SUMMER TRAINING REPORT

ON

MUTUAL FUNDS

ANAND RATHI SECURITIES PVT. LTD.

YOUR FINANCIAL ADVISOR

SUBMITTED BY: MAYANK SOLANKI

(M.F.C. IIIrd SEMESTER) (BATCH: 2004 - 06)

JAI NARAIN VYAS UNIVERSITY MY FIRST REGARDS

On the completion of my training, I have a great opportunity to convey my regards from whom I have always received warmth and support. Even I know that I can make only a little effort for expressing my gratitude. I express my deepest sense of indebtedness to him with whom I spent many hours discussing the problems, I encountered during my training. He has been abundantly generous with his time and many of his valuable suggestions have helped me to give the report in the present form. I am grateful to him for the keen interest he showed in my work, the insights he shared with me and the clarification he gave regarding the Mutual Fund Industry. Without his apt suggestions, guidance and bountiful benevolence, this report would have remained a dream. I hope that he will understand my feelings lest unsaid with thoughtfulness. With this belief........ (Mayank Solanki)

ACKNOWLEDGEMENT
I would like to thank Anand Rathi Securities Pvt. Ltd. for giving me the opportunity to pursue my summer training in their respected organization. Preparing a training report is always teamwork and I realized the advantage of working in a team. This acknowledgement is an effort to recognize these professionals who have made this training a combination of coordination, cooperation and success. I would like to thank my faculty guide Prof. Sushil J. Lalwani and Dr. Sunil Mehta because without their guidance and valuable recommendations it would not have been possible for me to reach at this destination. Now, I take the opportunity to thank my training guide Mr. Tabish Mehmood (Relationship Manager, Mutual Fund, Anand Rathi Securities Pvt. Ltd. Jaipur Branch) for lending his valuable time and suggestions, his kind support made us to possess in depth knowledge in the Mutual Fund. I would also like to thank Mr. Rajkumar Jain (Branch Manager, Anand Rathi Securities Pvt. Ltd. Jaipur Branch) for his support, whenever I needed. I also thank all the colleagues whom I worked with. They lend a part of their valuable time, gave some precious suggestions and exchange their experience. Nothing is perfect in this world and so is this report. Instead of all the precautions and applying all the skills that I have, there are some loopholes left. But even after doing all this, my training report remains incomplete if I dont thank Mr. Sachin Khadilkar (HR Head, Anand Rathi Securities Pvt. Ltd.) for his kind attention and accepting our humble request.

PREFACE

Summer training is an integral part of MFC curriculum. Main objective behind this training is to link the theoretical inputs and their practical applications, which are essential to keep pace with the dynamic environment. To survive, thrive and beat the competition in todays brutally competitive world, one has to manage the future. Managing the future means managing your savings. One can manage his/her savings by investing them in Mutual Fund Companies, Banks and other Financial Institutions. The training undergone provides an overview of the complexities of todays financial market. It also showed my errors, which were not discovered until I worked on this project. The training enriched my knowledge regarding Mutual Funds. It also helps me to analyze the mindset of the Fund Manager while he is investing the fund in the diversified equities, bonds and any other financial market instruments. Instead of the efforts there might be some mistakes left in the project.

CONTENTS
1. 2. 3. My First Regards Acknowledgement Preface
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1 2 3

Objective About Anand Rathi Securities: As a Whole Group Jaipur Branch 6. Introduction to Mutual Fund: Definition Concept Benefits Disadvantage History Role Types of Schemes/ Funds Types of Returns Frequently Used Terms 7. Procedure for Investment: Who can apply How to apply Mode of Payment How to Redeem How to Switch Systematic Withdrawal Plan (SWP) Systematic Transfer Plan (STP) Rights of Mutual Fund Unit holder Resolving the Grievances 8. Regulation/Constitution of Mutual Fund: Constitution Trustee Asset Management Company Custodian & Depositories Bankers Transfer Agents 9. Operations of Mutual Fund 10 Association of Mutual Funds of India (AMFI) . 11 Restriction on Investment of Fund Money . 12 General Risk Factors: .
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4. 5.

6 7 7 9 10 10 11 13 15 16 18 19 24 24 26 26 26 27 27 27 28 29 29 30 32 32 34 38 40 41 41 42 50 51 54

 Managing Risk Types of Risks 13 Systematic Investment Plan . Meaning How does it work Benefits 14 Investment in Mutual Funds by NRIs: . Basics Procedure for investment of NRI/ PIO/ FII Redemption Taxes Some Special Terms 15 Tax Implications of Mutual Fund Investment . 16 Some Interesting Terms: . Floating Rate Fund Dividend Sweep Triggers 17 Tips for Investment in Mutual Funds: . 5 Pointers to Mutual Fund Performance 5 Easy Steps to Invest in Mutual Funds Top 11 Tips to Invest in Mutual Funds The Right Asset Allocation 18 Equity & Debt Funds: . 5 Reason for investing in Equity Funds Valuation of Debt Funds: 19 Performance Measures of Mutual Funds: . Sharpe Ratio Treynor Ratio Jensens Ratio Expense Ratio 20 How to Play in an Over-Heated Market .
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55 57 60 60 60 64 65 65 66 68 70 72 74 81 81 82 83 86 86 89 92 100 103 103 106 112 113 113 114 115 116

21 New Fund Offers (NFOs): . SBI Magnum Comma Fund PruICICI Infrastructure Fund Reliance Tax Saver (ELSS) Fund 22 Glossary . 23 General Facts regarding Mutual Fund Industry . 24 Conclusion . 25 Bibliography .

118 118 122 127 134 172 173 174

OBJECTIVE
The report aims at imparting education about Mutual Funds, as there is a potentially large market for Mutual Fund Industry left. As I interviewed the Chartered Accountants, Company Secretaries, Investment Consultant, Tax Consultants etc, I visualize the importance of this project because many of them lack adequate knowledge about mutual funds. The purpose was to answer their questions, like: What is a Mutual Fund, Why should they invest in a mutual fund and what are the benefits, What is the concept of Mutual Fund, What are the myths and the facts about mutual funds, What are the various options to invest in a mutual fund, What is the constitution of AMC and how it is constituted, Risk awareness of the investor, Some general tips for investing in the Mutual Funds, Tax implication of the income earned by investors from Mutual Funds, NRIs investment in the Mutual Funds, and many more

ABOUT ANAND RATHI SECURITIES

With Anand Rathi Securities, part of the Anand Rathi Group, everyone can count on the expertise and stability of a major financial services player behind them. Single-mindedly research driven. Distinguished for transparency in execution and settlement practices. Professional to the core. A comprehensive range of services that are aimed at building robust relationships. It's largely due to a team of vastly experienced specialists who provide you the momentum to make the most of whatever you need on financial solutions. From sophisticated analysis and trading expertise, to efficient settlements, and ongoing investment research of more than 150 leading Indian companies, Anand Rathi Securities assist everyone in developing actionable strategies that maximise the potential of the market. Their appreciation of the power of technology to everyones needs at a much faster pace adds to their responsiveness in every situation. Which is why their clients find themselves in good company with almost all the institutional investors based in India. The scope and depth of their research activities is continually being enhanced with exacting guidelines that minimise subjective judgment, provide everyone greater transparency and ensure everyone a competitive advantage. To capitalise on opportunities as they emerge, what anyone need most is information on a real time basis wherever he is. Thats why Anand Rathi Securities is bringing about aggressive changes through a dramatically enhanced IT infrastructure. Everyone can access critical information simply and cost effectively through their web site. Their internal systems and processes are designed to international standards, enabling them to leverage their comprehensive knowledge of the way the markets function, for everyone benefit. Allowing more accurate decisions and speedier settlements to be carried out.
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With a commitment to spend up to 25% of their revenue on upgrading systems and adopting the latest technologies, everyone benefit from cutting edge systems, everyone can rely on round the clock, around the world. In conclusion Anand Rathi Securities see technology as the compelling driving force in assisting everyone to attain his investment objectives and long term goals. Wherever in the country if anyone needs professional and transparent retail broking services, he will find Anand Rathi Securities present. With the BSE permitting establishment of terminals across the country, they were among the first to set up an allIndia network, getting closer to investors, extending their reach nationwide.

ANAND RATHI SECURITIES COUNTRY WIDE NETWORK

Currently, branches in most of the major cities handle all financial requirements. With state-of- the-art Infrastructure such as networking through the Internet as well as experienced specialists at investors call in every branch, he has direct access to online trading, besides a host of other facilities. Anand Rathi Group, Corporate Office: J. K. Somani Building, 3rd Floor, British Hotel Lane, Bombay Samachar Marg,
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Fort, Mumbai 400023. Tel.: 56377000

ABOUT ANAND RATHI SECURITIES, JAIPUR BRANCH

The Anand Rathi Securities, Jaipur branch is dealing in the followings: Demat Services NSE, BSE, F&O Trading Services Commodity Trading Mutual Fund Distribution Life and Non-life Insurance IPO Financial Advisor Research Assistance

The organizational structure of Anand Rathi Securities, Jaipur Branch is as follows: Regional Director Mr. Rajkumar Jain Business Development Manager Mr. Anurag Rastogi Accounts Manager Mr. R. K. Agarwal Relationship Manager (Accounts) Mr. R. C. Somani Operation Manager (Trading) Mr. K. C. Sharma Depository Participant Mr. V. K. Indoria Assistant Depository Participant Mr. H. K. Wadhwa Relationship Manager (Mutual Fund) Mr. Tabish Mehmood Anand Rathi Securities, Jaipur Branch: Sanghi Upasana, Tower, C 98, Subhash Marg, C-Scheme, Jaipur 302001 Tel.: 0141 5115472 / 74 / 75 Fax: 0141 2365135 E-mail: jaipur@rathi.com

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INTRODUCTION TO MUTUAL FUND DEFINITION

According to SEBI (MF) Regulations, 1996 Mutual Fund means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. The other common and well-known definitions of Mutual Funds are as follows: A Mutual Fund is an investment tool that allows small investors access to a welldiversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. A Mutual Fund is a company that pools the money of many investors, its shareholders to invest in a variety of different securities. The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. In conclusion, we can say that Mutual Fund collects the money of individuals, partnership firms, association of persons/body of individuals, trust, HUFs, banks, company/body corporate, society, financial institutions, foreign individuals, foreign financial institutions or any other person, or of public or any part of public at large and deploys the collected fund according to the scheme into the diversified portfolio of equities, bonds, financial market instruments and other securities to generate returns. As and when any person redeems his/her units, the Mutual Fund Asset Management Company (AMC) will pay him his invested amount with the return generated depending on the option chosen by the person.

CONCEPT

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A Mutual Fund is not an alternative investment option to stocks and bond; rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

MUTUAL FUND OPERATION FLOW CHART

Anybody with an investible surplus of as little as a few hundred rupees can invest in mutual funds. The investors buy units of a fund that best suit their investment objectives and future needs. A Mutual Fund invests the pool of money collected from the investors in a range of securities comprising equities, debt, money market instruments etc. after charging for the AMC fees. The income earned and the capital appreciation realised by the scheme, are shared by the investors in same proportion as the number of units owned by them. In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from each other. When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment
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strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you. A Mutual Fund may not, through just one portfolio, be able to meet the investment objectives of all their Unit holders. Some Unit holders may want to invest in risk-bearing securities such as equity and some others may want to invest in safer securities such as bonds or government securities. Hence, the Mutual Fund comes out with different schemes, each with a different investment objective. Mutual funds can be divided into various types depending on asset classes. They can also invest in debt instruments such as bonds, debentures, commercial paper and government securities apart from equity. Every mutual fund scheme is bound by the investment objectives outlined by it in its prospectus. The investment objectives specify the class of securities a mutual fund can invest in. There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

MUTUAL FUND ORGANISATIONAL FLOW CHART

The structure indicated by the new regulations is indicated as under. A mutual fund comprises four separate entities, namely sponsor, mutual fund trust, AMC and custodian. The sponsor establishes the mutual fund and gets it registered with SEBI. The mutual fund needs to be constituted in the form of a trust and the instrument of the trust should be in the form of a deed registered under the provisions of the Indian Registration Act, 1908. The sponsor is required to contribute at least 40% of the minimum net worth (Rs. 10 crore) of the asset management company. The board of trustees manages the MF and the sponsor executes the trust deeds in favour of the trustees. It is the job of
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the MF trustees to see that schemes floated and managed by the AMC appointed by the trustees are in accordance with the trust deed and SEBI guidelines.

BENEFITS
There are several benefits from investing in a Mutual Fund: Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance. Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick good investment opportunities.

Spreading Risk:

An investor with a limited amount of fund might be able to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs. Transparency and interactivity: Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor.

Liquidity:

Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value whereas in openended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.

Choice: The large amount of Mutual Funds offers the

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investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile. Diversification: Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.

Low Cost:

A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them. Convenience and Flexibility: You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.

Personal Service

One call puts you in touch with a specialist who can provide you with information you can use to make your own investment choices. They will provide you personal assistance in buying and selling your fund units, provide fund information and answer questions about your account status. Our Customer service centers are at your service and our Marketing team would be eager to hear your comments on our schemes. Tax Benefits: Some of the schemes of the Mutual Funds like Equity Linked Saving Schemes (ELSS) give the benefits of tax saving also as the investment in ELSS upto Rs. 1lakh is allowable as deduction u/s 80(C). The dividend earned through mutual funds is also exempt from tax. There is no tax on long term capital gain on equity funds.

Ease of investing:

As one can invest in mutual funds with small amount of his/her savings therefore it is easy for him to invest in mutual funds and the AMC will take care of his investment. Record Keeping Services: All Asset Management Companies (AMC)
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maintains all the records regarding the investments made by each and every investment e.g. account statement or account summary. Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.

DISADVANTAGES OF MUTUAL FUNDS

Investor can not choose the securities which they want to invest in. Investors face the risk of Fund Manager not performing well. If Fund Manager's pay is linked to performance of the fund, he may be tempted to perform only on short term and neglect long term performance of the fund. The management fees charged by the fund reduce the return available to the investors. Investors in Mutual Fund have to rely on the fund manager for receiving any earning made by the fund, i.e. they are not automatic.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase 1964-87 An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management (AUM). Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 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 nonUTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
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89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. 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) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 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. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase since February 2003 In February2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs. 1,26,726 crores under 386 schemes.
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The graph indicates the growth of assets over the years.

GROWTH IN

ASSETS UNDER MANAGEMENT Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

ROLE OF MUTUAL FUNDS

Mutual Funds have opened new vistas to investors and imparted much needed liquidity to the system. In this process they have challenged the hitherto dominant role of the commercial banks in the financial market and national economy.

Mutual Funds and Household Savings In 1997 the share of mutual funds in household financial assets was over 5% in the USA, 8% in Germany, 3% in Japan, 3% in Italy and about 5% in India. The other indicator which highlights their importance is the rate of growth of this share. The economists magazine in its issue of 9 October 1995 reported that in 1980, 58% on the personal sector wealth in the USA was held in financial assets, by 1992 this had risen to 63%. Out of these financial assets the share of mutual funds stood at 5.4% as against 0.7% in 1980. In India there has been a steady increase in the share of mutual funds in house holds savings (financial assets) since 1988-89 i.e. after the entry of public sector mutual funds. The most significant growth during 1980-81 to 1992-93
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was in respect of UTI. It increased from 0.3% of the total household savings in 198081 to 7.0% in 1992-93. However the percentage share of bank deposits declined from 45.8% in 1980-81 to 40.2% in 1994-95.

Mutual Funds and the Capital Market According to Center for Monitoring Indian Economy (CMIE), "Mutual Funds" cornered 12% of the total market capitalization, the share of UTI being 9.4% of the total market capitalization of Indian Stock Markets in 1994. Out of the total investment of Rs. 71,828.62 crores, 51% was invested in equities while about 21% was invested in debt instruments like debentures and bonds. This indicates that mutual funds have strongly supported the equity market. While non UTI mutual funds have tended more towards equities and debentures, UTI due to its special structure, has rendered better support to government securities market. Mutual Funds and Corporate Finance According to the flow of funds statistics published by the RBI, the share of the banking sector in filling the resource gap of the corporate sector has declined from 54.42% in 1988-89 to 2.3% in 1991-92, while of the other financial sector (including mutual funds) has increased from 39.9% to 102.58%. RBI has noted that "The rapid growth of mutual funds and increase in term lending by other financial institutions appear to have contributed to this trend."

TYPES OF SCHEMES/FUNDS
I. By Structure II. By Investment Objective III. Other Schemes 1. Tax Saving Scheme 2. Index Scheme 3. Sector Specific

1. Open Ended Scheme 1. Growth Scheme 2. Close Ended Scheme 2. Income Scheme 3. Interval Schemes 3. Balanced Scheme

4. Money Market Schemes 4. Real Estate Scheme

5. Gilt Schemes Open ended Schemes 1. The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. 2. Unit capital of the schemes keeps changing each day. 3. Offer very high liquidity to investors and are becoming increasingly popular in India.
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Closed ended Scheme 1. The unit capital of close-ended products is fixed as it makes a one-time sale of fixed number of units. 2. Are launched with a New Fund Offer (NFO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. 3. In the interim, investors can buy or sell units on the stock exchanges where they are listed. 4. Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. 5. After an initial closed period, the scheme may offer direct repurchase facility to the investors. 6. Are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. 7. This type of scheme does not exist in present. Interval Scheme 1. Basically a close ended scheme with a peculiar feature that every year for a specified period (interval) it is made open. 2. Prior to and such interval the scheme operates as close ended. 3. During the said period, mutual fund is ready to buy or sell the units directly from or to the investors. Growth Schemes 1. Commonly called as Equity Schemes. 2. Seek to invest a majority of their funds in equities and a small portion in money market instruments and have the potential to deliver superior returns over the long term. 3. They are exposed to fluctuations in value especially in the short term. 4. Hence not suitable for investors seeking regular income or needing to use their investments in the short-term. Ideal for investors who have a long-term investment horizon and risk bearing capacity. 5. The return comes in two sizes in this type of schemes, one is small i.e. dividend and another is medium i.e. at redemption time.

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GENERAL PURPOSE EQUITY SCHEMES

Income Schemes 1. Commonly known as Debt Schemes. 2. These schemes invest in money markets, bonds and debentures of corporate with medium and long-term maturities. 3. These schemes primarily target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. 4. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. 5. The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. 6. These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. 7. However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk.

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General Purpose Debt Schemes

Balanced Schemes 1. Aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities. 2. Appropriate for investors looking for moderate growth. 3. They generally invest 40-60% in equity and debt instruments. 4. NAVs of such funds are likely to be less volatile and bear lower risk compared to pure equity funds. 5. Theses funds are also known as Hybrid Schemes. Money Market Schemes 1. Invest in short term instruments such as Commercial Paper (CP), Certificates of Deposit (CD), Treasury Bills and Call Money. 2. Least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. 3. Are popular with institutional investors and high net worth individuals having short-term surplus funds. Tax Saving Schemes Investors (individuals and Hindu Undivided Families (HUFs)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme (ELSS) by offering them a tax deduction u/s 80(C). The deduction is allowable upto the limit of Rs. 1 lakh u/s 80(C). Index Schemes 1. Replicate the portfolio of a particular index such as the BSE Sensitive Index, S&P NSE 50 index (Nifty), etc
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2. Invest in the securities in the same weight age comprising of an index. 3. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. 4. Exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. 5. The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. Sector Specific Schemes 1. These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector, pharma sector, power sector etc. 2. Depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. 3. They are suited for informed investors who wish to take a view and risk on the concerned sector. Real Estate Schemes 1. Specialized real estate funds would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets.

Gilt Schemes 1. This scheme primarily invests in Government Debt. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free.

TYPES OF RETURNS
Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution.

Capital Appreciation

An increase in the value of the units of the fund is known as capital appreciation. As the value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit by selling the units at prices
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higher than the price at which he bought the units.

Dividend Distribution

The profit earned by the fund is distributed among unit holders in the form of dividends. Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to the investor. Under the Growth Plan, the investor realizes the capital appreciation of his/her investments while under the Dividend Reinvestment Plan, the dividends declared are reinvested automatically in the scheme.

FREQUENTLY USED TERMS

Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Sale price is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Repurchase price is the price at which a closeended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price Redemption price is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales or Entry Load Sale load is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.

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 Repurchase, Exit or Back-end Load Repurchase load is a charge collected by a scheme when it buys back the units from the unit holders.

PROCEDURE FOR INVESTING WHO CAN APPLY

IN

MUTUAL FUNDS

The following persons are eligible to apply for subscription to the Units of Mutual Fund Scheme. However that purchase of units of Mutual Funds is governed by relevant statutory regulations. Changes in such regulations may affect eligibility. Resident adult individuals either singly or jointly; the number of joint subscribers cannot exceed three, Minors through parent/lawful guardian,
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 Companies, Bodies Corporate, Public Sector Undertaking, Association of Persons or Bodies of Individuals and Societies registered under the Societies Registration Act, 1860 (so long as the purchase Units is permitted under the respective constitutions), Religious and Charitable Trusts, Wakfs or Endowments and Registered Societies (including registered Co-operative Societies) and Private Trusts (subject to receipt of necessary approvals as required), Partnership Firms, Karta of Hindu Undivided Family (HUF), Banks and Financial Institutions, Scientific and Industrial Research Organisations and Other Associations, Institutions, Bodies, etc. who are permitted to invest in this Scheme as per their respective constitutions. Subject to the regulations, the Trustee may reject any application received, in case the application is found invalid or incomplete or for any other reasons, at the Trustee's sole discretion.

HOW TO APPLY

For convenience of investors some application forms are attached with the offer document. Applicants should use the appropriate Application Form. Application Forms will be available at all places as specified in the Application form, investor service centers, Marketing Associates, and at the office of the AMC. Applications complete in all respects may be submitted at the designated branches of Investors Service Centers and the registered office of AMC. As per the directives issued by SEBI, it is mandatory for applicants to mention their bank account numbers in their applications for purchase or redemption of Units. Kindly ensure that the acknowledgement slip is initialed/ stamped by the collecting authority and retain it.

MODE OF PAYMENT
Investors may pay by local cheque/bank draft, drawn on any bank which is a member of Bankers clearing house located at a place where the application is submitted. Cheques/demand drafts should be crossed "Account Payee Only".
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HOW TO REDEEM
Redemption of Units will be made on any business day at the Applicable NAV of the option within the scheme. In order to redeem Units, unit holders must submit a redemption request in the proper form accompanied by account statements. Alternatively, unit holders may download redemption request form. Under normal circumstances, the scheme will endeavour to dispatch the redemption cheques by courier or by Registered Post within three business days from the redemption day. The application / redemption request shall be handed over to any of the investor service centre of the fund.

HOW TO SWITCH
Unit Holders will have the option to switch all or part of their investment in the Scheme, to any other scheme(s) established by the mutual Fund, which is available for investment at that time. The switch will be affected by way of redemption of Units of this Scheme and reinvestment of the redemption proceeds in the other scheme(s) selected by the Unit Holders, at the prevailing terms of that scheme. The other scheme(s) may at discretion of Trustee or the AMC, may waive entry load to the extent of the entry load paid by the investor while joining this scheme. In other words, the difference in the Net Asset Values (NAVs) of the two schemes and applicable loads will be reflected in the number of units allotted. Unit Holders should note that each switch would represent the sale of Units from one scheme (which may result in a capital gain or loss) and purchase of Units in another scheme. Unit Holders who have subscribed under Section 54EA / 54EB facility will be permitted to switch their investment only after the completion of their respective lock-in periods. Switching between Investment plans within the Scheme will also be permitted.

FIXED SYSTEMATIC WITHDRAWAL PLAN (SWP)

SWP is a Tax efficient way of obtaining regular income. Investor can opt for SWP for periodic withdrawal of sums from their accounts. Investor can opt for any one of the following two options offered by the Schemes:

Amount Encashment Under this facility, the Unit holders can opt to redeem/
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switch (transfer) fixed amount of money from their accounts at periodic intervals. Capital Appreciation Encashment Under this facility, the Unit holders can opt to redeem amounts equivalent to the appreciation in their investment value at periodic intervals. Thus the appreciation, if any, earned by the Scheme during the specified period shall be automatically redeemed and paid to the investors at the Applicable NAV. Presently this option is available only for investors in Growth Plan/Option. The amount thus withdrawn / switched shall be converted into units at the Applicable NAV, subject to load, if any, and such units shall be subtracted from the Unit balance of that unit holder. This facility shall be subject to the terms and conditions contained in the SWP / STP enrollment form. The Registrar may terminate SWP/ STP on receipt of appropriate notice from the Unit holder. It will terminate automatically if all Units are liquidated or withdrawn from the account or upon the receipt of notification of death or incapability of the Unit holder. SWP / STP shall not be available for investments under 54 EA / 54 EB of the Income Tax Act, 1961, during the stipulated lock-in-period of 3 years / 7 years respectively. The withdrawal / Transfer would happen on the date prescribed by the Investment Manager and would be subject to applicable load structures for respective schemes. Investors desiring to opt for these benefits are requested to read the instructions contained in the enrollment form carefully. SWP can be modified/terminated by the unit holder by submitting a written request 5 days in advance.

SYSTEMATIC TRANSFER PLAN (STP)

The Systematic Transfer Plan gives investors the option of systematic transfer of fixed amounts/ capital appreciation on a periodic basis to another Plan/ Scheme of the Mutual Fund. STP can availed of as a monthly or quarterly basis from one plan to another plan in the same scheme or to another scheme within the fund All transfers will take place on the 30th/ 31st of every Month/ Quarter based on the NAV of that day. An investor can opt for systematic transfer of fixed amount or of the Capital Appreciation on investment in the scheme to any desired scheme on a monthly or quarterly basis. STP of Capital Appreciation is available only under the Growth plan and not under Dividend Plan. The amount of transfer under STP will be considered as redemption and will be made at the applicable redemption price on the day of transfer and at the applicable load, if any. STP can be modified/terminated by the unitholder by submitting a written request 5 days in advance.
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RIGHTS OF A MUTUAL FUND UNITHOLDER

The offer documents of a scheme lay down the investors rights. The important rights of the unitholders are outlined below: Receive unit certificates or statements of accounts confirming the title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date of request for a unit certificate is received by the Mutual Fund. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. Right of beneficial ownership of the schemes assets as well as any dividend or income declared under the scheme. Right to information regarding any adverse happening. Right to inspect major documents of the fund i.e. material contracts, the investment management agreement, the custodian services agreement, registrar and transfer agency agreement, memorandum and articles of association of the AMC, recent audited financial statements and the offer document of the scheme. Vote in accordance with the Regulations to: 1. Approve or disapprove any change in the fundamental investment policies of the scheme, which are likely to modify the scheme or affect the interest of the unit holder. The dissenting unit holder has a right to redeem the investment. 2. Change the Asset Management Company. 3. Wind up the schemes. Legal Limitations to Investors Rights: 1. Unitholder can not sue the trust but they can initiate proceedings against the trustees, if they feel that they are being cheated. 2. Except in certain circumstances AMC can not assure a specified level of return to the investors. AMC can not be sued to make good any shortfall in such schemes.

RESOLVING THE GRIEVANCES

Investors can get in touch with the contact person named in the offer document, trustees and directors of the AMC with their grievances. Mutual funds are regulated by SEBI. The investor has the recourse to approach SEBI for any grievances towards a mutual fund in connection with non-receipt of dividends, redemption, account statement, etc. Various investor forums also take up the case of individual investors.
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Investors can contact: Securities and Exchange Board of India (SEBI) Mutual Funds Department, Mittal Court, B Wing, First Floor, 224, Nariman Point, Mumbai 400 021. Phone: 285 0451-56 Website: www.sebi.gov.in Consumer and Education Research Society Gandhi Nagar Highway, Ahmedabad 380 054. Phone: 079-7489945 Fax: 079-7489947 Website: www.cercindia.org Investors Grievance Forum 9/C Neelam Nagar, Mulund East, Mumbai 400 084. Phone: 022-25644151 Fax: 022-25647432 Email: igfmumbai@vsnl.net

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REGULATION/CONSTITUTION OF MUTUAL FUNDS SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) (INVESTMENT IN MUTUAL FUNDS)

DEFINITION OF MUTUAL FUND

It is a pool of investors money invested and managed by an investment adviser. Money can be invested in the fund or withdrawn at any time, with few restrictions, at net asset value (the per share market value of all securities held) minus any loads and/or fees. Definition of mutual fund as given in the regulations is a fund established in the form of a Trust by a sponsor to raise monies by the trustees through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments in accordance with the SEBI Regulations.

CONSTITUTION OF A MUTUAL FUND

In India, a mutual fund is allowed to issue both close ended and open ended funds under the common law. This is against the practice as followed in UK. A mutual fund in India is constituted in the form of trust created under the Indian Trusts Act, 1882. The fund sponsor acts as the Settlor of the trust, contributing to its initial capital and appoints a Trustee to hold the assets of the trusts for the benefit of the unitholders, who are the beneficiaries of the trust. Under the Indian Trusts Act, the trust or the fund has no independent legal capacity itself, rather it is the trustee or trustees who have the legal capacity and therefore all acts in relation to the trust are taken on its behalf by the trustees. The trustees hold the unitholders money in a fiduciary capacity i.e. the money belongs to the unitholders and it is entrusted to the fund for the purpose of investment. The fund sponsor can be compared to a promoter of a company. The Asset Management Company (AMC) is appointed to act as the investment manager of the trust under the Board supervision and direction of the trustees. The sponsor appoints the AMC which would in the name of trust, float and then manage the different investment schemes as per SEBI guidelines. The above aspects can be understood easily in the following paragraphs.

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Who can establish a mutual fund A mutual fund is to be established through the medium of a sponsor A sponsor means any body corporate who, acting alone or in the combination with another body corporate, establishes a mutual fund after completing the formalities prescribed in the SEBIs Mutual Funds Regulations. The sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions.

Sound track record shall mean that the sponsor should: 1. be carrying on business in financial services for a period of not less than five years, 2. the net worth is positive in all the immediately preceding five years, 3. the net worth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company, 4. the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year, and 5. the sponsor should be a fit and proper person. How to establish a mutual fund 1. The mutual fund has to be established as a trust and the instrument of trust shall be in the form of a deed. The deed shall be executed by the sponsor in favour of the trustees named in the instrument of trust. The trust deed shall be duly registered under the provisions of the Indian Registration Act, 1908. The trust deed shall contain clauses specified in the Third Schedule of the Regulations. 2. An Asset Management Company, who holds an approval from SEBI. Is to be appointed to manage the affairs of the mutual fund and it should operate the schemes of such fund. 3. The sponsor should contribute at least 40% to the net worth of the Asset Management Company. The Trustee should hold the property of the mutual fund in trust for the benefit of the unitholders.

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Sponsor Company Managed by a Board of Trustees Mutual Fund

Establishes MF as Trust, Registers MF with SEBI Hold Unitholders fund in MF, Ensure compliance to SEBI, Enter into agreement with SEBI Float Mutual Funds fund, Manages funds as per SEBI guidelines and AMC agreement Provides necessary Custodian Services

Appointed by Board of Trustees AMC Appointed by Trustees Custodian Appointed by Trustees Bankers Appointed by Trustees Register Transfer Agents

Provides Banking Services

Provide Registrars Services and act as a transfer Agents

TRUSTEE

Definition

Trustee means the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust for the benefit of the unitholders. Eligibility for Appointment as Trustee 1. No person shall be eligible to be appointed as a trustee unless: he is person of ability, integrity and standing; has not been found guilty of moral turpitude; has not been convicted of any economic offence or violation of any securities laws; and
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 has furnished particulars as specified in Form C specified in SEBI Regulations. 2. An asset management company or any of its officers or employees shall not be eligible to act as a trustee of any mutual fund. 3. No person who is appointed as a trustee of a mutual fund can be appointed a trustee of any other mutual fund unless: Such a person is an independent trustee, and Prior approval of the mutual fund of which he is a trustee has been obtained for such an appointment. 4. Two-thirds of the trustees shall de independent persons and shall not be associated with the sponsors or be associated with them in any manner whatsoever. 5. In case a company is appointed as a trustee then its directors can act as trustees of any other trust provided that the object of the trust is not in conflict with the object of the mutual fund, trustee shall initially or any other time thereafter be appointed without prior approval of SEBI. Rights and Obligations of the Trustees Operation of the Trust 1. The trustee shall have a right to obtain from the Asset Management Company such information as is considered necessary by the trustees. 2. If the trustees have reason to believe that the business of the Mutual Fund is not conducted in conformity with the SEBI regulations, they shall forthwith take such remedial steps as are necessary to rectify the situation and keep SEBI informed of the violation and the action taken by them. 3. The trustees shall ensure that the transactions entered into by the Asset Management Company are in accordance with the SEBI Regulations and the scheme. 4. The trustees shall be accountable for and be the custodian of the property of the respective schemes and shall hold the same in trust for the benefit of the unitholders in accordance with the SEBI Regulations and the provisions of the trust deed. 5. The trustees shall be responsible for calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme in accordance with the SEBI Regulations and the trust deed. The trustees shall ensure that an Asset Management Company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker. The trustees shall ensure that the Asset Management Company has not given any undue or unfair advantage to any associates
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or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit holders. The trustees shall ensure that the Asset Management Company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of on scheme are not being compromised with those of any other scheme or other activities of the Asset Management Company. The trustees shall call for the details of transactions in securities by the key personnel of the Asset Management Company in his own name or on behalf of the asset Management Company on a six monthly basis and shall repot to SEBI, as and when required. The trustees shall quarterly review all transactions carried out between mutual funds, Asset Management Company and its associates. The trustee shall quarterly review the net worth of the asset Management company and in case of any shortfall, ensure that the Asset Management Company make up for the shortfall as per clause (f) of sub-regulation (1) of regulation 21. The trustees shall ensure that there is no conflict of interest between the manner of deployment of its net worth by the Asset Management Company and the interest of the unitholders. Each trustee shall file the details of his transactions of dealings in securities with the Mutual Fund on a quarterly basis.

Report to SEBI The trustees shall furnish to SEBI on a half yearly basis: a report on the activities of the mutual fund, a certificate stating that the trustees have satisfied themselves that there have been no instances of self-dealing or front running by any of the trustees, directors and key personnel of the Asset Management Company, a certificate to the effect that the Asset Management Company has been managing the scheme independently of any other activities and in case of activities of the nature referred to in the regulation 24 have been undertaken by the Asset Management Company and has taken adequate steps to ensure that the interest of the unitholders are protected, the independent trustees referred to in regulation 16 shall give their comments on the report received from the Asset Management Company regarding the investments by the mutual fund in the securities of group companies of the sponsor. 1. Due Diligence by Trustees General Due Diligence:
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1. 2. 3.

4.

2.

The trustees shall be discerning in the appointment of the Board of the Asset Management Company. Trustees shall review the desirability of continuance of Management Company if substantial irregularities are observed of the schemes and shall not allow the asset management to float new schemes. The trustees shall ensure that the trust property is properly held and administered by proper reasons and by a proper number of such persons. The trustees shall ensure that all service providers are holding the registrations from SEBI or concerned regulatory authority. The trustees shall arrange for test checks for service contracts. Trustees shall immediately report to SEBI of any special development in the mutual fund. Specific Due Diligence The trustee shall obtain internal audit reports at regular intervals from independent auditors appointed by the trustees, obtain compliance certificates at regular intervals from the Asset Management Company, hold meeting of trustees more frequently, consider the reports of the independent auditor and compliance reports of Asset Management Company at the meetings of trustees for appropriate action, maintain records of the decisions of the trustees at their meetings and of the minutes of the meetings, prescribe and adhere to a code of ethics by the trustees, Asset Management Company and its personnel, communicate in writing to the Asset Management Company of the deficiencies and checking on the rectification of deficiencies. Reports to Trustees

The AMC shall submit a monthly report to the trustees giving details and adequate justification about the purchase and sale of the securities of the group companies of the sponsor or the AMC, as the case may be, by the mutual fund during the said quarter. The AMC shall submit to the trustees, quarterly reports of each year on its activities and the compliance with SEBI regulations.

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ASSET MANAGEMENT COMPANY (AMC)

Who can be Asset Management Company A company formed and registered under the Companies Act, 1956 and which has obtained the approval of SEBI to function as an Asset Management Company may be appointed by the sponsor of the mutual fund as such. If the trust deed of a mutual fund authorizes the trustees, the later shall appoint the aforesaid terminated by majority of the trustees or by seventy five percent of the unitholders of the scheme. Any change in the appointment of the Asset Management Company shall be subject to prior of SEBI and unitholders. SEBIs approval of an Asset Management Company before granting an approval to the Asset Management Company, SEBI will take into account the following factors: 1. all matters which are relevant to efficient and orderly conduct of the affairs of the Asset Management Company. 2. the existing Asset Management Company has a sound track record, general reputation and fairness in transactions. For this purpose, sound track record means the net worth, and the profitability of the Asset Management Company. 3. the Asset Management Company is a fit and proper person. 4. the directors of the Asset management Company are persons having adequate professional experience in finance and financial service related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws. 5. the Board of Directors of the Asset Management Company has at least fifty percent directors, who are not associate of or associated in an manner with the sponsors or any of its subsidiaries or the Trustees. 6. the Chairman of the Asset Management Company should not be trustee of any mutual fund. 7. the Asset Management Company shall have a minimum net worth of rupees ten crores. If an Asset Management Company was already granted approval under the provisions of SEBI (Mutual Fund) Regulations, 1993, it shall, within a period of 12 months from the date of notification of SEBI (Mutual Funds) Regulations, 1996, increase its net worth to rupees ten crores. the period of 12 months referred to above may be extended by SEBI upto three years in appropriate cases for reasons to be recorded in writing. However, no new schemes should be allowed to be launched or managed by such Asset Management Company till the net worth has been raised to rupees ten crores. Net Worth It means the aggregate of paid up capital and free reserves of the AMC after deducting there from miscellaneous expenditure
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to the extent not written off or adjusted or deferred revenue expenditure, intangible assets and accumulated losses. 8. the key personnel of the Asset Management Company have not been found guilty of moral turpitude or convicted of economic offence or violation of securities laws or worked for any Asset Management Company or Mutual Fund or any intermediary during the period when registration has been suspended or cancelled at any time by SEBI. Conditions to be fulfilled by the Asset Management Company 1. Any director of the AMC shall not hold the place of a director in another AMC unless such person is independent director referred to in clause (d) of Subregulation (1) of Regulation 21 of the Regulations and approval of the Board of AMC of which such person is a director, has been obtained. 2. The AMC shall forthwith inform SEBI of any material change in the information or particulars previously furnished which have a bearing on the approval granted by SEBI. 3. No appointment of a director of an AMC shall be made without the prior approval of the trustees. 4. The AMC undertakes to comply with SEBI (Mutual Funds) Regulations, 1996. 5. No change in controlling interest of the AMC shall be made unless prior approval of the trustees and SEBI is obtained: a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated. the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load. the AMC shall furnish such information and documents to the trustees as and when required by the trustees. Obligation of the Asset Management Company 1. The AMC shall manage the affairs of the mutual fund and operate the schemes of such fund. 2. The AMC shall take all reasonable steps and exercise due diligence to ensure that the investment of the mutual funds pertaining to any scheme is not contrary to the provisions of SEBI Regulations and the trust deed of the Mutual Fund. The AMC shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business. Recording of investment decisions SEBI has advised AMCs to maintain records in support of each investment decision.
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3. The AMC shall be responsible for the acts of commissions by its employees or the persons whose services have been obtained by that company.

CUSTODIAN AND DEPOSITORIES

Custodian is a person appointed for safe keeping of the securities. Mutual funds deal in buying and selling of large number of securities. AMC appoints a Custodian for safe keeping of these securities and for participating in clearing system on its behalf. In case of dematerialized securities, holdings will be held by Depository through Depository participant. Definition Custodian means a person who has been granted a certificate of registration by SEBI to carry on the business of custodian of securities under the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes of the fund and send intimation of the same to SEBI within fifteen days of the appointment of the custodian. No custodian in which the sponsor or its associates hold 50% or more of the voting rights of the share capital of the custodian or where 50% or more of the directors of the custodian represent the interest of the sponsor or its associates shall act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company.

Agreement with Custodian

The mutual fund shall enter into a custodian agreement with the custodian, which shall contain the clauses which are necessary for the efficient and orderly conduct of the affairs of the custodian. The agreement, the service contract, terms and appointment of the custodian shall be entered into with the prior approval of the trustees.

BANKERS
The AMC of the mutual fund appoints bankers to the mutual funds. It provides facilities like receiving the proceeds on sale of investments, enchasing high value cheques, giving multi city cheque book facilities etc.
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TRANSFER AGENTS

He is responsible for issuing and redeeming units of mutual funds. He prepares transfer documents and update investor records.

OPERATIONS OF MUTUAL FUND

The operations of mutual funds generally include the following heads: Valuation of Investment Pricing of Units Dividend Distribution Apportionment of Expenses Advertisement Norms Investment Approaches Offer Document In detail;

Investment Valuation Norms Mutual fund value the traded securities on a Mark to Market basis. They are valued at a date known as valuation date. The unrated securities are valued by the SEBI given principles of valuation. 1. Traded Securities The traded securities should be valued at the last quoted closing price on the stock exchange than the valuation should be as per the last quoted closing price on the Stock Exchange where the security is principally traded. When on a particular valuation day, a security has not been traded on the selected Stock Exchange, the value at which it is traded on another Stock Exchange may be used. 2. Non Traded Securities When a security is not traded on any Stock Exchange for a period of sixty days prior to the valuation date, the scrip must be valued as non traded scrip. They should be valued in good faith by the AMC on the basis of appropriate valuation methods based. Such method must be approved by the Board of the AMC. The auditors should also report it as fair and reasonable in their report. The following principles should be adopted: Equity instruments shall generally be valued on the basis of capitalization of earnings solely or in accordance with the net asst value. The price or earning
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ratios of comparable traded securities, with an appropriate discount for lower liquidity, should be used for the purposes of capitalization. Debt instruments should be valued on YTM (yield to maturity) basis. The capitalization factor being determined for comparable traded securities with an appropriate discount for lower liquidity. Government Securities will be valued at YTM based on the prevailing market rate. Call money, bills purchased under rediscounting and short term deposits with banks are to be valued at cost plus accrual, other money market instruments are traded at the yield at which they are currently traded. For Convertible Debentures and Bonds, Non Convertible component should be valued as a debt instrument and convertibles as any equity instrument. If after conversion, the resultant equity instrument would be traded pari passu with an existing instrument which is traded, the value of the latter instrument can be adopted after an appropriate discount for the non tradability of the instrument.

Pricing of Units

Mutual funds shall provide to the investors the price at which the units of the scheme may be subscribed. In case of open ended scheme the mutual funds shall publish at least in once a week in daily newspaper of all India circulations, the sale and repurchase price of units. Every mutual fund shall compute the net asset value of each scheme by dividing the net assets of the scheme by the number of units outstanding in the valuation date. The NAV shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. It should ensure that the repurchase price is not lower than 93% of the NET Asset Value and the sale price is not higher than 107% of the NAV. Care should be taken that the repurchase price of the units of a close ended scheme shall not be lower than 95% of the NAV. The difference between the repurchase price and the sale price of the units shall not exceed 7% calculated on sale price. Dividend Distribution Every mutual fund and AMC shall dispatch to the unit holders the dividend warrants within 42 days of the declaration of the dividend. It should dispatch to the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase. The AMC shall be liable for penalty for failure to dispatch the redemption or repurchase proceeds within the stipulated period. It is liable to pay interest to the unit holders @ 15% p.a.

Apportionment of Expenses An AMC incur various expenses such as

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initial expenses, recurring expenses and investment management and advisory fees. Whatever be the expenses but it should clearly identify all the expenses and apportion it in the individual schemes. 1. Limits on Investment and Advisory Fees 1.25% of the first Rs. 100 crores of the weekly average net assets outstanding in the accounting year, and @ 1% of weekly average net assets in excess of Rs. 100 crores. For schemes launched on a no load basis, the AMC shall be entitled to collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. 2. Initial Issue Expenses When a scheme is launched, the AMC incur some initial launching expenses. The benefits of theses expenses accrue over many years. So they can not be charged to any single year. SEBI permits amortization of initial expenses as follows: For a close ended scheme floated on a load basis, the initial issue expenses shall be amortised on a weekly basis over the period of the scheme. For a open ended scheme floated on a load basis, initial issue expenses may be amortised over a period not exceeding five years. Issue expenses incurred during the life of an open ended scheme can not be amortised. 3. Recurring Expenses It includes the following: Marketing and selling expenses including agents commission Brokerage and transaction costs Registrar services for transfer of units sold or redeemed Audit Fees Custodian charges Cost related to investor communication Costs of fund transfers from location to location Costs of providing accounts statements and dividend/redemption cheques and warrants Insurance premium paid by the fund Winding up costs for terminating a fund or a scheme Costs of statutory advertisements Other costs as approved by SEBI

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4. Total Expenses The total expenses of the scheme as charged by the AMC excluding issue or redemption expenses but including management and advisory fees, are subject to the following limits: On the first Rs. 100 crores of the average weekly net assets 2.5% On the next Rs. 300 crores of the average weekly net assets 2.25% On the next Rs. 300 crores of the average weekly net assets 2.0% On the balance of the assets 1.75%

Advertisement of Schemes

An advertisement relating to any scheme of the mutual fund has to comply with the provisions of Advertisement Code Prescribed by SEBI in Sixth Schedule of its Regulations. The advertisement shall be submitted to SEBI within seven days from the date of issue. The advertisement for each scheme shall disclose investment objectives of each scheme. The important points of the Advertisement Code for compliance in respect of an advertisement are: 1. It shall be truthful, fair and clear. 2. It shall not contain a statement, promise or forecast which is untrue or misleading. 3. It shall be considered to be misleading if it contains: misleading statements i.e. representations about the performance or activities of the mutual fund in the absence of necessary explanatory or qualifying statements and which give an exaggerated picture of the performance or activities of the fund, than what it really is. an inaccurate portrayal of a past performance or its portrayal in a manner which implies that past gains or income will be repeated in the future. statements promising the benefits of owning units or investing in the schemes of mutual funds without simultaneous mention of material risks associated with such investments. 4. Its design in content and format or in print should not be in such a way as likely to be misunderstood or likely to disguise the significance of any statement. 5. It shall not contain statements which directly or by implication or by omission may mislead the investor. 6. It shall not be so framed as to exploit the lack of experience or knowledge of the investors. As the investor may not be sophisticated in legal or financial matter care should be taken that the advertisement is set forth.
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7. It shall be in a clear, concise and understandable manner. Extensive use of technical or legal terminology or complex language or the inclusion of excessive details which may detract the investors should be avoided. 8. It should not contain information, the accuracy of which is to any extent dependant on assumptions. Any advertisement that makes claims about the performance of the fund shall be supported by relevant figures. 9. It should not contain comparisons of one fund with another, implicitly or explicitly, unless the comparison is fair and all information relevant to such comparison is included in the advertisement. 10. If it indicates yield on investment, the mutual fund must use standardized computations such as annual dividend on face value, annual yield on the purchase price and annual compounded rate of return. 11. If it gives the mutual funds guarantee or assurance of any minimum rate of return or yield to prospective investors, it should also indicate the resources to take such a guarantee. 12. If it gives particulars of the past performance of the mutual fund, it shall give the basis for computing the rates of return yield and adjustments made, if any, must be expressly indicated. It should also be made clear that such information is not necessarily indicative of future results and may not necessarily provide a basis for comparison with other investments. Any advertisement containing information regarding information regarding performance, NAV, yield or returns shall give such data for the past three years, wherever applicable. 13. It shall indicate names of the Settlor, Trustee, Manager and/or Financial Advisor to the fund, bringing out clearly their legal status, and liability, of these entities. All advertisements containing information regarding performance, advertising yield, return or any scheme detail or inviting subscription to the scheme shall contain disclosures of all the scheme detail or inviting subscription to the scheme shall contain disclosures of all the risk factors. 14. All advertisements shall clearly state all the risk factors associated with mutual funds and securities investments. It should state that they are subject to market risks, and there can be no assurance that the funds objectives will be achieved. 15. All advertisements issued by a mutual fund or its sponsor or AMC shall state that all investments in mutual funds and securities are subject to market risks and the NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market. These advertisements also disclose all the risk factors. 16. All advertisements launched in connection with the scheme should also disclose prominently the risk factors as stated in the offer document along with the warning statements. However if no reference has been made to the past figures of NAV and/or purchase
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 is only the name of the scheme and does not in any manner indicate either to quality of the scheme, its future prospects or returns; and please read the offer document before investing. 17. No name can be given to a scheme with a view to subtly indicate an, assurance of return, except in the cases of guaranteed return scheme in accordance with Regulation38. 18. No advertisement shall be issued stating that the scheme has been subscribed or oversubscribed during the period the scheme is open for subscription. 19. If a corporate advertisement is issued by the sponsor or any of the companies in the group, or an associate company of the sponsor during the subscription period, no reference shall be made to the scheme of the mutual fund or mutual fund itself; otherwise it will be treated as an issue advertisement. 20. If a corporate advertisement of a sponsor issued prior to the lunch of a scheme makes a reference to the mutual fund sponsored by it or any of its schemes launched/to be launched, it shall contain a statement to the effect that the performance of the sponsor has no bearing on the expected performance of the mutual fund, or any of its schemes. 21. Advertisements on the performance of a mutual fund or its AMC shall compare the past performance only or the basis of per unit of statistics as per these Regulations. Advertisements for NAVs must indicate the past as well as the latest NAV of scheme. The yield calculations will be made as provided in these Regulations. Apart from these guidelines SEBI has issued various other advertisement codes relating to standards of communication, forms of advertisements, use of rankings in advertisement and sales literature. The basic aim of these guidelines is the protection of investors interest and providing a level playing field to all the competitors.

Investment Approaches

There are two types of investment approaches practiced by the investment managers. There are top down approach and bottom up approach. The top down approach begins by analyse the national and international market environment through quantitative forecasting and scenario planning. The bottom approach begins with the analysis of concerned company. The top down approach helps in long term investment goals, whereas the bottom approach is utilized for short term or speculative gains. Institutions like mutual funds would benefit by top down approach because they have long term investment goals and their portfolio includes a variety of assets with different degree of risks. The success of the mutual fund depends on the ability of the fund managers to predict the future behavior of the
45

scrips. The five most effective methods to predict stock performance are as follows: Price/ Earning Ratio Price to Cash Flow Ratio Price to Book Value Ratio EBIDT Dividend Yield Price gain in the last year These parameters are our personal opinion and in no way they are the standard parameters. These above readings should be accompanied by a good quality investment research. Although the research culture has not grown in India but it is an indispensable part of any investment in securities. Theses research should broadly cover the following three points:
1.

Macro Level

It includes studying the past trend and forecasting about future performance of Indian as well as other world economies. Importance should be given to interest rate, inflation rate, unemployment, GDP figures, and change in Government policies in and around the world. The research should try to conclude the out performing sector of the economy in future. 2. Industry Level It includes foretelling the performance of a particular industry in the prevailing socio, economic, legal and political situations. Different parameters should be given to each independent industry. In this second step the research should try to conclude the growing industry.
3.

Micro Level Research

It includes studying the particular company in the above concluded profitable industry for the investment. This type of research is for long term investment and should be on a continuous basis.

Offer Document

Before the launching of any scheme, such scheme should be approved by the trustee and a copy of offer document should be filled with SEBI. The document containing the details of a new scheme that the AMC or sponsor prepares for and circulates to the prospective investor is called the Prospectus or the offer document. In case of close ended scheme the offer document is
46

issued only once at the time of issue where as in case of open ended scheme it is valid for all the time. Although it is issued only at the time of issue but it remain valid during the life of the units or till amended. It is called as Key Information Memorandum and it is most important document for investors. It contains details of AMC, sponsors, bankers, registrars etc. along with the term and conditions of the issue. It also mentions the rights and duties of the investors. Apart from the above seven, NAV and investments of fund money also plays an important part in operations of mutual fund.

ASSOCIATION OF MUTUAL FUNDS OF INDIA (AMFI)

Followings are the members of AMFI: ABN Amro Mutual Fund Alliance Capital Mutual Fund Benchmark Mutual Fund Birla Sun Life Mutual Fund BOB Mutual Fund Canbank Mutual Fund Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Mutual Fund GIC Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ING Vyasa Mutual Fund JM Financial Mutual Fund Kotak Mahindra Mutual Fund LIC Mutual Fund Morgan Stanley Mutual Fund Principal Mutual Fund PruICICI Mutual Fund Reliance Mutual Fund Sahara Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Sundaram Mutual Fund
47

Tata Mutual Fund Taurus Mutual Fund UTI Mutual Fund Zurich India Mutual Fund Investor can invest in any one or more of the schemes of the above AMFI members.

RESTRICTION ON INVESTMENT OF FUND MONEY

The monies collected under any scheme of the Mutual Fund can be invested only in transferable securities: in the money market in the capital market in privately placed debentures in securitised debts Moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the RBI. In a case of securitised debts such fund may invest in asset-backed securities and mortgaged-backed securities. A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the SEBI Act. Such investment limit may be extended to 20% of NAV of the scheme with the prior approval of the Board of Trustees and the Board of AMC provided that such limit shall not be applicable for in Government Securities and money market instrument. The investment within such limit can be made in mortgaged backed securitised debts which are rated not below investment grade by a credit rating agency registered with SEBI. A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of AMC. No mutual fund scheme shall make any investment in: any unlisted security of an associate or group company of sponsor, any security issued by way of private placement by an associate or the group company of the sponsor, the listed securities of group companies of the sponsor which is in excess of 25% of the net assets. No mutual fund scheme shall invest more than 10% of its NAV in the equity shares or equity related instruments of any company. The limit of 10% shall not be applicable
48

for investments in case of index fund or sector or industry specific scheme. A mutual fund scheme shall not invest more than 5% of its NAV in the unlisted equity shares or equity related instruments in case of open ended scheme and10% of its NAV in the case of close ended scheme.

Investment in ADRs/GDRs

All mutual funds will henceforth be permitted to invest in ADRs/GDRs upto 10% of the net assets managed by them as on the date of the last balance sheet, subject to a maximum of US $ 50 million per mutual fund. The mutual funds shall also have to obtain approval from RBI to invest in overseas market from exchange control angle. The mutual funds should forward to SEBI their proposals for undertaking investments and the amount which is proposed to be invested in the schemes in ADRs/GDRs. The proposal should give details of the modalities for making such investments and engaging the services of overseas intermediaries, if any. In case investments are proposed to be made by an existing scheme, the proposal should also specify whether these investments are consistent with the investments objectives of the scheme and the offer document provides for investments in overseas securities.

Index Funds

All investment restrictions shall be applicable at the time of making investment. With reference to the proviso to clause 10 of Seventh Schedule, the investments by index funds shall be in accordance with the weightage of the scrips in the specific index as disclosed in the offer document. In case of sector/industry specific scheme, the upper ceiling on investments may be in accordance with the weightage of the scrips in the representative index/sub-index as disclosed in the offer document or10% of the NAV scheme whichever is higher.

Limit on Investments The mutual funds have the following maximum

investment limits: 1. The mutual fund under all its schemes should own more than 10% of any companys paid up capital carrying voting rights. 2. Aggregate inter scheme investment made for all schemes under the same management or in scheme under the management of any asset management company shall not exceed 5% of the net asset value of the mutual fund. 3. A mutual fund can invest in short term deposits of scheduled commercial banks, pending deployment of funds of a scheme in terms of investment objectives.

Restrictions on Investments in Unrated Debt Instruments With a view to give operational

49

flexibility SEBI has decided that the mutual funds may constitute committees who can approve proposals for investments in unrated instruments. However the details of such investments must be approved by the AMC Boards and the trustees.

Restriction of Borrowing/Lending

The mutual fund shall not borrow except to meet temporary liquidity need of the mutual funds for the purchase of the repurchase, redemption of the units or payment of interest or dividend to the unit holders. They should not borrow more than 20% of the net assets of the scheme and the duration of such a borrowing shall not exceed a period of six months.

GENERAL RISK FACTORS

Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme.
50

The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. The Mutual Fund is not guaranteeing or assuring any dividend. The Mutual Fund is also not assuring that it will make periodical dividend distributions, though it has every intention of doing so. All dividend distributions are subject to the investment performance of the Scheme. Therefore, the discussion on investment objectives would not be complete without a discussion on the risks that investing in a mutual fund entails. At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. Remember that the value of all financial investments will fluctuate. Typically, risk is defined as short-term price variability. But on a long-term basis, risk is the possibility that your accumulated real capital will be insufficient to meet your financial goals. And if you want to reach your financial goals, you must start with an honest appraisal of your own personal comfort zone with regard to risk. Individual tolerance for risk varies, creating a distinct "investment personality" for each investor. Some investors can accept short-term volatility with ease, others with near panic. So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down. Recognizing the type of investor you are will go a long way towards helping you build a meaningful portfolio of investments that you can live with. Take the test "Tolerance Questionnaire" to determine where your preferences lie.

51

Risk Managing Risk Diversification SIP Types of Risk Market Inflation Credit Interest Rate Employees Exchange Rate Investment Government Policies Questionnaire

MANAGING RISK
Mutual funds offer incredible flexibility in managing investment risk. Diversification and Automatic Investing (SIP) are two key techniques you can use to reduce your investment risk considerably and reach your long-term financial goals.
52

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of different companies. You can also diversify over several different kinds of securities by investing in different mutual funds, further reducing your potential risk. Diversification is a basic risk management tool that you will want to use throughout your lifetime as you rebalance your portfolio to meet your changing needs and goals. Investors, who are willing to maintain a mix of equity shares, bonds and money market securities have a greater chance of earning significantly higher returns over time than those who invest in only the most conservative investments. Additionally, a diversified approach to investing -combining the growth potential of equities with the higher income of bonds and the stability of money markets -- helps moderate your risk and enhance your potential return. Systematic Investment Plan (SIP) The Unit holders of the Scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. Mutual fund SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the Scheme at NAV based prices. Here is an illustration using hypothetical figures indicating how the SIP can work for investors: Suppose an investor would like to invest Rs.1,000 under the Systematic Investment Plan on a quarterly basis. Amount Invested (Rs.) Initial Investment 1 2 3 4 5 6 7 8 9 10 11 TOTAL 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12,000 Purchase Price (Rs.) 10 8.20 7.40 6.10 5.40 6.00 8.20 9.25 10.00 11.25 13.40 14.40 No. of units Purchased 100 121.95 135.14 163.93 185.19 166.67 121.95 108.11 100.00 88.89 74.63 69.44 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36

53

Average unit price 109.6/12 = Rs 9.13 Unit price at beginning of next quarter Rs 14.90 Market value of investment 1435.9 * 14.90= Rs 21,395/The investor liquidates his units and gets back Rs 21,395/Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market is turned down.

TYPES OF RISKS
All investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started (Rs. 1000 gets you less than it got your father when he was your age). Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation Risk

Sometimes referred to as "loss of purchasing power." Whenever inflation sprints forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk

In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures? Interest Rate Risk Changing interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offsetting these changes.
54

Effect of Loss of key professionals and inability to adapt An industries' key asset is often the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests. Exchange Risks A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. Investment Risks The sector fund schemes invest predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.

Change in the Government Policy

Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.

55

SYSTEMATIC INVESTMENT PLAN

Typically caught in day to day work, most of people can afford very little time for financial planning. They are all constrained by paucity of time to do anything beyond routine. Moreover, with little access to real time information and lack of ability to interpret and use financial information, investment decisions just do not figure in our list of priorities. Creating wealth is not rocket science. All it requires is discipline and direction in financial planning. This is where a Systematic Investment Plan (SIP) helps bring in the much-needed discipline to your world of investing.

MEANING
A Systematic Investment Plan (SIP) is an investment vehicle that allows people to invest fixed amount of money at regular intervals of time (monthly or quarterly) in a
56

mutual fund scheme for a continuous pre-defined period; just like a recurring deposit account with a bank or a post office. SIP applies to the process of investing regularly i.e. at fixed intervals. SIP lets the investment in small amounts of money on a pre-determined basis and gives the option of increasing these amounts as investment capacity increases. Therefore SIP applies to invest regularly a fixed amount for purchasing units of schemes at prevailing NAV based prices. SIP can be activated by giving post dated cheques for the duration of the SIP or by using an auto debit facility where a fixed amount is debited from bank account on a monthly/quarterly basis.

HOW DOES AN SYSTEMATIC INVESTMENT PLAN WORK

SIP uses two basic principles for wealth creation over time. Power of Compounding Most people tend to continually delay their financial planning process. This results in savings being postponed to a later date. To break this habit, SIP offers the facility to invest small amounts regularly instead of investing large amounts sporadically. SIP inculcates a discipline in investment habits not only by making investment early rather than postponing investment till the point of accumulating a sizeable amount. It will be amazing to see that what one can achieve by investing a small sum of money regularly from an early age. In other words, the earlier one invests, greater will be the power of compounding and higher will be the benefits. The example below shows the difference in accumulative savings between Mr. Early and Mr. Late, who start saving at different times. Mr. early saves for 10 years and then stops. Mr. Late starts 10 year later and saves for 20 years. But Mr. Early still gets 87% more than Mr. Late (assuming 10% annual growth, not taking into account the annual inflation). The table below demonstrates this: Mr. Early Mr. Late Year Saving Accumulation Saving Accumulation 1 1000 1100 0 0 2 1000 2310 0 0 3 1000 3641 0 0 4 1000 5105 0 0 5 1000 6716 0 0 6 1000 8487 0 0 7 1000 10436 0 0
57

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

1000 1000 1000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

12579 14937 17531 19284 21213 23334 25667 28234 31058 34163 37580 41338 45471 50018 55020 60522 66575 73232 80555 88611 97472 107219 117941

0 0 0 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000

0 0 0 1100 2310 3641 5105 6716 8487 10436 12579 14937 17531 20384 23523 26975 30772 34950 39545 44599 50159 56275 63002

As shown by the table, Mr. Early has accumulated far greater wealth over time compared to Mr. Late. This example clearly illustrates the benefits of investing early and regularly, both of which are features offered by the SIP. The table given above can be easily understood by the graph:

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Start Early: Invest Regularly

120000 100000 Accumulation 80000 60000 40000 20000 Mr. Early Mr. Late 0 5th 10th 15th 20th Year 25th 30th

The key therefore lies in Starting Early, and giving the investments time to grow. Rupee Cost Averaging Investment would be simple if one could always pick the best time to buy and sell. However, timing the market consistently can be a difficult task and one could be hit sooner or later. The stock markets may be volatile, but in the long run it can help create wealth for everyone. Had anyone invested a fixed amount every month he would tend to buy more when the prices are less and buy less when the prices are high. He can seldom time the market. This automatic market timing mechanism is known as Rupee Cost Averaging. Therefore with SIP investor buy more units when the prices are low and fewer units when the prices are high. This results in averaging of the cost per unit which may lead to gains arising out of even market volatility. Market volatility which is generally a negative has been used effectively for the benefit of the investor by SIP. Rupee Cost Averaging does not guarantee a profit. However, with a disciplined approach and a long term investment horizon, it can smoothen out of the market bumps and spikes and reduce the risk of investing in a volatile market. This has been illustrated in the table below. I have considered three types of markets rising, falling and volatile. The table shows that the average unit cost will always be less than the average unit price, irrespective of whether the markets are rising, falling or fluctuating. Amount Invested Rising Market Falling Volatile Market (in Rs.) Market Month NAV Units NAV
59

Units

NAV

Units

1 1000 10.00 100.00 10.00 100.00 10.00 100.00 2 1000 10.50 95.24 9.50 105.26 9.50 105.26 3 1000 11.00 90.91 9.00 111.11 9.00 111.11 4 1000 11.50 86.96 8.50 117.65 8.20 121.95 5 1000 12.00 83.33 8.00 125.00 7.50 133.33 6 1000 12.50 80.00 7.50 133.33 8.00 125.00 7 1000 13.00 76.92 7.00 142.86 9.00 111.11 8 1000 13.50 74.07 6.50 153.85 9.75 102.56 9 1000 14.00 71.43 6.00 166.67 10.50 95.24 10 1000 14.50 68.97 5.50 181.82 11.25 88.89 11 1000 15.00 66.67 5.00 200.00 12.40 80.65 12 1000 15.50 64.52 4.50 222.22 13.00 76.92 Total 12000 153.00 959.02 87.00 1759.77 118.10 1252.02 Average Unit 12.75 7.25 9.84 Price (Sum of NAVs / No. of (153.00/ (87.00/ (118.10/ Investments) 12) 12) 12) Average Unit 12.51 6.82 9.58 Cost (Total Investment / (12000/ (12000/ (12000/ Total Units) 959.02) 1759.77) 1252.02) The key therefore is Time and not Timing the market, in the growth of an investment.

BENEFITS OF SYSTEMATIC INVESTMENT PLAN

A SIP is beneficial for the investor in the following ways: Ideal Saving Habit SIP is a plan that lets people save money as they earn. Convenience Investor can redeem their units as and when required under this scheme. They have the option of directly debiting or crediting their bank account for payments and redemptions after giving standing instructions once towards the same. Small Amount A SIP can be started with as little as Rs. 500 or
60

1,000 per month (according to the schemes) for 6 or 12 months (according to the schemes). Prevents Sentiment Driven Investments By making investment through SIP one can avoid the common error of investing larger sums in Bull markets and smaller sums in Bear markets. No Entry Load In order to facilitate a saving habit, almost all Fund Houses have waived the entry load on all schemes invested through SIP. However, such investments will be charged an exit load equivalent to the waived entry load if redeemed/switched out within 1 year or 2 year (depends on the Fund Houses and Schemes) from the date of allotment.

INVESTMENT IN INDIAN MUTUAL FUNDS BY NRIs BASICS

Non Resident Indian (NRI) A Non Resident Indian (NRI) is a person resident outside India who is an Indian citizen who stays abroad for employment / carrying on business or vocation outside India or stays abroad under circumstances indicating an uncertain duration of stay abroad or a person of Indian origin resident outside India and includes a student who has gone outside India for further studies.

Person of India Origin (PIO) A Person of Indian Origin means a citizen of any country (other than Bangladesh or Pakistan), if: (a) he at any time held an Indian passport; or (b) he or either of his parents or grand parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act,1955 (57 of 1955); or
(c) he is a spouse of an Indian citizen, or of a person referred to in (a) or (b) above. Foreign Institutional Investor (FII)

A FII means an institution established or incorporated outside India, which proposes to make
61

investment in Indian securities, and is registered with SEBI. NRIs bank account in India NRIs can maintain accounts in rupees as well as in foreign currency. Accounts in foreign currencies can, however be maintained in India with authorized dealers only. Can NRIs invest in Mutual Funds NRIs are eligible to invest in Mutual Funds on a repatriable as well as a non-repatriable basis. RBI has granted general permission in this regard and as such no special permission is required each time an NRI desires to invest.

Different types of NRIs/PIOs Bank Accounts: The different kind of Bank Accounts and their characteristics are depicted in the following table:
Particulars Account Maintained in currency Non Resident [External] Rupee Account Scheme (NRE) Indian Rupees Foreign Currency Non resident Bank Account Scheme (FCNR) US $, GBP, Yen, Euro, DM, Pound Sterling Non Resident Ordinary Rupee Account Scheme (NRO) Indian Rupees

Account type and tenure

Term Deposit for a specific period of 1 year and above but less than Normal Bank Account 2 years, 2 years and above but less than 3 years and 3 years.

Normal Bank Account

Whether Repatriable Investment could be done in Mutual Fund

Yes. Deposits as well as Yes. Deposits as well as No. Only interest are repatriable. interest are repatriable. repatriable. Yes Yes

interest

is

Yes

PROCEDURE FOR INVESTMENT OF NRI/PIO/FII IN MUTUAL FUND

The following summary outlines the various provisions related to investments by Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Foreign Institutional Investors (FIIs) in the Schemes of the Mutual Fund and is based on the relevant
62

provisions of the Income-tax Act, 1961 (the Act), regulations issued under the Foreign Exchange Management Act, 1999 and the Wealth-tax Act, 1957 (collectively called the relevant provisions), as they stand on the date of this abridged Offer Document. Purchase Applications 1. NRIs and other overseas investors can invest in Mutual Fund Schemes on Repatriable /Non-Repatriable basis as per the provisions of Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the Regulations') as explained below. A Common Application Form duly completed together with cheques or bank drafts should be remitted through Investor Service Centres (ISC). 2. All cheques/demand drafts accompanying the application form must be made in favour of Mutual Fund Scheme Name" and crossed "A/c payee" only and should be made payable at a city where the application is accepted by any Mutual fund ISC. 3. Once an account is opened the investor may purchase additional units by filling-up the Common Application Form or by simply filling in the account number in the application form and mailing the same to a Mutual Fund ISC, along with the cheque or the bank draft. Repatriable Basis NRIs, PIOs: In case of NRIs, PIOs seeking to apply for purchase of units on a repatriable basis, payments may be made by way of inward remittances, or by way of cheques drawn on the NRE/FCNR Account of the investor [Clause 3(2) of the Regulations] payable at the city where the application form is accepted by any Mutual Fund ISC.

Non-Repatriable Basis NRIs, PIOs:

In case of NRIs/PIOs seeking to apply for units on a non - repatriable basis, payments may be made by way of inward remittances, or by way of cheques/demand drafts drawn on the NRE/FCNR/NRO account of the investor [Clause 3(3) of the Regulations], payable at the city where the application form is accepted by any Mutual Fund ISC.

FII Investors

FIIs may pay for their subscription amounts out of funds held in Foreign Currency Account or Non-resident Rupee Account maintained in a designated branch of an authorized dealer [Clause 3(1) of the Regulations]. Payments may be made by way of cheques payable at a city where any Mutual Fund ISC accepts the application. Similarly, in case of an application made under a Power of Attorney or by an FII, the original Power of Attorney (or a duly
63

notarized certified true copy thereof), or the relevant resolution/authority to make the application, along with a certified copy of the Memorandum and Articles of Association and/or bye laws and Certificate of Registration should be submitted to the nearest ISC. The officials should sign the application under their official designation. The NRIs/PIOs/FIIs shall also be required to furnish such other documents as may be desired by the Fund in connection with the investment in the Schemes. 1. Investment in Mutual Fund in Foreign Currency: An NRI choosing to invest in Mutual Fund cannot make the investment in foreign currency. (Any investment in India except in FCNR account is in rupees only). He needs to give us a Rupee cheque from his NRE, NRO, and bank account in India. He may also send a Rupee cheque from abroad payable in a bank in India.
2. Income earned on Investments is repatriable or not:

NRIs/PIOs can invest in units of the schemes on a fully repatriable basis or on a non - repatriable basis where the principal is non-repatriable, but the income distributed is repatriable.

REDEMPTION:
Procedure for Redemption: Redemption proceeds will be paid by a payable at par cheque and payments will be made in favour of the first Investor and the bank account number shall be mentioned on the cheque as well. Redemption proceeds/ repurchase price and/or dividend or income earned (if any) will be payable in Indian Rupees only. The Mutual Fund will not be liable for any loss on account of exchange fluctuations, while converting the rupee amount in US Dollar or any other currency. Procedure for the repatriation of redemption proceeds:

Investments made on Repatriation basis: Under the exchange control regulations general permission is granted to authorised dealers to allow repatriation of proceeds of investments made under repatriable Schemes. The investments shall carry the right of repatriation of capital invested and capital appreciation so long as the investor continues to be a resident outside India, after payment of tax, if any.
1. 64

In the case of an FII, the designated branch of the authorized dealer may allow remittance of net sale/maturity proceeds (after payment of taxes) or credit the amount of sale/ maturity proceeds to the Foreign Currency account or Non-resident Rupee Account of the FII investor maintained in accordance with the approval granted to it by the RBI [Clause 5(i) of the Regulations]. In any other case, where the investment is made out of inward remittance or from funds held in NRE/FCNR account of the investor, the maturity proceeds/repurchase price of units (after payment of taxes) may be credited to NRE/FCNR/ NRO Account of the non-resident investor maintained with an authorized dealer in India [Clause 5(ii) of the Regulations]. Investment made on non-repatriable basis: Where the purchase of units is made on a non-repatriable basis, the maturity proceeds/repurchase price of units (after payment of taxes) will not qualify for repatriation out of India and the same may be credited to the NRO account of the non-resident investor [Clause 5(ii) of the Regulations]. However the interest earned on an NRO Account is repatriable. Similarly, investments in units purchased in Rupees while the investor was resident of India and becomes non-resident subsequently will not qualify for repatriation of repurchase proceeds of units. The entire income distribution on investment will however qualify for full repatriation. Investors are advised to contact their banks/tax consultants if they desire remittance of the income distribution on units abroad. The entire income distribution on investment will however qualify for full repatriation. Investors are advised to contact their banks/tax consultants if they desire remittance of the income distribution on units abroad.
2.

TAXES ON INCOME FROM MUTUAL FUNDS FOR NRIS

There are essentially two kinds of incomes that NRI investors would earn from Mutual Funds Dividend and Capital gains (upon redemption of units). Capital gains are further segregated into short-term gains and long-term gains. Taxation treatment differs as per the kind of income. Dividends from Mutual Funds are completely tax-free in the hands of the investor as per Sec. 10(35) of the Income Tax Act. However, there is a dividend distribution tax @ 12.8125% (including surcharge) payable by the Mutual Fund directly to the exchequer. Equity based schemes were exempted
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from this tax. It is widely expected that this provision would be extended once the new government comes into power. As far as capital redemption is concerned, if the units of any Mutual Fund for more than 12 months, the same would qualify as long-term capital assets. Else, these would be termed as short-term capital assets. Upon sale, any short-term capital asset is taxed at the normal rates applicable to the investor. These are Income Tax Rate: upto Rs. 50,000 between Rs. 50000 to 60000 between Rs. 60,000 to Rs. 1,50,000 above Rs. 150000 Nil 10% 20% 30%

There is a surcharge of 10% of the income tax for income over Rs. 8.50 lakhs. In such cases the surcharge payable is limited to the income over Rs. 8.50 lakhs. Surcharge is payable by both Residents and NRIs. There is also Education Cess of 2% over the income tax and surcharge charged on it whether the income is above Rs. 8.50 lakhs or not. For instance, if the income is Rs. 9 lakhs Rs. Tax on 1,000 Tax on 18,000 Tax on 2,25,000 2,44,000 Surcharge@ 10% 24,400 2,68,400 Education Cess @ 2% 5,368 Total Tax Payable 2,73,768 In the case of sale of Mutual Fund units which are long-term capital assets capital gains tax is payable @ 10% without indexation or @ 20% with indexation, whichever is lower. Such long-term gains of NRIs are not eligible for the Rs.50,000 basic exemption threshold, income below which tax is not payable. Therefore, for any amount of longterm capital gains income, tax is payable and tax returns would need to be filed. However, the Rs. 50,000 threshold is available for short-term capital gains and therefore short-term capital gains would not be taxable up to Rs.50,000 of course, assuming that the NRI has no other income in India. If the funds are invested in growth option of MF schemes, the growth is not taxable as long as there are no withdrawals.
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Rs. 60,000 90,000 7,50,000 9,00,000

Provision regarding Tax Deduction at Source: Since the dividends from units are tax free in the hands of the investor, there is no question of TDS thereon. However, capital gains are subject to TDS. The TDS on long-term capital gain is @ 20% and on short-term gains is @ 30%. If income is more than Rs. 8.50 lakhs a surcharge of 10% would be levied on such rates. Education Cess @ 2% is charged on the income and surcharge irrespective of the income level.

Special Provision relating to NRIs u/s 115C to 115I: Units are not included in the definition of foreign exchange asset under the Special Provisions. However, under these provisions, the benefit is in the form of investment income being taxed @ 20% and long-term capital gain @ 10%. In the case of Mutual Funds, dividends are tax-free in any case and longterm gains are taxed @10%. Therefore, the non-applicability of the Special Provisions is of no consequence to the NRI.

Tax saving methods for NRIs income from Mutual Funds: There are several ways to save tax on long-term gains that an NRI can employ. 1. Investment u/s 54EC: Sec. 54EC offers tax exemption if the long-term gains are invested in Bonds of NABARD, NHAI, REC, NHB and SIDBI within a period of six months from the date of transfer. These bonds have a lock-in of three years. The interest payable on the bonds (in the range of 5% - 5.25%) is fully taxable. However there is no TDS. If only a part of the capital gain is invested, exemption would be proportional. 2. Investment u/s 54ED: Sec. 54ED offers tax exemption if the long-term gains are invested in acquiring equity shares forming part of an eligible issue of capital (IPO) within a period of six months from the date of transfer. If the newly acquired shares are sold or transferred within one year, the capital gains from the original asset will be charged to tax in the year of the sale of transfer. If only a part of the capital gain is invested, exemption would be proportional. 3. Investment u/s 54F: Exemption u/s 54F is available if the investor purchases within one year before or two years after the date of transfer of constructs within three years after such date a residential house. If the cost of the house is not less than the net consideration, the entire capital gain is exempt from tax. Else, the exemption would be proportional.
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SOME SPECIAL TERMS:

Can an NRI gift the units of a mutual fund to another NRI: The Foreign Exchange Management Act, 1999 (the Act) or the rules or regulations under the Act do not contain any specific provision, which prohibits an NRI from gifting the units of a mutual fund to another NRI. However the RBI may by regulations prohibits, restrict or regulate the transfer or issue of units by a person resident outside India. Currently there are no regulations issued by the RBI prohibiting an NRI from gifting units in a mutual fund.

Interest on NRE, FCNR & RFC Account: Earlier interest earned on NRE A/c was fully exempt. In this budget it has been proposed that any interest paid or credited on or after 1st September, 2004 in respect of deposits in NRE and interest paid by banks to Non Resident or to a Not Ordinarily Resident on deposits in foreign currency shall be taxable at normal rates of taxation. The bank shall be required to deduct tax at 33.66% (i.e. Income tax @ 30% + Surcharge @ 10% + Education Cess 2%). However, if such deposits are with an Indian Company or bank, which is an Indian Company not being a private company as defined in the Indian Companies Act 1956, the rate of tax will be 22.44% (i.e. Income Tax @ 20% + Surcharge @ 10% + Education Cess 2%).

Tax Perspective: 1. Income up to Rs. 100000 would be fully exempt from tax applicable to residents only. 2. Gifts from unrelated persons above Rs. 25,000 to be taxed as income. However, gifts received from blood relations and on certain occasions like marriage would enjoy the tax benefit. 3. Service Tax lifted increased from 8% to 10% and several new services would be covered under service tax regime

Security Transaction Tax (STT): 1. The budget has proposed to levy a 0.15% STT on all the delivery based transactions on any recognized stock exchange. Both buyer and seller will share the same equally. 2. On non-delivery based transactions, the security transaction would be 1.5 basis point (0.015%) 3. In the derivative segment the transaction tax has to be paid 1 basis point (0.01%) of the transaction value.
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4. Debt securities/papers will have no transaction tax. 5. The income by way of long-term capital gain in respect of securities is exempted from tax, if the transaction of sale is entered into a recognized Stock Exchange in India. 6. The income on short term capital gains in respect of securities shall be taxable at a flat rate of 10% 7. Any dividends received would be tax free in the hand of the investor.

TAX IMPLICATIONS OF MUTUAL FUND INVESTMENTS

Tax Status of a Mutual Fund: A mutual fund is exempt from paying taxes on its income, by virtue of exemption granted under the Income Tax Act, 1961. The incomes earned by the fund are on its investment, and these incomes are passed on to the investors. Therefore the mutual fund is merely a pass through entity, which does not generate income on its own. It is therefore exempt from paying taxes on its income-dividends, interest and capital gains-both long and short term. Tax Status of an Investor: An investor can earn his income from mutual fund investments in two different forms: dividends and capital gains. Dividends again are of two types-regular periodic dividend, as indicated in the scheme (daily, monthly, quarterly and the like) or ad-hoc dividend (can be announced any time) as approved by the trustees. Capital gain (or loss) accrues to the investor, when the investor makes the decision to redeem the units. If he redeems the units at a price that is higher than his cost of purchase, there is a capital gain. If the redemption price is lower than his cost, there is a capital loss.

Tax Status of the Options: An investor can choose the form in which he likes to earn his income from the mutual fund. Basically there are two options in each scheme, first
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is Growth and the other is Dividend Payout or Dividend Reinvest. If an investor chooses the growth option, he does not earn a dividend income. To realize his returns, he has to redeem his units, such redemption is subject to the applicable capital gains tax. If he chooses dividend option, he earns dividend that is subject to tax as such. If he chooses a dividend reinvestment option, he is deemed to have received the dividend and subsequently reinvested the same, therefore the same tax provisions that apply to dividends will apply in this case. Tax Status of Capital Gains: Capital gain may be categorized as Short Term Capital Gain and Long Term Capital Gain. If an investor redeems his investments in a mutual fund before a period of 12 months is over from the date of buying the units, he is said to have held the units for the short term. The capital gains are taxed as short term capital gains. Short term capital gains from equity oriented funds are taxable at 10% (plus surcharge and cess). In the cases of all other funds, the short term capital gains will be taxed as normal income, at the marginal rates of taxation applicable to the investor. Income tax rates apply in slabs, specified for each level of income. The marginal rate is the highest rate an assessee given his level of taxable income. If an investor redeems his investments in a mutual fund after a period of 12 months from the date of buying the units, he is said to have held the units for the long term. The capital gains are taxed as long term capital gains. These are subject to the indexation. This means an investor can claim that since he held the investment for more than a year, due to inflation, the value of his investments has gone up. The CBDT therefore publishes a Cost of Inflation Index, and allows the investor to adjust his cost of the inflation index, before computing the capital gains. This process is called indexation. The rates are different depending on whether the capital gains are indexed or not. Long term capital gains from equity oriented funds are fully exempt from tax. Long term capital gains from all other funds are subject to taxation. The applicable tax rates are 10% (without indexation) or 20% (with indexation), surcharge and cess apply. NRIs are not eligible for indexation benefits, since they can avail currency value adjustment for computing capital gains. Indexed Cost =

Cost of Acquisition x Index in the year of sale Index in the year of Purchase

Tax Status of Dividends: Dividend from mutual funds are exempt from tax. However, in the case of all other funds, except equity and equity oriented funds, the
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mutual funds will have to deduct a dividend distribution tax at 12.5% + applicable surcharge (2.50%) and cess (2%), before paying out the dividend to the investor. In case of a fund that is not equity oriented, the income of the fund is mostly earned as interest income, and is normally subject to tax. But when the mutual fund distributes the same as dividend, it is exempt from tax. Therefore all funds other than equity oriented funds are subject to dividend distribution tax. In an equity oriented fund, the dividends that are earned are exempt from tax anyway, and the company that pays the dividend has paid the dividend distribution tax, before distributing the dividend to the mutual fund. An equity oriented fund is one that invests at least 50% of its net assets in equity shares of domestic companies. The monthly opening and closing holdings in equity should be computed and the annual average of this number should be at least 50%, for the fund to be classified as an equity oriented fund and be exempt from the provisions of the dividend distribution tax. The exemption for equity oriented funds had expired on March 31, 2004. The Finance Act (No 2) 2004 has extended this benefit unconditionally for equity oriented funds. It has also made a distinction between Individuals and HUFs and others. The dividend distribution tax applicable to all assesses, other than Individuals and HUFs, has been increased to 20% (plus surcharge and cess).

Securities Transaction Tax (STT): A 0.15% STT to be paid by the seller, on all transactions in equity oriented funds, where the units sold to a mutual fund. This means, no STT applies on purchase of units from the fund. Only on redemption, in an equity oriented fund, the investor is required to pay 0.15% of the transaction value as STT. In the case of all other funds, that are not equity oriented, there is no STT for the investors transaction with the mutual fund. The capital gain tax and the securities transaction tax, go together. The new capital gain tax rates will become applicable from the date the CBDT notifies the STT. Section 48 has been amended to provide that no deduction shall be allowed in respect of STT paid, for the purpose of computing capital gains. Set-Off and Carry Forwards: The act of reducing the capital gains by deducting the capital loss is called set off. The rules for set off are as under: 1. Loss arising from a short term capital asset can be set off against the gains arising from the sale of a long or short term capital asset. 2. Loss arising from a long term capital asset can be set off only against the gains from the sale of long term assets.
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3. Any loss under the head capital gains, either short or long term, can be set off only against income from the same head (capital gains). Short or long term capital losses can not be set off against any other source of income. 4. If there is a loss under any other head of income, that can be set off against short or long term capital gains. An investor, who makes a capital loss from his investments, is allowed to carry forward this loss for 8 years from the date of the loss. He can deduct the loss that is carried forward, from the capital gains that he makes in the subsequent years, so that his capital gains tax in the subsequent years is reduced. Under the current provisions an investor who has carried forward a long term capital loss, can set it off only against long term capital gains from debt funds and other funds that have less than 50% in equity. This is because long term capital gains from tax for equity oriented funds are exempt from tax. New Provisions for set off of Capital Loss on Ex-dividend basis: Dividend stripping is the practice of buying into a mutual fund prior to declaration of dividend and selling the units after dividends at the exdividend price. The investor then earns tax-free dividends and also has a capital loss that can be used for purposes of set off. Section 94(7) as amended by the Finance Act (No2) 2004, has plugged this loophole. If an investor acquires a unit any time in the period of 3 months before the ex-dividend date, and sells it within a period of 9 months from the ex-dividend date, the loss in the value of investments, to the extent of the dividend declared, will be ignored for the purposes of computing income chargeable to tax. What this means is that such loss in value will not be capital loss, available for set off against capital gains. A new section 94(8) has been introduced which makes the provisions of 94(7) apply even if the dividend distribution is in the form of bonus units. The same rules of 3 months before and 9 months after ex dividend dates apply, and the loss in the value of units will be deemed to be the purchase price of the bonus units. Applicable Tax Rates and Effective Tax Rates:

Resident Individuals Partnership Firms and HUFs and Indian Companies

1. Resident Individuals and HUFs:

Non Resident Indians

Foreign Companies Maximum

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Applicable Tax Rate 30% Capital Gains 10% (max. if income is over Surcharge for Dividend Distribution Tax 2.50% 2% Capital Gain Short Term Capital Gain Equity Funds 10%+10%SC+2%Cess Effective 11.22%

Applicable Surcharge for 8.50 lakhs) Applicable Applicable Cess

Debt Funds 30%+10%SC+2%Cess Effective 33.66% 10%+10%SC+2%Cess (without indexation) Effective 11.22% or 20% +10%SC+2%Cess (with indexation) Effective 22.44% Dividends are tax free. Subject to DDT @ 12.5%+2.5%SC+2%Cess Effective 13.07% Maximum Applicable Surcharge for

Long Term Capital Gain

Nil

Dividends

Nil

2. Partnership Firms and Indian Companies:

Applicable Tax Rate 35% Capital Gains 2.50% Applicable Surcharge for Dividend Distribution Tax 2.50% Applicable Cess 2%

Capital Gain Short Term Capital Gain Long Term Capital Gain

Equity Funds

Debt Funds

10%+2.5%SC+2%Cess 35%+2.5%SC+2%Cess Effective 10.46% Effective 36.5925% 10%+2.5%SC+2%Cess Nil (without indexation) Effective 10.46% or 20% +2.5%SC+2%Cess (with indexation)
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Dividends

Nil

Effective 20.91% Dividends are tax free. Subject to DDT @ 20%+2.5%SC+2%Cess Effective 20.91%

3. Non Resident Indians:

Applicable Rate for STCG 30% (Deducted as TDS) Rate for LTCG 20% (Deducted as TDS) Surcharge for Capital Gains 10% Dividend Distribution Tax 2.50%

Applicable Applicable Applicable Surcharge for Applicable Cess 2%

NRIs can opt for computation of LTCG under section 112, which enables adjusting for depreciation in value of the rupee before computing LTCG. Capital Gain Short Term Capital Gain Long Term Capital Gain Dividends Equity Funds 10%+10%SC+2%Cess Effective 11.22% Nil Nil Debt Funds 30%+10%SC+2%Cess Effective 33.66% 10%+10%SC+2%Cess Effective 11.22% Dividends are tax free. Subject to DDT @ 12.5%+2.5%SC+2%Cess Effective 13.07%

All these taxes on long term capital gain and short term capital gain is deducted as TDS (Tax Deducted at Source). 4. Foreign Companies: Maximum Applicable Tax Rate 35% Applicable Surcharge for Capital Gains 2.50% Applicable Surcharge for Dividend Distribution Tax 2.50% Applicable Cess 2% Capital Gain Short Term Capital Gain Equity Funds Debt Funds

10%+2.5%SC+2%Cess 40%+2.5%SC+2%Cess Effective 10.46% Effective 41.82%

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Long Term Capital Gain

Nil

Dividends

Nil

10%+2.5%SC+2%Cess (without indexation) Effective 10.46% or 20% +2.5%SC+2%Cess (with indexation) Effective 20.91% Dividends are tax free. Subject to DDT @ 20%+2.5%SC+2%Cess Effective 20.91%

A FEW INTERESTING TERMS FLOATING RATE FUNDS

A floating rate fund is a fund that by its investments in floating rate instruments seeks to provide stable returns with low level of interest rate risk and volatility. A Floating Rate Instrument is a debt instrument whose interest rate (coupon) is not fixed and is linked to a benchmark rate and is adjusted periodically. For example the Grindlays Floating Rate Fund invests primarily in: Floating rate debentures and bonds
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Short tenor fixed rate instruments Long tenor fixed rate instrument swapped to floating rate (Interest Rate Swaps).

Floating Rate Funds, Why? In a declining interest rate scenario older securities issued at higher coupon rates (interest paid on the face value of a debt instrument) appear much more attractive than the ones that are currently issued. Consequently older higher interest bearing securities would go at a premium. Thus long term income funds by virtue of their investments in longer maturing securities would see a rise in their Net Asset Values. However, when interest rates are on the rise newer securities appear more attractive than the ones that were issued earlier, as they offer higher coupons than their predecessors. The lesser paying older securities therefore will be sold at a discount. So the same income fund with a majority of investment in longer maturing securities, now start earning you lesser as newer securities continues to earn higher returns than the ones in the portfolio. This bearish scenario lasts as long as interest rates continue to show an upward trend. It is during these times that floating rate funds offer the best utility. Right time to Invest in Floating Rate Funds In a rising interest rate scenario, the interest rate on a Floating Rate instrument is periodically reset to a higher level due to the fact that accompanying benchmark rate is anyway at a higher level. On account of this periodic reset the difference in returns between a floating rate fund and a security that is issued currently is marginal. So the price difference is marginal leading to a marginal impact on the NAV. Floating Rate funds are protective funds and shield your investments from interest rate fluctuations. Benchmark Rate A benchmark or a reference rate is a rate that is an accurate measure of the market price. In the fixed income market, it is an interest rate that the market respects and closely watches. A benchmark rate should be from an unbiased source, be representative of the market, transparent, reliable and continuously available and most importantly be widely acceptable to the market as the benchmark rate. Such benchmark rates issued by unbiased sources are the Treasury Bill T-Bill) rate issued by the Government of India, the bank rate as decided by the Reserve Bank of India, the Mumbai Inter Bank Offering Rate (MIBOR) released by the National Stock Exchange of India and GOI Securities. An Example: A company issues debentures at 1 year GOI Security yield + 100 basis points (simply 1%) with a tenor of 5 years, periodically reset every six months.
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If the1 year GOI security is currently ruling at 5.75%, the interest rate that is fixed for the first six months is 5.75% +1%=6.75%.

DIVIDEND SWEEP
One more convenient method of investing is provided by the Mutual Funds. In this option one can invest the Dividend declared in a particular scheme in other scheme. The Dividends (net of TDS if any) earned by the Unit holder will be sweeped/ transferred into any desired Scheme or Plan. This facility helps the unit holder to build up his wealth continuously. No load will be applicable for sweep in, even if the Scheme in which the sweep is taking place has an entry load. There are no minimum amount restrictions. Further there is no facility for transfer of partial dividend or transfer of dividend to multiple schemes. With the introduction of above option, the Investor can either opt for: Pay out of full Dividend, subject to deduction of tax Reinvestment of full dividend into the same scheme, subject to payment of tax Transfer of full dividend to some other plan in the same scheme of other schemes Investors may avail any of the above facilities by ticking the appropriate box in the Application Form or may contact the ISCs or the AMC for further details.

TRIGGERS
Triggers are options provided to the unit holder as part of systematic withdrawal plan to enable automatic redemption on the happening of the desired event. Triggers can help Investor make the most of market movements without the hassle of constant tracking. Triggers can also be used as an efficient downside protection tool.

How to opt for Triggers

A unit holder may opt for this facility at any time by submitting a written application or by filling the relevant form. Under this option, the entire account will be redeemed when the chosen event occurs.

Cancellation of Triggers

A mandate of triggers could be cancelled by giving a letter to that effect mentioning information like Folio No, Name of the scheme, the transaction for which Trigger is to be cancelled etc When a request is made for canceling a trigger, it may take up to a maximum 5 business days to implement it.
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How to opt for Triggers

A unit holder may opt for this facility at any time by submitting a written application or by filling the relevant form. Under this option, the entire account will be redeemed when the chosen event occurs.

Different Trigger Options Following are the types of triggers offered by UTI

Mutual Fund: 1. The Value Trigger: Redemption will be triggered when your investment reaches a value that you have defined. For example - You have invested Rs 10,000 with us, and have set the Trigger at Rs 15,000/-. We will automatically redeem you when the repurchase value reaches Rs 15,000/2.

The Date Trigger:

Redeem on a date specified by you. For example - You may want to redeem your investment on a specific date - Your 25th Wedding Anniversary, your retirement date, three years from today, when your son reaches the age of 21 etc. 3. Capital Gains Distribution and Reinvestment Facility: Allows you to redeem or reinvest when the requisite period for realization of long-term capital gain is reached. Triggers at Transaction Level: An investor carries out two separate investment transactions with the Fund at two different times (even within the same folio), he could specify separate triggers for each of his transactions and these triggers could be of different types. 5. Downside Triggers: For Value Trigger, an investor now can specify the desired value being lower than the investment amount i.e. a Stop Loss Concept. For example if an investor invest say Rs. 10,000/-, he can specify a Value Trigger of 8,000/-. In case of depreciation in NAV, as and when his investment value reaches 8,000/- or lower, the Trigger would be fired.
4.

Switch Option for Triggers Earlier redemption was the only available option on the happening of a particular event. Now investors can switch to other Plan within the same Scheme or another Scheme of the UTI Mutual Fund as and when the Trigger is fired. The Switch option is available ONLY for Date, Value and Index Trigger and not
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for Capital Gains Trigger.

Index Based Triggers

All equity schemes can now avail a new trigger based on NSE Nifty / BSE Sensex values. An investor has to specify the Index value on reaching of which, investments should be redeemed/ switched.

Alerts

Instead of Redemption or Switch, an investor may only opt to be alerted as and when the Trigger gets fired (happening of specified event). The alert option is available ONLY for Date, Value and Index Triggers and an email will be sent to the investor informing him about the happening of event. Email address of the investors is a must for this option.

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TIPS FOR INVESTMENT IN MUTUAL FUNDS 5 POINTERS TO MUTUAL FUND PERFORMANCE

More often than not meritocracy of investments is often decided by the returns. Quite simply then a fund generating more returns than the other is considered better than the other. But this is just half the story. What most of us would appreciate is the level of risk that a fund has taken to generate this return? So what is really relevant is not just performance or returns. What matters therefore are Risk Adjusted Returns. The only caveat whilst using any risk-adjusted performance is the fact that their clairvoyance is decided by the past. Each of these measures uses past performance data and to that extent are not accurate indicators of the future. As an investor you just have to hope that the fund continues to be managed by the same set of principles in the future too. Standard Deviation The most basic of all measures- Standard Deviation allows you to evaluate the volatility of the fund. Put differently it allows you to measure the consistency of the returns. Volatility is often a direct indicator of the risks taken by the fund. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return, the average return of a fund over a period of time. A security that is volatile is also considered higher risk because its performance may change quickly in either direction at any moment. A fund that has a consistent four-year return of 3%, for example, would have a mean, or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2% and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. This fund is therefore more risky because it fluctuates widely between negative and positive returns within a short period.
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 Beta

Beta is a fairly commonly used measure of risk. It basically indicates the level of volatility associated with the fund as compared to the benchmark. So quite naturally the success of Beta is heavily dependent on the correlation between a fund and its benchmark. Thus if the fund's portfolio doesn't have a relevant benchmark index then a beta would be grossly inadequate. A beta that is greater than one means that the fund is more volatile than the benchmark, while a beta of less than one means that the fund is less volatile than the index. A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark. If, for example, a fund has a beta of 1.03 in relation to the BSE Sensex, the fund has been moving 3% more than the index. Therefore, if the BSE Sensex increased 10%, the fund would be expected to increase 10.30%. Investors expecting the market to be bullish may choose funds exhibiting high betas, which increase investors' chances of beating the market. If an investor expects the market to be bearish in the near future, the funds that have betas less than 1 are a good choice because they would be expected to decline less in value than the index. R-Squared The success of Beta is dependent on the correlation of a fund to its benchmark or its index. Thus whilst considering the beta of any security, you should also consider another statistic- R squared that measures the Correlation. The Rsquared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund's movements to that of an index, R-squared describes the level of association between the fund's volatility and market risk, or more specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations experienced by the overall market. R-squared values range between 0 and 1, where 0 represents no correlation and 1 represents full correlation. If a fund's beta has an R-squared value that is close to 1, the beta of the fund should be trusted. On the other hand, an R-squared value that is less than 0.5 indicates that the beta is not particularly useful because the fund is being compared against an inappropriate benchmark. Alpha Alpha = (Fund return Risk free return) Funds beta *(Benchmark return risk free return).
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Alpha is the difference between the returns one would expect from a fund, given its beta, and the return it actually produces. An alpha of 1.0 means the fund produced a return 1% higher than its beta would predict. An alpha of -1.0 means the fund produced a return 1% lower. If a fund returns more than its beta then it has a positive alpha and if it returns less then it has a negative alpha. Once the beta of a fund is known, alpha compares the fund's performance to that of the benchmark's riskadjusted returns. It allows you to ascertain if the fund's returns outperformed the market's, given the same amount of risk. The higher a funds risk level, the greater the returns it must generate in order to produce a high alpha. Normally one would like to see a positive alpha for all of the funds you own. But a high alpha does not mean a fund is doing a bad job nor is the vice versa true. Because alpha measures the out performance relative to beta. So the limitations that apply to beta would also apply to alpha. Alpha can be used to directly measure the value added or subtracted by a fund's manager. The accuracy of an alpha rating depends on two factors: 1) the assumption that market risk, as measured by beta, is the only risk measure necessary; 2) the strength of fund's correlation to a chosen benchmark such as the BSE Sensex or the NIFTY. Sharpe Ratio: Sharpe Ratio = Fund returns in excess of risk free

return/ Standard deviation of Fund So what does one do for funds that have low correlation with indices or benchmarks? Use the Sharpe ratio. Since it uses only the Standard Deviation, which measures the volatility of the returns there is no problem of benchmark correlation. The higher the Sharpe ratio, the better a funds returns relative to the amount of risk taken. Sharpe ratios are ideal for comparing funds that have a mixed asset classes. That is balanced funds that have a component of fixed income offerings.

5 EASY STEPS TO INVESTING IN MUTUAL FUNDS

Search: Where to look for if you want to begin saving in mutual funds

Mutual funds are much like any other product, in that there are manufacturers who provide the product and there are dealers who sell them.
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Large banks to organized brokerage houses to Individual Financial agents get empanelled with Mutual Funds to provide advice and assistance to customers who want to buy units. Mutual funds units can now also be bought over the Internet. Contacting an Investment advisor in a bank or a brokerage house or an Independent Financial Advisor is the first step to gathering information. Evaluation: choosing the right mutual fund for you Each Mutual fund offers a variety of schemes to suit differing needs of investors. The Bank/ Brokerage house/ Individual Financial Advisor help you make the choice based on your needs. As an investor one may: 1. want to invest for the short term or long term 2. want regular income or growth 3. want to target lower risk or higher returns 4. be convinced of a particular sector and want to invest in it. Remember, just like a salesman in a gift shop, your investment advisor can help you the most if he knows what you are looking for.

Purchase

After you have decided to save, you may have to decide among the various investment and withdrawal options that any fund offers to its investors. Most of these schemes also offer various options to customize your operation of the fund to your needs: 1. Systematic Investment Plan (SIP) Allows you to save a part of your income regularly. Also used to reduce risk when investing in schemes targeting aggressive growth. 2. Systematic Withdrawal Plan (SWP) Allows you to withdraw a part of your investment regularly. Used when you want to withdraw your investment for a specific regular payment, like insurance premium payments of monthly/quarterly frequency.
3.

Automatic Debit

Saves the hassle of writing a cheque when making an investment. Your account is debited automatically for the amount invested.
4.

Automatic Credit The reverse of Automatic Debit. Saves the hassle

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of enchasing a cheque when withdrawing an investment. Your account is credited automatically with the amount withdrawn.
5.

Dividend Plan

Allows you to get Tax-free dividends from your investment. (As per current Tax laws). 6. Growth Plan Allows the income generated from investment to be ploughed back into the scheme. Used by investor targeting growth in their investment. Some funds carry an entry load, which is a percentage fee deducted from the amount invested before investment. Thus a 2.5% entry load will mean that if you invest Rs 1 lakh in a Rs. 10 per unit IPO, instead of getting 10,000 units, you will be allotted 9,750 units. Check for presence of such loads and other conditions before investing. After deciding the choice of mutual fund, investment and withdrawal, you are ready to begin your savings. You need to now fill up an application form and attach a cheque of the value of your investment or mention your account number to have it automatically debited from your account.

Post Purchase Monitoring:

Once you have invested in an ongoing fund, expect a period of two to three days before you receive an account statement on the address mentioned by you in your application form. The Account Statement Your account statement indicates your current holding in the scheme that you have invested. Please ensure that all your details have been correctly captured in account statement. Please point out any discrepancies to your nearest CAMS investor Service Centre or the Mutual Fund office. You can request an account statement any time by calling up your nearest CAMS/ Mutual fund offices usually mentioned on the back of the account statement. The transaction slip at the end of the account statement can be used for additional purchases, redemptions or to intimate the mutual fund on any change in bank mandates/address. The NAVs of all the open-ended schemes are published at the fund's website, financial newspapers and AMFI (Association of Mutual Funds) web-site www.amfiindia.com.

Exit

While you should periodically monitor the performance of your investments, we recommend you do not get swayed by short term
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considerations in deciding your exit. If you have invested in a long term fund, you can spare yourself undue worries by not monitoring the NAV every day or week. Checking the performance once in a while along with your advisor should be fine. Most mutual funds will provide you with a toll free number that works from 9 am to 5 am and a website. For specific assistance you can also use your financial advisors help. Redemption/ Withdrawal Just submit your completed transaction within the transacted time for the scheme that you are invested in and deposit the same at the nearest CAMS Investor Service Centre or the office of the fund. You can either get a direct credit to your bank account or you can generally collect the cheque at the CAMS Investor Service Centre/ AMC offices. If you fail to do so then the cheque is couriered to the address mentioned in your account statement. Most funds take 1-3 days to credit your account with your redemption proceeds. In case an exit load is applicable to your withdrawal and you have redeemed a fixed amount, an additional number of units equivalent to the exit load amount will be liquidated from your investment. You can check this amount with the mentioned exit load when you get the account statement using a simple calculator.

TOP 11 TIPS FOR SUCCESSFUL INVESTMENT

1. Start early 2. Keep some cash aside 3. Decide how much risk you can tolerate 4. Bear in mind that inflation will eat into your savings 5. Think carefully about how long you will be investing for 6. Invest regularly 7. Spread your money across a range of investments 8. Choose your funds carefully 9. Remember that time not timing is the key to successful investing 10.Dont let the Sensex guide your senses 11.Review your investments In detail, we can understand these easily: Start early The sooner one invests, the more time his money will have to grow. If he delays, he will almost certainly have to invest much more to achieve a similar result e.g. if you started investing Rs. 5,000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 12 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 25,52,994 when
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you reach 60. But if you started investing ten years earlier, your Rs. 5,000 each month would add up to Rs. 18 lakhs over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 58,82,545 on your 60th birthday more than double the amount you would have received if you had started ten years later! The bottom line your investments gain most from compounded interest when you have time on your side. Keep some cash aside It is always a good idea to have some money in a deposit account in case of emergencies. Enough to cover three months living expenses is often a rough guide to how much you need and make sure you can withdraw it when you need to, without penalties. The following may be the reasons for which you might need your money at short notice: 1. making a major purchase, 2. taking an unplanned holiday, 3. seeing you through an emergency such as sudden hospitalization or job loss etc. Decide how much risk you can tolerate There is no point having a stock market investment you are going to lose sleep every time share prices go through a rough patch. Its vital that you are realistic about your appetite for risk an Investment Adviser may be able to help you decide how much risk you can tolerate. Peter Lynch, Vice Chairman of Fidelity Management & research Company has expressed his opinion as In many ways, the key organ for investing is the stomach, not the brain. What is your stomach going to do when an investment your brain selected declines for a year or two? The following factors will all have a bearing on the result: 1. Your time horizon Decide for how long you can have your money invested in equities before you need to dip into it for important outgoings, such as buying a house, paying for your childrens higher education or funding your retirement. As a general principle, equity investments should only be considered if your time horizon is over five years. Markets move in cycles and what goes down in quite likely to come up again, but it could take some time. You should be willing to stay focused on your goal through these difficult parts of the cycle.

2. Your attitude to losses How do you think you would feel when your investments get hit temporarily during a volatile twist of the market? If you are the sort to lose
86

sleep at times like these, equities are best avoided. 3. Your investment objective Think about what your primary objective is. Is it to preserve the values of the savings you have painstakingly built up over the years or is it to increase your savings into something far more substantial over time? Your Investment Adviser will discuss these and other important issues with you to get an idea of your appetite for risk. You can then decide on a mix of assets that would suit your particular circumstances. Bear in mind that inflation will eat into your savings Returns on risk free cash investments may sound respectable, but when you subtract the current rate of inflation you may not be so impressed. For significant long term grow you need to make your money work a little harder e.g. if you have Rs. 10,000 in a savings account earning 3% interest each year, in 20years time, your savings would be worth Rs. 18,061. Thats a return of just over 80%. However, if inflation is about 7%, Rs. 18,061 would only be worth Rs. 4,688 in todays terms. Think carefully about how long you will be investing for Only look at the stock market if you are prepared to put your money away for five or ten years, or perhaps even longer. If you are likely to need your money any sooner, keep it in a lower risk investment so there is less chance of a fall in value just before you make a withdrawal. As Peter Lynch, Vice Chairman of Fidelity Management & Research Company has said earlier If you are going to need money within the near future to pay college tuition or put a down payment on a house the stock market is not the place to be. You can flip a coin over where the market is headed over the next year. But if you are in the market for the long haul five, ten or twenty years then time is on your side and you should stick to your long term investment plan. The longer you stay invested, the better the chances that your investment will grow.

One Year
% of one year periods where investors

Three Years
% of three year periods where investors

Five Year
% of five year periods where investors

Made Money

Made Money

Made Money

Lost Money

Made Money

Lost Money

71.1%

28.9%

90.4%

9.6%

100%

0%

Just as the big falls in stock markets tend to be concentrated in short periods, the best rises happen quickly. And since these large gains often occur in the early days of an upward trend, an investor trying to time the market is highly likely to miss out. Missing the ten best days over the nine year period
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would have cut the average annual market return from 25.64% to 22.21% for actively managed funds. Similarly your annual returns from a fund tracking the BSE Sensex would have dropped significantly from 8.95% to 1.95% if you had not stayed invested throughout. So, far from minimizing investment risk, market timing seems to be high risk strategy.
COMPOUNDED ANNUALISED RETURNS 1996-2004 30% 25% 20% 15% 10% 5% 0%

Missed ten best days Stayed invested

Actively managed funds

BSE Sensex

Invest regularly

Investing regularly can be a great way to build up a significant lump sum. You will also benefit from what is known as Rupee Cost Averaging. This means that, if you are investing in a mutual fund, over the years you will pay the average price for units. If the market goes up, the units you already own will increase in value. If it goes down, your next payment will buy more units. This can be frequently understood at the time of studying about the Systematic Investment Plan. The regular saver finishes the period with an investment that is worth more than that of the lump sum investor even though the starting price, finishing price and average price are exactly the same. It sounds unlikely, but its true. Spread your money across a range of investments Its rarely a good idea to have all your eggs in one basket. Depending upon your goals and your attitude to risk, you will probably want to spread your money across different types of investment equities, bonds and cash. You may also want to diversify within each of these categories. The principle of diversification holds true within equities as well. Investing across a range of companies, sectors and even markets ensure that you are not reliant on the performance of any one type of equity and hence, do not run the risk of having all your eggs in one basket.
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Diversification within equities should ideally be considered at three levels: 1. 2. 3. Type Of Asset Cash Across stocks Across sectors Across markets Advantage High level of security Disadvantages

Bonds

Equities

Interest rates are variable and currently very low High liquidity The best rates may only be available on special terms Interest will always be paid or for larger amounts Interest is set in advance and The bond issuer may paid regularly default on interest The value of the bond in the payments or be unable to make the final payment open market may go up Paying interest on bonds is a The value of a bond in the higher priority than paying open market may go down dividends on shares Equities can increase Equities can also fall significantly in value significantly in value Its very difficult to predict Dividends can increase as what will happen in the company profits increase short term

Choose your funds carefully You should select investments on the basis of what is right for your personal circumstances and goals. If you are deciding on a mutual fund to invest in, dont opt for the one that is the flavour of the month, unless you are sure it will be right for your needs in the years to come. And dont assume that all funds investing in Indian equities are essentially the same look at the details of what a fund invests in and check if you are comfortable with its investment style and objectives.

Industry Sector Info. Technology (BSE IT Index) Public Sec. Utilities (BSE PSU Index) Capital Goods (BSE CG Index)
89

200 0 (%)
-37.2 -37.0 -35.9

200 1 (%)
-39.4 -4.2 -19.6

200 2 (%)
4.1 73.9 47.8

200 3 (%)
23.0 144.2 167.8

200 4 (%)
24.7 11.6 27.2

Consumer Goods (BSE FMCG Index)

-7.2

-10.9

-11.4

35.4

-6.9

Remember that time not timing is the key to successful investing When you are planning your investment, it can be tempting to wait for the market to reach a low point. But how will you know when this happens? You run the risk missing out on the significant rises that often occur in the early days of an upward trend. Even the experts can not time the market with consistent success. It is better to choose an investment that you feel confident about and take a long term view, so that you have time to ride out any ups and downs in the market. Dont let the Sensex guide your senses Investors often form their views on equities by looking at the BSE Sensex. Devotees of equities argue that this shows they yield superior returns over the long term. But the sceptics point out that the Sensex crossed 4,600 ways back in 1992. It has since gone up and down several times and by August 2005 has crossed 7,800. You could say that a 69% increase in 13 years (around 5% p.a.) is not much to show for the last 13 years surely this is long enough for the market to have delivered the superior performance it is capable of? The fact is that an equity market is more than a benchmark index. The BSE Sensex only represents 30 actively traded large companies. The Indian equity market offers an immense variety of other investment opportunities. Active equity fund managers have demonstrated that they can look beyond the index and spot companies that can deliver much better returns for investors. A passive or index tracking fund holds stocks not because they are worth investing in, but they are in the index. And it has to hold them as long as they stay in the index, even if they are over priced or on their way down. An actively managed fund, on the other hand, holds a stock because the fund manager wants it in the portfolio. Your Investment Adviser will be able to help you select actively managed equity funds that are right for your particular circumstances and goals. You will be investing in equities without having to worry about where the Sensex is, or where it is likely to go. The table shows the compounded annualized growth of the BSE Sensex, compared with the returns from actively managed funds over four different periods up to nine years.
.

90

COMPOUNDED ANNUALISED RETURNS

60% 50% 40% 30% 20% 10% 0% 1 Year 3 Years

Actively managed funds BSE Sensex

5 Years

9 Years

Over each of these periods, actively managed funds have outperformed the Sensex. Over a five year period this out performance has been quite substantial more than four times better than the index. This is the benefit of active management. Active fund mangers make their own decisions about which shares to buy. Some use statistical analysis, others follow fashion. A good fund manager will choose stocks on the basis of thorough research, seeking companies with the potential of reward investors. Passive of index tracking funds, on the other hand, attempt to replicate an index, such as the Sensex, by holding the same stocks and in the same proportions. Investment decisions are often made by the computers and no research is involved so these funds usually have lower charges. When you invest in actively managed funds your returns are more dependent on the stock selection skills of the fund manager and less on the movements of a major index like the Sensex. Active management has worked well in the Indian market and there appears to be no reason why it should not continue working as well in the future. This tip is applicable only for the investors who are investing in diversified equity funds.

Review your investments

A portfolio that is right for you at one point in your life may not be quite so suitable a few years later. Your investments need to adapt to changes in your circumstances, such as getting married, having children or starting a business. It is also a idea to check that each of the funds in your portfolio is living up
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to your expectations. Talking to an Investment Adviser could help you decide whether you need to switch money between funds. For the greatest long term growth potential you could simply invest all your money in equity mutual funds, right from the start of your investing period to the end. But, of course, this would be a high risk strategy. The markets could dip just before you need the money. Thats why you need to think about changing your portfolio over time. You may want to aim for strong growth in the early years, and then, as the years go by, lock in any gains you have made and move into lower risk investments, such as bonds. As you get closer to needing your money, lower risk bond and cash investments could become your emphasis.
.

25 Years to go

10 Years to go

5 Years to go

Bonds

Equities

Cash

Bonds

Equities

Cash

Bonds

Equities

Cash

THE RIGHT ASSET ALLOCATION FOR INVESTORS

There are three major asset classes that you can put your money into, namely equities, fixed income and money market instruments. In order to decide how much of your money goes into which investment class you must first consider a few important factors (most of these will be tackled by you during your goal definition phase): Return expected on your investment, Amount you will be able to save (present as well as future), Cash outflows you might have at certain points of time in the future, Risk appetite, Amount you will require for your retirement, Liquidity and Your Age Hence due to the variable nature of the investors finances and requirements there are no set strategies used by financial consultants. But we can provide you with broad strategies that you can adapt to meet you own needs. But first please take a look at the chart below to see which category you broadly fall into. Investment protection leads to safer interest generating asset allocations where as Investment Growth leads to higher volatility assets, that may tend to grow over a period of time. INVESTMENT PROTECTION V/S INVESTMENT GROWTH
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Investor Characteristic Time Horizon Future Income Requirements Volatility Limit (Risk Averseness) Inflation Protection Investor take on Equity Market

Investment Growth Short-term Steady / High Low Low Protection Needed Mostly Bearish

Investment Protection Long-term Variable / Low High High Protection Needed Mostly Bullish

If you are a person who broadly falls into the Investment Growth category you might be interested in looking at an Aggressive portfolio. On the other hand if you are leaning towards an interest income with minimal risk investments you might look at a Conservative asset allocation. Someone who wants a bit of steady income as well as asset growth might go in for a moderate or a balanced asset allocation.
18% AGGRESIVE PORTFOLIO 2%

80% Equity Fixed Income Cash

MODERATE PORTFOLIO
3%

37%

60%

Equity

Fixed Income

Cash

93

CONSERVATIVE PORTFOLIO 6% 35%

59% Equity Fixed Income Cash

Another way to ascertain the right asset allocation is by looking at your life cycle. The basis of this theory lies in the simple maxim that younger people with secure jobs will normally opt for higher returns and take higher risks compared to older retired people. One must remember that these are only indicative strategies and will probably have to be fine-tuned to meet your individual needs. Age 20-29 Main Objectives Aggressive Growth Sow the seeds, plan for housing and create a safety cushion Portfolio Strategy 50% - Growth Funds 30% - Balanced Funds 20% - Money Markets / Cash 45% - Growth Funds Growth Save for housing, childrens 30% - Balanced Funds expenses (present and future 05% - Blue Chip Stocks education etc.) and safety cushion 20% - Money Markets / Cash 40% - Growth Funds Growth Childrens expenses (present 30% - Balanced Funds and future education etc.) and safety 10% - Blue Chip Stocks cushion 20% - Money Markets / Cash 30% - Growth Funds Retirement Save for retirement and 40% - Balanced Funds build on safety cushion 10% - Blue Chip Stocks 20% - Money Markets / Cash 10% - Balanced Funds 15% - Income Funds Safety Preserve investments/ savings 10% - Blue Chip Stocks and opt for minimal growth 20% - Dividend Stocks 30% - Certificates of Deposits 15% - Money Markets / Cash
94

30-39

40-49

50-59

60-69

30% - Income Funds 70 25% - Dividend Stocks & Safety Preserve investments/ savings 35% - Certificates of Deposits 10% Above Money Markets / Cash

EQUTIY AND DEBT FUNDS 5 REASONS FOR INVESTING IN EQUITY FUNDS

Your money needs to generate much higher returns to secure your retirement

Connect the dots of your ages, your 30s/ 40s or 50s and they WILL connect to 60,70 and even 80. You will turn old one day. And you will not want to depend on someone then, even your kids. The good news is that you can start today and build sizeable savings by -50% the time you retire.

The chart shows how saving at a more than average rate of 20% can make your savings increase substantially over the next 20 years. By how much? A 1 lakh savings today can increase to close to Rs. 40 lakhs by the time you are ready to hang up your boots.
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The trick is not to be satisfied with the 5% or 10% returns and hunt for investments that can give you above average returns. Your search ends here. Equity markets can give the returns needed to secure your future The graph below shows that returns generated by the Sensex over the past 20 year period have been a healthy 15%. This while the Indian economy grew at 3-4% for more than half that 150% period. Going forward, this growth is targeted to be 6-8%, now you know why we are optimistic about the equity markets.

If you have been wary of investing in equity funds because of the risk involved, we have some news for you Historical data proves that investing in the Equity market becomes less risky in the long term

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As shown above, the peaks and troughs of returns can be mellowed by remaining invested for the long term. The historical analysis shows how the maximum and minimum returns generated by the Sensex behave from 1 year to 20 years. But you may be a complete beginner and may know nothing about how to invest. Fortunately, there are collections of investors called Mutual funds that have professional fund managers that invest in the stock market collectively on behalf of investors.

Mutual funds offer a better route to investing in equities for lay investors

A mutual fund acts like a professional fund manager, investing your money and passing the returns to you. All it deducts is a management fee and its expenses, which are declared in its offer document. As seen in the following graph, looking at the past 10 years, mutual funds have given higher returns over the BSE Sensex, even when measured on a 5 year rolling basis. 5 Years Rolling Returns (Daily Basis) for Last 10 Years Sensex Equity Mutual Fund Average -7.90% 8.94% 14.51% 33.53%

Min Max

The logic is simple, it makes sense to leave your investments in the hand of professionals you can trust. However, you may ask, why invest now. Because

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The Indian Economy is booming right now The Indian economy is growing strongly as shown by the growth rate of Gross Domestic Product (Broadly the Total Production of goods and services in the country). A booming markets. Investing now in the stock market can enable you to benefit from a growing Indian economy.

VALUATION OF DEBT FUNDS

Need of Valuation

Mr. Patel's Maruti car is a year old. With the blitzkrieg of new car launches Mr. Patel was really tempted to upgrade his Maruti to a Palio or an Indica by selling off his existing Maruti car. Being an accountant he found that taking the mentioned depreciation rate of 20% as per the Income Tax rules, the value of his Maruti bought initially for Rs 250,000 was now 200,000. He gathered that as per this he would have to invest another Rs 50,000 for a new Indica. Mr. Patel armed with this information decided to cross check this with his second car dealer and found to his utter surprise that the best he was getting was Rs 175,000. However as per the IT rules the car should give him Rs 200,000, Mr. Patel argued. The dealer patiently explained to him that the price of a second hand car depends on a host of factors. Obvious factors like usage, mileage and present condition of the car apart, extraneous market factors like: 1. The demand for a second hand cars,
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The availability of newer models in a similar price range, and The availability of older models in a similar price range. Mr. Patel returned a wiser man that day having learnt a new fact that a fair valuation is one that has to take into account market realities. Valuation of Debt Funds Debt funds like any other asset are driven by the same basic tenet. A fair valuation is one that has to take into account market realities at prices that are market driven. A debt fund at any given point in time holds different debt instruments. Thus the NAV, which reflects the value of all the underlying assets in the portfolio, to be fair and correct should take into account the market price of each of the instruments that comprise the portfolio. This process where each asset is valued at current market prices is called "Marking to Market". Marking to market has become very essential as it indicates the financial health of a portfolio. To a large extent this procedure indicates the amount of risk the fund carries. Essentially any portfolio can either have liquid or illiquid securities. While valuing liquid securities is a no-brainer as the prices can be taken from the exchanges, valuation does assume great significance when it comes to valuing illiquid securities. The problem of valuation gets compounded when it comes to valuing debt securities in India. The absence of a broad based market resulted that trades were concentrated around a few securities. A Debt fund at any given point of time can hold three different types of assets: 1. Government securities, 2. Corporate debentures with a residual maturity of more than 6 months, 3. Money market instruments and corporate debentures with a residual maturity of less than 6 months. Different categories of assets are marked to market in different ways depending mainly on the liquidity of the asset. As a thumb rule, higher the credit, higher the liquidity. Consequently the most liquid among debt instruments are the securities issued by the Government as the risk is sovereign.

2. 3.

Bond Valuation

The value of a bond can be defined as the present value of the future cash flows discounted at an appropriate rate. The cash flows expected from the bond are made up of 1. Coupon Payments and 2. redemption of Principal Thus the value of the bond in general terms: Bond Price= C/(1+i) + C/(1+I)2 + C/(1+I)3+ ..+ C/(1+I)n +M/(1+I)n
99

Where,

C M N I

= = = =

Coupon Payments Redemption Amount Number of Coupon Payments Discounting rate or the yield of the bond.

Yield or Discounting Rate

The price of the bond depends significantly on the rate which is used to discount the future cash flows. To get a uniform pricing for various debt instruments a matrix known as the CRISIL Bond Valuer maintained and developed by CRISIL and approved by SEBI is used for bond valuation. Valuation of Government Securities Government securities are marked to market on a daily basis. Since the G Sec market in our country is the most liquid segment of our debt markets, it is possible to get a price of G-Secs on any given day. Hence the G-sec portion of the portfolio is marked to market on a daily basis at the last traded price. Earlier fund houses used differing sources ranging from NSE to the RBI's SGL. However circa March 2002 it is mandatory for all fund houses to use prices provided by CRISIL. CRISIL uses the Spread over Benchmark concept while valuing non traded government securities. Any event like an interest rate change triggers the rise or fall of government securities. But the impact is not similar across all G-Secs. The impact depends on a host of factors chiefly duration, coupon rate and the liquidity level of the security. Benchmarks are set up for different tenor buckets e.g. securities with 1-2 years outstanding maturity, 2-3 years 3-4 years and so on. For each of these tenor buckets benchmarks are identified based on the turnover, frequency of trading in the secondary market. These prices are provided by CRISIL on a daily basis. Valuation of Money Market instruments Money market instruments and corporate debentures with residual maturity of less than 6 months are valued by amortization. The difference between the face value and the cost is amortised over the life of the instrument. SEBI has provided that all money market instruments and corporate debentures maturing within 6 months have to be valued on a cost plus accrual basis instead of marking to market. So the next time you decide to invest in a fund you know what to look out for. Valuation therefore is a critical element of the entire funds management business. It takes time and hence funds have cut-off times so that all transactions for the day can be accounted for the days NAV. Any transaction that gets missed out implies that the
100

resulting NAV is not the accurate NAV. It is for this reason that AMFI along with SEBI has started getting stricter on adherence to cut-off times.

Valuation of Corporate Securities Debt securities like bonds, debentures are valued differently depending on whether they are traded or non- traded and additionally depending on the value of the traded securities. The valuation for the traded securities of traded value in excess of Rs 5 crores is done based on the YTM. The YTM is calculated on the last traded price and is maintained till the next CRISIL matrix. Thinly traded securities and non-traded securities valued at more Rs 5 crores and with a residual maturity of more than 182 days are valued using the CRISIL Bond Valuer. The CRISIL Bond Valuer uses a benchmark YTM built using GOI Sec as the base for each duration bucket. There are 7 duration buckets starting from 0.5 to > 6 years. CRISIL provides a matrix of yields across various duration buckets (the topmost row in the table below) and rating categories (the leftmost column) on a weekly basis. Here is how it works. When deciding the price of a corporate debenture the key is to determine the yield of the debenture. CRISIL arrives at this table after taking into account various macro and micro economic factors and the repaying capacity. Once the yield is known the price computation is easily accomplished. When deciding the price of a corporate debenture the key is to determine the yield of the debenture. CRISIL arrives at this table after taking into account various macro and micro economic factors and the repaying capacity. Once the yield is known the price
101

computation is easily accomplished.

23/10/2002 Gilt AAA AA+ AA AAA+ A ABBB+ Average 6.46% 7.21% 7.58% 7.95% 8.47% 9.15% 9.73% 10.66% 11.59% 0.5-1 5.85% 0.75% 1.11% 1.45% 1.95% 2.60% 3.00% 3.70% 4.47% 1.0-2.0 6.01% 0.87% 1.16% 1.43% 1.89% 2.62% 3.18% 4.16% 5.03% 2.0-3.0 6.17% 0.83% 1.08% 1.40% 1.86% 2.62% 3.22% 4.31% 5.22% 3.0-4.0 6.31% 0.80% 1.05% 1.40% 1.89% 2.65% 3.30% 4.28% 5.25% 4.0-5.0 6.54% 0.78% 1.14% 1.63% 2.15% 2.84% 3.52% 4.41% 5.38% 5.0-6.0 7.05% 0.59% 1.11% 1.54% 2.10% 2.73% 3.39% 4.31% 5.28% >6.0 7.28% 0.64% 1.19% 1.62% 2.26% 2.78% 3.33% 4.28% 5.28%

If you buy a bond at face value, its rate of return, or yield, is just the coupon rate. However, after they're first issued, bonds rarely sell for exactly face value. The yield differs from the coupon. While the coupon rate is the stated interest rate offered by the debenture and is always calculated on the principal value, the yield is often the return that one would get considering the future interest flows and the prevailing interest rate scenario. To give an example using the above matrix say a corporate debenture issued by a Corporate rated AA+ with a residual duration of 2.5 years would be calculated as under. The yield of this will be the benchmark yield plus the markup depending on the bucket the debenture falls into. Therefore yield used for valuation would be 6.17(benchmark) + 1.08(spread) = 7.25%.

All corporate debentures that fall in a particular slot within the matrix are valued at rates specified by CRISIL matrix. Additionally the fund house is at a liberty to add a discretionary discount/premium upto +100/-50 bps
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for rated paper with duration upto 2 yrs and upto +75/-25 bps for rated paper with duration over 2 yrs. In case of an unrated paper the fund house needs to assign an internal credit rating which is then used for valuation. In this case the yield would be marked up by adding 50 basis points for securities having a duration upto two years and by 25 basis points for securities of duration higher than two years.

PERFORMANCE MEASURES OF MUTUAL FUNDS

With a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is frankly the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be held accountable for their selection of stocks. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations,
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which affect all the securities present in the market, called market risk or systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The total risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its Beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk can not. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis-vis one another in a better way. The criteria for evaluating the performance are as follows: Sharpe Ratio Treynor Ratio Jensens Alpha Expense Ratio In detail,

SHARPE RATIO

The ratio measures the return earned in excess of the risk free rate (normally Treasury Instruments) on a portfolios total risk as measured by the Standard Deviation in its returns over the measurement period. Nobel Laureate William Sharpe developed the model and the results of it indicate the amount of return earned per unit of risk. The Sharpe Ratio is often used to rank the risk-adjusted performance of various portfolios over the same time. The higher a sharpe ratio, the better a portfolios returns have been relative to the amount of investment risk the investor has taken. The major advantage of using the Sharpe Ratio over other models (CAPM) is that the Sharpe Ratio uses the volatility of the portfolio return instead of measuring the volatility against a benchmark (i.e. index). The primary disadvantage of the Sharpe Ratio is that it is just a number and it is meaningless unless you compare it to several other types of portfolios with similar objectives Return of Portfolio Return of Risk Free Investment S = Standard Deviation of Portfolio For example: Lets assume that we look at one year period of time where an index fund earned 11%, treasury bills earned 6% and Standard Deviation of the index fund was 20%. Therefore S = 11 - 6 0.20
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= 25%

The Sharpe Ratio is an appropriate measure of performance for an overall portfolio particularly when it is compared to another portfolio, or another index such as the S&P 500, Small Cap Index, etc. That said however, it is not often provided in most rating services.

TREYNOR RATIO

This ratio is similar to the above except it uses Beta instead of Standard Deviation. It is also known as the Reward to Volatility Ratio, it is the ratio of a funds average excess return to the funds Beta. It measures the returns earned in excess of those that could have been earned on a riskless investment per unit of market risk assumed. The formula is typically used in ranking Mutual Funds with similar objectives. T = Return of Portfolio Return of Risk Free Investment Beta of Portfolio

The absolute risk adjusted return is the Treynor plus the risk free rate. For example: Assume two portfolios A and B, return and Beta of which are 12, 14 and 0.7, 1.2 respectively. Risk free rate is 9%. T (A) = T (B) = 0.12 0.09 .07 0.14 - 0.09 1.20 = .043 = 0.04 Risk Adjusted Rate of Return of A = 0.043 + 0.09 = 0.133 or 13.3% Risk Adjusted Rate of Return of B = 0.04 + 0.09 = 0.13 or 13%

For many investors, without any analysis of risk, if we ask them what is the better number (12% or 14%) almost universally they state 14%. However, when we point out the risk adjusted rate of return, many adjust their thinking. For example: In 1990-93 where Fidelity Magellan had earned about 18%. Many bond funds had earned 13%. Which is better? In absolute numbers, 18% beats 13%, but if we then state that the bond funds had about the half risk, now which is better? We dont even need to do the formula for that analysis. But that is missing in almost all reviews by all brokers. For clarification we do not suggest they put all the money into either one just that they need to be aware of the implications.

JENSENS ALPHA

This is the difference between a funds actual return and those that could have been made on a
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benchmark portfolio with the same risk i.e. Beta. It measures the ability of active management to increase returns above those that are purely a reward for bearing market risk. Caveats apply however since it will only produce meaningful results if it is used to compare two portfolios which have similar Betas. Assume Two Portfolios: A B Return 12% 14% Beta 0.7 1.2 Risk Free Rate = 9%

Market Return 12% 10%

Expected Return = Risk Free Return + Beta of Portfolio (Return of Market Risk Free Return) Alpha = Return of Portfolio Expected Return Portfolio A: Portfolio B: Expected Return = 0.09 + 0.7 (0.12 0.09) = 0.11 Alpha = 0.12 0.11 = .01 or 1% Expected Return = 0.09 + 1.2 (0.10 0.09) = 0.102 Alpha = 0.10 0.102 = -0.002 or -0.2%

As long as apples are compared to apples in other words a computer sector fund A to computer sector fund B it is viable number, but if taken out of context, it loses meaning. Alphas are found in many rating services but are not always developed the same way so you cant compare an Alpha from one service to another. However we have usually found that their relative position in the particular rating service is to be viable. Short term Alphas are not valid. Minimum time frames are one year three year is more preferable.

EXPENSE RATIO
The percentage of the assets that were spent to run a mutual fund. It includes things like management and advisory fees, travel costs and consultancy fees. The expense ratio does not include brokerage costs for trading the portfolio. Also referred to as the Management Expense Ratio (MER). Pay close attention to the expense ratio, it can sometimes be as high as 2-3% which can seriously undermine the performance of your mutual fund.
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HOW TO PLAY AN OVER HEATED MARKET

At a time like this one is reminded of the old story where Birbal kept the weight of a goat constant by giving it as unlimited fodder and then caging a wolf next to it, so that it never ate more than it needed. The investor is equally strongly driven today by the fear of investing in an over-heated market and the desire to participate in the general prosperity. Let us begin with one salient fact investing cannot be ignored nor can it be postponed. Your choice of assets is limited gold, bank deposits; government sponsored or promoted savings schemes, the debt market and the equity market. What you should be doing in the equity market in these times is as follows:

This is an extreme market. A huge amount of liquidity is chasing stocks, because India is happening let no one tell you that the rationale institutional investors are not swayed by sentiment. Like any sentiment there is a sound basis in fact: India is set to realize its economic potential, but it wont happen overnight. So the first tip is that you can invest with one of two horizons: either 35 years or day trading. By committing to a 3-5 year horizon, you must be prepared to weather short-term corrections (by which I mean even sustained negative phases lasting months with everyone talking about how it would be wise to stay away from the market). If you dont have the ability to commit money of this nature, the alternative is to develop a good broker as a friend and seek his help in trading on stocks on a daily basis for a profit (after brokerage and STT) of between 15 paisa to 25 paisa and a stop loss of say 10 paisa. Dont worry, this is not gambling; it provides legitimate liquidity to the market. But it is risky, since most of your dealings will be in little known stocks with often little or no fundamental merit, and very low volumes. You can get stuck in your position. Try the former unless you are in a job, which gives you ample free time, or are retired and have
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Time Horizon

adequate time to monitor your brokers activity. Directly or through a Mutual Fund Again the argument in favour of mutual fund investing is that you may not have the time to do some serious investment analysis. But even in investing in mutual funds, you need to play to a strategy. The best way to do this is: 1. If you have a lump sum, place it in a liquid or floater fund, and leave instructions with the fund to transfer it systematically into the equity fund of your choice. 2. If you are investing a small amount each month, use the SIP route, invest a little bit each month in 3 or 4 funds 3. Do look at index funds for at least half your money, even for SIP. Fund managers are human, and they can be tempted by better job offers and promotions. An index fund does not face the problem of change of hands. Index funds are also cheaper 4. A very aggressive fund choices like mid-cap or sector funds unless you have some special knowledge of a sector.

Fear or Greed How to beat both Dont forget debt funds. They are still good for your bread and butter investing. The interest rates have stabilized and the returns are tending towards the normal. Keep your main savings and profits from equity investing in debt funds. Suddenly MIPs are also looking like an attractive option once again. Unfortunately the brief period of uncertainty for these funds last year has given them a bad name, but these are ideal options for the safety seeking investor, who wants limited exposure to equity. Look at taking an SIP in an MIP; this may be your best bet if you are a conservative investor. Conclusion Actually, if you get down to basics the norms of good investing remain true but markets like this require that we be reminded of these strategies once again. The only difference between investing in a hot market and one that is just getting hot is that the risk-reward ratio for the mid-term time horizon (3 to 6 month) becomes so bad that it is bests an Ed. When the index was at 5000, you may have probably profited from the stag approach; but no longer.

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NEW FUND OFFERS DURING THE TRAINING PERIOD

During the training, we have come across the three following New Fund Offers (NFO): SBI Magnum Comma Fund PruICICI Infrastructure Fund Reliance Tax Saver (ELSS) Fund

SBI MAGNUM COMMA FUND

What is SBI Magnum Comma Fund A first of its kind scheme. COMMA is an acronym for Commodities in Oil, Metals, Materials and Agriculture. SBI Magnum Comma Fund is an open-ended equity fund focused on investing across commodity (such as oil and gas, metals, materials, agriculture etc) based companies. SBI Magnum Comma Fund intends to follow a disciplined investment process to create a diversified portfolio of commodity based companies.

Investment Objective

To generate opportunities for growth along with possibility of constituent returns by investing predominantly in a portfolio of stock of companies engaged in the commodity business within the following sectors Oil and Gas, Metals, Materials and Agriculture and in the debt and money market instruments. Asset Allocation Pattern Types of Instruments Normal Allocation
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Risk Profile

(% of Net Assets) Equity and equity related instruments of commodity based companies Foreign Securities/ADR/GDR of commodity based companies Fixed/Floating rate debt instruments including derivatives Money Market Instruments 65% - 100% 0% - 10% 0% - 30% 0% - 30% High High Medium Low

1. Maximum limit of stock lending not more than 20% of the net assets of the scheme 2. The scheme would at all times have an exposure of at least 65% of its investment in stocks of companies engaged in the commodity business. 3. The scheme intends to take exposure only in the following four sectors (a) Oil and Gas (Petrochemicals, Power, Gas etc.), (b) Metals (Zinc, Copper, Aluminum, Bullion, Silver etc.) (c) Materials (Paper, Jute, Cement etc.) (d)Agriculture (Sugar, Edible Oil, Soya, Tea, Tobacco etc.). 4. The scheme would also invest in companies providing inputs to commodity manufacturing companies. 5. Exposure to derivatives instruments in the scheme can be upto a maximum of 50% of the equity portfolio of the scheme. Exposure to the derivative instrument may be through either Stock Option and Future or Index Options or Futures. Investment in Stock Options and Futures would be limited only to the stocks within the four sectors of Oil and Gas, Metals, materials and Agriculture. 6. Investments in foreign securities/ADR/GDR would comply with the guidelines and overall limits laid down for Mutual Funds by SEBI for investments in foreign securities. Investments in foreign securities would be only in the stocks of the following sectors oil and gas, metals, materials and agriculture. 7. Money market instruments will include Commercial Paper, Commercial Bills, Certificate of Deposit, Treasury Bills, Bills Rediscounting, Repos, Government Securities having an unexpired maturity of less than one year, Call or Notice Money, Usance Bills and any other such short term instruments as may be allowed under the regulations prevailing from time to time.

Dividend Policy

Dividend declaration under the dividend option of the scheme is subject to the availability of distributable surplus and at the discretion of the Fund Manager and no returns is assured under the scheme.

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Options

Growth option and Dividend option. Dividend option provides facility for payout and reinvestment. Minimum Application Amount Repurchase Rs. 1000 or 100 magnums whichever is lower

Purchase Additional Purchase Rs. 5000 and in Multiples of Rs. 1000 multiples of Rs. 1000 Benchmark Index: Fund Manager : Trustee Company :

BSE 200 Index Mr. Sandip Sabharwal SBI Mutual Fund trustee Company Pvt. Ltd.

Load Scheme New Fund Offer Period The initial issue expenses of the fund upto an extent of 6% of the new fund offer mobilization would be borne by the scheme and any expenses over and above 6% would be borne by the Asset Management Company. Entry Load: NIL Exit Load: For investments below Rs. 5 crores (1) 2% for exit within 6 months from the date of reopening of the scheme (2) 1% for exit after 6 months but within 12 months from the date of reopening of the scheme For investments of Rs. 5 crores and above 1% for exit within 3 months from the date of reopening of the scheme

Continuous Offer Entry Load: Investment below Rs. 5 crores 2.25% Investments of Rs. 5 crores and above NIL Exit Load: NIL For systematic Investment Plan (on an ongoing basis) Entry Load: NIL Exit Load: (1) for exit within 6 months of investment 1.00% (2) for exit after 6 months but within 1 year of investment 0.50% (for the purpose of calculating the exit load, the unit allotment date for each installment would be reckoned)

Recurring Expenses 1. First Rs. 100 cr. of average weekly net assets 2.50%
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2. 3. 4.

Next Rs. 300 cr. of average weekly net assets 2.25% Next Rs. 300 cr. of the average weekly net assets 2.00% Balance of the average weekly net assets 1.75%

Tax Treatment for the Investors 1. Tax benefit is available under sections 48 & 112 of the Income tax Act, 1961 on the capital gains for Resident Indians. Short Term Capital Gains from equity schemes will be taxed at 10% (plus applicable surcharge) while long term capital gains will not be subject to any tax. 2. Income distributed by equity schemes will not be subject to dividend distribution tax and will be tax free in the hands of the investor. 3. Magnums held under this scheme will not be liable to wealth tax and gift tax. 4. Securities transaction Tax (STT) of 0.20% would be levied at the time of redemption from all investors irrespective of the amount/tenure of investment. Key Features An open-ended equity scheme investing in stocks of commodity based companies Launch Date? 30th June 2005 New Fund Offer Period? 30th June 2005? 25th July 2005 Scheme reopens on 17th August 2005 Minimum Investment? Rs. 5000 and in multiples of Rs. 1000 Dividend and Growth options available. Reinvestment and Payout facility available. Dividends will be completely tax-free. Long term capital gains to be completely tax-free. STT would be at the rate of 0.20% at the time of repurchase. Entry load Nil (during new fund offer period) Exit load (only for investments during new fund offer period) For investments below Rs. 5 crores: 2% for exit within 6 months from the date of reopening of the scheme 1% for exit after 6 months but within 12 months from the date of reopening of the scheme For investments of Rs. 5 crores and above: 1 % for exit within 3 months from the date of reopening of the scheme.

1. 2. 3. 4. 5.
6.

7.
8.

9.

PRUICICI INFRASTRUCTURE FUND

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What is PruICICI Infrastructure Fund PrulCICI Infrastructure Fund is an openended equity fund focused on investing across Infrastructure sectors such as Cement, Power, Telecom, Oil and Gas, Construction, Banking, etc. PrulCICI Infrastructure Fund intends to follow a disciplined investment process to create a diversified portfolio of companies engaged in the Infrastructure sector providing optimum riskadjusted long-term return. Prudential ICICI Mutual Fund seeks to optimise the riskadjusted return by a mix of top-down macro and bottom-up micro research to pick up stocks providing long-term return potential.

Why invest in the Infrastructure Sector India has to invest large amounts in the Infrastructure sector like Roads, Ports, Power, Telecom, etc to sustain higher economic growth rate. Lack of adequate Infrastructure is acting as a speed breaker for rapid economic growth. The Government alone cannot spend large amounts on the development of Infrastructure, and it has actively encouraged private sector to invest in the Infrastructure sector. One such example of publicprivate participation is in the Telecom Sector. As can be seen in the table below, the Telecom Sector has seen tremendous improvement in availability as well as cost in the last few years.

Telecom Services Particulars No. of Connections(Mobile + Basic) in mn Teledensity Tarrifs - STD Rs per minute Tarrifs - ISD Rs per minute Tarrifs - (Mobile Phones) Rs per minute
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1999 22.8 2.32 30.00 61.20 16.00

2005 100.1 9.26 2.40 7.20 1.00

The Infrastructure sector has received tremendous boost from the various initiatives taken in the recent past as under: 1. Public-private Participation: The Government announced clear-cut policies for active participation by the private sector in areas like Power, Telecom, Roads and Ports. Establishment of Independent Regulators like Telecom Regulatory Authority (TRAI), Central Electricity Regulatory Commission (CERC) has helped in enhancing the private sector participation. 2. Increase in FDI Limit: The Government enhanced FDI Limit in Telecom to 49%, 100% in Roads, Ports and Power Generation to remove funding constraint and enhance technical knowledge. 3. Adequate Funding: The Government created adequate funding for roads development by charging cess on petrol and diesel and social Infrastructure by education cess on direct taxes. 4. User Charges: The Government allowed market determined user charges for various services ensuring adequate return on the investments. The companies engaged in the Infrastructure sector witnessed robust growth in terms of performance over the last couple of years due to initiatives as mentioned above. The stock markets recognised their performance as can be seen from the chart below. The Infrastructure index comprising of companies belonging to the Infrastructure sector out of the SENSEX like ACC, BHEL, Bharthi, Grasim, Gujarat Ambuja, HDFC Bank, Hindalco, HDFC, ICICI Bank, ONGC, Reliance Energy, SBI, TISCO and Tata Power have outperformed both the SENSEX and NIFTY between the June 02 -June 05 period. Moreover, the outperformance has come at a lower volatility as can be seen in the lower Beta of the Infrastructure Index at 0.97.

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We believe that the Infrastructure Sector has reached an inflection point on the back of initiatives taken in the past and the spending proposed for the future as can be seen in the table below: INFRASTRUCTURE SECTOR SPENDING US $ BILLION FY 2001-2004 FY 2004-2007 E FY 2006-2008 E ROADS 7.1 13.3 12.46 TRANSPORT 2.0 3.4 6.51 POWER 8.5 18.4 32.67 OIL AND GAS 8.1 14.5 16.90 TELECOM 14.3 15.9 25.77 TOTAL 40.1 65.5 94.30 What is the investment objective and asset allocation of fund The PrulCICI Infrastructure Fund is an open-ended equity fund investing in the Infrastructure sector for long-term capital appreciation. The fund may move up to 30% in debt securities if the risk reward ratio is favourable to such allocation. What are the risk to the investor 1. Infrastructure Fund like any normal equity fund carries the market risk. 2. Infrastructure projects have long gestation periods. They may not produce immediate return for the shareholders. The Infrastructure Fund will be exposed to such companies and may under perform the broad market in the short-term. Investors should have at least a 5-year investing horizon to match with the Fund's investment philosophy.

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3. Growth of the Infrastructure sector is dependent upon Government policies. Any adverse change in the policies can impact the valuation of Infrastructure sector companies. 4. Significant investments in the sector can happen in the form of debt instruments, creating a high level of financial leverage and corresponding risk to the equity investors.

Is this a good time to invest

The equity markets are unpredictable. Equities have a high volatility. Timing the market is not easy. One cannot make money in equity markets every day. We believe that at this point of time, India is an attractive long-term investment destination. The Infrastructure sector provides an attractive investment opportunity based on its long-term growth potential. We will recommend investors to diversify towards longer term growth stories as is intended to be offered in the PrulCICI Infrastructure Fund. We believe the best route for investment will be through Systematic Investment Plan. The use of SIP provides the investor a regular investment option with the benefits of rupee cost averaging.

Who should invest

PrulCICI Infrastructure Fund is a multi sector fund, and therefore has much lower concentration risks than a typical sector fund. The concentration risk will be managed in an optimum manner to seek diversification across various industries within the Infrastructure sector. The investment focus of this fund is on the core Infrastructure sectors, and the sectors that directly feed off the growth in the core sector. The fund intends to bring to the investor, a focused investment opportunity, at a risk level lower than a typical sector fund. 1. Investors who like a long term investment in equity that captures growth opportunities in Infrastructure sectors. 2. Investors who have been long term investors in debt products and are seeking some exposure to long-term equity with steady growth prospects. What are the scheme features PruICICI Infrastructure Fund Open-ended Equity fund Objective is to generate capital appreciation and income distribution to unit holders by investing predominantly in equity/equity related securities of the companies belonging to the Infrastructure industries and balance in debt securities and money market
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Key Features Type of the Scheme Investment Objective

Asset Allocation Pattern

Options Default Option Minimum Application Rs.5,000 and in multiples of Re.1/Amount Minimum Additional Rs.500 and in multiples of Re.1/Investment (i) For investment of less than Rs. 5 Crores: 2.25% Entry Load (ii) For investment of Rs.5 Crores & above:

instruments including call money. 70% to 100% in Equity & equity related securities instruments of companies engaged in the Infrastructure sector, 0% to 30% in Debt, Money Market Instruments & call money. Growth, Dividend Payout & Dividend Reinvestment Dividend Reinvestment

NIL (iii) For SIP investments: NIL (I) If the redemption amount is less than Rs. 5 Crores and the redemption request is made before completion of 6 months from the date of allotment of units: 1.00% c d e e d (II) For investment of Rs. 5 crores and above or the Exit Load redemption request is made on or after the completion of 6 months from the date of allotment of units: Nil f ffffffffffffffffffffffff (III) For SIP investment: 2% if redeemed within 365 days of allotment of units. S & P CNX Nifty hay I am mayank solanki a Benchmark Index Generally within 3 business days for specified RBI Redemption Cheques locations and an additional 3 Business Days for NonIssued RBI locations. 10th Aug, 2005 but extended to 16th Aug, 2005 due to Closing Date heavy rainfall and flood in Mumbai Minimum Redemption Rs. 500/Amount Monthly: Minimum of Rs.1000 + 5 post dated cheques SIP Investment for a minimum of Rs.1000 each. SWP Available Investment Mgt. Exp. 1.25% Other Recurring Exp. 1.25% Total 2.50%
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Moreover, this is not the first type of the fund. Before this the DSP Merrill Lynch Mutual Fund and Tata Mutual Fund has launched the Infrastructure based funds. DSP Merrill Lynch Mutual Fund has launched India Tiger Fund which is infrastructure based fund and has given an absolute return about 60% in just a year. Tata Mutual Fund has launched Infrastructure Fund which is infrastructure based fund and has given an absolute return about 20% just within the period of eight months.

RELIANCE TAX SAVER (ELSS) FUND

This is the first fund of its own category from the Reliance Mutual Fund in its working of over ten years. Objective of the Fund The Reliance Tax saver (ELSS) Fund is an open ended equity linked savings fund. The primary objective of this fund is to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments and offer tax benefits under Section 80C of the Income Tax Act, 1961. The 3 Way Advantage 1. Tax Savings Investment in this fund would enable the investor to avail the benefits under Clause (XIII) of Sub-section (2) of Section 80C of the Income Tax Act, 1961. Investment made in the scheme up to Rs. 1 lakh by the eligible investor being an Individual or a Hindu Undivided Family will qualify for deduction under this Section of the Act. Since it will be an income deduction, an investment of Rs. 1 lakh in this fund can shave off Rs. 33,660 from investors tax payable liability (assuming the investor is in the highest tax bracket). Moreover investor will receive tax free dividends. 2. Growth Potential Give your investments in a fund with an active investment strategy, which makes the most of the opportunities available in the
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equity markets. The experienced fund management team at Reliance Mutual Fund follows a disciplined approach to investment, focusing on minimizing risk by creating a well diversified portfolio. Proper asset allocation, Bottoms Up and Top Down stock selection and systematic use of derivatives are some of the tools the team uses to effectively maximize the growth potential of your investments. 3. Personal Accident Death Insurance Cover Accident Death Insurance Cover: All eligible investments would qualify for Personal Accident Death Insurance Cover up to the maximum cover of rs. 5 lakhs. (The term accident death would cover death occurring out of any Road or Rail accident only.) For Investment Amount Less than or equal to Rs. 10,000 Between Rs. 10,001 and Rs. 25,000 Between Rs. 25,001 and Rs. 50,000 Greater than Rs. 50,001

Level of Cover Rs. 50,000 Rs. 2,00,000 Rs. 3,00,000 Rs. 5,00,000

Long Term Perspective

Funds can be redeemed only after a minimum period of three years from the date of investment. The three year lock in period (as per Government Notifications) inculcates a discipline, which protects your money from short term market fluctuations. It also allows the Fund manager to plan your investment with a long term perspective. More Benefits 1. Systematic Investment Plan: Also available during the NFO 2. Greater Convenience: Through Systematic Withdrawal Plan, available after the 3-year lock-in period 3. Greater flexibility: through the Systematic Transfer Plan. However, the scheme can not become a transferor scheme before 3-years lock-in period 4. Switch Out Facility: Available after the 3-year lock-in period 5. Nomination facility

Benefit from our Experience

Think equity. Think Reliance Mutual Fund. With over a decade of experience in the equity markets, Reliance Mutual Fund today is a trusted name with over 4.5 lakh investors. We at Reliance Mutual Fund are committed to the growth of our investors, who have invested their faith in us. Reliance Tax Saver (ELSS) Fund
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Scheme Features Type An Open-ended Equity Linked Savings Scheme. 80-100% in equity and equity related securities. Investment Pattern Upto 20% in Debt and Money Market Instruments. The primary objective of the scheme is to generate long-term capital appreciation from a portfolio that is invested Investment Objective predominantly in equity and equity related instruments. Net Asset Value Calculated & declared every working day Growth Option Plans / Options Dividend Pay-out Option and Dividend Reinvestment Option The minimum amount for all category of investors is Rs. 500/and in multiples of Rs. 500 thereafter. There is no cap on the Application Amount maximum amount. However investments only upto Rs. 1 lakh by the eligible investor in the scheme will qualify for deduction under the Act. Min. Additional Minimum additional purchases of Rs. 500. Investment Portfolio Disclosures Half-yearly Entry Load During New Fund Offer: NIL Exit Load During New Fund Offer: NIL Contingent Deferred NIL Sales Charge Unit holders will have the flexibility to alter the allocation of their investments among the scheme(s) offered by the Mutual Fund, in order to suit their changing investment needs, by easily switching between all the scheme(s)/plans/options of the Inter-Scheme Switch Mutual Fund, after the statutory lock-in period of 3 Years. No load applicable for switches between the equity schemes. However, differential load shall be charged for switching from Reliance Index Fund and switching to Reliance NRI Equity Fund. Unit holders will have the flexibility to alter the allocation of their investments among the scheme(s) offered by the Mutual Inter Plan/Inter Fund, in order to suit their changing investment needs, by easily Option Switch switching between all the scheme (s)/plans/options of the Mutual Fund, after the statutory lock-in period of 3 Years. Redemption Cheques Will be allowed only after the expiry of the lock in period of 3 Issued years. Minimum Will be allowed only after the expiry of the lock in period of 3 Redemption Amount years.
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Recurring Investment Plan (RIP) Cut off time Regular investment option for corporate employees Regular withdrawal Plan (RWP) Trigger Facility Switch Facility Systematic Transfer Plan / Dividend Transfer Plan Nomination Facility Mode of Holding Benchmark Index Switching Option

Available 3:00 p.m. on working days as defined in the Offer Document Available Available. Only after the expiry of the lock in period of 3 years. Value & NAV Trigger to introduce a Stop loss or a Gain Cap. Available only after the expiry of the lock in period of 3 years. Available after the statutory lock-in period of 3 Years. Available. However, the scheme cannot become a transferor scheme before 3 year lock-in-period. Available Single, Joint or Anyone or Survivor BSE 100 Available only after the expiry of the lock in period of 3 years. AMC Fees 1.25% Operational Expenses 0.25 % Marketing Expenses 1.00 % Total 2. 50% The above expenses are estimates only and are subject to change as per actual. Expenses on an ongoing basis will not exceed the maximum limits as may be specified by SEBI Regulations from time to time. Please read the offer document for details. For Subscriptions received at the DISC's within the cut-off timings and considered accepted for that day, the units will be allotted on the T day. Where the T day is the transaction day, provided the application is received within the cut-off timings for the transaction day. i)Purchases: In respect of valid applications received upto 3 p.m. by the Mutual Fund alongwith a local cheque or a demand draft payable at par at the place where the application is received, the closing NAV of the day on which application is received shall be applicable. In respect of valid applications received after 3 p.m. by the Mutual Fund alongwith a local cheque or a demand
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Recurring Expenses

Allotment of Units Applicable NAV

draft payable at par at the place where the application is received, the closing NAV of the next business day shall be applicable. ii)Redemptions: In respect of valid applications received upto 3 p.m. by the Mutual Fund, same day's closing NAV shall be applicable. In respect of valid applications received after 3 p.m. by the Mutual Fund, the closing NAV of the next business day shall be applicable. Accident Death Insurance Cover: All eligible investments would qualify for Personal Accident Death Insurance Cover up to the maximum cover of Rs. 5 lakh. (The term accidental death would cover death occurring out of any Road or Rail accident only). (Please read the terms & conditions carefully before investing).hay I am mayank solanki and who ar The insurance cover will be linked to the investment value of the individual (at NAV related prices) & will not be linked to the capital appreciation on his investment. i.e.: if his capital appreciates on account of market conditions, his insurance Special Benefit cover will not change. Under this Scheme Insurance Cover For investment amount Level of Cover Less than or equal to Rs 50,000 Rs 10,000 Between Rs 10,001 to Rs 2,00,000 Rs 25,000 Between Rs 25,001 to Rs 3,00,000 Rs 50,000 Greater than Rs 50,001 Rs 5,00,000 1. Investment in this fund would enable you to avail the benefits under clause (xiii) of Sub-section (2) of Section 80C of the Income-tax Act, 1961. Investment made upto Rs 1 lakh by the eligible investor being an Individual or a Hindu Undivided Family in the scheme will qualify for deduction under this Section of the Act. Hay I am mayank solanki and who are you 2. Dividends received will be absolutely TAX FREE in the hands of investors. Hay I am mayank solanki an 3. The dividend distribution tax (payable by the AMC) for equity schemes is also NIL. Hay I am maya 4. Attractive Capital Gains Tax on Equity Schemes, shown as
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Tax Benefits

under: Type of Long term Capital Short term Capital Scheme Gains Gains Equity Nil *10% Schemes *plus surcharge & education cess PS: STT is levied at the time of redemption of units. It is applicable only in Equity Funds. The above should not be construed to be tax advice and the same is subject to any change that may be affected in the Act or any guidelines /amendments /rules /clarifications issued in respect thereof from time to time.

GLOSSARY

Account Statement

A document issued by the mutual fund, giving details of transactions and holdings of an investor. Adjusted NAV (Total Return) The net asset value of a unit assuming reinvestment of distributions made to the investors in any form. Advisor Your financial consultant who gives professional advice on the fund's investments and who supervise the management of its assets.

Age of Fund The time elapsed since the launch of the

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fund. Alpha Coefficient It is the excess return of the fund above risk adjusted market return, given its level of risk as measured by beta. An investment with a positive alpha indicates that the fund has performed better than expected, given its beta. And a negative alpha indicates that the fund has under performed.

American Depository Receipt (ADR) A security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. ADRs are issued to offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. The first ADR was issued in 1927. ADRs are listed on the NYSE, AMEX, or NASDAQ.

Amortization

A method of equated monthly payments over the life of a loan. Payments usually are paid monthly but can be paid annually, quarterly, or on any other schedule. In the early part of a loan, repayment of interest is higher than that of principal. This relationship is reversed at the end of the loan.

Annual Return

The percentage of change in net asset value over a year's time, assuming reinvestment of distribution such as dividend payment and bonuses.

Appreciation

When an investment increases in value, it appreciates. For example, equity share whose price goes from Rs. 20/- to Rs. 25/- has appreciated by Rs. 5/-.

Application Form

Form prescribed for investors to make applications for subscribing to the units of a fund.

Arbitrage
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The practice of buying and selling an interlisted stock on different exchanges in order to profit from

minute differences in price between the two markets.

Asset

Property and resources, such as cash and investments, comprise a person's assets; i.e., anything that has value and can be traded. Examples include stocks, bonds, real estate, bank accounts, and jewellery.

Asset allocation

When you divide your money among various types of investments, such as stocks, bonds, and short-term investments (also known as "instruments"), you are allocating your assets. The way in which your money is divided is called your asset allocation. Asked or Offering Price The price at which a mutual fund's shares can be purchased. The asked or offering price means the current net asset value (NAV) per share plus sales charge, if any. For a no-load fund, the asked price is the same as the NAV.

Asset Allocation Fund

A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change. Automatic Investment Plan Under these plans, the investor mandates the mutual fund to allot fresh units at specified intervals (monthly, quarterly, etc.) Against which the investor provides postdated cheques. On the specified dates, the cheques are realized by the mutual fund and on realization, additional units are allotted to the investor at the prevailing NAV.

Automatic Reinvestment

A service offered by most mutual funds whereby income, dividends and capital gain distributions are automatically invested into the fund by buying additional shares and
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thus building up holdings through the effects of compounding.

Annualised Return

This is the hypothetical rate of return, if the fund achieved it over a year's time, would produce the same cumulative total return if the fund performed consistently over the entire period. A total return is expressed in a percentage and tells you how much money you have earned or lost on an investment over time, assuming that all dividends and capital gains are reinvested. Average Cost Method A method of finding out the cost per unit by adding up all the costs involved in purchasing all the units of investment and then dividing the sum by the total number of units.

Average Credit Quality

The composite indicator of the credit quality of the scheme's portfolios. It is an average of each debt instrument's credit rating, weighted by the instruments relative weight in the portfolio. For these calculations, Government of India securities, cash and call money instruments are taken as AAA credit quality and non-rated debt instruments are taken as having bbb credit quality. Back End Load The difference between the NAV of the units of a scheme and the price at which they are redeemed. The difference is charged by the fund.

Balance Sheet of a A financial statement showing the company's assets, liabilities and

nature and amount shareholders' equity.

Balanced Fund

A mutual fund that maintains a balanced portfolio, generally 40% bonds and 60% equity. Balance Maturity Tenure of a Scheme In the case of close-ended schemes, the balance period till the redemption of the scheme.

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Barter

The exchange of goods and services for other goods and services without the use of money.

Basis Point

A phrase used to describe differences in bond yields, with one basis point representing one-hundredth of a percentage point. Thus if bond x yields 8.5 per cent and bond y 8.75 per cent, the difference is 25 basis points.

Bear Market

Period during which investors are on a selling spree and the share prices are going down.

Benchmark

A parameter with which a scheme can be compared. For example, the performance of a scheme can be benchmarked against an appropriate index.

Beta

A measure of the relative sensitivity of a stock or mutual fund to the market. The higher the beta, the more volatile (or more sensitive) the stock or fund is considered to be relative to the market as a whole. The BSE Sensex is assigned a beta of 1. Bid or Sell Price The price at which a mutual fund's shares are redeemed (bought back) by the fund. The bid or redemption price means the current net asset value per share, less any redemption fee or back-end load.

Blue Chip A share in a large, safe, prestigious of the highest class among stock market investments. A company would be called thus by being well-known, large paid-up capital, a good track record of dividend and skilled management.

company, blue-chip having a payments

Board of Directors

A committee elected by the shareholders of a company, empowered to act on their behalf in the
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management of company affairs. Directors are normally elected each year at the annual meeting.

Bond

An interest-bearing promise to pay a specified sum of money -- the principal amount -- due on a specific date. Bond Funds Registered investment companies whose assets are invested in diversified portfolios of bonds primarily fixed income securities.

Bond Rating

System of evaluating the probability of whether a bond issuer will default. CRISIL, ICRA, CARE and other rating agencies analyze the financial stability of both corporate and state government debt issuers. Ratings range from AAA (extremely unlikely to default) to d (likely to default). Mutual funds generally restrict their bond purchases to issues of certain quality ratings, which are specified in their prospectus.

Bonus

Additional units allotted to investors on the basis of their existing holdings. Basically, there is a split of existing units into more than one unit resulting in the reduction of the NAV per unit.

Broker

One who guides the investors on one or more investments and facilitates the process of investment. A broker is a member of a recognized stock exchange who buys and sells or otherwise deals in securities.

Brokerage

The fee payable to a broker for acting as an intermediary in a transaction. For example, brokerage is payable by a fund for getting fresh investments from investors.

BSE Index

An index reflecting the stock prices of 30 companies listed on the Bombay Stock Exchange (BSE) which is
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taken to be representative of the stock market movement.

Bull Market

Period during which the prices of stocks in the stock market keep continuously rising for a significant period of time on the back of sustained demand for the stocks.

Capital

This is the amount of money you have invested. When your investing objective is capital preservation, your priority is trying not to lose any money. When your investing objective is capital growth, your priority is trying to make your initial investment grow in value.

Capital Appreciation

As the value of the securities in a portfolio increases, a fund's net asset value (NAV) increases, meaning that the value of your investment rises. If you sell units at a higher price than you paid for them, you make a profit, or capital gain. If you sell units at a lower price than you paid for them, you'll have a capital loss. Capital Appreciation Fund A mutual fund that seeks maximum capital appreciation through the use of investment techniques involving greater than ordinary risk, such as borrowing money in order to provide leverage and high portfolio turnover.

Capital Gains

The difference between an asset's purchased price and selling price, when the difference is positive. A capital loss would be when the difference between an asset's purchase price and selling price is negative.

Capital Gains Distributors

Payments (usually annually) to mutual fund shareholders of gains realized on the sale of portfolio securities. Capital Growth A rise in market value of a mutual fund's securities, reflected in its NAV per share. This is a specific long-term objective of many mutual funds. Capital loss realized when an
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instrument or asset is sold at a price below its cost.

Capital Market

The market where capital funds, debt (Bonds) and equity (Stocks) are traded.

Cash & Other Category

A mutual fund asset allocation theory that includes net cash, short-term securities, and any other securities (such as options) not included in other asset allocation categories. Callable Bond A bond which the issuer is permitted or required to redeem before the stated maturity date at a specified price, usually at or above par, by giving notice of redemption in a manner specified in the bond contract.

CDSC

Contingent Deferred Sales Charge (CDSC), a charge imposed when the units are redeemed within the first four years of unit ownership. The SEBI (Mutual Funds) Regulations, 1996, direct that a CDSC may be charged only for the first four years after purchase and mandates the maximum amount that can be charged in each year.

Certificate of Deposit

These are issued by banks in denominations of Rs. 5 lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year. Closed-Ended Mutual Fund A mutual fund that offers a limited number of shares. They are traded in the securities markets. Price is determined by supply and demand. Unlike open-ended mutual funds, closed-ended funds do not redeem their shares.

Collateral Security

This is extra security provided by a borrower to back up his/her intention to repay a loan.
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Common Stocks

Stocks represent a share in the ownership of a particular company. If the company does well, the value of each share generally goes up. Although common stocks have a history of long-term growth, their prices fluctuate based on changes in a company's financial condition and on overall market and economic conditions.

Commercial Paper

A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India Corporates, Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can issue these notes. It is generally companies with very good ratings which are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular duration is 90 days. Companies use CPs to save interest costs.

Commission

The broker's or agent's fee for buying or selling securities for a client. The fee is usually based on a percentage of the transaction's market value.

Compliance Officer

Officer appointed by the AMC to comply with regulatory requirement and to redress investor grievances. Compounding When you deposit money in a bank, it earns interest. When that interest also begins to earn interest, the result is compound interest. Compounding occurs if bond income or dividends from stocks or mutual funds are reinvested. Because of compounding, money has the potential to grow much faster. Consideration The 'consideration' is the total purchase or sale amount associated with a transaction. The amount you 'pay' or 'receive'. It may also be the basis for working out the commission, taxes and any other charges you are asked to pay.
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Continuous Offer

Offer of the units when the scheme becomes open ended, after closure of the initial offer. The scheme became open ended on January 1, 1998

Convertible Bond

A corporate bond, usually a junior subordinated debenture, which can be exchanged for shares of the issuer's common stock.

Convexity

A mathematical concept that measures the sensitivity of the market price of interest- bearing bonds to changes in interest rate levels. See also duration.

Corpus

The total amount of money invested by all the investors in a scheme.

Correlation Measures

Measures that show the validity of a comparison to a benchmark index based on the historical relationship between portfolio returns and index returns. See r"2". See also volatility measures. Cost of Churning/Turnover Cost The portfolio of a scheme changes from time to time. The rate of change depends on the style of the fund manager. Such portfolio changes have associated costs of brokerage, custody fees, transaction fees and registration fees, which lower the returns. These costs comprise the cost of churning.

Coupon The term is used colloquially to refer to Coupon Rate

a security's interest rate.

The annual rate of interest payable on a debt security expressed as a percentage of the principal amount.

Currency Fluctuation Changes in the value of a currency in

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relationship to other major currencies. Currency fluctuations can have a significant effect on the value of international mutual funds.

Currency Risk

The risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.

Current Income

Monies paid during the period an investment is held. Examples include bond interest and stock dividends. Current Load Load structure applicable currently. Funds keep revising the load structures from time to time.

Current Market Value

The amount a willing buyer will pay for a bond today, which may be at a premium (above face value) or a discount (below face value).

Current yield

The ratio of interest to the actual market price of the bond stated as a percentage: Annual Interest Current Yield = Current Market Value

Custodian

The bank or trust company that maintains a mutual fund's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities but has no role in portfolio management. For reliance capital asset management, deutsche bank ac, Mumbai, is custodian to the schemes, or any other custodian who is appointed by the trustee.

Cut Off Time

In respect of all mutual funds regulated by SEBI, fresh subscriptions and redemptions are processed at a particular NAV. Every fund specifies a cut-off time in respect of fresh subscriptions and redemption of units. All requests received before
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the cut-off times are processed at that day's NAV and thereafter at the next day's NAV.

Date of Redemption

The date specified for the redemption of a scheme. No such date is specified for an openended scheme. Debt /Income Funds Funds that invest in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers. Although these funds are less volatile, the underlying investments carry a credit risk. Comparatively, these funds are the least risky and are preferred by risk-averse investors.

Deficit

The shortfall between government revenues and budgetary spending in any given year. A surplus occurs when annual revenues exceed expenditures.

Derivative

A derivative is an instrument whose value is derived from the value of one or more underlying security, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. Designated Investor Service Centres Any location, as may be defined by the asset management company from time to time, where investors can tender the request for subscription, redemption, switching of units, or any other request.

Depository as defined in the

Depository depositories act, 1996 (22 of 1996).

Diversification

Diversification is the concept of spreading your money across different types of investments and/or
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issuers to potentially moderate your investment risk.

Dividend Income distributed by the scheme on the Dividend Distribution Tax

units.

A tax payable by a debt oriented mutual fund (a mutual fund that invests more than 50% of its portfolio in the debt market) before dividend is distributed to the unit holders. The current dividend distribution tax is 20% plus the 10% surcharge Dividend Frequency The periodicity of dividend payout of a scheme. This is especially valid in the case of an income/debt scheme. Dividend History The track record of dividends declared by a fund till date. Dividend Per Unit Total amount of dividend declared by a fund for a scheme divided by total number of units issued to all the investors. Dividend Period The period for which the dividend is declared.

Dividend Plan

In a dividend plan, the fund pays dividend from time to time as and when the dividend is declared.

Dividend Reinvestment

In a dividend reinvestment plan, the dividend is reinvested in the scheme itself. Hence instead of receiving dividend, the unit holders receive units. Thus the number of units allotted under the dividend reinvestment plan would be the dividend declared divided by the ex-dividend NAV.

Dividend Warrant An instrument issued by companies/

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mutual funds to an investor for the purpose of payment of dividends

Dividend Yield

The dividend earned per unit of a scheme at the prevailing per unit price.

Duration

Duration estimates how much a bond's price fluctuates with changes in comparable interest rates. If rates rise 1.00%, for example, a fund with a 5-year duration is likely to lose about 5.00% of its value. Other factors also can influence a bond fund's performance and share price. A bond fund's actual performance may differ.

Endorsement

Assigning or transferring a lien to another person is accomplished through the use of an endorsement. The words "pay to the order of" and then the name of the person to whom the lien is being assigned to, is written. If there is not enough space on the original note to write an endorsement, it is written on a separate piece of paper that is permanently affixed to the original note. This is called an allonge.

Entry Load Load on purchases/ switch-out of units. Equity Schemes

Schemes where more than 50% of the investments are done in equity shares of various companies. The objective is to provide capital appreciation over a period of time.

Exchange Priviledge

The right to transfer investments from one fund into another, generally within the same fund group, at nominal cost.

Exchange Rate The price at which one currency Ex-dividend Rate The day that a fund's board of directors
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trades for another.

declares the amount of income or capital gain to be distributed to shareholders and deducts that amount from the fund's net asset value. Expense Ratio Annual percentage of fund's assets that is paid out in expenses. Expenses include management fees and all the fees associated with the fund's daily operations.

Exit Load Load on redemptions dividend switch-

out of units. Face Value

The face value is the term used to describe the value of a bond in terms of what the company which issued the bond will actually repay when the loan matures. It's sometimes described as nominal or par value.

FII

Foreign Institutional Investors, registered with SEBI under the securities and exchange board of India (foreign institutional investors) regulations, 1995.

Fiscal Year

An accounting period consisting of 12 consecutive months. Fund a mutual fund is a trust under the Indian trust act. Each fund manages one or more schemes.

Fund Category

Classification of a scheme depending on the type of assets in which the mutual fund company invests the corpus. It could be a growth, debt, balanced, gilt or liquid scheme

Fund Family All the schemes, which are managed by Fund Management Costs

one mutual fund.

The charge levied by an AMC on a mutual fund for managing their funds.

Fund Manager The person who makes all the final

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decisions regarding investments of a scheme.

Gilt Funds

Funds, which invest only in government securities of different maturities. With virtually no default risk, they are very secure. While returns are steady and secure, they are lower than those from other debt funds. Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years. Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations (OMO). OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels.

Global Depository Receipt

Similar to the ADR described above, except the GDR is usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990. They are shares without voting rights. The ratio of one depository receipt to the number of shares is fixed per scrip but the quoted prices may not have strict correlation with the ratio. Any foreigner may purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising this right.

Growth

Fund's growth funds are designed to pursue capital appreciation over the long-term. Some growth funds are broad-based, meaning that they have a wide range of stocks and industries in which they can invest. Others have a narrower focus - for example, they may invest in a particular type of stock,
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such as small-cap or cyclical stocks, or use a specialized approach to stock selection, such as investing only in stocks that are currently underpriced. Growth funds are more volatile than more conservative income or money market funds and generally reflect changes in market conditions and other company, political, and economic news.

Growth Fund

A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in common stocks with significant growth potential. Growth stocks of companies that have shown or are expected to show rapid earnings and revenue growth. Growth stocks have relatively more risk than other conventional forms of investment.

Income Fund

A mutual fund that primarily seeks current income rather than growth of capital. It will tend to invest in stocks and bonds that normally pay high dividends and interest.

Index Fund

A passively managed, limited-expense (advisor fee no higher than 0.50%) fund designed to replicate the performance of an unmanaged stock index on a reinvested basis.

Inflation

When the price of goods and services rises, the result is called inflation. This means that things you buy today at one price are likely to cost more in the future.

Inflation Risk

The chance that the value of assets or income will be diminished as inflation shrinks the value of a currency. Initial Offer/Initial Issue Offer of reliance income fund units during the initial offer period.

Initial Offer Price

The price at which units of a scheme are offered in its Initial Public Offer (IPO).
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Initial Offer Period

The dates on or the period during which the initial subscription to units of the scheme can be made i.e. December 20, 1997 to December 27, 1997 in the case of reliance income fund.

Institutional Investor

An institutional investor is a professional money manager whose job it is to put money into shares and other assets on behalf of private investors who entrust them with money via their pension and life insurance funds.

Interest

The amount paid by a borrower as compensation for the use of borrowed money. This amount is generally expressed as an annual percentage of the principal amount. Interest Rate The annual rate, expressed as a percentage of principal, payable for use of borrowed money. International Funds / Emerging Market Funds Funds investing in assets or bonds/shares of companies from emerging economies. These are not permissible in India due to regulations against investing abroad. Most of the schemes of Foreign Institutional Investors (FII's) investing in India are funds of this type.

In the Money Securities

An option contract on a stock whose current market price is above the striking price of a call option or below the striking price of a put option. For example, a call option on ABC fund at a striking price of 100 would be "in the money" if ABC fund were selling at 10"2", and a put option with the same striking price would be "in the money" if ABC were selling at 98. Investment Grade or Investment Grade Bond The broad credit designation given to corporate and municipal bonds which have a high probability of being paid and minor, if any, speculative features. Bonds rated BAA and higher by Moodys investors service or BBB and higher by
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Standard & Poor's are deemed by those agencies to be "Investment Grade." Investment Management Agreement (IMA) The agreement entered into between reliance capital trustee co. Limited and reliance capital asset management limited by which reliance capital asset management ltd. Has been appointed the investment manager for managing the funds raised by RCMF under the various schemes, and all amendments thereof. Investment Objective The identification of attributes associated with an investment or investment strategy, designed to isolate and compare risks, define acceptable levels of risk, and match investments with personal goals.

Issue Date The date on which a security is deemed Issuer

to be issued or originated.

A state, political subdivision, agency or authority that borrows money through the sale of bonds or notes. Issued Share Capital This is the total number of shares a company has made publicly available multiplied by the total nominal value of the shares. A company may have 10 million shares in issue, each with a nominal value of Rs. 1. So the issued share capital is Rs. 10 million.

Junk Bond A speculative bond with higher credit Launch Date

risk.

The date on which a scheme is first made open to the public for subscription.

Lessee

The person who makes lease payments. He has right of possession and use of a property under the terms of
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a lease.

Lessor person who receives lease

The payments. He leases property.

LIBOR

Libor stands for London Inter Bank Offer Rate. It's the rate of interest at which banks offer to lend money to one another in the so-called wholesale money markets in the city of London. Money can be borrowed overnight or for a period of in excess of five years. The most often quoted rate is for three month money. '3 month libor tends to be used as a yardstick for lenders involved in high value transactions. They tend to quote rates as libor. So if 3 month libor were (say) six per cent, a bank may choose to lend to another bank at (say) 6 and a quarter per cent. E.g. A quarter per cent above 3 month libor.

Lien

A type of security instrument (i.e., a tax lien), placed against property, making it security for the payment of a debt, judgment, mortgage, or taxes. If the lien is not paid, the lien holder has the right to confiscate the property in order to recover the money that was loaned.

Liquidity

The ability to buy or sell an asset quickly or the ability to convert to cash quickly Liquid Funds/Money Market Funds Funds investing only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit. The objective is to provide liquidity and preserve the capital.

Load

A charge that may be levied as a percentage of NAV at the time of entry into the scheme/plans or at the time of exiting from the scheme/plans.

Local Cheque A cheque handled locally and drawn on

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any bank, which is a member of the banker's clearing house located at the place where the application form is submitted.

Lock in Period in

The period after investment fresh units during which the investor cannot redeem the units.

Management Fee

Money paid by a mutual fund to its investment manager or advisor for overseeing the portfolio. A management fee is usually between one-half and one percent of the fund's net asset value. Margin Trading Securities can be paid for in cash or a mix of cash and some borrowed funds. Buying with borrowed funds permits the investors to buy a security at a good price at a good time. This act of borrowing money from a bank or a broker to execute a securities transaction is referred to as using "margin". As of now in India, only brokers are allowed to provide the margins. Traders can put up part of the payment. Brokers borrow the remaining funds from a moneylender with whom they would lodge the shares as collateral for the loan. The safety of this mechanism rests on the risk management capabilities of both the stockbroker and the lender. However, recently SEBI has proposed to RBI that banks could lend to exchanges on margin trading and the exchanges could provide assistance to brokers. When this happens, the volumes should increase in the markets making them more vibrant.

Market

A public place where the buying and selling of all types of bonds, stocks and other securities takes place. A stock exchange is a market.

Market Price

The price at which the units of a scheme are quoted on a stock exchange.

Market Risk

The risk that the price of a security will rise or fall due to changing economic, political, or market conditions,
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or due to a company's individual situation.

Marketability or difficulty with which

The ease securities can be sold in the market.

Maturity or Maturity Date

The date upon which the principal of a security becomes due and payable to the security holder.

Maturity Value

The amount (other than periodic interest payment) that will be received at the time a security is redeemed at its maturity. On most securities the maturity value equals the par value. MIBOR Stands for Mumbai Inter Bank Offered Rate and is closely modeled on the LIBOR. Currently there are two calculating agents for the benchmark - Reuters and the National Stock Exchange (NSE). The NSE MIBOR benchmark is the more popular of the two and is based on rates polled by NSE from a representative panel of 31 banks/institutions/primary dealers Minimum Additional Investment The minimum amount, which an existing investor should invest for purchasing fresh units.

Minimum Balance

Minimum amount specified by a fund that should remain invested in a scheme after any redemption.

Minimum Subscription

The minimum amount required to be invested to purchase units of a scheme of a mutual fund.

Minimum Withdrawal

The smallest sum that an investor can withdraw (get redeemed) from the fund at one time.

Money Market Fund

A mutual fund that aims to pay money market interest rates. This is accomplished by investing in
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safe, highly liquid securities, including certificates of deposit, commercial paper, and government securities. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety. Money Market Instruments Commercial Paper, Treasury Bills, GOI securities with an unexpired maturity up to one year, call money, certificates of deposit and any other instrument specified by the reserve bank of India.

Mortgage

A legal instrument given by a borrower to the lender entitling the lender to take over pledged property if conditions of the loan are not met.

Moving Averages

The average price of a mutual fund calculated periodically over some designated period of time and plotted on a chart against actual price. The effect of a moving average is to minimize short-term price fluctuations and highlight long-term price fluctuations.

Mutual Fund

An investment that pools shareholders money and invests it toward a specified goal. The funds are invested by a professional investment manager usually called the AMC (Asset Management Company).

Mutual Fund Regulations

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as amended up to date and such other regulations, as may be in force from time to time, to regulate the activities of the mutual fund.

No-load Scheme A scheme where there is no initial entry

or exit load. NAV

Net Asset Value of the units in each plan of the scheme is calculated in the manner provided in this offer
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document or as may be prescribed by regulations from time to time. The NAV will be computed upto four decimal places. NAV formula : Market/Fair Value of Scheme's Investments (+) Receivables (+) Accrued Income (+) Other Assets (-) Accrued Expenses (-) Payables (-) Other Liabilities Number of Units Outstanding

NAV Change

The difference between today's closing net asset value (NAV) and the previous day's closing net asset value (NAV).

NAV Change %

The percentage change between today's closing net asset value (NAV) and the previous day's closing net asset value (NAV).

Net Worth

A person's net worth is equal to the total value of all possessions, such as a house, stocks, bonds, and other securities, minus all outstanding debts, such as mortgage and revolving credit lines.

Net Yield

Rate of return on a security net of outof-pocket costs associated with its purchase, such as commissions or markups. Non Performing Investments Part of the portfolio investment of a debt fund which is not making interest payment or principal amount repayments in time.

Nifty An index of prices of a group of fifty NRI Non-Resident Indian OCB Overseas
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stocks listed on the NSE.

Corporate

Bodies,

firms

and

societies which are held directly or indirectly, but ultimately, to the extent of at least 60% by NRIs and trusts in which at least 60% of the beneficial interest is held irrevocably by NRIs. Offer Document or Prospectus The official document issued by mutual funds prior to the launch of a fund describing the characteristics of the proposed fund to all its prospective investors. It contains information required by the Securities and Exchange Board of India, such as investment objective and policies, services, and fees. Individual investors are encouraged to read and understand the fund's prospectus. Offering Period The period during which the initial offer to subscribe for the units of a scheme is open.

Offer Price

The lowest price that a seller is willing to accept from a prospective buyer. In the case of a mutual fund with a sales charge, this price is the net asset value (NAV) plus the sales charge. In the case of no-load funds, it is the NAV.

Offering Date

The date on which a distribution of stocks or bonds will first be available to the public. Open-Ended Schemes/ Funds A fund whose units are redeemable at any time at asset value, except for funds that no longer accept new unitholder, new units are offered continuously.

Opening NAV

The NAV disclosed by the fund for the first time after the closure of an IPO.

Option

A device used to speculate or hedge in securities markets. Buying a "call" option gives an investor the right to buy 100 shares of a stock at a certain price within a specified time; buying a "put" option allows an investor to sell a stock under
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the

same

conditions.

Opportunity Risk

The risk that a better opportunity may present itself after you have already committed your money elsewhere. Plans The scheme offers five plans, growth plan and four dividend plans viz. Monthly, quarterly, half yearly and annual dividend plans.

PIO Person of Indian Origin. Portfolio

The list of securities owned by the Mutual Fund. This list may be long, for example, Fidelity Magellan, with over 2000 stocks, or relatively short, for example, Sequoia, with only 16 stocks.

Portfolio Churning

Switches between different stocks in the market, keeping in view the market conditions, in order to give unit holders a better yield.

Premium

The amount by which a bond/ or a stock (in case of a IPO) sells above its par (face) value.

Price of Units

Price offered by a mutual fund for repurchase or sale of a unit on a daily basis. Price/earnings ratio this is the price of a stock divided by its earnings per share. This ratio gives an investor an idea of how much they are paying for a particular company's earning power. A trailing P/E refers to a ratio that is based on earnings from the latest year, while a forward P/E uses an analyst's forecast of next year's earnings. For instance, a stock selling for Rs. 20 a share that earned re. 1 last year has a trailing P/E of 20. If the same stock has projected earnings of Rs. 2 next year, then it has a forward P/E of 10.
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Price Stability

Price stability protects the original amount you put into an investment. A mutual fund's price stability is seen in changes in its net asset value over time. Primary Market (New Issue Market) The market on which newly issued securities are sold, including government security auctions and underwriting purchases of blocks of new issues, which are then resold.

Prospectus

An official document that each investment company must publish, describing the mutual fund and offering its shares for sale. It contains information that has been mandatory required by SEBI.

Purchase Price

Purchase price to the investor of units of any of the plans computed in the manner indicated in this offer document.

Rate of Return

The total proceeds derived from the investment per rupee initially invested. Proceeds must be defined broadly to include both cash distributions and capital gains. The rate of return is expressed as a percentage.

Ratings

Designations given by credit rating agencies indicating relative credit quality as compared to other funds.

Record Date

The date the fund determines who its unit holders are; "unit holders of record" who will receive the fund's income dividend and/or net capital gains distribution.

Recurring Sales Expenses

The Asset Management Company may charge the fund a fee for operating its schemes, like trustee fee, custodian fee, registrar fee, transfer fee etc. This fee is called
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recurring expense and is expressed as a percentage of the scheme's average net assets. The recurring expenses are subject to certain limits as per the regulations of SEBI. Weekly Average Net Assets (Rs.) First 100 Crores Next 300 Crores Next 300 Crores Balance Assets

Equity Schemes 2.50% 2.25% 2.00% 1.75%

Debt Schemes 2.25% 2.00% 1.75% 1.50%

Redemption

The paying off or buying back of units of a mutual fund / bond by the issuer.

Redemption Fee

A fee charged by a limited number of funds for redeeming, or buying back, fund units.

Redemption Price

The price at which a mutual fund's units are redeemed (bought back) by the fund. The redemption price is usually equal to the current NAV per unit.

Refund

The act of returning money to an investor by the fund. This could be on account of rejection of an application to subscribe units or in response to an application made by the investor to the fund to redeem units held by him.

Registrar

Who have been appointed as the registrar; or any other registrar who is appointed by Asset Management Company.

Reinvestment Date

The date on which a share's dividend and/or capital gains will be reinvested (if requested) in additional fund shares.

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Reinvestment Privilege

A service that most mutual funds offer whereby a shareholder's income dividends and capital gains distributions are automatically reinvested in additional shares. See automatic reinvestment.

Relative Volatility

A ratio of a portfolio's standard deviation to the standard deviation of a benchmark index. See volatility measures. Repatriation Conversion Investor's Base Currency

of

Foreign

Currency

to

an

With Rupee Cost Averaging, you invest a fixed amount on a regular basis - regardless of the current market trends. The investor buys more shares when the price is low and fewer shares when the price is high; the overall cost is lower than it would be if a constant number of shares were bought at set intervals. Rupee-cost-averaging does not assure a profit or protect against a loss in a declining market. You must continue to purchase shares both in market ups and downs. The goal of rupee-cost-averaging is to attain a lower average cost per share.

REPO

Sale of securities with simultaneous agreement to repurchase them at a later date.

Repurchase

Buying back/ cancellation of the units by a fund on an ongoing basis or for a specified period or on maturity of a scheme. The investor is paid a consideration linked to the NAV of the scheme.

Repurchase Date/Period

In the case of close-ended schemes, the specified date on which or period during which the investor can redeem units held by him in the scheme before the maturity of the scheme.

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Repurchase Price

The price of a unit (net of exit load) that the fund offers the investor to redeem his investment.

Returns

The dividend and capital appreciation accruing to the investor on the investment held by him.

Reverse REPO with

Purchase of securities simultaneous agreement to sell them at a later date.

Risk Adjusted Returns

Generally, the expected returns from an investment are dependent on the risk involved in the investment. For the purpose of comparing returns from investments involving varying levels of risk, the returns are adjusted for the level of risk before comparison. Such returns (reduced for the level of risk involved) are called Risk - Adjusted Returns.

SAPs

Special purpose vehicles approved by the appropriate authority or the government of India.

Sale Price

The price at which a fund offers to sell one unit of its scheme to investors. This NAV is grossed up with the entry load applicable, if any.

Sales Charge

Fee on the purchase of new shares of a mutual fund. A sales charge is similar to paying a premium for a security in that the customer must pay a higher offering price. Sometimes called a load.

Scheme

A mutual fund can launch more than one scheme. With different schemes, in spite of there being a common trust, the assets contributed by the unit holders of a particular scheme are maintained and managed separately from other schemes and any profit/loss from the assets accrue only to the
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unit

holders

of

that

scheme

SEBI The Securities and Exchange Board of India. SEBI Regulations

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 or such other SEBI (MF) Regulations as may be in force from time to time and would include circulars, guidelines etc., unless specifically mentioned to the contrary.

Secondary Market

The market where the securities are traded i.e. purchased or sold after they have been initially offered to the public through a public offer in the primary market.

Sector Allocation

That portion of a fund which invests in narrowly defined segments of the economy, i.e. Utilities, healthcare services, telecommunications, etc.

Sector Funds

Sector Funds invest in the stocks of one specific sector of the economy, such as health care, chemicals, or information technology.

Security

Generally, an instrument evidencing debt of or equity in a common enterprise in which a person invests on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership.

Share Price

The value of one share in a listed company fund. With most funds, the NAV is calculated every day, because the value of a fund's securities changes every day in response to the movements of the stock, bond and money markets. For some funds, share price is calculated on an hourly basis.
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Share Holder

The owner of one or more shares of stock in a corporation. Shareholder rights can vary according to the articles of incorporation of the by-laws of a particular company.

Sharpe Ratio

The Sharpe Ratio measures the riskadjusted return of a fund. Simply put, the ratio measures the variability of ' excess returns' (defined by returns of the fund over the 'risk less' 91 day t-bill). Mathematically, the formula takes a fund's return in excess of a risk-free investment and divides this by the standard deviation of the returns. The higher the Sharpe Ratio, the better the fund.

Spread

The difference between the rates at which money is deposited in a financial institution and the higher rates at which the money is lent out. Also, the difference between the bid and ask price for a security.

Subsidy

A financial contribution by government (including any form of income or price support) that also confers a benefit to the recipient (i.e., producers of goods or services or buyers of goods). Many types of government practices constitute a financial contribution, including traditional forms of subsidies such as grants and loans, as well as foregone revenues such as tax credits. Switch Switching provides investors with an option to transfer the funds amongst different types of schemes or plans. Investors can opt to switch units between Dividend Plan and Growth Plan at NAV based prices. Switching is also allowed into/from other select open-ended schemes currently within the Fund family or schemes that may be launched in the future at NAV based prices. While switching between Debt and Equity Schemes, one has to take care of exit and entry loads. Switching from a Debt Scheme to Equity scheme involves an entry load while the vice versa does not involve
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an entry load. Systematic Investment Plan (SIP) Many mutual funds offer investment programs whereby unit holders can invest. The unit holders of the scheme can benefit by investing specific rupee amounts periodically, for a continuous period. The sip allows the investors to invest a fixed amount of rupees every month or quarter for purchasing additional units of the scheme at NAV based prices.

Systematic Withdrawal Plans Many mutual funds offer withdrawal programs whereby unit holders receive payments from their investments. These payments are usually drawn from the fund's dividend income and capital gain distributions, if any, and from principal only when necessary.

Systematic Transfer Program (STP) A plan that allows the investor to give a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another.

Standard Deviation

A statistical measurement of the dispersion of a fund's return over a specified time period. Investors may examine historical standard deviation in conjunction with historical returns to decide whether a fund's volatility would have been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater historical volatility. Standard deviation does not indicate the absolute performance, but merely indicates the volatility of its returns over time.

Takeover

A change in the controlling interest of a corporation. A takeover may be a friendly acquisition or a hostile bid. A hostile takeover is usually attempted through a public tender offer.

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Taxable Equivalent Yield

The interest rate return which must be received on a taxable security to provide the holder the same after-tax return as that earned on a tax-exempt security.

Term interest

The time during which payments will be made on a bond or certificate of deposit.

Total Return

Return on an investment, taking into account capital appreciation, dividends or interest, and individual tax considerations adjusted for present value and expressed on an annual basis.

Trade Date

The actual date on which your shares were purchased or sold. The transaction price is determined by the closing net asset value on that date.

Transaction Cutoff Timings Currently 2 p.m. on all working days. Transaction Day

A transaction day ( day 'T' commences after the previous working day's cut off time to the following working day's cut off time. Presently 'T' day commences after 2 p.m. of the previous working day and ends at Z p.m. of the following working day.

Transaction Slip

A brief form to be filled at the time of additional purchases or redemption.

Treasury Bills

Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days and 364 days. Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate
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debentures, bills of exchange and promissory notes.

Trustee

A person or a group of persons having an overall supervisory authority over the fund managers. They ensure that the managers keep to the trust deed that the unit prices are calculated correctly and the assets of the funds are held safely.

Trust Deed

The trust deed entered into on April 24, 1995 between the sponsor and the trustee, and any amendment thereof.

Trust Fund

The corpus of the trust, unit capital and all property belonging to and i or vested in the trustee.

Turnover

The extent to which the fund's portfolio is turned over during the course of a year. High turnover results in greater investment expenses and therefore in an erosion of the value of share assets.

Turnover Rate

A measure of the fund's trading activity calculated by dividing total purchases or sales of portfolio securities (whichever is lower) by the fund's net assets over a period of time.

Underwriter

The organisation that acts as the distributor of an initial offer share to broker/dealers and investors and undertakes to subscribe to any under-subscription of the offer.

Unit

The interest of the investors in any of the plans of the scheme which consists of each unit representing a share in the assets of the corresponding plan of the scheme.
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Unit holder A person who holds unit(s) under any Unit holder of Record

plan of the scheme.

Unit holders whose names appear on the unit holders register of the concerned plan/ (s) on the date of determination of dividend, subject to realisation of the proceeds towards subscription

Valuation

Calculation of the market value of the assets of a mutual fund scheme at any point of time.

Value Date

The date on which a foreign exchange transaction or a cash movement takes place. Can be used interchangeably with settlement date.

Value Stocks

Stocks that are considered to be undervalued based upon such ratios as price-to-book or price-toearnings (P/E). These stocks generally have lower price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth rates than growth stocks.

Vertical Integration

This is where a company merges or takes over other companies in the same supply chain. If a shoe manufacturer, takes over his supplier it would be vertical integration.

Volatility

In investing, volatility refers to the ups and downs of the price of an investment. The greater the ups and downs, the more volatile the investment.

Voluntary Plan

A flexible plan for capital accumulation, involving no specified time frame or total sum to be invested.
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Volatility Measures

Volatility measures the variability of historical returns. Relative Volatility, beta, and R"2" compare a portfolio's total return to those of a relevant market, represented by the benchmark index. Standard Deviation is calculated independent of an index.

Working Day

Any day, provided such day is not a Saturday or a Sunday any day on which banks in Mumbai and / or the Stock Exchange, Mumbai and National Stock Exchange are closed for transactions or a day on which sale and repurchase of units is suspended by the AMC or a day on which normal business could not be transacted due to storms, floods, bandhs, strikes etc., subject to modifications by AMC from time to time.

52 Week High

The highest market value of a unit (in terms of NAV) during the immediately preceding 52 weeks.

Week Low

The lowest value of a unit (in terms of NAV) during the immediately preceding 52 weeks

Yield

The percentage of return an investor receives based on the amount invested or on the current market value of holdings.

Yield Curve

The relationship at a given point in time between yields on a group of fixed-income securities with varying maturities -- commonly, treasury bills, notes, and bonds. The curve typically slopes upward since longer maturities normally have higher yields, although it can be flat or even inverted.

Yield to Maturity

Used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond is held to its maturity date. It takes into account purchase price, redemption value, time to maturity, coupon yield
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and the time between interest payments.

Zero-Coupon Bond

A bond where no periodic interest payments are made. The investor purchases the bond at a discounted price and receives one payment at maturity. The maturity value an investor receives is equal to the principal invested plus interest earned compounded semiannually at the original rate to maturity. Interest income from zero-coupon bonds is subject to taxes annually even though no payments will be made. 'Points above

GENERAL FACTS REGARDING MUTUAL FUND INDUSTRY

The size of Mutual Fund Industry in terms of money is Rs. 1,75,898 Crores whereas the size of Bombay Stock Exchange (BSE) in terms of money is about Rs. 20 lakh thousand Crores as on 31/07/2005. The size of Mutual Fund Industry of Rajasthan in terms of money is Rs. 1,100 crores approximately. The largest city of Rajasthan in terms of investment in Mutual Fund is Jaipur which has the corpus of Rs. 850 crores approximately. The largest investor of Mutual Fund from Rajasthan is Hindustan Zinc which has the portfolio of Rs. 1,100 crores i.e. equivalent of whole Rajasthan investment but it invests through its Head Office which is situated in Mumbai. The relationship of Stock Indices (i.e. Sensex, Nifty, Nifty Junior etc.) and Mutual Funds is such that if Stock Indices rise/fall, the NAVs will also rise/fall but in lesser proportion. The largest Asset Management Company (AMC) in terms of corpus is Unit Trust of India (UTI) amounting to Rs. 30,000 crores. The top Asset Management Companies (AMC) in terms of performance is Franklin Templeton Investment in diversified equity funds and Standard Chartered Mutual Fund in debt funds. The largest Mutual Funds in terms of corpus are Franklin India Flexi Cap Fund in diversified equity funds and Prudential Cash Fund in debt funds.

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The top Mutual Funds in terms of performance are shown in the following diagram:

Top Mutual Fund Diversified Equity Fund Reliance Growth Fund (since last I Year) Franklin India Blue chip Fund (since last 13 Years) Monthly Income Plan (MIP) HDFC Monthly Income Plan - Long Term Plan Franklin Templeton Monthly Income Plan

CONCLUSION
The report enlightened many facts, which were not known before. It also enlightened, where the Mutual Funds are lagging behind. The investors are of a mixed breed, some of them are risk averse and some are risk taking. The investors who are risk taking have adequate knowledge of mutual funds, but those who are risk averse either lacks knowledge or they have some misconception regarding the concept of mutual funds. The main problem was that there were more myths and fewer facts known to the investors. Like some of them were only aware of the equity oriented schemes offered by the companies and not about the Debt oriented schemes; so the perception that was in their mind was that mutual fund investment is a very risky game as it involves stock market. To some extent it is true that investment in mutual fund involves risk but not in all types of schemes that todays fund houses offer. The schemes that mutual fund companies are offering are so diversified that it suits the investment criteria of every investor. Let the investor be risk averse or risk taking or a combination of both there are schemes for everyone. There are a potentially large number of investors but they lack knowledge regarding the benefits of investing in a mutual fund. Every type of investment in this world involves risk, some has high risk and some has low risk. Mutual Fund investments have both types of plans (schemes); higher the risk higher is the returns and lower the risk-comparatively lower is the return. There are advantages and disadvantages in all kinds of investments. In the end let me finish by saying that during the training the market crossed the magical figure of 7,800 (BSE Sensex) for the first time but the Mutual Funds Scheme will definitely give returns in long term investment.
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The experience I gained from the training will help me to understand the market in a better manner in future.

BIBLIOGRAPHY WEBSITES

Standard Chartered Mutual Fund www.standardcharteredmf.com Franklin Templeton Mutual fund www.franklintempletonindia.com Fidelity Mutual Fund www.fidelity.co.in HSBC Mutual Fund www.hsbcinvestments.co.in ABN Amro Mutual Fund www.abnamro.com Association of Mutual Funds in India www.amfiindia.com Securities and Exchange Board of India (SEBI) www.sebi.gov.in Reliance Mutual Fund www.reliancemutual.com Prudential ICICI Asset Management Company www.pruicici.com HDFC Mutual Funds www.hdfcfund.com Unit Trust of India (UTI) Mutual Funds www.utimf.com Kotak Mahindra Mutual Funds www.kotakmutual.com www.mfea.com www.mutualfundindia.com www.moneycontrol.com SBI Mutual Fund www.sbimf.com Birla Sun Life Mutual Fund www.birlasunlife.com Tata Mutual Fund www.tatamutualfund.com Search Engine www.google.com

PRINTED LITERATURE
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Fact Sheets of various AMCs C.A. Final Study Material Reviews of Experts

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