1. Way to Riches

2. Mutual Fund

3. What is a Mutual Fund?
A mutual fund is a pool of money managed by a professional money manager.
The objective and the risk level are outlined in a document called a prospectus. The prospectus provides detailed guidelines for the types of investments the manager can purchase.
A mutual fund is also known as an open-ended investment fund, which means the fund sells units (of this pool on money) upon request.

4. What are the benefits of purchasing a mutual fund?
Professional Management: The fund company hires talented money managers who have many resources behind them (including a team of people dedicated to researching, tracking, determining trends, and doing thorough analysis), and who work full time on your behalf.
Diversification: Lowers the risk because, regardless of the size of your investment, each unit purchased is made up of many different investments.
Liquidity: Mutual funds can be sold anytime, and easily
Flexibility: Mutual funds allow you to purchase as much or as little as you want, and offer a variety of purchase plans.

5. What are the fees? Mutual funds can either be purchased through a:
Front-end load: An investor pays a fee upfront (usually, a percentage of the total investment).
Back-end load: An investor doesn't pay an initial fee, but they are locked into the fund family for a predetermined period of time (outlined in the prospectus). If the investor holds the fund to "maturity"of the "contract," they will never pay a fee. But, if they choose to redeem early, they will have to pay a redemption fee, which decreases on a percentage basis every year the fund is held.

6. What types of funds can I buy? Major Asset Classes:
Money Market Funds
Bond Funds
Balanced Funds
Dividend
Equity Funds
Specialty Funds

7. What is a Money Market Fund?
This type of fund's main objective is to hold investment instruments that are liquid and secure. This type of fund is usually held on a short-term basis and invests in money market securities. Examples: Treasury bills, banker's acceptances, and short term notes.
One thing an investor should be aware of is that these funds are NOT guaranteed like a Fixed deposit, and hold NO fixed return, but are of low risk.

8. What is a Bond Fund?
This type of fund's main objective is to provide a steady stream of income, and holds bonds issued by either governments or corporations.
The risk level of this type of fund will be determined by the guidelines in the prospectus, which will, in turn, determine what type of "rating" and term (years to maturity) of bond the manager is allowed to purchase.

9. What is a Balanced Fund?
This type of fund's main objective is to hold an optimal mix of investments among cash, equities, and income-producing securities.
This type of fund usually has several managers who specialize in a specific area.
This type of investment is ideal for someone who wants a better return than a fixed income, but also wants less risk than equity.

10. What is an Equity Fund?
This type of fund's main objective is to provide long-term growth through equity/stock investments.
Different types of equity funds:
Diversified Equity Funds
Sector specific Funds
Index Funds
Middle Capitalization Funds
International Equity Funds
Others

11. What is a Specialty Fund?
This type of fund's main objective is to concentrate its holdings in one particular sector, geographic region, or in one capital market.
Examples: telecommunications, health care, technology, financial services, European markets or Japan.
As you specialize, you minimize diversification, and that results in increased risk.

12. What are the three different investment styles for equity investing?
Fund managers have different styles of investing. Their style affects the type of stocks they will purchase, and the price they are willing to pay. This, in turn, affects your future returns.
Value: A manager purchases stocks that offer value at a time when the price of the stock is low, relative to the actual book value. In other words, the company is selling for less than it is worth. * Note: This is the most conservative approach.

13. What are the three different investment styles for equity investing?
Growth: A manager purchases stocks that are deemed to have growth potential, which, in turn, could generate above average returns in the future. * Note: Growth investments are usually small- to medium-sized companies, thereby increasing the risk exposure.

14. What are the three different investment styles for equity investing?
Momentum/Sector rotation: A manager purchases sectors that are, or that they think will soon be, "hot." The choices are determined by the manager's anticipation of where the greatest potential rests. * Note: This is a high-risk way of investing. Other investments with structures similar to a mutual fund include clone funds, and segregated funds.

16. Growth of Mutual Funds In India
GROWTH IN ASSETS UNDER MANAGEMENT
Growth of Mutual Funds In India
Mutual Fund - the History
The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.
In the past decade, Indian mutual fund industry had seen a dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn.
Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry.
The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under.
First Phase
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase (Entry of Public Sector Funds)
Entry of non-UTI mutual funds. SBI Mutual Fund was the first 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 in 1989 and GIC in The end of 1993 marked Rs.47,004 as assets under management.
Third Phase (Entry of Private Sector Funds)
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 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in The industry now functions under the SEBI (Mutual Fund) Regulations The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase - since February 2003
This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs crores under 421 schemes.

17. Mutual Funds - Organisation
Sponsors:
The sponsors initiate the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. A sponsor has to satisfy certain conditions, such as capital, record (at least five years’ operation in financial services), de-fault free dealings and general reputation of fairness. The sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder.
Trust/ Board of Trustees:
Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unit holders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unit holders consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets – 0.5 percent of the weekly net asset value.
Fund Managers/ AMC: They are the ones who manage money of the investors. An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.
Custodian: Often an independent organisation, it takes custody of securities and other assets of mutual fund. Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range between percent of the net value of the holding. Custodians can service more than one fund.

18. Some facts for the growth of mutual funds in India
Huge growth in the last 6 years.
Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
SEBI allowing the MF's to launch commodity mutual funds.
Emphasis on better corporate governance.
Introduction of Financial Planners who can provide need based advice

20. Performance Measure The Treynor Measure The Sharpe Measure
Jenson Model
Fama Model

21. The Treynor Measure Treynor’s Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the
fund.
All risk-averse investors would like to maximize this value. While a high and positive
Treynor’s Index shows a superior risk-adjusted performance of a fund, a low and negative
Treynor’s Index is an indication of unfavorable performance.

22. The Sharpe Measure Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
Implication The higher the Sharpe ratio is, the greater an investment's return per unit of risk. Thus if portfolio's Sharpe ratio is better than the market than it is giving better returns per unit of risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. Thus its risk adjusted performance is better.

23. Jenson Model
Required return of a fund at a given level of risk (Bi) can be calculated as:
Ri = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period.
Alpha
can be obtained by subtracting required return from the actual return of the fund.
Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the
fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of
market is primitive.

24. Fama Model
Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)
Where, Sm is standard deviation of market returns. The net selectivity is then calculated by subtracting this required return from the actual return of the fund.
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called net selectivity.

25. Use of Models
Among the above performance measures, two models namely, Treynor measure and Jenson model use systematic risk based on the premise that the unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors.
However, Sharpe measure and Fama model that consider
the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversified.