Mutual Fund Basics

Q: What is a Mutual Fund?

A mutual fund is a trust that pools the savings of a number of investors who share a
common financial goal and investments may be in shares, debt securities, money-market
securities or a combination of these. Those securities are professionally managed on behalf
of the unit holders and each investor holds a pro-rata share of the portfolio, that is, entitled
to
profits
as
well
as
losses.
Income earned through these investments and the capital appreciation realized is shared by
its unit holders in proportion to the number of units owned by them. A mutual fund is the
most suitable investment scope for common people as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively lower cost.
Q: Who regulates the Mutual Fund market?
SEBI
To protect the interest of investors, SEBI formulates policies and regulates the mutual funds.
It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time.
Mutual funds, either promoted by public or by private sector entities including one promoted
by foreign entities, are governed by these regulations.
Q: What is NAV?
Just like a share has a price, a mutual fund unit has an NAV. To put it simply, NAV represents the market
value of each unit of a fund or the price at which investors can buy or sell units. The NAV is generally
calculated on a daily basis, reflecting the combined market value of the shares, bonds and securities
(as reduced by allowable expenses and charges) held by a fund on any particular day.

Q: What are the different types of Mutual Funds?

There exist various mutual fund schemes to cater to the needs such as financial position,
risk tolerance and return expectations etc.
The content below gives an overview of the existing types of mutual fund schemes in the
industry.

By Structure

Open-Ended Schemes
Open-ended schemes are mutual funds that can issue and redeem their shares at any time.
Open-ended funds do not have restriction on the amount of shares the fund will issue. They
offer units for sale without specifying any duration for redemption. If demand is high enough,
the fund will continue to issue shares, no matter how many investors are there. Open-ended
funds also buy back shares when investors wish to sell. Investors can conveniently buy and
sell units of open-ended funds directly from the fund house at the prevalent Net Asset Value
(NAV) prices. One of the key features of open-end schemes is the liquidity that these funds
offer to investors.
Close-Ended Schemes
Close-ended schemes are mutual funds with a fixed number of shares (or units). Unlike
open-ended funds, new shares/units are not created by managers to meet demand from
investors but the shares can only be purchased (and sold) in the secondary market.
Close-ended funds raise a fixed amount of capital through a New Fund Offer (NFO). The fund
is then structured, listed and traded like a stock, on a stock exchange. The price per share is

determined by the market and is usually different from the underlying value or net asset
value (NAV) per share of the investments held by the fund. The price is said to be at a
discount or premium to the NAV when it is below or above the NAV, respectively. A premium
might be due to the market's confidence in the investment managers ability to produce
above-market returns. A discount might reflect the charges to be deducted from the fund in
future by the fund managers.
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, that is, either repurchase facility or through listing
on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Interval Schemes
Interval schemes are those that combine the features of both open-ended and close-ended
schemes. The units may be traded on the stock exchange or may be open for sale or
redemption during pre-determined intervals at NAV-related prices.

By Investment objective:

Growth or Equity-Oriented Schemes

The aim of growth funds is to provide capital appreciation over medium to long- term. These
schemes normally invest a major part of their portfolio in equities and have comparatively
high risks. They provide different options to the investors like dividend option, capital
appreciation, etc. and investors may choose one depending on their preferences. 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.
It can be further classified into following depending upon objective:

Large-Cap Funds: These funds invest in companies from different sectors. However,
they put a restriction in terms of the market capitalization of a company, i.e., they
invest largely in BSE 100 and BSE 200 Stocks.

Mid-Cap Funds: These funds invest in companies from different sectors. However,
they put a restriction in terms of the market capitalization of a company, i.e., they
invest largely in BSE Mid Cap Stocks.

Sector Specific Funds: These are schemes that invest in a particular sector, for
example, IT.

Thematic: These schemes invest in various sectors but restrict themselves to a

particular theme e.g., services, exports, consumerism, infrastructure etc.

Diversified Equity Funds: All non-theme and non-sector funds can be classified as
equity diversified funds.

Tax Savings Funds (ELSS): Investments in these funds are exempt from income tax at
the time of investment, upto a limit of Rs 1 lakh.

Income or Debt oriented Schemes

The aim of income funds is to provide regular and steady income to investors. These
schemes generally invest in fixed-income securities such as bonds, corporate debentures,
Government Securities and money-market instruments and are less risky compared to
equity schemes. However, opportunities of capital appreciation are limited in such funds.

The NAVs of such funds are impacted because of change in interest rates in the economy. If
the interest rates fall, NAVs of such funds are likely to increase in the short run and vice
versa. However, long-term investors do not bother about these fluctuations.
Balanced Schemes
The aim of the balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income instruments in the proportion indicated in
their offer documents. These are appropriate for investors looking for moderate growth.
They generally invest between 65% and 75% in equity and the rest in debt instruments.
They are impacted because of fluctuation in stock markets but NAVs of such funds are less
volatile compared to pure equity funds.
Money Market or Liquid Funds
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 Deposits, Commercial Paper and inter-bank
call money, Government Securities, etc. Returns of these schemes fluctuate much less than
other funds. These are appropriate for investors as a means of short-term investments.
Gilt Funds
These funds invest exclusively in Government Securities. 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.
Fund of Funds Schemes
Fund of Funds invests in other mutual fund schemes. A traditional mutual fund comprises a
portfolio of shares, but a Fund of Funds comprises a portfolio of different mutual fund
schemes. A Fund of Funds helps the investor to reduce his chances of selecting the wrong
mutual fund. Gold Exchange Traded Funds
It is an open-ended Exchange Traded Fund. The investment objective of the scheme is to
generate returns that are in line with the returns on investment in physical gold, subject to
tracking error.
Floating Rate Funds
These are open-ended income schemes seeking to generate reasonable returns with
commensurate risk from a portfolio which comprises floating rate debt instruments and fixed
rate debt instruments swapped for floating rate returns. The scheme may also invest in fixed
rate money market and debt instruments

Other schemes:

Tax-saving schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax
Act, 1961 as the Government offers tax incentives for investment in specified avenues like
Equity Linked Savings Schemes (ELSS). ELSS is a type of diversified equity mutual fund,
which is qualified for tax exemption under Section 80C of the Income Tax Act, and offers the
twin-advantage of capital appreciation and tax benefits. It comes with a lock-in period of
three years.
The Rajiv Gandhi Equity Savings scheme (RGESS), which was revised in the Union Budget
2013-14, would provide a 50% tax deduction on investments up to Rs. 50,000 to first time
investors in equity whose annual taxable income is below Rs. 12 lakh.
Index Schemes
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P
NSE 50 index (Nifty), etc. 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". Necessary disclosures in this regard are made in the offer document of
the scheme.

There are also exchange traded index funds launched by the mutual funds which are traded
on the stock exchanges.
Sector Specific schemes
These are the funds which invest in the securities of only those sectors or industries as
specified in the offer documents like Pharmaceuticals, Software, FMCG, Petroleum stocks etc.
The returns of these funds are dependent on the performance of the respective
sectors/industries. While these funds may give higher returns, they are more risky compared
to diversified funds. Investors need to keep a watch on the performance of those
sectors/industries and must exit at an appropriate time.
Load or No-Load Funds
A load fund is one that charges a percentage of NAV for exit. That is, each time one sells
units in the fund, a charge will be payable. This charge is used by the Mutual fund for
marketing and distribution expenses.
A no-load fund is one that does not charge for exit. It means the investors can exit the fund
at no additional charges during sale of units. In accordance with the SEBI circular no.
SEBI/IMD/CIR No.4/168230/09 dated June 30, 2009, no entry load will be charged for
purchase / additional purchase / switch-in accepted by the fund with effect from August 1,
2009. Similarly, no entry load will be charged with respect to applications for registrations
under Systematic Investment Plan/ Systematic Transfer Plan / Systematic Investment Plan
Plus accepted by the fund with effect from August 1, 2009.
Dividend Payout Schemes
Mutual Fund companies as when they keep on making profit, distribute a part of the money
to the investors by way of dividends. If one wants to keep on taking part of profit regularly,
he may select this option.
Dividend Reinvestment Schemes
This option is similar to the first option except that the dividend declared is re-invested in
the same fund on the same days NAV.
Q:Types of returns?
Following are the ways by which returns can be realized in a mutual fund:
Dividends
Unit holders earn dividends on mutual funds. These dividends are distributed from the
income generated through dividends on stocks and interest on other instruments.
Capital Gains
Investors get capital gains on mutual funds. If the fund sells securities that have appreciated
in value, it earns capital gains. Most funds distribute these capital gains also to investors.
Profit from higher NAV
Any increase in value of funds asset increases the NAV of the fund. Investors can make
profit by selling back their units to fund house.
Q: Advantages of investing in Mutual Funds.
Professional Management
Mutual funds employ experienced and skilled professionals who make investment research
and analyze the performance and prospects of various instruments before selecting a
particular investment. Thus, by investing in mutual funds, one can avail the services of
professional fund managers, which would otherwise be costly for an individual investor.
Diversification

Diversification involves holding a wide variety of investments in a portfolio so as to mitigate

risks. Mutual funds usually spread investments across various industries and asset classes,
constrained only by the stated investment objective. Thus, by investing in mutual funds, one
can avail the benefits of diversification and asset allocation without investing a large amount
of money that would be required to create an individual portfolio.
Liquidity
In an open-ended scheme, unit holders can redeem their units from the fund house anytime.
Even with close-ended schemes, one can sell the units on a stock exchange at the prevailing
market price. Besides, some close-ended and interval schemes allow direct repurchase of
units at NAV related prices from time to time. Thus investors do not have to worry about
finding buyers for their investments.
Flexibility
Mutual funds offer a variety of plans, such as regular investment, regular withdrawal and
dividend reinvestment plans. Depending upon ones preferences and convenience, one can
invest or withdraw funds, accordingly.
Cost Effective
Since Mutual funds have a number of investors, the funds transaction costs, commissions
and other fees get reduced to a considerable extent. Thus, owing to the benefits of larger
scale, mutual funds are comparatively less expensive than direct investment in the capital
markets.
Well Regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of
India (SEBI), which strives to protect the interests of investors. Mutual funds are required to
provide investors with regular information about their investments, in addition to other
disclosures like specific investments made by the scheme and the proportion of investment
in each asset classes.
Convenient Administration
The facility of making investments through service centers as well as through internet
ensures convenience.
Return Potential
By allocating right asset mix, mutual funds offer a chance of higher potential of returns. The
high concentration of risky assets would lead to higher return and vice-versa.
Transparency
Information available through fact sheets, offer documents, annual reports and promotional
materials help investors gather knowledge about their investments.
Choice of Schemes
The investors can chose from various kinds of scheme available to them. The risk-seeker
investors can go for more aggressive schemes while risk-averse investors can go for income
schemes funds and so on.

Life Insurance Basics.

In simple terms, life insurance is a back up or plan-B for life, which answers the what if
questions for people who buy it. Questions like:
What will happen to my family if I were to die early?
What happens if my money runs out after I retire?
What will I do to fund my childs aspirations?
Essentially, the objective of owning life insurance is to take advantage of the peace of
mind that it brings comes with. This is achieved through different types of life insurance
policies that cater to a wide variety of needs. Here are some basic types of life insurance
policies.
Life insurance is a means of providing protection and long-term savings. The most basic type
of life insurance plan is one that offers protection or a life cover, for a fixed premium. These
are protection or term plans. In addition there are a number of plans aimed at long-term
savings. These plans are of two types traditional plans and unit-linked plans. Both these
plans invest your premiums in various available instruments including equity, debt and
money market. In unit-linked plans the entire risk of the investment is borne by the policy
holder while traditional plans offer assured returns. One should choose a long-term life
insurance plan after determining how much risk you would like to take.

Detailed below are some typical life insurance plans.

1. Term Insurance Plans: This is one of the most widely bought life insurance products
globally. However, we in India are just catching up to the great benefits that term insurance
offers.
In simple words, term insurance is a pure risk cover product. This means that it pays a death
benefit when the policyholder/person who is insured dies during the period for which he/she
is insured. In case he/she survives this period, he/she will not receive any money from the
insurance company.
Now you may wonder, So whats the use of such a policy where you dont get the money
back? Isnt it a waste of money?
Well, this is one concern that has kept many people away from term insurance. However,
what they fail to appreciate is that term insurance is generally the cheapest form of life
insurance. For a very small premium, it provides the highest amount of cover (sum assured).
If you are working and have dependents and liabilities such a home loan you cannot
afford to ignore buying a term plan.
Term plans also come with a return of premium option. For a slightly higher premium the life
insurance company refunds all your premiums if you survive the policy term.
2. Endowment Plans: This is one of the most popular traditional life insurance policies
bought in India. Endowment policies combine risk cover with financial savings, and are thus
seen as an alternative for fixed deposits and other safe investments.
As mentioned above, there is dual benefit that a policyholder/insured person receives from
endowment policy. One, in case of death during the tenure, the beneficiary/nominee gets the
cover amount (sum assured). Two, if the individual survives the policy tenure, him /her gets
sum assured and benefits like bonuses depending on the policy benefits. Returns on
endowment policies are conservative but guaranteed and these are meant for risk-averse
individuals those who prefer a steady though moderate return rather than take high risks
for high returns. Endowment plans are a good way of safely accumulating a lump sum
corpus required at retirement.

3. ULIPs: Unit linked insurance plans (ULIPs) are plans that invest the policyholders
premium in capital market. Unlike traditional savings plans, the risk of investment in this
case is borne completely by the policyholder as the policyholder chooses the investment
options in which he/she wants to invest in. A part of the amount that the policyholder pays
as premium goes toward providing life cover. The rest is invested in the different investment
options (equity, debt, money markets, etc) available under the product. ULIPs can over the
long-term provide higher returns but come mostly without guarantees. ULIPs are very good
long-term savings investments. They combine the discipline of regular savings with the
potential of good returns and a life cover as well.
ULIPs come with a number of additional features such as riders, partial withdrawals and topups. ULIPs also come with fund choices (unlike traditional plans); here policyholders can
choose depending on their risk capacity. ULIPs are a great combination choice and flexibility.
Other categories and variations of insurance plans:
1. Money Back Plans: Money back policies have also been amongst the most popular life
insurance policies in India for many years. It is a type of endowment policy. However the
popularity of the policy lies in the fact that it gives payments at specific intervals during the
period of the policy.
A money back policy is very simple to understand. At fixed intervals during the period of the
policy the life insurance company gives back a fixed proportion of the cover amount (sum

assured) to the policyholder along with accumulated bonuses (if available) which are paid on
maturity. In case of death during the policy term, the beneficiary gets the full cover amount
along with the accumulated bonuses (if available).
2. Child Plans: These are unique products that are bought with the specific objective of
providing for childrens future financial needs, such as higher education, marriage, etc. Child
plans are available in traditional or unit linked variation depending on the consumers need.
These plans cover the life of the parent (policyholder) and ensure that in case of his/her
death, the child gets the cover amount. Not only this, the insurance company may also fund
future premiums and the child gets the value accumulated at the end of the policy period.
Some plans also provide income benefit to the child. Hence, Child Plans are largely suitable
for safeguarding the future of your children in both circumstances i.e. whether you are there
or not.
3. Health: Health plans as the name suggests are plans which provide for medical
expenses. These are similar but in many ways better to the medical insurance plans
provided by general insurance companies. These plans offer fixed payout in case of healthrelated expenses, for a fixed premium. These expenses may include hospitalisation
expenses, expenses incurred for surgical treatment, etc. Health plans are available in both
categories i.e. traditional and ULIP.
4. Retirement or Pension plans: A pension plan is designed to generate regular income
for individuals once they retire. Insurance companies offer various pension plans (also called
as retirement plans or annuity plans) where a person has to initially invest either a lump sum
amount or regular annual premiums over a period of time. In return he will get regular
income (pension) for life. In case of death, the beneficiary gets the cover amount plus the
bonuses/additions, if any. Retirement plans are available in both categories i.e. traditional
and ULIP.
5. Whole Life Plans: A whole life policy provides life insurance cover for the entire life of
the insured person or up to a specified age (the age varies from company to company but is
mostly above 85 years).
Generally, whole life plans come with limited premium payment option as people may retire
and stop earning by the time the policy reaches maturity. These policies are used to create a
legacy for the next generation as the cover amount (Sum Assured) is paid irrespective of the
age at death of the life assured.