UNDERSTANDING OF MUTUAL FUND

what is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer
document.

Investments in securities are spread across a wide cross-section of industries and sectors
and thus the risk is reduced. Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the same time. Mutual fund issues
units to the investors in accordance with quantum of money invested by them. Investors
of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The
mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI) which regulates
securities markets before it can collect funds from the public.

CONCEPT
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.
How to select a good mutual fund

For a common investor the following factors should be considered when selecting
equity oriented mutual funds. For debt fund selection the factors may vary a bit.
Though the below mentioned factors may not be comprehensive, they would be a good
starting point from where a person can increase her/his awareness about how to pick
mutual funds.
Scheme philosophy
Whenever a mutual fund scheme is launched there is a specific mandate (philosophy of
investing) based on which investing is done by that mutual fund. This mandate outlines
the debt-equity mix and the type of instruments that the fund would invest.
For example, the prospectus of a mutual fund will always mention the stock universe
that fund invests in viz, large cap, mid cap, small cap, sector funds etc.
Fund management team
A critical component that determines performance of a mutual fund is the fund manager
and her/his team. Finally it is their skills which are responsible in the decisions made
regarding investing.
We have to look at both aspects -- 'Fund Manager' and 'The Team' behind her/him. If
the fund manager has been around for a while, by looking at past performance we can
get some idea about her/his abilities.
Even though the fund manager is the key decision maker and is finally responsible for
the fund performance, her/his team too is important. To this end the process followed in
short listing and selecting investment opportunities is important.
A good process would ensure that the performance of the fund does not depend only on
the skills of a single person, but rather is a team effort.
 A GUIDE TO MUTUAL FUND INVESTMENT

Mutual funds can be broadly classified into two categories in terms of the fund
management style i.e. actively managed funds and passively managed funds (popularly
referred to as index funds).
Actively managed funds are the ones wherein the fund manager uses his skills and
expertise to select invest-worthy stocks from across sectors and market segments. The
sole intention of actively managed funds is to identify various investment opportunities
in the market in order to clock superior returns, and in the process outperform the
designated benchmark index.
On the contrary, passively managed funds/index funds are aligned to a particular
benchmark index like the S&P CNX Nifty or the BSE Sensex. The endeavor of these
funds is to mirror the performance of the designated benchmark index, by investing
only in the stocks of the index with the corresponding allocation or weightage.
In the Indian context, index funds have never really caught the retail investor's fancy.
This is in complete contrast to developed economies like the United States for instance
wherein index funds form "staple diet" for retail investors. And the reasons for the same
aren't very difficult to guess.
In the United States, stock markets are more efficient, so investment opportunities are at
a premium and are relatively difficult to identify. Consequently, a number of actively
managed funds fail to outperform the broader stock market. Also other factors like no
loads and lower expenses further the cause of index funds.
Furthermore, investing in index funds is less cumbersome as compared to investing in
actively managed funds. Broadly speaking, investors need to consider two important
aspects i.e. the expense ratio and the tracking error (i.e. the difference between the
returns clocked by the designated index and index fund).
Conversely, investing in actively managed funds demands a deeper review and
understanding of the fund house's investment philosophy; also the investor needs to
decide on the kind of funds he wishes to invest in - a large cap/mid cap/small cap fund
among others.
In the Indian context, the mutual fund industry is dominated by actively managed funds;
index funds occupy a smaller share of the market. Well-managed actively managed
funds have been successful in outperforming index funds by a huge margin.
This could be attributed to the fact that the Indian markets are still in an evolutionary
phase and there exist a number of inefficiencies. These inefficiencies are in turn utilised
by competent fund managers to outperform the index. This explains why many actively
managed funds manage to outperform the index over the long-term (3-5 years).
We conducted a study wherein we compared category averages of index funds (passive
funds) with those of diversified equity funds (active funds), over varied time frames.
 The active-passive tradeoff
Categories Average category returns
1-Yr (%) 3-Yr (%) 5-Yr (%)
Index funds 40.75 32.91 32.38
Actively managed funds 29.05 38.37 41.05
S&P CNX Nifty 39.50 30.96 30.32
BSE Sensex 44.91 35.22 33.20
(Source: Credence Analytics. NAV data as on February 8, 2007. Growth over 1-Yr is compounded annualised)

The results are quite interesting. Over the 1-Yr time frame, index funds (40.75 per cent)
aligned to the BSE Sensex have comfortably outscored diversified equity funds (29.05
per cent). However over longer time frames (3-Yr and 5-Yr), diversified equity funds
have stolen the march over index funds powered by a strong showing. Over 3-Yr,
diversified equity funds (38.37 per cent CAGR) have outperformed index funds (32.91
per cent CAGR). The degree of outperformance further widens over 5-Yr; diversified
equity funds (41.05 per cent CAGR) fare better than index funds (32.38 per cent).
In a nutshell, in the Indian context, index funds have proven their mettle over shorter
time frames. It's the opposite over longer time frames (3-5 years), where actively
managed funds rule the roost.
However the same should not be seen as a blanket recommendation for actively
managed funds. Not all actively managed funds are invest-worthy and capable of
generating superior returns vis--vis benchmark indices (passively managed funds).
There are many laggards in the category as well who have failed to match the
benchmark indices (in this case BSE Sensex). To substantiate this, we have outlined
some non-performing actively managed funds (from diversified equity funds category),
based on their performance over 3-Yr and 5-Yr (as these are the ideal time frames for
evaluating equity funds).
Laggards: 3-Yr CAGR Laggards: 5-Yr CAGR
Actively Managed NAV (Rs) 3-Yr (%) Actively Managed NAV (Rs) 5-Yr (%)
Funds Funds
LIC Equity Plan (G) 22.79 23.11 DBS Chola Opp. (G) 29.08 26.93
Birla Div. Yield (G) 43.81 26.17 LIC Equity Plan (G) 22.79 29.90
UTI Mastershare (G) 36.23 28.76 UTI Mastershare (G) 36.23 30.14
UTI Growth & Value (G) 60.87 29.27 ING Vysya Stocks (G) 28.91 30.65
ING Vysya Equity (G) 31.61 29.52 Birla MNC (G) 128.26 34.71
BSE Sensex 35.22 BSE Sensex 33.20

(Source: Credence Analytics. NAV data as on February 8, 2007. CAGR - Compounded Annualised Growth Rate)

Hence, investors would do well to understand that, though the actively managed funds
category has delivered impressive performances over the long-term, there are duds
within the category whose performance is nothing to write home about.
This in turn, necessitates that investors add to their portfolios well-managed diversified
equity funds with proven track records over longer time frames and market phases.
Given the performance of diversified equity funds and how domestic markets are
placed, risk-taking investors would do well to hold a larger portion of their portfolio in
actively managed (diversified equity) funds. Index funds, on the other hand can occupy
a smaller portion therein, but purely from a diversification perspective.
 TIPS TO HELP YOU PICK THE RIGHT MUTUAL
FUND

There has been a lot of volatility in the stock markets. This year, there have been
many sharp corrections and rallies in the stock markets. Currently, the Sensex is in the
14,000 levels which is over 30 per cent lesser than its peak in January this year. The net
asset values (NAV) of equity mutual funds across the board have taken a beating this
year - especially the mid-cap and small-cap focused mutual funds which have a higher
co-relation with the market.

Investors who entered near the market's peak have lost a significant portion of their
principal investments and others have seen a significant dip in their capital
appreciation. Investors who invested in the wrong mutual funds are stuck with them.

In the current market conditions, many investors are pulling out investments in equity
mutual funds and investing in debt funds and instruments - liquid funds, bank deposits
etc. It makes sense for short-term investors as it is difficult to predict the market
direction in the short term. Long-term investors should not park funds in debt
instruments as the returns in debt-based instruments will be negative after factoring in
inflation. Historically, equity-based investments provide positive returns over the long
term. Long-term investors should look at investing in good equity funds systematically.
 HOW TO CHOOSE THE RIGHT MUTUAL FUND

Mutual funds have emerged as the best in terms of variety, flexibility,

diversification, liquidity as well as tax benefits. Besides, through MFs investors can
gain access to investment opportunities that would otherwise be unavailable to them
due to limited knowledge and resources.

MFs have the capability to provide solutions to most investors' needs, however, the key
is to do proper selections and have a process for monitoring. Let us see how MFs can
make a difference to an investor's financial planning and its results.
Planning for long term objectives
Many people get overwhelmed by the thought of retirement and they think how will
they ever save the huge money that is required to lead a peaceful and happy retired life.
However, the fact is that if we save and invest regularly over a period of time, even a
small sum of money can suffice.
It is a proven fact that the real power of compounding comes with time. Albert Einstein
called compounding "the eighth wonder of the world" because of its amazing abilities.
Essentially, compounding is the idea that one can make money on the money one has
already earned. That's why, the earlier one starts saving, the more time money gets to
grow.
Through mutual funds, one can set up an investment programme to build capital for
retirement years. Besides, it is an ideal vehicle to practice asset allocation and
rebalancing thereby maintaining the right level of risk at all times.
It is important to know that determination and maintaining the right level of risk
tolerance can go a long way in ensuring the success of an investment plan. Besides, it
helps in customising fund category allocations and suitable fund selections. There are
certain broad guidelines to determine the risk tolerance. These are:
Be realistic with regard to volatility. One needs to seriously consider the effect of
potential downside loss as well as potential upside gain.
Determine a "comfort level" i.e. if one is not confident with a particular level of risk
tolerance, then select a different level.
Regardless of the level of risk tolerance, one should adhere to the principles of effective
diversification i.e. the allocation of investment assets among different fund categories to
achieve a variety of distinct risk/reward objectives and a reduction in overall portfolio
risk.
It helps to reassess risk tolerance every year. The risk tolerance may change due to
either major adjustment in return objectives or to a realization that an existing risk
tolerance is inappropriate for one's current situation.
Market cap of a company signifies its market value, which is equal to the total number
of shares outstanding multiplied by the current stock price. The market cap has a role to
play in the kind of returns the stock might deliver and the risk or volatility that one may
have to encounter while achieving those returns.
For example, large companies are usually more stable during the turbulent periods and
the mid cap and small cap companies are more vulnerable.
As regards the allocation to each segment, there cannot be a standard combination
applicable to all kinds of investors. Each one of us has different risk profile, time
horizon and investment objectives.
Besides, while deciding on the allocation, one has to keep in mind the fact whether the
allocation is being done for an existing investor or for a new investor. While for an
existing investor, the allocation that already exists has to be considered, for a new
investor the right way to begin is by considering funds that invest predominantly in
large cap stocks. The exposure to mid and small caps can be enhanced over a period of
time. (Also read - How to reduce risk while investing?)
It is always advisable to take help of professionals to decide the allocation as well as
select the appropriate funds. However, investors themselves have an important role to
play in this process.
All award-winning funds may not be suitable for everyone
Many investors feel that a simple way to invest in mutual funds is to just keep investing
in award winning funds. First of all, it is important to understand that more than the
awards; it is the methodology to choose winners that is more relevant.
A rating firm generally elaborates on the criteria for deciding the winners i.e. consistent
performance, risk adjusted returns, total returns and protection of capital. Each of these
factors is very important and has its significance for different categories of funds.
Besides, each of these factors has varying degree of significance for different kinds of
investors. For example, consistent return really focuses on risk. If someone is afraid of
negative returns, consistency will be a more important measure than total return i.e.
growth in NAV as well as dividend received.
A fund can have very impressive total returns overtime, but can be very volatile and
tough for a risk averse investor. (Also read - 7 investment tips to improve your returns)
Therefore, all the award winning funds in different categories may not be suitable for
every one. Typically, when one has to select funds, the first step should be to consider
personal goals and objectives. Investors need to decide which element they value the
most and then prioritize the other criteria.
Once one knows what one is looking for, one should go about selecting the funds
according to the asset allocation. Most investors need just a few funds, carefully picked,
watched and managed over period of time.
Evaluate Portfolio performance
It is important to evaluate the performance of the portfolio on an on-going basis. The
following factors are important in this process:
Consider long-term track record rather than short-term performance. It is important
because long-term track record moderates the effects which unusually good or bad
short-term performance can have on a fund's track record. Besides, longer-term track
record compensates for the effects of a fund manager's particular investment style.
Evaluate the track record against similar funds. Success in managing a small or in a
fund focusing on a particular segment of the market cannot be relied upon as an
evidence of anticipated performance in managing a large or a broad based fund.
Discipline in investment approach is an important factor as the pressure to perform can
make a fund manager susceptible to have an urge to change tracks in terms of stock
selection as well as investment strategy.
The objective should be to differentiate investment skill of the fund manager from luck
and to identify those funds with the greatest potential of future success.
CLASSIFICATION OF MUTUAL FUNDS

Abstract:

Classification of Mutual Funds in India is done on the basis of their objective and
structure. Classification of Mutual Funds in India has helped to categorize them into
major types such as Funds of Funds, Regional Mutual Funds, Closed- End Funds, Large
Cap Funds, and Interval Funds.
A glance at Mutual fund in India:
Mutual fund in India is a kind of collective investment that is managed professionally.
In Mutual fund in India, the money is collected from a large number of investors and
then it is invested in bonds, stocks, and various other securities.
The fund manager of Mutual fund in India collects the interest income which is then
distributed among the individual investors on the basis of the number of units that they
hold. Mutual fund's value of a share is calculated on a daily basis and is known as per
share Net Asset Value (NAV).

Various kinds of Mutual funds in India:

Classification of Mutual Funds in India has been done on the basis of their investment
objective and structure. Classification of Mutual Funds in India has be done into main
types such as Income Funds, Sector- Specific Funds, Large Cap Funds, Fixed- Income
Funds, Interval Funds, Closed- End Funds, and Tax Saving Funds. Income Funds in
India are a kind of mutual fund whose aim is to provide to the investors with steady and
regular income. They usually invest their principal in securities such as corporate
debentures, bonds, and government securities.

Sector- Specific Funds in India are funds that make investments in specified sectors
only. They give importance to one sector only such as pharmaceuticals, software,
infrastructure, and health care. Large Cap Funds in India are a kind of mutual fund that
makes investment in the shares of large blue chip companies. Fixed- Income Funds in
India makes investment in debt securities that have been issued either by the banks,
government, or companies. They are also known as income funds and debt funds.

Classification of Mutual Funds on the following :

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended
scheme depending on its maturity period.

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and

repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The
fund is open for subscription only during a specified period at the time of launch
of the scheme. Investors can invest in the scheme at the time of the initial public
issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where the units are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the
mutual fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is provided to the
investor i.e. either repurchase facility or through listing on stock exchanges. These
mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly
as follows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a major part of their corpus in equities.
Such funds have comparatively high risks. These schemes provide different
options to the investors like dividend option, capital appreciation, etc. and the
investors may choose an option depending on their preferences. The investors
must indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds
are less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation are
also limited in such funds. The NAVs of such funds are affected because of change
in interest rates in the country. If the interest rates fall, NAVs of such funds are
likely to increase in the short run and vice versa. However, long term investors
may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking for
moderate growth. They generally invest 40-60% in equity and debt instruments.
These funds are also affected because of fluctuations in share prices in the stock
markets. However, NAVs of such funds are likely to be less volatile compared to
pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government securities, etc. Returns
on these schemes fluctuate much less compared to other funds. These funds are
appropriate for corporate and individual investors as a means to park their
surplus funds for short periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities

have no default risk. NAVs of these schemes also fluctuate due to change in
interest rates and other economic factors as is the case with income or debt
oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the
same weightage comprising of an index. 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.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme.

There are also exchange traded index funds launched by the mutual funds which
are traded on the stock exchanges.
BENEFITS OF MUTUAL FUNDS
Investing in mutual has various benefits, which makes it an ideal investment avenue.
Following are some of the primary benefits:

Professional investment management - One of the primary benefits of mutual funds is

that an investor has access to professional management. A good investment manager is
certainly worth the fees you will pay. Good mutual fund managers with an excellent
research team can do a better job of monitoring the companies they have chosen to
invest in than you can, unless you have time to spend on researching the companies you
select for your portfolio. That is because Mutual funds hire full-time, high-level
investment professionals. Funds can afford to do so as they manage large pools of
money. The managers have real-time access to crucial market information and are able
to execute trades on the largest and most cost-effective scale. When you buy a mutual
fund, the primary asset you are buying is the manager, who will be controlling which
assets are chosen to meet the funds' stated investment objectives.

Diversification - A crucial element in investing is asset allocation. It plays a very big

part in 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 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 - Investing in mutual funds has its own convenience.
While you own just one security rather than many, you still 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. 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.

Liquidity - In open-ended schemes, you can get your money back promptly at net asset
value related prices from the mutual fund itself.

Transparency - Regulations for mutual funds have made the industry very transparent.
You can track the investments that have been made on your behalf and the specific
investments made by the mutual fund scheme to see where your money is going. In
addition to this, you get regular information on the value of your investment.

Variety - There is no shortage of variety when investing in mutual funds. You can find
a mutual fund that matches just about any investing strategy you select. There are funds
that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds.
The greatest challenge can be sorting through the variety and picking the best for you.
DISADVANTAGES OF MUTUAL FUNDS

some disadvantages of mutual fund are follows :

Fluctuating Returns
Mutual funds are like many other investments without a guaranteed return: there is
always the possibility that the value of your mutual fund will depreciate. Unlike fixed-
income products, such as bonds and Treasury bills, mutual funds experience price
fluctuations along with the stocks that make up the fund. When deciding on a particular
fund to buy, you need to research the risks involved - just because a professional
manager is looking after the fund, that doesn't mean the performance will be stellar.

Another important thing to know is that mutual funds are not guaranteed by the U.S.
government, so in the case of dissolution, you won't get anything back. This is
especially important for investors in money market funds. Unlike a bank deposit, a
mutual fund will not be insured by the Federal Deposit Insurance Corporation (FDIC).
(For more on this, read Are My Investments Insured Against Loss?)

Diversification?
Although diversification is one of the keys to successful investing, many mutual fund
investors tend to overdiversify. The idea of diversification is to reduce the risks
associated with holding a single security; overdiversification (also known as
diworsification) occurs when investors acquire many funds that are highly related and,
as a result, don't get the risk reducing benefits of diversification. (To read more on this
subject, see The Dangers Of Over-Diversificaton.)

At the other extreme, just because you own mutual funds doesn't mean you are
automatically diversified. For example, a fund that invests only in a particular industry
or region is still relatively risky.
Cash, Cash and More Cash
As you know already, mutual funds pool money from thousands of investors, so
everyday investors are putting money into the fund as well as withdrawing investments.
To maintain liquidity and the capacity to accommodate withdrawals, funds typically
have to keep a large portion of their portfolios as cash. Having ample cash is great for
liquidity, but money sitting around as cash is not working for you and thus is not very
advantageous.

Costs
Mutual funds provide investors with professional management, but it comes at a cost.
Funds will typically have a range of different fees that reduce the overall payout. In
mutual funds, the fees are classified into two categories: shareholder fees and annual
operating fees.

The shareholder fees, in the forms of loads and redemption fees, are paid directly by
shareholders purchasing or selling the funds. The annual fund operating fees are
charged as an annual percentage - usually ranging from 1-3%. These fees are assessed
to mutual fund investors regardless of the performance of the fund. As you can imagine,
in years when the fund doesn't make money, these fees only magnify losses. (For more
on this topic, read Stop Paying High Fees.)

Misleading Advertisements
The misleading advertisements of different funds can guide investors down the wrong
path. Some funds may be incorrectly labeled as growth funds, while others are
classified as small cap or income funds. The Securities and Exchange
Commission (SEC) requires that funds have at least 80% of assets in the particular type
of investment implied in their names. How the remaining assets are invested is up to the
fund manager.

However, the different categories that qualify for the required 80% of the assets may be
vague and wide-ranging. A fund can therefore manipulate prospective investors by
using names that are attractive and misleading. Instead of labeling itself a small cap, a
fund may be sold as a "growth fund". Or, the "Congo High-Tech Fund" could be sold
with the title "International High-Tech Fund".

Evaluating Funds
Another disadvantage of mutual funds is the difficulty they pose for investors interested
in researching and evaluating the different funds. Unlike stocks, mutual funds do not
offer investors the opportunity to compare the P/E ratio, sales growth, earnings per
share, etc. A mutual fund's net asset value gives investors the total value of the fund's
portfolio less liabilities, but how do you know if one fund is better than another?

Furthermore, advertisements, rankings and ratings issued by fund companies only

describe past performance. Always note that mutual fund descriptions/advertisements
always include the tagline "past results are not indicative of future returns". Be sure not
to pick funds only because they have performed well in the past - yesterday's big
winners may be today's big losers. (To learn more, read Choosing Quality Mutual
Funds.)

Conclusion
When you buy any investment, it's important to understand both the good and bad
points. If the advantages that the investment offers outweigh its disadvantages, it's quite
possible that mutual funds are something to consider. Whether you decide in favor or
against mutual funds, the probability of a successful portfolio increases dramatically
when you do your homework.
 EXPENSES INCURRED IN MUTUAL FUND
INVESTMENT :

Entry load, exit load, annual recurring expenses and initial issue expenses are the four
types of expenses incurred in mutual fund operations.

Entry load : When you buy shares through a broker he imposes brokerage commission
plus securities transaction tax plus stamp duty.

Similar to this when you buy the units of a fund they impose entry load.

Some funds don't impose entry load for their new fund offers. These schemes are called
No Load schemes.

Entry loads may be upto two percent of the net asset value of a unit.

For example, you pay a total amount of Rs 10.20 to buy a unit that has a net asset value
of Rs 10.00

Exit Load : When you sell share through a broker he imposes brokerage commission
plus STT.

Similar to this the mutual fund imposes exit load when you sell off or redeem the units
back to the fund.

Exit load is also called redemption load

Zero to three percent of the net asset value of the unit is imposed as exit load generally.

Exit load discourages the investor from redeeming his units. The technique is to make
him stay in the scheme for a long time.

The investor may want to sell(=redeem) the units before the lock up period or holding
period is over. In such cases a contingent deferred sales charge also is levied.
Annual recurring expenses :

Annual recurring expenses include :

• Investment management and advisory fees charged by the Asset management

company of the mutual fund.
• Marketing and selling expenses
• Brokerage costs paid by the mutual fund
• Trustee fees
• Custodian fees
• Audit fees
• Communication expenses
• Statutory Advertisement costs
• Costs of providing account statements, dividend or redemption cheques,
warrants etc.
Initial issue expenses : of upto six percent of the total amount collected by the
scheme can be charged to the scheme.

If the initial expenses go beyond six percent, the excess amount should be borne
by the asset management company. The common practice is that AMCs bear
all the initial issue expenses.

Brokerage commission levied on a fund by a stock broker, marketing and

advertising expenses, printing and distribution costs are incurred during every
new fund offer as initial issue expenses.