must take
objective decision.
An investor before investing in a scheme should carefully read the offer document.
Due care must be given to portions relating to main features of the scheme, risk factors,
initial issue expenses and recurring expenses to be charged to the scheme, entry or exit
charges, sponsors track record, educational qualification and work experience of key
personnel including managers, performance of other schemes launched by the mutual
fund in the past, pending litigations and penalties imposed etc.
 CHAPTER 9

VARIOUS COST OF INVESTING IN MUTUAL FUNDS

There are a number of explicit, implicit, and hidden costs associated with investing in
mutual
funds:

Explicit Cost
Loads are a sales charge an investor must pay to purchase certain types of mutual
fund shares. Front-end loads are charged when a fund is purchased and are essentially
sales charges to pay the broker for selling the fund. Back-end loads are charged when
an investor sells certain types of shares. Some funds use back-end loads to discourage
investors from switching funds too often. Back-end loads are often given a sliding
scale, which means that the longer you hold the shares, the smaller the back-end load.
No-load funds do not charge a commission when funds are purchased or sold.

Management fees are assessed to compensate the portfolio manager; these fees are
generally based on a percentage of annual average assets (e.g., 75 basis points, or 0.75
percent per year of assets under management). These fees are assessed annually but are
taken out of the net asset value on a daily basis (i.e., the fund managers are paid daily).

Annual custody fees are charged to hold mutual funds or ETFs in your account. The
custody fee may be a fixed amount for small accounts. For large accounts, the custody
fee may be either a specific charge per holding or a percentage of assets held.

Other fees: There are a number of other fees that may be assessed to your mutual fund,
including 12b-1 fees, distribution fees, and transfer agent fees. A mutual fund charges
investors 12b-1 fees to cover some of the costs of advertising and marketing the fund to
new investors. The fund also charges distribution fees to cover the costs of selling the
fund. The transfer agent fee is charged to compensate the transfer agent, or the company
or institution responsible for ensuring shares are transferred correctly, for maintaining the
investor’s records.

Overall expense ratio is the overall cost of all management fees, custodial fees, trustee
fees, and other fees. It represents the most important explicit cost you should consider
when evaluating mutual funds. An overall expense ratio of 2.25 percent means the mutual
fund must earn 2.25 percent before you will break even on your investment.

Implicit Costs
Implicit costs are expenses that must be accounted for to calculate the true return of your
portfolio; these costs do not appear on your monthly mutual fund report. The implicit cost
of investing in a mutual fund is taxes. You must pay taxes on the four main types of
distributions: bond dividends and interest, stock dividends, short-term capital gains, and
long-term capital gains.

Hidden Costs
Transaction costs cover the expenses of buying and selling securities and the expenses
that are not covered by any other fees. These expenses include commission costs, bid-ask
spreads, and soft-dollar arrangements. Mutual funds that have high turnover—funds that
buy and sell a lot of securities—will have much higher transaction costs than mutual
funds that use a buy-and-hold investment strategy. Recent research has shown that in
some high-turnover funds, the hidden costs of trading are more than double the explicit
overall expense ratio. Such costs significantly reduce the amount of return on the fund.

Commission costs are the costs incurred by the mutual fund buying and selling the
securities in the fund. Mutual fund companies are not required by law to disclose the
amount of commission costs in the prospectus, although this information should be
included in the firm’s statement of additional information. A good way to evaluate
commission costs is to look at the mutual fund’s turnover ratio. The turnover ratio is a
measure of trading activity during the current period. The turnover ratio is calculated by
dividing the average number of net assets in the fund by the amount of securities that
have been bought and sold. A turnover ratio of 50 percent means that half of the value of
the mutual fund has been bought or sold during the period. Not only does turnover raise
commission costs but it also results in short-term capital gains, which are taxed at a
higher percentage rate than long-term capital gains.

Bid-ask spread: Contrary to popular belief, investors may be charged different prices for
buying a security and for selling a security. The difference between these two prices is
the bid-ask spread. This spread can vary depending on the liquidity of the security and the
supply and demand for the security.

Soft-dollar arrangements: Many mutual funds have soft-dollar arrangements with

brokerage houses whereby the brokerage house charges commissions for services in
addition to charges for order execution. These commissions may be charged for research,
access to information sources, computer equipment, and even personal services.

Other hidden costs: In addition to transaction costs, mutual funds may charge several
other hidden costs, such as account transfer fees, account maintenance fees, inactivity
fees, and minimum balance fees
 CHAPTER 10

HOW TO MAKE MONEY FROM MUTUAL FUNDS?

There are two ways to make money on mutual fund holdings: capital appreciation and
distributions.
Capital Appreciation
One way to earn money on mutual fund shares is to purchase shares and hold them for an
extended period of time. Then, when the market value of the shares increases, you can
sell the shares and collect capital gains. Capital gains are generally the preferred type of
earnings because they are not taxed until you sell your mutual fund shares and you get to
decide when to sell those shares. In addition, capital gains are taxed at 15 percent by the
federal government whereas ordinary income may be taxed at a rate of up to 35 percent.

Distributions
Distributions are the second way you can make money on mutual funds. They are a less
attractive type of earnings than capital gains because you do not have control over the
taxes associated with distributions. Even if you do not sell any mutual fund shares, you
must still pay taxes on your mutual fund’s annual distributions. There are five main types
of distributions: short-term capital gains, long-term capital gains, qualified stock
dividends, ordinary (nonqualified) dividends, and bond interest and bond fund
distributions.

Short-term capital gains: Short-term capital gains are earnings on assets you owned
for less than 366 days. Short-term capital gains are taxed at your marginal tax rate,
which can be up to 39.6 percent for federal taxes and 10 percent for state taxes.

Long-term capital gains: Long-term capital gains are earnings on assets the fund has
owned for 366 days or more. In 2015, long-term capital gains are taxed at a federal rate
of 0 percent if your marginal tax rate is 15 percent or less, at 15 percent if your federal
marginal tax rate is between 25 and 35 percent, and at 20 percent if your federal marginal
tax rate is 39.6 percent or higher. There is also an added Medicare tax on long term
capital gains of 3.8 percent if your adjusted gross income (AGI) is $250,000 or higher
(Married Filing Jointly).

Qualified stock dividends: A qualified dividend is a dividend paid by a U.S. corporation

whose stock you held for more than 60 days during the 121-day period that begins 60
days before the ex-dividend date In 2015, qualified stock dividends are taxed at a federal
rate of 0 percent if your marginal tax rate is 15 percent or less higher, at 15 percent if
your federal marginal tax rate is between 25 and 35 percent, and at 20 percent if your
federal marginal tax rate is 39.6 percent or higher. There is also an added Medicare tax on
long term capital gains of 3.8 percent if your AGI is $250,000 or higher.

Ordinary (or non-qualified) stock dividends: Ordinary stock dividends are cash
earnings paid to investors that have not held the stocks for the necessary amount of
time. These dividends are taxed as ordinary income at both the federal and state
levels.

Bond dividends and interest: Bond dividends and interest are distributions from
bonds and bond mutual funds. These earnings are taxed at your marginal tax rate,
which may be as high as 39.6 percent for federal taxes and 10 percent for state taxes.
The key to making money on mutual fund holdings is to invest in funds with high
after-tax returns. The higher the after-tax returns on a fund, the more quickly you will
be able to achieve your personal and financial goals.
 CHAPTER 11

CALCULATING MUTUAL FUND RETURNS

Calculating mutual fund returns is not as easy as it sounds. Too often investors only
account for the explicit costs of trading and they forget about the implicit tax costs.
These costs can significantly reduce the amount of a fund’s return. Remember to
invest wisely and to account for after-tax returns.

Calculating total returns: Mutual fund returns include dividends and distributions as
well as any net asset value (NAV) appreciation. The basic equation for total return is
as follows:
([ending NAV – beginning NAV] + distributions) / beginning NAV

Before using this equation, be sure to adjust your beginning and ending net asset
values to account for the costs of both front-end and back-end loads. These costs will
significantly decrease your return.

Calculating before-tax returns: Before-tax returns are the same as total returns if all
distributions are reinvested. The before-taxes total return includes the increase in the
net asset value and the increase in the number of shares. The total return before taxes
is calculated as follows:

([#ES * EP] – [#BS * BP] + ATSD + ATLCG + ATSCG + ATBDI) / (#BS * BP)

In this equation, the variables are defined as follows:

#BS = number of beginning shares owned

 BP = beginning price of the shares
#ES = number of ending shares owned
EP = ending price of the shares
ATSD = after tax stock distributions, or stock dividend distributions * (1 – the tax
rate on stock dividends)
ATLCG = after tax long-term capital gains distributions, or long-term capital gain
distributions * (1 – tax rate on long-term capital gains)
ATSCG = after tax short-term capital gains distributions, or short-term capital
gains
distributions * (1 – tax rate on short-term capital gains)
ATBDI = after tax bond dividends and interest distributions, or bond dividends
and
interest distributions * (1 – the tax rate on bond dividends and interest).
 CHAPTER 12

WHY INVEST IN A MUTUAL FUND?

The potential of mutual funds is enormous. Mutual funds can bring the average
investor great returns if he/she is willing to follow two basic tenets: doing research and
having patience. These two characteristics, as you will learn, define any successful
investor.

Many people, adults included, do not have the vaguest idea of what mutual funds are.
In a way, they can be described as a group of people investing for a common interest.
They are appealing to the average, conservative investor. And they’re easy enough so that
the common investor can do it on his/her own. The world of mutual funds is so vast that
it can be overwhelming. There are many types of funds, so take it slowly and absorb the
information.

The purpose of this section is not to tell you precisely when and in what to invest but
to help you become aware. The informed decision, after all, is far more sound than one
made on impulse. Beginning to decipher this complex mass information and concepts
will help you make better choices. People invest in mutual funds for so many different
reasons, as you can see below. Over time, mutual funds have proved themselves to be
solid investments.

Reasons why People Invest in Mutual Funds

 CHAPTER 13

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

Association of Mutual Funds in India (AMFI) is an apex body of asset management
companies of the Mutual Fund registered in India. It was incorporated on the August
22nd 1995 as a non-profit making organization. It is dedicated to developing the Indian
Mutual Fund industry on professional, healthy & ethical lines & to enhance and maintain
standards in all areas with a view to protecting & promoting the interests of Mutual
Funds & their unit holders.

OBJECTIVES
• To recommend & implement healthy business practices, ethical code of conduct,
standard principles & practices to be followed by the members of the company & others
engaged in the activities of Mutual Funds & Asset Management including agencies
connected or involved in the field of capital Markets & financial Services.
• To promote high standards of commercial honor & encourage & promote among
members & others the observance of securities laws including regulations & directives
issued by Securities & Exchange Board of India (SEBI) & function in the best of interest
of the investing public.
• To help in setting up professional standards for providing efficient services &
establishing standard practices for Mutual Fund & Asset Management activities.
• To bring about better co-ordination in the field of Mutual Funds & Asset
Management Industry.
• To promote & develop sound, progressive & dynamic principles, practices &
conventions in the activities of Mutual Fund & Asset Management.
• To render assistance & provide common services & utilities to the persons
engaged in the field of Mutual Funds & Asset Management.

The sponsors of association of Mutual Funds in India:

Bank sponsored:
SBI Fund Management Ltd.
BOB Asset Management Co.Ltd.
UTI Asset management Co. Pvt. Ltd.

Institutions:
GIC asset management Co. Ltd.
Jeevan Bima Sahayog Asset Management Co.ltd.

Private sector:
Benchmark Asset Management Co. Pvt. ltd.
Cholamandalam Asset Management Co.ltd.
Credit capital Asset Management Co.ltd.
Escorts Asset Management ltd.
JM Financial Mutual Fund
Kotak Mahindra Asset Management Co.ltd.
Reliance Capital Asset Management ltd.
Sundaram Asset Management Co.ltd.

Predominantly Indian Joint Venture:

Birla Sun Life Asset Management Co.ltd.
HDFC Asset Management Co.ltd.

Predominantly Foreign Joint Venture:

Principal Asset Management Co.ltd.
Prudential ICICI Asset Management Co.ltd.
Standard Chartered Asset Management Co. Pvt. ltd.

CHAPTER 14

SECURITY EXCHANGE BOARD OF INDIA (SEBI)

A index fund scheme’ means a mutual fund scheme that invests in securities in the same
proportion as an index of securities;” A mutual fund may lend and borrow securities in
accordance with the framework relating to short selling and securities lending and
borrowing specified by the Board.”A mutual fund may enter into short selling
transactions on a recognized stock exchange, subject to the framework relating to short
selling and securities lending and borrowing specified by the Board.” “Provided that in
case of an index fund scheme, the investment and advisory fees shall not exceed three
fourths of one percent (0.75%) of the weekly average net assets.”
“Provided further that in case of an index fund scheme, the total expenses of the scheme
including the investment and advisory fees shall not exceed one and one half percent
(1.5%) of the weekly average net assets.” Every mutual fund shall buy and sell securities
on the basis of deliveries and shall in all cases of purchases, take delivery of relevant
securities and in all cases of sale, deliver the securities: Provided that a mutual fund may
engage in short selling of securities in accordance with the framework relating to short
selling and securities lending and borrowing specified by the Board: Provided further that
a mutual fund may enter into derivatives transactions in a recognized stock exchange,
subject to the framework specified by the Board.”

SEBI GUIDELINE OF MUTUAL FUND

SEBI Regulation Act 1996 Establishment of a Mutual Fund: In India mutual fund plays
the role as investment with trust, some of the formalities laid down by the SEBI to be
establishment for setting up a mutual fund. As the part of trustee sponsor the mutual fund,
under the Indian Trust Act, 1882, under the trustee company are represented by a board
of directors. Board of Directors is appoints the AMC and custodians. The board of
trustees made relevant agreement with AMC and custodian. The launch of each scheme
involves inviting the public to invest in it, through an offer documents. Depending on the
particular objective of scheme, it may open for further sale and repurchase of units, again in
accordance with the particular of the scheme, the scheme may be wound up after the particular
time period.

1. The sponsor has to register the mutual fund with SEBI

2. To be eligible to be a sponsor, the body corporate should have a sound track record and
a general reputation of fairness and integrity in all his business transactions.
Means of Sound Track Records:

 The body corporate being in the financial services business for at least five years
 Having a positive net worth in the five years immediately preceding the application of
registration.
 Net worth in the immediately preceding year more than its contribution to the capital
of the AMC.
 Earning a profit in the three out of the five preceding years, including the fifth year.

3. The sponsor should hold at least 40% of the net worth of the AMC.
4. A party which is not eligible to be a sponsor shall not hold 40% or more of the net
worth of the AMC.

5. The sponsor has to appoint the trustees, the AMC and the custodian.

6. The trust deed and the appointment of the trustees have to be approved by SEBI.

7. An AMC or its officers or employees can not be appointed as trustees of the mutual
fund.

8. At least two thirds of the business should be independent of the sponsor.

9. Only an independent trustee can be appointed as a trustee of more than one mutual
fund, such appointment can be made only with the prior approval of the fund of which
the person is already acting as a trustees.

LAUNCHING OF A SCHEMES
Before its launch, a scheme has to be approved by the trustees and a copy of its offer
documents filed with the SEBI.

1. Every application form for units of a scheme is to be accompanies by a memorandum

containing key information about the scheme.

2. The offer document needs to contain adequate information to enable the investors to
make informed investments decisions.

3. All advertisements for a scheme have to be submitted to SEBI within seven days from
the issue date.

4. The advertisements for a scheme have to disclose its investment objective.

 5. The offer documents and advertisements should not contain any misleading
information or any incorrect statement or opinion.

6. The initial offering period for any mutual fund schemes should not exceed 45 days,
the only exception being the equity linked saving schemes.

7. No advertisements can contain information whose accuracy is dependent on

assumption.

8. An advertisement cannot carry a comparison between two schemes unless the schemes
are comparable and all the relevant information about the schemes is given

. 9. All advertisements need to carry the name of the sponsor, the trustees, the AMC of
the fund.

10. All advertisements need to disclose the risk factors.

11. All advertisements shall clarify that investment in mutual funds is subject to market
risk
and the achievement of the fund’s objectives cannot be assured.

12. When a scheme is open for subscription, no advertisement can be issued stating that
the scheme has been subscribed or over subscription.
 CHAPTER 15

MUTUAL FUND & CAPITAL MARKET

Indian institute of capital market (IICM) aims is to educate and develop professionals
for the securities industry in India and other developing countries, other objectives like to
function on a centre for creating investors awareness through research & turning and to
provide specialized consultancy related to the securities industry.
Capital market play vital role for the growth of Mutual fund in India, capital market
divided into the two parts one is the primary market and another is secondary market,
primary market concern with issue management, as per the mutual fund concern the
primary called as the NFO New Fund Offer, all the AMC (Assets Management
Company) are issuing all the funds all the way through the NFO, Every NFO came with
particularly investment objectives, style of investment and allocation of the funds all that
thing depend on the fund manager style of investment. The other portion of the capital
market is secondary market, as we have a discussion with reference with mutual fund
secondary market means when the market bull stage the investors sole the units. Opposite
when the bear stage the investor buy or some of the investor time wait for sale.
ROLE OF MUTUAL FUNDS

Mutual Funds & Financial Market: In the process of development Indian mutual funds
have emerged as strong financial intermediaries & are playing a very important role in
bringing stability to the financial system & efficiency to resource allocation. Mutual
Funds have opened new vistas to investors & imparted a much-needed liquidity to the
system. In the process they have challenged the hitherto role of commercial banks in the
financial market & national economy.

Mutual Fund & Capital Market: The active involvement of Mutual Funds in
promoting economic development can be seen not only in terms of their participation in
the savings market but also in their dominant presence in the money & capital market. A
developed financial market is critical to overall economic development, & Mutual Funds
play an active role in promoting a healthy capital market. The asset holding pattern of
mutual funds in the USA indicates the dominant role of Mutual Funds in the capital
market & money market. More over they have also rendered critical support to securities
mortgage loans & municipal bond market in the USA. In the USA, Mutual Funds provide
very active support to the secondary market in terms of purchase of securities.

Investor’s preferences pattern in India has undergone a tremendous change during

recent times, along with the changes in the share of financial assets in the total annual
savings. Indian investors have moved towards more liquid & growth oriented trade able
instruments like’s shares/debentures & units of Mutual Funds. The shift is asset holding
pattern of investors has been significantly influenced by the ‘equity’ & ‘unit’ culture
while the holders of company shares & debentures are concentrated in the urban areas,
small/medium investors in the semi-urban & rural areas are tending towards Mutual
Funds. Mutual Funds in India have certainly created awareness among investors about
equity oriented investments & its benefits
\

CHAPTER 16

TAX BENEFIT FROM MUTUAL FUND

For most of us, this would mean parking more money in PPF to NSC To earn tepid
returns, just to claim the tax break.
This year, if you are looking to save tax and earn relatively higher returns, we
suggest you take a look at equity linked savings schemes (ELSS).coupled with other
benefits such as shorter lock-in periods and tax free dividends, the ELSS is definitely
worth a slice of your section 80C investments.

WHY ELSS?
ELSS is like any other diversified equity fund but investors can avail tax benefits,
provided the investment is locked in for a period of three years. Hoe do this schemes are
stack up against other instruments permitted for tax planning?
The best performing ELSS scheme gave a three year return of 64.5 percent. While the
worst performer in the period gave a return of 19.88 percent. The 8 percent return from
PPF and NSC hardly compare.

ELSS Scores on the liquidity front too, with a lower lock-in of three years compared to
the PPF’s 15 years and six years of the NSC.
Unlike assured return scheme, ELSS does not guarantee returns, but if you are
comfortable with taking a moderate risk for higher returns, ELSS Is just the product for
you.

TAX CONSEQUENCES

When you buy and hold an individual stock or bond, you must pay
income tax each year on the dividends or interest you receive. But
you won’t have to pay any capital gains tax until you actually sell and
unless you make a profit.

Mutual funds are different. When you buy and hold mutual fund
shares, you will owe income tax on any ordinary dividends in the year you
receive or reinvest them. And, in addition to owing taxes on any personal
capital gains when you sell your shares, you may also have to pay taxes each
year on the fund’s capital gains. That’s because the law requires mutual funds
To distribute capital gains to shareholders if they sell securities for a profit
That can’t be offset by a loss.

Bear in mind that if you receive a capital gains distribution, you will
 Likely owe taxes—even if the fund has had a negative return from the
Point during the year when you purchased your shares. For this reason,
You should call the fund to find out when it makes distributions so
You won’t pay more than your fair share of taxes. Some funds post that
Information on their websites.

SEC rules require mutual funds to disclose in their prospectuses

after-tax returns. In calculating after-tax returns, mutual funds must use
standardized formulas similar to the ones used to calculate before-tax
average annual total returns. You’ll find a fund’s after-tax returns in the
“Risk/Return Summary” section of the prospectus. When comparing
funds, be sure to take taxes into account.

CONCLUSION

When you buy any investment, it's important to understand both the good and bad points.
If the advantages that the investment offers outweigh its disadvantages, it's quite possible
that mutual funds are something to consider. Whether you decide in favor or against
mutual funds, the probability of a successful portfolio increases dramatically when you
do your homework. Too many investors fail to stay the course with their investment
strategy, and instead tend to sell funds when they underperform, or rush in when a
manager has been An old saying, “Don't put all your eggs in one basket” holds very
much true for mutual funds as their biggest advantage is diversification which says that
distributing your money across different types of investments will reduce your risk
enormously up to a certain extent.

Thus we can conclude that mutual funds offer a simple and efficient solution for
investing thereby allowing investors to meet their financial goals. But investing in mutual
fund is not merely giving the check and signing an application form; it also requires
continuous monitoring of funds from time to time.

So whenever you plan investments in mutual funds, you will need the advice and
guidance to help you reach your investment goals. In that case, consider seeking an
advice from experts and consultants/distributors of mutual funds who will help you move
closer to funding the dreams of your life

Thus we can conclude that mutual funds offer a simple and efficient solution for
investing thereby allowing investors to meet their financial goals. But investing in mutual
fund is not merely giving the check and signing an application form; it also requires
continuous monitoring of funds from time to time 

BIBLOGRAPHY

The validity of any research is based on the systematic method of data collection
and analysis of the data collected. The data is collected through secondary sources
which include several websites on internet, forums, blogs, etc.

Study also include data collected and analyzed from the few reference books
such–

1. www.efinancemanagement.com
2. www.accountlearning.com
3. en.wikipedia.org
4. www.investopedia.com
5. www.businessdictionary.com
6. www.yourarticlelibrary.com
7. www.cleverism.com
8. bccaarmel.blogspot.com
9. www.preservearticles.com
10.www.chron.com