Mutual Funds E Book v2.5

Hello, My Name is Mr.
Mutual Fund
I help you to get rich. You can buy me in different types. If
you be with me for a long time, I can handsomely reward
you. I grow fast & I save taxes for you. Want to know how
to make the right use of me?
Read on…..
THE STORY OF
MR. MUTUAL FUND
Smitha Hari
Vidya Kumar
Rohit Shah
Version Control
Version 1.0
Published: September 2013
Publisher:
GettingYouRich.com
Shah Rohit Financial Services Pvt. Ltd.
Rustomjee Ozone, T1-301, Goregaon Mulund Link Road,
Goregaon (W), Mumbai 400 062. India
Authors:
Smitha Hari, Blog Editor at GettingYouRich.com
Vidya Kumar, Blog Writer at GettingYouRich.com
Rohit Shah, Founder & CEO at GettingYouRich.com
Graphics & Design:

Rohit Shah
We would love to hear from you

listen@gettingyourich.com
About
GettingYouRich.com is a Financial Planning services Company based out of Mumbai, India. We specialize in
making a “Merawala Plan”. Our goal is to make you financially stronger and help you to achieve your
dreams.
Credits
The contents of this eBook have been originally written by the Authors as mentioned above. Our knowledge
in the personal finance area has been shaped over the years through research and reading through various
magazines, books, newspapers, conferences and thought leadership of veterans in the financial services
industry.
While we have self-designed the cover page of this eBook from scratch, we are inspired by the cover page
designed by Jason J Heuer for the Book ‘American Nerd’
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Disclaimer:
The articles in this eBook are compiled & edited from the various articles written on GettingYouRich.com’s
personal finance blog. While adequate care has been taken to include latest developments and present a
concurrent analysis, investors should engage a Financial Planner for a formal advice. This eGuide is not an
investment advice. Errors & Omissions expected (E&OE). There is no warranty on accuracy & we do not
accept any liability for any error, omission or any loss in this regard.
Page 2 of 50 GettingYouRich.com
Dedication
This eBook is dedicated to our clients, colleagues & friends who supported
us, right in the first year. Without them, we would not be here.
To our First 70 client & 1,800 + Friends who engaged, read, listened,
rejected, pushed, mentored and motivated us.
To our colleagues Smitha Hari, Dhiren Dharamshi, Vidya Kumar, Viren
Dedhia, Janya Menghrajani, Deepak Varier, Pravesh Gupta, Karan
Kataria, Apurba Sen, Ankush Thakur, Harjot Kaur and Sanket Sheth. They
worked hard and smart. They helped us to move forward.
CONTENTS
1. The Right way to invest in Equities 6
2. Comparison of Mutual Funds with other forms of investments 8
3. Basics of Mutual Fund 11
4. Invest in Direct Stocks or Equity MF 12
5. Categories of mutual funds in India 14
6. All About SIP Investing 16
7. Top 5 Myths around Mutual Funds 19
8. Growth V/s. Dividend Schemes in MF 21
9. What is NAV of a Scheme 24
10. 5 Smart Tips to Buy Mutual Funds 26
11. All about Tax Saving Mutual Funds 28
12. Are MF Direct Plans suitable for you? 31
13. How many MF schemes should you own 33
14. Your KYC Compalince in Mutual Funds 36
15. How to buy mutual funds 38
16. How to redeem Mutual Funds? 41
17. Recent Guidelines for Mutual Funds 45
18. Investor Awareness Initiatives 47
19. FREE Resources @ GettingYouRich.com 49
I know I am not your favourite
So you are thinking that Equities have not given
good returns in last few years. Now you are in an
affair with my colleagues. You seem to
particularly love Mr. Fixed Deposit. Alright, you
have a freedom of choice. When you earn more
than inflation and when you save on taxes, you
are actually generating wealth. There is enough
evidence available that proves my point. I have
generated far better real returns than any of your
favourites. You can look at a selective period
and say I did badly. I will continue to generate
wealth for you. I will continue to love you.
Continued….
THE RIGHT WAY TO INVEST IN EQUITIES
Right methodology, goal based investment and your commitment is a key to a successful investing
in Equity MFs. Here are the key considerations:
1. Align investment to your goals
2. Ascertain Capacity to take Risks
3. Design your MF portfolio
4. Identify top performing MFs
5. Invest through SIPs & withdraw through SWPs
6. Keep a regular check on your MF portfolio
7. Hire an expert
8. Manage logistics
You can invest in Equity Market through Directly buying Equity Stocks, Buying Mutual Funds, signing
up for a Portfolio Management Schemes or taking an exposure through Futures & Options or
structured products. As a best practice, we normally recommend all our clients to invest in equities
for long term through mutual funds as a core strategy. Here is the methodology that we suggest.
1. Align investment to your goals: Decide the objective and duration of your investment. The
Equity MFs are suitable only for a long term period i.e. 5 years or more. Goal based investment
is one of the best way of building a portfolio.
2. Ascertain Capacity to take Risks: Equity investments come with market risks. You should not
invest in Equity if you are not comfortable with fluctuations and possibility of losing capital
especially in the short term. You can use Risk Assessment tools on internet. You can decide
exposure to Equity based on your age, risk profile & goal requirements.
3. Design your MF portfolio: We normally recommend actively managed Large Cap Equity MFs &
based on your risk appetite, you can also invest in Mid & Small Cap MFs. Additionally, consider
taking an exposure on specific sectors up to 10% of your MF portfolio. Ideally, you should not
invest in more than 4-5 MFs. Some experts prefer passively managed funds given their lower
cost structure & market linked returns.
4. Identify top performing MFs: Check www.valuereserachonline.com or www.morningstar.in to
research the right schemes for you. Compare rankings on two sites for a second opinion. Your
Financial Planner may have paid research tools and better insights. Remember that past
performance is not a guarantee of future performance. Try & diversify across AMCs & stick to
those AMCs which have a long standing track record.
5. Invest through SIPs & withdraw through SWPs: Leveraging SIPs (Systematic Investment Plans) is a
core to a successful investing in Equities. Invest at least for 3 years through SIPs and hold the
investments at least for 5 years. When you have to withdraw, again use SWPs (Systematic
Withdrawal Plans). Start SWPs say a year or two before your goal is due. Keep taxes in mind.
6. Keep a regular check on your MF portfolio: Assign “Buy, Hold or Sell” ratings to your MFs at least
once in six months. However, avoid shuffling your portfolio very often. If your Fund is not
performing well, you can stop the SIP and see if the fund recovers in next few quarters. You
should also check the risk (fluctuations). Continue investing if your fund is giving returns higher
than the category average & if you are comfortable with the volatility. We believe that 12%
CAGR is a reasonable return expected from Equity MFs in the current scenario.
7. Hire an expert. Equity investments are not a rocket science. Following above steps, you are
likely to get on a good start. That said, consider outsourcing this job to your Financial Planner if
you are unable to dedicate time or if you have a large size portfolio.
8. Manage logistics: Invest time in getting access to transact online & getting monthly email
updates from your fund houses. You may have to fill in additional forms. This can save lot of
running around.
COMPARISON OF MUTUAL FUNDS WITH
OTHER FORMS OF INVESTMENTS
Investors are often confused about the kind of investments they would need to make at different
stages of their lives. While each investment avenue is unique in its own right, there are some
broad buckets into which each of these can be classified. Fixed Deposits and Gold are perceived
to be safe avenues of investment. While this is partially true, your returns from fixed deposits may
not be great over the long term. Returns from Debt Mutual Funds and Fixed Maturity Plans are
linked to market movements and carry a moderate risk. Both Real Estate and Equity Mutual Funds
fall under the high risk category; however, over the long term, equity funds can give you superior
returns and they also enjoy superior tax treatment. This article is an attempt to compare some
important aspects of various investment options available in the market today.
Parameter Equity MF Debt MF Fixed Fixed Real Estate Gold
Deposits Maturity
Plan
Safety of Not assured Not assured Assured, Not assured; Not assured Not assured
but Indicative in
Returns
Secured nature
only up to
Rs. 1 lakh
per bank
Returns Dividend Dividend Interest Dividend Capital Capital gains
income income income income gains on the on sale
(optional)+ (optional)+ (optional)+ sale of
Capital Capital
Capital property;
appreciation appreciation
appreciation Rental
income if
the property
is rented
Risk High risk Moderate risk Low to Moderate risk High risk Moderate risk
moderate
risk
Liquidity Liquid Liquid Illiquid; Liquid Illiquid Liquid
Premature
withdrawal
allowed
on
payment
of penalty
Storage costs Nil Nil Nil Nil Not Physical
applicable Gold: High
ETFs: Nil
Investment Managemen Management Nil Management Registration, Physical
t fees, fund fees, fund fees, fund stamp duty Gold: Nil
costs
distribution distribution distribution on purchase ETFs:
costs and costs and
costs and of real Management
brokerage brokerage
costs on costs on
brokerage estate and fees of AMC
purchase purchase costs on brokerage and
and sale and sale purchase costs brokerage
and sale costs on
purchase
and sale
Definition of Short Term: Short Term: Not Short Term: Short Term: Physical
Less than 1 Less than 1 applicable Less than 1 Less than 3 Gold: Short
tenure for
year year year years Term: Less
calculation of Long Term: Long Term:
capital gains Long Term: Long Term: than 3 years
Greater than Greater than
Greater than Greater than and Long
for tax 1 year 1 year
1 year 3 years Term: Greater
purposes than 3 years
ETFs: Short
Term: Less
than 1 year
and Long
Term: Greater
than 1 year
Tax Dividend Dividend Interest is Dividend Short Term Physical
option: option: taxable at option: Capital Gold: Short
Implications
Dividends Dividends are the Dividends are Gain: Taxed Term Capital
are tax free tax free in the applicable
tax free in the as per the Gains are
Growth hands of the tax slab;
option: If STT investor but Only
hands of the applicable taxable at
is paid, Short the company interest investor but slab of the normal rates
Term Capital pays a from tax the company investor as per tax
Gains is 15% Dividend efficient 5 pays a Long Term slab and
and Long Distribution year FDs is Dividend Capital Long Term
Parameter Equity MF Debt MF Fixed Fixed Real Estate Gold
Deposits Maturity
Plan
Term Capital Tax; Growth not Distribution Gain: 20% Capital Gains
Gains is option: Short taxable Tax; with are taxed at
exempt; If STT Term Capital Growth Indexation 20% of the
is not paid, Gains are
option: Short gains
Short Term taxable at
Capital normal rates
Term Capital ETFs:
Gains are and Long Gains are Short Term
taxable at Term Capital taxable at Capital Gain
normal rates Gains are normal rates are taxable
and Long taxed at 20% and Long at normal
Term Capital (with Term Capital rates and
Gains are indexation) or Gains are Long Term
taxed at 20% 10% (without taxed at 20% Capital Gains
(with indexation)
(with are taxed at
indexation)
or 10%
indexation) or 10% (without
(without 10% (without indexation) or
indexation) indexation) 20% with
indexation
Advantages Gives Although Returns Returns are Stable asset Physical
superior returns are are fixed indicative, in the high Gold: Easy
returns over not assured, it and although not return mode of
the long can be assured;
assured; category; purchase
term, beats estimated Low risk
inflation and based on the investment
Liquid in Indexation ETFs: Pure
is liquid too; predicted option nature; benefit and and safe
Superior tax movement of Suitable to ways to form of
treatment interest rates; enter during avoid investment
Liquid in high inflation payment of which is liquid
nature; as interest long term and easy to
Suitable to rates will be capital gains store
enter during high; Post tax tax are
high inflation
interest can legally
as interest
rates will be
be higher possible for
high; Post tax than FD long term
interest can option due to capital gains
be higher indexation
than FD benefit
option due to
indexation
benefit
Disadvantages Suitable for Risky during If FD is Risky during Capital Physical
high risk period of locked in period of appreciation Gold:
investors volatile for a volatile is risky, unless Problem in
interest rates; period,
interest rates; a good storage and
Both short benefits of
Both short property is entails
term and high
long term interest term and selected; payment of
gains are rates long term Illiquid asset; making
taxed cannot be gains are Tenure for charges
availed. taxed long term ETFs:
Similarly, capital gains Brokerage
inflation is high at 3 costs to be
may years paid
negate
returns; Tax
inefficient
investment
option;
Premature
withdrawal
entails levy
of penalty
BASICS OF MUTUAL FUND
A mutual fund is a financial instrument which helps all categories of investors to invest in equity or
debt instruments. Investors can earn returns in the form of dividend income and capital gains.
Mutual funds help in diversification and liquidity and bring with it advantages of professional
management and simplicity. Tax saving is also possible by investing in Equity Linked Savings
Schemes (ELSS) of mutual funds.
Assume that you have Rs. 100,000 and wish to invest this money in the stock or bond markets.
However, you have no idea or experience in investing directly in stocks or bonds. Then, how do
you go about investing? This is when mutual funds come to your rescue. Read on!
What is a mutual fund?
 A financial instrument, which pools money from several investors, builds a corpus and then
invests this corpus in various securities.
 Underlying assets can be equity or debt oriented.
 Professionally managed by fund managers, who are investment experts.
 You are given units in the mutual fund in exchange for the money you invest in the fund
 Units represent your ownership / participation in the fund.
 Not an alternative investment option to stocks and bonds; rather, the returns generated by
a mutual fund reflect returns on individual securities.
EXAMPLE: Rs. 50,000 invested in XYZ mutual fund at the price per unit of Rs. 50, gives you 1,000
units of XYZ mutual fund. Thus, investing in a mutual fund is like buying a small piece of a big cake.
How does a mutual fund work?
Investors
This is Pool
passed on to resources
Returns Asset Management

Company
This
Invests in
generates Securities - Stocks,
Bonds, Money
market instruments
INVEST IN DIRECT STOCKS OR EQUITY MF
Investing in equity markets can either be done directly (by direct investing in shares of companies)
or indirectly (by investing in a mutual fund). Key differences are:
1. Management of Investment
2. Diversification
3. Volatility
4. Risk and Returns
5. Mode of Investment
6. Taxation
Your friend Raj wants to invest Rs. 50,000/- in equity markets. He can buy a company’s (say,
Reliance Industries’) shares by purchasing in the stock markets directly, or invest this in an equity
mutual fund, which in-turn buys shares of different companies; this constitutes investment in mutual
funds. Here are some differences between the two forms of investing:
Management of Investment - As an investor in stocks, the decision of when, what and how much
to invest in each stock solely lies with you. You need to constantly monitor your stocks, closely
follow market movements which may affect your stocks and make your buy/sell decisions based
on your individual judgement. Investing in mutual funds is much easier, as professionally qualified
fund managers monitor the fund and buy/sell stocks in the portfolio.
Diversification - When you invest in stocks, your risk is concentrated, as your investments are
restricted to a particular company or group of companies. At the most, you can diversify as per
size or sector. The portfolio of a mutual fund is comprised of several companies which have their
own risk-return profiles. Hence, your investment is diversified. Mutual funds can also invest in other
asset classes like debt, gold or a mix of debt and equity.
Volatility - Individual investment in stocks is highly volatile as risk lies with a single stock. This may
result in you taking rash decisions. Mutual fund investments are less volatile due to the number and
variety of stocks in each fund’s portfolio, which largely smoothens out uneven movements. Stocks
that move positively make up for the limitation of the stocks that have not performed so well.
Risk and Returns - Returns from investing directly in stock markets depend a lot on your
knowledge, patience and time you dedicate. In a bull run, you can reap huge profits without
much hard work; but in a bear run, the vice versa is also true, as stock market investing is riskier
compared to mutual fund investing. Mutual funds give you balanced returns, compared to stock
markets (neither as spectacular as stocks in a bull run, nor as unimpressive as stocks in a bear run).
Mode of Investment - You can invest in a mutual fund, either a lump sum, or as a systematic
investment plan (SIP), making periodic investments. SIP is recommended for long term and can be
adopted even if you do not understand equity markets. You can follow SIP in stock investing also;
but since there is no diversification of risk, this is not a smart idea and is hence not popular also.
Taxation - Short term capital gains and long term capital gains follow the same treatment, both in
the case of stock investments and equity mutual fund investments. When you invest in stocks, you
do not get any tax benefits. However, you can get tax benefits when you invest in Equity Linked
Savings Scheme, which is an equity mutual fund with a lock-in period of 3 years. You can avail tax
benefits under Sec 80(C) up to an amount of Rs. 1,00,000/-
Stocks and equity mutual funds belong to the same asset class - equity, which, compared to other
asset classes, is likely give the best returns in the long term.
CATEGORIES OF MUTUAL FUNDS IN INDIA
Mutual Funds can be of various categories based on different risk-return profiles, investment
patterns and investment horizon. Some important categories are based on maturity period, nature
of investments, investment objective, size of investments etc.
The Indian Mutual Fund industry has a plethora of options to choose from, with a wide variety of
mutual funds catering to the needs of all categories of investors. Mutual Funds cater to different
risk profiles, return expectations and financial position of the investors.
Let’s look at the important categories of Mutual Funds present in the market today:
Category Types of Funds

Maturity Open Ended Schemes: Available for subscription throughout the year;
Period no pre-defined maturity period; can be easily bought and sold at
prevailing NAV
Close Ended Schemes: Investments made at the time of initial issue;
there is fixed maturity period; mode of exit dependent on the structure
of the scheme
Nature of Equity Funds: Corpus invested in equity related instruments; rank high on
Investments risk-return spectrum; generally best for long term
Debt Funds: Invests in fixed income instruments; rank low on risk-return
spectrum; different debt funds based on objective and time horizon
Balanced Funds: Invests both in fixed income and equity instruments; no
fixed allocation between the two categories
Investment Growth schemes: Profits reinvested into scheme; no periodical
Objective distribution of profits
Dividend schemes: Profits distributed as dividends; frequency and
amount of dividend is not guaranteed
Dividend Re-investment schemes: Dividend is declared, but re-invested
back into the fund
Size of Large Cap: Investments in large cap companies, generally > $10 billion
Investments
Mid Cap: Investments in mid cap companies, generally $ 2-10 billion ;
risk and returns are high
Small Cap: Investments in small cap companies, generally less than $ 2
billion ; highly risky
Definition of large cap, mid cap and small cap companies varies.
Sectoral Invests in specific sectors; funds are categorized based on the sector in
Funds which they invest in; returns are risky due to sector concentration; returns
are benchmarked with respective sectoral indices
Tax Saving Diversified equity schemes; investments into such funds qualify for tax
Funds deduction; funds have a lock in period of 3 years
Index Funds aim to replicate a particular index like BSE Sensex of Nifty 50; Stock
Funds holdings and proportion of holdings of the fund is similar to the
benchmark index
Exchange Combination of stocks and mutual funds; invest in a specific set of
Traded instruments - e.g.: Gold; traded on the exchange like a stock
Funds
Mutual Funds can be a combination of one or more of the above categories. Go ahead and pick
the one which best suits your risk-return profile!
ALL ABOUT SIP INVESTING
The Systematic Investment Plan or SIP is a popular mode of investing in mutual funds, where you
can invest a fixed amount every month for a predetermined term. SIP Investing brings about a
discipline in investing helps you invest small amounts and reduces risk as market timing is not
needed. However, in a bull market, SIPs will not give you the best of returns as it results in a
higher average cost. SIPs are beneficial when stock markets are volatile. Since it is very difficult to
predict the direction of markets, SIP is strongly recommended for the long term.
Little drops of water make the mighty ocean. Similarly, regular savings help in building a large
corpus of investments over time. The Systematic Investment Plan (known as SIP) is a popular mode
of investing in mutual funds, wherein you invest a fixed amount every month for a fixed tenure.
Units are allotted depending on the NAV prevailing on the date of your investment every month.
So, why should you as an individual go in for an SIP compared to lump-sum investment?
 Discipline in investing: Regular savings make you a disciplined investor. Further, you can
invest small amounts every month rather than investing a huge lump sum in one shot.
 Market timing not needed: As an individual investor, you may be unsure of market
movements. SIP investing helps you in averaging costs and reduces risk associated
with lump sum investments.
 Rupee cost averaging: In SIP, you buy less when the NAV is up and buy more when the NAV
is low. This lowers the cost per unit.
Working of SIP
Let us assume you have Rs. 12,000/- and want to invest this in a mutual fund. Consider the
following two scenarios:
Scenario 1: You invest Rs.12,000 in a lump sum on 15th January 2011 at an NAV of Rs. 24, thus
effectively owning 500 units of the mutual fund.
Scenario 2: As you are unsure of market movement, you decide to invest Rs. 1,000/- per month, for
the next 12 months, starting 15th January 2011. As the markets are highly volatile, the NAV
fluctuates every month, resulting in the following:
The total number of units you hold at the end of 12 investments is 506.82, at an average cost of
Rs.23.67 per unit (Total investment of Rs.12,000/Total units of 506.82). Note that your average cost is
lower than the average NAV of Rs.23.71 (Sum of NAVs of Rs.284.6/ Total number of investments of
12) during the period. This is due to the rupee cost averaging concept of SIPs.
Comparison between the two scenarios:
In both the scenarios, you have invested Rs.12,000/-. But you end up holding more units under
Scenario 2, compared to Scenario 1.
This is because of the magic of SIP! As the NAV of the fund fluctuated due to volatile markets,
there were some months where the NAV was lower than Rs.24 (NAV in Scenario 1). This resulted in
you getting more units during that month. So you ended up owning more units in Scenario 2.
But does this magic always work in SIP investing? No, not necessarily!
Disadvantages of SIP
 Bull market: When the equity market is expected to go up continuously, SIPs will result in a
higher average cost and lower units, compared to a lump sum investment
 ELSS funds lock-in: If you use SIP mode to invest in tax savings schemes, each of your
investments is locked in separately for 3 years from the date of the respective investment.
So, is SIP as a mode of investment, good or bad?
SIPs are beneficial if you expect volatility in stock markets, or if you expect a bear phase in the
ensuing period. If markets are expected to be bullish, SIPs will not be useful and will result in lower
returns compared to a lump sum investment in the beginning. Since it is difficult to predict the
direction of the market in the short term, Financial Planners strongly recommend Mutual Fund SIP
route for long term equity investments.
TOP 5 MYTHS AROUND MUTUAL FUNDS
Majority of mutual fund investors base their investment decisions around some common myths of
mutual fund investing. Here are the popular myths
 A fund with a lower NAV is better than a fund with a higher NAV
 New Fund Offers are better than existing funds
 Funds declaring dividends are better
 Last year’s top performing funds are better
 Investing in many funds is better
Mutual funds have several advantages. However, most mutual fund investors have many myths
based on wrong information or half-truths. Let’s look at the top 5 myths:
A fund with a low Net Asset Value (NAV) is better than a fund with a higher NAV
NAV represents the market value of its investments which determine the movement of the NAV.
Example: Let’s say you invest Rs. 1,000 each in two funds - Fund A with NAV of Rs.10 and Fund B with NAV of
Rs.100. You get 100 units of A and 10 units of B.
Scenario 1: If both the funds return 10% in one year, the NAV of Fund A becomes Rs. 11 and that of Fund B
becomes Rs.110. Your investment grows to Rs.1,100 in both cases. Since returns are the same, the NAV
value of the two funds does not have any impact.
Scenario 2: Suppose Fund A gives a return of 10% and Fund B gives a return of 20% in one year,
then the NAV of Fund A becomes Rs. 11 and that of Fund B becomes Rs. 120. However, your
money grows to Rs. 1,100 in Fund A, whereas it grows to Rs. 1,200 in Fund B. So the fund which
looked cheaper with a lower NAV actually gave you lower returns.
Thus the growth in your money depends on the fund performance and not in NAV value. A low
NAV can only get you more units in the fund, but doesn't necessarily guarantee high returns.
New Fund Offers (NFOs) are better bets compared to existing funds
NFOs are riskier compared to existing funds since they don’t have a track record for comparison. It
is better to choose a fund with a long term performance record.
Funds declaring dividend are better
When funds declare dividends, the NAV is adjusted accordingly. Dividend distribution expenses
are also borne by the unit holders. If you invest in a growth scheme, the returns are deployed
back into the fund, giving you the benefit of compounding. Further, sometimes dividends are
declared when there is no attractive investment opportunity for the fund’s surplus, simply to
attract investors.
Last year’s top performing funds are better
Equity mutual funds give the best returns over a long term. It is important to study the long term
performance of a fund (over 5-10 years), to understand how the fund has performed in all
business cycles. Looking at 1 or 2 year time-frame will often give erroneous results.
Investing in many funds is better
Mutual funds are by themselves a diversification vehicle, as each scheme invests in 30-40 stocks.
Therefore there is no need for you to hold more than 4-6 good quality funds of different types.
When you hold a large number of funds, you may not be able to track your investment and may
be losing money on the bad funds you hold.
GROWTH V/S. DIVIDEND SCHEMES IN MF
One mutual fund scheme may have 2 NAVs due to the presence of two options - growth and
dividend. A growth scheme invests profits back into the fund, while a dividend scheme distributes
profits periodically to its investors in the form of dividend. As a result, the NAV of a growth scheme
is always higher than the dividend scheme, although the returns may be the same. However, over
the long term, the growth scheme is more beneficial due to the benefit of compounding. Taxability
for both the options differ for both equity and debt mutual funds. If you require regular income, you
can opt for dividend schemes; else you can opt for the growth option.
Stumped that one mutual fund scheme can have two different NAVs?
This is possible, as there may be two options for the same mutual fund scheme - Growth and
Dividend, which results in different NAVs for the same scheme. How is this possible? Let’s find out.
In a growth scheme, the profits made by the fund are invested back into the fund and are not
distributed to the unit holders. A dividend scheme, on the other hand, periodically distributes its
profits to the unit holders in the form of dividends.
Effect on NAV under both the schemes:
Suppose you invested Rs. 10,000 each in growth and dividend schemes of XYZ equity mutual fund.
NAV of both the schemes: Rs. 100
Number of units held: 100
Face value: Rs.10
Returns from both the schemes: 50% at the end of Year 1
The dividend scheme declares a dividend of 20%, i.e.: Rs.20 per unit
NAV of the growth scheme grows to Rs. 150 (Rs.100+ 50% returns). Your investment is worth
Rs.15,000. Under the dividend scheme, you get a dividend of Rs. 2,000 (Rs. 20*100). Now NAV will
fall by Rs. 20 which has been paid out as dividend. NAV after dividend pay-out will be: Rs.
100+Rs.50 - Rs.20=Rs.130. Your investment is now worth Rs. 13,000 (Rs.130*100 units). In addition, you
have received Rs. 2,000 as dividend. So the total worth of your investment is Rs. 15,000 under the
dividend scheme as well.
Due to the above mechanism, the NAV of the growth scheme will always be higher than its
dividend counterpart due to this adjustment.
How does this impact you as an investor?
As an investor, you can see from the above example that your total returns are same in both the
cases after Year 1. However, over a long term, the growth scheme benefits due to the
compounding effect on the returns re-invested, and gives a higher return compared to the
dividend scheme.
Tax Treatment:
Equity Funds: Dividends from equity funds also do not attract Dividend Distribution Tax (DDT). Thus,
for a short term investor in equity funds, dividend schemes are better, as dividend is tax free, and
the short term capital gain is lower due to a fall in NAV. For long term investors, it makes no
difference if you opt for growth or dividend schemes, as both dividends and long term capital
gains are tax free.
Debt Funds: Debt funds attract DDT at 28.33% which is deducted before releasing dividend to the
investors. The DDT which was recently hiked in this year’s budget has resulted in a fall in dividend
income for most investors. Further, a dividend scheme which looked attractive for short term
investors may no longer be beneficial if you are at the 10% or 20% brackets as the DDT will be
higher than the short term capital gain which is as per the income bracket. So a short term
investor at lower tax slab can opt for growth scheme. If you are at the higher tax bracket,
dividend option is still attractive in the short term. A long term investor can choose growth
schemes to lower tax outflow by claiming benefits of indexation on long term capital gains.
Which scheme is better?
As returns from both the schemes are almost the same, the choice depends on your needs and
the market situation. However, do keep in mind that the frequency and amount of dividends are
not guaranteed. It is solely at the discretion of the fund. If you are looking at regular cash flows,
then dividend schemes work best for you. On the other hand, if you are a long term investor and
are not interested in regular cash inflows, you can opt for the growth option.
WHAT IS NAV OF A SCHEME
The NAV (Net Asset Value) is the market value of one unit of a given mutual fund scheme on any
given business day. If the market value of securities of a mutual fund scheme is Rs. 50 Crores and
the fund has issued 50 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the
scheme is Rs.100. The NAV of a scheme varies on a day to day basis, as the market value of
securities changes every day.
How do you make money by investing in mutual funds?
Returns can be either:
 Dividend Income: Mutual fund schemes declare dividend from time to time which are
either a pay-out to the investors, or get re-invested into the fund.
 Capital Gains: When the securities in a fund’s portfolio are sold at a gain, the fund enjoys a
capital gain. This is reflected in an increase in the price of each unit. Investors make a
capital gain when they sell these units at a price higher than their purchase price.
Advantages of investing in mutual funds
 Diversification - Investors can diversify by investing in various securities across different

sectors and instruments.
 Professional management - Fund managers who are professionally qualified manage your
investments.
 Liquidity - Similar to shares, mutual fund investments are highly liquid.
 Wide variety of options - Investors can pick any fund which satisfies their risk-return
preferences.
 Simplicity - Mutual fund investments are relatively simpler compared to other instruments.
Even small investors can participate in the stock markets as the minimum investment
amount is very small.
Saving Taxes with Mutual Funds
Come February or March every year, and most of us scout for tax planning options which qualify
for tax exemption under Sec 80(C). ELSS is a popular choice, which is an equity mutual fund
qualifying for tax exemption. Click here to read more about Tax Savings Mutual Funds.
Financial Planners recommend investments in Mutual Funds for a long term i.e. Five years and
more.
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5 SMART TIPS TO BUY MUTUAL FUNDS
There are several thousand mutual fund schemes available in the market today. Few things to be
considered when you buy a mutual fund scheme are:
1. Look at the long term track record,

2. Compare the scheme to the benchmark index,
3. Management,
4. Expense ratio
5. Portfolio allocation of the scheme
The mutual fund industry is characterised by the problem of plenty. With hundreds of mutual fund
schemes in India, across over 40 fund houses, how would you know which funds are worth
investing in?
Let’s look at the top things to consider when you choose a mutual fund. The points below are
applicable to equity mutual fund schemes in India.
Track record- This is, by far, the most common parameter which investors look for. The track record
of the mutual fund schemes is based on the past performance of such schemes. The irony in this is
that every bit of communication from a mutual fund company states that the past performance
of the scheme is not an indication of the future performance!
So then, should this be ignored? No. The answer to this is to look at the performance over a long
term, at least for a period of 5 to 10 years, rather than considering the short term historical
performance of the scheme. As equity mutual funds deliver superior returns only over the long
term, it is important that you do not get swayed by a fund which has delivered excellent returns
over the past 6 months or 1 year. Analyse the returns clocked by the scheme during both the
periods of ups and downs in the industry.
Benchmark comparison- Every equity mutual fund scheme has its own philosophy of investing and
can be compared to a benchmark index. Choose a scheme which has outperformed its
benchmark or delivers returns which are at least comparable to benchmark returns.
Management- A mutual fund scheme which is backed by a sound Asset Management Company
(AMC) is an ideal pick compared to an unknown scheme. Find out details about the fund
manager who will be managing your fund. Ideally, the fund manager should have seen through a
few business cycles to understand market movements. In addition to the fund house and the fund
manager, it is important that the mutual fund has a stable management team, who can manage
the fund’s activities even if the fund manager leaves the fund house.
Expense ratio- The fee charged by the fund house to manage and operate the fund is known as
expense ratio. These expenses are paid by the unit holders even if the fund doesn’t do well in any
year. Hence it is very important to look out for well managed funds which have a low expense
ratio.
Portfolio allocation- When you have shortlisted a few funds, study their portfolio allocation.
Understand the quantity of funds invested in the various categories and stocks. Studying the
portfolio allocation helps you to understand the risk profile of the scheme.
The above are some of the top things to look out for when you plan to invest in an equity mutual
fund scheme in India. Of course, you can outsource such aspects of your investments, by availing
services of qualified Financial Planners.
ALL ABOUT TAX SAVING MUTUAL FUNDS
Equity Linked Savings Schemes are tax saving mutual funds which are equity oriented mutual
funds giving you a tax benefit under Sec 80C. Returns from an ELSS fund mirror the returns of the
stock markets, and hence they have the same advantages and limitations of equity mutual funds.
In addition, this is an attractive tax saving option. However, the tax treatment under the Direct Tax
Code for ELSS funds is still unclear.
Tax planning is an integral part of personal finance. Equity Linked Savings Scheme or ELSS is an
equity diversified fund which offers investors the twin benefits of capital appreciation and tax
benefits.
Salient features of ELSS:
 A diversified equity mutual fund with majority of the corpus invested in equities and a lock
in period of 3 years from the date of investment.
 Investment up to Rs. 1 lakh is eligible for deduction from gross total income in a financial
year.
 Returns from ELSS schemes reflect returns from the equity markets.
 ELSS schemes have both growth and dividend options. Under the growth option, investors
get a lump-sum only on the expiry of 3 years. Under the dividend option, investors receive a
regular dividend income even during the lock-in period.
 Returns from ELSS schemes are tax-free.
Why you should choose ELSS over other tax saving instruments?
 The lock in period of ELSS is lower than other tax saving instruments like PPF (15 years), NSC
(6 years) and bank fixed deposit (5 years).
 This is an investment in equity markets, and so investing in a good ELSS scheme can give
you better returns compared to other asset classes over the long term
 SIP investments are possible, helping you bring about discipline in investing.
 Dividend option in ELSS helps you receive income even during the lock-in period.
What are the downsides of an ELSS?
 Since ELSS comprises of investments in stock markets, all risks associated with equity
investments pertain to ELSS. If you are a risk-averse investor, it is better to avoid ELSS.
 Premature withdrawal is not possible in ELSS; instruments like PPF and bank fixed deposits
allow withdrawal subject to certain conditions.
What happens to ELSS as an investment category after the introduction of DTC?
The last draft of the Direct Tax Code (DTC) provides for tax exemption of long term capital gains
from equity funds. Hence gains made from ELSS investment will be exempt from tax under DTC.
However, the draft has excluded ELSS as a tax saving instrument. This means that your investment
in ELSS after the introduction of DTC will not qualify for tax exemption under Sec 66 (which is a
replacement of Sec 80C under DTC). However, remember that this is only a draft version of the
DTC. The final DTC may spring a positive surprise.
Popular ELSS funds in the market:
Investing in tax saving funds should involve proper research and planning, similar to any other
fund. Click here to know what you need to consider while buying a mutual fund. Based on 5 year
performance, top rated ELSS funds by Value Research are Canara Robeco Equity Tax Saver,
Religare Invesco Tax Plan and Franklin India Taxshield. It would be useful to consult your adviser
when you decide to purchase an ELSS fund as your adviser may have paid research tools being
used by institutions like Value Express & CRISIL. This can help you make a better decision.
ELSS schemes are by far the best tax saving instruments in the long term for investors with a high
risk appetite, offering better returns compared to other tax saving instruments. Let’s hope the
mutual fund industry is successful in getting ELSS qualified as a tax saving instrument under DTC.
ARE MF DIRECT PLANS SUITABLE FOR YOU?
SEBI has instructed all MFs to have direct plans for all their schemes, which means investors can
buy directly from the Mutual Fund, bypassing agents/distributors. This would mean a lower
expense ratio and therefore slightly higher yields than yields on the same schemes that are sold
by a distributor. Lay investors need to take care of all documentation and processes themselves
and so they should be fully aware of all consequences before going the ‘direct plan’ way.
“It's not whether you're right or wrong that's important, but how much money you make when
you're right and how much you lose when you're wrong…”
George Soros
What are direct plans?
There is a new regulation from SEBI, which says every MF scheme, must have a direct plan as well.
This basically means investors can buy MF scheme units directly from the fund house without any
broker/distribution house/agent etc. from 1 January 2013.
As the middlemen are eliminated, these plans will have no distribution and commission expenses.
Therefore these schemes will have a lower expense ratio. SEBI has instructed the AMCs to declare
distinct NAVs for these. As the expenses are lower, the returns on these schemes could be slightly
higher than the same schemes sold by a distributor.
What are the advantages of direct plans for the retail investors?
Today if an investor buys directly from an AMC, the distribution expenses/commission falls into the
hands of the AMC. With the new ruling, AMCs have to offer direct plans with distinct NAVs
separately. This means the cost of investing for the investors is less. Since expenses for the AMCs
are lower for such schemes, NAVs and returns should be higher. Industry experts estimate that this
could translate to yields being higher by 0.5%-1.25% for retail investors per year.
What should the retail investors be cautious about? What are the disadvantages of direct plans for
them?
Lay investors who are not well versed about investing in mutual fund products should not buy
direct plans right away. They need to do their research thoroughly. They need to understand
where the scheme fits in within their portfolio or in terms of asset allocation.
All the documentation would have to be handled by the investor alone like getting the forms,
filling it, attaching relevant documentation, sending it to the AMC and then ensuring that
purchase and sale related proceeds and documentation each time is in place. Monitoring the
NAV movements; keeping a tab on charges; revision of portfolio; changes in expense structure
and maintaining all documentation will be the responsibility of the investor. These responsibilities
are not easy for lay investors or first time investors. Changing from your existing plan to a direct
plan would have tax implications. You should also think of SIPs that are already in place for existing
plans.
Savvy investors can take advantage of direct plans. We would recommend a wait and watch
policy till the beginning of next year and keep track of benefits on schemes that you already have
before taking the plunge.
HOW MANY MF SCHEMES SHOULD YOU OWN
Each mutual fund invests in at least 30 to 40 stocks, thus helping you diversify. However, if you
invest only in 1 mutual fund or in different funds of the same category, the risk is not really
diversified. You must invest in maximum 4 to 6 good quality funds, across debt and equity asset
classes in various categories and regularly review the performance.
Mutual fund investors are often stumped by the question of what is the ideal number of funds to
be held in one’s portfolio. Many times, it is seen that investors invest in a large number of mutual
funds thinking that this is the best way to diversify risk and increase the return potential. But does
this really make sense?
Not really! This is because mutual funds themselves are a diversification vehicle, with each scheme
investing in a minimum of 30-40 stocks.
Let’s see some examples of what happens when you invest Rs. 30,000 in different number of
mutual funds. Consider the following scenarios:
 You invest in only one equity fund. Over the next one year, the fund performs badly and has
gone down by 20%; the market value of your holdings will go down to Rs. 24,000. By investing in
a single fund, you have increased your risk profile considerably which has resulted in a huge
wipe-out of your investment.
 You divide this amount equally and invest in two equity funds - a large cap and a mid-cap
fund. After a year, the mid cap fund falls by 20%, whereas the large cap fund gives a positive
return of 25%. The market value of your holdings will be Rs. 30,750. Though you have not
diversified asset classes, you have invested in different categories of mutual funds. Your gains
in the large cap fund has offset the losses in the mid cap fund.
 You invest 50% in a diversified equity fund and another 50% in a debt fund. After a year, the
equity markets have performed badly and your investment in the equity fund has fallen by
20%. However, the debt fund has performed well, giving you 20% return. The market value of
your holdings will be Rs. 30,000. You have invested in different asset classes, thus helping you
diversify risk at asset class level. As in Scenario 2, you have again at least preserved your initial
capital.
Though all the return percentages in the above illustration have been assumed, it is suffice to show
that spreading your investment across funds and asset classes will help you reduce risk.
Adding mutual funds in the same category - Is it beneficial?
The portfolio of similar categories of mutual funds will almost be the same, with investments being
made in mostly the same set of companies. Let’s take the case of sectoral funds. Two funds
investing in the same sector may invest in different companies. But sector-wise movements will be
similar, giving similar results to the investor. Same is the case with any other category of mutual
fund. Beyond a certain point, neither is the risk reduced, nor is the returns enhanced. So adding
more mutual funds of the same category is not advisable.
How much is too much?
It is often said that if you begin to forget the names of the mutual funds you hold, it is time for you
to bring down the number of funds in your portfolio. It is recommended to invest in a maximum of
4-6 good quality funds across debt and equity asset classes in various categories, with regular
review of performance. Ideally your portfolio should have a good mix of the best large cap, mid
cap and sectoral funds in the equity category along with a couple of funds in the debt category.
Investing in few funds aids in better tracking, helping you get rid of funds where you may be losing
money and also reduces transaction costs. So next time you think of investing in a fund, remember
to check what value-add it brings to your portfolio before purchasing it.
Please click here to download our sample financial plan for you to get an overall view of the
mutual funds you must invest in, according to your financial goals and overall investment priority.
YOUR KYC COMPALINCE IN MUTUAL FUNDS
In order to comply with regulatory provisions, an individual must complete the Know Your
Customer (KYC) guidelines which have been mandated by SEBI. The investor must submit
documents for proof of identification and proof of address, along with his photograph and PAN
card copy, at any of the approved Point of Service outlets. You should be KYC compliant in all
respects, including complete the In-Person Verification in order to invest in existing and new
mutual funds without any hassle.
The Mutual Fund industry has witnessed constant changes with respect to guidelines and
regulations. Last year, the new additional KYC formalities were introduced by SEBI which Mutual
Fund investors were required to complete to be able to continue investing. The first round of KYC
requirements was supposed to be completed by all Mutual Fund investors in 2011, wherein the
proof of ID and address proof were verified. According to new KYC norms, effective January 2012,
the Securities and Exchange Board of India (SEBI) has directed Mutual Fund investors to do their
KYC again to update all details which were left out in the first round.
Investors need to fill in a new KYC Form, which has additional details like father’s/spouse name,
marital status, nationality, gross annual income or net worth. There are separate forms for
individuals and non-individuals. Based on your KYC status, again the forms are different. To check
your KYC status, please click here.
Type Status Form Comments
Individual Full KYC Please click here If no KYC records are found
Individual Change KYC Please click here If KYC registered before the year 2012
Non-Individual Full KYC Please click here If no KYC records are found
In addition to submitting new documents, an investor must also get the In-person Verification (IPV)
done. An IPV is a process where your fund house will verify your physical presence. For this, you will
have to personally visit either a KYC registration agency or a Mutual Fund distributor or a Mutual
Fund registrar and transfer agent or the fund house itself and submit your documents and
photograph. An IPV completes the KYC requirements and you can start investing in new funds.
If you are a new investor who wishes to start investing in Mutual Funds, then the procedure must
be done from the scratch. You must fill the KYC application form, submit all supporting documents
and also carry out the IPV process to be able to start making investments.
Now what happens when you complete the KYC requirements?
There are four KRAs with several branch offices located across the country, which help you in
completing the KYC requirements for equity market investments. When you submit the completed
application form along with your documents, photograph and IPV, your information is stored in a
central KYC database which is accessed by these KRAs. The KYC norms hold good for all your
future stock market investments as well.
The deadline for submitting the new forms was November 30th 2012. Beyond this date, new
investments cannot be made. You can check if you are KYC compliant by clicking here and
entering the required details under the “KYC Inquiry” section. It is important that you complete the
KYC requirements immediately in order to invest in mutual funds without any hassle.
HOW TO BUY MUTUAL FUNDS
There are several ways to buy Mutual Funds in India, the most prominent being through agents,
through the AMC directly, through independent online portals, through a De-mat and online trading
account and through your bank. Cost and comfort are two important parameters to be considered,
as each mode of purchase come with different fees and convenience aspects.
Technological advancements have opened new avenues for the Mutual Fund industry, with
different ways of purchasing Mutual Funds, which are both convenient and cost-efficient for the
investor. Let’s look at some of the most popular ways of buying Mutual Funds in India today:
Investing through agents:
 One of the oldest and most convenient ways of buying Mutual Funds, still followed by many
individuals, especially older people with existing relationships.
 The agent will help you fill the forms, submit the forms and other documents to the Mutual
Fund office and give you the certificate.
 Typically, agents charge 1% of the investment amount as their commission.
 In addition to the above services, some agents also offer advice on which Mutual Funds to
invest and which ones to avoid. However, you must do your own research and invest
prudentially, as agents may have their own hidden interest in some funds.
 You can check out the list of agents in your city by clicking here.
Investing through Asset Management Company (AMC) directly:
 The first time you invest in any Mutual Fund through the AMC directly, you will have to go to
the Mutual Fund office to make your investment.
 Thereafter, any further investments in different schemes of the same fund can be made
online (provided this facility is offered by the AMC) or offline, using the folio number in your
name.
 Some AMCs also have the facility of sending an agent to help you with your investments.
 Remember to check the banks they have partnered with, as not all AMCs would have
partnered with the bank of your choice.
 You can save on commissions and charges, as you personally make the investment
directly. You also don’t need a de-mat account to invest in this method.
 However, this process involves the initial trouble of going to different AMC offices and filling
out application forms, if you wish to invest in different funds.
Investing through Online Portals:
 There are many online portals in India, through which you can invest in various Mutual
Funds, the most prominent being FundSuperMart and FundsIndia, which also have tie-ups
with banks for funds transfer.
 You will need to open an account with these portals, by filling in the application form and
submitting all necessary documents, along with a nominal account opening fee. On
receipt of a confirmation message from the portal that your account is active, you can
start transacting in Mutual Funds.
 These portals make money by getting paid a commission from the AMC every time you
make a purchase or sale.
Investing through your bank:
 Most banks have a tie-up with specific fund houses, and work as Mutual Fund agents.
 You can enquire if your bank has partnered with the Mutual Fund you wish to invest in, and
if yes, invest through your bank.
Investing through De-mat & Online Trading Account:
 If you have a de-mat account, you can buy and sell Mutual Funds through this account.
Popular brokerages offering this service include ICICI Direct, HDFC Securities, Geojit
Securities and Sharekhan.
 Though this method gives you the flexibility to control all your investments in one place, you
will have to shell out commissions, similar to how you pay agents. Commissions can either
be a flat amount or based on a percentage of the investment amount.
Other Methods: You can also invest through the Mutual Fund transaction processing company -
CAMS, by downloading the application form from the Mutual Fund website and submitting it to
CAMS or Karvy Investor Centre with the other documentation.
Cost and comfort are the two main factors to be considered while choosing the method of
Mutual Fund investing. You should consult your Financial Planner to help you choose the best
mode of investments.
HOW TO REDEEM MUTUAL FUNDS?
Redemption of mutual funds is possible through agents, through the AMC directly, through online
portals, through your trading account broker and through CAMS. When you redeem mutual funds,
remember to fill in the application form correctly and ensure your bank account is active.
The following are the redemption procedures of mutual funds, depending on the mode of
purchase:
Redemption process if Mutual Funds have been purchased through an agent: When you have
purchased your Mutual Fund through an agent, you can redeem it through the same agent. The
agent will provide you with the Mutual Fund Redemption Form. This needs to be filled in and
submitted to the agent, who will then submit it to the Mutual Fund office to process your request.
Redemption process if Mutual Funds have been purchased through the AMC directly: When you
buy Mutual Funds from the AMC directly, you can sell it through the AMC, either on their websites
or by visiting the closest office. Most AMCs offer the facility of transacting online. You can login to
your account and redeem the units. However, if you do not have an online account, or if the
AMC does not offer this facility, you can collect the redemption form from the AMC’s office and
submit it after filling in the details.
Redemption process if Mutual Funds have been purchased through online portals: When you
purchase Mutual Funds through online portals like FundsIndia and FundSuperMart, the units can
be redeemed through a few clicks. You will need to login to your account with these portals and
select the scheme to be redeemed. You have to simply select the number of units to be
redeemed to process the request.
Redemption process if Mutual Funds have been purchased through Demat and Online Trading
Account: This method is similar to the previous method. You will need to login to your trading
account and access the Mutual Funds section. Select the scheme to be redeemed and the
number of units to be redeemed. When you confirm your order, your request will be taken up for
processing.
Redemption process if Mutual Funds have been purchased through CAMS: CAMS offers the ease
of redeeming more than one Mutual Fund in a single place. You can download the Redemption
Transaction Slip on the CAMS website, or visit your nearest CAMS office to collect the same. You
will have to fill in the particulars by specifying the name of the fund and the folio number. Submit
this to the CAMS processing assistant, who will process your request by putting it up to the
concerned AMC. However, CAMS does not handle all Mutual Fund requests. So remember to
check with CAMS on which mutual funds they handle, before approaching them.
Important points to note when you redeem your Mutual Funds:
 Filling in the application form: For offline methods of redemption discussed above, you will
have to fill the Redemption Form. Though this form is very simple to fill, it is critical to fill in all your
details correctly (especially the folio number), to avoid problems later.
 NAV applicability: The NAV at which your units will be sold depends on the time you submit
your redemption request. If you submit your request before 3.00 pm, the closing NAV of the
same day will be applicable. However, if the request is submitted after 3.00 pm, the next day’s
NAV will be considered.
 Time to receive redemption proceeds: It normally takes a maximum of 2-3 working days to
receive the redemption proceeds in your bank account.
 Bank account: The proceeds of sale of mutual fund units will be credited to your bank account
which has been registered with the AMC at the time of purchase. It is important to make sure
that this bank account is active. If this bank account is inactive, you will have to follow several
procedures to get the proceeds credited to your new bank account, which can be quite
exasperating. In very rare cases, electronic transfer is not done and the AMC sends a cheque
to the KYC address of the holder, registered with it.
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RECENT GUIDELINES FOR MUTUAL FUNDS
SEBI regularly makes changes to the policy framework guiding the MF industry to ensure that
there is a good business climate for AMCs and at the same time retail investors are protected. We
have highlighted three important guidelines that have been brought in by SEBI recently –
 Direct Plans
 Colour Coding
 Increased Total Expense Ratio
As per an article in Indian Express (on 3-Apr-2013), there are about 44 fund houses in India and
together they had an average AUM (Asset Under Management) of Rs. 8,16,400 Crores at the end
of fiscal year ended March 31, 2013, as per data available with Association of Mutual Funds in
India (AMFI).
There are many regulations being made or policies and rules being updated for the MF industry by
SEBI. The key considerations for SEBI from the MF industry perspective are –
 Improvement of business environment and increased business for MFs

 Spread of mutual funds’ investments all across the country
 Ensuring that interests of retail investors are taken care of.
Here are some guidelines that SEBI has undertaken recently –
Direct Plan – SEBI had issued a guideline that all Asset Management Companies (AMCs) have to
launch direct plans for open-ended MF schemes. This will allow investors to buy the scheme
directly from the AMC without the help of any agent/distributor. Therefore Direct Plans will not
have distribution costs or commissions etc., leading to a lower expense ratio. This will result in
higher NAVs (Net Asset Value) and ultimately higher returns for retail investors. This means one
scheme of a MF should have two NAVs - one for the regular scheme and another one for the
direct plan scheme.
Colour Coding – Another guideline that SEBI has issued is the product-labelling framework. Key
features of the framework are –
 Products should have labels that have details about the schemes. All details should be
shown on the first page of IPO forms, normal application forms and advertisements.
 Colour codes should be used to indicate the risk level of the product/scheme –
o Blue – Indicates low risk product
o Yellow – Indicates medium risk product
o Brown – Indicates high risk product
Increased TER – Last year, SEBI announced that AMCs can charge expenses up to 30 bps (0.30%)
more if 30% of its net sales or 15% of AUM whichever is higher originates from beyond the top 15
cities. AMCs can also charge the service tax in the total expense ratio and not bear it themselves
which will though in the short term mean more expenses for the retail investor but in the long term,
he or she will benefit as the NAVs will be affected positively by this feature. There are mixed
opinions on this announcement. Some question as to why investors of Tier I cities should bear
expenses for getting investors for the MF in Tier –II and Tier III cities.
As investors, we should be informed of latest news, updates and trends in the different investment
arenas. We could either read financial websites, magazines, and newspapers or ask our financial
planner/advisor to keep us abreast with the latest developments. We should also be aware of
experts’ and industry opinions on these developments.
INVESTOR AWARENESS INITIATIVES
SEBI has mandated that MFs spend a particular amount on investor awareness. Many mutual
fund houses have taken steps towards this aspect. It is good as if this is done in the right sense it
will help the investors positively and also expand the market.
SEBI had mandated some time back that Mutual Funds have to keep aside a minimum of at least
2 basis points on daily net assets for investor awareness and education. As you know, 1 basis point
is 0.01%.
We feel that this is a good initiative from all perspectives. It will help retail investors be aware of
Mutual Funds and they can benefit by investing in Mutual Funds judiciously. The investors might still
need the help of financial planners or professionals in selecting the right products but the final
decision that they take will be more informed. It will help them in asking the right questions to their
advisors. At the same time, the industry will benefit as the overall market size will grow and they will
have more business. In the current scenario many people do not want to consider mutual funds as
a savings or investment vehicle. Mutual funds do not feature in many investors’ financial plans.
Let us look at some of the initiatives taken by various Mutual Fund houses that we can use to
understand and enhance our knowledge.
• Birla SunLife has started an investor awareness website - http://www.janotohmano.com/.

The website has information, videos, glossary and FAQs on mutual funds for both first time
investors as well as those who invest in mutual funds already.
• HDFC Mutual Fund has some pages on their website dedicated to MF investor education.
• Tata Mutual Fund has a ‘Knowledge Centre’ its website. There are different sections for
educating prospective MF investors. You can have a look here -
http://www.tatamutualfund.com/. The section ‘Prof. Simply Simple’ has articles on
demystifying financial concepts and animated videos explaining different terminologies.
Other sections like detailed articles; FAQs and Glossary focusing on mutual funds are also
present.
• ICICI Prudential has also taken steps in the direction of this initiative. It has adopted the
print, outdoor and digital media to spread awareness among mutual fund investors. ICICI
Pru had launched a program –‘Invest Correctly’ which had various campaigns on various
aspects of Mutual Fund investments.
Of course many Mutual Fund companies are using this mandate as an opportunity for some
branding and marketing purposes. They are putting up billboards/advertisements with some
information about mutual funds, more about the Mutual Fund itself and marking the information
on billboards and advertisements as ‘Knowledge’.
It remains to be seen if this really helps in investor awareness/education or does it merely serve as
an advertising vehicle.
FREE RESOURCES @ GETTINGYOURICH.COM
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The Story of Mr. Mutual Fund
Smitha Hari is an MBA in Finance and has over 7
years’ experience in investment banking, equity
research, consulting and banking. She is the Co-
Founder of a Financial Consulting Firm & a freelance
writer. At GettingYouRich.com, Smitha writes and
edits the Personal Finance articles on the blog
Vidya Kumar writes regularly on our Personal

Finance Blog. She is a management graduate and has
an experience of about 6 years in writing on personal
finance on various blogs and websites. She currently
manages software projects in a multinational
software company.
Rohit Shah is a Personal Finance Coach, a Social

Entrepreneur and helps clients to achieve their
financial dreams. Rohit is a Post Graduate in Finance
and a Certified Financial Planner (CFPCM). Rohit has
15+ years of experience across Finance, Project
Management & IT assignments
SHAH ROHIT FINANCIAL SERVICES PVT. LTD.

Rustomjee Ozone, T1-301, Goregaon Mulund Link Road,
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Hello, My Name is Mr.

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We would love to hear from you

Rights & Price

rejected, pushed, mentored and motivated us.

To our colleagues Smitha Hari, Dhiren Dharamshi, Vidya Kumar, Viren

Dedhia, Janya Menghrajani, Deepak Varier, Pravesh Gupta, Karan

worked hard and smart. They helped us to move forward.

1. The Right way to invest in Equities 6

2. Comparison of Mutual Funds with other forms of investments 8

3. Basics of Mutual Fund 11

4. Invest in Direct Stocks or Equity MF 12

5. Categories of mutual funds in India 14

6. All About SIP Investing 16

7. Top 5 Myths around Mutual Funds 19

8. Growth V/s. Dividend Schemes in MF 21

9. What is NAV of a Scheme 24

10. 5 Smart Tips to Buy Mutual Funds 26

11. All about Tax Saving Mutual Funds 28

12. Are MF Direct Plans suitable for you? 31

13. How many MF schemes should you own 33

14. Your KYC Compalince in Mutual Funds 36

15. How to buy mutual funds 38

16. How to redeem Mutual Funds? 41

17. Recent Guidelines for Mutual Funds 45

18. Investor Awareness Initiatives 47

19. FREE Resources @ GettingYouRich.com 49

1. Align investment to your goals

2. Ascertain Capacity to take Risks

3. Design your MF portfolio

4. Identify top performing MFs

5. Invest through SIPs & withdraw through SWPs

6. Keep a regular check on your MF portfolio

What is a mutual fund?

How does a mutual fund work?

Returns Asset Management

4. Risk and Returns

Category Types of Funds

Comparison between the two scenarios:

So, is SIP as a mode of investment, good or bad?

Funds declaring dividend are better

Last year’s top performing funds are better

Investing in many funds is better

Effect on NAV under both the schemes:

NAV of both the schemes: Rs. 100

Number of units held: 100

Face value: Rs.10

Returns from both the schemes: 50% at the end of Year 1

How does this impact you as an investor?

Which scheme is better?

How do you make money by investing in mutual funds?

Returns can be either:

Advantages of investing in mutual funds

 Diversification - Investors can diversify by investing in various securities across different

 Liquidity - Similar to shares, mutual fund investments are highly liquid.

Saving Taxes with Mutual Funds

1. Look at the long term track record,

Salient features of ELSS:

 Returns from ELSS schemes are tax-free.

What are the downsides of an ELSS?

What happens to ELSS as an investment category after the introduction of DTC?

Adding mutual funds in the same category - Is it beneficial?

How much is too much?

Investing through agents: