Mutual Funds

Human Life Cycle

Phase I Phase II
Childs Marriage Childs Education Housing Child birth Marriage 22 yrs 38 yrs 10- 20 yrs

Phase III

Education Age- 22 yrs

Earning Years

Post Retirement Years

Age- 60 yrs
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Individual Investor: Life Stages

Earnings Consumption Savings

22 27 Young Independent Young Married

40 Middle Age

60 Retirement

All individuals have a finite period to save for their investment goals
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What is a Mutual Fund?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. The money collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the schemes stated objectives. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them.

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Brief History
First Phase 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase-1987-1993 (Entry of Public Sector Funds)

marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase-1993-2003(Entry of Private Sector Funds)

1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the SEBI Mutual Fund Regulations

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Organization of a Mutual Fund

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Terminologies Contd
NAV
Market value of assets of scheme minus its liabilities. = Net Asset Value No. of Units Outstanding on Valuation date

Per unit NAV

Entry Load/Front-End Load (0-2.25%)

The commission charged at the time of buying the fund. To cover costs for selling, processing

Exit Load/Back- End Load (0.25-2.25%)

The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage withdrawals May reduce to zero as holding period increases.

Sale Price/ Offer Price

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

Re-Purchase Price/ Bid Price

Price at which close-ended scheme repurchases its units

Redemption Price
Price at which open-ended scheme chopra.rajiv@icai.org

TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Investment Objective Special Schemes

Structure Open Ended Funds

Growth Funds Income Funds

Industry Specific Schemes

Close Ended Funds Interval Funds

Index Schemes
Sectoral Schemes

Balanced Funds
Money Market Funds
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Types of Mutual Fund Schemes

By Structure
Open-Ended anytime enter/exit Close-Ended Schemes listed on exchange, redemption after period of scheme is over.

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

Other Schemes
Tax Saving Schemes Special Schemes
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SPECIAL SCHEMES-EXAMPLE
Funds based on Size of the Companies Invested in Large cap funds:Funds that invest in companies whose total market cap is above Rs40bn Mid cap funds: Funds that invest in companies whose market cap is between Rs20-40bn Small cap funds: Funds that invest in companies whose market cap is below Rs20bn
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10 REASONS TO INVEST IN MUTUAL FUNDS

Expert on your side: When you invest in a mutual fund, you buy into the experience and skills of a fund manager and an army of professional analysts Limited risk: Mutual funds are diversification in action and hence do not rely on the performance of a single entity. More for less: For the price of one blue chip stock for instance, you could get yourself a number of units across a number of companies and industries when you invest in a fund! Tax benefits: Over the years, tax policies on mutual funds have been favourable to investors chopra.rajiv@icai.org and continue to be so.

 Easy investing: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing in a monthly savings plan. Convenience: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet. Investor protection: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests.
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 Quick access to your money: It's good to know that should you need your money at short notice, you can usually get it in four working days. Transparency: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook. Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions.
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