Every Mutual Fund on behalf of the unit holders sets up an Asset Management Company (AMC) or assigns its fund to a AMC for managing its funds. The AMC invests on behalf of the unit holders, in line with the objectives of the respective schemes. Regular expenses like Custodial fees, Cost of dividend warrants, registrar fees, AMC Fee are borne by the individual schemes. However, these regular expenses cannot exceed 3 % of the assets of a scheme in a year.

Steps an Investor should take before Investing in a Mutual Fund Scheme:

Step I: Choosing the fund

Once the Investor decides to invest in a Mutual Fund scheme, the investor has to choose as to which fund he would be interested in. The investor can choose the fund on various criteria, but primarily these can be the following:

• The track record of performance of schemes over the last few years managed by the fund.
• How well the mutual fund is organized to provide efficient, prompt and personalized service.
• Degree of transparency as reflected in frequency and quality of the fund’s communications in the form of disclosures etc.

Step II: Select the ideal mix of schemes:

The investment objective of schemes is different. The investor has to identify the schemes depending on his requirement of funds to meet his day-to-day expenses or accumulate funds for purposes as buying a house or for the marriage of their children. Depending on this the investor will have to choose the schemes, i.e. whether he would like to go for scheme offering regular return or a scheme offering capital appreciation. However, the investor has to keep in mind the risk. For getting a steady return or for getting a superior return over the domestic bank deposits he may go in for an income scheme.

The investor also has to decide whether he can afford to keep his funds locked-in for a specific time period in case he decides to invest in close-ended schemes. Though investor’s in close-ended schemes are provided with an exit option through repurchase/listing on the stock exchange, but the market price in the stock exchange generally quote at a discount to the NAV of the scheme.

Investors investing in open-ended schemes have to check with the fund/broker/agent about the entry and exit load if any.

You can earn money from your investment in three ways.

First, a fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.

Second, the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Third, if a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases. The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital gain).

Usually funds will give you a choice: the fund can send you payment for distributions and dividends, or you can have them reinvested in the fund to buy more shares, often without paying an additional sales load.

Classification of Mutual Funds:

Mutual Funds can be classified on two broad parameters. These can be:

A) On Liquidity

1. Open-Ended Schemes

These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemption's. The key feature is liquidity. The investor can conveniently buy and sell his units at net asset value ("NAV") related prices after adjusting for any load if any.

2. Close-Ended Schemes

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. The investor can invest directly in the scheme at the time of the initial issue and thereafter he can buy or sell the units of the scheme through the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unitholder's expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows down.

Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.

3. Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

B) Providing the Returns

1. Growth Schemes

Aims to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation.

These schemes are not for investors seeking regular income or needing their money back in the short-term.

Suitable for:

• Investors in their prime earning years
• Investors seeking growth over the long-term

2. Income Schemes

Aims to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Nowadays funds are also offering schemes income-oriented schemes offering high liquidity. This essentially means, the investor can park their surplus funds in these schemes for a very short period of time to even a day and exit out of the scheme whenever he desires so. These schemes invest in money-market instruments.

Capital appreciation in such schemes may be limited.

Suitable for:

• Retired people and other with a need for capital stability and regular income.
• Investors who need some income to supplement their earnings.

3. Balanced Schemes

Aims to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls.

Suitable for:

• Investors looking for a combination of income and moderate growth.

4. Money Market Schemes

Aims to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposits, commercial paper and inter- bank call money. Currently these schemes have got a lock-in-period of 14 days and three funds are offering these schemes. They are UTI, Kothari Pioneer MF, and IDBI MF.

Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.

Suitable for:

• Corporate and individual investors as a means to park their surplus funds for short period or awaiting & more favorable investment alternative.

5. Tax Saving Schemes

These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Saving Schemes (ELSS) and Pension Schemes.

Recent amendments to the Income Tax Act Provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax saving are provided in the relevant offer documents.

Suitable for:

• Investors seeking tax rebates.

6. Special Schemes

This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, of industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings).

Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.

7. Sectoral Fund Schemes

Any one scheme may not meet all your requirements for all time. The investor needs to invest his money in a judicious manner in different schemes to be able to get the combination of growth, income and stability.Remember, as always, higher the return you seek higher the risk.

Suitable for:

• These are ideal for investors who have already decided to invest in a particular sector or segment.

8.What is a Money Market Fund?

By definition a money market fund is an open-ended mutual fund that invests in short-term debt instruments, most of which mature in less that a year. The investments usually have a maturity of less than 120 days, which greatly reduces the risk due to interest rates. Short-term debt instruments include commercial paper, government-backed securities, bank CD's and short-term debt of credit worthy corporation. Yields among the different funds vary due to differences in portfolio compositions, average maturity and fund expenses. As interest rates fluctuates so does interest income.

Advantages:

• Money market funds are great for emergency reserves. Most funds offer free check writing privileges, telephone redemptions.
• Dividends are normally higher than what you would receive for a bank savings account or CD.
• Money market funds are viewed as "safe" investments Money market funds only invest what investors have deposited, which creates safety in and of itself.

Money markets can offer tax advantages for investors in high tax brackets.

Disadvantages:

• For long time horizon, money market funds have minimally beaten the inflation rate. While it's great for emergency cash reserves it shouldn't be used for long-term investments.
• Money markets are associated with interest rate risk. Once the investment entities mature they may be re-invested at a lower rate of return.

Frequently Used Terms:

Net Asset Value ("NAV"): Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price: It is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price: The price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price: Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related

Sales Load: It is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.

Repurchase or 'Back-end' Load: It is a charge collected by a scheme when it buys back the units from the unit holders.

Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and is sent either through cheque or ECS facility.

TDS is deducted if the interest on fixed deposit exceeds Rs.5000/- in a financial year.

No, at the end of deposit period principal is returned to the deposit holder.

• Avoid the unrated Company Deposit Schemes.
• Within a given rating grade, choose the company with a better reputation.
• Once you decide on a company, next choose the schemes that have given a better return. Unless you need income regularly, you should prefer cumulative to regular income option since the interest earned automatically gets reinvested at the same coupon rate giving upon better yields. It also gives you a lump-sum amount at one go.
• It is better to make shorter deposit of around 1 year to 3 years. This way you not only can keep a watch on the company’s rating and servicing but can also plan to have your money back in case of emergency.
• Check on the servicing standards of the company. You should not oblige companies that care little about investor services like promptly sending interest warrants or the principal cheque.
• Involve your reputed Financial planner / Investment Advisor like us for advice in all your transactions. Do not bypass and invest directly just to earn an extra incentive.
• For outstation investors, it is recommended to check whether the company accepts outstation cheques and makes payment through at par cheques.

Companies registered under Companies Act 1956, such as:

• Manufacturing Companies
• Non-Banking Finance Companies
• Housing Finance Companies
• Financial Institutions
• Government Companies

Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Company can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.

The advantages of company Deposits from an investor’s point of view are:

1.Higher Interest Rates

Selected finance companies with highest credit rating are offering interest rates which is above what the banks pay for there deposits.

2. Variety of Deposit Schemes

Companies are free to design their own deposit schemes and most companies offer one of the following types:

• Monthly income deposits where interest is paid every month.
• Quarterly income deposits where interest is paid once in a quarter.
• Cumulative deposits where interest is accumulated and paid at the time of maturity.
• Recurring deposits similar to the recurring deposits of banks.
• Cash certificate schemes.

3. No Tax deducted at source

Companies do not deduct tax at source up to an interest income of Rs.5000 per annum. Further, no tax is deducted at source if the depositor submits from 15H(duly filled in) even if the interest payable exceeds Rs.5000 p.a. However, interest on company deposits is fully taxable, unlike interest on bank deposits and some other investments, covered under Section 80L.

4. Other Attractions

Many companies have come up with servant other attractions to lure depositors:

• Allotment of safe deposit vaults on a preferential basis.
• Instant loan scheme.
• Premature withdrawal facility.
• Entitlement to future issues of equity shares, convertible debentures, etc., on a firm allotment basis.
• Free trips to company’s plants.
• Scholarships to depositor’s children.

Deposits are Unreserved

All Company deposits are unreserved. In other words, these deposits are not backed by any assets, specifically or generally charged.

Risk

There is no deposit insurance scheme with companies to protect as there is in the case of bank deposits up to Rs.1,00,000 per individual your deposit. If a company goes into liquidation the depositors as unsecured creditors of the company, rank only after secured lenders, like financial creditors of the company, institutions and banks.

This risk of default by a company is not a notional risk. There are several well-known companies, which have defaulted in repayment of deposits.

Notwithstanding the disadvantages discussed above, if you wish to invest the company deposits the following guidelines are suggested for your benefit:

COMPANIES YOU MUSTN’T INVEST IN

New companies which have yet to prove their financial and managerial expertise;

It is best to avoid private limited companies, and partnership firms. Such companies are under no obligation to publish their working results and it is therefore very difficult to judge their performance and ability to meet their obligations.

It is advised not to invest in:

• Companies which offer interest higher than 15%
• Companies which are not paying regular dividends to the shareholder
• Companies whose Balance Sheet shows losses
• Companies which are below investment grade (A or under) rating
• Companies whose balance sheets show accumulated losses.
• Companies with a poor liquidity position;

DO NOT RENEW YOUR DEPOSITS AUTOMATICALLY

Never renew your deposits automatically without first asking for a refund of the matured amounts. A timely refund establishes the credibility of the company in honoring its commitments.

CHECK CRISIL OR ICRA OR CARE RATING

Look for the CRISIL or ICRA or CARE rating. Invest only in highly rated companies

DIVERSITY YOUR DEPOSITS

Do not put all your money in any one company, no matter how sound it may be.

1. Government of India Bonds

The Government of India (GOI) from time to time, issues bonds through RBI :

2. Fixed Rate Bonds

These Bonds carry fixed rate of interest which is declared at the time of issue and remains same till maturity.

3. Floating Rate Bonds

These Bonds carry interest rate which is linked to independent reference rates, independent index, commodities etc. and the rate is fixed for next period at the beginning of the period itself.

4. Deep Discount Bonds

This bond is issued at a discount to the face value. The face value is paid at the maturity. These bonds are also know as Zero coupon bonds or "Zeros".

5. Gilts

Fixed interest securities issued by the Government to raise money for public expenditure. In India these securities are issued by RBI on behalf of Govt. of India by auction process.

6. Corporate Debentures

The corporate debentures are issued by Indian companies, whether secured or unsecured, having maturity of 18 months and above. These are issued in certificate form and are transferable instruments.

7. Public Sector Bonds

These bonds are medium and long term obligations issued by public sector companies where the Government shareholding is 51% and more. Most of PSU bonds are in form of promissory notes transferable by endorsement and delivery. No stamp duty or transfer deed is required at the time of transfer of bonds transferable by endorsement.

8. Tax Saving Bonds

Tax saving bonds offer tax exemption under section 88.

Form of Holding Bonds

The bonds will be held in Dematerialized form i.e. in ‘ Bond Ledger Account’. A certificate evidencing the investment held in the Bond ledger Account will be issued to the investor.

Date of Issue

From the date of realization of Cheque / DD / Pay-Order or submission of Cash.

Interest Payment

There are two options available:

1. Non – Cumulative Option, where interest is paid every half-yearly, on every 1st January and 1st July during the tenure of investment, or,

2. Cumulative option, where the payment is made at the end of the maturity date.

Interest can be credited directly to investor’s bank account by giving the ECS mandate.

Nomination

A sole holder or a single surviving holder of the bonds can nominate one or more persons.

Loans against Bonds

The bonds are not eligible as collateral for loans from banks, financial institutions and Non-banking Finance Companies.

Transfer of Bonds

Bonds are not transferable and cannot be tradable in the secondary market.

Checklist for applications:

1. Application form

2. Nomination form, if applicable

3. ECS Mandate form for direct credit of interest amount

4. Declarations forms, if any

It is the rate of interest which the issuer pays on the principal/paid up value of the Bond. It is fixed at the time of issuance of the bond.

Maturity is the point at which the term of investment ends and proceeds are paid out. Maturity Date is the date on which the Bond matures. Generally Bonds mature in a bullet form with a single repayment on single date. But some bonds have split or part redemptions with varying repayment dates.

It is average rate of return on bond if it is held to its maturity date and if all cash flows are reinvested at the same rate of interest.

It is the frequency of payment of interest on the bonds. It could be monthly, quarterly, semi annually, annual or cumulative at redemption.

The ease with which securities can be sold and converted into cash is called liquidity.

It is short term unsecured instrument issued by corporate bodies (both public and private) to meet short term requirement of working capital. Maturity varies between 3 months to one year. These can be issued to any individual, bank, company whether in India or abroad.

These instruments are issued by scheduled commercial banks excluding regional rural banks. These are unsecured, negotiable, promissory notes having maturity of 91 days to one year.

Public constitutes of both Institutional and Non Institutional investors.

Institutional investors includes:

• Foreign institutional investors (FII’S)
• Mutual funds (MF’S)
• Public sector banks
• Private sector banks
• Domestics institutions (FI’S)
• OCB’s
• Corporates
• Non-Institutional includes: Indian and NRI Investors

Nearly 1 month

Securities and Exchange Board Of India (SEBI) is the nodal authority for all capital market activities including public issues. All companies wishing to come out with an IPO has to file the draft offer document with SEBI through a merchant banker.

Judging the financial health and the expected cash flow of the company and together with various other factors, the merchant bankers and the issuer company decides the additional amount besides the face value. This additional amount is called the premium of the share.

The face value together with the premium is called the price of the share in a public issue.

A currency forward contract that is standarised, exchange-traded and guranteed by the clearing corporation is called a currency futures. A large currecy market already exists. Currently, there is no options trading in the Currency segment on any exchange.

Send in an order to your broker member as you do with Capital markets futures trading.

It is exactly like a futures contract on derivative trading. A futures price F is traded on the screen. It pertains to the INR/USD exchange rate at a future date. If the spot price goes up, the futures buyer (the long) makes a profit at the expense of the futures seller (the short).Give me an example.

Suppose we are standing on 1 August and suppose the INR/USD exchange rate is at Rs.44 a dollar. Suppose the futures price on the NSE screen is Rs. 45. The contract size is $1000. Think of this as a ‘market lot’. Suppose the contract expires on 31 August. The buyer of one futures contract makes a commitment to buy $1000 on 31 August at a price of Rs. 45 per dollar.

On 31 August, suppose the INR/USD exchange rate on the spot market is Rs. 43 a dollar. In this case, the buyer has made a loss of Rs. 2. Since the contract size is 1000, this means that the buyer pays Rs. 2000 to the seller.

Customers who wish to enter into a currency forward talk to bank. The bank quotes them a price. These contracts are bilateral contracts between two counterparties and therefore utilise credit limits. The credit rating of the client could impact the pricing they get from banks.The currency futures are as transparent and safe for customers as the NIFTY Futures Orders are matched by price time priority;customers can be sure they got best execution. All these features are lacking in the forward market, which is a non transparent OTC maket.

Data for the INR/USD exchange rate starts from 1 April 1993. It is a fairly low volatility product: the overall annualised volatility, from 9 April 1993 till 4 July 2008 was 4.36% per year.

When the numeric value of the INR/USD exchange rate goes up, this is a depreciation.conversely, when the numeric value of the exchange rate goes down, this is termed an appreciation because Indian consumers are able to buy foreign goods at a lower price measured in rupees.

No, most major exchange rates are considerably more volatile. The volatility of the Great Britian Pound (GBP) against the USD is 7.95% a year.

RBI trades extensively on the rupee-dollar market, aiming to reduce the movement of the rupee-dollar rate. If , as an extreme case, the volatility of the rupee-dollar rate were 0, then the rupee-yen volatility would be exactly the same as thatof the dollar-yen.

While the overall volatility is low at 4.36% per year, this volatility has not been fixed through time, and big movements do happen over short periods of time.

Big appreciations: In the 1% of weeks with a most extreme appreciation, an appreciation of more than 1.7% took place.

Big depreciations: In the 1% of weeks with a most extreme depreciation, a depreciation of more than 2% took place.

The frequency of these large changes is not what we would normally expect from a financial price with a volatility of 4.36% per year.

Does RBI make announcements about the date when the currency volatility changes? E.g. was there an announcement in March 2004 about an increase in volatility from 2% to 4.9%?

No.

RBI trades on both the currency forward and on the spot market. Daily data is not available. Monthly data is released, with a delay of two months. Intelligent guesswork can be done about RBI’s activities of the last two months, but there is no data.

Securities and Exchange Board of India (SEBI) is the regulatory body for the Indian Stock markets. SEBI has been established under Section 3 of SEBI Act to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto.

• Composition
• Some of the measures of SEBI

Composition

Chairman

Two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law

One member from amongst the officials of the Reserve Bank

Two other members appointed by the Central Government, who are professionals and interalia, have experience or special knowledge relating to the securities market.

Some of the measures include:

• Regulating the business in stock exchanges and any other securities markets.
• Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner.
• Registering and regulating the working of collective investment schemes, including mutual funds.
• Promoting and regulating self-regulatory organizations.
• Prohibiting fraudulent and unfair trade practices in securities market.

DP:

Dematerialisation (Demat) is the process by which a client can get physical certificates converted into electronic balances maintained in his account with the DP.

Features of Dematerialisation:

• Holdings in only those securities that are admitted for dematerialisation by National Securities Depository Ltd (NSDL) can be dematted.
• Structure of holding in the securities should match with the account structure of the depository account. Now shares in different order of names can also be dematted.

Only those holdings that are registered in the name of the account holder can be dematerialised. Physical shares which have not been transferred and are still there with a transfer deed cannot be dematted. Only a few companies have been given the permission to offer Transfer-cum-Demat. The list of these companies can be viewed in the ‘Scrips for Demat’ section.

Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the rematerialisation request to the DP with whom he has an account along with a Remat request form. The physical shares will be posted by the company directly to the clients.