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Understanding Mutual FundsUnderstanding Mutual Funds

Godmind Mutual Fund Advisory services

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What is a Mutual Fund?What is a Mutual Fund?

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A vehicle for investing in stocks and bondsA vehicle for investing in stocks and bonds

y A vehicle for investing in stocks and bonds.

y Not an alternative investment option to stocks and bonds.

y It pools the money of several investors and invests this instocks, bonds, money market instruments and other typesof securities.

y owner of a mutual fund unit gets a proportional share of the fund¶s gains, losses, income and expenses.

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Each mutual fund has a specific stated objectiveEach mutual fund has a specific stated objectivey Fund¶s objective is laid out in the fund's

prospectus, which is the legal document thatcontains information about the fund

y Its history, its officers and its performance.

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Some popular objectives of a mutual fund areSome popular objectives of a mutual fund are --

Fund Objective What the fund will invest in

Equity (Growth) - Only in stocks

Debt (Income) - Only in fixed-income securities

MoneyMarket - In short-term money market

instruments(including government securities)

Balanced - Partly in stocks and partly in

fixed- income securities,('balance' in returns and risk)

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Managed by an Asset Management Company (AMC)Managed by an Asset Management Company (AMC)

y The company that puts together a mutual fund is called anAMC .

y AMC may have several mutual fund schemes .

y AMC hires a professional money manager, who buys andsells securities in line with the fund's stated objective.

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All AMCs Regulated by SEBI, Funds governed by Board ofAll AMCs Regulated by SEBI, Funds governed by Board of

DirectorsDirectors

y Mutual fund regulations require that the fund¶sobjectives are clearly spelt out in the prospectus.

y Every mutual fund has a board of directors thatis supposed to represent the shareholders'

interests, rather than the AMC¶s.

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THE THE BASICS OF MUTUAL FUNDS.BASICS OF MUTUAL FUNDS.

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Net Asset Value or NAVNet Asset Value or NAV

y NAV is the total asset value (net of

expenses) per unit of the fund and iscalculated by the AMC at the end of everybusiness day.

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HOW IS NAV CALCULATED?HOW IS NAV CALCULATED?

y The value of all the securities in the

portfolio in calculated daily. From this, allexpenses are deducted and the resultantvalue divided by the number of units inthe fund is the fund¶s NAV.

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EXPENSE RATIOEXPENSE RATIO

y AMCs charge an annual fee, or expense ratio thatcovers administrative expenses, salaries,

advertising expenses, brokerage fee, etc.

y Fund's expense ratio is typically to the size of thefunds under management and not to the returns

earned.

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LoadLoad

y Some AMCs have sales charges, or loads, ontheir funds (entry load and/or exit load) to

compensate for distribution costs.

y Funds without a sales charge are called no-load

funds.

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OpenOpen-- and Closeand Close--Ended FundsEnded Funds

y Open-ended Funds : can enter and exit the

fund scheme at its NAV.

y Close-Ended Funds: Redemption can takeplace only after the period of the scheme is over.Close-ended funds are listed on the stock

exchanges

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Important documentsImportant documents

y Two key documents that highlight the fund'sstrategy and performance are 1) the prospectus

(legal document) and the shareholder reports

(normally quarterly).

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Benefits of Investing Through Mutual FundsBenefits of Investing Through Mutual Funds

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Professional Money ManagementProfessional Money Management

y Fund managers are responsible for implementinga consistent investment strategy .

y Fund managers monitor market and economictrends and analyze securities

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DiversificationDiversification

y Diversification is one of the best ways to reducerisk.

y Mutual funds offer investors an opportunity todiversify across assets.

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LiquidityLiquidity

y Investors can sell their mutual fund units on anybusiness day.

y Receive the current market value on theirinvestments within a short time period (normally

three- to five-days).

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AffordabilityAffordability

yThe minimum initial investment

for a mutual fund is fairly low formost funds (as low as Rs500 forsome schemes.

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ConvenienceConvenience

y Convenience of periodic purchase plans,automatic withdrawal plans and the automatic

reinvestment of interest and dividends.

y Reports and statements .

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Flexibility and varietyFlexibility and variety

y Pick from conservative, blue-chip stock funds,Sectoral funds,

y Funds that aim to provide income with modestgrowth

y Those that take big risks in the search forreturns.

y You can even buy balanced funds, or those that

combine stocks and bonds in the same fund.

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Tax benefits on Investment in Mutual FundsTax benefits on Investment in Mutual Funds

y 100% Income Tax exemption on all

Mutual Fund dividends .

yDeduction upto 1 lakh available u/s

80(c) under investment inELSS

funds as of FY2005-2006.

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INVEST EARLY INVEST REGULARLYINVEST EARLY INVEST REGULARLY

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Happy Investing

mutualfunds know

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