MUTUAL FUNDS

THEORITICAL BACKGROUND

Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as
disclosed in offer document.
A mutual fund is an investment vehicle for investors who pool their savings for
investing in diversified portfolio of securities with the aim of attractive yields
and appreciation in their value.
Investments in securities are spread across a wide cross-section of industries
and sectors and thus the risk is reduced .Mutual funds issues units to the
investors in accordance with quantum of money invested by them. Investors of
mutual funds are known as unit-holders. The profit or losses are shared by the
investors in proportion to their investments. The mutual funds normally come
out with a number of schemes with different investment objectives, which are
launched from time to time. A mutual fund is required to be registered with
securities and exchange board of India.
A mutual fund is setup in the form of a trust, which has
1. Sponsor
2. Trustees
3. Asset Management Company and
4. Custodian.
The trust is established by a sponsor or more than one sponsor who is like
promoter of a company. The trustees of mutual fund hold its property for the
benefit of the unit-holders. Asset management company (AMC) approved by
SEBI manages the funds by making investments in various types of securities.
Respective asset management companies (AMC) management mutual fund
schemes. Different business groups have sponsored these AMC s. some
international funds are also operation independently in India like Aliens and
Template.

A BRIEF HISTORY OF MUTUAL FUND

The concept of mutual fund is a new feather in Indian capital market but not
to international capital markets. The formal origin of mutual funds can be
traced to Belgium where society generated Belgium was established in 1822 as
an investment company to finance investments in National Industries with high
associated risk. The concept of mutual funds spread to USA in the beginning of
20th century and three investment companies were started in 1924 since then the
concept of mutual funds has been growing all around the world
In India, first mutual fund was started in 1964 when unit trust of India (UTI)
was established in the similar line of operation of the UK.
The term Mutual fund has not been explained in British literature but it is
considered as synonym of investment trust of

DEFINITIONS
The concept of mutual fund has been defined in various ways.
The mutual fund as an important vehicle for bringing wealth holders and
deficit units together indirectly
...Mr. James pierce
Mutual fund as financial intermediaries which being a wide variety of
securities with in the reach of the most modest of investors.
Frank Relicy
According to SEBI mutual fund regulations 1993, Mutual fund means a fund
established in the form of trust by sponsor to raise moneys by the trustees
through the sale of units to the public under one or more schemes for investing
in securities in accordance with these regulations.

CONCEPT OF MUTUAL FUNDS

A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized 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 low cost.

The flow chart below describes broadly the working of a mutual fund:

VALUE CHAIN OF MUTUAL FUND

SPONSOR:
Any person who, acting alone or in combination with another body
corporate, establishes a mutual fund.
Asset Management Company
A firm that invests the pooled funds of retail investors in securities in line
with the stated investment objectives. For a fee, the investment company
provides more than diversification, liquidity, and professional management
service than is normally available to individual investors.
Trustee

The Board of Trustees or the Trustee company who hold the property of the
Mutual Fund in trust for the benefit of the unit holders.
Mutual Fund
A fund established in the form of a trust to raise money through the sale of
units to the public or a section of the public under one or more schemes for
investing in securities, including money market instruments.

Transfer Agent
A transfer agent is employed by a mutual fund to maintain records of
shareholder accounts calculate and disburse dividends and prepare and mail
shareholder account statements, federal income tax information and other
shareholder notices.
Custodian
Mutual funds are required by law to protect their portfolio securities by
placing them with a custodian. Nearly all mutual funds use qualified bank
custodians.
Unit Holder
A person who is holding units in a scheme of a mutual fund.
CLASSIFICATION OF SCHEMES
By Structure
Open-ended
A scheme where investors can buy and redeem their units on any business day.
Its units are not listed on any stock exchange but are bought from and sold to
the mutual fund.
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Close-ended
A mutual fund scheme that offers a limited number of units, which have a lockin period, usually of three to five years. The units of closed-end funds are often
listed on one of the major stock exchanges and traded like securities at prices,
which may be higher or lower than its NAV.In India 90% of the schemes is
open-ended fund and the rest 10% is close-ended funds. There are 1062 openended funds and 119 close-ended funds.

By Objective
A scheme can also be classified as growth scheme, income scheme, or balanced
scheme considering its investment objective. Such schemes may be open-ended
or close-ended schemes as described earlier. Such schemes may be classified
mainly as follows:
Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a major part of their corpus in
equities. Such funds have comparatively high risks. These schemes provide
different options to the investors like dividend option, capital appreciation, etc.
and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds
also allow the investors to change the options at a later date. Growth schemes
are good for investors having a long-term outlook seeking appreciation over a
period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds,
corporate debentures, Government securities and money market instruments.
Such funds are less risky compared to equity schemes. These funds are not
affected because of fluctuations in equity markets. However, opportunities of
capital appreciation are also limited in such funds. The NAVs of such funds are
affected because of change in interest rates in the country. If the interest rates
fall, NAVs of such funds are likely to increase in the short run and vice versa.
However, long-term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as
such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. These are appropriate for
investors looking for moderate growth. They generally invest 40-60% in equity
and debt instruments. These funds are also affected because of fluctuations in
share prices in the stock markets. However, NAVs of such funds are likely to be
less volatile compared to pure equity funds.
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Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively
in safer short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government securities, etc.
Returns on these schemes fluctuate much less compared to other funds. These
funds are appropriate for corporate and individual investors as a means to park
their surplus funds for short periods.

Gilt Fund
These funds invest exclusively in government securities. Government securities
have no default risk. NAVs of these schemes also fluctuate due to change in
interest rates and other economic factors as, is the case with income or debt
oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the
securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index,
though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms. Necessary disclosures in this regard are
made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds that
are traded on the stock exchanges.
AVENUES OF INVESTMENTS
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Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver
for growth of the country. Indian financial scene too presents a plethora of
avenues to the investors.
Banks:
Considered as the safest of all options, banks have been the roots of the
financial system in India. For an ordinary person though, they have acted as the
safest investment avenue wherein a person deposits money and earns interest
on it. One and all have effectively used the two main modes of investment in
banks, savings accounts and fixed deposits. However, today the interest rate

structure in the country is headed southwards, keeping in line with global

trends. With the banks offering little above 7% in their fixed deposits for one
year, the yields have come down substantially in recent times. Add to this, the
inflationary pressures in economy and you have a position where the savings
are not earning. The inflation is creeping up, to almost 8% at times, and this
means that the value of money saved goes down instead of going up. This
effectively mars any change f gaining from the investments in banks.
Post office Schemes
Among all saving options, post office schemes have been offering the highest
rates. Added to it is that the investments are safe with the department being a
government of India entity. So the two basic and most sought for features,
those of return safety and quantum of returns were being handsomely taken
care of Public Provident Funds act as options to save for the post retirement
period for most people and have been considered good option largely due to the
fact that returns were higher than most other options and also helped people
gain from tax benefits under various sections. The following are the post office
savings schemes available for the investors:
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Monthly Income scheme:

This scheme offers an interest of 8%p.a, payable monthly and a bonus of
10% payable at maturity after 6 years. There is no tax deductible at source
(TDS) applicable on investments made in this scheme.
National Savings Scheme:
This scheme offers an interest of 8% p.a; compounded half yearly and
payable at maturity in 6 years.

Post Office Time Deposits:

There are 4 options available to investors depending on the term of
investment desired by the investor. They are:
1 year) this gives an interest of 6.25% p.a
2 year) This gives an interest of 6.5% p.a
3 year) This gives an interest of 7.25% p.a
4 year) This gives an interest of 7.5% p.a
Kisan Vikas Patra:
An important feature of this scheme is that it assures that the money invested
doubles in 8 years and 7 months.
Public Provident Fund:
This scheme gives a return of 8% per annum, compounded annually for
maturity of 15 years.

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Government of India Bonds:

The GOI Bonds have the following investment options:
6.5% Tax free bonds
There is no ceiling on the amount of investment in these bonds. The effective
yields of these bonds are 9.28% p.a for the period of 5 years and premature
encashment option available to investors only after the completion of 3 years.
8% Taxable Bonds:
These bonds do not have any TDS charged on them. There is no maximum
limit of investment in these bonds but there should be a minimum investment
of Rs.1, 000. The maturity period is 6 years. The investor has the option of

interest payable half yearly or cumulative. The investors can also avail tax
benefit under section 80L of income Tax Act, up to Rs. 15,000.
Company Fixed Deposits:
Companies have used fixed deposit schemes as a means of mobilizing funds
for their operations and have paid interest on them. The safer a company is
rated, the lesser the return offered has been the thumb rule. However, there are
several potential roadblocks in these.
The danger of financial position of the company not being understood by the
investor lurks.
1. Liquidity is a major problem with the amount being received monthly
after the due dates.
2. The safety of principal amount has been found lacking.
Stock markets:

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Stock markets provide an option to invest in a high risk, high return game.
While the potential return is much more than 10-11% any of the options
discussed above can generally generate, the risk is undoubtedly of the highest
order. However, as it might appear, people generally are clueless as to how the
stock market functions and in the process can endanger the hard-earned money.
For those who are not adept at understanding the stock market, the task
of generating superior returns at similar levels of risk is arduous to say the
least. This is where mutual funds come into picture.

COMPARISION OF OTHER AVENUES WITH MUTUAL FUNDS

The mutual fund sector operates under stricter regulations as compared
to most other investment avenues. Apart from offering investors tax efficiency
and legal comfort, how do mutual funds compare with other products?
Company Fixed Deposits versus Mutual Funds
Fixed deposits are unsecured borrowings by the company accepting the
deposit. Credit rating of the fixed deposit program is an indication of the
inherent default risk in t he investment. The money of investors in a mutual
fund scheme are invested by the AMC in specified investments under that
scheme. These investments are held and managed in-trust for the benefit of the
schemes investors. On the other hand, there is no such direct correlation
between a companys fixed deposit mobilization, and the avenues where it
deploys these resources.

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There can be no certainty of yield, unless a named guarantor assures a

return or to a lesser extent, if the investment is in a serial gilt scheme. O the
other hand, the return under a fixed deposit is certain, subject only to the
default risk of the borrower.
The basic value at which fixed deposits are encashable is not subject to
market risk. However, the value at which units of a scheme are redeemed
entirely depends on the market. If securities have gained value during the
period, then the investor can even earn that is higher than what she anticipated
when she invested. Conversely, she could also end up with a loss.
Early encashment of fixed deposits is always subject to a penalty
charged by the company that accepted the fixed deposit. Mutual fund schemes
also have the option of charging a penalty on early redemption of units (by
way of an exit load).

Bank Fixed Deposits versus Mutual Funds

Bank fixed deposits are similar to company fixed deposits. The major
difference is that banks are more stringently regulated than are companies.
They even operate under stricter requirements regarding Statutory Liquidity
ratio(SLR) and Cash Reserve Ratio (CRR) mandated by RBI.
While the above are for comfort, bank deposits too are subject to default
risk. However, given the political and economic impact of bank defaults, the
government as well as Reserve Bank of India (RBI) tries to ensure that banks
do not fail.
Further, the Deposit Insurance and Credit Guarantee Corporation
(DICGC) protect bank deposits up to Rs. 100,000. The monetary ceiling of
Rs.100,000 is for all the deposits in all the branches of a bank, held by the
depositor in the same capacity and right.

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Bonds and Debentures versus Mutual funds

As in the case of fixed deposits, credit rating of a bond or debenture is an
indication of the inherent default risk in the investment. However, unlike fixed
deposits, bonds and debentures are transferable securities.
While an investor may have an early encashment option from the issuer ( for
instance through a put option), liquidity is generally through a listing in the
market, implications of this are:
The value that the investor would realize in an early exit is subject to
market risk. The investor could have a capital gain or a loss. This aspect is
similar to a mutual fund scheme.
A hypothecation or mortgage of identified fixed and / or current assets
could back debt securities, e.g secured bonds or debentures. In such a case, if
there is a default, the identified assets become available for meeting redemption
requirements.

An unsecured bond or debenture is for all practical purposes like a fixed

deposit, as far as access to assets is concerned.
A custodian for the benefit of investors in the scheme holds the investment
of a mutual fund scheme.
Equity versus Mutual fund
Investment in both equity and mutual funds are subject to market risk.
Investment in an open-end mutual fund eliminates this direct risk of not being
able to dell the investment in the market. An indirect risk remains, because the
scheme has to realize its investments to pay investors. The AMC is however in
a better position to handle the situation. Further, on account of various SEBI
regulations, such as illiquid securities are likely to be only a part of the
schemes portfolio.

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Another benefit of equity mutual fund scheme is that they give investors the
benefit of portfolio diversification through a small investment.

RISK AND RETURN GRID:

An investor has mainly three investment objectives.
1. Safety of Principal
2. Return
3. Liquidity
BANKS
Returns

Low

Administrativ
e expenses
Risk

High
Low

FIXED
DEPOSIT

BONDS AND
DEBENTURE
S
Low
to Low
to
Moderate moderate
Moderate Moderate
to
to High
high
Low
to Low
to
Moderate moderate

EQUITY
MARKET
Moderate
high
Low
Moderate
High

MUTUAL
FUND
to Better
to Low
Moderate

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Investment
options
Network

Less

Few

Few

Many

High
penetratio
n
At a cost

Low
penetratio
n
Low

Low
penetration

Low
but Low
but
improving fast
improving

of Not
transparen
t
Guarantee
Maximum
Rs 1 lakh

Not
transparen
t

Liquidity
Quality
Assets

Low
to Moderate
moderate
High
Not
Transparent
transparent

More

to Better
Transparent
None

Pricing
The net asset value of the fund is the cumulative market value of the asset fund
net of its liabilities. In other words, if the fund is dissolved or liquidated, by
selling off all the assets in the fund, this is the amount that the shareholders
would collectively own. This gives rise to the concept of the net asset value per
unit, which is the value, represented by the ownership of one unit in the fund. It
is calculated simply by dividing the net asset value of the fund by the number
of units. However, most people refer loosely to the NAV per unit as NAV,
ignoring the per unit. We also abide by the same convention.
Calculation of NAV

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The most important part of the calculation is the valuation of the assets
owned by the fund. Once it is calculated, the NAV is simply the net value of
assets divided by the number of units outstanding. The detailed methodology
for the calculation of the asset value is given below.
Asset value = (Value of investments+ receivables+ accrued income+ other
current assets- liabilities- accrued expenses) /Number of units outstanding.
ADVANTAGES OF INVESTING IN MUTUAL FUND:
Number of options available
Mutual funds invest according to the underlying investment objective
as specified at the time of launching a scheme. Mutual fund have equity funds,
debt funds, gilt funds and many others that cater to the different needs of the
investor. While equity funds can be as risky as the stock markets themselves,
debt funds offer the kind of security that is aimed for at the time making
investments. The only pertinent factor here is that the fund has to be selected
keeping the risk profile of the investor in mind because the products listed
above have different risks associated with them.

Diversification
Diversification reduces the risk because all stocks dont move in the same
direction at the same time. One can achieve this diversification through a
Mutual Fund with far less money that one can on his own.
Professional Management
Mutual Funds employ the services of the skilled professionals who have
years of experience to back them up. They use intensive research techniques to
analyze each investment option for the potential of returns along with their risk
levels to come up with the figures for the performance that determine the
suitability of any potential investment.
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Potential of returns
Returns in the mutual are generally better than any option in any other
avenue over a reasonable period of time. People can pick their investment
horizon and stay put in the chosen fund for the duration.
Liquidity
The investors can withdraw or redeem money at the Net Asset Value
related prices in the open-end schemes. In the Closed-end Schemes, the units
can be transacted at the prevailing market price on a stock exchange. Mutual
Funds also provide the facility of direct repurchase at NAV related prices.
Well Regulated
The Mutual Fund industry is very well regulated. All investment has to
be accounted for, decisions judiciously taken. SEBI acts as a true watch dog in
this case and can impose penalties on the AMCs at fault. The regulations
designed to protect the investors interests are implemented effectively.

Transparency
Being under a regulatory frame work, Mutual Funds have to disclose
their holdings, investment pattern and all the information that can be
considered as material, before all investors. This means that investment
strategy, outlooks of the markets and scheme related details are disclosed with
reasonable frequency to ensure that transparency exists in the system.
Flexible, Affordable and Low cost
Mutual Funds offer a relatively less expensive way to invest when
compared to other avenues such as capital market operations. The fee in terms
of brokerages, custodial fees and other management fees are substantially
lower than other options and are directly linked to the performance of the
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scheme. Investment in Mutual Funds also offer a lot of flexibility with features
such as regular investment plans, regular withdrawal plans and dividend
investment plans enabling systematic investment or withdrawal of funds.
Convenient Administration
Investment in the mutual fund reduces paper work and helps you avoid
many problems such as bad deliveries, delayed payments and follow up with
brokers and companies. Mutual Funds save your time and make investing easy
and convenient.

TAXATION ON MUTUAL FUNDS

An Indian mutual fund registered with the SEBI, or schemes sponsored
by specified public sector banks/financial institutions and approved by the
central government or authorized by the RBI are tax exempt as per the
provisions of section 10(23D) of the income tax act. The mutual fund will
receive all income without any deduction of tax at source under the provisions
of section 196(iv), of the income tax act.

HDFC MUTUAL FUND

Schemes
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HDFC Growth Fund:

It is a open ended scheme seeking to generate long term capital
appreciation from a portfolio that is invested predominantly in equity and
equity related instruments
HDFC Equity Fund:
It is an open-ended growth scheme to achieve capital appreciation.
HDFC Top 200 Fund:
It is an open-ended growth scheme seeking to generate long-term capital
appreciation from a portfolio of equity and equity-linked instruments primarily
drawn from the companies in BSC 200 index.
HDFC Balanced Fund:
It is an open ended balanced scheme seeking to generate capital
appreciation along with current income from a combined portfolio of equity
and equity related and debt & money market instruments.
HDFC Tax Savers Fund:
It is an open-ended equity linked saving scheme with a lock-in period of 3
yrs seeking to generate long term growth of capital.
HDFC Gilt Fund:
It is an open-ended income scheme seeking to generate credit risk-free
returns through investments in sovereign securities issued by central
government or state government.

Birla Sun Life Mutual Fund:

Schemes
Birla Advantage Fund:

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It is an open-ended diversified equity fund and portfolio remains over

wait across banks MNC pharma, IT and Telecom.
Birla Dividend Yield Plus:
It is an open-ended growth scheme investing in high dividend yield companies
and continuously having a positive outlook on banking sector.
Birla Mid cap Fund:
It is an open ended growth scheme investing primarily in mid cap stocks
and the portfolio remains well diversified across pharmaceutical, banking,
consumer non durable, IT, Hotels.
Birla MNC Fund:
It is an open-ended growth scheme investing in multi national companies
and the portfolio remains over weight across consumer non-durable, IT, Agro
chemicals.
Birla Gilt Plus:
It is an open-ended government security scheme.

CONCLUSION

Mutual funds are still and would continue to be the unique financial tool in
the country. One has to appreciate the fact that every aspect of life as its periods
of high and lows. This has been the case with the stock markets. Why not apply
the same logic to mutual funds? Mutual funds have not failed in any country
where they worked with regulatory frame work. Their future is bright. The poor
performance of many mutual funds schemes may be mostly attributed to the
quality of personal involved and their matter of fund management.
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BIBLIOGRAPHY
WEBSITES
http:// www.google.com
http:// www.moneycontrol.com
http:// www.franklintempletonindia.com

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