Basic Rules of Mutual Funds

Following are some rules to help invest better and attain your financial goals.

Know Yourself -- The first step towards achieving your goals is that you must know yourself. Try to get an idea of how much risk you can handle. Do a tolerance test for yourself. If your Rs. 10000 investment turning into Rs. 6,000 upsets you--even if it could subsequently bounce back--perhaps an aggressive equity fund is not for you.

Reality Check --. What are your goals? If you need to turn Rs 10,000 into Rs 50,000 in two years, a medium term bond fund may not be the right answer. Work on setting realistic expectations for both your goals and your funds.

Know Your Portfolio -- Look for areas that are over-represented and for those that are lacking. For example, is your portfolio overly concentrated in the large-cap equities or too much of highly rewarding but wildly volatile infotech stocks. Are you missing investments in small-cap stocks?

Know What You Are Buying -- Once you discovered yourself, spend some time for a close understanding of your funds. The stated objective of a fund as given in a prospectus is often incomplete and does not reveal much. Based on the readily available portfolio and fund manager's commentary, you can broadly understand the style and strategy followed by a fund. This will help you meaningfully diversify your portfolio. This will also help you assess potential risks. In general, large-cap value funds are less risky than small-cap growth funds.

Examine sector weightings to find out what will drive the portfolio's returns-both up and down. And know that funds with large stakes in just one or two sectors will likely be more volatile than the more evenly diversified funds. Looking at a fund's sectors historically will help you gain a good perspective. Does the manager move in and out of sectors frequently and dramatically? If so, the fund might get hurt, if the manager is ever caught on the wrong foot.

Check out Your Fund's Concentration. A portfolio with just 20 or 30 stocks or one that puts most of its assets in just a few stocks will likely be more volatile than a fund that's spread among hundreds of stocks. But there could be rewards of concentration. A concentrated portfolio will also get more bang for its buck if its stocks work out. You may want to add a concentrated fund, one that owns fewer stocks or puts most of its assets in the top 10 or 20 stocks, to your portfolio.

But largely, your core funds should probably be well a diversified and more predictable. Though a small allocation to a sector-oriented fund, a more-flexible fund, or a more-concentrated fund could boost your returns.

Assess Performance Appropriately -- Past performance is no indicator of future results. Investors should commit this statutory quote from mutual fund prospectuses, advertisements and any other literature to memory. It should be recalled more readily than the your bank account number. It should be repeated anytime you consider sending money to any fund with a 100% three-month gain.

Why? Chances are, that three-month boom will be followed by a three-month bust. To prove it, we took a look at the top 10 domestic equity funds as of September 30 for each of the past five years. What proportion of them landed in the top 10 for the ensuing three-month period? Don't laugh. It was just 10%.

What's an investor to do? Not concentrate a mutual fund portfolio on a concentrated fund. And, above all, don't focus on short-term returns. When choosing a fund, look for above-average performance, quarter after quarter, year after year.

Be A Disciplined Investor -- After you've chosen some funds, stick with them. Don't be afraid to go against the tide, as often the unpopular groups tend to outperform in subsequent years. In other words, small contrarian bets could be lucrative. And discipline is the key. Rupee-cost averaging, or investing a regular amount of money at regular intervals, tends to add value. With a systematic investment plan, you are likely to beat the fund returns.

Know How Much You Pay -- Money saved is money earned. So it's always better to pay less than it is to pay more. Expenses are very important with your larger-cap, lower-risk funds, and less critical with small-cap funds and other higher-risk categories. For example, be wary of high expenses when you are considering bond funds. And you can afford to be lenient with the expense of a small-cap or a sector equity fund.

The nuances of mutual fund investing can be endless. But the strength of the mutual fund idea lies in its simplicity. Don't get bogged by the noise and clutter. You could well be on your way reach your goals by following these basic guidelines and be a smarter investor.

Mutual Funds work?

A mutual fund is a company that pools investors' money to make multiple types of investments, known as the portfolio. Stocks, bonds, and money market funds are all examples of the types of investments that may make up a mutual fund.

The mutual fund is managed by a professional investment manager who buys and sells securities for the most effective growth of the fund. As a mutual fund investor, you become a "shareholder" of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.

Mutual funds are, by definition, diversified, meaning they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem).

Because someone else manages them, you don't have to worry about diversifying individual investments yourself or doing your own record keeping. That makes it easier to just buy them and forget about them. That's not always the best strategy, however -- your money is in someone else's hands, after all.

Since the fund manager's compensation is based on how well the fund performs, you can be assured they will work diligently to make sure the fund performs well. Managing their fund is their full-time job!

Mutual funds can be open-ended or closed-ended. But many people consider all mutual funds to be open-ended, while putting closed-ended funds in another category.

"Open-ended" means that shares are issued in the fund (or sold back to the fund) whenever anyone wants them. With closed-ended funds, only a certain number of shares can be issued for a particular fund, and they can only be sold back to the fund when the fund itself terminates. (You can sell closed-ended funds to other investors on the secondary market, though.)

Load refers to the sales charges added to a mutual fund when you purchase it. The load charge goes to the fund salesperson as a commission and payment for their research services. Load charges can be up to 8.5 percent of the selling price and can be figured in as a front-end load (meaning you pay it when you buy the mutual fund) or a back-end load (meaning you pay when you sell the mutual fund).

Many mutual funds are no-load funds. Yes, that means there is no sales fee charged and the fund is direct-marketed so you can buy it without the help of a salesperson. With the wealth of information on the Internet today, it is certainly easier to make smart choices yourself to save money.

In addition to no-load funds, there are also funds that charge up to 3.5 percent as a sales fee. These are called low-load funds and can still be a good deal.

Mutual funds fall into three categories:

* Equity funds are made up of investments of only common stock. These can be riskier (and earn more money) than other types.
* Fixed-income funds are made up of government and corporate securities that provide a fixed return and are usually low risk.
* Balanced funds combine both stocks and bonds in the investment pool and offer a moderate to low risk. While low risk may sound good, it is also accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much. You have to decide how much risk you're willing to take on before you invest your money.

Knowing About Mutual funds

What is a Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

Diversification

Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: BY STRUCTURE


1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

1. Close - Ended Schemes:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. 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.

1. Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. Overview of existing schemes existed in mutual fund category: BY NATURE 1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

* Diversified Equity Funds
* Mid-Cap Funds
* Sector Specific Funds
* Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

* Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.



* Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities



* MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.



* Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

· Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. 3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly. By investment objective:

* Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.



* Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.



* Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).



* Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.


Other schemes


* Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.



* Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.



* Sector Specific Schemes: 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.


Types of returns:


There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

* Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.



* If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.



* If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. Advantages of Investing Mutual Funds: 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. 3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Select the Best Mutual fund scheme

Selecting the right mutual fund, especially in the equity segment, is a challenge.

But, deciding which option to go for (dividend payout, dividend reinvestment, growth option) is as critical. Let's work on that.

Equity funds - Growth option

Under this option, no dividend is declared and the Net Asset Value moves up and down depending on the market movement.

You end up paying tax only when you sell your units. The rate of tax depends on the period for which you held the units.

Let's say you sold your units (redeemed them) within 12 months of buying (date of investment). You will have to pay short-term capital gains. This is a flat rate of 10%.

If you redeem the units after 12 months, you will have to contend with long-term capital gains. As per the current tax laws, this is nil.

While most investors may be clear about this, they are unsure about the right time to book profits (sell your units at a profit). And, it is essential to sell to rebalance your portfolio to the original asset allocation.

Asset allocation is a method by which one decides the percent of total investments (exposure) to different asset classes such as equities (shares) and debt (fixed-return).

So, when the value of your equity funds grows over a period of time, your exposure to that asset class increases.

Remember, the key to success in equity investing is to book profits periodically, even if you are a long-term investor.

Undoubtedly, the growth option can be described as the best as it advocates long term investing. However, investors have had mixed experiences over a period of time.

There have been occasions when investors have sold their units (exit) only to see the NAV scale greater heights. Or, they may exit in panic when they see the NAV spiral downwards.

Therefore, deciding the right time to rebalance, is a challenge for those who opt for growth option.

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Equity funds - Dividend payout

Under this option, the fund declares a dividend as and when it has surplus money.

As per the current tax laws, dividend declared by equity and equity oriented funds is tax free in the hands of investors.

An important highlight of this option is that any dividend received within 12 months from the date of investment, a part of the short-term capital appreciation, is converted into tax-free income.

For example, assume that the NAV of a fund grows from Rs 10 to Rs 14 after seven months and the fund declares a dividend of Rs 3 per unit. This will convert 75% of the short-term gains into a tax-free income.

If you had to sell your units, you would have had to pay tax. But when you get a dividend, you don't.

Another major advantage of this option is that it allows you to book a profit at different levels without having to bother about the right or wrong time to do so.

Considering the tax laws and the automatic rebalancing of portfolio, this certainly can be a better option.

• The best tax saving funds

Equity funds - Dividend reinvestment

Under this option, the fund declares a dividend and reinvests it into the fund.

The point to be noted is that the entire tax-free dividend amount is reinvested on a particular day, which in a way is timing the market.

Considering that timing the market is not a strategy that works all the time, re-investment option may not prove effective at all times.

The one that scores?

To avoid the market timing, one can opt for dividend payout and reinvest the dividend amount in an equity fund through a Systematic Transfer Plan.

A STP allows you to transfer a fixed sum at pre-determined intervals, from one fund to another. So, you may have some money invested in a floating rate fund and you can opt for a STP whereby the money will move to an equity fund of the same mutual fund house.

If the amount is not sufficient to enroll for an STP, some additional contribution can be made.

• Why you must invest in ELSS funds

Debt funds

These are funds that invest in fixed-return instruments.

In the debt and debt oriented funds, it is beneficial to opt for the dividend option for an investment made for less than one year.

On the other hand, it makes sense to go for the growth option for investments that one intends to keep for more than one year.

When a debt fund declares a dividend, there are certain tax implications.

As per the current tax laws, mutual funds are required to pay:

Dividend distribution tax: 12.50%
Plus Surcharge: 10% on the tax
Plus Education cess: 2% on the total of the above two

This is for individual investors. If it is a corporate, then the dividend distribution tax increases to 22.44%, while the other two stay constant.

But, it is important to note that dividends are tax free in the hands of investors.

On the other hand, long-term capital gains are taxed at 10% for every investor, irrespective of the category he falls under.

The short-term capital gains are taxed as per the applicable slabs for individuals. In other words, the gain is added to the income and according to the tax bracket the individual falls under, he is taxed. For corporates it is 30%.

As is evident, each of these options have positive and negative implications. The key is to select the right option keeping in mind the type of fund, tax incidence, investment objectives and time horizon.

The author is CEO, Wiseinvest Advisors Pvt. Ltd, a mutual fund advisory firm.

Select the right Mutual Fund Scheme

Purchasing units of mutual fund schemes during the IPO

Mutual funds advertise in newspapers when they come up with a new scheme. On reading the advertisement, contact your broker or the mutual fund office for an application form or download the form from the fund’s website. Fill in the application form and lodge it with your broker along with a cheque for the investment amount. You can also hand over the duly filled in application to the mutual fund office. On receiving the application form, the mutual fund’s registrar will issue an account statement showing you how much you have invested and the units allotted to you (for instance, if you invest Rs 10,000, you will receive 1000 units during the IPO at Rs 10 per unit). The account statement is a record of your investment in the mutual fund scheme.

Purchasing units of close-ended mutual fund schemes after IPO

Units of close-ended mutual fund schemes are available for purchase from the mutual fund segment of the stock market. The unit will be available at the price at which it is quoted on the market. Contact your stockbroker and place a purchase order. The broker will buy the units for which you will have to pay him the purchase cost plus his brokerage. Brokerage charged will be about 0.5-2% of the purchase cost of the units.

For instance, if your purchase cost is Rs 15 per unit and brokerage is 1%, you will pay the broker Rs15.15 per unit (i.e. Rs 15 plus 1% of Rs 15). You also incur costs of stamp duty to have units transferred in your name. However, if you purchase units in dematerialized form no stamp duty is payable.

Purchasing units of open-ended mutual funds after the IPO

Units of open-ended mutual funds are also available for purchase from the mutual fund itself. On the closure of the IPO, the mutual fund’s registrar processes the application received and issues the account statement. During this time, the fund does not accept any new applications. On completing the procedure, the fund reopens the scheme for the sale and repurchase of the investors.

Ask your broker for a form of the scheme. Fill it in and return it to your broker along with the cheque for the amount of investment. On receiving the application, the fund’s registrar processes it and issues you an account statement indicating amount of units allotted and the amount of investment made.

Units of the mutual fund will now be available at the current NAV and not the face value of Rs 10.

How do you redeem your Mutual fund investment?

Should you want to exit a close-ended mutual fund scheme before closure of the scheme, you can do so by selling the units in the mutual fund segment of the stock market. Some mutual funds offer to repurchase units for short periods of time, during which, you can directly sell your units back to the mutual fund. On selling the units in the stock market, you incur a brokerage cost of 0.5-2%. This means that you get a lower amount on the sale. For instance, if you sell 1000 units at Rs 15 per unit and you pay 1% brokerage; you will receive only Rs 14.85 per unit.

You have to give a sell order to your broker, who will then sell your units in the stock exchange.

If the units are in the dematerialised form, you can instruct the Depository to transfer the units to your broker’s account. The broker will then pay you the sale proceeds minus the brokerage.

Selling close-ended mutual fund schemes on scheme closure date Mutual funds inform you about the (closure date of the scheme and the amount due to you. However, on closure date, some mutual funds choose to convert the close-ended scheme to an open-ended one, offering you two options:

Remain invested in the mutual fund in its new form. Request for redemption of the amount due to you. If you want to remain invested, you have to inform the mutual fund accordingly. If you want to exit, a redemption request forming part of the account statement has to be filed by you and sent to the fund or the registrar. Selling units of open ended mutual fund In the case of units of open-ended mutual fund schemes, simply fill in the redemption request on your account statement and lodge it with the mutual fund or your broker. You will receive your cheque within seven working days.

Understand ways of investing in Mutual funds

How do I buy the units of a fund?" someone asked me the other day. This query was followed by a mail from a reader who wanted to know if he had to buy mutual fund units from the stock market.

For all of you who are plagued with similar questions, here is the answer.

We have listed five ways in which you can buy your fund units.

• Have I invested in the right funds?

1. Get in touch with the Asset Management Company

The first step is to track the AMC -- as fund houses are known -- online.

Once you get onto their Web site, you will get their office addresses, phone numbers and a contact e-mail address. You will even be able to transact online with some of them.

Online addresses of the AMCs

ABN AMRO Mutual Fund

Benchmark Mutual Fund

Birla Sun Life Mutual Fund

BOB Mutual Fund

Canbank Mutual Fund

Chola Mutual Fund

Deutsche Mutual Fund

DSP Merrill Lynch Mutual Fund

Escorts Mutual Fund

Fidelity Mutual Fund

Franklin Templeton Mutual Fund

GIC Mutual Fund

HDFC Mutual Fund

HSBC Mutual Fund

ING Vysya Mutual Fund

J M Financial Mutual Fund

Kotak Mahindra Mutual Fund

LIC Mutual Fund

Morgan Stanley Mutual Fund

Principal Mutual Fund

Prudential ICICI Mutual Fund

Reliance Mutual Fund

Sahara Mutual Fund

SBI Mutual Fund

Standard Chartered Mutual Fund

Sundaram Mutual Fund

Tata Mutual Fund

Taurus Mutual Fund

UTI Mutual Fund

Invest online with the mutual fund

Some mutual fund Web sites allow you to invest online. However, you must check if you have an account with the banks they have partnered with.

For example, Prudential ICICI Mutual Fund allows you to buy funds online if you have a banking account with any of the following banks: Centurion Bank, HDFC Bank [Get Quote], ICICI Bank [Get Quote], IDBI Bank and UTI Bank [Get Quote].

You can buy units of SBI [Get Quote] Mutual Fund's schemes only if you have an account with the State Bank of India or HDFC Bank.

Get in touch with the fund house

By going online, you will be able to locate the fund house's address and phone number (toll free number in some cases). You can call and request them to send an agent over.

Or, if you want, go over personally. Do make an appointment; you may end up wasting time if the person you want to speak to is not available.

Some, like Prudential ICICI Mutual Fund, have a form you can fill and submit online. Do so and they will send someone over to meet you.

• An aggressive tax saving fund

2. Visit your bank

A number of banks are mutual fund agents.

Just walk into your branch and ask if they are selling any funds. See if they have a tie-up with the fund house you want to invest in.

• 6 large-cap funds to consider

3. Ask around

Ask your colleagues, neighbours, friends and relatives. Someone will know an agent. Just ask them for his contact details or ask that he get in touch with you.

• Why investing in an SIP is important

4. Visit the AMFI website

The Web site of the Association of Mutual Funds in India has a list of mutual fund agents across the country.

Under the heading Investors Zone, you will find another one called ARN Search. This refers to the AMFI Registration Number.

Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city.

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5. Check the online finance portals

Do you have an online trading account? Then you could check if they also sell mutual funds online.

If you do not have an online trading account and are considering opening one, you could look for a player that offers both.

Some like ICICI Direct sell funds online. But you must have a trading account with them. Others, like India Bulls and Motilal Oswal, do not have this facility online but if you call and leave your contact details, they will send an agent over.

Here are some of the prominent players.

5 paisa

Geojit Securities

HDFC Securities

ICICI Direct

India Bulls

InvestSmart Online

Investmentz.com

Kotak Street

Motilal Oswal

Sharekhan

Invest in Mutual Funds

What exactly is a portfolio?

In a general sense, all the investments of an investor are collectively referred to as a portfolio. And this portfolio is meant to serve a few particular goals.

Here's how to build a portfolio of mutual funds.

• Is the Super SIP a good investment?

Define your goal

This may come as a surprise. But, you need a distinct portfolio for each goal. Why? Because you will be requiring the money at different points of time.

For instance, if you are saving for your wedding two years down the road and your retirement 30 years down the road, you will invest differently for each.

If saving for your wedding, then you don't have much time. So your risk cannot be too high. Neither can you put it in an investment which will be locked for a longer duration.

So you would not be able to consider an Equity Linked Saving Scheme which has a three-year lock-in period. These are diversified equity funds with a tax benefit. You will probably have to consider a debt fund (fund that invests in fixed return investments) or a Fixed Maturity Plan or a balanced fund (fund that invests in both shares and fixed return investments).

But, with a 30-year time frame you have lots of time on your side.

You could definitely consider equity funds � funds that invest in shares of companies.

Over long periods of time, the risk of investing in equity (and hence equity funds) is minimal and the rewards you can expect are high.

At the broad level, money that is needed within the next three to five years must be in debt funds while money that is going to be needed after that can mostly be in equity funds.

• Why Magnum Contra is a great investment

Define your asset allocation

Which means how much should be split between the various types of funds.

At a higher level, you need to decide how much to invest in equity funds and debt funds.

On the next level, you need to make selections within these broad categories.

Equity

The first step that you should take is to invest in diversified equity funds.

In our rating � which takes into account risk and return � we list funds on the basis of a star rating. Five star funds are the best you can have in your portfolio.

The September 2005 list of diversified equity funds has six funds with a five-star rating. HDFC Equity has a below average risk grade and above average returns grade. In contrast, Franklin India Prima has an average risk grade and high returns grade. Thus, compared to HDFC Equity, Prima delivers higher returns but takes more risk in doing so.

This is the kind of insight that should be the key driver in deciding which funds should form the core of your portfolio. The core should be composed of funds that offer stability coupled with returns.

Don't judge funds based on the short-term performance, always look at the long-term performance.

If you still want to invest in some equity funds, then you could try sector funds and mid-cap funds. You could also look at funds like Kotak Contra and Magnum Contra which buy stocks that are not currently popular with other investors. All these can be referred to as non-core funds.

But look carefully at your current investments before deciding.

Let's say that you have invested in HDFC Equity and Franklin Bluechip. If you take both the fund manager's investments into account, 22% of total investments would be in technology stocks and 15% in auto stocks. Now, if you decide to invest in a tech fund or auto fund (both sector funds), you are taking the call that these two fund managers have not invested sufficiently in this sector and you are really keen on investing in such stocks. Go ahead only if you are certain that you want to invest heavily in these sectors.

To compare funds, you need to look at returns and risk. How to compare mutual funds and How risky is your mutual fund? will enable you to do that.

Debt

There are ultra-short term funds, known as cash funds, which are suitable for those who want to park surplus money for a very short duration, ranging for a few weeks to a few months.

Read Tired of your savings account? Try this to get a better understanding on such funds.

Then there are short-term debt funds for those who want to invest for a year or so.

Floating rate funds invest in instruments where the interest rate fluctuates depending on the overall interest levels in the economy. When one is unsure of which direction interest rates are headed, this is a good option.

There are also medium-term debt funds which have the potential to deliver higher returns than the above.

Gilt funds are those that only invest in government securities (investments with the government backing).

How many funds?

Even within mutual funds, diversification is a must. You must invest in different types of mutual funds and they should be from different Asset Management Companies (fund houses).

Looking at the actual portfolios that people send us, most investors tend to err on the side of having too many funds, rather than too few.

To make matters worse, many of these portfolios have funds of the same type.

In our opinion, two to four equity funds and one or two debt funds are quite enough for each type of fund.

Let's say you want to invest in short-term debt funds, floating rate debt funds, large-cap diversified equity funds and mid-cap funds.

What we suggest is:

Short term-debt fund: 1
Floating rate debt fund: 1
Large-cap equity funds: 3
Mid-cap funds: 3

• Mutual funds give great returns

Evolving a portfolio

You must monitor your portfolio.

Let's say a fund might have been an excellent performer years ago but has consistently being underperforming.

In such a case, you should think of selling your units or at least stopping further investments if you are doing it via a Systematic Investment Plan. This is a scheme where you put in fixed amounts every month.

Also, if you have been saving with a 10 year time frame in mind and eight years later a bull run is on, it would be wise to take a look at your investments.

After all, you invested because you needed the money in 10 years time. Now, you need it just two years down the road. If you are making a good profit, sell your units and put them in a fund that is meant for a shorter time frame.

• Must mutual funds declare dividends

Get cracking

Constructing a mutual fund portfolio is not rocket science. It just requires a great deal of careful thought.

Remember, it's your money so don't blindly play around with it.