MUTUAL FUND - A GLOBALLY PROVEN INVESTMENT

Worldwide, the Mutual Fund, or Unit Trust Trust as it is called in some parts of the world, has a long and successful history. The popularity of the Mutual Fund has increased manifold. In developed financial markets, like the United States, Mutual Funds have almost overtaken bank deposits and total assets of insurance funds.

In India, the Mutual Fund industry started with the setting up of Unit Trust of India in 1964. Public sector banks and financial institutions began to establish Mutual Funds in 1987. The private sector and foreign institutions were allowed to set up Mutual Funds in 1993. This fast growing industry is regulated by the Securities and Exchange Board of India (SEBI).

WHAT IS A MUTUAL FUND?

A Mutual Fund is a trust that pools the savings of a number of investors who share in common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy.

The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme's stated objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively lower cost.

TYPES OF MUTUAL FUND SCHEMES

There are a wide variety of Mutual Fund Schemes that cater to your needs, whatever to your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals.

(A)By Structure

Open-Ended Schemes

These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value("NAV") related prices.

Close-Ended Schemes

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you 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, unitholders expectations and other market factors. One of the characteristics of the close-ended scheme is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.

Some close-ended schemes give you an additional option of selling your 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 are provided to the investor.

Interval Schemes

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.

(B)By Investment Objective

Tax Saving Schemes

These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specific avenues. For example, Equity Linked Saving Schemes(ELSS) and Pension Schemes.

Recent amendments to the Income Tax Act provide furthur opportunities to investors to save capital gains by investing in Mutual Funds. The detail of such tax savings are provided in the relevant offer documents.

Ideal for:

• Investors seeking tax rebates.

Special Schemes

This category includes index schemed that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or the industry specific schemes(which invest in specific industries) or sectoral schemes(which invest exclusively in segments such as 'A' Group shares or initial public offerings).

Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.

Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment.

Keep in mind that anyone scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you.

Remember, as always, higher the return you seek, higher the risk you should be prepared to take.

WHY SHOULD YOU INVEST IN MUTUAL FUNDS?

The advantages of investing in Mutual Fund are:

1. Professional Management. You avail of 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 the suitable investments to achieve the objective of the scheme.

2. Diversificaton. 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 decline in the same time and in same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

3. Convenient Administration. Investing in a Mutual Fund reduces paper work and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Fund saves your 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, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at a prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.

7. Transparency. You get regular information on the value of your investment in addition to disclosure on the specific investments made by your 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 withdrawl plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

9. Choice of Schemes. Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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.

UNDERSTANDING AND MANAGING RISK

All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power.

While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimise risk and maximises returns.

HOW TO INVEST IN MUTUAL FUNDS?

Step One - Identify your investment needs.

Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions:

1. What are my investment objectives and needs?

   Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs.

2. How much risk I am willing to take?

   Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short-term loss in order to achieve a long-term potential gain.

3. What are my cash flow requirements?

   Probable Answers: I need a regular cash flow or I need a lumpsum amount to meet a spacific need after a certain period or I don't require a current cash flow but I want to build my assets for the future.

By going through such an excercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund investment strategy.

Step Two - Choose the right Mutual Fund.

Once you have a clear strategy in mind, you have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplemetary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are:

• the track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category.
• how well the Mutual Fund is organised to provide efficient, prompt and personalised service.
• degree of transparency as reflected in frequency and quality of their communications.

Step Three - Select the ideal mix of Schemes.

The following tables could prove useful in selecting a combination of schemes that satisfy your needs.

AGGRESSIVE PLAN

MODERATE PLAN

CONSERVATIVE PLAN

Step Four - Invest regularly

For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum every month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you.

Step Five - Keep your taxes in mind

If you are in a high tax bracket and have utilised fully the exemptions under section 80L of the Income Tax Act, investing in growth funds that do not pay dividends might be more tax efficient and improve your post-tax return.

If you are in a low tax bracket and have not utilised fully the exemptions available under Section 80L of the Income Tax Act, selecting funds paying regular income could be more tax efficient. Furthur, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws.

You may therefore, consult your tax advisor or Chartered Accountant for specific advice.

Step Six - Start early

It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at the compounded rate of return.

Step Seven - The final step

All you need to do now is to get a touch with a Mutual Fund or your agent/broker and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk-taking, growth-oriented or income seeking.

YOUR RIGHTS AS A MUTUAL FUND UNITHOLDER.

As a unitholder in Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulation, ("Regulations") you are entitled to:

1. Recieve unit certificates or statements of accounts conforming your title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date your request for a unit certificate is recieved by the Mutual Fund;

2. Recieve information about the investment policies, investment objectives, financial position and general affairs of the scheme;

3. Recieve dividend within 42 days of their declaration and recieve the redemption or repurchase proceeds within 10 days from the date of redemption or date of redemption;

4. Vote in accorance with the Regulations to:

   a. either approve or disapprove any change in the fundamental investment policies of the Scheme which are likely to modify the scheme or affect your interest in the Mutual Fund; (as a dissenting unitholder, you would have the right to redeem your investments);

   b. change the asset management company;

   c. wind up the schemes.

5. Inspect the documents of the Mutual Funds specified in the scheme's offer document.

In addition to your rights, you can expect the following from Mutual Funds :

• To publish their NAV, in accordance with the regulations: daily, in case of open-ended schemes and periodically, in case of close-ended schemes;

• To disclose your schemes' portfolio holdings, expenses, policy on asset allocation, the Report of the Trustees of the operations of your schemes and their future outlook through periodic newsletters, half-yearly and annual accounts;

• To adhere to a Code of Ethics which require that investment decisions are taken in the best interests of the unitholders.