Mutual Funds

1) Mutual Funds: Universal appeals [email protected] Savings form an important part of the economy of any nation. With 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 multiple avenues to the investors. Though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. Investment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child’s education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well. Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors’ interest, ensures that the investors are not cheated out of their hard-earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal. Investors of all categories could choose to invest on their own in multiple options but opt for mutual funds for the sole reason that all benefits come in a package. An investor normally prioritizes his investment needs before undertaking an investment; therefore different goal will be allocated different proportions of the total disposable amount. Investments for specific goals normally find their way into the debt market as risk reduction is of prime importance. This is the area for the risk-averse investors and here, mutual funds are generally the best option. The reasons are not difficult to see. One can avail of the benefits of better returns with added benefits of anytime liquidity by investing in open-ended debt funds at lower risk. Many people have burnt their fingers by investing in fixed deposits of companies who were assuring high returns but

have gone bust in course of time leading to distraught investors as well as pending cases in the Company Law Board. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies’ financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 10 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis. Moving up in the risk spectrum, we have people who would like to take some risk and invest in equity funds/capital market. However, since their appetite for risk is also limited, they would rather have some exposure to debt as well. For these investors, balanced funds provide an easy route of investment. Armed with the expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate moderate returns even in pessimistic market conditions. Next come the risk takers. Risk takers by their very nature, would not be averse to investing in high-risk avenues. Capital markets find their fancy more often than not, because they have historically generated better returns than any other avenue, provided,

the money was judiciously invested. Though the risk associated is generally on the higher side of the spectrum, the return-potential compensates for the risk attached. Capital markets interest people, albeit not all for there are several problems associated. First issue is that of expertise. While investing directly into capital market one has to be analytical enough to judge the valuation of the stock and understand the complex undertones of the stock. One needs to judge the right valuation for exiting the stock too. It is very difficult for a small investor to keep track of the movements of the market. Entrusting the job to experts, who watch the trends of the market and analyze the valuations of the stocks will solve this problem for an investor. Mutual funds specialize in identification of stocks through dedicated experts in the field and this enables them to pick stocks at the right moment. Sector funds provide an edge and generate good returns if the particular sector is doing well. Next problem is that of funds/money. A single person can’t invest in multiple highpriced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. This not only diversifies the portfolio and helps in generating returns from a number of sectors but reduces the risk as well. Though identification of the right fund might not be an easy task, availability of good investment consultants and counselors will help investors take informed decision. Their appeal is not just limited to these categories of investors. Specific goals like career planning for children and retirement plans are also catered to by mutual funds. Children funds have found their way in a big way with many of the fund houses already having launched a children fund. Essentially debt oriented, these schemes invite investments, which are locked till the child attains majority and requires money for higher education. The schemes have given very good returns of around 14 percent in the last one-year period. These schemes are also designed to provide tax efficiency. The returns generated by these funds come under capital gains and attract tax at concessional rates.

Besides this, if the objective was to save taxes, the industry offers equity linked savings schemes as well. Equity-based funds, they can take long-term call on stocks and market conditions without having to worry about redemption pressure as the money is locked in for three years and provide good returns. Some of the ELSS have been exceptional performers in past and cater to equity investor with good performances. The industry offered tax benefits under various sections of the IT Act. The benefits listed so far have essentially been for the small retail investor but the industry can attract investments from institutional and big investors as well. Liquid funds offer liquidity as well as better returns than banks and so attract investors. Many funds provide anytime withdrawal enabling a big investor to take maximum benefits. Like stated earlier, the appeal of mutual funds cuts across investor classes.

Risk Return Grid

Risk Tolerance/ Return

Focus

Suitable Products

Expected Low

Debt

Partially Debt, Partially Equity

based Funds

Diversified Equity Funds and some debt Funds, Mix of shares and Fixed Deposits Capital Market, Equity

High

Equity

MFs

Bank/ Company FD, Debt Liquidity, Better Post-

Balanced Funds, Some Medium

Benefits offered by

Funds (Diversified as well as Sector)

Tax returns Liquidity, Better Post-Tax returns, Better Management, Diversification Diversification, Expertise in stock picking, Liquidity, Tax free dividends

2) Let’s sip off the Benefits of mutual funds

Professional management The AMCs managing the funds have employees who are professionally trained to manage money. They have a thorough knowledge of stock markets, debt markets, money markets, the overall economy etc. Therefore, they are better placed than ordinary people like you and me to manage money. Moreover, since their only work is to manage money, they devote themselves completely to the task. This, however, should not be taken as an assurance of performance. Like all investors professional managers too go wrong but the probability is far less. 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 decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Returns in the mutual funds are generally better than any other 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. Equity funds can outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the portfolio. Convenient administration Investing in a Mutual Fund reduces paperwork 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. 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. 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. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Fixed deposits with companies or in banks are usually not withdrawn premature because there is a penal clause attached to it. The investors can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In 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. Bullish market may result in schemes trading at Premium while in bearish markets the funds usually trade at Discount. This means that the money can be withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit loads for withdrawal within a period linked to Transparency Mutual funds are very transparent. Most open-ended mutual funds today disclose their NAV daily and full portfolio quarterly. They give detailed information about your investments, the proportion in which investments have been made in different asset categories, fund manager's investment strategy, and goals of the mutual fund. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Lower investment outlay Mutual Funds are typically meant for small investors. The initial investment outlay in these funds is therefore quite low. Some funds even have minimum investment at an amount as low as a few thousand rupees. Reduction in costs Mutual funds have a pool of money that they have to invest. So they are often involved in buying and selling of large amounts of securities that will cost much lower than when you invest on your own. 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. 3) Let’s Discover the Variety of Flavours That Mutual Funds Come In Being a collection of many stocks, you may have thought that picking a mutual fund might be easy. Not necessarily... there are over 60 mutual funds to choose from. It is easier to think of mutual funds in categories. A Mutual Fund, by its very nature, is diversified – its assets are invested in many different securities. Beyond that, there are many different types of Mutual Funds with different objectives and levels of growth potential, furthering your chances to diversify. Mutual Funds invest in a number of investment options – equity, call money, commercial paper, debentures, government securities, etc. You have a choice of deciding where you want your money to be invested by selecting specific schemes. On this basis the simplest way to categorise schemes would be to group these into two broad classifications: Operational Classification and Portfolio Classification. Operational classification highlights the two main types of schemes, i.e., open-ended and close-ended which are offered by the mutual funds.

Portfolio classification projects the combination of investment instruments and investment avenues available to mutual funds to manage their funds. Any portfolio scheme can be either open ended or close ended. 4a: Operational Classification (a) Open Ended Schemes: As the name implies the size of the scheme (Fund) is open – i.e., not specified or pre-determined. Entry to the fund is always open to the investor who can subscribe at any time. Such fund stands ready to buy or sell its securities at any time. It implies that the capitalisation of the fund is constantly changing as investors sell or buy their shares. Further, the shares or units are normally not traded on the stock exchange but are repurchased by the fund at announced rates. Open-ended schemes have comparatively better liquidity. The reason is that investor can any time approach mutual fund for sale of such units. No intermediaries are required. Moreover, the realizable amount is certain since repurchase is at a price based on declared net asset value (NAV). No minute to minute fluctuations in rates haunt the investors. The portfolio mix of such schemes has to be investments, which are actively traded in the market. Otherwise, it will not be possible to calculate NAV. This is the reason that generally open-ended schemes are equity based. Moreover, desiring frequently traded securities, open-ended schemes hardly have in their portfolio shares of comparatively new and smaller companies since these are not generally traded. In such funds, option to reinvest its dividend is also available. Since there is always a possibility of withdrawals, the management of such funds becomes more tedious as managers have to work from crisis to crisis. Crisis may be on two fronts, one is, that unexpected withdrawals require funds to maintain a high level of cash available every time implying thereby idle cash. Fund managers have to face questions like ‘what to sell’. He could very well have to sell his most liquid assets. Second, by virtue of this situation such funds may fail to grab favourable opportunities. Further, to match quick cash payments, funds cannot have matching realisation from their portfolio due to intricacies of the stock market. Thus, success of the open-ended schemes to a great extent depends on the efficiency of the capital market. (b) Close Ended Schemes: Such schemes have a definite period after which their shares/ units are redeemed. Unlike open-ended funds, these funds have fixed

capitalisation, i.e., their corpus normally does not change throughout its life period. Close ended fund units trade among the investors in the secondary market since these are to be quoted on the stock exchanges. Their price is determined on the basis of demand and supply in the market. Their liquidity depends on the efficiency and understanding of the engaged broker. Their price is free to deviate from NAV, i.e., there is every possibility that the market price may be above or below its NAV. If one takes into account the issue expenses, conceptually close ended fund units cannot be traded at a premium or over NAV because the price of a package of investments, i.e., cannot exceed the sum of the prices of the investments constituting the package. Whatever premium exists that may exist only on account of speculative activities. In India as per SEBI (MF) Regulations every mutual fund is free to launch any or both types of schemes. (c) Interval Schemes: Interval funds combine the features of open-ended and closeended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. 4b: Portfolio Classification of Funds: EQUITY SCHEMES Equity Diversified Schemes invest 90% or less of the funds collected, into equity. Selection of companies, whose equities are invested in, is left to the discretion of the Fund Manager of the scheme. Equity Tax-Saving Schemes work on similar lines as diversified equity funds. The only difference between these funds & equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits.

Sector Schemes invest in equity & related securities of companies specific to a particular sector such as IT, banking, etc. Index Schemes invest in shares forming part of an index such as BSE sensex, NSE, Nifty, etc., in the same proportion as the weightage these shares have in the index. Such

schemes seek to provide returns that closely correspond to the return of the index being mirrored. Exchange Traded Funds (ETF’s) are the same as index schemes with one crucial difference. An ETF is listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund. Dynamic Funds alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity. DEBT SCHEMES Medium-Term Debt Funds have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of five to seven years. Such funds seek to optimize returns while maintaining a balance of safety, yield and liquidity. Short-Term Debt Funds have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of one to two years. Such funds seek to generate higher returns with greater stability.

Money Market Debt Funds: Enhancement of income with a high level of liquidity is the objective of these funds with a judicious portfolio mix of money market and debt instruments. Under normal circumstances, the fund will have a 50-90 per cent exposure to money market instruments while holding 10-50 per cent in debt instruments. Medium-Term Gilt Funds aim to provide steady returns with low risk and highest possible safety by investing primarily in Government Securities. The average maturity of the securities in the portfolio would be over three years.

Short-Term Gilt Funds are dedicated gilt schemes, which seek to generate reasonable returns with investments in Government Securities. The securities invested in are of short to medium term residual maturities. Floating Rate Funds invest in securities with floating interest rates, which are generally linked to some benchmark rate like Prime Landing Rate. Floating Rate Funds have a high relevance when the debt markets are volatile and investors can effectively make use of these funds to hedge their debt fund investments against the interest rate fluctuations. Monthly Income Plans (MIPs) are basically debt schemes, which make marginal investments in the range of 10-25 % in equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly higher return than pure long-term debt schemes at marginally higher risk. Balanced Schemes invest approximately half the funds in equities and the other half in debt. They seek to balance risk while aiming to offer better returns than pure debt schemes. OTHER SCHEMES Realty Funds are expected to be introduced in the market in the near future as SEBI has given the approval for the same. Such funds would invest in real estate. Thus even individuals with relatively small investments would get access to real estate investment, which has been the privilege of big investors over the years. Fund of Funds invest in various schemes of that company with different asset allocation to suit investors with different risk profiles. The significant benefit of this scheme type is diversification, not only across investments, but also across Fund Managers.

Global Funds invest in the International Equity markets. These types of funds allow the investor to diversify their portfolio across countries thus reducing country-specific risk. Hedge Funds are expected to be launched in the near future. These funds will be allowed to invest in all kinds of instruments including derivatives, and their main objective will be to cash in on the arbitrage opportunities using advanced investment strategies. Arbitrage Funds involves simultaneous purchase and sale of identical or equivalent instruments from two or more markets in order to benefit from a discrepancy in their prices. What leads (or rather misleads) everyone to believe that arbitrage funds are riskfree is that, in arbitrage strategies, both the buying and selling transactions exactly offset each other (supposedly), thus making it immune to the market movements. That is, regardless of stock market fluctuations, the fund will not get impacted. The profit in arbitrage strategy is the difference between the prices of the instrument in different markets (like cash and derivative markets for instance). Capital Protection funds: The main objective of the fund is to protect the capital of the investors by investing in high quality fixed income securities and generate capital appreciation by investing in equity and equity related instruments in BSE-500 companies. These funds however are closed-ended and returns should typically be in line with a balanced fund.

4c: Different Mutual Funds on the basis of Option: Growth Fund: A diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. Most growth funds offer higher potential capital appreciation but usually at above-average risk. Growth funds are more volatile than funds in the value and blend categories. Dividend is not paid-out under a

Growth Option and the investor realises only the capital appreciation on the investment (by an increase in NAV). Dividend Payout Option: Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout. Dividend Re-investment Option: Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.

4)Important terms Asset Management Company (AMC) A mutual fund is normally formed as a Trust and is governed by a Board of Trustees. The Trustees in turn appoint an investment advisor to manage the various schemes launched by the mutual fund. This investment advisor is called an Asset Management Company (AMC). The AMC is responsible for marketing and selling the schemes, investing the funds collected by it and servicing the investors. The AMC is responsible to the Trustees and has to take their approval for all major actions taken in connection with the mutual fund. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes. Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. Assets Under Management (AUM) as at the end of June-2008 (Rs in Lakhs) Top of Form

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

ABN AMRO Mutual Fund AIG Global Investment Group Mutual Fund Benchmark Mutual Fund Birla Sun Life Mutual Fund BOB Mutual Fund Canara Robeco Mutual Fund DBS Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDFC Mutual Fund ING Mutual Fund

679100.47 380887.45 264180.76 4107523.54 5953.67 393275.34 194078.69 1103737.79 2054041.86 16246.73 810434.39 2474206.35 5271080.51 1735730.82 5947358.64 1164128.48 849610.65

18. JM Financial Mutual Fund 19. JPMorgan Mutual Fund 20. Kotak Mahindra Mutual Fund 21. LIC Mutual Fund 22. Lotus India Mutual Fund 23. Mirae Asset Mutual Fund 24. Morgan Stanley Mutual Fund 25. PRINCIPAL Mutual Fund 26. Quantum Mutual Fund 27. Reliance Mutual Fund 28. Sahara Mutual Fund 29. SBI Mutual Fund 30. Sundaram BNP Paribas Mutual Fund 31. Tata Mutual Fund 32. Taurus Mutual Fund 33. UTI Mutual Fund

Grand Total Bottom of Form

1165515.19 265470.28 2118330.04 1863346.86 740606.11 243664.98 311083.45 1419920.79 6661.66 9081345.11 17600.87 3013240.09 1284672.32 2385289.12 29896.08 5077056.56 56475275.65 Source www.amfiindia.com

Fund Manager The portfolio of mutual fund is managed by a "Fund Manager", whose responsibility is to invest and satisfy the desire of the investors. While selecting the securities for investment, these managers analyze economic conditions, industry trends, government regulations and their impact on the stocks, and forecasts for the specific stocks to the project the future outcome generated by the companies. As we all know that the economic and business condition do not remain constant, so these managers also revise their portfolio with the passage of time, as the circumstances demand. Net Asset Value The net asset value (NAV) of a scheme is defined as the market value of the scheme's investments less all liabilities. Simply stated, NAV is price at which unit in that scheme is valued on a particular business day. It is calculated at the end of the trading day. NAVs are the basis of determining the purchase/redemption prices of units. If a scheme has an entry load, then the purchase price will be the NAV plus the entry load. Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since

market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly depending on the type of scheme. NAV = Total Assets – Total Liabilities No. of units outstanding 1)

Spices of Mutual Funds- Risk

Here are some essential risk types you need to understand and assess to comprehend the overall risk level of your investment portfolio. Market Risk: Equity investments are subject to the risk associated with the capital market. They hence share direct relationship with the performance of the capital market. When the capital market is on the bull spree, equity will outperform all the other investment options, and vice-versa holds true when the stock prices plummet. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Credit Risk: Debt investments carry this risk. This risk is the possibility of default in repayment and in payment of interest by the borrower. Higher the exposure of the mutual funds to debt investments, the higher this risk. For instance, Gilts (Government Securities) will carry no credit risk while a corporate bond will carry a significant risk (again, this will depend on the quality of the corporate whose debt is invested in). Interest Rate Risk:

This is the risk that interest rate changes will lead to a change in the principal value of the debt investment. This risk arises as a result of the inverse relationship between interest rates and prices of debt securities. If the interest rates rise, prices of existing debt securities fall, which in turn brings down the NAV of a mutual fund scheme, which has invested in debt. On the other hand, if the interest rates fall, existing debt securities become more precious and rise in value, which in turn pushes up the NAV of a mutual fund, which has invested in debt. Inflation Risk: Inflation causes money to decrease in value. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Inflation risk occurs whether you invest or not. Selecting investments that are able to outpace the inflation rate is the only way to build real wealth.

Call Risk: The possibility that falling interest rates will cause a bond issuer to redeem—or call—its high-yielding bond before the bond's maturity date which have a call option so that they can do away from paying high interest when the interest rates comes down and re-issue if wanted at lower coupons. Country Risk: The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline.

Currency Risk: The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.

Income Risk: The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk: The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Manager Risk: The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.

Doing away with these risks Diversification is one of the best ways to control risks. 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 at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Market Risks can best be controlled by investing in a basket of equity representing different sectors, which are complementary to each other. In other words, if one sector is on a downturn, the other sector should move up helping your portfolio to maintain a balance. This means your portfolio will never experience all your equities losing value at the same time, which can result in significant capital erosion. Diversified equity mutual funds offer such a portfolio. Before investing, assess sectoral diversity of the portfolio. Credit Risk can be controlled by investing in good quality credit-rated debt paper. To assess whether the mutual fund has invested in such debt, check the credit rating of the

debt investments in the mutual fund’s portfolio. Ensure that debt paper invested in carry at least an ‘A’ rating. Interest Rate Risk is best controlled by opting for floating rate mutual funds when interest rates are on the rise. If you are expecting rates to fall, opt for medium-term debt funds to lock-in at the existing higher rates. 2) Testing -The Performance of Mutual Funds Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be held accountable for their selection of stocks. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations, which affect all the securities, present in the market, called market risk or

systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk can not. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another in a better way. In order to determine the risk-adjusted returns of investment portfolios, several eminent authors have worked since 1960s to develop composite performance indices to evaluate a portfolio by comparing alternative portfolios within a particular risk class. The most important and widely used measures of performance are: ➢ The Treynor Measure ➢ The Sharpe Measure ➢ Jenson Model ➢ Fama Model The Treynor Measure Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri s return on fund

Rf is risk free rate of return Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. The Sharpe Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si Where, Si - Standard deviation of the fund. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher

on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure. Jenson Model Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the Differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm - Rf) Where, Rm - average market return during the given period. After calculating it, alpha can be obtained by subtracting required return from the actual return of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of market is primitive. Fama Model The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called net selectivity. The net selectivity represents the stock selection skill of the fund manager, as it is the excess return over and above the return required to compensate for the total risk taken

by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Sm - standard deviation of market returns. The net selectivity is then calculated by subtracting this required return from the actual return of the fund. Among the above performance measures, two models namely, Treynor measure and Jenson model use systematic risk based on the premise that the unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors. However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversified. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite.

1) HOW TO TRACK YOUR INVESTMENT It is important that you don't forget about the scheme once you receive your unit certificate. A lot can go wrong at the Mutual Fund's end. Take the case of investors who put their money in the Taurus Starshare scheme in January 1994. Even after a holding period of five-and-a-half years, their return is still negative and the scheme's NAV is languishing at Rs 6.57.A periodic review not only keeps you updated on your scheme, but also with events in the Mutual Fund industry.

Monitor performance Track your scheme's NAV on a monthly or quarterly basis. Look for changes in the portfolio. Compare the scheme's performance with that of the Sensex, or similar schemes of other Mutual Funds. Ensure that the fund is adhering to the objectives stated in the offer document. Keep track of various periodic statements like newsletters, and half-yearly and annual reports. Read them thoroughly and file them for future reference. If you have queries, contact the investor service centers or agents. Some Mutual Funds also maintain websites, which provide information on schemes, NAVs, the industry and the investment outlook. Changes in constituents Sponsors often change the composition of the asset management company, trustees or custodians, which can affect performance. Whenever such changes take place, review your comfort level. Warning signals If your scheme fares badly in two consecutive quarters, find out whether it is because of a depressed capital market, or due to reasons specific to your scheme. Don't get hassled if your scheme under-performs in a runaway market. But if it is under-performing in a falling market (the fall in the scheme's NAV is greater than the fall in the benchmark index), review your investment. Read the Fund Manager's comments in newsletters and the annual report. Continue with the scheme only if you are satisfied with the explanation. You don't have to be an investment expert to sense trouble; you just have to keep an ear to the ground. Be wary of funds that renege on promises. For instance, Canbank Mutual is refusing to pay up the indicated rate of return on its Cantriple scheme. One can conclude that if a fund can cheat one section of investors, it can do so to others as well. READING THE NEWSPAPER LISTINGS Although they may look pretty cryptic, fund listings are very easy to read and can tell you a great deal about the fund in a small amount of space.

You can determine the value of your portfolio by multiplying the number of shares you own by the "NAV." Multiplying the number of shares you own by the Offer Price tells you how much you would pay to buy those same shares. Or you can directly compare your purchase price per unit.

1. Funds are listed alphabetically by Fund Company with specific funds listed under each company. 2. "NAV" means "Net Asset Value" and is the value of stocks being held in the portfolio divided by the number of the shares in the fund being held by the shareholders. "NAV" shows how much each share in the fund is worth. 3. "Offer Price" is the amount you would pay if you wanted to buy the shares and is the same as the "NAV," plus any sales charges. "NL" means it is a no-load fund and you would pay the same price per share to buy it as you would receive if you were to sell it. 4. This tells how much the net asset value of the fund has changed since the previous trading day. A plus (+) value means your shares have increased in value since the close of the last trading day by the amount indicated, and a minus (-) value means each of your shares has fallen by that amount. 5. Change shows the amount by which the net asset value of one share of the fund increased or decreased the day before.

Mutual Fund newspaper listings are most useful for keeping track of what is happening to the funds you own. Some newspapers provide more detail than others and include investment objectives and total return data. If you are trying to make a decision about buying a fund, newspaper listings can give you some idea about fund families and provide some indication about fees and expenses. But they don't provide all of the information you need. As a long-term investor, you will probably not find it necessary to check on the daily value of your fund shares. However, whenever you want to check the progress of your fund, you can obtain performance data and daily share prices directly from the fund company by calling them, referring to current prices of Mutual Funds listed daily in most newspapers, or visit their website.

1) Grilling the tax deductions Deduction permitted from gross total income Sectio n 80C 80C 80C 80C 80C 80C 80C 80C 80C

Investment Pension plan Life Insurance premium Public Provident Fund Deposits in NSC Interest on NSC (reinvested upto 5th completed year only) Unit Linked Insurance plans ELSS – Mutual Funds NHB scheme Investment in infrastructure funds

Maximum Limit 10000 100000 100000 100000 100000 100000 100000 100000 100000

2) Indian Mutual Funds Industry GROWTH IN ASSETS UNDER MANAGEMENT

Source: http://amfiindia.com

There has been a substantial growth in the AUM of the Indian mutual fund industry and it’s been increasing day by day. The AUM was Rs. 505152 crs on 31 st march 2008. Mutual funds as an investment option got an acceptance and started growing substantially from the year FY-03 and has gown 3.5 times in value since then.