ABC of Mutual Funds

Mutual Fund’s
A B C
An investor education initiative by
Mutual Fund’s
A B C
Contents
Contents
01 Introduction 3
02 Working of mutual funds 9
03 Mutual funds for your need 21
04 How to buy a mutual fund 41
05 Navigating investments 53
06 Your first fund 63
Disclaimer: Any information contained herein is for informational purpose only and
does not constitute advice or offer to sell/purchase units of the schemes of Taurus
Mutual Fund. Information gathered and provided in this booklet has been provided by
Value Research and the Fund does not warrant the accuracy and/or completeness of
any information. Taurus AMC/Taurus MF disclaims any liability for action taken by
anyone on the basis of the opinions contained herein.
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Introduction
CHAPTER
1
Introduction
Mutual funds combine the savings of a large number of
investors and manage it as a single pool of money. Instead of
the investors worrying about which stock or bond or com-
modity to invest in, professional fund managers do the job.
Mutual funds are run by mutual fund companies, also
known as Asset Management Companies (AMC). Each AMC
operates a number of fund scheme that suit different types
of investment needs.
For individual investors who don’t have the time to study
and research investments, mutual funds are the best option
for reaping the benefits of diversified investments with min-
imum effort. In most funds, it is possible to start investing
with as little as a few thousand rupees. Also, unlike many
other investments, mutual fund investments (open-ended
schemes) are highly liquid and can be withdrawn anytime.
The benefits of investing in mutual funds, is that they let
individual investors like you to invest in a wide variety of
companies and instruments such as equity shares, bonds,
3
Introduction
besides investments in other parts of the world at a much

lower cost than if you bought and sold the stocks or bonds by
yourself. There are broadly two ways in which one can make
money from mutual fund investments—income earned from
dividends declared by mutual fund schemes or by redeeming
units in a fund scheme that has appreciated in value.
WHY INVEST IN MUTUAL FUNDS?

There are several advantages to investing in a mutual fund
compared to directly investing in stocks or bonds other than
the cost advantage of investing in them.
Convenience: Almost anyone can buy mutual funds, because
investments in mutual funds start at as low as `1,000,
which makes them immensely affordable for a lot of peo-
ple. Likewise, you can easily make investments as well as
withdraw them in any amount that you like. Investments
can be made by filling up a simple form or by going online
with direct debit from your bank account. Similarly,
redemption proceeds can be credited directly into your
bank account, which does not take more than 3 to 10 days.
Instead, if you go directly to buy shares of different com-
panies to have a diversified set, you will need a lot of
money. However, through a mutual fund, you can invest in
a diversified set of stocks for far less. And what’s more,
you can invest more, (or redeem) in small batches.
Instant and easy diversification: The basics of safe investing is
to spread your money across different investments.
Unlike many other investments, mutual fund investments

are highly liquid and can be withdrawn without any delay
4
Introduction
According to modern portfolio theory, when your invest-

ments are spread across several securities, your risk
reduces substantially.
Mutual funds are an easy way to do this. Each fund
spreads the money across a large number of investments. A
mutual fund is able to diversify more easily than an average
investor across several companies, which an ordinary
investor may not be able to do. With an investment of `1,000,
you can buy stocks in some of the top Indian companies
through a mutual fund, which may not be possible to do as
an individual investor.
Professional research and investment management: Investing is a
lot work. There are hundreds of companies to track and
their prospects could change without warning. While you
could do it all by yourself, you may not have the time or the
resources. For an average investor, it is difficult to decide
what securities to buy, how much to buy and when to sell.
However, when you buy a mutual fund, you acquire a pro-
fessional fund manager who manages your money. This is
the person who decides what to buy for you, when to buy it
and when to sell. The fund manager takes these decisions
after doing adequate research on the economy, industries
and companies, before buying stocks or bonds. Most mutual
fund companies charge a small fee for providing this service
which is called the management fee, which is shared mutu-
ally among all the investors in a fund.
Liquidity: Unlike several other forms of savings like the
Redemptions can be made directly into your bank

account, which does not take more than 3 to 10 days
5
Introduction
Public Provident Fund (PPF) or the National Pension

Scheme (NPS), you can withdraw your money from a mutu-
al fund immediately, making them highly liquid.
As per SEBI’s rules, all mutual funds must offer liquidity.
However, the liquidity is of a different nature depending on
whether a fund is open-ended or closed-ended. Open-end
funds are perpetual funds that are always available for
investment or redemption with the AMC. In the case of
open-ended funds, the AMC itself will redeem the money at
the NAV-based selling price withing 3 to 10 days.
Closed-ended funds are launched for a fixed period and
you can invest in them only at the time of the initial offer.
For closed-end funds, the AMCs get the fund listed on a stock
exchange so that you can sell your units like a stock through
a stock broker. However, this is not a great option because
the stock-exchange price of a fund is generally a lot less
than the NAV. In practice, you should consider closed-end
funds to be locked in for their full duration.
There is another category of funds, which are called equi-
ty linked savings scheme (ELSS), which have a three-year
lock-in. These funds save you tax under Section 80C of the
Income Tax Act but you cannot redeem for three years as
per the tax law. Moreover, in these funds, one can invest a
maximum of `1 lakh in a financial year.
Variety: There are mutual funds available for every kind of
return and risk level and suitable for every kind of time
horizon. No matter what kind of investment you want,
ELSS have a three-year lock-in and provide tax savings up

to `1 lakh on investments in a financial year
6
Introduction
Unique benefits
There are many investments you can make only through a mutual
fund and there are some where the convenience is immense.
Government Securities: Individuals can’t buy government
bonds, but they can buy funds that invest in such bonds.
International Stocks: For most of us, it would be prohibitively
complex to open brokerage accounts and buy shares in different
countries. However, you can do so easily by investing in an interna-
tional fund.
there’s likely to be a variety of funds that suit you.

Tax Efficiency: By design mutual funds make investing simple
and if used smartly, are tax efficient and do not burden
investors. Take for instance, when you buy or sell any
investments, you have to pay tax on the profit you make.
However, this doesn’t happen when that buying and selling
is done on your behalf by a mutual fund.
To maximise profits, the fund manager could keep buying
and selling stocks as and when needed, but you have to pay
tax only when you redeem your investments from the fund.
For example, in case of equity funds, the investments
redeemed after a holding period of one year are tax free,
because long-term capital gains on equity investments are
nil. Likewise, dividends from equity funds are tax-free in the
hands of investor. Even though dividends from debt funds
are also tax-free in the hands of the investor, the respective
Certain mutual funds provide access to inaccessible

assets, making them unique investment vehicles
7
Introduction
fund/scheme pays the additional income tax on distribution

of dividend.
Transparent, well-regulated industry: Mutual funds are obligated
by law to release comprehensive data about their operations
and investments. Almost all funds release NAV daily and
most release their complete portfolio every month. SEBI
regulates the fund industry very tightly and is constantly
refining the applicable rules to protect investors better.
As you would expect, funds that invest in equity offer the
highest potential returns with the highest risk. At the other
extreme are funds that invest in short-term bonds and
deposits which offer returns that are in the range of what
banks offer with a high degree of safety.
Moreover, there is a wide diversity within the quality of
funds. Which means, not all funds have the ability to deliver
what they promise and investors also have to keep an eye on
the track-record of specific funds, the fund manager and
asset management companies at the time of investing.
8
Working of mutual funds
CHAPTER
2
Working of
mutual funds
The genesis of a mutual fund is a sponsor, who takes the ini-
tiative to start a mutual fund. There are other participants
in a mutual fund such a Board of Trustees, an Asset
Management Company or AMC (the manager) and unit-
holders, who are investors in the fund scheme.
The sponsor is a shareholder of the AMC, and as per SEBI
regulation, the effective control of the AMC is with the
Board of Trustees, who function as the governing body.
It is for this reason that most of the trustees are inde-
pendents, while the sponsor can have nominees. Moreover,
maximum limits have been prescribed for management fees
and other chargeable expenses by the regulator.
The SEBI regulations provide the framework for mutual
funds to operate and prescribes limits for management fee
and other chargeable expenses. SEBI also regulates many
other aspects of an AMC’s operations and policies. All of
these actions make the mutual fund industry highly regu-
lated and safe.
9
INVESTMENT OBJECTIVE
Each Asset Management Company (AMC) offers several
fund schemes. The way to distinguish one scheme from
another is to look at their stated investment objective.
Simply put, the investment objective indicates the financial
goal that the fund scheme invests to achieve.
For example, some funds invest in well-established large
companies, or companies that regularly pay dividends.
There are funds that invest in bonds or gilts and some that
invest in international markets. While a mutual fund
scheme is launched with a stated investment objective, with
time funds can change the stated objective by notifying
investors of the change in its objective.
WHAT IS NAV?
The Net Asset Value (NAV) of a fund and the number of
units that an investor owns are two of the least useful, most
misunderstood and most over-valued numbers. A mutual
fund is made up of all the money that its various investors
have invested collectively. Here’s an example: A fund is
launched and a 1,000 investors each invest `10,000 in it. In all,
the fund has `1 crore of assets under its management. Just
for convenience, a fund is divided into ‘units’ of a certain
value, which is set to a round number initially. Typically, this
is `10. In the above fund, each investor is said to own a 1,000
units and in all, the fund has issued 10,00,000 units.
The NAV is basically the current value (on any given day)
A fund’s investment objective helps investors choose a

fund scheme based on their needs and risk tolerance
10
of each unit of the funds. In the current example, the fund

manager invests the `1 crore of assets in various instru-
ments such as stocks and bonds. In the beginning, the NAV
is `10 and each unit is worth `10.
Let’s say that after an year, the investments have done
well and the `1 crore grows to `1.1 crore. Now, the NAV of
each unit is `11 (1.1 crore divided by 100,000). Each investor
owns 1000 units so the value of his investments has grown to
`11,000. It is important to understand that the only relevant
thing here is that the total assets have grown by 10 per cent
and therefore the investors have had a gain of 10 per cent. If
the fund had initially had a face value of `100, then the NAV
would have grown to `110 or if the face value had been `1
then the NAV would have grown to `1.10. From the investors’
point of view, only the percentage change in the NAV is
important, not the actual number.
Whenever an investor has to invest or redeem his money,
he either buys fresh units or sells them at the NAV at the
point. Under some circumstances, there might be a small
extra charge at the time of redemption. Also, some funds
allow entry and exit at any time while others allow entry
only when the fund is launched and exit only after a pre-
determined period when the fund is terminated.
CHARGES, FEES, EXPENSES AND OTHER COSTS

For the services that a mutual fund company provides, it
levies investors with charges and fees.
The NAV is dynamic and is basically the current value (on

any given day) of each unit of the funds
11
Fund classification
There are hundreds of mutual funds in India. If you were to try and
understand each one individually by reading their investment objective
before deciding which is a suitable one to invest in, it would be an
impossible task. However, the task is made easier if you could divide the
funds into categories according to their investment characteristics.
The purpose of the fund classification system is to help you match your
returns expectations and risk-taking ability with the type of fund that you are
going to invest in.
The Value Research mutual fund classification is almost entirely about
dividing the entire risk-return continuum into bands of roughly equal return
and risk expectations. This makes the real task, that of identifying funds that
are likely to generate higher returns at lower risk, easier. The entire fund
universe can be divided into 26 categories: 12 are pure equity categories, 6
are hybrids (equity and debt) and 7 are pure debt categories with the last
one being gold.
This way you can zero in on the exact balance of risk and return; and
second, peer funds can be compared easily. The entire categorisation is
based on the actual portfolios that the fund managers are running, spread
over the past three years.
Debt Funds
Income: Funds which can vary their in gilt securities with average
average maturity widely, as per their maturity of over the last 6 months is
declared objective between 1 and 4.5 years
Gilt: Medium & Long-term: Funds Ultra Short Term: Funds whose
which invest in gilt securities and average maturity over the last 6
can vary their average maturity months is less than 1 year, but
widely, as per their declared which are not liquid funds
objective Liquid: Funds which do not invest
Short-Term: Funds whose average any part of assets in securities with
maturity over the last 6 months is a residual maturity of more than 91
between 1 year and 4.5 years days FMPs: tenure fixed by the
Gilt: Short Term: Funds which invest issuer
12
Equity Funds
Large-Cap: Funds with more than Sector Funds
80 per cent of assets in large-cap Banking sector funds: as per
companies over the last three years declared objective
Large & Mid-Cap: Funds with 60 to FMCG funds: as per declared
80 per cent of assets in large-cap objective
companies over the last three years Infrastructure sector funds: as per
Multi-Cap: Funds with 40 to 60 declared objective
per cent of assets in large-cap Pharma sector funds: as per
companies over the last three years declared objective
Mid & Small-Cap: Funds with at Technology, IT sector funds: as per
least 60 per cent of assets in small declared objective
and mid-cap companies over the Miscellaneous: Other funds, which
last three years cannot be classified in any of the
Tax Planning: Funds with tax rebate existing categories and do not have
under Section 80C of the Income the requisite numbers for a
Tax Act separate category.
International: Funds with over 65
per cent of assets invested abroad
Hybrid Funds
Equity-oriented: Hybrid funds with from arbitrage opportunities
over 60 per cent average equity between equity and derivatives, and
exposure over the last one year invest in debt when no arbitrage is
Debt-oriented Aggressive: Hybrid possible
funds with 25 and 60 per cent Asset Allocation: Funds which may
average equity exposure over the invest fully in equity or debt
last one year depending on the market conditions
Debt-oriented Conservative: Hybrid Miscellaneous: Other funds, which
funds with less than 25 per cent cannot be classified in any of the
average equity exposure over the existing categories and do not have
last one the requisite numbers for a
Arbitrage: Funds which seek returns separate category.
13
Total Expense Ratio (TER): Typically, AMCs charge investors

for professional fund management, regular operational
costs which include investment management and advisory
fees, sales or agent commissions, ongoing service fees,
legal and audit fees, registrar and transfer agent fees, fund
administration expenses, marketing and selling expenses.
All these expenses charged to an investor are together
called the ‘total expense ratio’ (TER); it is an annual
charge on AUM in percentage terms. According to the
SEBI guidelines, TER needs to be lower as AUM increases.
The net asset value (NAV) of a mutual fund scheme is net
of all liabilities including TER, and hence a lower TER
results in higher returns and vice versa. In recent times,
SEBI has also included service tax under ‘cost to
investors’ which was earlier paid by the AMCs. The TER is
total expenses during an accounting period divided by the
total net assets of the fund.
CHARGES UNDER TER

With effect from October 1, 2012, the SEBI allowed the TER
to be fungible. To put it simply, fungible means interchange-
able; just the way `100 is replaceable with another `100 note
or other currency notes, as long as they are valid. For AMCs,
this means that expenses will be a single pool which they
SEBI limit on TER in per cent

Daily NAV (`) Equity Debt
First 100 crore 2.50 2.25
Next 300 crore 2.25 2.00
Next 300 crore 2.00 1.75
On the balance assets 1.75 1.50
14
can divide between various eligible expenses and fees. Until

October 2012, there was an internal division in the expenses
charged between actual expenses and management fees,
which will all be included in the single head of TER.
In addition to the above expenses, with effect from October
1, 2012, SEBI has allowed the following additional expenses
to be charged to the scheme
1. Additional expenses under different heads not exceeding
0.20 per cent of daily net assets of the scheme
2. In order to encourage investments from beyond top 15
cities, additional expenses not exceeding 0.30 per cent of
daily net assets may be charged to the scheme if the new
inflows from such cities as specified by SEBI are at least:
(i) 30 per cent of gross inflows in the scheme OR
(ii) 15 per cent of the average net assets under manage-
ment (year to date) of the scheme
The amount incurred as expense on account of inflows
from such cities are to be credited back to the scheme in case
the said inflows are redeemed within a period of 1 year from
the date of investment.
Transaction charge: Since August 2011, SEBI has allowed
AMCs to collect a nominal amount as a one-time transaction
fee in case the investment is routed through a distributor or
agent. It ruled that for a first time investor, AMCs can collect
`150 as a fee if the investment is more than `10,000 while the
fee for an existing investor would be `100; no fee can be
charged for any amount less than `10,000. In the case of
Total Expense Ratio is an annual charge on AUM in per-

centage terms, which goes down as the AUM increases
15
Systematic Investment Plans (SIPs), where the total com-

mitment towards the SIP is more than `10,000, a transaction
charge of `100 is levied payable in four equal instalments
starting from the second to the fifth instalment.
Exit load: This charge is levied when an investor redeems or
sells his units within a span of time in which the exit load is
charged. Mutual funds charge exit loads to deter investors
from leaving mutual fund schemes before holding them for
a sufficient period. Various categories charge exit loads
depending on pre-defined holding period cut-offs.
This charge varies across fund schemes and follows a
sliding rule, which means a lower rate is charged as exit
load when the investment stays for the long run, which in
many cases is also nil. Exit load, if any, charged to the
investor is credited to the fund scheme, net of service tax.
Other costs: There are indirect costs that investors may incur
when investing in exchange traded funds (ETF) where one
has to pay for opening a demat account, for maintaining the
account, and brokerage charges. Moreover, mutual funds
pay securities transaction tax while buying and selling
stocks, which is indirectly borne by investors. Unitholders
are required to pay securities transaction tax (STT) at the
rate of 0.001 per cent at the time of redemption or switch out
of units of an equity-oriented fund.
WHAT IS AN ACCOUNT STATEMENT?

A mutual fund account statement lists details pertaining to
your investment such as the name of the fund, the folio
number, your PAN, the type of investment plan you are
invested in like growth, dividend or dividend re-investment.
You can also see the amount invested, the number of units
16
allocated and the acquisition price of the units.

Since October 1, 2011, as per SEBI guidelines, an
allotment confirmation specifying the units allotted is sent
by way of email and/or SMS within 5 business days of the
initial investment transaction to investors who register
their e-mail address and/or mobile number. After this
initial allotment confirmation, a Consolidated Account
Statement (CAS) is sent to you which details the folio
transactions that have taken place during a month, on or
before 10th of the succeeding month by mail or email. One
can also request an account statement for specific period as
required by them, at no cost to the investor.
A CAS is a single account statement that reflects all trans-
actions of a unit holder in all folios across all schemes of all
mutual funds. Only those folios are considered for the
despatch of the statement that have recorded financial
transactions in a month, have identical holders, and where
all unit holders are PAN and KYC compliant. Here is how to
17
Consolidating investments
Investors are identified across fund houses by their permanent
account number - PAN for the purposes of a CAS. Holding pattern
in the folios determines CAS. For example if unit holders A, B and
C are all unit holders in a particular folio, all folios within the Fund
House and across mutual funds with a similar holding pattern will
be classified for consolidation purposes.
ensure you are entitled to receive the CAS.

Update: You must submit a self attested copy of his PAN card
and of all holders, along with a letter carrying the folio
number and holder details, to the AMC.
KYC compliance: You need to complete the KYC formalities at
any point of service of a KYC Registration Agency (KRA).
The KYC form, along with documents for proof of identity
and address, needs to be submitted.
Eligibility: The investment will be eligible for a common CAS
only if the mode of holding and order of holders is the same
across mutual fund folios.
HOW TO REDEEM YOUR INVESTMENT IN A FUND?

Redeeming a mutual fund scheme, is nothing but selling
units in the scheme. The redemption process varies depend-
ing on how one has bought the fund scheme—through a dis-
tributor, online or directly from the AMC.
Redemption if purchased from an agent or directly from
an AMC, you need to first fill a redemption form. The details
that you necessarily need to fill in this form include your
name, the folio number of the fund in which you have
invested and the number of units that you wish to redeem.
Your bank account plays a role too, especially the one that
18
you provided when you first invested in the fund scheme.

For, when you redeem the mutual fund, the redemption will
be credited to the same account. However, if you have
changed your bank account, you will need to submit the
proof of your new bank account.
You could do this by attaching a copy of the passbook of a
new bank account that you maintain. A declaration letter
from the bank with the bank manager’s signature will also
suffice to redeem your investment into. Normally, once you
submit a completed redemption form, your money is credit-
ed to your bank account within ten working days.
19
Blank
20
Mutual Funds for your needs
CHAPTER
3
Mutual Funds
for your needs
There are over 2,000 fund schemes in India, which is a lot to
choose from. There are funds that can serve any conceivable
purpose and can be used to create a portfolio suitable for a
wide variety of uses. For instance, there are funds to meet
short-term cash-parking requirement to a post-retirement
portfolio that is meant for a time-span of decades. This is
where you gain from the level-headed perspective of choos-
ing funds and sifting the wheat from chaff.
HOW TO CHOOSE A FUND?

Choosing a mutual fund is not an easy task with so many
funds available. Rarely do investors, who do something
else for a living-have a systematic checklist of things that
they should evaluate about a fund, which they are consid-
ering to buy. Here’s a blueprint for a structured approach
to fund selection. There are five basic areas that you must
evaluate in a fund to decide whether it’s a good investment
and get started.
21
Performance: When choosing a fund, look for one that has a

fairly long performance history, especially over both bad
and good phases of the markets. Next, compare perform-
ance for similar funds, that is funds that are based in the
same category . Only when used within the same category of
funds do performance numbers tell you anything at all.
A good way to start comparing funds is by using inde-
pendent rating agencies like Value Research,
Moneycontrol.com, CRISIL and others. The rating will tell
you how a fund has performed on a risk-adjusted basis rela-
tive to a relevant category in the past. The fund rating is a
good starting point for a fund evaluation.
Diversification: Mutual funds are diversified, but what is the
way to evaluate if it is well diversified? One way to check if
a fund is well diversified is to check the fund’s portfolio
which is shared every month. For instance, a well diversi-
fied portfolio will have at least 20-30 stocks, with no less than
X per cent of the total portfolio. The stocks must be spread
over at least 5 sectors with no sector being less than Y per
cent. At least Z per cent must be held only in large compa-
nies because they tend to be more stable in bad times. And
so on and so forth.
Collectively, such rules define a frame-work which
ensures that the portfolio stays diversified and safe from
shocks that may strike individual stocks, sectors or types of
stocks. Individuals who manage their own stock investing
would rarely have the knowledge or the discipline to do all
There are five basic areas that you must evaluate in a

fund to decide if it’s a good investment and get started
22
this continuously. Even if the investor has the knowledge

and the discipline, he’s unlikely to have the tools to evaluate
if their investment portfolio is well diversified.
Risk: Almost all investing is risky, at least those investments
that get you any meaningful returns. In general it is said
that the riskier a fund, the more its potential for earning
high returns, at least most of the time. However, this is a
simplified view that implies that a given amount of risk
always gets you the same returns. This is simply not true
because not all funds are equally well-run. The true meas-
ure of risk is whether a fund is able to give you the kind of
returns that justify the kind of risk it is taking.
Evidently, this is not as easy to measure as returns. There
are a wide variety of statistical techniques that can be used
to measure this, and the rating agencies distil a combina-
tion of performance and risk measurement into their Fund
Ratings. When a rating agency says that a fund has a 5- or 4-
star rating, it means that the fund, compared to similar
funds, performed better, given its risk level.
Portfolio: Unlike performance and risk, portfolio is the inter-
nals of a fund. It is internal in the sense that the result of
good, bad or ugly portfolio is already reflected in the first
two measures and it’s perfectly fine for you to choose funds
on the basis of those two measures alone without actually
bothering about what they own.
A fund’s monthly Fact sheet (available on its website)
indicates the fund’s holdings in the previous month. The
Almost all investing is risky, at least those investments

that get you any meaningful inflation beating return
23
important information on the factsheet to use is the data

about the portfolio, which lists the fund’s holdings in stocks
and other instruments and how much it makes for as a per-
centage of the assets. There is also data on sector allocation
indicating the sectors in which the fund has invested.
In case of fixed income funds, the data indicates the qual-
ity of fixed return instruments in which it has investments.
One can also analyse whether a fund prefers safer (lower
returns) securities or riskier (higher returns) securities. In
the case of hybrid funds, the mix of both equity and debt
investments can be ascertained to evaluate the portfolio.
Management: Fund management is a fairly creative and per-
sonality-oriented activity. This may not be true of some
types of funds like short-term fixed-income funds and, of
course, index funds, but equity investment is more of an art
than a science. When you are buying a fund because you like
its track record (and unless you can foresee the future, that’s
the only way to buy a fund), what you are actually buying is
a fund manager’s (or sometimes a fund management team’s)
track record.
What you need to make sure is that the fund manager who
was responsible for the part of the fund’s track record that
you are buying into is still there. After all, a high-perform-
ance equity fund with a new manager is actualy like a new
fund offering to some extent.
Cost: While these are the four main points on which to eval-
uate a fund, there is one more factor that is becoming
A fund’s monthly Fact Sheet available on its website,

indicates the fund’s holdings in the previous month
24
increasingly important and that is cost. Funds are not run

for free and nor are they run at an identical cost. While the
difference in different funds’ cost is not large, these can
compound to significant variations, especially for fixed
income funds where the performance differential between
funds is quite small to begin with. Even for equity funds, it
may not be worth buying a higher cost fund that appears to
be only slightly better than a lower cost one.
Remember, there is no reason for one AMC to have much
higher costs than others, apart from the fact that it wants to
have a higher margin, or that it wants to spend more on
things like marketing, which are of no relevance to you.
DIFFERENT NEEDS, DIFFERENT FUNDS

Useful, simple to understand and easy to execute. Those
should be the qualities that your investments should have.
However, your financial needs may be different and call for
a different approach and collection of funds to achieve the
same. For instance, your need may be long-term growth or
tax savings or income in retirement and so on.
GROWTH
Your investments can either grow and build value or gener-
ate income. If you are investing for growth, it means taking
no income from your savings and investments and reinvest-
ing all interest and dividends. Growth seekers tend to be
investors who have time to sit back and watch their money
Your financial needs may be different and call for a differ-

ent approach and collection of funds to achieve them
25
grow. And they are likely to be saving for a particular event,

such as retirement, their children’s university costs or a
wedding. It generally means saving for a minimum of five to
seven years rather than just a few months.
Investing for growth means investing for the long-term.
and investing for growth inevitably means investing in equi-
ty or equity-based investments, as in the long run equity is
the only asset class that manages to beat inflation.
Types of funds to invest? Equity and balanced funds,
International funds, Other kind of equity funds such as
index funds, sector and thematic funds.
Equity funds: These are funds that predominantly invest in
equity stocks across different market capitalisation. These
can be further classified as large-cap, large- and mid-cap,
multi-cap, sector funds and international funds.
Balanced funds: Also called hybrid funds combine equity and
debt investments in a certain ratio. In order to maintain this
ratio, the fund manager will typically disinvest from hold-
ings that have gained more and invest in holdings that have
gained less. Effectively, the gains that are made in equity are
protected by debt.
The great advantage of balanced funds is that they are
inherently safer than pure equity funds. They gain well
when the markets gain but when the markets fall, they fall
less sharply , thus protecting the gains that were made in
the good times.
International funds: An increasingly wide range of Indian
In the long run equity is the only asset class that man-
ages to beat inflation and earn positive returns
26
5-year rolling returns of a Large cap fund
Large cap funds are safe, have predictable returns and are less volatile to market swings
mutual funds now invest abroad. These are funds that pre-
dominantly invest outside of India providing both geo-
graphic diversification as well as investments in different
themes and businesses.
10-year rolling returns of a Large cap fund
These funds are less volatile to market swings and mirror the performance of the economy
27
5-year rolling returns of a Large & Mid cap fund
During bull runs, this category does better than the benchmark
At present, there are three types of global funds are avail-

able: those that allow direct investing into global markets;
funds that use the feeder route to invest in an existing glob-
al fund; and lastly, fund of funds that invest in several funds
10-year rolling returns of a Large & Mid cap fund
The allocation to mid-cap stocks is the key for the spurt in these fund’s returns
28
5-year rolling returns of a Balanced fund
These funds are not meant to out perform the broad equity fund categories but check the fails
to achieve international exposure.

Some of these schemes have geographical focus and some
invest in a sector or a theme such as agriculture or com-
modities. Depending on your need, you can decide on the
10-year rolling returns of a Balanced fund
These funds are tax efficient by dynamically managing the equity-debt allocation
29
kind of investment you wish to invest. You need to be aware

of the tax implications when investing in international
funds; funds with less than 65 per cent domestic equity expo-
sure are taxed as debt funds, which means short term and
long term gains tax applies.
Index funds: As the name implies, index funds are those mutu-
al fund schemes that replicate the performance of a given
index. For instance, there are index funds that replicate the
Sensex and the Nifty.
Sector funds: Sector funds, as the name suggests are mutual
funds that predominantly invest in a particular sector. For
instance, there are funds that invest in a single sector such
as banking, FMCG or pharmaceuticals. The idea of such
funds is to provide investors an option to enhance their
exposure to a sector which has a strong growth potential.
Thematic funds: A thematic fund is one that doesn’t limit itself
to a specific, clearly identifiable sector but a broader invest-
ment theme. However, even though theme is broader than a
sector, the fund is not a true diversified fund. Some of the
themes on which funds have been launched in India are
rural growth, economic reforms, generation next, shariah
principles, and even the internet. As is evident from their
names, these are a diverse lot.
GROWTH AND TAX SAVINGS

There is a type of mutual fund scheme which not only
allows for growth, it also helps investors reduce their
income tax liability. Tax saving funds are also called ELSS
funds as their formal name in the tax law is Equity-Linked
Savings Scheme. They are basically all-equity funds, invest-
ments in which are eligible for tax exemptions under
30
10-year rolling returns of ELSS
The funds in this category are managed like any other diversified equity fund
Section 80C of the Income Tax Act.

Under Section 80C, you can invest up to `1 lakh in a set of
investments, one of which is ELSS funds. Since they are
equity funds, one should invest in them for long-term. This
5-year rolling returns of ELSS
The 3-year lock-in allows fund managers to manage these schemes without redemption pressure
31
long-term imperative is compulsorily enforced because

under the tax laws, investments made into these funds are
locked in for at least three years. Because of this lock-in,
investors tend to have a good experience of getting reason-
able returns from these funds. Moreover, the tax-break acts
as a natural boost to returns.
Types of funds to invest? Equity-Linked Savings Scheme
TAX EFFICIENT INCOME

Investment for income is mostly in a situation when you
need to regularly withdraw a part of your investment to
meet your living expenses. Generally, this is done by retired
people or others who don’t have a real income.
Investing for income is different from investing for accu-
mulating wealth. First and foremost, it needs to be pre-
dictable. When money is accumulating for use much later ,
then it doesn’t really matter if you get somewhat higher or
lower returns at different times. However , when you need to
make regular withdrawals, then this unevenness is not
desirable.
Secondly, this predictable rate of return needs to match
the inflation rate, or at least come close to it. If the rate of
return doesn’t match inflation then your money is just los-
ing value even when you are not using it.
Thirdly, the investment needs to be liquid. By liquid, we
mean that it should not have a long lock-in period and you
should be able to withdraw regularly.
Debt funds generate regular income but you need to

understand how exactly to use them
32
Income fund Returns
Income funds bet to leverage from interest rate fluctuation
There aren’t many investment avenues that satisfy all

these needs. Savers tend to use a bank savings account for
this purpose. Savings accounts score well on points number
one and three mentioned earlier. They are certainly safe and
predictable. They are also highly liquid. However , their
interest rate is low. Currently, most banks offer interest rate
of 4 cent, with a few newer banks offering slightly higher
rates, up to 6 per cent, especially on larger deposits. This
may be impressive compared to what savings accounts used
to pay till a few years ago, but it doesn’t even come close to
matching the rate of inflation that consumers face. Your
money loses real value lying in a savings account, and buys
less and less as time goes by.
This leaves debt funds as one of the alternatives. They
don’t suffer from any of the above flaws. The best suited sub-
type for this purpose are short-term debt funds. Debt funds
as a category are funds based on the their stated goal as liq-
33
uid funds, short- term, ultra short-term and gilt funds.

Within this universe the income fund category has evolved
more by way of exclusion. The income fund category can
broadly be divided into those with high yield debt which bet
on corporate debt and those that bet to leverage from inter-
est rate fluctuation.
Funds in this category invest in bonds, debentures, cer-
tificates of deposit, commercial papers, government securi-
ties, pass through certificates and collateralised debt obliga-
tions. Interest rates and prices of fixed income instruments
have an inverse relationship; when the overall interest rates
in the economy rise, bond prices fall and vice versa.
These funds also have excellent liquidity—you can
redeem your money on the day of request, but it normally
takes up to 3 working days for redemption. And the returns
compare favourably to bank fixed deposits. In fact, if your
investments last for longer than a year, then on a post-tax
Short-term debt fund returns
Investments are in short to medium term debt and money market securities to deliver returns
34
basis, you are likely to earn far better than what your invest-
ment in fixed deposit can manage. An investment that is
made for income has to have a higher level of predictability
of returns and risk as well as higher liquidity A good invest-
ment will not just match inflation but exceed it, thus becom-
ing a second source of income. In the long term Debt funds
can be a much better source of regular income compared to
bank deposits
ENHANCING RETURNS OVER IDLE BANK BALANCE

More often than not for fear of losing money, one tends to
park large sums of money in a bank savings account which
earns measly returns. Debt funds are a direct alternative
and competitor for bank fixed deposits. The primary area of
difference between the two is on safety and taxation (and
thus returns), with mutual funds holding the advantage in
tax-adjusted returns and fixed deposits in safety.
Liquid fund returns
Select a scheme that matches your investment tenure with a track record and low expenses
35
As with all mutual funds, there are no guarantees in debt

funds. Returns are market-linked and the investor is fully
exposed to defaults or any other credit problems in the enti-
ties whose bonds are being invested in. However, that’s a
legalistic interpretation of the safety of your investments in
mutual funds.
The big difference is that of taxation. Returns from bank
fixed deposits are interest income and as such have to be
added to your normal income. Since many investors are in
the top (30 per cent) tax bracket, this effectively reduces
return by an equal percentage. With debt funds, the returns
are classified as long-term capital gains for investments of
over 12-months for and are thus taxed at 10 per cent or 20 per
cent with indexation. If you take into account indexation
benefits, then the difference between FD returns and debt
fund returns are quite large. And if you can time the invest-
ment to get double indexation benefits for say a 370 days
Fixed Maturity Plans, then its quite a bonanza.
Short-term capital gains tax applies on debt funds that are
held for less than a year at the income tax slab that one falls
in. However, there is tax efficient strategy that you can
adopt. Dividends from debt/liquid funds are tax-free in the
hands of investor, which makes them more attractive than
bank fixed deposits. However the debt fund scheme pays the
additional income tax on distribution of dividend. This is at
the rate of 23.325 per cent (including applicable surcharge
and cess) when dividend is paid to an individual/HUF and at
Debt funds are a versatile asset class and can play many
different roles in an investment portfolio
36
the rate of 33.99 per cent (including applicable surcharge

and cess) when dividend is paid to any other investor.
Earlier the dividend distribution tax on liquid funds was
lower as compared to other debt funds but it has now been
brought on par, so much of the advantage is lost now.
Consider opting for dividend reinvestment when investing
in a liquid fund because dividends stripped will be reinvest-
ed as units and will be considered as fresh investments. This
way the capital gain will be very low. In case you do plan to
hold the investment in liquid fund for over a year; opt for the
growth option to benefit from the indexation benefits.
SMART ALTERNATIVE TO FDs

The Fixed Maturity Plan (FMP) is a good alternate to bank
fixed deposit. These can be used by investors as an alterna-
tive to bank fixed deposits. In general, these funds resemble
FDs more than they do other mutual funds. These are
How FMPs score over bank deposits

Bank Fixed FMP With Without
Particulars Deposit Indexation Indexation
Amount Invested (`) 1,00,000 1,00,000 1,00,000
Tenure (in days) 372 372 372
Indicative Yield (%) 10 9 9
Total Amount + Interest (`) 1,10,191.8 1,09,172.6 1,10,191.8
Interest/Gain (`) 10,191.8 9,172.6 10,191.8
Indexed Cost (`) - 1,04,078.8 -
Indexed Gain (`) - 5093.8 -
Tax Rates (%) 30.90 22.66 11.33
Tax Amount (`) 3,149.3 1,154.3 1,154.7
Post Tax Gain (`) 7,042.5 8,018.3 9,037.0
Post Tax Yield (%) 7.04 8.02 9.04
37
The Systematic Way

Apart from straightforward investment and redemption in funds,
there are some special systematic ways of investing and redeeming
your money in mutual funds. They are enormously useful in making
you a more disciplined investor, as well as enhancing your returns.
Investing regularly means lower risks and higher gains. Systematic
investments plans make this simple and easy.
Systematic Investment Plan (SIP)

An SIP is a regular investment in a fund of a fixed amount at a
fixed frequency. Generally, the frequency is monthly. SIPs neatly
solve the two main problems that prevent investors from getting
the best possible returns from their mutual fund investments.
Firstly, since SIPs mean investing with a fixed sum regularly
regardless of the NAV or market level, investors automatically buy
more units when the markets are low. This results in a lower
average price, which translates to higher returns. One of the basic
principles of investing is ‘Buy Low, Sell High’. SIPs automatically
enforce this.
If you invest a large sum at one go, you could end up catching
a high point of the equity markets. This would mean that you have
invested at a high NAV and that would reduce your gains if the
market falls. An SIP is a good way to invest at an average price over
a period.
Secondly, SIPs are also a great psychological help while
investing. Investors inevitably try to time the market. When the
closed-end funds, meaning that one can only enter them

when they are launched and exit them when their pre-stated
term is over.
You can exit them earlier since they are listed on the stock
exchanges, you will be able to realise a lower value as they
are usually quoted at a price lower than their NAVs.
38
market falls, they sell and they don’t invest any more. When it
rises, they invest more. This is the opposite of what should be
done. An SIP puts an end to all this by automating the process of
investing regularly. It eliminates the mental load of deciding when
to invest and leads to better returns.
For inexperienced investors, this is normally the biggest barrier
to getting good returns. Investors end up ‘buying low’ and that
stand them in good stead eventually.
Systematic Withdrawal Plan (SWP)

SWPs are a regular redemption from a fund. There are a number
of variations. Investors can either redeem a fixed amount, a fixed
number of units or all returns above a certain base level. Among
other things, they are a convenient way to take a regular income
from a fund investment.
Systematic Transfer Plan (STP)

An STP is a regular transfer from one fund to another. It’s like an
SIP but the source of the money is an STP from another fund. The
most frequent use of an STP is when you have a lump sum to
invest in an equity fund. For reasons listed above, it is always
better to invest gradually through an SIP rather than with a large
sum all at once. In such cases, you could put the lump sum in a
debt fund of an AMC and simply give instructions to transfer a fixed
amount into a chosen equity fund every month. This is called STP.
Although fund houses can no more provide the indicative

return on the FMP, the returns are comparable and some-
times better than what bank deposits offer.
FMPs invest in debt instruments with the intent of hold-
ing them to maturity. This means that regardless of any ups
and downs in the market value of the investments, the final
39
earnings are predictable.

One obvious question is why investors should prefer
FMPs to bank deposits. The reason is mostly to do with tax
efficiency. When you put money in a fixed deposit, the inter-
est gets added to your income. In FMPs longer than a year, if
you elect to take all your gains as capital appreciation, the
taxation is merely 10 per cent without indexation benefit or
20 per cent with indexation. That’s generally quite a saving
from the tax rate which either individuals or companies
would pay on the interest earned from a bank deposit.
CAPITAL PROTECTION
For investors oriented to safety, there is a category of funds
that they can explore--the capital protection oriented funds.
These do not guarantee capital protection, but are struc-
tured to protect the capital. Capital protection is a goal and
not an obligation with these funds. But, one way by which
these type of funds score over bank fixed deposits is in
terms of taxation. If redeemed after one year they are taxed
at the rate of 20 per cent without indexation or 10 per cent
with indexation while in case of bank fixed deposits TDS
(tax deducted at source) is deducted at 30 per cent for a per-
son falling in the highest tax bracket.
40
How to buy a mutual fund
CHAPTER
4
How to buy a
mutual fund
There are several ways to buy a mutual fund scheme. But
before selecting a fund scheme to invest, one needs to be
ready with the necessary paperwork to make a hassle free
investment.
WHAT YOU NEED TO GET STARTED WITH MUTUAL

FUND INVESTING
To start investing in a fund scheme you need a PAN, bank
account and be KYC (know your client) compliant. The bank
account should be in the name of the investor with the
Magnetic Ink Character Recognition (MICR) and Indian
Financial System Code (IFSC) details. These details are
mentioned on every cheque leaf and it is common for an
agent or distributor to seek a cancelled bank cheque leaf.
HOW TO GET YOUR KYC?

The need for KYC is to comply with the market regulator
SEBI in accordance with the Prevention of Money
41
laundering Act, 2002 (‘PMLA’), which undergo changes

from time to time.
KYC process is investor friendly and is uniform across
various SEBI regulated intermediaries in the securities
market such as Mutual Funds, Portfolio Managers,
Depository Participants, Stock Brokers, Venture Capital
Funds, Collective Investment Schemes and others. This way,
a single KYC eliminates duplication of the KYC process
across these intermediaries and makes investing more
investor friendly.
Documents required to be submitted along with KYC application

 Recent passport size photograph
 Proof of identity such as a copy of PAN card or UID
(Aadhaar) or passport or voter ID or driving licence
 Proof of address passport or driving license or ration
card or registered lease/sale agreement of residence or
latest bank A/C statement or passbook or latest telephone
bill (only landline) or latest electricity bill or latest gas
bill, which are not older than three months.
You will need to submit copies of all these documents by
self-attesting them along with originals for verification. In
case the original of any document is not produced for
verification, then the copies should be properly attested by
entities authorised for attesting the documents. In case you
are unable to furnish proper documents, it could result in
delays in getting a KYC.
A single KYC eliminates duplication of KYC process

across intermediaries and makes investing easy
42
Resident Indians can get it attested by: Notary public, Gazetted

officer, Manager of a scheduled commercial or co-operative
bank or multinational foreign banks. Make sure the name,
designation and seal is affixed on the copy.
NRIs can get attestation from: Authorised officials of overseas
branches of scheduled commercial banks registered in
India, notary public, court magistrate, judge, Indian
Embassy in the country where the client resides.
HOW TO CHECK YOUR KYC STATUS?

Existing investors and those who have submitted their
applications can check the status on KYC compliance with
their PAN number with any of the KYC Registration
agency
 www.cvlkra.com/
 https://kra.ndml.in/
 www.nsekra.com/
 https://camskra.com/
 www.karvykra.com/
MUTUAL FUND APPLICATION FORM

Each mutual fund scheme has a form that investors need to
fill. If you start investing in the systematic investment plan
(SIP), you need to fill in two forms: one to open an account
with the mutual fund and the other to specify your SIP
details such as frequency, monthly instalment amount, and
date on which the SIP sum is to be invested.
You can check the status on KYC compliance with your

PAN number with any of the KYC Registration agency
43
Investing for Minors

If you wish to invest in the name of a minor, you need to fill in a
third-party declaration form.
 Only parents are allowed to invest on behalf of their children
 Documents that establish the parent’s relationship with the
child should be submitted (Passport, birth certificate or any
other ID proof)
 If the child has no parents in case of an eventuality, then a
court-appointed guardian can invest if necessary documentary
proof is submitted to establish the relationship between the
minor child and the guardian
GROWTH, DIVIDEND OR DIVIDEND RE-INVESTMENT

When investing in mutual funds, there are three options that
are available in which you could invest: growth, dividend and
dividend reinvestment. One is normally expected to select one
of the three options when filling an investment form, however,
in case if you do not fill any of the option, the fund house
selects the default option for the scheme as mentioned in its
Scheme Information Document (SID), which is most often the
growth option. Investors have the flexibility to change the
investment option at a later date to suit their convenience.
Growth option: In this option, the scheme does not pay any
dividend, but continues to grow. Therefore, nothing is
received by you as a unit holder and hence, there is nothing
to reinvest in the scheme. Any gains made by selling the
fund holdings are invested back into the scheme, which can
When a dividend is declared, it gets deducted from the

NAV of your fund scheme and is paid to you
44
be seen in the NAV (net asset value) of the scheme, which

rises over time. But, the number of units with the investor
remains the same.
Dividend payout: In this option, the mutual fund scheme pays
you from the profits made by the scheme at regular periods
which could be monthly, quarterly, half-yearly or yearly in
case of debt funds and at irregular intervals in case of equity
funds. A liquid fund also provides for a daily or weekly
dividend option. However, you should be aware that
dividends are not guaranteed, which means a fund is not
bound to pay out a dividend; it may or may not pay a dividend.
Dividend reinvestment: In this option, the dividend is not paid
to you, instead it is reinvested in the fund scheme itself by
buying more units on your behalf.
Each of the three options has its share of pros and cons,
which will vary depending on your needs. As investors, the
treatment of gains and taxes are the two essential features
that differentiate these options. If evaluating the returns
from an investment at a point of time, there is no difference
among the three options. The difference emerges in an
implicit form with respect to the applicable taxes.
Further, it is important to consider the tax impact when
selecting between the growth, dividend payout or dividend
reinvestment options as the post-tax returns’ differs between
the options. This difference occurs because, the tax treatment
is different for long-term and short-term holding period. The
tax treatment also differs for equity and debt funds.
The growth option is the most suitable if you are investing

for long term wealth creation
45
Capital Gains from Mutual Funds

Type of investment Short-term holdings Long-term holdings
(less than one year) (more than one year)
Equity and Equity-ori- Taxed as short-term Not Taxed
ented Hybrid Funds capital gains, currently
15 per cent
All Other Funds Taxed as part of Taxed as long-term cap-
investor’s income ital gains, adjusted for
inflation
Dividend Income from funds
Type of investment Dividend tax
Equity and Equity-oriented Hybrid Funds None
All Other Funds 25%*
* for individuals and HUF, plus surcharge as applicable and 3% education cess
WHERE AND HOW TO BUY FUNDS?

Like the many mutual fund schemes to choose from, there
are several ways in which one can invest in them. One can
invest online or offline or in direct as well as regular plans.
Like everything else, each option has its limitations and
advantages, which vary for each investor.
Direct Plan: Since January 1, 2013, all mutual fund houses
have rolled out a new plan under all of their existing fund
schemes—the Direct Plan. These plans are targeted at
investors who do not make their mutual fund investments
through distributors and hence have a lower expense ratio
compared to existing fund schemes of the AMC.
This means that you, as an investor, will get an opportunity
In direct plans you get an opportunity to earn a slightly

higher return from your mutual funds
46
to earn a slightly higher return from your mutual fund

despite it having the same portfolio. The direct plans will not
charge distribution expenses or commission, resulting in
these plans having lower annual charges and eventually, a
different (higher) NAV compared to the regular plans.
Through intermediaries: There is a wide variety of
intermediaries available. These include most banks,
distribution companies having national or regional
presence, some stock brokers (including online brokers)
and a large number of individuals and small financial
advisory companies. All intermediaries have to be
registered with the Association of Mutual Fund in India
(AMFI), which also maintains a searchable online directory
at www.amfiindia.com. The website also lists
intermediaries who have been suspended for malpractice to
protect investors from going back to them.
The intermediary, normally brings the required mutual
fund application form, helps you fill the forms, submit the
forms and other documents to the Mutual Fund office and
sometimes even brings in the Account Statement. But, all
these services come to you for a fee. Typically, agents charge
a flat fee for these services.
Through IFAs: IFAs are independent Financial Advisors, who
are individuals who act as agents to facilitate a mutual fund
investment. They help you fill the application form and also
submit the same with the AMC.
Directly with the AMC: You can invest in a mutual fund scheme by
Online portals charge an initial fee to setup an account

and facilitate smooth future access to invest and redeem
47
investing directly through the AMC. The first time you invest
in any Mutual Fund, you may have to go to the AMC’s office to
make your investment. Subsequently, future investments in
different fund schemes of the same AMC can be made online
(provided this facility is offered by the AMC) or offline, using
the folio number in your name. Some AMCs may extend the
facility of sending an agent to help you fill the application
form, collect the cheque and send the acknowledgement.
Through Online Portals: There are several third party online
portals, from where you can invest in various mutual fund
schemes across AMCs. Most of the portals have tie-ups with
banks to facilitate easy fund transfer at the time of
investing. These portals charge an initial fee to setup an
account and facilitate future smooth online access to invest
and redeem your investments.
Through your bank: Banks are also intermediaries who
distribute fund schemes of different AMCs. You can invest
directly at your bank branch into fund schemes that you
wish to invest in.
Through Demat and Online Trading Account: If you have a demat
account, you can buy and sell mutual funds schemes
through this account.
ELECTRONIC MONEY TRANSFER

The traditional way to transfer money from one bank
account to another is to write a cheque and then deposit it.
The advent of technology has ensured that one need not go
Each intermediary has different advantages and limita-

tions, so opt for one that suits your needs
48
through such a tedious process anymore. Over the years, the

RBI has introduced several steps that has resulted in
paperless transfer of funds through electronic funds
transfer (EFT). There are several other acronyms that one
comes across, especially when transferring funds online or
through electronic clearances such as RTGS, NEFT and
ECS. Each of these plays an important role in ensuring your
investments are timely and you do not lose time when
investing. Each of these options plays a role in the way your
investments are treated in a mutual fund.
Electronic Clearing Service (ECS): ECS is an electronic mode of
payment or receipt for transactions that are repetitive and
periodic in nature. For this reason, ECS is most preferred
and useful when investing through SIP. Essentially, ECS
facilitates bulk transfer of money from one bank account to
many bank accounts or vice versa.
Primarily, there are two variants of ECS—ECS Credit and
ECS Debit. ECS Credit is used by an institution for affording
credit to a large number of beneficiaries having accounts
with bank branches at various locations within the
jurisdiction of a ECS Centre by raising a single debit to the
bank account of the user institution. ECS Credit enables
payment of amounts towards distribution of dividend,
interest, salary, pension, etc., of the user institution.
ECS Debit is used by an institution for raising debits to a
large number of accounts maintained with bank branches
at various locations within the jurisdiction of an ECS
ECS is most preferred and useful when investing through

systematic investment plans (SIP)
49
Centre for single credit to the bank account of the user

institution. ECS Debit is useful for payment of mutual fund
SIPs, because these are periodic or repetitive in nature and
payable to the user institution by large number of investors.
National Electronic Fund Transfer (NEFT): This is a nationwide
payment system facilitating one-to-one funds transfer.
Under this scheme, individuals, firms and corporate can
electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any
other bank branch in the country participating in the
Scheme. Individuals who do not have a bank account (walk-
in customers) can also deposit cash (up to `50,000) at the
NEFT-enabled branches with instructions to transfer funds
using NEFT. At present, NEFT operates in hourly batches -
there are eleven settlements from 9 AM to 7 PM on weekdays
and five settlements from 9 AM to 1 PM on Saturdays.
Electronic Funds Transfer (EFT): This is a paperless method by
which money is transferred from one bank account to other
bank account without the cheque or currency notes. The
transaction is done at bank ATM or using Credit Card or
Debit card. In the RBI-EFT system you need to authorise the
Electronic payments
IFSC or Indian Financial System Code is an alpha-numeric code
that uniquely identifies a bank-branch participating in the NEFT
system. This is an 11 digit code with the first 4 alpha characters
representing the bank, and the last 6 characters representing the
branch. The 5th character is 0 (zero). IFSC is used by the NEFT
system to identify the originating or destination banks or branch-
es and also to route the messages appropriately to the concerned
banks or branches.
50
bank to transfer money from your bank account to other

bank account that is called as beneficiary account. Funds
transfers using this service can be made from any branch of
a bank to any other branch of any bank, both inter-city and
intra-city. RBI remains intermediary between the sender’s
bank called as remitting bank and the receiving bank and
affects the transfer of funds. Using this method, funds are
credited into the receiver’s account either on the same day or
within a maximum period of four days, depending upon the
time at which the EFT instructions are given and the city in
which the beneficiary account is located. Usually the
transactions done in first half of the day will get first
priority of transfer than the transaction done in second half.
Real Time Gross Settlement (RTGS): The real time gross
settlement is an instantaneous funds-transfer system,
wherein the money is transferred in real time. With this
system you can transfer money to other bank account
within two hours. In this system there is a limit that you
have to transfer money only above `1 lakh and for money
below `1 lakh transactions, banks are instructed to offer
the NEFT facility to their customers. This is because;
RTGS is mainly used for high value clearing. The RTGS
facility is available only up to 3 PM and inter-bank
transactions are possible up to 5 PM.
Fund houses can accept cash up to `20,000 per

investor, per mutual fund per financial year
51
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52
Navigating investments
CHAPTER
5
Navigating
investments
Over the years, the regulator and market forces have created
several initiatives that have worked towards simplifying
mutual fund investing. There is easy information available,
which can be well used to make investing enjoyable.
COLOUR OF A FUND
The market regulator SEBI, has standardised fund labels
and colour codes, which will help investors make the right
choice. The colour code is done based on risk profiles with
three colour schemes; brown for high-risk products, yellow
for medium-risk and blue for low-risk ones. The criterion
considered is the risk on the principal invested. Broadly, the
colour code indicates that all equity products are classified
as high-risk, majority of debt funds as low-risk and all
hybrid ones (mix of equity and debt) as medium-risk.
The colour code will be useful for you to understand the
basics of what kind of investment a fund is intended for and
what it’s risk profile is. With this basic information, you will
53
be equipped to interact with your distributor or the

intermediary selling you a fund scheme, the colour code will
help you identify and invest in a fund scheme, which invests
in what you are looking for or at least in a scheme that
matches your risk profile. The colour codes, at best can be
the starting point to identify funds based on your risk
profile and need, but by no means is it conclusive to invest
in a fund scheme.
Today, product label details about a fund scheme is
disclosed on the front page of the Scheme Information
Document (SID). Moreover, the label is placed in the
common application forms and advertisements. According
to the SEBI, the product label has to be placed in proximity
to the caption of the scheme in the initial offering—Key
Information Memorandum (KIM) and Scheme Information
Documents (SIDs)—and common applications so that they
are prominently visible to investors.
WHAT IS A PROSPECTUS OR OFFER DOCUMENT?

All mutual fund schemes are mandated to provide an offer
document or prospectus to investors, which contains details
on the fund schemes such as issue date, investment
objective, fees and lot more.
Date of issue: This is the start and end date of new fund offers.
Investment objective: This section details the broad criteria
that the mutual fund will follow with regard to investing in
a particular security.
The colour codes can be the starting point to identify

funds based on your risk profile
54
Minimum investment: In this section, mutual funds prescribe

the minimum sum to be invested through new fund offers
and multiple sums in addition to the prescribed minimum.
Investment policy: The offer document will also outline the
general strategies the fund managers will implement, types
of investments, and asset allocation pattern considered
appropriate for the fund.
Risk factors: The offer document is required to describe the
risks associated with investing in the fund. You should be
familiar with the differences between varieties of risk, why
these risks are inherent in particular funds, and how these
risks fit in with risks in the overall portfolio.
Benchmark: This section details the benchmarks chosen by
the fund to ensure that its relative performance is
appropriate. Be careful to read the fine print in these
sections, especially the composition of the benchmark.
Fees and expenses: Offer documents are also required to list
the limits on fees, including entry and exit loads, switching
charges, annual recurring expenses, management fees and
investor servicing costs. The prospectus also indicates the
impact these have had on fund investment.
Key personnel: This section details the qualifications and
professional experience of the top management in the fund
company, including those of the chief executive officer
(CEO) and fund managers.
Tax benefit information: Mutual funds enjoy significant tax
benefits. Thus careful reading of the tax benefits is essential
The prospectus indicates the fee and expenses for a fund

scheme and its impact
55
before you to plan tax benefits you can avail, so as to enhance

your post-tax returns.
Investor services: These are details of services such as
automatic reinvestment of dividend and systematic
investment or withdrawal plans that a mutual fund provides
for an investor’s convenience.
WHAT IS SCHEME INFORMATION DOCUMENT (SID)

This is an exhaustive document which concisely lists the
information about the scheme that a prospective investor
ought to know before investing. Before investing, you should
also ascertain about any further changes to this SID after
the launch of the fund scheme from the AMC or
distributors, because the SID can be modified from time to
time through an addendum whenever a material change
occurs. Such material change will also be filed with SEBI
and circulated to all unit holders or may be publicly notified
by advertisements in newspapers subject to regulations.
Investors can obtain such addenda from the mutual fund or
its Investor Service Centres (ISC) or distributors.
WHAT IS STATEMENT OF ADDITIONAL INFORMATION

This statement provides details on the AMC besides the tax
and legal issues. The SAI, is part of the SID and the two
should be read in conjunction and not isolation to get the
full picture on what the scheme proposes to do and how it is
expected to be managed.
KIM, SID and Fact Sheet are important documents to

ascertain what a fund scheme does and how it is faring
56
WHAT IS KEY INFORMATION MEMORANDUM (KIM)

The KIM has information, which a prospective investor
ought to know before investing. In some ways it is an
abridged version of the SID.
WHAT IS A FUND FACT SHEET?

A fund scheme’s fact sheet reveals loads of information about
the fund. It informs investors where their money has been
invested and how their investments are performing.
Typically, AMC’s release their monthly fact sheet
detailing the fund’s investment performance and
investments in the previous month in the first week of the
subsequent month. For you, the information in the fact
sheet can help make the decision to invest in a scheme,
exit a scheme or continue investing in a scheme.
57
APPLICATION FORM
The mutual fund application form has the necessary details
that is needed from you at the time of buying units in the fund
scheme you have short listed to invest. Details such as your
name, address, amount of investment and such other
information as required in the application form. Details of
bank account number and PAN also need to be filled.
OTHER INVESTOR SERVICES

As a mutual fund investors, you may wish to make changes
to your investment. For instance, you may wish to stop a SIP,
58
or redeem an investment. With time, you may have changed

your residence and would need to get the same reflected in
your account or change your bank and a lot more. Every
AMC has provision to facilitate such changes and there are
specific forms to address each of such changes. All you need
is to fill the appropriate form and submit it to your
distributor or the Investor Service Centres (ISC) and the
change will be incorporated.
HOW DO I GET MY GRIEVANCES REDRESSED?

Every AMC mentions the name of the person to be
contacted for redress of grievances in their scheme offer
document. Moreover, the offer document also has details of
the trustees of mutual funds and the names of the directors
of the AMC and trustees. You can also approach SEBI for
redressal of complaints at http://investor.sebi.gov.in/. On
receipt of complaints, SEBI takes up the matter with the
concerned mutual fund and follows up on these till the
matter is resolved.
59
List of Mutual Funds
Name of the Asset Management Co. Website Customer Care e-mai l ID Toll free No.
Axis Asset Management www.axismf.com customerservice@axismf.com 1800 3000 3300
Baroda Pioneer Asset Management www.barodapioneer.in info@barodapioneer.in 1 - 800 – 419091
Birla Sun Life Asset Management www..birlasunlife.com 1-800-270-7000
BNP Paribas Asset Management www.bnpparibasmf.in customer.care@bnpparibasmf.in
BOI AXA Investment Managers www.boiaxa-im.com service@boiaxa-im.com 1800-103-2263
Canara Robeco Asset Management www.canararobeco.com crmf@canararobeco.com 1800-209-2726
Daiwa Asset Management (India) www.daiwafunds.in investorcare@daiwafunds.in 1 800 419 5000

Deutsche Asset Management (India) www.dws-india.com dws.mutual@db.com
DSP BlackRock Investment Managers www.dspblackrock.com service@dspblackrock.com 1800-200-4499
Edelweiss Asset Management www.edelweissmf.com EMFHelp@edelweissfin.com 1800 425 0090
Escorts Asset Management www.escortsmutual.com help@escortsmutual.com
Franklin Templeton Asset Mgmt. (India) www.franklintempletonindia.com service@templeton.com 1800-425-4255
60
Goldman Sachs Asset Mgmt. (India) www.gsam.in gsamindia@gs.com 1800-266-1220
HDFC Asset Management www.hdfcfund.com cliser@hdfcfund.com. 1800-3010-6767
HSBC Asset Management (India) www.assetmanagement.hsbc.com/in hsbcmf@hsbc.co.in 1800 200 2434
ICICI Prudential Asset Management www.icicipruamc.com enquiry@icicipruamc.com 1800 200 6666
IDBI Asset Management www.idbimutual.co.in contactus@idbimutual.co.in 1800-22-4324
IDFC Asset Management www.idfcmf.com investormf@idfc.com 1-800-2666688
IL&FS Infra Asset Management www.ilfsinfrafund.com
India Infoline Asset Management www.iiflmf.com service@iiflmf.com 1800-200-2267
Indiabulls Asset Management www.indiabullsmf.com customercare@indiabullsmf.com 1800 200 7777
ING Investment Management (India) www.ingim.co.in information@in.ing.com 18004255433
JM Financial Asset Management www.jmfinancialmf.com investor@jmfl.com 1800 1038 345
Name of the Asset Management Co. Website Customer Care e-mai l ID Toll free No.
JPMorgan Asset Management www.jpmorganmf.com India.Investors@jpmorgan.com 1-800-200-5763
Kotak Mahindra Asset Management www.kotakmutual.com mutual@kotak.com 1800222626
L&T Investment Management www.lntmf.com investor.line@lntmf.co.in 1800 2000 400
LIC NOMURA Mutual Fund Asset Management www.licnomuramf.com corp.office@licnomuramf.com 1800-258-5678
redressal@licnomuramf.com
Mirae Asset Global Investments (India) www.miraeassetmf.co.in customercare@miraeasset.com 1800-1020-777
Morgan Stanley Investment Management www.morganstanley.com/indiamf msmfcustomercare@karvy.com 1800 425 1313
Motilal Oswal Asset Management www.motilaloswal.com/assetmanagement/ query@motilaloswal.com
Peerless Funds Management www.peerlessmf.co.in pfmc@peerless.co.in
PineBridge Investments Asset Management www.pinebridge.in india.investorcare@pinebridge.com 1800-200-3444
PPFAS Asset Management www.amc.ppfas.com ppfasmf@ppfas.com
Pramerica Asset Managers www.pramericamf.com customercare@pramericamf.com 1-800-266-2667
61
Principal Pnb Asset Management www.principalindia.com customer@principalindia.com 1800 425 5600
Quantum Asset Management www.QuantumAMC.com Customercare@QuantumAMC.com 1800 22 3863 or
1800 209 3863
Reliance Capital Asset Management www.reliancemutual.com customer_care@reliancemutual.com 1800-300-11111
Religare Invesco Asset Management www.religareinvesco.com msfservices@religareinvesco.com 1-800–209–0007
Sahara Asset Management www.saharamutual.com saharamutual@saharamutual.com
SBI Funds Management www.sbimf.com partnerforlife@sbimf.com 1800 425 5425
SREI Mutual Fund Asset Management mfinvestorservices@srei.com
Sundaram Asset Management www.sundarammutual.com customerservices@sundarammutual.com 1800 103 7237
Tata Asset Management www.tatamutualfund.com 1800-209-0101
Taurus Asset Management www.taurusmutualfund.com customercare@taurusmutualfund.com 1800 108 1111
Union KBC Asset Management www.unionkbc.com investorcare@unionkbc.com 18002002268
UTI Asset Management www.utimf.com invest@uti.co.in , service@uti.co.in 1800 22 1230
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62
Your first fund
Your first fund

Useful, simple to understand and easy to execute. Those
should be the qualities your first fund investments should
have. For beginners, these requirements are generally best
satisfied by investing in equity funds.
Tax Savings Funds: Investments in Equity-Linked Savings
Scheme are eligible for tax exemptions under Section 80C of
the Income Tax Act. Under Section 80C, you can invest up to
`1 lakh in a set of investments, one of which is ELSS funds.
The long-term imperative is compulsorily enforced in this
fund, because under the tax laws, investments in these funds
are locked in for at least three years. The lock-in, can result
to be a good experience, save taxes and also build wealth.
Monthly Income Plan (MIP): These funds have low equity
exposure and try to address the capital protection concerns
of investors by investing predominantly in debt
instruments. These funds suit investors seeking income
from investments, with low risk, which can beat inflation
and provide regular income. Some MIPs also offer
controlled exposure to gold in addition to equity and debt.
Other Options: You can also look at investing in an Index Fund
based on S&P BSE Sensex or CNX Nifty or a diversified
equity fund with focus on large cap stocks. An investor with
surplus money available for a short duration can look at
parking in a liquid fund.
Disclaimer: MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISK, READ ALL SCHEME RELATED DOCU-
MENTS CAREFULLY.
63
Your first fund
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Mutual Fund’s

02 Working of mutual funds 9

03 Mutual funds for your need 21

04 How to buy a mutual fund 41

06 Your first fund 63

besides investments in other parts of the world at a much

WHY INVEST IN MUTUAL FUNDS?

Unlike many other investments, mutual fund investments

According to modern portfolio theory, when your invest-

Redemptions can be made directly into your bank

Public Provident Fund (PPF) or the National Pension

ELSS have a three-year lock-in and provide tax savings up

there’s likely to be a variety of funds that suit you.

Certain mutual funds provide access to inaccessible

fund/scheme pays the additional income tax on distribution

A fund’s investment objective helps investors choose a

of each unit of the funds. In the current example, the fund

CHARGES, FEES, EXPENSES AND OTHER COSTS

The NAV is dynamic and is basically the current value (on

Total Expense Ratio (TER): Typically, AMCs charge investors

CHARGES UNDER TER

SEBI limit on TER in per cent

can divide between various eligible expenses and fees. Until

Total Expense Ratio is an annual charge on AUM in per-

Systematic Investment Plans (SIPs), where the total com-

WHAT IS AN ACCOUNT STATEMENT?

allocated and the acquisition price of the units.

ensure you are entitled to receive the CAS.

HOW TO REDEEM YOUR INVESTMENT IN A FUND?

you provided when you first invested in the fund scheme.

HOW TO CHOOSE A FUND?

Performance: When choosing a fund, look for one that has a

There are five basic areas that you must evaluate in a

this continuously. Even if the investor has the knowledge

Almost all investing is risky, at least those investments

important information on the factsheet to use is the data

A fund’s monthly Fact Sheet available on its website,

increasingly important and that is cost. Funds are not run

DIFFERENT NEEDS, DIFFERENT FUNDS

Your financial needs may be different and call for a differ-

grow. And they are likely to be saving for a particular event,

5-year rolling returns of a Large cap fund

10-year rolling returns of a Large cap fund

5-year rolling returns of a Large & Mid cap fund

At present, there are three types of global funds are avail-

10-year rolling returns of a Large & Mid cap fund

5-year rolling returns of a Balanced fund

to achieve international exposure.

10-year rolling returns of a Balanced fund

kind of investment you wish to invest. You need to be aware

GROWTH AND TAX SAVINGS

10-year rolling returns of ELSS

Section 80C of the Income Tax Act.

5-year rolling returns of ELSS

long-term imperative is compulsorily enforced because

TAX EFFICIENT INCOME

Debt funds generate regular income but you need to

Income fund Returns

Income funds bet to leverage from interest rate fluctuation

There aren’t many investment avenues that satisfy all