What is a Mutual Fund?
A mutual fund is a trust. It pools money from like-minded shareholders and invests in diversified portfolio of securities, through various schemes that address different needs of investors. The pool of money thus collected is then invested by the Asset Management Company (AMC) in different types of securities. These could include shares, debentures, convertibles, bonds, money market instruments or other securities, based on the investment objective of a particular scheme. Such objective is clearly laid down in the offer document for that scheme. The fund adds value to the investment in two ways: income earned and any capital appreciation realised through sale. This is shared by unit holders in proportion to the number of units they own.


What is an Asset Management Company?
An AMC is involved in the daily administration and also acts as investment advisor for the fund. An asset management company is promoted by a sponsor which usually is a reputed corporate entity with sound record of profits. An AMC typically has three departments:

	Fund Management
	Sales & Marketing
	Operations & Accounting

What are the different types of mutual fund schemes?

Mutual fund schemes can be classified as follows:

By Structure
Open-ended schemes
Close-ended schemes
Interval schemes

By Investment Objective
Growth schemes
Income schemes
Balance schemes
Money Market schemes

Other types of schemes
Tax Saving schemes
Special schemes
Index schemes
Sector specific schemes


By Structure

• Open-end Funds

An Open-end Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices.

• Close-ended Funds

A Close-ended Fund has a stipulated maturity period which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they are listed.


By Investment Objective

• Growth Funds

The aim of growth funds is to provide capital appreciation from over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time.

• Income Funds

The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

• Balanced Funds

The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are ideal for investors looking for a combination of income and moderate growth.

• Money Market Funds

The aim of Money Market Funds is 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 Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.



Other Schemes

• Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

• Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

• Sectoral Schemes

Sectoral Funds are those which invest exclusively in a specified sector(s) such as FMCG, Infotech, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to sector(s) / industry(ies).


What is the difference between an open ended and close ended scheme?
Open ended funds can issue and redeem units any time during the life of the scheme. Close ended funds cannot issue new units except through a bonus or rights issue. Hence, unit capital of open ended funds can fluctuate daily. Further, new investors to an open ended fund can join the scheme by directly applying to the mutual fund at applicable Net Asset Value-related prices. In the case of close ended schemes, new investors can buy units only from the secondary market.


What is a Prospectus or Offer Document?
It is a document which an open-end fund, or newly issued closed-end fund, is required to provide to investors. Funds say that investors should read it carefully before investing or sending money. A prospectus contains descriptions of:

     • Fees, in a standardized format
     • Investment Objective
     • Some financial data
     • Investment methods
     • Risk factors and description
     • Investment management and compensation
     • Dividend and Capital Gain distributions
     • Other services



What is the Net Asset Value (NAV)?
The net asset value (NAV) is the market 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. The NAV per units is such Net Asset Value divided by the number of outstanding units:

NAV =   Market Value of Assets - Liabilities
           - - - - - - - - - - - - - - - - - - - - -
                         Units Outstanding


What are Dividends?
A mutual fund may receive dividend or interest income from the securities it owns; it is required to pay out this income to its investors. Most open-end funds offer an option to purchase additional shares with the dividends. Dividends are often made monthly or quarterly, though many funds make distributions only yearly.


Are investments in mutual fund units safe?
No stock market related investments can be termed safe with certainty; they are inherently risky. However, different funds have a different risk profile, which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets.

What are the Risks in a Mutual Fund?
Equity Funds are open to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested may decrease. Of course, the prices may also go up, making it possible for the Fund to earn profits.

Debts Funds are open to two main risks - Credit Risk and Interest Rate Risk. Credit Risk refers to the possibility that the company that has issued the bond or debenture in which the Fund has invested may default on interest or on principal payments. Debt Fund managers take care of this by investing in bonds which have good credit rating.

Interest Rate Risk refers to the possibility that the price of the bond in which the Fund has invested may go down because of an increase in the interest rates in the economy. In general, it is useful to remember that this is a "see-saw" relationship - bond prices (and therefore, NAV) goes up when interest rates drop and drops when interest rates rise.


What are the benefits of a Mutual Fund?

	Your money is managed by experienced and skilled professionals
	Your investment is automatically diversified over a large number of companies and industries, thus reducing the element of risk
	Your money is very liquid, especially in an open-end fund
	The potential to provide a higher return over the medium to long term is better in a wide range of securities than in any one
	The costs of research and investing directly in the individual securities are spread over a large corpus and thousands of investors thus minimising individual share
	There is a high degree of transparency in the operation of a mutual fund, so you can take investment decisions based on more information
	You have a choice of schemes to suit your needs
	The industry is well regulated with many measures oriented towards investor protection

Do Mutual Funds assure returns?
Some mutual funds have floated "assured" return schemes that guarantee a certain annual return. At present, there are very few funds who assure returns as they have realized that it is not possible to assure returns in a volatile market.


How do you make money in a Mutual Fund?
There are three ways in which you can make money in a Mutual Fund

	First you can earn a dividend from the Mutual Fund. Most Debt Funds declare dividends around once in six months in their Dividend Option. If you do not want the dividend, you can choose to be in the Cumulative Option. When a dividend is declared, the NAV of the units will fall, since dividend is paid out of the appreciation in the value of the unit
	Next, you can make a profit by selling the mutual fund units at a price higher than that at which you bought them. This is capital gain. (If you sell the units at a lower price, you make a capital loss.)
	Finally, the value of the units you hold can appreciate. This is unrealised capital gain. Dividends and capital gains are treated differently

What are the tax benefits for investing in mutual fund units?
20% rebate on contribution up to Rs 10,000/- under ELSS (equity linked saving schemes)


Tax Benefits of Investing in Mutual Funds

As per the taxation laws in force as at the date of updating this document, the tax benefits that are available to the investors investing in the Units of the Scheme(s) are stated herein below.
The tax benefits described in this Document are as available under the present taxation laws and are available subject to relevant conditions. The information given is included only for general purpose and is based on advice received by the AMC regarding the law and practice currently in force in India and the Investors/Investors should be aware that the relevant fiscal rules or their interpretation may change. As is the case with any investment, there can be no guarantee that the tax position or the proposed tax position prevailing at the time of an investment in the Scheme will endure indefinitely. In view of the individual nature of tax consequences, each Investor is advised to consult his/ her own professional tax advisor.


To the Mutual Fund
The entire income of the Mutual Fund will be exempt from Income Tax in accordance with the provisions of Section 10(23D) of the Income Tax Act, 1961 ("the Act")

The Mutual Fund will receive all income without any deduction of tax at source under the provisions of Section 196(iv), of the Act. However, on income distribution, if any, made by the Mutual Fund, income-tax will be payable under Section 115R of the Act, at 12.5% (plus surcharge as applicable from time to time) on the dividends declared under the schemes on or after April 1, 2003

However, these provisions will not be applicable to any income distributed by an open-ended equity oriented fund (where more than 50 percent of total proceeds of the mutual fund are invested in equity shares of domestic companies as defined in Section 115T of the Act) for a period of one year commencing from April 1, 2003.

To the Investors

    • Tax Implications To Resident Investors
    • Non -Resident Assesses


Tax Implications to Resident Investors

The following summary outlines the tax implications applicable to resident Investors of the Schemes and is based on relevant provisions under the Act, 1961, Wealth-tax Act, 1957 and Gift Tax Act, 1958 (collectively called 'the relevant provisions'), consequent upon the amendments enacted by the Finance Act 2003:


a) Income other than Capital Gains

As per the provisions of Section 10(35) of the Act, income received in respect of units of a mutual fund specified under Section 10(23D) of the Act is exempt from income tax in the hands of the recipient Investors.
Tax Deduction at Source
In view of the exemption of income in the hands of the Investors, no income tax is deductible at source, on income distribution by the Mutual Fund, under the provisions of sections 194K of the Act.


b) Capital Gains
As per section 2(42A) of the act, units of the scheme held as a capital asset, for a period of more than 12 months immediately preceding the date of transfer, will be treated as a long-term capital asset for the computation of capital gains; in all other cases, it would be treated as a short-term capital asset.

Also, sub-section (7) of section 94 of the act provides that loss, if any, arising from the sale/transfer of units (including redemption) purchased up to 3 months prior to the record date and sold within 3 months after such date, will not be available for set off to the extent of income distribution (excluding redemptions) on such units claimed as tax exempt by the Investors.

Long-term and short-term capital gains arising to resident Investors from the transfer of the units of the Scheme will be taxable at the following rates:

Tax Rate

* plus surcharge as may be applicable (refer Note 1)

Tax Deduction at Source

No tax is required to be deducted at source from capital gains arising at the time of repurchase or redemption of the units.


c) Wealth-tax Benefits

Units held under the Schemes are not treated as assets under Section 2(ea) of the Wealth Tax Act, 1957 and are therefore not liable to wealth tax.


d) Gift Tax

The Gift-tax Act, 1958, has ceased to apply to gifts made on or after 1st October 1998. Gifts of Units, purchased under the Schemes, would therefore, be exempt from gift-tax


e) Religious and charitable trusts

Investments in Units of the Mutual Fund will rank as an eligible form of investment under Section 11(5) of the Act read with Rule 17C of Income Tax Rules, 1962 for Religious and Charitable Trusts.

Note 1: Surcharge is levied as under