A mutual fund is an investment that pools money from many individuals and invests it according to stated objectives. Professional managers make investment decisions on behalf of fund investors, buying and selling investments such as money market investments, bonds, and stocks. When you purchase units of a mutual fund, you become a part owner of all the investments held by that fund. Due to a large pool of investors, the individual risk is spread. So individually you take on low risk. Hence mutual funds are relatively safe investment avenues enabling you to rake in attractive gains. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

Sn the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are - to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

An 'Asset Management Company' is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors. The diversification of portfolio is done by investing in such securities which are inversely correlated to each other. They collect money from investors by way of floating various mutual fund schemes. They charge a small management fee, which is normally 1.5 per cent of the total funds managed.

Presently there are 33 Mutual Funds in India and close to 400 mutual fund schemes. We will very soon be putting up detailed analysis of major schemes operating in India.

The net asset value (NAV) is the value of the fund's underlying securities. It is calculated at the end of the trading day. Any open-end fund buy or sell order received on that day is traded based on the net asset value calculated at the end of the day. A few funds calculate net asset value at more frequent intervals and process trades at those values. The NAV of a scheme has to be declared at least once a week. However many Mutual Fund declare NAV for their schemes on a daily basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. However, NAV of a close-ended scheme targeted to a specific segment or any monthly income scheme (which are not mandatorily required to be listed on a stock exchange) may be published at monthly or quarterly intervals.

An open-end(ed) fund is a collective investment which can issue and redeem shares at any time. An investor can purchase shares in such funds directly from the mutual fund company, or through a brokerage house. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV).

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, 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 i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

On the basis of Objective

Equity Funds/ Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. 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.

Diversified funds

These funds invest in companies spread across sectors. These funds are generally meant for risk-taking investors who are not bullish about any particular sector.

Sector funds

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in 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. They may also seek advice of an expert.

Index funds

These funds invest in the same pattern as popular market indices like S&P 500 and BSE Index. The value of the index fund varies in proportion to the benchmark index.

Tax Saving Funds

These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s 54EA and 54EB. They are best suited for investors seeking tax concessions.

Debt / Income Funds

These Funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide regular income and safety to the investor.

Liquid Funds / Money Market Funds

These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and short-term fixed deposit accounts with comparatively higher returns. These funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.

Gilt Funds

These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.

Balanced Funds

These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium- to long-term investors willing to take moderate risks.

Hedge Funds

These funds adopt highly speculative trading strategies. They hedge risks in order to increase the value of the portfolio.

On the basis of Flexibility

Open-ended Funds

These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Investors are permitted to join or withdraw from the fund after an initial lock-in period.

Close-ended Funds

These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.

Interval funds

These funds combine the features of both open-ended and close-ended funds wherein the fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.

On the basis of geographic location

Domestic funds

These funds mobilise the savings of nationals within the country.

Offshore Funds

These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment. Is there is any tax applicable on the redemption of mutual funds? Yes. The tax applicable is called as STT i.e. Security transaction tax which is 0.25%. STT is applicable only in case of redemption of equity linked schemes

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realises capital appreciation on the investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the investors.

Automatic Investment Plan

Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is given the option for investing in a specified frequency of months in a specified scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to plan their savings through a structured regular monthly savings program.

Automatic Withdrawal Plan

Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan (SWP), a facility is provided to the investor to withdraw a pre-determined amount from his fund at a pre-determined interval.

Load is a charge collected by a mutual fund when it sells units. It can be levied as an entry load (i.e., the charge is collected when an investor buys the units) and as an exit load (i.e, the charge is collected when the investor sells back the units). Schemes that do not charge any load and are called No Load Schemes.
Now, you can buy mutual funds directly from the fund house, instead of going through an agent, thus saving money on the entry load. The entry load is a deduction made by the mutual fund company from your invested amount to pay the agent's commission. So, if you choose not to use the services of an agent, you can save anything between 2 to 6% of your invested amount.

The buy and sell price of schemes can be different from the NAV due to entry / exit loads. For example, if the current NAV of a scheme is Rs. 10 and the entry and exit load is 1.5% then the effective purchase price for the investor per unit will be Rs. 10.15, and the sale price will be Rs. 9.85.

Purchase price is the price paid by a customer to purchase a unit of the fund. If the fund has no entry load, then the sales price is the same as the NAV. If the fund levies an entry load, then the sales price would be higher than the NAV, to the extent of the entry load levied.

Redemption price is the price received on selling units of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load.

Repurchase price is different from redemption price and refers to the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.

Some mutual funds provide the investor with an option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee. Switching allows the Investor to alter the allocation of their investment among the schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime.

Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency. You often decide to start saving and investing regularly, but get caught up in your day to day activities and forget investments. SIP, the time-tested investment approach helps bring in the much-needed discipline, and has shown good results the world-wide.

An SIP helps you reach your financial goals by investing a fixed sum monthly / quarterly, in your chosen fund, for a pre-determined number of periods. So that you -
a) Average out on market fluctuations (no need to time the market).
b) Get investment discipline, helping you invest for and reach your future goals.
c) Invest disposable funds - that might otherwise lie in Savings accounts, earning low interest and letting inflation eat into them.

1 . Go to Mutual fund agent or broker.

2 . Locate the nearest office of the mutual fund house in your city. Visit the office, fill up the form, submit the documents and voila.

3 . If you are Internet savvy, online is the way to go. You can buy any mutual fund of your choice by visiting the web site of that particular fund house. Here you will need to fill up your personal and investment details as asked in the application form and quote your Permanent Account Number (PAN), which is mandatory. When investing online, you can pay through your bank account debit card, if that fund house has tied up with your bank. In case your bank account is not among the tie-ups, don’t worry. There always plan B. You can choose to make the payment through a cheque/demand draft. In that case, you would need to courier the same. In case you are opting for an SIP, you can choose the Electronic Clearance Scheme (ECS).