12 FUNDDS:

nent t
CLASSIFICATION OF UTUAL FUND
MUTUAL

4.2
4.2
4.2.1 EQUITY FUNDS:

shares of
those that of the com
invest in
are
funds
stock exchanges. The
Fauity Bon.
on the and
that are
paid
listed
out by
a company
also get ded
added to
to the total
the
i h e r e are various categorias of returnDividend
Within equity of produy
Investor,
risk and return attributes Pod
that comes
with their own
4.2.1.1 Aggressive Investments:

(a) Growth Funds: Growth fund's investment is mainly in

stocks of companies, which are expected to do tharequir
betterthan
lo better
market. These companies feature above average incre
assets and earnings. The stocks typically payout little or n n
dividends since each company reinvest its earnings to
for
expansion. The category covers firms of different sizes, ages
and growth rates. High-expected growth and risk
go hand
hand. The higher the expected growth rate,, the riskier in
the
Company.
The primary objective of such funds is to seek
capital appreciation long-term
(growth of capital). These funds are best
suited for investors
wanting their capital to grow, and are,
therefore, to be
considered as long-term investments held for
at least three to five
years. When it comes to risk, these funds
belong the category of moderate to high risk.
to
suitable for those investors Hence, are
who can be described as "FAIRLY
AGGRESSIVE".
(b) Mid-Cap Funds: These funds share
growth funds and sometimes get similarity with aggressive
mid-cap funds are conservatively lumped together. Some
distinction. As the name so managed, there is a
suggest
funds invest in mid-
sized
companies. Such companies cap grow at f rate than large
companies do because their expansion takes place smaller
base of assets and
revenues. These
narrower business focus
than
companies usually have a
the
Most funds in this large-companies.
category have
whose earningsgrowth
These funds a
orientation.
increase companies are
stocks generally expected
at a
high rate. Such to
have above
 rage
average P/E
P/E ratios. But some mid-caps follow 'value
o r i e n t a t i o n .

Jalue Fund: Investment of these funds is mainly in equity

a.
(c) current valuation does not reflect some
stocks whose
underlying value proposition. This philosophy is popularly
known as value investing and aims to seek out securities
with the most promising potential for long-term growth.
Funds (Focus on Dividend Yields): These are
Equity-Income
( d ) E q u i t y - I n c

equity funds with the objective to provide a major portion of

equ
invest in stocks
total return through income and primarily
These portfolios are
that yield well above the average.
focused primarily on dividend yields. They see significantly BSE 30
such
higher than that of an overall market yardstick
as

or Nifty.
which
(e) Index
Funds: Index funds are portfolio of securities,
to represent the
the
have been specifically designed
index. Index funds
characteristics and attrib a chosen target
which
a variety of ways. A portfolio,
can be constructed in
of all the stocks, which comprises Index in the
comprises fund. On the
same proportion, is known
as fully replicated
makes investments only in
other hand a sampled index fund
An index fund closely
stocks, which are part of the index.
the composition of index and the return of the
replicates
have a fund that
index. It is for the investor wanting to
The advantages of
follows the swings of the stock market.
investing in an Index Fund are:
Diversification: Since index schemes replicate to a large
diversification
extent the market index, they provide
across various sectors and segments.
as a
Low costs: Index schemes are passively managed,
result of which costs such as those relating to
management fees, trade execution, research etc. are kept
relatively low.
Transparency:: As indices are pre-defined, investorsS
know the securities and proportion in which their money
will be invested.
 TO Ue tyu
tne
E
n
stsa
tanntt eN
xP 0s
pO sure equty markets
equt markets, equalizing
1alizing cash
cash or for
for
laetween the cash
r b i t r a g i n g ;l b e t w e c and futures market.
H i g h - R i s

High Return Category

3
(a) S e c t o r
Funds and Thematic Funds: Sector funds invest
in specific
inly in specific sector stocks. These funds concentrate in
il a r in
rticular industry, such as technology, telecommunication,
etc., Investors likely to go in for such funds
petroleum
EMCG,
are those willi
willing to accept higher levels of risk as these funds
mally have some limited diversification within their
normally

narrow range. These funds have a tendency to be

relative
rela
m o r e volatile
vo than the broadly diversified portfolios. Aiso
frequently do not move in sync with the market
their returns
Funds invest in one or two sectors
While the Sector
averages.
Funds invest in a bunch of sectors that are
the Thematic
Infrastructure,
woven by a common Theme, such as
and FMCG. These are the most risky of
Consumer spending
are, typically very
all types of Funds as their portfolios
lack of diversification
concentrated. On account of their
of sector and thematic funds depend on handful of
fortunes
advisable for the
sectors and stocks. Hence, it is generally
of the Theme or the
Investors to have a proper understanding
Sectoral or
wish to invest through a
Sector in which they
Thematic Fund.
Cap Funds: The Large Cap Funds
(b) Large Cap/Mid Cap/Small market
well established companies in the
invest in Large and
Technologies
such as State Bank of India, Infosys
Thses companies are heavy
Ltd. Reliance Industries Ltd, etc. researched by
in the Stock Markets and are well
weights
and Analysts. Large Cap
many Experts, Fund Managers Funds. These companies
Funds are typically the least risky in
volatile companies as they are mostly
are among the least

Mature Business and have left

the Volatile growth period
with
behind. They are also widely held companies MOst
cases.
shareholders in Millions in certain
running
 Mand

diversified funds
preter
to be invested QOgemer
nificant in 1,
t
imit their volatility.
to
CapSerips
The Mid
Cap Funds: These funds
and Small
than the large
cap funds.I hey
invest in
Smallcompanite ive
stages. The Large com.
in their growing
are
were once upon a time small an mid-sized companiesof ies t t

the Mid-cap and small-cap companies are in the ,

stages,theytypically rise more than the large -cap
in rising markets but fall more than large cap compa
the fallinf markets. When compaie
these companies graduate
large-cap companies,their share prices show a sharn
over a period of time. If the Fund
harp incte
these companies, he could make a good
Manager correctl
also prove to be very costly and are
profit.Wrongcal
Wrong cali
punished a by severe
vere t
in their value.
(c Equity Linked Savings Schemes (ELSS): These funds
investments in equity and equity related Ma
instruments with
objective produce long-term capital
to
difference between an equity fund andappreciation. The
an ELSS is
latter has a 3-year lock-in and tax that
benefit like other
products viz. Public Provident Fund tax-sa
certificate (NSC), infrastructure (PPF), national savi
bonds and insurance.
year lock-in is imposed
by the Central Board of This
(CBDT). These schemes are Direct Ta
investors seeking to suitable for equity
generate orient
equity portfolio as well as tax capital appreciation from
the Income Tax
Act of Income
benefits (if applicable) u/s 8
4.2.2 TaxAct, 1961.
BOND FUNDS:
4.2.2.1 Debt
Funds or Income
NAV of Bond Funds:
Funds and
These are the Interest Rates
tes are
instruments, funds that invest
Inversely
Inversely Related
Kela
and Debt funds are st in fixed income yie
capital used for
broadly theyprotection,
fall into There are
some
ome kind
kind of
of regular
I ret
two
types. many types
types ofor aro
debt fund: bu
 n of Mutual Fund Products
(BFM . , Combination of Debt and Equity:
4.2.3.1 COmb.

79
Tate
aPon d
Balanced Funds: Investment is mainly in a mix of
S O aaced funds have the equity and
B a l a n c e d
objectives of payment of current
The del
1oderate capital appreciation and preservation of
/11C; m o d e r a t
capital.
s who want to hold a
vho wan
n cstors W
portfolio of combination of
lar securities seek some current income and moderate
growth with
ort ivel of
of ris
level
risk may invest in balanced funds.
ade Jo
Generally
the net asset value. (NAV) of balanced funds move in
Of
arrower range and is not as volatile as that of equity funds.
he a nar
Thus bal alanced funds tend to outperform the equity funds in a
earish phase but do less well than them in a bullish market.
be
42.3.2 Accomplishing the Goals of Asset Allocation:
in
Asset Allocation Fund: An asset allocation fund invests a
variety of securities in different asset classes. The purpose 1s to
consistent
provide investors with truly diversified holdings and
investor the trouble of having to
returns while sparing the
accomplish asset allocation at different market conditions. Some
breakdown of asset classes
asset allocation funds have a specific
as stable-allocation
that they try to maintain over time (known
as opportunities and
portfolio), while others vary the composition allocation
circumstances
flexible
change (known as portfolio).
maintain that their funds make it
Asset allocation fund managers
and to resist the
easier for investors to buy low and sell high,
to
whern the equity market is soaring
or
temptation to buy stocks
become overpriced. Asset allocation
load up on bonds when they
stocks to
to determine how many
funds use quantitative models
allocation plans may range from
buy how many bonds. Asset
vs.
devoted to equity) to very
very conservative (less proportion
devoted to equity). It is generally
aggressive (more proportion
markets move in opposite
observed that debt and equity
fund could complete
serve as a
direction. An asset allocation
investors who can afford to own only one
investment plan for
fund.
Fixed Maturity Plans (FMP):
debt fund where the
Fixed maturity plans are a kind of
to the maturity of the
investment portfolio is closely aligned
 tion of u u d rund Producte
Class

4,2.3.1 Co ombination of Debt and 19

Balar
d
Funds: Investment is Equity:
gaeanCed funds have the mainly in mix of
Balanced fur
equity
a
debt

moderate
moderatee
capital objectives of and
and payment
of current
C who want to appreciation
income

hold preservation of capital.

current incomeportfolio
a
nies
Investo

seek some of
rities seek
and combination of
moderate growth with
owLovel
of ri
level of risk may invest in
balanced funds.
Generally
aerally th
the net asset value
Ower range and is not as(NAV)
of balanced funds
move in
volatile as that of
halanced
funds tend to equity funds.
Thus outperform equity funds
the
ish phase but do less well than them in a bullish
in a
bearish
market.
9.3.2 Accomplishing the Goals of Asset Allocation:
Asset Allocation Fund: An asset allocation fund invests in a
variety of securities in different asset classes. The purpose is to
Drovide investors with truly diversified holdings and consistent
P
returns while sparing the investor the trouble of having to
accomplish asset allocation at different market conditions. Some
asset classes
asset allocation furnds have a specific breakdown of
maintain time (known as stable-allocation
that they try to over

portfolio), while others vary the composition as opportunities and

flexible allocation portfolio).
circumstances change (known as
it
maintain that their funds make
Asset allocation fund managers the
investors to buy low and sell high, and to resist
easier for or to
the equity market is soaring
temptation to buy stocks when allocation
become overpriced. Asset
load up on bonds when they
models to determine
how many stocks to
funds use quantitative from
Asset allocation plans may range
bonds.
buy vs. how many proportion
devoted to equity)
to very
conservative (less It is generally
very todevoted equity).
a88ressive (more
proportion move in opposite
markets
observed that debt and equity as a complete
fund could
serve
allocation one
direction. An asset to own only
can afford
investors who
nvestment plan for
fund.
Fixed Maturity Plans
(FMP): fund where
the
are a kind of debt of the
Ixed maturity plans to the maturity
aligned
estment portfolio is closely
 80 Vipul'sTM Mutual Fund
round Manogemen
scheme. AMCs tend to structure the scheme
investments. Further, ike close-ended schem
ar VES
moneys post-NFO. they prdoeidnotenv
Arbitrage Funds: ac
Arbitrage Funds take
contrary positions in diffe
but a different
nt am
/securities, such that the risk is neutralized,
For instance, by buying a share in
returm
BSE, and simultane is earne
the same share in the NSE at a a
take contrary higher
positions between the price. Most arbitra
and options market. (Futures' and equity market rage turand the
referred to as
derivatives. These are Options' arehuture
common
are

their risk in designed

take positions or to help
elp invest
investors
an equity share.
protect some other
They are traded in security, such s
the BSE. Unit 10
linked to gold). provides an exampleexchanges
of
like the NSE
futures contract anicd
that
Monthly Income Plan:
MIP seeks to declare a
invests largely in debt
dividend every month. It
securities. However, a small therefore
invested in equity shares to percentage is
be discussed in Unit improve the scheme's yield. As will
8, the term Monthly Income'
misnomer, and investor needs to is a bit of a
before presuming that an income study the scheme properly,
will be received
every month.
Capital Protected Schemes:
Capital Protected Schemes are close-ended schemes, which are
structured to ensure that investors get their principal
irrespective of what back
happens to the market. This is ideally done
by investing in Zero Coupon Government Securities whose
maturity is aligned to the scheme's maturity. (Zero coupon
securities are securities that do not pay a
regular interest, but
accumulate the interest, and pay it along with the principal when
the security matures). As detailed in the following example, the
investment is structured, such that the principal amount invested
in the zero-coupon security, together with the interest that
accumulates during the period of the scheme would grow to the
amount that the investor invested at the start.
 Mutuol Fund Products 8
of

Example SuppOse an nvestor invested Rs. 10,000 in a capital

scheme of 5 years. It 5-year government securities yield
p r o l e c t e ds h e m

Prthal hen an amount of Rs. 7,129.86 invested in 5-year

time, th
that tinne,
at in
7%
eoUpon
e r oc o u
gOvernment securities would mature to Rs. 10,000
ears.
Thus, by investing Rs. 7,129.86 in the 5-year zero-coupon
have
5 ye mment security, the scheme ensures that it will
governm

to the investor in 5 years. After investing

in the
10.000
Rs. to
10,000 repay invested
ernment security, Rs. 2,870.14 is left over (Rs. 10,000
gOv
less Rs. 7129.86 invested in government
the investor, securities like
by This amount is invested in riskier
urities).
s e c u

becomes completely
investment
Quities. Even if the risky
is assured of getting
equities

investor
worthless (a rare possibility), the received
invested, out of the maturity moneys
hack the principal Some of these schemes
are structured

onthe government security. in

is made good quality
minor difference the investment
with a companies, rather than
Central
securities issued by the
debt borrower other than
Securities. Since any
Government view these
it would be appropriate to
default, Schemes rather
government can Oriented
alternate
structures as Capital Protection that capital
Protected Schemes. It may be noted
than Capital from a

can
through a guarantee
also be offered
protection
financial strength
to offer the guarantee.
has the
guarantor, who in the market.
are however not prevalent
schemes
Such
International Funds:
the country. For instance, a
invest outside
These are funds that investors in India,
with an
offer a scheme to
mutual fund may
abroad. One way for the fund to
investment
to invest
objective will who
to hire the requisite
people
the investment is fixed costs
manage salaries would add to the
Since their of
manage the fund. be justified only
if a large corpus
of managingthe fund, it can would
alternative route
investment. An
funds is available for such If an Indian
the host fund).
fund (called
be to tie up with a foreign with a Chinese
in China, it will tie up
mutual fund sees potential feeder hund.
launch what is called a
fund. In India, it will fund. The moneys
will invest in the feeder host
Investors in India
be invested in the Chinese
would
collected in the feeder fund does well, the
market
Chinese host
Thus, when the Chinese
fund. will follow suit.
in India
do well, and the feeder fund
Would
 Iana
82 be
used
tor any
kind
of in nagemenm
intery
can
ecific to
be specific to a
Such
feeder

i n v e s t m e n t .
funds

The
i n v e s t m e n t

across
could
countries.A
f ount
n ry (i,
eder fund
vith any investmen ob
ectndiiave andin
diversified investment

China
fund) or
fund
with any oftiv
to any
host
to legal
strictions of
restrictions

local inu
aligned
subject
of the
world,
the local
s, the
schemes,
invest.
converted into vesy
part
In such are converho
country.
rupeesare
Units.The for.
other

for buying
the
abroad.
to be
They need to be rre-cor
theInele
rupees

Currency
investing
for
are to be paid
back to
ocal inves,
when the moneys ot be
rates cannot be prer
predicte
rupees
risk. Investor's to toda
currency
the future
foreign
Since
element of toreign
currency
the international in
retu
there is

in such
an

schemes will depend

how
on how

the
the foreign currencyDo
toreign currency
investperforn
me
well as
performs,
as
currency the ininvestox
can pull down the
Weakness in the foreign
overall return.

4.2.3.3 Low Risk

Low Return High Liquidity:
Funds:
Market Mutual Funds/Liquid
Money
These funds make investment mainly in short-term, liquid
instruments. Investors principal, higher
seeking stability of
and shorter investment horizon consider these funds
liquidity
furnds have low risk, there are
Although money market of these funds
differences in risk within and between categories
which choose to make most
The lowest risk category is of funds,
bill and or notice
of their investments in government Treasury
is of funds which are more diversified
money. The other category
in nature. These funds invest in the following
short term
securities: commercial papers, commercial bills, treasury bills,
government securities having maturity up to one year, call or
notice money, certificate of deposits, permitted securities undera
repo/reverse repo agreement and any other instrument permitted
by RBI/SERI from time to time.
Liquid Funds:
cash from
These are funds meant to park your surplus a time
ime
period of overnight to about three months. In the Mufual F
space, they are cosidered the safest because they invest in s und
that mature in a very short term. Hence they aren't
crashas brought
voPs
The 2008 market crash h ile
though there are no guarantes.
 for
for any kind gemem
82
Such
feeder
tunds
can

i n v e s t m e n t
be
used

could be
bespecifici u a coun
specific interna ti,
The
across
untries. AA feede
Countries.
i n v e s t m e n t .
d i v e r s i f i e d

China

aligned to
fund)

any
or

host fund
fund with any
with.

to legal
investme
obj
ictions of India
restrictions ectwe n
of the
world,
subject
schemes,
the local
the local inve
investor and
part n such
converted
other
country.
Units.
the
The rupees are re-rof
into
for buying They need
need to be
be re-converte
rupees abroad. Ihey
for investing
paid backto thelocal
to the locali
currency

rupees
when the moneys
are
rates cannot be predic
to be
not be predicted investo
currency
Since the
future foreign
currency
risk. nvestor's tosl
Investor's total reth
foreign
element of
is an the international inve
there
such schemes
will depend on how stme
in
how the foreign currency perf
perform
well as
performs, as
can pull down the
invest.
in the foreign currency stor,
Weakness
overall return.
Return High Liquidity:
4.2.3.3 Low Risk Low
Funds/Liquid Funds:
Market Mutual
Money
in short-term, liqud
These funds make investment mainly
instruments. Investors seeking stability
of principal, higher
and shorter investment horizon consider these
funds.
liquidity
Although money market funds have low risk, there are
differen.ces in risk within and between categories of these funds
The lowest risk category is of funds, which choose to make most
of their investments in government Treasury bill and or notice
money. The other category is of funds which are more diversified
in nature. These funds invest in the
short term following
securities: commercial papers, Commercial bills,
treasury bills,
government securities having maturity up to one
notice money, certificate of deposits, permitted call or year,
securities under a
repo/reverse repo agreement and any other instrument
by RBI/SERI from time to time. permitted
Liquid Funds:
These are funds meant to
park your surplus cash from a
period of
overnight about three months.
to
In the
ti
space, they are cosidered the safest because Mutual .. Fund
that mature in a very short they invest in
terim.TheHence they aren't as vola
though there are no guarantes. crips
2008 market atile crash latile
 Vipul's Mutual Fund Mo

84 OF
MUTUAL
FUNDS
FUNDs IN
MoTERnagemem
SERVICES/OPTIONS
VARIETY S AND
AND PLANS:
PLANS:
4.3
CLOSE-ENDED:

AND
OPEN-ENDED

the ler
4.3.1
distinction
in funds is based on
th ot fime
Another money,
There are two
fund is collecting
the and close
ended
which

this
ssification, i-a open
ended
ed fufune
you
nere you get and
can
car
in
life-As infioand
under fundsw
These are
open-ended-
anytime you
want a s they have perpetual
there
inflows
no limit to wh
there is no
unrestricted
and typically,
unlimited
According to
tracker Hor
mutual fund
to.
can grow of stay-end
in India as of stay-end has
corpus
India, the largest equity scheme beena
star
crone.
the oldest scheme has
And at wori
of RS. 7,490
corpus most fiend houses prefer
38 years, At present, t
for the last the fund houses ga
funds as it help
launder open-ended continuous básis
and manage it on
a
money consistently of time in
funds. Different periods
convert them to open-ended
seen open
ended and close-end funde
have
the last 20 years investors interest but
due to what
not due to
change in popularity, companies-(A-r/105)
the corporations that
the asset management for the mutual fund.
function
the asset management
carry out
wanted to launch.
mutual fund ears
of the opening up of the
In the early years
fund man would come
and St in
not sure if investors market,
were
investor behaviour,
on account of
the fund, Due to uncertainty schemes. As
launched in the 19905 were closed-end
most schemes open-ended
market matured, fund houses moved to offering
the is
now Knew that
real retail money (your money)
products-in in and out of funds,
Funds
and does not like to shift
sticky closed-end funds in 2005-and 2007
due to a
switched to launching
allowed them to charge-
closed-end funds that
cost advantage that over and
fees from you-That arbitrage is
initial marketing closed-end funds with the
funds launch open-ended and
currently
fund in mind (though majority of
a
investor and purpose of the
funds are now open-ended funds).
the break up of schemes under thee
ese
The chart below gives 2011.
a s at 30th June,
various fund categories
 u rund Produ

Chass Products
TOTAL OF
OPEN END FUNDS ALL 85
No of
Schemes
Amount
CLOSE END FUNDS
No o
SCHEMES
Amount INTERVAL FUNDS (Rs. in Crores)
215 Schemes No. .of
hwneFund
242400 344 Amount TOTAL
309 22 526 3chemes No. of
Eouty
Fund
13,763 Amount
BelenoedFund
31
1,400
3
4502 Schemes
64 92
LetManey
1,641,597 269 428
8 316
690 3 13.763
ELSSEquty 520 1,400
1
G oETFs 1,172 1841 597
19
O m e rETFs 1,385 18
7
Fund
ofFunds
545 520
730 1,172
Total
1,903,472 363
22,526
Source: www.amfiin
fiindia.com. 3
4,502 45
1,126
1,930 500
4.3.2 ACTIVE AND PASSIVE:
ather di
Another distinction that
eive funds. distinctionisisimportant is between
passive funds. The
active and
his Tole, Active funds are
view
based on
how the fund
those that aim to
chmark, A benchmark is reference
bend
managers
beat the market a
manager and investors can
point against which fund
Nample, most equity funds compare the performance. For
will have either
Nifty Index as
benchmark. the Sensex or the
The funds that want
index to
are
passive funds. Investors who wantjust mimic an
called
investment vehicle that they want to choose once andto have an
Ise over their
investment lifetime, without then just
whether their fund manager is worrying about
whether he will sustain going to stay with the
fund or
the
Investors who want returns that performance, choose passive funds..
are ahead of the market and do
not mind taking the higher risk that, comes due to the fund
manager's risk, choose active funds.
Active Funds: The reason for the existence of
an active fund is
to beat the benchmark
it has chosen to measure its
against. The fund managers of active funds believe performance
they have the
ability to select stocks and time the market in a manner that makes
the returns on their
portfolio higher than what the market (in the
form of
benchmark)
gives over a specific period ot time. Active
funds have fund managers who have the freedom to pick and
choose stocks they want to buy or sell. Of course, the freedom
Ones in an institutional structure with internal rules. Since the
 86 Vipul's Mutual Fund
Mano
Fund Managers are actively
and transactions.
involved, there are coc
costs
agemem
on Tesea
t
Passive Fund: Also called index funds since
mimic an index,
their onl
they don't have Fund
managers, In y aim is
need fund managers, They
simply mimic their benchmey ey don fact,th
They invest in
scrips and in exactly the same enchmar
their benchmark indices.
They move up and down a proportion ndice
their benchmarks move, For e
Index will buy all so stocks inexample
a
passive fund on tha
are held
the Nifty in the same eNify
by the Nifty. Each time a stock is taken
the NIFTY index, the out or aproportion
this makes lesser
fund will do the same, on a
day-to day
added
work than what has
entail. Changes in the managing active funds woi
more
frequent than once a composition
of the index are
usually na
scrips in an index changeyear, However the individual weight
of
mandated to every day and since index
hour before thesimultaneously change thrie scrips in the funds are
Equity Market closes by last halt
portfolios, index funds do end rebalancing
their existing
can up incurring some cost.
expect almost the same return
though there will be a small as the index Investors
their fund
performance and that of its difference between an 'index tracks,
is caused benchmark. Called
because of the small fund's
fund keeps. (to cash tracking error, this
costs it incurs
face
redemption component that every index
pressure) and also the various
(that eventually reduce
brokerage, advertising and your fund's
NAV) such as
passive fund compared with marketing. Costs are lower
an active in
4.3.3 fund. a
GROWTH OPTION,
REINVESTMENT OPTION: DIVIDEND OPTION
AND
Investors who DIVIDEND
The scheme prefer capital
Thus unit would
holders
not declare
dividends
appreciation
opt for growth plan.
income from the who opt for growth under the growth plan.
will scheme.
remain invested plan will
Instead the income not
receive any
Net Asset within the units earned on the
Value. So while and will be units
investor remains the number reflected in
value of the constant, the value of the of units held by the
investment portfolio. units the
varies with the
JossificotionofM
Fund Products 87
tion
Mutual
of
Investors
who wish to receive regular income can opt for
w

nvestan. Under this plan the scheme will declare dividend.

dividend plan
Aivideders may decide to reinvest the dividend in additional
U n i th o l d e r s

schenme at NAV prevalent at that point in time. This

nits o f the
nits known as dividend reinvestment option. In this option
ption i s .
opioher off u
number o units
r held by the investors increase with every
of units. Mostly all schemes give dividend
theiditional
the

purchase
Honal purch
nvestment option allowing the investors to reinvest any
reition
distribut
into additional units at NAV without any load
charges.

Most MF schemes have dividend and growth options, The

dividend option gives out a cash flow by liquidating some units
riodically, while the growth option allows the money to stay
Pvested.
i n v e s t e d . While filling the investment application form,if you
forget to choose one, your fund will allot you the default option.
MFs pay dividends whenever your-investments earn profit that
they can pay
out. If you need
periodic dividends as a source of
income from, say, debt funds, or if you feel the need to
periodically book profits in your equity funds, choose the
periodically
dividend plan. One thing an investor should remember that the
dividends come out of their own pockets. When a Fund declares
dividend, its NAV comes down by that extent, Dividends are
good for those who reinvest them effectively or those who need
thorn as current income.

4.3.4 SYSTEMATIC INVESTMENT PLAN (SIP):

Under this facility an investor can invest a fixed amount every
month for a pre-decided period of time usually six months or one
year through post-dated cheques at applicable NAV-related
prices. This facility helps the investors to average out their cost of
investments over a period of six months or one year and thus
Overcome the short-term fluctuations in the market. This strategy
is popularly known as Dollar-cost of averaging.
Features:
a) Dollar Cost of Averaging: Not many inwestors can time the
market get in at the bottom and get out at the top for a fat
profit: For such investors the dollar cost averaging is the best
way to go as it eliminates the market timing decision. With
 Mutual Fund
Vipul's" Mutual Fund Fund anogsie
88 i n v e s t o r
always be fulily
will always
belo
Monog
invested
erer
strategy
an
examplebelowwill
The example
show
this
how
market.

turns
in the
the
works: month) Unit
Unit PriceUnits Acy
10th of every

Regular
Investment (At
100
the
11.79
12.11
Acauiren
8.48
100 8.26
11.17
100 8.95
11.62
100 8.61
13.59
100 7.36
13.82 7.24
100
11.82 8.46
100
10.3 9.71
100
10.38 9.63
100
100
9.74 10.27

1000
116.34 86.96

investor Rs. 11.50.

Average unit cost to the
Average unit price to the investor Rs. 11.63.
As given in the table above, the investor own 87 units o
the fund by investing Rs.1000. These units become worth
more than what the investor has paid for it. The
average price
of his 10 investments is Rs.11.63. However, the investor has
acquired these units at the average price of Rs.11.50. The idea
behind Dollar cost of
averaging
That way the investor will be sure to
is to invest for the
long term.
catch the down markets
and be fully invested in the
up markets. However, he should
stick to the investment in the
be forced to sell units at a
down market otherwise he will
loss.
(b) Value
Averaging: Value averaging is an
This tactic is suitable aggressive form
dollar cost of
averaging.
who can tolerate for those investors
fixed amount greater price volatility. Instead of
regularly, in value investing a

specify the investment averaging the investor has to

value
over a increase by a
specific time frame. This specified amount
investing more in some months
means the
investor will be
declined and less when the when the investment has
investment has increased
expectations. The example below shows beyond how it works:
 futualFund Products 89

Value of the
Investment on Investment to be
Adfitional units
PsnemVM
UnitPricea Units
10th betore made on 10th of
acquired
10tho fe v e r y
acquired additional units every month
month

are acquired
Wny
onth

8.49 100
11.79

16.51 103 97
12.11
116 10
26.86 184
200
11.17

34.4 312 88
11.62

36.80 468 32
13.59
500 43.40 509 91
13.82
187 16
600 59.22 513
11.82
190 18
00
77.69 610
10.30
94 9
800 86.73 806
10.38
900 155 16
9.74 102.65 845
1000

investment made 1150.

Total
investor Rs. 11.21.
unit cost to the
Average
unit price: Rs. 11.63.
Average
shows that average
unit cost to the
The example clearly to value averaging.
It is
lesser when he has resorted
investor is Rs.11.63. This strategy is
to
the average price of
Rs.11.21 as against investment purposes.
Over the long-
be used for the long-term
Dollar cost averaging.
value averaging outperforms the
term could under perform
in the short-term, value averaging
However, are suitable for
cost averaging. In short, these strategies
dollar unit
investment planning in
volatile markets. Any
long-term to certain terms and
holder can avail of this facility subject
torm of the respective
conditions specified in the SIP apPplication
mutual fund scheme.
Illustration:
Investment
Table: SIP v/s One-Time
One-time SIP
Month NAV
Units
Rahul Shyam
1,00,000 10,000 1,000.00
10.00
833.33
12.00 10,000
10,000 1111,11
9.00
10,000 1250.00
8.00
5 10,000 1666.67
6.00
 Vipul's Mutual Fund
800 10,000
Managen
nogemem y
10 00 10,000 EA
11.00 10,000
14.00 10,000
15.00 10,000
10,000
Totai Units

Fund Value
1,50,000
Profit Due to SIP 6,017
The fund value of Shyam is more than that of Rah
Rahul's investment was one-time and could not take the h n ahul, sin
movements in the market. We can see that for Rahul, the a
cost of purchase is Rs 10/unit, whereas for Shyam, the
cost of purchase is Rs 6/unit. This is where SIP
aver. averany
scores over (
time investment. Markets are volatile and the
value keens
fluctuating; there is always downside risk
a On
involved. SIP hel
not only minimize the risk but also take the elps
opportunity when
there is fall in market. This is
a
why the loss incurred is
less
because it comes with the
advantage of
averaging the
cost of
acquisition.
Thus we can conclude
that before
needs to understand what returns investing any product, one
in
one can
period of time, and whether the same will addexpect from it over a
to its
create any value. The
investment approach/style shouldportfolio and
meet the
objective of investment. Equities are risky, but
surely help one to gain from markets. right timing will
4.3.5
Systematic Withdrawal Plan (SWP):
In this plan the investor withdraws
fixed amount of
periodically.
want to
SWP is a mirror
image of money
SIP. Just as investors do not
buy all their units at a
market
their units redeemed in
a market
peak, they do not want all
opt for the safer route of trough. Investors can therefore
of units. offering for
repurchase, a constant value
Switch Facility: Unit
units between dividend holders under a scheme can opt to switch
also any plan, growth plan and any other
option(s) within a plan under a plan and
NAV based scheme, at
prices. Besides, the unit holders under a applicable
exchange their units for units of the other
scheme may
scheme(s).
 Exanmple:
le: Suppose an investor were to offer for re-purchase
00permonth
month for 6 months. If, in the first month, the NAVVis
000
RL
s 000
tor's unit-holding will be reduced by Rs 1,000
10100
RsI units. In
100units. In the second month, if the NAV has gone up
oie12, the unit-h
R1
s 014

nit-holding will go down by fewer units viz. Rs

o Rs Rs 12 i.e. 83.333 units. If the NAV goes down to Rs 9 in the
nonth, the unit-holder will be offering for re-purchase a
l o w i n gm o n t h ,

lowher ofof units

units viz. Rs 1,000 + Rs 9 i.e. 111.111 units.
number

Thus,
higher repurchases
vestor repurchases his Units at an average NAV during the 6
the oriod.
the The investor does not end up in the
o n t hp e r i o d

unfortunate
noof
position of exiting all the units in a market trough. Mutual funds
it
convenient
convenier tor investors to manage their SWPs
by
ing
make

icati
the amount, periodicity (generally, monthly) and
dforfor their
period the SwP. Some schemes even offer the facility of
only the appreciation or the dividend. Accordingly,
nsferring
mtual fund will re-purchase the appropriate number of units
t h em u

fof the
the unit-hol
unit-holder, without the formality of having to give a re-
urchase instruction for each transaction.
An investor may opt for SWP for several reasons:
As discussed earlier, minimise the risk of
units during a market trough.
redeeming all the
Meet liquidity needs for regular expenses.
Assuming the scheme is profitable; the re-purchase ensures
that some of the profits are
being regularly encashed by the
investor.
As discussed under Taxation, debt
schemes are subject to
Income Distribution Tax. In such
schemes, it would be
more tax-efficient to take
money out of the scheme as a re-
purchase (on which there is no income distribution tax) as
compared to dividend (which would be liable to income
distribution tax).
43.6 Systematic Transfer Plan:
This is a variation of SWP. While in a SWP
the constant amount
s paid to the investor at the
pre-specified
amount which is withdrawn froma schemefrequency,
in a STP, the
IS re-invested
Oner scheme in some
of the same mutual fund. Thus,
rates as aSWP
 Vipul's Mutual Fund lanagement (8FM
92 L

SIP into the second Sincethe

scheme.
from the first scheme, and a
between schemes, it is also calle
investor is effectively switching
unit-holder were to do this SWP and SIP SIP a
"switch". If the
separate transactions:
The Unit-holder ends up waiting for funds during the time
period that it takes to rece/ve the re-purchase proceeds, and
has idle funds, during the time it takes to re-invest in the
second scheme. During this period, the market movements
can be adverse for the unit-holder.
The Unit-holder has do two sets of paper work (Sale and
Repurchase) for every period. The STP offered by mutual
funds is a cost-effective and convenient
facility.
instruil

4.4 EXCHANGE TRADED FUNDS:"

EXChange traded funds (ETFs) hybrid of open-ended
are a
utual funds and listed individual stocks. They are index fund
mutual

f u n d s listed on stock
exchanges and trade like individual stocks
an th
on the stock exchange. However, trading at the stock exchange
s nnot
does
o t affect their
portfolio. ETFs do not sell their shares
Airectly to investors for cash. The shares are offered to investors
uer the stock exchange. ETFs are basically passively managed
nds that track a particular index such as S&P CNX nifty. Since
they are open-ended
and listed on stock exchanges, it is
possible
to buy and sell them throughout the day and their price is
is
determined
d etermined by the demand-supply forces in the market. In
by
Dractice, they trade in a small range around the value of the assets
(NAV) held them.
ETFs the innovation of the last few years, a mix between
are
mutual funds and investment trusts. As with mutual funds, new
units can be created at any time, son in
theory there is no
maximum size the fund can reach. This also means that the issuer
can keep the price linked to the
price of gold, by issuing or
redeeming shares if it gets out of line. But, as with investment
trusts, they are traded continuously, so you can buy and sell them
much like shares.
 Mutual
Fund via oFM
Vipul's"
94 are
trade.ded mo
but
funds
are trad.
trade
t h a t .are
that
ETFs are similar to index
nutual
s e c u r i t i e s

d u eto passiv
asket of and
a
They represent
funds

like a stock. index as com

as comparedmpared t
are passive
inuccer fees
passive
fees
whero
exchange. They
lesser

on an charge
fund
s c h e m e

h
fund management these
funds
mutual

the day
and the un
of
other funds. Unlike any at
the
other
end
house
only, ETF ETF uni
is the
fund
d e c l a r e d

and so
NAV of the scheme through be
bought

and
sold and
can

which
the ETFs un
can be bought exchanges at
of
are traded
on
stock
The
rate orpriceto the
real
NAV
th
these
exchanges.

is very
close
through
any bro.
through any brok
through
through
the
exchange
or
sold

IS traded on
can
be bought
scheme.
They
throughout the country.
advantages. advantagesal
distinct
time pricing
ETFs
offer
several

and real to trade int

ability
the trading funds.
The
intra-da
ETFs bring mutual the
actual
(1) stocks to close to
individual
usually trading. ET:
are real-time
that almost
at prices makes it allowine
day day,
of the
scheme
the trading
NAV throughout funds.
sold mutual
c a n be bought
and is rare
with
trading-which can attrac
for intra-day and hence they
index futures due
understand

ETFs are simpler to to trade in

(2) who a r e
deterred
investors can
small
investors
contract size. Small
ofminimum ETF limit orders and
to requirement of can place
liquidity ofthe
one unit
minimum
increase
buy This in turn would
trade intra-day.
cash market.
between index
effectively
ETFs can be
used to arbitrate
(3) of market makers can
index. The presence
futures and spot of
units directly with the funds for exchange
create or redeem difference
securities. Hence, any
defined basket ofunderlying as an
price the exchange is used
in the NAV and the
on

the market maker.

arbitrage opportunity by
funds. The
benefits of diversified index
(4) ETFs provide the the
investor can benefit from the flexibility
of stocks as well as
diversification.
somewhat higher NAV
(5) ETFs being passively managed have a
The operatin
against an index fund of the same portfolio.
 Mutualal Fund
f Mutual Products
Products
af
enses of
EFTs
are
hey do not
nds as the lower than 95
have even
those of
to
shares through stock exchanges.service investors similar index
eneficial
ETs can be benefi who deal in
for
(0 ions can
in tions, use ETFs for
institutio financial institutions
also. Financial
redemptions,
moditying sector utilizing idle cash,
matket eXPOSure,
allocations, and managing
The first exchange traded hedging
Deposilory Receipt (SPDR
1993. ETFs have -also fund-Standard
called and poor's
poor's
he US
the US in 9 5 . ETFs have

assets on
billion in assets as grown rapidlySpider)-was launched
with around USD in
alue on the December2001. Today about 60
ading value o
trad
American Stock
100

ETFs. ETFs were launched in Exchange percent of

Europe and Asia
(AMEX) is from
than 280ETFS are available
280E in 2001.
US, Europe, Currerntly,
more
n ckong, Japan and other
Hongkong
in
SPDRs (Spider) based on countries. Singapore,
the S & P Among
the
are
aced on the Nasdaq-100 500 Index, popular ones
Index, I SHARES QQQs (cubes)
and TRAHK (Tracks) based on the
nd TRA based on MSCI
Indices
ctructure has seen over USD
336
Hang Seng Index. The ETFs
30ETFs. It has become the fastest billion pouring into more than
The first ETFs to be
growing fund structure.
introduced in
India is Nifty
Exchange. Traded Scheme (Nifty Benchmark
BeES).
launched towards the end of 2001 by It is an
open ended ETF,
The fund is listed in the benchmark Mutual Funds.
trades the S&P CNX
capital market segment of the NSE and
Nifty Index. The benchmark Asset
Management Company has become the first
company in
excluding Japan) to introduce ETF. Each Nifty BeES Asia
of the S&P CNX unit is 1/10th
Nifty
BeES units are traded and
settled in
dematerialized form like any other share in the
If
charges a management fee of 0.35 percent androlling
the
settlement.
total ratio is
080 percent
p.a. which is the lowest in India. It has a
error of 0.12 percent (annualized), which is tracking
India for any index fund. again the lower in
Junior BeES
Denchmark Mutual Fund on 6 March 2003 and launched by
was
trades on the
pital market segment of the NSE. Each Junior BeES units is
h of the CNX Nifty Junior Index value. Benchmark Mutual
now offers six ETF
products: Banking BeES, Benchmark
 Mutual Fund Ma
Vipui's

and
Benchmark Split
Capit
Split Capital
B e n c h m a r k
Manogement
Fi nagemem (
und (A
Benchmark ETS (}
D e r i v a t i v e
Fund,
ETS, Nifty
Benc
launche in
S and y
B e n c h m a r k

BeES nd was
fund w a s launched
in July 2003
Liquid
funior
BeES.
The Liquid
Liquid
The banki
banking BeES
Benchmark.

kev h afun u
2003
und trac
tracks the
Crisil
comprises
comprises 12 key banki
Index, hich
which
Bank
the CNX of the CNX bank, which
Each unit is priced
at 1/10th
Each unit is
stocks. Each
unit at 1/10th of
priced ati
is priced mprises
the CNX.
key
banking
The
Benchmark
Derivative fund
launched
was banly
Split Capital fund was lau
fundlaunched
Index. was
and the
December,2004
Management handles four out of five
Benchmark Asset
2005.
available in the market.
currently
Fund (SPIC
SENSEX Prudential ICICI Exchange Traded Fund (SPICE i
SENSEX
traded fund (ETF) on
launched
the first exchange b
Prudential ICICI Fund. One unique feature of SPICE is Can can
bought and sold like another equity share on the BSE tradin
terminal (BOLT) through a stockbroker. The minimum lot siz ng
is
one unit of SPICE and a retail investor can buy one SPICE unit for
Rs. 33 and it in his demat account just like any other security. UTI
launched UTI Sunder Fund which tracks the S & PCNX Nifty.

4.5 FUND-OF-FUNDS:
An FOF scheme invests in a combination of equity and debt
mutual fund schemes available in the market. The fund manager
changes the percentage of equity and debt allocation based on the
market view.
Fund-of-funds invest in other mutual funds and offers a return
to investors. Internationally, fund-of-fund do not limit their
exposure to other mutual funds. They are more like hedge funds
and do not necessarily restrict themselves to
investing in other MF
schemes. They put money in other fund classes such as
private
equity funds and distressed assets funds. This enables the
investors in FOFs to obtain
diversity in risk allocation. This
strategy provides the fund manager more flexibility in
the investible corpus. allocating
The flip side is that there may be a double
to the end investors pay the layer of fees charged
expense fees to the fund manage
er
 ofMutual Fund Products
Cassification
97
the
sible for the
eilhble FOF. In addition, they could be
responsil

resphe changes incurred by the fund manager in

requiredinto
buying
to
b e a rt h e

bea
various
MF schemes. Also it is possiblethat the fund
manager
the ame stock through various schemes.
be buying
Kotak lutual
unds has an FOF that invests in schemes of
fund houses. The other mutual funds offering the scheme
ther
Standard
are Standard Chartered Mutual Fund and Prudential ICICI
Fund. The assets under management of FOF(AUM)
Mutual
crore in January 2005 and this reduced to Rs 813
schemes Rs. 1,040
in July2005. The factors restraining the growth of FOF are:
crore
distribution tax is levied on FOF and rate applicable
Dividend
to individuals is 14 percent.
tax of 10 percent without
The long-term capital gains
indexation and 20 percent with indexation is applicable to
funds, the short-term gains tax is 10
FOF. In equity mutual
tax is nil. Hence taxes are a
percent and long
-term gains fund
of FOFs. All investment in
major deterrent to the growth
investments and is taxed like debt
funds are treated as debt
funds is exempt from long-term
funds. Investment in equity the same at 10
funds are subject to
capital gains while debt fund-of-funds attracts a
long-term
percent. Investment in a
Fund-of-funds have to be actively managed
tax of 10 percent. asset classes
But it is difficult as very few
by fund managers.
there is lack of
information

are available to invest

in the investment.
corporate and retail
of
regarding the composition to invest in
an
schemes
fund houses choose
their own an
diversification
MOst advantage of
FOF schemes which limits the
investor is looking for.