An extract from frozen thoughts for the month of september

"No matter what circumstances men of substance encountered in their lives, they always triumphed over them through some mental philosophies they believed in."

I used to work for a taskmaster in Dubai. His name was Mahesh Menda. He always challenged his people to go beyond what they believed to be possible. Every time we went back to him to explain why a task could not be done, his standard reply would be, “I am not paying you to tell me it cannot be done.” Though he seemed apathetic during such moments, on retrospection I realized, it enabled us to look at possibilities that we hadn't looked at till then. And invariably, we did come up with solutions that seemed impossible earlier. He led our minds beyond what we believed we were capable of.

Bruce Lee uttered, “To hell with circumstances. I create opportunities.”

I was also fortunate enough to work with an incorrigible optimist in Mumbai. His name was David Samson. His famous lines were, “I don't take 'no' for an answer. First say 'yes, it can be done', and then let us discuss how to do it. There must be a way. There is always a way.” In fact, his lines had rubbed so much into us that in most meetings, whoever said 'no', the rest of us would smile at David Samson, and in chorus we would say, “First say 'yes', it can be done…” And invariably, we did come up with a way that we were blind to till then. He led our minds beyond what we perceived as our limits.

Napoleon Bonaparte stated, “Circumstances! What are circumstances? I make circumstances.”

I was blessed to be a witness to that moment. “How are you?” asked the elderly gentleman to the one who had a fracture in his hand. The man replied, “I am pulling on.” The wise old man roared back, “Say, you are on 'Top of the World'. Out of 206 bones, only one is broken. Celebrate the remaining 205 that are intact.” He then added these transforming words, “Don't look at what has left you. Look at what you are left with.” Ever since, I experience a compulsive gratitude to 'what I am left with', and never the repulsive remorse for 'what has left me'. He led my mind to see the larger picture beyond the immediate trifles.

James Allen tells us, “Circumstances do not make the man. They reveal him to himself.”

No matter what circumstances men of substance encountered in their lives, they always triumphed over them through some mental philosophies they believed in.
Rather than allowing the circumstances to govern them, they ensured that the mental philosophies they believed in governed the circumstances. They showed us that man is bigger than all his circumstances, which he will realise, only if his life is governed by strong mental philosophies.

What is possible for 'one' is possible for many. What is possible for 'many' is possible for all. If they all could do it, we too can. Let us take life head on...

What Paryushan means?

PARYUSHAN means: Festival of self friendship and realisation of soul. Festival of sacrifice, penance & endurance. Festival of soul purification & self search, time to keep aside the post, wealth & prestige & be with the God. The time to forget & forgiveness make the enemy a friend & increase the love and kindness.

1st Day of Paryusan: The day of making the mind & soul pure and concentrate in vitrag.

2nd Day of Paryushan: On this day with the help of our sweet & kind speech spread the fragrance of inspiring virtues & constructive activities. Donate with free hand & become a king.

3rd Day of Paryushan: To make the Mind (soul) & Body Pure and pious with the self of sacrifice & penance. Self control & self-friendship is also practice. Meditation for enlightment.

4th Day of Paryushan: Rare occasion of gaining AatmaLaxmi.

5th Day of Paryushan: The day of "KALPASUTRA" sacred document of Jainism. On this day Bhagwan Mahavira's birth is celebrated with special celebrations, a part of which is the auction of 14 items, dreams of by the Lords mother Trishala Devi, while she was carrying him.

6th Day of Paryushan: 'SWAN' floating in the MANSAROVAR of Jain Empire (Religion SASAN)

7th Day of Paryushan: Day of Divine message of Tolerance & power of endurance.

8th Day of Paryushan: 'SAVANTSARI': The Day of the grand 'GATE WAY' of 'SALVATION' (Moksha).

વાર નથી લાગતી

આશાઓ પર પાણી ફરી જતાં વાર નથી લાગતી
કિનારે આવી ડૂબી જતાં વાર નથી લાગતી
જીતનો જલસો માનવાની ઉતાવળ ન કર
જીતેલી બાજી હારી જવામાં વાર નથી લાગતી

તારી ઊંચાઇનું નાહક અભિમાન ન કર
કે મિનારોને તૂટી જવામાં વાર નથી લાગતી
બાંધ્યો છે માળો તો જરા દિલથી જતન કર
કે માળાને પીંખાઇ જતાં વાર નથી લાગતી

માણી લે હર એક પળ તું આજે
આંખોને મિંચાઇ જતાં વાર નથી લાગતી

Compelling Logic

An atheist professor of philosophy speaks to his class on the problem
science has with Krishna. He asks one of his new students to stand and.....

Professor: You are a Hare Krishna devotee, aren't you, son?

Student: Yes, sir.

Prof: So you believe in God?

Student: Absolutely, sir.

Prof: Is God good?

Student: Sure.

Prof: Is God all-powerful?

Student: Yes.

Prof: My brother died of cancer even though he prayed to Krishna to heal
him. Most of us would attempt to help others who are ill. But Krishna
didn't. How is this Krishna good then? Hmm? (The student is silent.)

Prof: You can't answer, can you? Let's start again, young fella. Is God
good?

Student: Yes.

Prof: Is Satan good?

Student: No.

Prof: Where does Satan come from?

Student: From...God...

Prof: That's right. Tell me son, is there evil in this world?

Student: Yes.

Prof: Evil is everywhere, isn't it? And God did make everything. Correct?

Student: Yes.

Prof: So who created evil?

(The student does not answer.)

Prof: Is there sickness? Immorality? Hatred? Ugliness? All these terrible
things exist in the world, don't they?

Student: Yes, sir.

Prof: So, who created them?

(The student has no answer.)

Prof: Tell me, son. Do you believe in Krishna?

Student: Yes, professor, I do.

Prof: Science says you have 5 senses you use to identify and observe the
world around you. Have you ever seen Krishna?

Student No, sir.

Prof: Tell us if you have ever heard your Krishna?

Student: No, sir.

Prof: Have you ever felt your Krishna, tasted your Krishna, smelt your
Krishna? Have you ever had any sensory perception of Krishna or God for that
matter?

Student: No, sir. I'm afraid I haven't.

Prof: Yet you still believe in Him?

Student: Yes.

Prof: According to empirical, testable, demonstrable protocol, science says
your Krishna doesn't exist. What do you say to that, son?

Student: Nothing. I only have my faith.

Prof: Yes. Faith. And that is the problem science has.

Student: Professor, is there such a thing as heat?

Prof: Yes.

Student: And is there such a thing as cold?

Prof: Yes.

Student: No sir. There isn't.

(The lecture theatre becomes very quiet with this turn of events.)

Student: Sir, you can have lots of heat, even more heat, superheat, mega
heat, white heat, a little heat or no heat. But we don't have anything
called cold. We can hit 458 degrees below zero which is no heat, but we
can't go any further after that. There is no such thing as cold. Cold is
only a word we use to describe the absence of heat. We cannot measure cold.

Heat is energy. Cold is not the opposite of heat, sir, just the absence of
it.

(There is pin-drop silence in the lecture theatre.)

Student: What about darkness, Professor? Is there such a thing as darkness?

Prof: Yes. What is night if there isn't darkness?

Student: You're wrong again, sir. Darkness is the absence of something. You
can have low light, normal light, bright light, flashing light.....But if
you have no light constantly, you have nothing and it's called darkness,
isn't it? In reality, darkness isn't. If it were you would be able to make
darkness darker, wouldn't you?

Prof: So what is the point you are making, young man?

Student: Sir, my point is your philosophical premise is flawed.

Prof: Flawed? Can you explain how?

Student: Sir, you are working on the premise of duality. You argue there is
life and then there is death, a good God and a bad God. You are viewing the
concept of God as something finite, something we can measure. Sir, science
can't even explain a thought. It uses electricity and magnetism, but has
never seen, much less fully understood either one. To view death as the
opposite of life is to be ignorant of the fact that death cannot exist as a
substantive thing. Death is not the opposite of life: just the absence of
it.

Now tell me, Professor. Do you teach tour students that they evolved from a
monkey?

Prof: If you are referring to the natural evolutionary process, yes, of
course, I do.

Student: Have you ever observed evolution with your own eyes, sir?

(The Professor shakes his head with a smile, beginning to realize where the
argument is going.)

Student: Since no one has ever observed the process of evolution at work and

cannot even prove that this process is an on-going endeavour, are you not
teaching your opinion, sir? Are you not a scientist but a preacher?

(The class is in uproar.)

Student: Is there anyone in the class who has ever seen the Professor's
brain?

(The class breaks out into laughter.)

Student: Is there anyone here who has ever heard the Professor's brain, felt

it, touched or smelt it?.....No one appears to have done so. So, according
to the established rules of empirical, stable, demonstrable protocol,
science says that you have no brain, sir. With all due respect, sir, how do
we then trust your lectures, sir?

(The room is silent. The professor stares at the student, his face
unfathomable.)

Prof: I guess you'll have to take them on faith, son.

Student : That is it sir.. The link between man & god is FAITH.

That is all that keeps things moving & alive.

When stock prices drop, where's the money?

Have you ever wondered what happened to your socks when you put them into the dryer and then never saw them again? It's an unexplained mystery that may never have an answer. Many people feel the same way when they suddenly find that their brokerage account balance has taken a nosedive. So, where did that money go? Fortunately, money that is gained or lost on a stock doesn't just disappear. Read to find out what happens to it and what causes it.

Disappearing money
Before we get to how money disappears, it is important to understand that regardless of whether the market is in bull (appreciating) or bear (depreciating) mode, supply and demand drive the price of stocks, and fluctuations in stock prices determine whether you make money or lose it.

So, if you purchase a stock for $10 and then sell it for only $5, you will (obviously) lose $5. It may feel like that money must go to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you. The company that issued the stock doesn't get it either. The brokerage is also left empty-handed, as you only paid it to make the transaction on your behalf. So the question remains: where did the money go?

Implicit and explicit value
The most straightforward answer to this question is that it actually disappeared into thin air, along with the decrease in demand for the stock, or, more specifically, the decrease in investors' favorable perception of it.

But this capacity of money to dissolve into the unknown demonstrates the complex and somewhat contradictory nature of money. Yes, money is a teaser - at once intangible, flirting with our dreams and fantasies, and concrete, the thing with which we obtain our daily bread. More precisely, this duplicity of money represents the two parts that make up a stock's market value: the implicit and explicit value.

On the one hand, money can be created or dissolved with the change in a stock's implicit value, which is determined by the personal perceptions and research of investors and analysts. For example, a pharmaceutical company with the rights to the patent for the cure for cancer may have a much higher implicit value than that of a corner store.

Depending on investors' perceptions and expectations for the stock, implicit value is based on revenues and earnings forecasts. If the implicit value undergoes a change - which, really, is generated by abstract things like faith and emotion - the stock price follows.

A decrease in implicit value, for instance, leaves the owners of the stock with a loss because their asset is now worth less than its original price. Again, no one else necessarily received the money; it has been lost to investors' perceptions.

Now that we've covered the somewhat "unreal" characteristic of money, we cannot ignore how money also represents explicit value, which is the concrete worth of a company. Referred to as the accounting value (or sometimes book value), the explicit value is calculated by adding up all assets and subtracting liabilities. So, this represents the amount of money that would be left over if a company were to sell all of its assets at fair market value and then pay off all of liabilities.

But you see, without explicit value, implicit value would not exist: investors' interpretation of how well a company will make use of its explicit value is the force behind implicit value.

Disappearing trick revealed
For instance, in February 2009, Cisco Systems Inc had 5.81 billion shares outstanding, which means that if the value of the shares dropped by $1, it would be the equivalent to losing more than $5.81 billion in (implicit) value. Because CSCO has many billions of dollars in concrete assets, we know that the change occurs not in explicit value, so the idea of money disappearing into thin air ironically becomes much more tangible.

In essence, what's happening is that investors, analysts and market professionals are declaring that their projections for the company have narrowed. Investors are therefore not willing to pay as much for the stock as they were before.

So, faith and expectations can translate into cold hard cash, but only because of something very real: the capacity of a company to create something, whether it is a product people can use or a service people need. The better a company is at creating something, the higher the company's earnings will be and the more faith investors will have in the company.

In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Because this perception would not exist were it not for some evidence that something is being or will be created, everyone in a bull market can be making money. Of course, the exact opposite can happen in a bear market.

To sum it all up, you can think of the stock market as a huge vehicle for wealth creation and destruction.

Disappearing stocks
No one really knows why socks go into the dryer and never come out, but next time you're wondering where that stock price came from or went to, at least you can chalk it up to market perception.

Valentine’s Day

Every February, across the country, candy, flowers, and gifts are exchanged between loved ones, all in the name of St. Valentine. But who is this mysterious saint and why do we celebrate this holiday? The history of Valentine's Day — and its patron saint — is shrouded in mystery. But we do know that February has long been a month of romance. St. Valentine's Day, as we know it today, contains vestiges of both Christian and ancient Roman tradition. So, who was Saint Valentine and how did he become associated with this ancient rite? Today, the Catholic Church recognizes at least three different saints named Valentine or Valentinus, all of whom were martyred.

One legend contends that Valentine was a priest who served during the third century in Rome. When Emperor Claudius II decided that single men made better soldiers than those with wives and families, he outlawed marriage for young men — his crop of potential soldiers. Valentine, realizing the injustice of the decree, defied Claudius and continued to perform marriages for young lovers in secret. When Valentine's actions were discovered, Claudius ordered that he be put to death.

Other stories suggest that Valentine may have been killed for attempting to help Christians escape harsh Roman prisons where they were often beaten and tortured.

According to one legend, Valentine actually sent the first 'valentine' greeting himself. While in prison, it is believed that Valentine fell in love with a young girl — who may have been his jailor's daughter — who visited him during his confinement. Before his death, it is alleged that he wrote her a letter, which he signed 'From your Valentine,' an expression that is still in use today. Although the truth behind the Valentine legends is murky, the stories certainly emphasize his appeal as a sympathetic, heroic, and, most importantly, romantic figure. It's no surprise that by the Middle Ages, Valentine was one of the most popular saints in England and France.

While some believe that Valentine's Day is celebrated in the middle of February to commemorate the anniversary of Valentine's death or burial — which probably occurred around 270 A.D — others claim that the Christian church may have decided to celebrate Valentine's feast day in the middle of February in an effort to 'christianize' celebrations of the pagan Lupercalia festival. In ancient Rome, February was the official beginning of spring and was considered a time for purification. Houses were ritually cleansed by sweeping them out and then sprinkling salt and a type of wheat called spelt throughout their interiors. Lupercalia, which began at the ides of February, February 15, was a fertility festival dedicated to Faunus, the Roman god of agriculture, as well as to the Roman founders Romulus and Remus.

To begin the festival, members of the Luperci, an order of Roman priests, would gather at the sacred cave where the infants Romulus and Remus, the founders of Rome, were believed to have been cared for by a she-wolf or lupa. The priests would then sacrifice a goat, for fertility, and a dog, for purification.

The boys then sliced the goat's hide into strips, dipped them in the sacrificial blood and took to the streets, gently slapping both women and fields of crops with the goathide strips. Far from being fearful, Roman women welcomed being touched with the hides because it was believed the strips would make them more fertile in the coming year. Later in the day, according to legend, all the young women in the city would place their names in a big urn. The city's bachelors would then each choose a name out of the urn and become paired for the year with his chosen woman. These matches often ended in marriage. Pope Gelasius declared February 14 St. Valentine's Day around 498 A.D. The Roman 'lottery' system for romantic pairing was deemed un-Christian and outlawed. Later, during the Middle Ages, it was commonly believed in France and England that February 14 was the beginning of birds' mating season, which added to the idea that the middle of February — Valentine's Day — should be a day for romance. The oldest known valentine still in existence today was a poem written by Charles, Duke of Orleans to his wife while he was imprisoned in the Tower of London following his capture at the Battle of Agincourt. The greeting, which was written in 1415, is part of the manuscript collection of the British Library in London, England. Several years later, it is believed that King Henry V hired a writer named John Lydgate to compose a valentine note to Catherine of Valois.

In Great Britain, Valentine's Day began to be popularly celebrated around the seventeenth century. By the middle of the eighteenth century, it was common for friends and lovers in all social classes to exchange small tokens of affection or handwritten notes. By the end of the century, printed cards began to replace written letters due to improvements in printing technology. Ready-made cards were an easy way for people to express their emotions in a time when direct expression of one's feelings was discouraged. Cheaper postage rates also contributed to an increase in the popularity of sending Valentine's Day greetings. Americans probably began exchanging hand-made valentines in the early 1700s. In the 1840s, Esther A. Howland began to sell the first mass-produced valentines in America.

According to the Greeting Card Association, an estimated one billion valentine cards are sent each year, making Valentine's Day the second largest card-sending holiday of the year. (An estimated 2.6 billion cards are sent for Christmas.)

Approximately 85 percent of all valentines are purchased by women. In addition to the United States, Valentine's Day is celebrated in Canada, Mexico, the United Kingdom, France, and Australia.

Valentine greetings were popular as far back as the Middle Ages (written Valentine's didn't begin to appear until after 1400), and the oldest known Valentine card is on display at the British Museum. The first commercial Valentine's Day greeting cards produced in the U.S. were created in the 1840s by Esther A. Howland. Howland, known as the Mother of the Valentine, made elaborate creations with real lace, ribbons and colorful pictures known as "scrap".

How the American housing dream went bust

The US housing boom, which occurred around 2001-2005 attracted a lot of curiosity and interest. The people and the banks of United States, wondered how to make the most of this consistently escalating prices in the real estate market. People were interested in buying homes and selling them at a profit. The subprime borrowers, who had a poor credit score felt they had an opportunity to pay off all their outstanding loans by cashing in on this boom.

Banks decided to cater to this segment as well. One such product, which became a rage during this boom season was Option ARM. The product pioneered by World Savings Bank, run by the Sandlers seemed like a miracle loan that could help people, particularly subprime borrowers aspiring for a change in fortunes. This subprime mortgage has been the subject of intense discussion, ever since it came into the limelight revealing shocking details and appalling truths of the intense drama of a lending operation gone berserk.

Optional Adjustable Rate Mortgage, is a loan product which, in addition to having a very low down payment (usually 5% of the home value), gave the borrower an introductory period during which he could choose to pay the interest due alone for the month or to pay an even lower repayment termed "minimum payment". Making only minimum payments would result in an ever increasing outstanding loan amount resulting in the "principal" growing large, which is known as "negative amortization".

One of the main USPs of this miracle loan is the fact that you can pay the low minimum payment in the first year, which is calculated at an interest rate of as low as one per cent, and for a few years the monthly payment rises by only 7.5 per cent. The flip side for those choosing the minimum payment option is that after the introductory period, their monthly payment will suddenly double or increase even further.

This will happen under two circumstances:

The first circumstance is that after the introductory period of about 5 years, the monthly payment gets "recast" to adjust the amortization to its full limits. The monthly payments will then be recalculated at the prevailing interest rates for the remainder of the loan tenure. This happens irrespective of the extent of increase in the amount to be repaid.

The second circumstance is when the outstanding loan exceeds a negative amortization maximum, which is about 125 per cent of the original loan amount. If the balance hits this limit, which can happen before a period of 5 years, when interest rates rise, the payment is increased to its full amortization level. Both the recast clause and the negative amortization cap can result in a rude "payment shock".

The Option-ARM terms run something like this:

$500,000 loan, 1.5% start rate, 2.80% margin over cost of funds, 11.95% lifetime cap, 125%/10-year reset cap

The minimum payment is based on the 1.5% start rate, and changes +/- 7.5% per year.

In this example, that minimum payment is:

1st year - $1,725.60
2nd year -$1,855.02
3rd year - $1,994.15
4th year - $2,143.71
and so on.

However the fully-amortized payment on the $500,000 is $3,296.35. This means that during the initial years, the principal gets larger and larger.

When the loan balance reaches 125 per cent of the original loan amount, the loan resets, causing the monthly payment to more than double as now the amount owed is much larger and the payment needs to be increased to a level, which enables the principal to be paid off.

Right from the early days of Option ARMs, it was clear that borrowers would not be able to afford the monthly payments once the loans reset, however banks made these loans in the hope that housing prices would continue to increase rapidly.

As long as housing prices rose, borrowers could sell their houses for a profit before their monthly payments were increased and pay back the bank, thus making a healthy profit for both the bank and the borrower. However once housing prices started to stagnate, borrowers were stuck in houses that they could not afford to keep but could not sell either. This is when the US housing bubble started to burst.

When the real estate markets crashed, many of banks had to declare bankruptcy. Two noteworthy examples of such lenders include Wachovia Corporation and WaMu (Washington Mutual). The former acquired the bank from World Savings, which was earlier run by the Sandlers, who pioneered the attractive loan product Option ARM.

By the time Wachovia bought over World Savings, the days of profitability were being counted and when Wachovia demanded more growth noticing the slackening market, an aggressive and indiscriminate selling of the loan product led to a sudden surge in the lending figures.

The sale of this product increased dramatically and the year 2005 recorded $238 billion made in option ARM loans nationally, out of which World Savings issued about $52 billion!

Of course when the market crashed a lot of subprime borrowers felt cheated and argued the logic of such a lending product, while the Sandlers who pioneered the concept kept saying in their defense that if only the market prices did not crash, the scenario would be the exact opposite.

WaMu on the other hand was promoting their loan shop aggressively and one notable ad campaign they ran was the "Power of Yes" campaign, which practically sums up their loan business model. They said yes to every loan purchase inquiry, without conducting a stringent quality check on the loan consumer's ability to repay the loan. In the bid to make the most of the real estate boom WaMu started ignoring even the basic eligibility factors like the compatibility check between loan and income.

There were examples of people claiming salaries that were ridiculously high for their professions. A popular newspaper in the United States , cites the incredible example of a "Mariachi Singer" ( a profession that one usually did not hear of) getting a loan approval and the documented proof for her profession that went into her file, was a photograph of the singer in her mariachi outfit! It's no wonder then that when the real estate markets crashed in the United States, WaMu eventually had to shut down its sub prime lending operations, recording a $67 million loss in 2007.

The lending scenario in India

A subprime crisis of this nature and magnitude is unlikely to occur in India, thanks to some very strict bank policies that are in practice.

As a general rule the borrower needs to pay a down payment that covers 15-20 per cent of the cost of the property. This by itself is a test of the borrower's credit worthiness and enables him to have a stake in the property. Also, the bank safeguards its lending interests by ensuring that the money lent is below the market value of the property making allowance for a nominal dip in property prices.

Another important factor is the initial screening banks conduct to confirm the eligibility of the loan seeker for the requested loan amount. Banks make sure that the EMI of their loan applicants does not exceed 50-55 per cent of their monthly incomes. This ensures that as long as the borrower is able to maintain his current income levels, he will have no trouble in making his monthly payments.

Moreover the Indian sentiment revolves around buying a house and spending a lifetime there. Home buyers looking to live in the house purchased rarely change homes in short time frames while in a place like America embracing change is second nature. A situation like this may be far away for India, as we are a growing economy, where mortgage levels are not comparable to developed economies.

We also have strict regulatory bodies like the Reserve Bank of India, which ensures that loan products that could produce systemic risk never make it to the market. Besides this aspect, a favourable market does not exist in India for similar loan products like the Option ARM. The psyche of the Indian consumer does not easily accept debt instruments and a loan is usually high priority and the focus is usually on closing it as early as possible.

What are mutual funds? Where do they invest?

It is almost always assumed that anyone reading an analysis on mutual funds (or the fund management industry) knows the intricacies of the same. This is not universally true and, at all times, there are a) new people trying to understand the basics, and b) people who want to brush up their knowledge of the fundamentals.

We will use this 6-part series to understand mutual funds from their very basic concepts. Here is the first part.

What are mutual funds?

If we break the phrase 'mutual funds' and analyze the words, we realize that it refers to funds that are raised and invested mutually, i.e. on behalf of everyone participating in the scheme. If you and your friend both pool your money and invest it jointly, you have created your own mutual fund.

When the concept of companies initially formed, people who knew each other and were willing to take the risk of the venture used to put in the share capital of the company. Slowly, entrepreneurs realized that many are interested in investing financially in the company but do not want to take the day-to-day hassle of managing the company. Thus began the concept of passive investing in companies: with shareholders and executives separated.

Similarly, in the case of mutual funds, people are not interested in the day-to-day management of the funds but are interested in the final outcome of the investment. Hence, they pool their money together, hire an investment manager who manages funds for them and expect to earn a return on them.

Interestingly, while the process started from the point of view of the investor and the fund was the outcome, in today's time, it is hard to see the reality this way. With rampant (mis?)marketing of the mutual funds, it seems as if the funds came in first and they want the investor money to increase their assets under management.

How do the funds raise money?

The asset management companies (AMCs) that manage the mutual funds define avenues where they think profitable opportunities exist. For example, currently many AMCs believe that small and medium cap stocks will yield significant return over the medium to long term. Hence, they launch a 'fund' (called a new fund offer: NFO) which seeks to bring all those investors together who believe similarly.

The AMC releases a prospectus wherein it details the objective of the fund, the credentials of the company and the fund manager and the avenues where the money will be invested. Based on this information, the investor needs to decide whether this fund meets his objective or not. If the investor (or his advisor) believes that the new fund fits his required risk-return profile, the investor invests in the fund.

You might wonder that you have never seen a prospectus but only an application form for investing. Well, sometimes you give the authority to your financial advisor to choose what is best for you (and sometimes, when you lose control, s/he just chooses on your behalf!)

Where do mutual funds invest?

Mutual funds, unlike companies do not take the risk of a business directly. For example, Reliance faces the risk of change in refining margins and Hindalco faces the risk of fall in aluminum prices. Companies take the risk head-on and craft strategies to maximize their competitive position and profits.

Mutual funds, however, take one step back and invest in the companies which take on business risks. Funds which invest in the shares (or equity) of the company are called 'equity mutual funds.' Funds like PruICICI Power or Reliance Growth are examples of such funds.

Similarly, funds can invest in government securities (bonds issued by central or state governments, PSUs or other government entities) or corporate debt (issued by companies and banks). These funds are called 'debt funds.' Funds like Reliance Income Fund invest primarily in medium and long-tenor debt. Again, there are funds that invest in very short term loans (typically overnight to up to three months): these funds are called money market mutual funds. Examples include HDFC Cash Management - savings plan.

While the above three are the basic avenues for the funds to invest, many funds combine the three types in various proportions and produce 'hybrid or balanced funds.' HDFC Prudence and SBI Magnum Balanced are examples.

Based on where the funds invest, they expect returns and have corresponding risks. Equity funds are the most risky followed by debt funds; cash funds are considered almost risk less. Based on the standard theory of finance, the riskiest funds are expected to deliver the highest returns over the long run.