WHAT IS MUTUAL FUND

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

NET ASSET VALUE

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place. Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme. Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors should note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debtoriented schemes. On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weight age to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently. The investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future
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performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio.

HOW MUTUAL FUNDS WORK

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was delinked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.

Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

GROWTH IN ASSET UNDER MANAGEMENT

ALL ABOUT MUTUAL FUNDS

CLASSIFICATION OF MUTUAL FUNDS Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or closeended scheme depending on its maturity period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Closed Vs Open Ended Funds: Like load vs. no load, you'll hear mutual fund people divide their universe between open-end and closed-end funds. Here's what it means: Open and closed-end funds are both pools of investor money and they are both managed by professionals to maximize diversification within a set strategy. The difference is in how the fund is structured in terms of ownership. An open-end fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. This happens routinely every day and the total assets of the fund grow and shrink as money flows in and out. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, since net asset value (NAV) is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. A closed-end fund is a different animal. Like a company, it issues a set number of shares in an initial public offering and they trade on an exchange. This fund trades on the Stock Exchange just like any other stock. Its share price is determined not by the total value of the assets it holds, but by investor demand for the fund. Investing in closed-end funds can be very confusing for the novice investor and we don't recommend it. Since these funds are traded on the open market, most sell at a discount to their underlying asset value for a number of reasons. Most investors who buy closed-end funds look for those with solid returns that are trading at large discounts. They bet that the spread between the discount and the underlying asset value will close. If you don't understand the mechanics of evaluating the discount spread, however, you're better off sticking to open-end funds.

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Load Vs No Load Funds: A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Let's first review the different types of mutual fund structures. Load funds charge a commission while no-load funds are commission-free. The structure of load funds can be (1) front-end with the commission varying from 2 to 6.25 percent of the investment, or (2) back-end, also known as redemption, with the commission usually at 3 percent of asset value when sold. Is there really that much of a worthwhile difference between load and no-load funds? An analogy to comparing mutual fund structures would be a onehundred yard race. If the race competitors have equal ability, but one has a five to six yard head start, so we obviously know who would win the contest. In fact, the one with the head start would only lose to a competitor with far superior ability. In the mutual fund illustrations below, assume all "competitors" have equal ability in order to accurately demonstrate the differences in performance.
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Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme 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, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

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Balanced Scheme The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

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TYPES OF MUTUAL FUNDS

Equity Mutual Funds: Most mutual funds invest in stocks, and these are called equity funds. While mutual funds most often invest in the stock market, fund managers don't just buy any old stock they find attractive. Some funds specialize in investing in large-cap stocks, others in small-cap stocks, and still others invest in what's left -- mid-cap stocks. On Dalal Street, cap is shorthand for capitalization, and is one way of measuring the size of a company -- how well it's capitalized. Large-cap stocks have market caps of billions of dollars, and are the best-known companies in the country. Small-cap stocks are worth several hundred million dollars, and are newer, up-and-coming firms. Mid-caps are somewhere in between. Mutual funds are often categorized by the market capitalization of the stocks that they hold in their portfolios. Equity fund managers usually employ one of three particular styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies. Often, the share prices of these stocks have been beaten down by the market as investors have become pessimistic about the potential of these companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. These funds buy shares in companies that are growing rapidly -- often well known, established corporations. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks. This is known as the blend approach.
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Large and Small Cap Funds: STOCK FUNDS are often grouped by the size of the companies they invest in -big, small or tiny. By size we mean a company's value on the stock market: the number of shares it has outstanding multiplied by the share price. This is known as market capitalization, or cap size. Big companies tend to be less risky than small fries. But smaller companies can often offer more growth potential. The best idea is probably to have a mix of funds that give you exposure to large-cap, midsize and small companies. For more detail on how these different types of stocks behave, take a look at our Stocks department. Large-Cap Funds Large-capitalization funds generally invest in major blue chip companies like Reliance Industries Ltd which have a market capitalization of greater than ten lac rupees. Large-cap funds are less volatile than funds that invest in smaller companies. Usually, that means you can expect smaller returns, but lately, large caps have outperformed all others. The last few years of the 1990s dished up an odd combination of economic stability in the U.S., but turmoil in Asia, Latin America and Russia. The recent turmoil in the market due to oil price rise has made the Indian stock market extremely volatile and convinced many investors to run for the relative stability of large, established companies like Reliance and Tata. That may not always be the case, but for most investors, a large-cap fund is their core long-term holding, anyway. A good one is a reliable -- but far from stodgy -- place to park your retirement savings.

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Mid-Cap Funds

As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings.

Small-Cap Funds

A small-cap fund, like HSBC Small Cap Fund, will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile. Because of their volatility, small-cap funds require that you have enough time to make up for short-term losses. And as we saw during 1997 and 1998, there are times when the market turns away from small-cap companies altogether for extended periods. (Large caps have taken the spotlight lately due to extreme volatility in the markets; small caps, meanwhile, have floundered.) But that's no reason to abandon these funds. History would indicate that small companies will eventually regain favour as markets settle down. And when they do, they will likely grow more quickly than their larger cousins -- which

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can provide a good kicker for aggressive investors who need to build as much wealth as possible while they're young.

Micro-Cap Funds

We're talking small fries here -- companies with market values below $250 million. These funds tend to look for start-ups, takeover candidates or companies about to exploit new markets. With stocks this small, the volatility (read risk) is always extremely high. A good example of the micro cap fund is the DSP ML micro cap fund. If you have the time and inclination to pay attention to a fund like this, you might be willing to put some money in. But beware: Micro-cap funds can rear up and bite you. Growth and Value Funds: Every manager is different, but there are three broad archetypes when it comes to investment strategy: growth, value and blend. The issue here is whether the manager (a) is willing to chase popular (a.k.a. expensive) stocks, hoping to cash in on their momentum; or (b) is seeking to "discover" cheap stocks, betting that the market will discover them, too. Growth Funds As their name implies, these funds tend to look for the fastest-growing companies on the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation. For example, Reliance, ONGC and SBI are generally considered "expensive" stocks, because their prices have been bid high relative to their profits. But because they enjoy vibrant markets and have rapid earnings growth, managers have no qualms paying big prices. They know that investors crave these super-charged growth stocks and will keep piling into them as long as the growth keeps up. But if the growth slows, watch out -- the more momentum a stock has, the harder it is likely to fall when the news turns bad.
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That's why growth funds are the most volatile of the three investment styles. It's also why expenses and turnover (which leads to tax liability) are also higher. For these reasons, only aggressive investors, or those with enough time to make up for short-term market losses, should buy these spooky funds.

Value Funds These funds like to invest in companies that the market has overlooked. Managers search for stocks that have become "undervalued" -- or priced low relative to their earnings potential. Sometimes a stock has run into a short-term problem that will eventually be fixed and forgotten. Or maybe the company is too small or obscure to attract much notice. In any event, the manager makes a judgment that there's more potential there than the market has recognized. His bet is that the price will rise as others come around to the same conclusion. A good example of this type of fund is the UTI Master Value Fund which invests in companies like KSB Pumps and Kalyani Steels. The big risk with value funds is that the "undiscovered gems" they try to spot sometimes remain undiscovered. That can depress results for extended periods of time. Volatility, however, is quite low, and if you choose a good fund, the risk of doggy returns should be minimal. Also, because these fund managers tend to buy stocks and hold them until they turn around, expenses and turnover are low. Add it up, and value funds are most suitable for more conservative, tax-averse investors. Blend Funds

These can go across the board. They might, for instance, invest in both highgrowth Internet stocks and cheaply priced automotive companies. As such, they are difficult to classify in terms of risk. Rated AAAf# by CRISIL - The highest debt fund rating from CRISIL - which indicates that the fund's portfolio holdings provide very strong protection against losses from credit defaults. Birla Bond Index Fund is the first debt index based fund in the country
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designed to track the CRISIL Composite Bond Fund Index. The Fund seeks to approximate as closely as practicable, the returns generated by the debt market as measured by CRISIL Composite Bond Fund Index. The fund being an index fund is a passively managed fund with relatively low expense structure. In order to determine if a particular blend fund is right for your needs, you'll probably have to look at the fund's holdings and make a call. Index Funds Essentials: An index fund allows you to enjoy the good parts of a mutual fund, with little or none of the bad, by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. An index fund builds its portfolio by simply buying all the stocks in a particular index -- the fund buys the entire stock market, not just a few stocks. The most popular index of stock index funds is the Standard & Poor's 500, but there are index funds that track 28 different indexes, and more are added all the time. An S&P 500 stock index fund owns 500 stocks -- all the companies that are included in the index. This is the key distinction between stock index funds and "actively managed" mutual funds. The manager of a stock index fund doesn't have to worry about which stocks to buy or sell -- he or she only has to buy the stocks that are included in the fund's chosen index. A stock index fund has no need for a team of highly-paid stock analysts and expensive computer equipment that goes into picking stocks for the fund's portfolio. So the hard part about running a mutual fund is gone. Investing in stock index funds is often called passive investing, since the funds don't use the same active management techniques as other funds. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Eliminate those analysts' salaries and an index fund can cut its costs tremendously -and those savings can be passed along to investors in the form of higher returns. The second main advantage of stock index funds is that they perform better than actively managed funds. Some investors find it incredible when they learn
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that most mutual funds are flops, at least when it comes to generating returns for their shareholders. In 1998, for instance, 85 percent of all mutual funds that were set up to beat the S&P 500 failed to meet that goal. When you think about it, that's an amazing statistic -- eight out of ten mutual funds didn't beat the market! Of course, investing in a stock index fund guarantees that you'll never outperform the overall market, but less than 20 percent of all professional mutual fund managers master that task in any given year. Even armed with this knowledge, some investors are convinced that they can pick out one of the funds that will be in the rare 20 percent club -- easy in theory but actually much harder in practice. If you looked at lists of the top-performing mutual funds for the last several years, you won't likely find many of the same names on more than a few of them. It's not uncommon for a fund to have a "hot" year, but it's very uncommon for a fund to consistently turn in above average performance.

Sector Funds: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. E.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. Sector Funds do what their name implies: They restrict investments to a particular segment -- or sector -- of the economy. A fund like Reliance Diversified Power Sector Fund, for instance, only buys power companies for its portfolio. Fidelity has a whole stable of sector funds from Fidelity Select Insurance to Fidelity Select Automotive. The idea is to allow investors to place

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bets on specific industries or sectors whenever they think that industry might heat up. While such a strategy might appear to throw diversification to the wind, it doesn't entirely. It's true that investing in a sector fund definitely focuses your exposure on a certain industry. But it can give you diversification within that industry that would be hard to achieve on your own. How? By spreading your investment across a broad representation of stocks. Of course, such concentrated portfolios can produce tremendous gains or losses, depending on whether your chosen sector is in or out of favour. An example of this type of fund is Sundaram BNP Paribas Asset Management Company Ltd. The objective of the Scheme would be to achieve long term capital appreciation by investing primarily in the equity and equity related instruments of companies that focus on opportunities in the entertainment business. As a thematic fund, the portfolio will be more diversified than a sector fund and may not be as diversified as a typical equity fund. The portfolio manager will adopt an active management style to optimize returns.

Global Funds

Global funds are the most diverse of the four categories. But don't be fooled by their cosmopolitan-sounding name. They're able to invest in any region of the world, including the U.S., so they don't actually offer as much diversification as a good international fund. A prime example: Idex Global, which is 26% invested in the U.S., 11% in Britain, 8% in France, 6% in Japan and 6% in Germany. Global funds tend to be the safest foreign-stock investments, but that's because they typically lean on better-known U.S. stocks. Tata IndoGlobal Infrastructure Fund objective is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of companies engaged in infrastructure and infrastructure related sectors and which are incorporated to have their area of primary activity, in India and other parts of the World.
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International Funds

These funds invest most of their assets outside the U.S. Depending on the countries selected for investment; international funds can range from relatively safe to more risky. An example is Franklin India International Fund scheme is designed to give you access to a portfolio of US Government Securities. The scheme invests in units of Franklin US Government Fund, an international mutual fund scheme from Franklin Templeton, investing predominantly in securities issued or backed by the US Government. The best thing to do is to choose a fund with the best balance, or make damn sure the manager has done a good job of moving in and out of regions profitably.

Money Market Funds Money Market or Liquid funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Money-market funds are often touted as the safest kind of mutual fund, but that depends on your perspective. On the one hand, it's almost impossible to lose your principal in one of these things. On the other, their returns are so low -- 4% to 6% on average -- that they can't beat inflation over time. In the long term, your money loses its buying power and so actually becomes less valuable. Consequently, money-market funds are most useful for parking cash

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you need in the short term -- a car or house down payment, for instance, or next year's tuition. The UTI Money Market Fund aims to generate higher returns by primarily investing in short-term money market instruments (1 day to 1 year).Investment in the fund is considered much safer as the money is lent to creditworthy borrowers such as Government of India, commercial banks and highly rated corporate debentures. There are various types of money-market funds based on the type of securities they buy, but the most important distinction is whether your dividends are taxable or tax-free.

Gilt Fund These funds invest exclusively in government securities. Government

securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

Fund of Funds (FoF) scheme

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A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe.

INVESTMENT STRATEGIES: 1. Systematic Investment Plan: under this a fixed sum is invested each month on a fixed date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. 3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.

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Offer document An offer document is issued when the AMCs make New Fund Offer (NFO). Its advisable to every investor to ask for the offer document and read it before investing. An offer document consists of the following: Standard Offer Document for Mutual Funds (SEBI Format) Summary Information Glossary of Defined Terms Risk Disclosures Legal and Regulatory Compliance Expenses Condensed Financial Information of Schemes Constitution of the Mutual Fund Investment Objectives and Policies Management of the Fund Offer Related Information.

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Key Information Memorandum A key information memorandum, popularly known as KIM, is attached along with the mutual fund form. And thus every investor gets to read it. Its contents are: 1. Name of the fund. 2. Investment objective 3. Asset allocation pattern of the scheme. 4. Risk profile of the scheme 5. Plans & options 6. Minimum application amount/ no. of units 7. Benchmark index 8. Dividend policy 9. Name of the fund manager(s) 10. Expenses of the scheme: load structure, recurring expenses 11. Performance of the scheme (scheme return v/s. benchmark return) 12. year- wise return for the last 5 financial years.

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Distribution channels: Mutual funds posses a very strong distribution channel so that the ultimate customers doesnt face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are: 1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly. The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merrill Lynch, etc. 2. Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/sub-broker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers.eg: KARVY being the top financial intermediary of India has the greatest network. So the AMCs dealing through KARVY has access to most of the investors. 3. Individual agents, Banks, NBFC: investors can procure the funds through individual agents, independent brokers, banks and several non- banking financial corporationss too, whichever he finds convenient for him.

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Costs associated: Expenses: AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio Loads: Entry Load/Front-End Load (0-2.25%) - its the commission charged at the time of buying the fund to cover the cost of selling, processing etc. Exit Load/Back- End Load (0.25-2.25%) - it is the commission or charged paid when an investor exits from a mutual fund; it is imposed to discourage withdrawals. It may reduce to zero with increase in holding period.

Asset Management Company:

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It is a highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - openend /closed-end across several categories - growth, income, balanced and the above mentioned types. Examples of AMC are Reliance Asset Management Company, Lotus Asset Management Company, JP Morgan Asset Management Company, etc. Taxes
Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments?

EQUITY LINKED SAVINGS SCHEMES

Equity Linked Savings Schemes (ELSS) Are Strong Favourites ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax.

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These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80 C i.e. investments of up to Rs 1 lakh in such schemes can be reduced from your gross income. Hemant Rustagi, CEO, Wise invest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. Being equity oriented schemes, ELSS has the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable, he adds. Absolute Returns ELSS SBI Magnum Scheme HDFC Tax Saver Sundararam Taxsaver Franklin India Tax Shield BNP Tax Gain 3 Year -2% -5% 2% -2% 5 Year 24% 18% 22% 13% Assets (Rs in cr) 583.55 589.25 294.28 184.65

Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS. All Smiles from Equity Funds
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Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best exercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price. So what strategy will help to reduce the burden of STT to the minimum possible extent? Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend, he adds. Absolute Returns Equity Diversified Scheme HDFC Equity Fund Reliance Growth Fund Franklin India Prima Fund Franklin India Blue-chip Reliance Vision Fund 3 Year -5.2% -1.6% -3.2% -3% -2% 5 Year 16% 19% 15.8% 16.3% 22% Assets (Rs in cr) 2,657.90 2,496.41 2,418.55 2,107.56 1,694.92

Debt Funds Can Benefit From Indexation Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes. Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20%
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after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%. Nevertheless for the risk averse, there are ways to reduce the tax burden on returns. Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2008, and redeem early in the next financial year say on April 2, 2009, you use the index of both Financial Year ending March 2009 and March 2010 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read How to ride the rising interest rate tide?) In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option. Analyst advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.

TAX EFFICIENT INVESTMENT

History of ELSS In 2005, the long awaited Equity Linked Savings Scheme finally arrived. The one single point focused objective of this scheme is to specifically provide deduction to the tax payers in terms of section 80C of the Income-tax Act, 1961. It may be recalled here that the Finance Act, 2005 has introduced a new
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section 80C to the Income-tax Act which would now provide a deduction to the extent of Rs.1,00,000/- while computing the total taxable income of the individual as also Hindu Undivided Family. Gone were the old days of granting tax rebate as per the old provisions of section 88. The new provisions granting tax deduction under section 80C were investor friendly and the benefit of this deduction is available to assessees of all income groups till date. Investment in Equity Linked Savings Scheme more popularly known as "ELSS" is one of the important option which is made available to the tax payer to enjoy the tax benefit of new section 80C. Although, there are various investment options available to the tax payer but because of certain special features of the ELSS investment option a large number of tax payers are opting for investment of the entire sum of Rs.1 lakh in the Equity Linked Savings Scheme plans which are made available by different Mutual Funds in the country.

The latest notification

From the point of view of saving Income-tax on ELSS investment the latest introduced Equity Linked Savings Scheme, 2005 has nothing new to offer to the investor. The taxes saving provisions of ELSS are already contained in section 80C of the Income-tax Act, 1961. The lock in provision of three year
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period remains unchanged. Similarly, the total quantum of investment eligible for tax deduction on ELSS investment together with other investments continues to be Rs.1.00 lakh. Likewise, the minimum amount of investment in the Equity Linked Savings Plan of the Unit Trust or of a Mutual Fund shall be in multiples of Rs.500/-. Thus, the new Equity Linked Savings Scheme, 2005 provides for detailed guidelines to a Mutual fund particularly with reference to repurchase, transfer, investment pattern of the funds raised under Equity Linked Savings Scheme, the formula for arriving at the repurchase price and finally it also provides for the rules and regulations for termination of the plan. The new Equity Linked Savings Scheme, 2005 has been framed by the Government keeping in view the powers conferred by clause (xiii) of section 80C (2) of the Income-tax Act, 1961. While dealing with the provisions concerning investment and repurchase the Scheme provides that the Investment in the plan will have to be kept for a minimum period of three years from the date of allotment of units. After the said period of three years, the assessee shall have the option to tender the units to the Unit Trust or the Mutual Fund, for repurchase. Presently the subscription to the units of Equity Linked Savings Scheme is open round the year and thus provides flexibility to the investor to invest on any day. However, the provisions contained in the new scheme provide that the ELSS plans shall be open for a minimum period of one month during the financial year 2005-06 and a minimum period of three months during the subsequent years. Although the investment in the Equity Linked Savings Scheme is blocked for a minimum period of three years and thus the units issued under the plan can be transferred, assigned or pledged only after three years of issue but in the event of the death of the assessee, the nominee or legal heir, as the case may be, shall be able to withdraw the investment only after the completion of one year from the date of allotment of the units to the assessee or anytime thereafter. The present day norms relating to investment of the Equity Linked Saving Funds have been altered. These norms are to be followed by all Mutual Funds who are raising funds under ELSS plan. It is good in the interest of the taxpaying public that the strict norms have been laid out which would ultimately help the investor because no Mutual Fund bringing out ELSS plan
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can afford to ignore these new investment norms. The following are the main norms for investment of Equity Linked Savings Funds:(a)The funds collected under a plan shall be invested in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies. Investment may also be made in partly convertible issues of debentures and bonds including those issued on rights basis subject to the condition that, as far as possible, the non-convertible portion of the debentures so acquired or subscribed, shall be disinvested within a period of twelve months. (b)It shall be ensured that funds of a plan shall remain invested to the extent of at least eighty per cent. In securities specified in clause (a). The Unit Trust and Mutual Fund shall strive to invest their funds in the manner stated above within a period of six months from the date of closure of the plan in every year. In exceptional circumstances, this requirement may be dispensed with by the Unit Trust or the Fund, in order that the interests of the assessee are protected. (c)Pending investment of funds of a plan in the required manner, the Unit Trust and Mutual Fund may invest the funds in short-term money market instruments or other liquid instruments or both. After three years of the date of allotment of the units, the Unit Trust or Mutual Fund may hold up to twenty per cent of net assets of the plan in short-term money market instruments and other liquid instruments to enable them to redeem investment of those unit holders who would seek to tender the units for repurchase. Presently the Mutual Funds having ELSS plan are announcing their NAV on daily basis. But under the new scheme it is provided that the Unit Trust and other Mutual Funds shall announce the repurchase price one year after the date of allotment of the units and thereafter on a half-yearly basis. The new Equity Linked Savings Scheme, 2005 provides that after a period of three years from the date of allotment of units, when the repurchase of units is to commence, the Trust and the Mutual Fund shall announce a repurchase price every month or as frequently as may be decided by them. The scheme
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also gives clear cut guidelines for calculating the repurchase price of units of Mutual Fund under ELSS plans. These repurchase rules are investor friendly. The new rules or repurchase now provide that in calculating the repurchase price, the Unit Trust and the Mutual Fund shall take into account the unrealised appreciation in the value of the investment of the funds of a plan to the extent they deem fit provided that it shall not be less than fifty per cent of such unrealised appreciation. While calculating the repurchase price, the Unit Trust and Mutual Funds may deduct such sums as are appropriate to meet management, selling and other expenses including realisation of assets and such sums shall not exceed five per cent per annum of the average Net Asset Value of a plan. At the time of repurchase of the units by the Mutual fund the same will be purchased by the Mutual fund at the repurchase price prevailing on the date tendered for repurchase. Under the new scheme of ELSS there is also a mention about the period of termination. It is now provided that a plan operated by Unit Trust or a Mutual Fund would be terminated at the close of the 10th year from the year in which the allotment of units is made under the plan. If however, ninety per cent or more of the units under any plan are repurchased before completion of ten years, the Unit Trust and Mutual Fund may at their discretion, terminate that plan even before the stipulated period of ten years; and redeem the outstanding units at the final repurchase price to be fixed by them. Thus, as a result of introduction of the new Equity Linked Savings Scheme, 2005 many unclear issues have been cleared and obligations are cast on the Mutual Funds to strictly comply with the norms of investment, repurchase price determination and the termination of the plan.

TAX PLANNING

Finally, from the point of tax planning and investment planning the taxpaying individuals and HUFs should freely opt to invest in the Equity Linked Saving Schemes of various Mutual Funds.
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One should consider investing a part of your investible income in equity linked savings scheme (ELSS) of mutual funds. ELSS is an efficient investment tool that offers the twin-advantage of healthy capital appreciation and reduced tax burden. In our work-a-day life, we exert ourselves utmost to save every penny but are exasperated when taxes eat into our savings. In order to save on tax, we have the option to invest a maximum of Rs 1, 00,000 in various tax saving instruments under Section 80C of the Income Tax Act. The eligible investments for availing Section 80C benefits include contribution to Provident Fund or Public Provident Fund (PPF), payment towards life insurance premium, investment in pension plans/ specified government infrastructure bonds/ National Savings Certificates (NSC)/ Equity Linked Savings schemes (ELSS) of mutual funds, payment towards principal repayment of housing loan (also any registration fee /stamp duty paid), and payments towards tuition fees for children to any school or college or university or similar institution (only for 2 children). If you do a cost-benefit analysis of ELSS, PPF and NSC, then you will find that ELSS offers you manifold advantages/ benefits as compared to the other two tax savings instruments. ELSS has a lock-in of only three years, whereas PPF and NSC have a longer lock-in period of 15 years and six years respectively. PPF and NSC fetch you a return at a compounded annual growth rate (CAGR) of 8 per cent while the average returns over three years in ELSS, which allows investors to participate in the India growth story by investing its money in shares, for the top five schemes as on November 30, 2007 is in the region of 50 per cent. The maximum investment an individual can make in PPF under Section 80C is Rs 70,000, whereas it is Rs1, 00,000 in the case of NSC and ELSS. When it comes to reaping taxation benefits, ELSS scores over PPF and NSC. As per current tax laws if you invest in ELSS, then dividend and capital gains are taxfree. While interest received in the case of PPF is tax-free, the same is not true in the case of NSC.
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There are two ways to invest in ELSS. ~ Invest a fixed amount every month through systematic investment plan (SIP) in ELSS and reduce the burden of large investment towards the end of financial year. ~ Invest lump sum at any point of time. One of the best ways to invest is to save and invest on a regular basis through SIPs. SIP is a planned investment programme, whereby an investor invests small amounts of his/her savings in mutual funds at regular intervals. SIP helps an investor take advantage of the fluctuations in the stock markets by rupee cost averaging (in a rising equity market an investor gets fewer MF units but when the market is sliding he/she gets more MF units) and also helps him/ her reap the benefits of compounding. A SIP in ELSS offers an investor the best combination of investments -- taxsavings and capital appreciation -- available to investors. The minimum investment in an ELSS through the SIP route can be as small as Rs 500.

Of the tax-saving instruments available under Section 80C, equity linked savings schemes (ELSS) have in the past three years emerged as the most popular, thanks to the rapid rise of the Indian stock markets over this period. Assets under management of ELSS schemes have multiplied almost ten times from Rs 1,701 crore in January 2005 to Rs 17,811 crore in January 2009.

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ELSS VS. THE REST Risk, return, liquidity and tax benefits are the parameters on which any investment instrument is judged. ELSS scores over tax saving bank deposits, National Savings Certificate (NSC) and Public Provident Fund (PPF) both in terms of return and liquidity. While no tax is levied on interest income earned from PPF, its main disadvantage is the lack of liquidity (lock in of six years). In the case of bank deposits and NSC, withdrawals are permitted after five and six years respectively. However, the interest income earned from both these instruments does not enjoy tax waiver, which lowers their effective yield. Despite the three-year lock-in, what has made ELSS popular is the good returns over the past three years (though being equity-linked, there is no guarantee that returns will continue to be good in future). One of the common ploys used by mutual fund houses to attract investment is to come up with new fund offerings (NFO) in the ELSS domain, especially in the last quarter of the financial year. This year has been no different. Five fund houses have launched their tax-saving schemes that are currently open for subscription. However, investing in an NFO that does not offer a new fund
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management approach is not a good idea when there are so many existing ELSS with a proven track record. Over the last five years, the Sensex generated a compounded annual return of 8 per cent. Fifteen of the 19 ELSS schemes outperformed the Sensex over this time horizon, with SBI Magnum Tax gain leading the pack. The Sensex generated a three-year compounded annual return of -3 per cent. However, a notable point about the three-year time horizon is that of the 20 funds in existence, only five outperformed the Sensex. The rest were all laggards. While past performance over the longer tenure (three to five years) of ELSS schemes has been stellar, one also needs to see how well these schemes have weathered the recent volatility in the stock market. One needs to compare the performance of schemes that have been in existence for a long time against that of schemes that were launched only a year or two ago. What emerges is that SBI Magnum and HDFC TaxSaver, which have been the best performers over the three- and five-year horizons, have slipped up over the last one year. Both of HDFC's ELSS schemesHDFC TaxSaver and HDFC LT Advantagehave lagged behind the Sensex during this period. According to Amar Pandit, a Mumbai-based financial planner, "If the fund has given a good return over the three- and five-year tenures but has been doing badly for the last four quarters or more, investors need to take a call on that fund." Look for consistency of performance in an ELSS fund. While the long-term track record of three to five years is important, give importance to one-year return as well. Opt for schemes well-diversified schemes (funds that are overweight on mid-stocks may fetch higher returns but are more volatile). Ideally, you should also take into consideration the fund manager's track record. Finally, do look at the table (Stars, not meteors) for consistent performers. By investing regularly in ELSS, the problems of wrong timing, wrong stock selection and burden towards the end of financial year is reduced substantially.

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Since ELSS has a lock-in of three years, the fund manager does not face any redemption pressure. This is important as the manager has the elbow-room to allow the stocks in his/her portfolio to mature. He/ she is not under undue pressure to sell stocks which are expected to fetch good returns over a twothree year horizon. In sharp contrast, open-ended schemes can be likened to an expressway which has an exit every 500 meters. So, when investors in an open-ended scheme go for redemption, the fund manager has no choice but to sell stocks which have the potential to grow over a two-three year period. While choosing ELSS an investor would do well to keep in mind the size, experience, quality and consistency of fund houses over a period of time. If you are building a nest-egg and are conservative, then you should consider channelling your precious resources into ELSS even as you apportion a small part of your savings to PPF and NSC.

ELSS Schemes Performance Comparison-May 2008

Investments in Equity Linked Savings Schemes, popular mode of investment for tax planning purposes has increased over the period of years. Below is the comparison of some of the schemes. All investments in this category of mutual funds are eligible for tax rebates and have a lock in period of 3 years from the date of investment.

Every one of us saves certain amount of money every month from our salary to get the benefit of Income tax exemption under 80C of the Income tax Act. As you are aware, we can claim 100% income tax exemption for this savings up to Rs.1 lakh. But are we prudent in using this opportunity to get the maximum benefit out of this? Of course some of us do and I hope rest of us will do so after reading this article.

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This article is about the advantages of saving in ELSS (Equity Linked Savings Scheme) of a quality Mutual Fund through Systematic Investment Plan. I recently saw series of advertisements in TV about a Mutual Fund. The Concept of those Ads is very simple and yet very powerful. A guy or a girl will be wearing a dress with printed words, which identifies his/her career (say a guy who wants to make a career in cricket will be wearing a shirt with slogan Cricketer, likewise a girl who longs to be a beauty queen in a beauty pageant would be wearing a shirt with a slogan beauty-contestant and so on). In addition, these guys/girls will have two sign boards, one in each of the two hands. He/She will show One sign board conspicuously but with a bit of disinterest. Lets say this is Sign Board-1. The same Guy/girl will also show the other sign Board inconspicuously but in a jubilant manner. We will name is board as Sign board-2. The following table shows the wordings in Sign Boards 1 and 2 carried by our personalities.

Personality Cricketer Beauty contestant Politician Bride IIT Student

Sign Board-1 World cup World peace Vote Pious man Work for Company

Sign Board-2 Ad shoots Bollywood Note Wealthy Man IndianUS green Card

I like this concept even though this is comical and these ads propose the double benefit of an Equity linked savings Scheme i.e. Tax exemption and Capital growth. Is it true? Yes! ELSS mutual funds have 3 year lock in period, Fund Managers have the freedom of keeping the fund fully invested rather than have a cash of around 30% in their pocket without investing the same in the market in the fear of redemption pressure as in the case of open-ended Mutual funds. So, every rupee you invest in the ELSS works for you. This would end up in more growth of your hard earned money.
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Is it safe to invest in ELSS funds? Yes. All approved mutual funds in India are monitored by SEBI (Security Exchange Board of India- An independent body constituted by Government of India). I mean to say according to ups and downs of the stock market mutual funds may fluctuate. But they are fraudproof. As like other Mutual fund Schemes, ELSS is also directly linked with Stock Market. So you may presume erosion in your investment in the event of Stock Market Crash. For the Short-term of course you will have a setback. For the medium term and long term (5 years to 8 years and 15 to 20 years respectively) you can surely get a growth of around 25% to 45% calculated on annual basis. Coming to the main point of this article, now you are inclined to invest in an ELSS for tax benefit. Will you do it in a stroke at the end of a financial year, as you normally rush for Indira Vikas or NSS Certficate during every February? No. This is not a correct way of investing in Mutual funds. You have to do it systematically by investing a uniform amount every month throughout the year which is known as Systematic Investment Plan in the Market Parlance. SIP is applicable for all Mutual fund investments. By SIP you will get the benefit of averaging, which the expert does with much toil. But with SIP even the novice investor does the tricks of the stock market such as rupee cost averaging, Contra buying, bottom fishing, etc., and at the same time without knowing nothing about these tricks of the trade. This is because when you invest through SIP and if the stock market is up your monthly investment buys less units and when the market is down you will end up in buying more units. This will help in averaging your price/cost. Secondly, if a person deals in the stock market directly, when market crashes he would not buy due to negative sentiments and in the fear of another. In this way he misses the opportunity to buy in the dips and selling in the highs. But through SIP we just avoid this error by investing at regularly throughout the year and over time; it will work on investors favour only. The following statistics is about an ELSS started at 1996 with the face value of Rupees 10. If you had invested Rs.1000 per month from the inception in this ELSS you will have invested Rs.1, 38,000/- over this period (138 months X Rs.1000). Now see the value of units you hold as on 31 December 2007.
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Whopping 23.25 lakhs for an investment of Rs.1, 38,000 and that too in instalments! In fact, this ELSS, which I had taken for discussion (HDFC TAX SAVER FUND), has been ranked as 27th for this year by the financial experts. If the ELSS ranked 27th has performed for an annual return of 45% throughout 13 years, just imagine the performance of other funds which were ranked from 1st to 26th. SIP Investments Total Amount Invested (Rs.) Market Value as on Dec 31, 2007 Returns (Annualised)*% Since Inception 138,000.0 0 2,325,025. 28 45.02% 120,000. 00 227,076. 11 56.14% 60,000.0 0 66,544.6 6 44.29% 1,366,130 .11 45.72% 36,000.00 12,000.0 0 15,648.5 9 60.83% 10 Year 5 Year 3 Year 1 Year

Lets be frank. Can our traditional tax saving instruments such as GPF, NSS, PPF etc., would give returns like this? You may say, Stock market was bullish during the period from 2003 to 2007 but bearish trend has set in this year and the market would further bottom out in the coming years. I do accept this Point, but even if we will not get aggressive returns like this, we are poised for returns of around 15% to 25%, which is definitely more than the traditional tax saving instruments.

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Is ELSS Better Option As A Tax Saving Investment?

The crash of stock market in the month of March is good opportunity for investors to opt for Equity Linked Saving Scheme because unit price of those schemes shall also be lower on account of crash in stock market. That is not the only reason for recommending ELSS as an investment. The other reasons are 1. Claim Deduction up to Rs 1 lakh Those readers who have still trying to search for an investment option for tax savings, can get deduction u/s 80C which by virtue of clause 2(xiii) gives deduction up to Rs 1 lakh. 2. Minimum lock in period.

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The PPF or NSC gives you risk free returns but they have locked in period of six years, whereas ELSS has only 3 years of lock in period. SO, after three years only you can get your wealth back. 3. Tax free gains While interest from PPF is tax free, interest from NSC is taxable. Whereas in case of ELSS, not only tax on the long term capital gains is tax free, even dividends you receive are tax free. 4. Chance of better returns The prediction about Indian economy makes a case for long term investment in equity. Therefore there is likelihood of getting much better return out of investment as the equity market is set to go up in near future again. The tax free gain will be more than the PPF or NSC.

So which are those ELSS plans? Given below is the list of ELSS which were ranked by ICRA for giving Award for performance of the fund. The rank was for performance by the ELSS funds for one year period ending 31/12/2008. ELSS- ONE YEAR PERFORMANCE Rank for Year Ending 31/12/2008
1. PRINCIPAL Tax Savings Fund 2. Principal Personal TaxSaver 3. Birla Sun Life Tax Relief 96 4. Kotak TaxSaver - Growth 5. DWS Tax Saving Fund - Growth 46

6. Sundaram BNP Paribas TaxSaver 7. (Open Ended Fund) - Growth 8. Fidelity Tax Advantage Fund - Growth 9. SBI Magnum Tax Gain Scheme 93 - Growth 10. UTI Equity Tax Savings Plan - Growth 11. ABN AMRO Tax Advantage Plan - Growth 12. Birla Equity Plan - Growth 13. Franklin India Tax shield - Growth 14. Tata Tax Saving Fund 15. HDFC TaxSaver - Growth 16. Reliance Tax Saver Fund - Growth 17. HDFC Long Term Advantage Fund - Growth 18. ING Tax Saving Fund - Growth 19. ICICI Prudential Taxplan - Growth

[Ranking Source: ICRA Mutual Fund Award]

Great Tax Planning!

After three years sale those units, get tax free redemptions and invest in ELSS again to claim the tax deduction. You will never be short of funds for tax saving purpose! The basis for the Tax saving instruments like Equity Linked saving schemed mutual funds is the following sections:

EQUITY-LINKED SAVINGS SCHEME IN A NUTSHELL

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Equity-Linked Savings Schemes are by far the most exciting of all the tax-saving schemes. The catch in this financial product is that if the returns are high, so are the risks. Who can subscribe? Individuals, Hindu Undivided Families (HUFs) and companies. Where can you apply? Various mutual funds. Nomination. Nomination facility is available with ELSS. Are the units transferable? The units can be easily transferred by filling out a transfer form. Investment limit. A maximum investment of Rs 10,000 to claim an income tax rebate of 20 per cent. Maturity period and returns. Open-ended mutual funds have no maturity period. However, to claim tax rebate under Section 88, the minimum lock-in period is three years. Withdrawal. In the case of open-ended schemes, the units can be sold anytime after the initial lock-in period of three years. In the case of closed-end schemes, the units can be sold only on the due date specified. Tax benefits. Dividends from mutual funds are fully exempt from income tax under Section 10(33). Equity funds (schemes that invest 50 per cent of their funds in equity) are also exempt from dividend tax. ELSSs offer under section 88 tax rebate on investments up to Rs 10,000 in a financial year. The difference between the selling price and the cost price is taxable as capital gains in the year of sale, at 10 per cent or 20 per cent, depending on whether or not you claim indexation benefits.

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Pluses

Possibility of high returns Lock-in period of only three years Easy transfer Low tax incidence (10 per cent) on redemption Efficient service, especially in the case of private mutual funds

Minuses

High risk Difficult to choose the right fund

RISK The other side of the coin

While investing in Mutual Fund, most of the people tend to stress on returns, but it's equally important to consider the risk ratios too. Here's a simple explanations which will help to decipher the meaning of this ratios. We know that shares carry a risk but are mutual funds also risky? Well any investment decision has to carry a certain amount of riskdoesnt it? So, it means that mutual funds also carry a risk profile with them. So how do you assess your mutual funds risk profile? Some of the tools available to assess your scrips riskiness also are used to assess a mutual fund's risk (or its close cousin, volatility). Alpha: It's a measure of an investment's performance on a risk-adjusted
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basis. It takes the volatility (price risk) of a fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha". Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under performance of 1%. For investors, the more positive an alpha is, the better it is. Beta: Also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Portfolio values are measured according to how they deviate from the market. A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market. Conservative investors looking to preserve capital should focus on fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.

R-Squared: It's a statistical measure that represents the percentage of a fund portfolio's movements that can be explained by movements in a
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benchmark index. R-squared values range from 0 to 100. Its said that, a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index. Mutual fund investors should avoid actively managed funds with high Rsquared ratios, which are generally criticized by analysts as being "closet" index funds. In these cases, why pay the higher fees for socalled professional management when you can get the same or better results from an index fund? Standard Deviation: It measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance. Sharpe Ratio: Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (Government Bond) from the rate of return for an investment and dividing the result by the investment's standard deviation of its return. The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance. Overseas, one has mutual fund rating companies - like Morning Star
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which provide views of risk. Morningstar says that what we investors really care about is when our funds LOSE money, not when they're doing better than the benchmark or than their long-term averages. It measures how often and by how much a fund trails the monthly T-bill rate, and then compares that average loss with that for the investment class. The average for a class is 1.00, so numbers above that mean a fund is riskier than its peers, and below is considered less risky. In India we still have to introduce this kind of a risk rating. However till then remember one needs to be conscious of risk, but not push it to the last decimal point. It's about awareness, rather than mathematics. So what should one do? Go for it. Its a pity that you can only invest up to Rs 10,000 to claim the maximum tax rebate under Section 88. However, stay away from ELSSs if you cannot stomach the risk. You can also consider withdrawing from the PPF scheme and investing your money in tax-saving mutual fund schemes. Of course, you cannot reinvest the money that you withdraw. But you can channel this money towards other financial obligations and invest in ELSSs using your taxable income for the year.

CASE STUDY The ideal ELSS schemes to invest in during the months of February and March 2009: The advice to the interested customers about which ELSS scheme to invest in was given by me on the basis of the overall past performance of the mutual fund scheme and as well as the potential performance depending upon the extremely cloudy conditions of the market. Due to the troublesome market scenario in the month of October, 2008, people were very apprehensive about their corpus already locked up in the market and very reluctant to make any further investments for the purpose of making huge profits. Somehow the idea
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of investing in the current situation didnt appeal to the majority of the working class people as they were under the wide spread notion that they should sit back until the waters cleared up a bit. They forgot the boon of SIP which is meant to average out the cost of the total number of units bought while investing in a mutual fund scheme. That, in turn, wipes out the risk factor to quite an extent especially during the volatile situations of the market as observed by all of us during the last two months. The aim of the study was to find out what the customers want in the current market scenario and what their apprehensions are. In order to gather this information, a systematic approach was needed to be implemented. Amongst the majority of the people whom I approached for information about their preferences to make an investment in the various financial products available in the market, Tax Planning topped the list. Also, for a newbie in the wonderland of investments, Tax saving products are the most popular amongst their cousins like insurance, equities, commodities, etc. and irrespective of the market scenario, the newcomers in the salary classed group are willing to hear out about the Tax saving schemes saga in as much detail as possible.

The study was conducted on various groups of people. These are as mentioned below: 1. Managerial level employees 2. Young IT professionals 3. Housewives 4. Businessmen(Small scale) 5. Government officials
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It can be inferred from the above mentioned facts that a majority of people were interested in tax saver schemes in mutual funds. Now the question which arose here was that out of so many ELSS schemes available in the market, which one is the best for the interested potential investors? To answer this, a comparative analysis was done amongst the top ten ELSS mutual funds. The list of top ten schemes was found out by using certain measures of performance. To measure the funds performance, the comparisons are usually done with: With a market index. Funds from the same peer group. other similar products in which investors invest their funds

ELSS SCHEMES PERFORMANCE COMPARISON-MAY 2008.

Investments in Equity Linked Savings Schemes, popular mode of investment for tax planning purposes has increased over the period of years. Below is the comparison of some of the schemes. All investments in this category of mutual funds are eligible for tax rebates and have a lock in period of 3 years from the date of investment.

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FINDINGS
Mutual funds have given excellent returns in this bull-run since 2003 and taxes saving schemes were also on the same track. Currently, there are 29 tax saving schemes in the market. Some schemes have performed well above the expectations and delivered outstanding returns in the last one, three and five years.

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The two most important benefits, which differentiate mutual fund ELSS and conventional instruments, are holding period and the returns. Today's investors abhor a longer holding period and lesser returns if invested in PPF and NSC instruments. Investors should be ready to take certain amount of risk for higher returns and this risk is nullified when invested for three years. DWS Taxsaving Scheme has given highest return in 1 year but in long run in 3 years Birla tax relief 96 has given highest return.

CONCLUSION
An ELSS has a lock-in period of three years, which entails a minimum investment of Rs 5,000. The investor gets tax benefit by investing in ELSS, reducing his burden to a large extent. In addition to this, the investor earns capital appreciation over a period of three years. After three years, it can be redeemed or may be continued. The same three-year lock-in is available in close-ended schemes also but there is no tax benefit as the investor can exit
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the scheme any time but there is a higher exit load. In case of ELSS, you can't remove the money in less three years of your investment period irrespective of how much return the scheme has generated. According to your risk appetite there are three options available to choose from: growth, dividend and dividend reinvestment. Some investors are very risk averse. They want a regular flow of funds to maintain confidence on that particular scheme. This type of investor may go in for dividend. Dividend is declared depending upon the fund house. Dividend is generally declared at least once in a year. The percentage of dividend is based on the growth achieved by the scheme in less time. But he should understand that the increase in the NAV of the dividend option would be relatively slower than the growth option as there is cash outflow at regular intervals. And it reduces the chances of higher compounded growth over a longer period. Another option is dividend reinvestment (div reinvest). There is little difference between this and growth option. If the fund declares a dividend then the dividend will be reinvested back into the scheme but at the current NAV price. Growth option is the best and the most used one as your investment value grows faster. It is seen that majority of the investments happens in March as the main objective is tax benefits and not returns. They invest a lump sum amount. Ideally, an investor should invest in such a manner that it should generate high returns with low or no pressure felt as far as cash position is concerned. Investors can also go in for Systematic Investment Plan (SIP), where investment can be made in small instalments at regular intervals on a fixed date for a certain period: half-yearly, annually, etc. Also intervals can be weekly, monthly, and on quarterly basis. SIP is easier than lump sum as it eases the outflow of cash over a period. Besides, SIP allows the investor get units at lower NAV in a volatile market, thus getting more units. Investing in ELSS attracts entry and exit load. Every fund house has a different load factor, varying from zero to 2.5%. Exit load may be in the range of 1% to

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1.5%. The load percentage is very less but for higher amounts the load turns out to be big. So be aware of the load factor while investing. Tax benefits Investors making investments in tax saving mutual funds can avail of a deduction of up to Rs 1 lakh under Section 88 from the gross total income. The tax benefit is 33% if the gross taxable income comes in the highest income tax bracket of 30%. In addition to this, the capital appreciation you get on your investment will be totally tax-free after one year. Also, the dividend distributed does not attract dividend distribution tax. Criteria Currently, almost every mutual fund house has a tax saving scheme. So you have a gamut of options of various fund houses to select from. Now the biggest and the most challenging question: which scheme to go for? There is no doubt that most schemes perform and give decent returns in a bull market. However, the best fund is that which sustains in the long term and gives decent returns over a period of three years. Do your homework before selecting a scheme, as there are certain things to be looked at. The most obvious is the brand image of the fund house in the market. Short-term performances can be ignored up to a certain limit, but not the brand and the value it has in the market. There are several cases where a certain fund-house becomes a 'flavour of the month' and then after a while starts deteriorating as the fund manager cannot sustain the returns. Or, the returns were a function of some wild bets that worked. A strong brand is created only when there is a consistent reward that investors have got. Simply going by a brand without any track record can be dangerous, as investors in the early nineties learnt when they invested in a top-rung global fund management firm, only to see their investment value fall drastically.

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The next thing to look at is the returns delivered by that particular scheme. Generally, the investors look at the short-term returns generated by the scheme, primarily monthly or three-month gain. However, they forget that the investment is for a span of three years. Thus they overlook the best performing fund over the long term. Another important criterion while choosing an ELSS is the asset size. Should you choose a large asset sized fund or one which has a smaller base? Typically, it would seem that larger the asset size better is the fund. It might not be the case. Managing a large asset size can be arduous. Some fund managers keep higher percentage in cash and cash equivalent due to larger size. Higher percentage of cash will lead to relatively less increase in the net asset value over a period of time because there is no benefit in holding cash. Hence, it is good to look at lower- to medium-size asset size as the returns will higher. A medium size would be in the range of Rs 200-500 crore and a lower size would be less than Rs 200 crore. For instance, the asset base of ING Tax Savings is just Rs 74.17 crore as on December 2007. When it was launched the fund size was barely Rs 1.3 crore, but has managed to give 53% returns every year over the last five years. Performance monitor It is advisable to invest in a fund where there is a three year or more of track record to stand for. However, many investors are enticed by short-term return gains and often what their advisor pushes. Remember, some of the advisors gain commission from selling these products and are often known to recommend products that might not be suitable for you. And this applies to most other funds as well. To select the right performance oriented fund requires data mining and indepth research on the companies to find whether they provide good returns in the long run. Often, ELSS funds don't churn their portfolio frequently as compared to open-ended non-ELSS schemes, where it is common due to liquidity pressure; hence it is paramount to look at their equity holdings with attention.
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Though, past performance may not be reflected in the future, the economic scenario in India looks strong and the markets are expected to outperform other forms of financial investments. Hence, ELSS will continue to remain a smart place to invest in. Now, even after the three years of lock-in, you could redeem your current holdings and reinvest to avail of the tax benefit for that financial year. In this case, your investment will be continued at the current NAV price. The other aspect Like every good thing, there are caveats here as well. Some mutual funds claim to have declared dividend of 200% or more, urging you to invest with them within a record date to receive a specified dividend. When you come across such claims, proceed with caution. After putting in money with the fund house with an entry load of 2.5% you get the dividend on the invested value. It means that you are actually incurring a loss of 2.5% if you are investing before the dividend is declared. So don't get lured towards such promotional activities. Purely from a tax management perspective, ELSS investment stands out as a preferred destination. Investors, who want to lock-in their funds and not succumb to the temptation of re-working and shuffling their holdings, will also find ELSS a good avenue for investment as there is the three year lock-in period. For others who want liquidity as well as growth and the freedom to shift through funds, then there are other avenues available as well. But from a tax saving perspective, this is a must-have.

BIBLIOGRAPHY
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WEBSITES www.amfiindia.com www.sebi.gov.in www.outlookmoney.com www.mutualfundsindia.com www.moneycontrol.com www.morningstar.com www.yahoofinance.com www.money.rediff.com www.investopedia.com

JOURNALS & OTHER REFERENCES: The Economic Times Business Standard Business India Fact sheet and statements of various fund houses.

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