A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy.
The money thus collected is then invested by the fund manager in different types of securities. These could be:

The quantum of investment in specific securities depend upon the scheme's stated objectives i.e. whether its income oriented/growth oriented/income cum growth oriented/ tax-saving savings. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them.

Thus a Mutual Fund is the considered to be most suitable investment for the common man as it offers an opportunity to invest in a diversified professionally managed basket of securities at a relative low cost.

However a Mutual Fund unit is not a share. It is an alternative savings product. It offers better prospects compared to fixed deposits/debentures/bonds. However, since the portfolio of a growth oriented fund includes substantial investments in equities, its exposure to market risk is higher than that of a bank deposit. But a well managed mutual fund can offer better returns than a fixed deposit, over a longer period of time.

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

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

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

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

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

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

You can earn money from your investment in three ways.

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

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

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

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

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

A) On Liquidity

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

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

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

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

B) Providing the Returns

1. Growth Schemes
Aims to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money back in the short-term.

Suitable for:

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

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

Capital appreciation in such schemes may be limited.

Suitable for:

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

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

Suitable for:

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

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

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

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

5. Tax Saving Schemes
These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Saving Schemes (ELSS) and Pension Schemes.
Recent amendments to the Income Tax Act Provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax saving are provided in the relevant offer documents.
Suitable for:

• Investors seeking tax rebates.

6. Special Schemes
This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, of industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings).
Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.

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

Suitable for:

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

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

Advantages:

Disadvantages:

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

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

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

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

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

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