What is a mutual fund? Good guide: http://www.investing-in-mutual-funds.

com

Put simply, a mutual fund is a pool ofmoney provided by individual investors, companies, and other organizations. A fund manager is hired to invest the cash the investors have contributed. The goal of the manager depends upon the type of fund; a fixed-income fund manager, for example, would strive to provide the highest yield at the lowest risk. A long-term growth manager, on the other hand, should attempt to beat theDow Jones Industrial Average or the S&P 500 in a fiscal year (very few funds actually achieve this; to find out why, read Index Funds - The Dumb Money Almost Always Wins). Closed vs. Open-Ended Funds, Load vs. No-Load Mutual funds are divided along four lines: closed-end and open-ended funds; the latter is subdivided into load and no load.

Closed-End Funds This type of fund has a set number of shares issued to the public through an initial public offering. These shares trade on the open market; this, combined with the fact that a closed-end fund does not redeem or issue new shares like a normal mutual fund, subjects the fund shares to the laws of supply and demand. As a result, shares of closed-end funds normally trade at a discount to net asset value.

Open-End Funds A majority of mutual funds are open-ended. In simple terms, this means that the fund does not have a set number of shares. Instead, the fund will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. Open-end funds always reflect the net asset value of the fund's underlying investments because shares are created and destroyed as necessary. Load vs. No Load A load, in mutual fund speak, is a sales commission. If a fund charges a load, the investor will

pay the sales commission on top of the net asset value of the funds shares. No load funds tend to generate higher returns for investors due to the lower expenses associated with ownership. What are the benefits of investing through a mutual fund? Mutual funds are actively managed by a professional money manager who constantly monitors the stocks and bonds in the fund's portfolio. Because this is his or her primary occupation, they can devote considerably more time to selecting investments than an individual investor. This provides the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculatingfinancial ratios. How do I select a fund that's right for me? Every fund has a particular investing strategy, style or purpose; some, for instance, invest only in blue chip companies. Others invest in start-up businesses or specific sectors. Finding a mutual fund that fits your investment criteria and style is absolutely vital; if you don't know anything about biotechnology, you have no business investing in a biotech fund. You must know and understand your investment. After youve settled upon a type of fund, turn to Morningstar or Standard and Poors (S&P). Both of these companies issue fund rankings based on past record. You must take these rankings with a grain of salt. Past success is no indication of the future, especially if the fund manager has recently changed. How do I begin investing in a fund? If you already have a brokerage account, you can purchase mutual fund shares as you would a share of stock. If you don't, you can visit the fund's web page or call them and request information and an application. Most funds have a minimum initial investment which can vary from $25 - $100,000+ with most in the $1,000 - $5,000 range (the minimum initial investment may be substantially lowered or waived altogether if the investment is for aretirement account such as a 401k, traditional IRA or Roth IRA, and / or the investor agrees to automatic, reoccurring deductions from a checking or savings account to invest in the fund. The importance of dollar-cost averaging The dollar-cost averaging strategy is just as applicable to mutual funds as it is to common stock. Establishing such a plan can substantially reduce your long-term market risk and result in a higher net worth over a period of ten years or more.

What to look while you choose a mutual fund :) One of my readers was confused with the question Which mutual fund should he invest in through SIP ? He started an SIP of 1000 in Reliance Regular Saving mutual fund , suggested by an agent . How was his investment ? It is a mistake or a good decision ? This is a common problem with investors . Let me today give you a simple way to think and a methodology to choose mutual funds for your investment depending upon your requirement . In this article we will only talk about investment in Equity Diversified mutual funds for long term (5+ years) . For Beginners : Read what are mutual funds Question : What does the return from mutual funds tells us ? and how do you interpret it ? Ans : Understand that the returns of a mutual fund shows you how did it perform over than period , How did it manage his funds and took there investment decisions in good times and bad times . It means that you should see its performance in good times and bad times . A simple analogy can be how do you want your wife/husband to be like , One who is really great in good times and excellent person to be with in Good Times , when everything in life goes great . Or you want a person who is there with you in good and bad times , supports you in good and bad times . When times are good , everyone behaves good and performs well , There is a saying Dont judge people by there Sunday appearances . Look at a bigger Picture . Looks how a mutual fund performed in good times , in bad times , did it invest according to there plan , Is there management excellent . It does not matter if they were No 1 or No 2 this year or that year . But if they were just good in every year , and perform well above there benchmark, and keep performing over time , Its bound to be become an excellent long term consistent performer . Question : What about the last 3 yrs returns of a mutual funds ? Answer: It will give you a good indication , but not an overall picture . If you see 3 yrs return , you have to understand that out of those 3 yrs , 1st and 2nd years were strong bull markets , where any dog and cat has also performed very good if not excellent . and in last year they gave very bad returns . so ultimately they will be in positive returns in 3 yrs . You should also look at there 5 yrs return and 3 yrs returns . Both in synergy with each other . When you see Reliance Regular Savings Fund you can see that its 3 yrs returns are 7.82% which is very good compared to other funds (this fund is Rank 2/135 in the 3 yrs category ) , but when you see its 1 yrs returns , you can see actual face , the returns are -51% , if you see the rank for 1 yr , its 127/210 .

If you look at its portfolio allocation at http://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=2790 you can see that its allocation to mid cap and small cap companies is very high , It can give you good returns but also it has very high risk . Please understand that i am trying to say that this fund is good or Bad . No !! . I am trying to tell you what to see , how to interpret. People get excited by seeing returns of years 2003-2007 , that was in range of 35-50% . Which is not possible in long term . Now from this point on (2009) , the returns in long term will be in range of 12-15% (max 20%) . Now its difficult to see this kind of bull run in another medium term (5-7 yrs) . Now you should just expect normal 12-15% kind of returns in long term . So , whom should you rely on , On mutual funds who launched them selves near 2001-2002 and gave great returns from there onwards because they them selves dont know how they gave them . Or shall you choose those mutual funds who have seen all types of markets in India and continuously gave much better than average returns from long term , They performed in good market , bad market , quiet market and roaring market . So the things you should look at mutual funds are : 1. Long term performance , It should figure out in top 10-15 at least over 5 yrs returns . 2. They should have a track record of consistently outperforming its Bench mark (this shows that they did better than what they were based on and tracking ) . 3. See that its management is good , Dont just buy Any Idiot MF just because it returns 45% last year , but you have never heard of its parent name . Some long term Great AMCs are DSP , SBI , Sundaram , HDFC , KOTAK , PRINCIPAL , HSBC , RELIANCE (In order of my liking) , Make sure you dont follow this , it is just to give an idea . DSP is one of the best and old AMC in India , dont look only for Indian names . 4. Once you shortlist some mutual funds , then look for its portfolio allocation , see how it has put its money for large , Medium and small cap companies . If its concentration is high on Mid and small cap funds , it means that it has more than average risk , but potential for very great returns also , choose it if it fits your risk appetite . For people who just want to take a short route and want to choose some mutual fund based fast , but with not great accuracy , you can just see the list of mutual funds appearing on 5 yrs returns list or since inception returns (Should be greater than 3-4 yrs at least) and choose any one of them . This will make sure that you have not made a bad choice , if not great .

Some links : To see the rankings of mutual funds and compare them on different parameters 1) a) b) c) http://www.valueresearchonline.com/funds/default.aspto http://www.moneycontrol.com/ http://www.jagoinvestor.com/

2) In the right side , you can see Compare Fund , choose Open Ended in the first box and for the second part choose Equity Diversified or Tax Planning or any other thing which you want to compare. and now click on Go. 3)You can now see a list with different parameters like Snapshot , Performance , Portfolio etc etc. 4) Click on Performance and then you can see different parameters like 1 month , 6 months , 1 yr , 3 yr , 5 yrs and ranks . You can sort them by clicking on 5yrs or 5 yrs ranking to see the ranking . Example . When you click on 5 yrs returns on the top , you can see the ranking either in ascending or descending form (click once again to see in different order) . 5) In the same way you can choose different parameter also . This article gave you a general idea on how to choose a mutual fund and interpret different things . You can also do some advanced analysis the way i discussed in one of my previous article :http://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html Question : Which Mutual funds i will invest in if given a choice ? Ans : I hate this part for suggesting some mutual funds , but i know people look for it and expect so let me give some . Equity Funds : 1. Sundaram BNP Paribas Select Focus Reg 2. DSPBR Equity-D 3. Magnum Contra 4. Sundaram Taxsaver (For TAXSAVING) : see this for more 5. Nifty Beas (Index Fund , take SIP in this) : see this article for more

5 Ways To Measure Mutual Fund Risk There are five main indicators of investment risk that apply to the analysis of stocks, bonds and mutual fund portfolios. They are alpha, beta, r-squared, standard deviation and theSharpe ratio. These statistical measures are historical predictors of investment risk/volatility and are all major components of modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixedincome and mutual fund investments by comparing them to market benchmarks. All of these risk measurements are intended to help investors determine the riskrewardparameters of their investments. In this article, we'll give a brief explanation of each of these commonly used indicators. 1. Alpha Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha". Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is. (To learn more, see Adding Alpha Without Adding Risk.) 2. Beta Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market. A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market.

Conservative investors looking to preserve capital should focus on securities and fund

portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments. (Keep reading about beta in Beta: Know the Risk.) 3. R-Squared R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained by movements in a benchmark index. For fixedincome securities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill and, likewise with equities and equity funds, the benchmark is the S&P 500 Index. R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an Rsquared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index. Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being "closet" index funds. In these cases, why pay the higher fees for so-called professional management when you can get the same or better results from an index fund? (To learn more, read Understanding Volatility Measurements, The Lowdown On Index Funds and Benchmark Your Returns With Indexes.) 4. Standard Deviation Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance. 5. Sharpe Ratio Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (U.S. Treasury Bond) from the rate of return for an investment and dividing the result by the investment's standard deviation of its return. The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance. (Keep reading about this subject inUnderstanding The Sharpe Ratio and The Sharpe Ratio Can Oversimplify Risk.)

Conclusion Many investors tend to focus exclusively on investment return, with little concern for investment risk. The five risk measures we have just discussed can provide some balance to the risk-return equation. The good news for investors is that these indicators are calculated for them and are available on several financial websites, as well as being incorporated into many investment research reports. As useful as these measurements are, keep in mind that when considering a stock, bond, or mutual fund investment, volatility risk is just one of the factors you should be considering that can affect the quality of an investment. Significance of PE Ratio

Is price-earning (PE) ratio for one year or a longer period? If the PE ratio is 18.50 does it mean a mutual fund unit purchased at Rs 10 will yield an earning of Rs 185? A fund with a higher price -earning ratio is better performing. Is this correct? Please also explain price-book value ratio. -DK Anand The PE ratio is the current price of the stock divided by the reported earning per share of the stock. As a result the PE of a stock is subject to daily change. Since, the future earnings of a company are often built into the price of a stock, the PE ratio signifies to what extent the price is valued at the earning of the share of the past year. It is essentially the price you are willing to pay for Re 1 of a company's earnings. Given that future earnings of a company are uncertain, robust companies are able to extract a premium for their earnings. It has little to do with the returns that a stock could deliver. As a result you cannot use it as a means to forecast future performance, to elucidate further; PE of 18.50 times does not mean that the stock price will essentially grow to 18.50 times. It only means that investors are valuing the stock at 18.50 times of its earnings. Price to book value ratio (PB) compares a stock's market value to its book value (book value is assets minus liabilities). A lower PB could either mean that the stock is undervalued or that there is something fundamentally wrong with the company. PE and PB are used more as tool for comparison between stocks belonging to a certain peer group as stand alone PE does not signify anything.

As far as mutual fund units are concerned the PE and PB are arrived through a weighted average of the inherent stocks. As a result, you shouldn't assign as much importance to a mutual fund's PE and PB as you would give to a stock's PE. High PE and PB relative to a

category would indicate that the mutual fund holds stocks that are currently quoting at a premium and points towards a growth oriented strategy. If you are investing in a value fund, then expect the fund to have a PE lower than that of growth funds. While short-listing funds going through each funds PE and PB can be quite cumbersome and misleading. To this extent the Value Research Style Box takes care of this problem by presenting a unified snapshot of how a fund's portfolio looks relative to others in its category. This snapshot is a nine-grid matrix, which represents an equity fund in terms of its market capitalisation and valuation. The cost of investing in mutual funds The charges you pay to buy or sell a fund and the ongoing fund operating expenses impact the rate of return you earn on your investments. This is due to the fact that fees are deducted from your investment returns. All other things being equal, high fees and other charges depress your returns. Many people wrongly assume that the only expenses they incur are the much talked about loads. Figuring out how much a fund charges each year in fees and expenses can be a real headache, but it is a crucial factor in your investment choice. Apart from the various advantages offered by mutual funds (liquidity, diversification, and professional management), another advantage of mutual funds is the complete disclosure of all fees. Mutual fund costs can be classified into two broad categories: operation expenses, which are paid out of the fund's earnings, and sales charges, that are directly deducted from your investment. ExpenseRatio/operatingexpenses: Every mutual fund is allowed to charge for operating expenses, which are basically the costs of doing business. The costs are deducted from the income earned by the fund, and are called "expense ratios." It is an annual fee that is charged to a mutual fund to pay for such expenses as:

Investment management and advisory fees Sales/agents commissions and ongoing service fees legal and audit fees registrar and transfer agent fees fund administration expenses marketing and selling expenses

An annual expense is expressed a percentage of the fund's average daily/weekly net assets. The break-up of these expenses is required to be reported in the scheme's offer document. The

expense ratio is calculated by dividing the operating expenses by the average net assets. For instance, a fund with Rs. 100 crore in assets and expenses of Rs. 20 lakh would have an expense ratio of 2%. Depending on the type of scheme and the net assets, operating expenses are determined by limits mandated by the Securities and Exchange Board of India (SEBI) Mutual Fund Regulations, which are as follows: Net assets Equity schemes Debt schemes First Rs. 100 crore 2.50% 2.25% Next Rs. 300 crore 2.25% 2.00% Next Rs. 300 crore 2.00% 1.75% On the balance of assets 1.75% 1.50% Assuming that an equity scheme generating 15% returns has net assets of Rs 100 crore. With the operating expense ratio at 2.50%, the effective return would be 12.5% (i.e. 15-2.5). Operating expenses are calculated on an annualized basis and are normally accrued on a daily basis. Therefore, you pay expenses pro-rated for the time you are invested in the fund. Loads: Loads are the most talked about fees that mutual funds charge. These are one-time charges for purchasing or redeeming shares of a mutual fund. They are of two types: Front-end load: A front-end load is a sales charge you pay when you buy units of a mutual fund. This reduces the amount of your investment in the fund. For instance, if you invest Rs 10,000 in a mutual fund with a 2% front-end load, Rs 200 will be paid as sales charge, and Rs 9,800 will be invested in the fund. Back-end load: A back-end load is a charge you pay when you sell your units. This reduces the amount you receive when you redeem the units. For instance, you redeem your units at a NAV of Rs 10.5. You have around 1000 units. At the time of redemption, lets say the fund charges an exit load of 1%. Then you will receive Rs 10,395 after deducting Rs 105 as the sales charge. Contingent deferred sales charge (CDSC): A CDSC is a sales load that investors pay at the time of redeeming the mutual fund units. This charge decreases over time. In order to charge a CDSC, the scheme has to be a no-load scheme as per the regulations laid down by SEBI. The asset management company is entitled to levy a CDSC not exceeding 4% of the redemption proceeds during the first four years after purchase, 3% in the second year, 2% in the third year and 1% in the fourth year.

Tradingcosts Still another expense is the cost of trading securities, including charges such as brokerage commissions. These costs aren't included in the fund's expense ratio, but are taken into account while calculating the NAV. Higher costs could impact the NAVs. The turnover ratio for a mutual fund can provide you with useful information about how expensive a fund is and how it is managed. Turnover ratios measure the amount of trading activity in the fund's portfolio. They are calculated by taking all of the fund's sales for a specified period of time (usually one year) and dividing by the fund's total assets. This number tells you how much the fund's portfolio has changed. A high turnover means that the fund's manager is buying and selling very often, and, since every sale and every purchase involves a commission, this means that funds with high turnover ratios often have high expenses. Before deciding on a mutual fund always compare the costs with its peers. All mutual funds are required to publish their costs in the prospectus or in the half-yearly or annual unaudited accounts. Check the fee table to see if any expenses of the fund have been waived off for a temporary period. In case the fund has a temporary waiver on fees, they might crop up once the period ends. Many mutual funds also charge a switchover fee while allowing you to switch to another scheme. Check out if the fund is charging any fees for the same. Selecting the appropriate fund to meet your investment objectives, of course, involves much more than looking at fees. You also need to consider the fund's investment objective and policies, its risks, and the types of services offered by the fund. Choose a fund because it has solid management and a good track record and meets your investment strategy.