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MUTUAL FUNDS

Introduction to Mutual funds


A mutual fund is a common pool of money into which investors with common investment objectives place their contributions that are to be invested, in accordance with the stated objective of the scheme. The investment manager invests the money collected into assets that are defined by the stated objective of the scheme. For example, an Equity fund would invest in Equity and Equity related instruments and a Debt fund would invest in Bonds, Debentures, Gilts etc.

Regulator of Mutual fund industry


The Association of Mutual Funds in India (AMFI) is dedicated to developing the In dian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the inte rests of mutual funds and their unit holders. But all Asset Management Companies are required to be registered with SEBI.

Why should we invest in Mutual Funds?

1. Professional Investment Management One of the primary benefits of investing in Mutual Funds is that an investor gets the advantage of professional management of his finances. Being full-time, high-level investment professionals, a good investment manager is more resourceful and more capable of monitoring the companies the Mutual Fund have chosen to invest in, rather than individual investors. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. 2. Diversification A crucial element in investing is asset allocation. It significantly contributes to the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater 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, which are usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 3. Low Cost A mutual fund enables you to participate in a diversified portfolio for as little as Rs.5000, and sometimes even lesser. And with a no-load fund, you pay little or no sales charges to own them. 4. Convenience and Flexibility Investing in Mutual Funds has its own convenience. With Kotaksecurities.com, you can truly experience the advantages of investing online in Mutual funds with the click of a button. Gone are the days when people used to fill up long and tedious forms for applying in Mutual Funds. Apart from this, you can also call us on 30305757 to place your orders in a particular Mutual Fund and we will execute orders on your behalf. Another big advantage is that you can move your funds easily from one fund to another, within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.

5. Liquidity In open-ended schemes, you can get your money back at any point in time at the prevailing NAV (Net Asset Value) from the Mutual Fund itself. 6. Transparency Regulations for Mutual Funds established by SEBI, have made the industry very transparent. You can track the investments that have been made on your behalf to know the sectors/scrips into which your money has been invested. In addition to this, you get regular information on the value of your investment. With Kotaksecurities.com, you can check the status of your orders placed for Mutual Funds, online. 7. Variety Mutual funds offer you a whole range of industries/sectors to choose from. You can find a Mutual Fund that matches just about any investment strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. Infact, the greatest challenge can be sorting through the variety and picking the best for you. As a customer of Kotaksecurities.com , you can invest in about 14 different Mutual Fund Houses with over 560 schemes to choose from.

Mutual Fund Investment Based on Constitution


1. Open-ended schemes Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund, on any business day. These schemes have unlimited capitalization, do not have a fixed maturity date, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis. The advantages of open-ended funds over close-ended are as follows: At any time exit option, the issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. At any time entry option, an open-ended fund allows one to enter the fund at any time and even to invest at regular intervals. 2. Close-ended schemes Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that, such schemes cannot issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors' expectations and other market factors. 3. Interval schemes These schemes combine the features of open-ended and closed-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV based prices.

Mutual

Funds

Classification

based

on

Investment

Objective:

1.Equity Oriented a. General Purpose The investment objectives of general-purpose Equity schemes do not restrict these funds from investing only in specific industries or sectors. Hence these funds have a diversified portfolio of companies spread across a vast spectrum of industries. While these schemes are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. b. Sector Specific These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. They are best suited for informed investors who wish to take a view and risk on the concerned sector. c. Special schemes Index schemes 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. An Index also serves as a relevant benchmark to evaluate the performance of Mutual Funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. Tax saving schemes Investors (Individuals and Hindu Undivided Families ("HUFs") are now encouraged to invest in Equity markets through Equity Linked Savings Scheme (ELSS) by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched - out until completion of 3 years from the date of allotment of the respective Units. The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS.

Investments in ELSS schemes are eligible for deduction under Sec 80C.An example of ELSS scheme is the Kotak ELSS scheme. Real Estate Funds 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. 2. Debt Based These schemes, (also commonly referred to as Income Schemes), invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable as compared to Equity schemes. Most of the returns to the investors are generated through dividends or steady capital appreciation in these schemes. These schemes are ideal for conservative investors or those not in a position to take higher Equity risks, such as retired individuals. However, when compared to the money market schemes they do have a higher price fluctuation risk. a. Income Schemes These schemes invest in money markets, bonds and debentures of corporates with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. Hence they distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. 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. b. Liquid Income Schemes Liquid Income Schemes are similar to the Income schemes but have a shorter maturity period. c. Money Market Schemes These schemes invest in short term instruments such as commercial paper ("CP"), certificates of deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The schemes are the least volatile of all the types of schemes because of their investments in money market instruments with short-term maturities. These schemes have become

popular with institutional investors and high net worth individuals having short-term surplus funds. d. Gilt Funds These schemes primarily invest in Government securities. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. 3. Hybrid Scheme These schemes are commonly known as balanced schemes and invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation .

Who can invest in Mutual Funds?


A: Mutual Funds in India are open to investment by 1. Residents including a. Resident Indian Individuals b. Indian Companies c. Indian Trusts / Charitable Institutions d. Banks e. Non-Banking Finance Companies f. Insurance Companies g. Provident Funds 2. Non-Residents including a. Non-resident Indians, and b. Other Corporate Bodies 3. Foreign entities, viz. a. Foreign Institutional Investors (FIIs) registered with SEBI.

However some category of investors are not allowed to invest in particular schemes of certain funds. Besides the investors who are eligible to invest may still need to follow different procedures.

WHAT IS NET ASSET VALUE (NAV)


: Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in the securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-today basis.

The market value of securities of a scheme NAV = ______________________________________________ Total number of units of the scheme on any particular date.

For example, if the market value of securities of a Mutual Fund scheme is Rs.200 lakhs and it has issued 10 lakh units of Rs.10 each, to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the Mutual Funds on a regular basis - daily or weekly - depending on the type of scheme.

Types of risk involved in investing in mutual funds


All investments involve some form of risk. Mentioned below are the common types of risks. An investor would do well to evaluate them against potential rewards while selecting 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". It is also known as systematic risk. Inflation Risk Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster than the earnings on your investment, one runs the risk of actually being able to buy less, not more. Inflation risk also occurs when prices rise faster than returns. Credit Risk In short, how stable is the company or entity to which one lends his/her money while investing? 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. Exchange risk 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 In sectoral fund schemes, investments will be 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.