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In Mutual Funds, Assured Return Schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

A powerful insight into assured–returns products is obtained by noticing that there is an option embedded in the product. When a fund sells a product where the unit holder receives all the upside potential, but his downside is capped at a fixed level: (a) the unit holder is getting a put option and (b) the fund is short–selling this put option. In order to evade itself, the fund needs to buy a put option, the price of which should really figure in every NAV calculation.

Assured returns schemes thus consist of Mutual Fund selling put options without hedging away that risk. This should make them exactly as uncomfortable as short selling put options on NSE’s upcoming options market. In terms of prudential regulation, regulators should be exactly as uncomfortable with a large short position on a put option market (which would require initial margin) as with a MF which assures returns (which has paid no initial margin).

Some investors look for investment options which guarantee them a fixed amount of return year after year because they believe they stand to gain without taking any risk. However, they could be exposing themselves to a much bigger risk – the risk of not keeping ahead of inflation.

This is why it may be sensible to have an investment portfolio that consists of more than just guaranteed return schemes. One can also consider investing in Fixed Income Funds. Fixed-income funds have the potential to earn a rate of interest commensurate with market interest rates. Credit ratings of companies are rapidly changing. Well-diversified income funds are able to spread this risk as research analysts are were equipped to track company credit rating changes. Investing through a bond/ fixed income fund does not mean giving up liquidity as is normally required with fixed deposits such as assured returns schemes.

A mutual fund represents a pool of financial resources obtained from individuals and companies, which is invested in the money and capital markets. This process represents another method for economic savers to channel funds to companies and government units that need extra funds. Mutual Funds, being a good opportunity of investment have become very popular in the recent past.

Unlike individual stocks, whose value vary minute by minute, mutual funds are priced at the end of each day the market opens, based on what the securities in the portfolio are worth. The price per unit of a mutual fund is recorded as the net asset value (NAV).

Mutual Fund loads are the price of buying a unit. It is a fee charged when an investor makes a transaction in the units of the mutual fund. Most funds sell units at a premium to its underlying net asset value, and purchase them at the net asset value. When the fund company charges a load when it sells units, it is called Sales Load or Entry load. Schemes that do not charge a load are called ‘No Load’ schemes. When it charges a load at the time of buying the units back from the unit holder, it is called Repurchase or “Back-end” or exit load.

A load fund charges an up-front fee and is used as a commission payment for sales representatives. These fees can be as high as 8.5 percent. A no-load fund does not charge a sales fee, although a small annual fee can be charged to cover certain administrative expenses. This small fee, which is called a 12b-1 fee, usually ranges between 0.25 and 0.35 percent of assets.

Securities and Exchange Board of India (SEBI) has put a ban on entry-load from August 1 2009. SEBI has stipulated that upfront commission to distributors would be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

Mostly people tend to advice on avoiding investing on load funds. But many studies have shown that both kinds of mutual funds almost tender the same return. Like the names suggest, they only differ in the fees, charged.

It is always wise to understand the costs properly to avoid losses. We should always be aware of the tough financial jargons used by the professionals and investors so that investing for us becomes smooth and meaningful. It only takes some time to brush up our financial knowledge and then start investing like a pro!

A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund’s prospectus. A mutual fund allows investors to pool their money, and then the fund invests it on their behalf.

Unlike individual stocks, whose value vary minute by minute, mutual funds are priced at the end of each day the market opens, based on what the securities in the portfolio are worth. The price per unit of a mutual fund is recorded as the net asset value (NAV).

Mutual Fund loads are the price of buying a unit. It is a fee charged when an investor makes a transaction in the units of the mutual fund. Most funds sell units at a premium to its underlying net asset value, and purchase them at the net asset value. When the fund company charges a load when it sells units, it is called Sales Load or Entry load. Schemes that do not charge a load are called ‘No Load’ schemes. When it charges a load at the time of buying the units back from the unit holder, it is called Repurchase or “Back-end” or exit load.

Most equity mutual funds charged retail investors an entry load of 2.25% on their investments. This entry load was mandatorily payable irrespective of an investor’s mode of entry. The total amount collected as load for each scheme, as per SEBI stipulations, had to be maintained in a separate account by AMCs and could be utilized to meet selling and distribution expenses. Securities and Exchange Board of India (SEBI) has put a ban on entry-load from August 1 2009. SEBI has stipulated that upfront commission to distributors would be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

SEBI has also mandated that of the exit load charged to the investor, a maximum of 1% of the redemption proceeds should be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses and any balance should be credited to the scheme immediately. All these decisions are applicable to investments in and redemptions from mutual fund schemes from August 1st, 2009.

These days between work, family, and friends, most of us do not have the time to make or monitor personal investment decisions on a regular basis. Mutual funds have competent professionals who do all this for you. This is the reason why, the world over, they have become the most accepted means of investing.

Mutual funds curtail risk by creating a diversified portfolio while providing the essential liquidity. Additionally, you benefit from the expediency of not having to bother with too much paperwork or repeat transactions. It is our belief that investors vary in their investment needs based on their individual financial goals.

The only goal of a Mutual Fund company is to earn good returns out of the investments. In order to achieve this goal, there are multiple players, working together, each player being a key entity involved in Mutual funds.

Sponsor:

Any registered company or a financial institution is called a sponsor. A sponsor is the most important entity of a fund. As per SEBI, a sponsor must have a good financial record in past.

Board of Trustees:

Mutual Funds in India have a Board of Trustees to run the fund. The power completely lies with the trust, thought the third party, AMC (Asset Management Company) is appointed by the trustees. They can even dismiss the Asset Management Company if it is found doing unethical practices or underperforming.

Custodian:

It is an independent entity that holds and safe keeps the assets. Mostly financial institutions or banks act as custodians.

Asset Management Company

It is the prime entity of any fund. It manages all the investments made by the investors. Records of pricing and accounting of data is looked after by these Asset Management Companies. It also calculates the Net Asset Value of the funds.

Fund Managers/ Portfolio Managers:

Under an Asset Management Company, there are Fund Managers or Portfolio Managers, who take necessary decisions related to the investments made by the investors. They are the person who monitor and manage your funds and investments.

There are some other entities involved with their prominent roles, which could be seen in the following flowchart:

Key entities involved in Mutual Fund: Flowchart

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India and can be broadly divided into four distinct phases:

First Phase (1964-87): The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase (1987-1993): It marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase (1993-2003): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed.

The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase – In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities – The Specified Undertaking of the Unit Trust of India, representing broadly, the assets of US 64 scheme, schemes with assured returns and certain other schemes and UTI Mutual Fund conforming to SEBI Mutual Fund Regulations. As at the end of March 2008, there were 33 mutual funds, which managed assets of Rs. 5,05,152 crores (US $ 126 Billion) under 956 schemes. This fast growing industry is currently regulated by the Securities and Exchange Board of India (SEBI).

A Wide variety of Mutual Fund Schemes exists to cater to different needs and is categorized by Structure, Investment objective and other schemes.

By Structure

• Open Ended Scheme: These do not have a fixed maturity and one can conveniently buy and sell their units at Net Asset Value(NAV) related prices, at any point of time.
• Close Ended Scheme: Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close ended schemes. One can invest in the scheme at the time of the initial issue and thereafter can buy or sell the units of the scheme on the stock exchanges where they are listed.
• Interval Scheme: These combine the character of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals.

By Investment Objective

• Growth Scheme: They aim to provide capital appreciation over the medium to long term and normally invest a majority of their funds in equities. They are ideal for investors in their prime earning years.
• Income Scheme: They aim to provide regular and steady income to investors and generally invest in fixed income securities. These are ideal for retired people.
• Balanced Scheme: They provide both growth and income by periodically distributing a part of the income and capital gains they earn and invest in both shares and fixed income securities in the proportion indicated in their offer documents. These are best for investors looking for a combination of income and moderate growth.
• Money Market Scheme: They provide easy liquidity, preservation of capital and moderate income and generally invest in safer and short term instruments. They are perfect for customers to invest their surplus funds for short periods.

Other Scheme

• Tax Saving Scheme: They offer tax benefits to the investors and promote long term investment in equities.
• Index Scheme: They attempt to duplicate the performance of a particular index such as the BSE Sensex, or the NSE 50 (NIFTY).
• Sector specific scheme: They invest in specific sectors such as Technology, Banking, Pharma.
• Special Schemes: Fixed Maturity Plans, Exchange Traded Funds, Capital Protection Oriented Schemes, Gold Exchange Traded Funds, Quantitative Funds, Funds investing Abroad, and Funds of Funds come under Special Schemes.

The investor picks up a Mutual Fund that suits him best and gives him maximum return.

With changing economic conditions, one has to plan his investments properly to have a contended life. Unforeseen expenses and future uncertainty could be unmanageable and thus investments have become a fundamental requirement for all of us.

Mutual Funds, being a good opportunity of investment have become very popular in the recent past. Mutual Funds are the portfolio of stock market shares and collection of other financial products, run by Government trusts, public and private financial institutions. The money is collected from various investors and the capital raised is then invested in various options like gold, bond, equity etc. Mutual Funds can be Open Funded or Closed Ended. There are various types of Mutual Funds to suit your investment requirements. These are growth funds, income funds, balanced funds, money market funds, etc.

At the end of each day, the market opens and Mutual Funds are priced, based on the securities. The investment company’s best assessment value of a portfolio holding is known as NAV- the Net Asset Value/ Price per share. The professionals called fund managers analyze the market conditions and make necessary investment decisions in order to achieve maximum profit. Finally, the earnings are passed on to the investors. In return of the services offered, some fees is charged from the investors. There are also some `no load funds’ that have no sales charge.

The fees of the Mutual Funds could be divided into two categories:

1. Ongoing yearly fees

2. Transaction fees paid when we buy or sell shares.

Due to many hidden costs, tagged as financial implications with big jargons, most of the investors are unaware of what are they actually paying for!

Buying of Mutual Funds can be done by contacting fund companies directly or through brokers, banks, insurance agents etc. Sales charge needs to be paid if we buy it from a third party.

There is an extensive set of regulation of Mutual Funds. These must observe a strict set of rules controlled by the Securities and Exchange Commission.

There is a mutual fund table used by investors to collect data about a particular mutual fund. Today, many websites have these tables online to help the investors. The table gives details like fund name, net asset value, trade time, price change, previous close price, year-to-date return, net assets and yield.

Also there are some disadvantages of Mutual Funds like their high costs, possible tax consequences and over diversification. So, it is very important for one to understand the basics and then shop!