BY: Anurag Tripathi

Impact of inflation on monthly

expenses of Rs. 30,000 today
Value of Rs. 100,000 over time
At inflation of 7.55%(may 2012)
Investors need to beat inflation
30,000
43169
89387
89787
Today 5 years 15 years 20 years
100,000
67536
30804
20803
Today 5 years 15 years 20 years
A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial goal.
It is not an alternative investment option to stocks
and bonds, rather it pools the money of several
investors and invests this in stocks, bonds, money
market instruments and other types of securities.

Anybody with an investible surplus can invest in Mutual
Funds.

These investors buy units of a particular Mutual Fund
scheme that has a defined investment objective and
strategy.

First Phase 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of
1988 UTI had Rs.6,700 crores of assets under management.
Second Phase-1987-1993 (Entry of Public Sector Funds)
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. At the end of 1993,
the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase-1993-2003(Entry of Private Sector Funds)
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. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805 crores.
Fourth Phase since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI Mutual
Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the
SEBI Mutual Fund Regulations
Asset Allocation
Diversifying investments in different assets such as stocks, bonds, real estate,
cash in order to optimize risk.

Fund Manager
The individual responsible for making portfolio decision for a mutual fund, in
line with funds objective.

Fund Offer Document
Document with investment objectives, risk factors, expenses summary, how to
invest etc.

Dividend
Profits given to the investor from time to time.

Growth
Profits ploughed back into scheme. This causes the NAV to rise.

NAV
Market value of assets of scheme minus its liabilities.

Per unit NAV = Net Asset Value
No. of Units Outstanding on Valuation date

Entry Load/Front-End Load (0-2.25%)
The commission charged at the time of buying the fund.
To cover costs for selling, processing

Exit Load/Back- End Load (0.25-2.25%)
The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage
withdrawals
May reduce to zero as holding period increases.

Sale Price/ Offer Price
Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than
NAV)

Re-Purchase Price/ Bid Price
Price at which close-ended scheme repurchases its units

Redemption Price
Price at which open-ended scheme

Type of
Mutual Fund
Schemes
Structure
Investment
Objective
Special
Schemes

Open Ended
Funds
Close Ended
Funds
Interval Funds
Growth Funds
Income Funds
Balanced Funds
Money Market
Funds
Industry Specific
Schemes
Index
Schemes
Sectoral
Schemes
By Structure
Open-Ended anytime enter/exit
Close-Ended Schemes listed on exchange, redemption after period of
scheme is over.

By Investment Objective
Equity (Growth) only in Stocks Long Term (3 years or more)
Debt (Income) only in Fixed Income Securities (3-10 months)
Liquid/Money Market (including gilt) Short-term Money Market
(Govt.)
Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)

Other Schemes
Tax Saving Schemes
Special Schemes
ULIP
Expert on your side: When you invest in a mutual fund,
you buy into the experience and skills of a fund manager
and an army of professional analysts.
Limited risk: Mutual funds are diversification in action
and hence do not rely on the performance of a single
entity.
More for less: For the price of one blue chip stock for
instance, you could get yourself a number of units across
a number of companies and industries when you invest in
a fund!
Convenience: You can invest directly with a fund house,
or through your bank or financial adviser, or even over
the internet.
Transparency: As an investor, you get updates on the
value of your units, information on specific investments
made by the mutual fund and the fund manager's
strategy and outlook.
Tax benefits: Over the years, tax policies on mutual
funds have been favourable to investors and continue to
be so.
chopra.rajiv@icai.org
TAXATION
All dividends declared by debt / equity oriented schemes are tax
free in the hands of the investor
Dividend distribution tax @ 14.1625% for individuals and 22.66%
for corporates under debt oriented schemes
No DDT under equity schemes
Long term capital gain in equity schemes exempt from tax
Indexation benefit available for long term non equity schemes
Equity short term capital gain @10%
STCG in Debt funds Rates applicable for the investor
Deduction of Rs. 1 lac under section 80C
Systematic Investment Plan (SIP)
Invest a fixed sum every month. (6 months to 10 years-
through post-dated cheques or Direct Debit facilities)
Fewer units when the share prices are high, and more units
when the share prices are low. Average cost price tends to
fall below the average NAV.

Systematic Transfer Plan (STP)
Invest in debt oriented fund and give instructions to transfer
a fixed sum, at a fixed interval, to an equity scheme of the
same mutual fund.

Systematic Withdrawal Plan (SWP)

An investment plan to invest a
fixed amount regularly at a
specified frequency say,
monthly or quarterly.

SIP is a simple method of investing used
across the world as a means to creating wealth
Benefits of SIP
Regular
Investments happen every month unfailingly
Power Of Compounding
Rupee Cost Averaging
Forced saving
Helps you overpower the temptation to spend fully
Helps you build for the future
Automated
Completely automated process
No hassles of writing cheque every month
Light on the wallet
Investment amount can be so small that you do not even feel the pinch
of it being directly deducted, yet the small amount is powerfully working
towards your financial security

Investing at Peak SIP is the way
Diversified equity funds
Index funds
Opportunity funds
Mid-cap funds
Equity-linked savings schemes
Sector funds like Auto, Health Care, FMCG etc
Dividend Yield Funds
Others (Exchange traded, Theme, Contra etc)
Errors
Invest in only top performing funds
These cannot go wrong
Replicate past performance in future

Appropriate way
Right Mix of equity MFs (Top 3-4 funds, may all be mid-cap funds)
Have variety of funds like diversified funds, mid-cap funds and sector funds
in right proportion.
Beginner- it makes sense to begin with a diversified fund
Gradual exposure to sector and specialty funds.

Look at performance of various funds with similar objectives for
at least 3-5 years (managed well and provides consistent returns)
Investing in Equity Funds
Extra Cash in savings A/c?? Consider Cash Funds

Liquidity: Savings account wins
b/w a savings account and a fixed deposit, no ATM (Now-
Rel Regular Savings Fund)
Safety: Savings account wins
All mutual funds are subject to market risks
Returns: Cash funds win
Upto about 17.5% return
Performance: Cash funds win
Interest rate fluctuations covered by quick maturation

Invest when surplus money in savings a/c based on
expense ratio
Contacting the Asset Management Company directly
Web Site
Request for agent
Agents/Brokers
Locate one on AMFI site
Financial planners
Bajaj Capital etc.
Insurance agents
Banks
Net-Banking
Phone-Banking
ATMs
Online Trading Account
ICICI Direct
Motilal Oswal, Indiabulls- Send agents
Filling up an application form and writing out a
cheque= end of the story NO!

Periodically evaluate performance of your funds
Fact sheets and Newsletters
Websites
Newspapers
Professional advisor
Fund's management changes
Performance slips compared to similar funds.
Fund's expense ratios climb
Beta, a technical measure of risk, also climbs.
Independent rating services reduce their ratings of the
fund.
It merges into another fund.
Change in management style or a change in the
objective of the fund.