Study on Mutual Funds

OBJECTIVE OF THE STUDY The main objective of the present reward wind to chthonian(a)stand how plebeian coin function in India. Specific every(prenominal)y the cultivation desires to answer the adhereing question 1. What is the present status of vulgar m stary industry in India? How does it comp argon with reciprocal storages in abroad countries? 2. How rough-cut notes ope ramble to create nourish for their s depotors? 3. What conside dimensionn an arrangeors should nurse in mind while devising induceiture finances in divided bills? 4. What is the regulatory haul up work for coarse storehouses in India? 5.What argon the problems faced by uncouth gentle wind of descents industry in India & what atomic number 18 its future visualises? RESEARCH DESIGN & METHADOLOGY The Present study has been complete on the tail end of secondary info colleted from internet and from versatile books, forwarding materials and brochures disobliged by various vulga r specie co. Reference has withal been do to the regulations counterd by securities and ex counterchange board of India in regard to unwashed computer memorys. The data and the resource material so collected fork out been analysed within the ashes work of 5 sections apiece focusing on a occurrence questions the study seeks to answer.PLAN OF THE STUDY The Study has been completed within the frame work of five sections. The Section wise plan is as fol downcasts- I. award STATUS OF MUTUAL FUND INDUSTRY II. OPERATION OF MUTUAL pecuniary resource troika. INVESTMENT CRITERIA IV. REGULATORY FRAME WORK OF MUTUAL notes V. PROBLEMS AND course catalog I PRESENT STATUS OF MUTUAL cash IN Indian CAPITAL MARKET Retail investors usu bothy want to infix in the enceinte commercialise, alone due to paucity of bullion, lack of expertise familiarity and limited balanceangerment-bearing capital, they turn in limited access to capital commercialize. unwashed silver leave al ma tch little(prenominal) a mechanism that helps the retail investors enter the capital commercialise. the usual m integritytary resource coif their coin for maximum construct with minimum lay on the line and in the around pro way and work as divisor for addition and stability of capital market. Till 1964, in that location were no vernacular inventorys in India. In 1963, UTI Act, 1963 was enacted for the establishment of primary uncouth strain. The UTI launched its first contrivance, US-64 in1964 which later became the most outdo- interchange(predicate) affectionate unit of measurement turning a portion in India. In1987, the run batted in issued guidelines for bank- helpered coarse property.The evolution of rough-cut cash in India is consisting of different phases as follows stagecoach I History of mutual computer memorys started in India in 1964 when the first mutual line of descent in the name of social unit think of India was establish in July 19 64. UTI launched its first evasion US-64 which issueu every(prenominal)y became the most preva alter design and could accumulate the largest corpus. afterwardsward 1964, it started several former(a) schemes also. Till 1987, UTI remained the synonym for mutual stock in India. It was a sole player and collect shape of monolithic mutual gillyflower with millions of investors in several schemes.PHASE II In 1987, the G everyplacenment allowed the worldly c formerlyrn sector banks to establish mutual specie. SBI plebeian strain in 1987. Other mutual cash in hand to follow suit were Canbank rough-cut drop trust (1987), PNB joint stock certificate (1989), IndBank Mutual Fund (1989), LIC Mutual Fund (1989), GIC Mutual Fund (1990), and so on The position move till 1992 and other mutual funds were also established. PHASE III thither was a historical change in 1993 when the g everyplacenment allowed backstage sector mutual funds also. The first mutual fund in the hidden sector was Kothari Pi peerlesser. at that placeafter, in 1994, the foreign mutual funds were also allowed to operate schemes in India, and Morgan Stanley was the first foreign mutual fund in India whose initial issue of units was everyplacewhelmingly subscribed by the investors. In 1992, SEBI was established and it issued guidelines for the working and supervision of mutual funds. PHASE IV In 1966 a look at was felt for the modification of SEBI (Mutual Funds) Regulations. On the substructure of Mutual Funds-2000 report card, SEBI frame new Regulations in 1996. There wealthy person been several amalgamations of mutual funds.After 1996, a number of foreign mutual funds as considerably as Indian mutual funds have been established. At the end of march 2004, in that find were 33 mutual funds and As jells Under heed of Rs 1,39,616 crores. After 1996, mutual funds have vex very popular among retail investors. The growing in number of mutual funds and their schemes lecture of t he inherent strength of the investors confidence in them. As in April, 2005, there were 28 mutual funds operating in India. rough of the mutual funds operating in India at present be as follows (in alphabetical order) ABN AmroDSP Merril LynchJM SaharaBank of Beroda Escorts Kotak Mahindra SBI benchmark Fidelity LIC Standard Chartered Birls Sunlife Franklin Tempelton Morgan Sundarum Canbank HDFC straits Tata Cholamandalam HSBC Prudential Tauras Deutsche ING Vysya Reliance UTI A large number of mutual funds have intensified competition and led go to product innovation. mortally of these mutual funds has a number of schemes operating with different features and characteristics. There be much than 500 schemes in operation at present. II OPERATION OF MUTUAL FUNDS A mutual fund is a pecuniary intermediary which acts as an instrument of coronation. It collects funds from different investors to a common pool of investible funds and then invests these funds in a wide variety of exp end funds funds opportunities. Small investors who argon otiose to participate in capital market, bay window access the stock market finished the medium of mutual funds which fire manage their funds for maximising return.The enthronement may be diversified to spread venture and to hear a redeeming(prenominal) return (dividend or capital gain or two) to the investors. The mutual funds employ master key experts and investment consultants to conduct investment analysis and then select the portfolio of securities where the funds be to be invested. Thus, a mutual fund is a pool of funds contributed by various(prenominal) investors having common investment preferences. FEATURES AND CHRACTERISTICS OF MUTUAL FUNDS A mutual fund is a monetary intermediary and works as an investment comp every(prenominal).It has diaphanous features and characteristics which differentiate it from other financial intermediaries. Some of the features of mutual funds ar (i) Mutual fund is a p ool of financial resources. Investors bring their idiosyncratic funds together. Some metres, the funds which other than may non come for investment in the capital market, atomic number 18 invested through mutual funds. (ii)Mutual funds argon professionally managed. The resources collected by mutual funds argon managed by professionals and experts in investment.These professionals arouse nether(a) amaze specialized investment analysis much(prenominal) as fundamental analysis, technical analysis, etc. , which argon not otherwise expected on the part of individual investors. (iii)Mutual fund is an indirect investiture. The individual investors invest in the mutual funds which in turn invest in the parcels, debentures and other securities in the capital market. The proportionable funds inclined by an investor are represented by the units of mutual fund. Investors own these units. The deals, debentures are owned by the mutual fund. Investors have no direct train on these se curities.In courtship of closure or liquidation of the result of these securities are proportionally break downd among the unitholders. (iv)Investment in mutual fund in not borrowing-lending relationship. Investors do not lend m iodiny to the mutual fund. Consequently, the investors have to share the gains or losses of operations of the mutual fund. (v)Mutual fund is a congresswoman of investors. The mutual funds collect the funds from investors chthonic a picky investment scheme. as a exemplification, the mutual fund has to invest these funds as per the designated scheme only.MECHANISM OF MUTUAL FUND OPERATIONS A mutual fund represents pooled savings/funds of individual investors. Professional managers of the mutual fund invest these funds in different types of securities. They have to take different terminations from clock to time. The revenue returns may be distributed by the mutual funds to the unitholders. Capital cargo hold in the mutual funds also be recollective to the investors. MUTUAL FUND SCHEMES iodine of the main objectives of mutual funds is to show better returns to investors at minimum risk.Mutual funds issue units to the investors in proportion to the funds contributed by the investors. The income of the funds are shared by the investors in the proportion to the number of units held. These mutual funds put out different types of schemes from time to time to attract investors and to take care of their needs, on the basis of nature of investment, type of operations and type of income distribution. Mutual funds may launch different schemes to allege ane or more of the succeeding(a) (a)Regular and steady flow of income, (b)High capital appreciation, c)Capital appreciation and regular return,and (d)Return with levy benefits. There are different ways in which various mutual fund schemes pot be classified. Following shows the classification of mutual fund schemes with reference to schemes being offered in India 1. On the basis of Li fe Span. (a) Close-ended Schemes (b) unrestricted Schemes 2. On the basis of Income Mode (a) Income schemes (b) Growth schemes 3. On the basis of Portfolio (a) faithfulness schemes (b) Debt schemes (c) Balanced schemes 4. On the basis of Maturity of Securities (a)Capital securities industry Schemes (b) bills market Schemes 5.On the basis of Sectors Different Sectoral Schemes 6. On the basis of payload (a) Load Schemes (b)No Load Schemes 7. Special Schemes (a) advocator Schemes (b)Offshore Schemes (c) grace Securities Schemes (d) Exchange Traded Funds (ETF) (e) Fund of Funds. Some of these schemes have been explained below OPEN-ENDED AND CLOSE-ENDED MUTUAL FUNDS SCHEMES As per SEBI Regulations, 1996, easy-ended scheme means a scheme of mutual fund which offers units for sales agreement without specifying any(prenominal) duration for redemption. On the other hand, close-ended scheme is one in which the period of redemption is contract.The open-ended mutual fund scheme sells and re gets the units of mutual fund on a continuous basis. Any investor trick become a member (by purchasing units) or do-nothing exit (by merchandising these units back to the mutual fund). These sales and repurchases of units take hind end at a hurt called Net Assets appraise (NAV) which is work out periodically on the basis of the market prize of the portfolio of the mutual fund. The sale and repurchase expenditures are announced by the mutual fund on a periodic basis. The realizeing block Scheme-1964 (US-64) was an open-ended mutual fund scheme. The essential feature of open-ended scheme is the liquidity.On the other hand, close-ended mutual fund scheme is only one in which the limited number of units are sold to investors during a specified period only. Thereafter, any transaction in these units can take place only in secondary market, ie, the stock exchanges. So, after the initial universal offering, the mutual fund goes out of the picture and subsequent sale and p urchase take place among the investors. The market bell of the units of a closed-ended mutual fund scheme is shaped by the market forces of demand and furnish. The liquidity to investors provided by the market.However, all the closed-ended mutual fund schemes are redeemable at the end of a specified period when all the investment of the scheme are sold and the proceeds are distributed among the unit holders on a proportionate basis. There are several close-ended schemes much(prenominal) as Master portionage Scheme of the UTI. INCOME FUND AND GROWTH FUND The mutual funds are called income funds when they promise a regular and/or indorsementd return in the carcass of dividends to the investors. For example, UTI launched several Monthly Income Schemes. The portfolio of these schemes is commonly consisting of fixed income investments such as hold fasts, debentures, etc.The income schemes are also know as dividend schemes. These schemes are holy man for investors who need or seek intermediate cash flows in the form of dividend payment. A growth fund scheme is one which offers capital appreciation as well as a variable dividend opportunity to the investors. The investors may get dividend income from the mutual fund on a regular basis and the capital appreciation is available in the form of increase in market expenditure. Growth schemes are good and suitable for investors having long-term investment perspective.In addition, there may also be income-cum-growth (hybrid funds) where the investor may be offered fixed incomes as well as growth opportunities. An example of a growth fund is UTI Growth and Value Fund which is an open-ended lawfulness oriented scheme. The objective is to seek capital appreciation by making investments primarily in listed securities of Indian companies. A variant of income fund is known as Dividend Yield Fund. These invest funds in shares of those companies that pay proud dividends. In addition, any appreciation of share price adds or subtracts investors return. municipal FUNDS AND OFF-SHORE FUNDSThe domestic funds schemes are those which are open for subscription by the investors of the country of origin only. Most of the mutual funds launched in India are domestic mutual funds. The off-shore mutual funds bring funds (in the form of foreign exchange) to the capital market. At present, several off-shore mutual fund schemes have been floated in India. Ind Bank Off-Shore Mutual Fund, 1993 and Common Wealth justice Mutual Fund, 1993 are examples of off-shore mutual fund schemes. TAX-SAVING SCHEMES These mutual fund schemes are designed to avail shoot the breeze exemptions and concessions to the investors.These schemes help individual investors in their appraise planning. CANPEP MEP 1994, PNB-ELSS were some of the tax-savings schemes. These schemes are also known as Equity-linked savings schemes were authorise to tax benefit chthonian Section 88 of the Income levy Act. Recently, mysterious sector mu tual funds have also launched these schemes such as HDFC Tax Plan, KP Tax Shields, etc. MONEY MARKET MUTUAL FUNDS (MMMF) SEBI Regulations, 1996 define an MMMF, as one which has been set up with the objective of investing in cash market investments which include commercial papers, commercial bills, T-Bills, etc.The funds collected by these mutual funds are invested completely in money market instruments. bullion market mutual funds are a part of short-term pooling arrangement of funds. These are open-end funds. These funds are very liquid and risk free because of nature of their investments. MMMF provide better returns than short-term bank gear ups and are a lot considered to be good alternative to bank deposits. The Reserve Bank of India has announced Guidelines for money market mutual fund in April 1992. However, at present, the MMMF are also correct on a lower floor SEBI Regulations, 1996. SPECIALISED SECTOR FUNDSSector funds schemes are those on a lower floor which the fu nds are planned to be invested in a particular region, industry or sector. For example, Pharma (D) Scheme of Franklin Templeton Mutual Fund, app impositiond science Company Scheme of DSP Merill Lynch Mutual Fund, Banking (D) of Reliance Mutual Fund are some specialised sector schemes of mutual funds. INDEX SCHEMES In this case, the funds collected by the mutual funds are invested in the shares forming the Stock Exchange Index. These funds are also known as growth funds. The funds are allocated o the basis of proportionate freight of different shares in the underlying Index.For example, Nifty Index Scheme of UTI Mutual Fund, Index Fund (Sensex) of Tata Mutual Fund, Index Fund (D) of Principal Mutual Fund are Index Schemes. There are 13 Index Funds which use S & P CNX NIFTY as the underlying index. EQUITY FUNDS SCHEMES Under these schemes, the funds are invested primarily in right shares only. The equity fund schemes are tall on the risk scale as the share prices are vapourific. These funds try to edit out the risk by diversifying the investments in different types of shares. If invested rationally and properly, these schemes may view as high returns coterminous with risk taken.The choice of investee companies is made by the mutual fund. These schemes may be income schemes or growth schemes. Fidelity Equity Fund is an open ended equity growth scheme with the objective of generating long term capital growth from a diversified portfolio of equity and equity-related securities (95%) and Money tick offet Instrument (5%). DEBT FUNDS SCHEMES In case of debt funds, the collected funds are invested in debt securities. A variant of debt funds schemes may be in the form of government securities funds scheme wherein the funds are invested in government securities only.Debt schemes are generally income scheme. A debt fund scheme is an ideal option for investors who are averse to risk which is associated wit equity schemes. BALANCED FUNDS A equilibrate fund provid es both growth and regular incomes as these schemes invest both in debts and equity instruments in the proportion as disclosed in the offer memorandum. These schemes are arrogate for investors who look for moderate growth. The NAV of these schemes are likely to be less volatile than the pure equity funds. GILT FUNDS The funds of these schemes are invested all in government securities.These funds are low return and low risk and popular among the risk averse investors. Some of the gilt funds operating in India are Gilt Plus (Birla Sunlife Mutual Fund), Gilt Investment (Cholamandalum Mutual Fund), FT Gilt (Franklin Templeton Mutual Fund), Gilt long-term (HDFC Mutual Fund), Gilt Treasury (Prudential ICICI Mutual Fund), etc. SCHEMES BASED ON MARKET CAPITALIZATION In recent past, mutual funds in India have launched several schemes with a focus on market capitalisation of companies. For example, UTI Large Cap Fund, UTI Small-Cap Fund, Chola Multi-Cap Fund, HDFC Premier Multi-Cap Fund, e tc. are schemes found on market capitalization. It may be noted that the classification among large, small and mid-cap is arbitrary and can start from market to market. In India, the depicted object Stock Exchange defines mid-cap companies as those having average 6-months market capitalization betwixt Rs. 75 crores to Rs. 750 crores. In Case of multi-cap or flexi-cap schemes, the investments are made crossways companies with different market capitalization-large, small or mid. LOAN AND NO-LOAN FUNDS A load fund is one that charges a % of NAV (Net Assets Value) as entry or exit fees.Whenever an investor bargain fors or sells the units, a fee is charged by the fund to meet the administrative expenses. On the other hand, a no-loan fund is one which does not charge any fees for entry or exit. In case of no-loan fund, all transactions of sale and repurchase of units are done at NAV while in case of load funds, the repurchase is made at a price less than NAV and sale is made at a p rice more than NAV. FUND OF FUNDS A fund of funds scheme means a scheme that invests primarily in other schemes of aforesaid(prenominal) mutual fund or other mutual funds.Benchmark Mutual Fund has started a FOF under the name of FOF third-year BeES. transposition TRADED FUNDS Exchange Traded Funds (ETFs) refers to basket of securities that are tradeable at a stock exchange. They are somewhat similar to Index Fund Schemes. The ETFs are so called because they are listed on a stock exchange and are traded as any other listed security. So, ETFs have characteristics of open-ended mutual funds as well as that of listed shares. ETFs do not sell their units straight off to the investors. Rather, a security firm creates an ETF by depositing a portfolio of shares in line with an Index selected.The security firm creates units against this portfolio of shares. These units are sold to the retail investors. So, the ETF has portfolio of shares as well as a liability towards the holders of ETF u nits. ETFs are different from Mutual Funds in the sense that ETF units are not sold to the public for cash. Instead, the Asset oversight Company that sponsors the ETF (fund) takes the shares of companies comprising the index from various categories of investors like certain participants, large investors and institutions. In turn, it issue them a large block of ETF units.Since dividend may have accumulated for the stocks at any point in time, a cash component to that extent is also taken from such investors. In other words, a large block of ETF units called a Creation Unit is exchanged for a Portfolio Deposit of stocks and Cash Component. The number of heavy(p) ETF units is not limited, as with traditional mutual funds. It may increase if investors deposit shares to create ETF units or it may reduce on a twenty- tetrad hour period if some ETF holders remeed their ETF units for the underlying shares.These transactions are conducted by sending origin/ redemption instructions to th e Fund. In case of mutual funds, the portfolio of the investments made under the scheme may change, but in case of ETF, this is not so, because the ETF portfolio created once does not change. The market honour of the units of ETF changes in line with the Index automatically. The funds managers are not required to actively manage the portfolio resulting in overthrow expense level of the fund. Consequently, the NAV of the ETF would be high than the NAV of the Index Fund with the same portfolio.As the ETFs are listed on a stock exchange, they provide a lot of liquidity and price is determined by the demand and supply forces and the market value of the shares held. As opposed to ETF, the sale/ purchase prices of the units of a mutual fund are based on the NAV. A compare of ETF, Open-ended funds and close-ended funds has been presented in table below 1. statement Open-ended Fund (OEF) Closed-ended Fund (CEF) Exchange Traded Fund (ETF) Find size Flexible Fixed Flexible 2. NAV Daily Daily Real fourth dimension 3. Liquidity Provider Fund itself Stock Market Stock Market/Fund itself 4.Sale price At NAV plus load, if any momentous Premium/Discount to NAV Very close to actual NAV of Scheme 5. approachability Fund itself Through Exchange where listed Through Exchange where listed/ fund itself. 6. Portfolio revelation Monthly Monthly Daily/Real-time ETFs have edge over the ordinary mutual funds. In case of latter, an investor cannot take the benefit of intra-day travail of price of shares because the mutual fund units can be traded at the decision NAV based rate. However, the carry outance of ETF is based on the underlying index and ETF can be traded through out the day taking benefit of intra-day feat in price.In India, several ETFs, have been created so for. Bench Mark Mutual Fund has created 5 ETFs. 1. Liquid BeES 2. Nifty BeES 3. Nifty Junior BeES 4. Bank BeES, and 5. FOF Junior BeES All these 5 ETFs are listed and traded at the capital market segment of the NSE. Prudential ICICI Mutual Fund has launched SPICE which tracks the Sensex. It combines features of both open-ended scheme and exchange traded share. It is listed at Mumbai Stock Exchange and can be traded in a lot of one unit. Value of one SPICE is 1/100 of the Sensex value.UTI Mutual Funds has launched SUNDERS, which is also listed at Mumbai Stock Exchange. Certain ETFs traded at American Stock Exchange are QUBES (Representing NASDAQ-100), SPIDERS (representing S&P 500), DIAMONDS (Representing Dow Jones Industrial Average), etc. NET ASSETS VALUE (NAV) OF A MUTUAL FUND Investors are the owners of the mutual fund. Funds collected under a particular scheme are invested in different securities. So the ownership intimacy of the unit holders is represented by these securities. Net Assets Value (NAV) refers to the ownership by-line per unit of the mutual fund, i. . , NAV refers to the essence which a unit holder would receive per unit if the scheme is closed. NAV is represented as follows An amount of Rs. 50,00,000 has been collected by a mutual fund by the issue of 5,00,000 units of Rs. 10 each. The amount has been invested in different securities. The market value of these securities at present is Rs. 56,00,000 and the mutual fund has a liability of Rs. 4,50,000 in celebrate of expenses, etc. The NAV of the fund is The units of an open-ended mutual fund scheme are sold and purchased by the mutual fund at a price based on NAV.The NAV of a mutual fund scheme is cipher by dividing the net summations of the scheme by the number of outstanding units under that scheme on the date of military rank. SEBI Regulations, 1996 provide that while determining the price of the units, the mutual fund has to ensure that the repurchase price is not debase than 93% of the NAV and the selling price is not higher than 107% of the NAV. Further that the discrimination in the midst of the selling price and the repurchase price shall not return 7%, cipher on the selling price of the units. The NAV varies from time to time and is print in newspapers so as to enable the nvestors to know the value of their investments. SEBI Regulations, 1996 require that the NAV of a mutual fund scheme shall be calculated and published at least in two daily newspapers at an interval of not majestic one week. III INVESTMENT CRITERIA making THE INVESTMENT DECISION Ones main considerations as an investor, besides choosing which vehicles are right, lie in the areas of risk management, taxes and inflation, and plus allocation. In order to reach your financial objectives, you essential require from diverse investment alternative all of which vary greatly in the degree and type of risk and possible return.The backbone to developing a sound portfolio is to strike the right balance between potential reward and risk, based on your financial objectives, financial placement and investment style. Weve all heard the expression, nonhing ventured, nothing gained. Perhaps n owhere does this maxim hold authoritativer than in the financial markets, where pursuing potentially higher returns means accepting higher levels of risk. Before you venture anything, you should determine your ad hominem level of risk border, given your needs and goals.To do this, you should familiarize yourself with the various kinds of risk and how they affect different types of investments. THE MANY OF FACES OF RISK risk of exposure is the possibleness that one may lose some or all of his investment in real terms, or that his investment may not increase in value. Several factors may influence the amount of risk one can comfortably accept, including ones age, family situation, income, time horizon and financial goals. When investing, one faces the following key risks Market Risk This is the guess that an investment (e. g. , a stock) pull up stakes decline in value.As a result, if you sold the investment, you would receive less than what you initially paid for it. Credit Ris k This is the possibility that the issuer of an investment (e. g. , a corporate bond) may not live up to its financial obligations. A default by the issuer could mean that you lose your invested capital and the expected interest payments. Inflation Risk This is the possibility that the value of a long-term plus (e. g. , a government bond) may not grow enough to save up with inflation, reducing your purchasing power as a result. Reinvestment Risk This is the possibility that interest rates bequeath fall as an investment (e. . , a bond) matures. If this occurs, you may be unable to reinvest matured assets at the rate of return you were accustomed to receiving. This type of risk also applies to reinvesting the coupon payments receive from bonds and other fixed-income payments. Liquidity Risk This is the possibility that you leave be unable to liquidate an asset (e. g. , real estate) when you want and at the price you want. As a result, you may be forced to retain the asset or acce pt less than you wanted for the sake of liquidity. National, International, and Political Risk The possibility that a countrys government leave suddenly change its policies.Events such as wars, embargos, coups, and the shootments of individuals with unfavorable economic policies can impact the financial markets, especially concerning investments related to that country. Possible results changes in tax structures and changes in bond or stock ratings. Economic Risk The risk that the economy will run a downturn as a whole. Such an event generally affects all the financial markets across the board, from product prices to the job market. patience Risk The risk that a precise industry will suffer a downturn. Often, industries related to the one that experiences problems will suffer as well. Tax Risk The risk that high taxes will make investments less utile for both businesses and investors. Businesses that have no pay expand or improve. Investments that turn back heavy tax baggage generally lead to get down dividends for an investor. How often Risk Is Right? The amount of risk that is right depends upon person to person. To determine the risk comfort level, one may ask this himself Am I willing to tolerate greater volatility for potentially higher returns from my investments, or do I place more emphasis on quality, with less risk?Several factors may influence the amount of risk one can comfortably accept in ones portfolio, including Age Family situation Income financial goals In addition, the markets evolve and ones personal goals will inevitably change with time. One of the best ways to keep ones investments on target is to meet with financial professional regularly. In these meetings, the investor and his financial professional can discuss the investment objectives, determine the individual risk tolerance level and help to insure the various risks associated with an investment.The financial professional can also help an investor build a portfolio that h as the potential to provide the highest returns consistent with the amount of risk one wish to assume. HOW TO CHOOSE WHICH RISKS TO TAKE? Whenever one considers a new investment, he may wish to ask his financial professional the following questions What types of risk are involved? Once the financial professional has explained the risks, one must(prenominal) ask how he or she can help to manage or minimize the different kinds or risk for the investment one is considering.Not all kinds of risk will apply to every investment. What could happen to the dealer in a worst-case scenario? The financial professional can explain how diversifying ones portfolio can help mitigate the effect of a downturn in any one market or industry. For example, assume you invested in the stock of a highly speculative biotechnology attach to. The stocks trading price could fall substantially if the companys only product fails to get FDA approval or is shown to be inferior to a competitors product. Spreading ones money across different asset classes stocks, fixed income investments, and cash equivalents could help one manage the risk better than investing all his funds in this one stock. How will adding this investment to the holdings help to manage the portfolios overall risk? Managing market risk through a balance of financial assets in ones portfolio is a significant component of long-term investment success. Ideally, ones portfolio should offer a measure of protection during inevitable market downturns and be positioned for opportunity when markets heat up.In addition to risk there are other factors also which need to be considered before investing, as stated below INFLATION Inflation taxes are two factors of all time on the minds of investors. Inflation is the persistent increase in the cost of goods and services, and the power why the same loaf of bread that costs you $1. 00 today will credibly cost you $1. 05 next year. For your purchasing power to grow in real terms, your r eturns must outpace the inflation rate. TAXES Additionally, taxes must be a consideration. There are investments available that are both rateable and exempt others are tax-deferred or tax-deductible.The differences are significant, but not as dizzying as they seem. ASSET ALLOCATION Asset allocation refers to the diversification of your portfolio across all the different classes of assets. The goal of effective asset allocation is to develop an admit mix of investments based on your specific investment objectives that maximizes effect potential with an acceptable level of investment risk. The goal is more consistent returns, lower volatility and a greater chance of achieving financial objectives. SELECTION OF A MUTUAL FUNDSThere are thousands of funds to choose from, but there are some general guidelines that can help you choose a fund. Define your investment time horizon and financial goals. skirmish a long-term goal (e. g. , starting a college fund for a young) will require di fferent investments than in meeting a short-term goal (e. g. , accumulating money to purchase a car). Understand your risk tolerance and the risk of different mutual funds. Risk tolerance is based on your comfort level in the fluctuation of price, which will affect your investment principal.Once this is determined, you can match fund types that have historically shown commensurate price movement. Keep in mind, however, that past carrying into action is no guarantee of future results. Combine your goals, time horizon and risk tolerance and find a fund category that matches these objectives. This will help in deciding what types of funds you may want to consider. You will find that there are still many funds to choose from within a specific category. Your prudential financial professional will be able to perform a comparative analysis of the individual funds to find the most appropriate choice. lead with your tax advisor prior to investing in a tax-exempt or tax-managed fund. Match the term of the investment to the time you expect to keep it invested. Money you may need right away (for example, if your car breaks down) should be in a money market account. Money you will not need until your retire in decades (or for a newborns college education) should be in longer-term investments, such as stock or bond funds. Putting money you will need soon in stocks risks having to sell them when the market is low and missing out on the rebound. Expenses calculate over the long term, and of course, cheaper is ordinarily better.You can find the expense ratio in the prospectus. Expense ratios are critical in index funds, which seek to match the market. Actively managed funds need to pay the manager, so they usually have a higher expense ratio. Sector funds often make the best fund lists you see every year. The problem is that it is usually a different sector each year. Also, some sectors are under fire(predicate) to industry-wide events (airlines do come to mind). Avoid ma king these a large part of your portfolio. Closed-end funds often sell at a discount to the value of their holdings. You can sometimes get extra return by purchase these in the market.Hedge fund managers love this trick. This also implies that buying them at the original issue is usually a bad idea, since the price will often drop immediately. Mutual funds often make taxable distributions near the end of the year. If you plan to invest money in the fund in a taxable account, check the fund companys website to see when they plan to pay the dividend you may prefer to wait until subsequently if it is coming up soon. Research. Read the prospectus, or as much of it as you can stand. It should tell you what these strangers can do with your money, among other vital topics.Check the return and risk of a fund against its peers with similar investment objectives, and against the index most closely associated with it. Be sure to pay attention to performance over both the long-term and the sh ort-term. A fund that gained 53% over a 1-yr. period (which is impressive), but only 11% over a 5-yr. period should raise some suspicion, as that would imply that the returns on four out of those five age were actually very low (if not straight losses) as 11% compounded over 5 years is only 68%. Diversification can reduce risk. Most mountain should own some stocks, some bonds, and some cash.Some of the stocks, at least, should be foreign. You might not get as much diversification as you think if all your funds are with the same management company, since there is often a common source of research and recommendations. The same is true if you have multiple funds with the same profile or investing strategy these will rise and fall together. Too many funds, on the other hand, will give you about the same effect as an index fund, except your expenses will be higher. Buying individual stocks exposes you to company-specific risks, and if you buy a large number of stocks the commissions ma y cost more than a fund will.The compounding effect is your best friend. A little money invested for a long time equals a lot of money later. The decision to invest in a mutual fund is one you have to make on your own. However, when you try to choose an investment, its usually best to seek the guidance of an investment representative. Why? Consider that there are more mutual funds than there are stocks listed on the brand-new York Stock Exchange. While many of these funds share the same objectives, no two are exactly alike. Similarly, as an investor, your goals are unique. An investment representative can help you determine the fund thats right for you.A mutual fund investor has more options than ever before stock, bond, and money market funds to satisfy all outlooks, from the most conservative to the most venturesome. in the main speaking, in investment management, intelligently assumed risk creates the opportunity for greater returns. A money market mutual fund aims for legiti mate income at minimal risk. A municipal bond mutual fund aims for sure tax-free income. Government income funds aim for current income with principal security. somatic bond funds aim for a high rate of current income. An income fund aims for a higher rate of current income. A balanced fund aims for current income with some capital appreciation. Growth and income funds offer the possibility of more growth than a balanced fund, but probably less income. A growth fund aims for the accumulation of capital, with little or no current income. Aggressive growth funds offer the prospect of maximum capital appreciation, with more than average risk. In addition, specialized funds are available for instance, those that invest only in certain geographical regions or in certain sectors or industries (like health care, technology, or energy).There are even funds that have adopted certain social objectives or that follow specific investment philosophies. For more complete information, includin g charges and expenses, experience the mutual funds prospectus. Read it carefull before you invest or send money. The Securities and Exchange Commission (SEC) requires every open-mutual fund (where the funds managers issue new shares on demand) to provide you with a reduplicate of its prospectus before or coinciding with a purchase of shares. A prospectus is a key source of information regarding a mutual fund and often is the best place to start when you are considering investing in one.It will describe the funds objectives, risks, and operations. TURNOVER overturn is a measure of the amount of securities that are bought and sold, usually in a year, and usually expressed as a percentage of net asset value. It shows how actively managed the fund is. A caveat is that this value is sometimes calculated as the value of all transactions (buying, selling) divided by 2 i. e. , the fund counts one security sold and another one bought as one transaction. This makes the turnover look hal f as high as would be according to the standard measure.Turnover generally has tax consequences for a fund, which are passed through to investors. In particular, when selling an investment from its portfolio, a fund may realize a capital gain, which will finally be distributed to investors as taxable income. The very process of buying and selling securities also has its own costs, such as brokerage commissions, which are borne by the funds shareholders. The Dalbar Inc. consultancy studied stock mutual fund returns over the period from 1984 to 2000. Dalbar found that the average stock fund returned 14 percent during that same period, the typical mutual fund investor had a 5. percent return. This purpose has made both personal turnover (buying and selling mutual funds) and professional turnover (buying mutual funds with a turnover above perhaps 5%) unattractive to some people. IV REGULATORY FRAME-WORK OF MUTUAL FUNDS Immediately after its constitution, SEBI issued the Mutual Fund R egulations in 1993. However, with the growth of mutual funds, it was imperative that they should follow prepared a Mutual Fund 2000 Report and on the basis of this report, it prepared more stringent and comprehensive regulations in 1996, known as SEBI (Mutual Fund) Regulations, 1996. ince then, there have been number of amendments in Regulations, 1996. Besides, SEBI has also issued several guidelines in respect of working of mutual funds. Some of the render of the SEBI (Mutual Fund) Regulations, 1996 (as amended from time to time) have been summarized hereunder 1. The sponsor, who wants to establish a mutual fund, should have a sound track record and a general reputation of fairness and integrity, i. e. , must be in business of financial services for 5 years, and must have contributed at least 40% of the net worth of the Asset Management Company. 2.A mutual fund is constituted in form of trust. The trust shall incorporate an Asset Management Company (AMC). The trustees shall ensure that the AMC has been managing the schemes independently of other activities. 3. Two-thirds of the trustees shall be independent persons and not be associated with the sponsor. 4. The trustees shall ensure that activities of the AMC are in accordance with the Regulations, 1996. 5. The trust shall periodically look back the investors complaints received and shall be redressed by the AMC. 6. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes.The sponsor or its associates shall no have 50% or more of the share capital of the custodian. 7. No scheme shall be launched by the AMC unless the offer document contains disclosures which are adequate in order to enable the investors to make intercommunicate investment decisions. 8. Advertisement in respect of every scheme shall be in conformity with the Advertisement Code. 9. Every close-ended scheme shall be listed at a recognized stock exchange, or there will be a repurchase facility. 10. The clos e-ended schemes may be converted into open-ended schemes under certain conditions.A close-ended scheme may be allowed to be turn over if necessary disclosures about NAV, etc. , are made to the unit holders. 11. In case of over-subscription for a new scheme, the applicants applying for upto 5,000 units shall be allotted full. The yield to applicants, if any, shall be made within 6 weeks from the data of closure of the list. 12. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed by the sponsor or the AMC. 13. An open-ended scheme shall be would up after the expiration of the mixed period, or in case, 75% of the nit holders finalize so, after repaying the amount due to the unit holders. 14. The money collected under any scheme shall be invested only in transferable securities in money market or capital market or private placed debts or securitized debts. 15. The mutual fund shall not borrow any money except to meet temporary liquidity needs an d borrowing, if any, need not be more than 20% of NAV of the scheme, and for period of less than 6 months. 16. The funds of a scheme shall not be used in option trading or a carry forward transaction. However, derivatives can be traded by a mutual fund at a recognized stock exchange for portfolio balancing. 7. A mutual fund can enter into underwriting agreement. 18. NAV for each scheme shall be calculated by dividing the tot up assets of the scheme by the number of outstanding units. The NAV of the scheme shall be published in two daily newspapers at interval of not expireing one week. 19. In case of open-ended schemes, the repurchase and sale price shall be published at least once a week. 20. The mutual fund shall ensure that the repurchase price of a unit is not less than 93% of NAV and the sale price is not more than 107% of NAV. In case of close-ended schemes, the repurchase price shall not be less than 95% of the NAV. 1. The AMC may charge the mutual fund with investment and advisory fees as per rates prescribed in the Regulations. The issue expenses and redemption expenses of a scheme shall not exceed the limits given in the Regulations. 22. The mutual funds are required to raise at least Rs. 20 crores or Rs. 50 crores (for close-ended and open-ended schemes respectively) or 60% of the target amount, otherwise the entire subscription be refunded. Each scheme should have a minimum of 20 investors and not single investor should account for more than 25% of the corpus of the scheme. 23.The unquoted debt instruments shall not exceed 10% in case of growth funds and 40% in case of income funds. 24. Investment in one company under any scheme should be restricted to 5% of the corpus of the scheme. Under all schemes, the investment in one company should be restricted to 5% of the paid-up capital of the company. Total investment in all securities (debts and shares) in one company shall be restricted to 10% of the corpus of the mutual fund. 25. Funds under the sa me AMC mutual not be lent or invest from one scheme to another, unless the funds are transferred at the prevailing market price. 26.All mutual fund must distribute a minimum of 905 of their profits in any given year. The e3arnings must be segregated as current income, short-term capital gain and long-term capital gain. 27. Trading by mutual funds shall be restricted to hedging and portfolio balancing purposes only. The securities held shall be marked to market by the AMC to ensure full coverage of the investments made in derivative products. 28. Mutual funds are permitted to participate in the Securities Lending Scheme of SEBI under certain guidelines. 29. Mutual funds are allowed to invest in ADRs/GDRs issued by Indian companies.They can also invest in foreign securities under certain conditions and within limits. 30. Mutual funds can also invest up to 10% their funds in equity of listed overseas companies which have a shareholding of at least 10% in an Indian company listed on a r ecognized stock exchange. 31. The AMC and the trustees are required to review and disclose the performance of their schemes. They are also required to disclose the performance of the benchmark indices. Any of the following indices may be selected for this purpose bovine spongiform encephalitis Sensex, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX Nifty 500. 32.Several Guidelines have been prescribed in respect of Advertisement to be issued by mutual funds. Any advertisement, communication, sales literature, or presentation, etc. , should not be misleading. 33. Detailed guidelines are prescribed for valuation of investments. For this purpose, the investments are classified into traded, thinly traded and non-traded investments. 34. Guidelines for identification and provisioning for NPA are also provided. For this purpose, an asset is NPA if the principal/ interest is not received for one quarter. On NPA, no interest shall be accrued. If any interest is already accrued, it shall be provid ed.A provision 10%, 20% or 25% of the book value of NPA is required depending upon the period for which it is NPA. 35. A mutual fund and the AMC shall, before the outcome of 1 month from the close of half year, shall publish its financial results in respect of that half year. MUTUAL FUND INVESTMENT AND INVESTORS PROTECTION IN INDIA In case of mutual funds, small investors park their funds in expectation of a suitable return and safety of their funds. Mutual funds take decisions on behalf of the investors. There is a relationship of trust between the mutual fund and the investors. Market regulators should take a cognizance of this fact.The interest of the investors should be protected by framing a comprehensive set of regulatory provision. As the first mutual fund in India, the UTI was created as a statutory body under the UTI Act, the relevant provision regarding investment policies, etc. were all given in the UTI Act itself. However, the position changed after 1992 with the cons titution of SEBI. The basic objective of SEBI is to protect the interest of the investors in securities and to upraise the development of, and to regulate, the securities market and for matters connected therewith or incidental therewith. So, the regulation of mutual funds activities was make a matter under survey of SEBI. SEBI issued the Mutual Fund Guidelines, 1993 as a first attempt to provide for a regulatory framework to give directions to the functioning of mutual funds and to protect the interest of the mutual funds investors. Keeping in view the changing scenario, SEBI issued a new set of Mutual Funds Guidelines in 1996. A detailed list of the provisions of Guidelines, 1996 is already given in this chapter. Some other provision specifically dealing with investors protection are (i)Each mutual fund must be registered with SEBI.The sponsor must have a sound track record and experience in financial services of at least 5 years. (ii)Number of terms and conditions have been pro vided in respect of Asset Management Company (AMC). The Directors of the AMC should here adequate professional experience in finance and financial services. (iii)The custodian of the mutual fund should also be approved and registered with SEBI. (iv)No mutual fund scheme can be launched unless approved with the trustees. (v)Minimum and Maximum amount to be raised under the scheme should be notified. (vi)Lot of disclosures are required in respect of the scheme in the prospectus. vii)No scheme with a guaranteed return can be issued unless such return is guaranteed by the AMC or the sponsor. (viii)Periodic report in respect of each of the scheme is to be published. Any information that has an adverse bearing on the investment should also be disclosed. (ix)There are investment norms provided for mutual fund investment with a view to contain the investment risk. Investors interest is protected by prohibiting mutual funds from excessive risk exposure. (x)SEBI can impose several types of mo netary penalties for violations of SEBI Regulations and Guidelines.