Professional Documents
Culture Documents
Funds Industry
With Specific Reference To
Submitted to
Submitted by:
Roll No.-5220342128
1
CONTENTS
2
ACKNOWLEDGEMENT
I would like to thank my guide Mr. Amit Chadha (for his kind guidance and
support through the project. He has always been there whenever I need
any expert advice and have been more than willing to go out of the way to
help.
I am grateful to the Library and Computer Center staff for all the help and
cooperation extended to us.
Finally, I would also like to take this opportunity to thank all my friends who
took out time to go through our documents and provide me positive
criticism. The project would not have been a value addition without the
help of the above stated people.
3
Statement about the problem:
A Mutual Fund is a trust that collects the savings of a number of investors
who share a common financial goal and pools it together to create a larger
resource of money. The money thus collected is invested by the fund
manager in different types of securities depending upon the objective of
the scheme. These could range from shares to debentures to money
market instruments. The securities could be further subdivided into
technology securities, pharmaceutical securities, FMCG securities etc. The
income earned through these investments and the capital appreciation
realized by the scheme are shared by its unit holders proportionately i.e.
on the basis of the number of units owned by them (pro rata).
Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
portfolio at a relatively low cost. Anybody with surplus money can invest,
even as little as a few thousand rupees can be invested in Mutual Funds.
Each Mutual Fund scheme has a defined investment objective and
strategy. The team undertakes this in the most professional manner.
Markets for equity shares, debentures, bonds and other fixed income
instruments; real estate, derivatives and other assets have reached their
maturity and are driven by latest up-to-date information. A mutual fund is
thus the ideal investment vehicle for today’s complex and modern financial
scenario.
Price changes in these assets are driven by global events occurring every
day, in-fact every minute in faraway places. It will be very difficult, in-fact
next to impossible for an ordinary individual to have the knowledge, skills,
inclination and time to keep track of events, understand their implications
and act speedily. An individual also finds it difficult to keep track of
ownership of his assets, investments, brokerage dues and bank
transactions etc. A mutual fund is the answer to all these situations. It
appoints professionally qualified and experienced staff that manages each
of these functions on a full time basis. The costs of hiring these
4
professionals per investor are very low, as the pool of money invested is
large. In effect, the mutual fund vehicle exploits economies of scale in all
three areas - research, investments and transaction processing.
While talking to many peoples in day to day life I come to know that
Mutual Funds are something about which the most of the peoples have
perceptions that it is just like the same as dealing in Shares in which they
can either earn or can lose their all amount.
So, I decided to take up my project in the area where I can remove this
perception of peoples that Mutual Funds and Shares are same.
I had interviewed some people in and around Delhi city to know more
about the Mutual Funds from the consumer’s point of view. Special care
was taken to include people from all income brackets. Many people had no
idea of Mutual Funds, which showed the low awareness level among the
people of Delhi about the Mutual Funds. This stresses the need for better
marketing
5
thrive only if they can live upto the hopes and trusts of their individual
members. This project deals with the structure of the Indian MF industry
and it’s constituents. It also classifies the Mutual fund schemes and
describes the major players in the industry, with specific reference to Unit
Trust Of India (UTI)
In the end it is concluded and recommended that there is a need for Better
marketing to increase awareness level, focus on building a relationship of
trust and commitment with the investors, provide better rate of returns to
the investors than offered by other investment options and providing better
service to the investors
Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
portfolio at a relatively low cost.
6
Objective and scope of the study:
The Mutual Fund Industry is fast gaining popularity in today’s
unpredictable financial scenario. It is emerging as one of the most lucrative
investment options. The primary objective of the project is to gain
detailed insight into this Industry.
Strategic importance has been given to both current and past trends
and we have tried to correlate both in a manner to gain maximum insight.
Also in some cases the companies contacted, were not willing to provide
adequate information about the Mutual funds schemes, this constraint led
to inability to cover the whole data. Which could give us clearer picture of
the subject.
Most of the data about the companies are collected from the concerned
Companies Website or directly through the Concerned Companies, which
can be manipulated or exaggerated by the company (Window dressing).
Methodology:
Research in this project will be conducted with the help of the
following:
8
The first stage included understanding the Concept, Structure and policy
(related to Mutual funds) in the Indian mutual fund industry and Secondary
data for this purpose will be collected through various books on mutual
funds, business newspapers, business magazines, trade journals, annual
& quarterly performance reports of the concerned mutual funds companies
and the World wide web (www Information- concerned websites mentioned
in the Bibliography).
The second stage included the input stage in which various types of
information data would be collected related to various mutual funds. The
data was collected through discussions & interviews with the
representatives of the companies. The financial and other relevant data
will be extracted from the performance and annual reports of the Asset
management companies (AMC) concerned
In the third stage all the gathered data will be arranged and tabulated to
arrive at the necessary conclusion. All the information was correlated into
tabulation charts and in figures to make the information easy to
understand. Primary collection of data included preparation of tools like
Questionnaires to evaluate various schemes mutual funds and to
determine the perception of the Indian investor towards the mutual funds.
The results and findings of primary data will be collected (Sample
Questionnaire) is given in the Annexure*.
The last stage, i.e. the output stage included analyzing of the processed
information in to final findings and comparing the information with the data
of mutual fund companies and then arriving of final conclusions and policy
recommendations to UTI.
Executive Summary
9
Mutual funds are financial intermediaries, which collect the savings of
investors and invest them in a large and well-diversified portfolio of
securities such as money market instruments, corporate and government
bonds and equity shares of joint stock companies. MF’s can survive and
thrive only if they can live up to the hopes and trusts of their individual
members. This project deals with the structure of the Indian MF industry
and its constituents. It also classifies the Mutual fund schemes and
describes the major players in the industry, with specific reference to Unit
Trust of India (UTI)
I met 25 people in and around Delhi city to know more about the Mutual
Funds from the consumer’s point of view. Special care was taken to
include people from all income brackets. About 10 people had no idea of
Mutual Funds, which showed the low awareness level among the people
of Delhi about the Mutual Funds. This stresses the need for better
marketing
In India, the trend is that investors invest when there is a boom in the stock
market and withdraw their holdings in times of slump. This is absolutely
contrary to how the system works abroad as their investments take place
in the slump period when greater units can be purchased with same
amount of money. Withdrawals are correspondingly done in boom times as
10
maximum return is achieved. This is the right strategy and Mutual Fund
companies are trying to create this awareness among consumers.
.
In the end it is concluded and recommended that there is a need for Better
marketing to increase awareness level, focus on building a relationship of
trust and commitment with the investors, provide better rate of returns.
11
OVERVIEW
Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
portfolio at a relatively low cost. Anybody with any surplus money that can
be invested, even as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and
strategy. The team undertakes this in the most professional manner.
Markets for equity shares, debentures, bonds and other fixed income
instruments; real estate, derivatives and other assets have reached their
maturity and are driven by latest up-to-date information. A mutual fund is
thus the ideal investment vehicle for today’s complex and modern financial
scenario.
Price changes in these assets are driven by global events occurring every
day, in-fact every minute in faraway places. It will be very difficult, in-fact
next to impossible for an ordinary individual to have the knowledge, skills,
inclination and time to keep track of events, understand their implications
and act speedily. An individual also finds it difficult to keep track of
ownership of his assets, investments, brokerage dues and bank
12
transactions etc. A mutual fund is the answer to all these situations. It
appoints professionally qualified and experienced staff that manages each
of these functions on a full time basis. The costs of hiring these
professionals per investor are very low, as the pool of money invested is
large. In effect, the mutual fund vehicle exploits economies of scale in all
three areas - research, investments and transaction processing.
13
How Mutual Fund Industry Works
The working of Mutual Funds can be briefly stated in the form of the points
below: -
14
INDUSTRY PROFILE
Mutual Fund industry today, with about 34 players and more than five
hundred schemes, is one of the most preferred investment
avenues in India. However, with a plethora of schemes to
choose from, the retail investor faces problems in selecting
funds. Factors such as investment strategy and management
style are qualitative, but the funds record is an important
indicator too. Though past performance alone cannot be
indicative of future performance, it is, frankly, the only
quantitative way to judge how good a fund is at present.
Therefore, there is a need to correctly assess the past
performance of different mutual funds.
UTI remained the monopoly player in the mutual fund sector until 1987,
when public sector banks and insurance companies were permitted to
enter the fray. Finally, in 1993, the Securities and Exchange Board of India
(SEBI) came up with comprehensive mutual regulations, that permitted the
private sector to start with mutual funds operations. These were later
replaced by the SEBI Mutual Fund Regulations, 1996.
15
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY
The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve
Bank the. The history of mutual funds in India can be broadly divided into
four distinct phases
16
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set
up by public sector banks and Life Insurance Corporation of India
(LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in
June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).
LIC established its mutual fund in June 1989 while GIC had set up
its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under
management of Rs.47, 004 crores.
With the entry of private sector funds in 1993, a new era started in
the Indian mutual fund industry, giving the Indian investors a wider
choice of fund families.
1993 was the year in which the first Mutual Fund Regulations came
into being, under which all mutual funds, except UTI were to be
registered and governed.
The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July
1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a
more comprehensive and revised Mutual Fund Regulations in 1996.
The industry now functions under the SEBI (Mutual Fund)
Regulations 1996.
As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,
17
541 crores of assets under management was way ahead of other
mutual funds.
In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI was bifurcated into two separate entities.
18
ASSETS UNDER MANAGEMENT (AUM) have grown as follows:
1965 24.67
1970 88.30
1975 169.95
1980 455.30
1985 2,209.61
1990 19,130.92
1995 72,967.17
1996 74,315.31
1997 70,197.41
1998 58,918.22
1999 70,623.50
2000 103,452.98
2001 90,587.00
2002 100,594.00
2003 79,464.00
31-mar-06 231862.00
19
Mutual fund schemes may be classified on the basis of its structure and its
investment objective. This classification is shown below.
20
Types Of Mutual Funds
B a s e d o n S t r u c t u r e B a s e d o n I n v e s t m e n t O b j e c
C lo s e E n d e O d p F e un n Ed ns d e d L Fo ua dn dF s u n d Ns o L o a d F u n d s
I n t e r v a l F u n d s G r o w t h F u n I nd c s o m e F u n d s
B a l a n c e d FM u o n n d e s y M a r k e t F u n d s
O t h e r S c h e m e s
T a x S a v i n g S S p c e h c e i a m l eS s c h e m e s
I n d u s t r y s p e Ic n i f d i c e xS cS h c e h mSe me e c s e t os r a l S c h e m e s
Open-ended Funds
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.
Closed-ended Funds
21
Interval Funds
Growth Funds
The aim of growth funds is to provide capital appreciation over the medium
to long- term. Such schemes normally invest a majority of their corpus in
equities. It has been proven that returns from stocks, have outperformed
most other kind of investments held over the long term. Growth schemes
are ideal for investors having a long-term outlook seeking growth over a
period of time.
Income Funds
Balanced Funds
The aim of balanced funds is to provide both growth and regular income.
Such schemes periodically distribute a part of their earning and invest both
in equities 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. These are
ideal for investors looking for a combination of income and moderate
growth.
Load Funds
22
A Load Fund is one that charges a commission for entry or exit. That is,
each time you buy or sell units in the fund, a commission will be payable.
Typically entry and exit loads range from 1% to 2%. It could be worth
paying the load, if the fund has a good performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or
exit. That is, no commission is payable on purchase or sale of units in the
fund. The advantage of a no load fund is that the entire corpus is put to
work.
These schemes offer tax rebates to the investors under specific provisions
of the Indian Income Tax laws as the Government offers tax incentives for
investment in specified avenues. Investments made in Equity Linked
Savings Schemes (ELSS) and Pension Schemes are allowed as deduction
u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to
investors to save capital gains u/s 54EA and 54EB by investing in Mutual
Funds, provided the capital asset has been sold prior to April 1, 2000 and
the amount is invested before September 30, 2000.
Index Schemes
Sectoral Schemes
23
Alone UTI with just one scheme in 1964 now competes with as
many as 400 odd products and 34 players in the market. In spite of the
stiff competition and losing market sh-are, UTI still remains a formidable
force to reckon with.
Last six years have been the most turbulent as well as exiting ones
for the industry. New players have come in, while others have decided
to close shop by either selling off or merging with others. Product
innovation is now passé with the game shifting to performance
delivery in fund management as well as service. Those directly
associated with the fund management industry like distributors,
registrars and transfer agents, and even the regulators have become
more mature and responsible.
Funds have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds performances
are improving. Funds collection, which averaged at less than Rs100bn
per annum over five-year period spanning 1993-98 doubled to Rs210bn
in 1998-99. In the current year mobilization till now have exceeded
Rs300bn. Total collection for the current financial year ending March
2000 is expected to reach Rs450bn.
Mutual funds are now also competing with commercial banks in the
race for retail investor’s savings and corporate float money. The power
shift towards mutual funds has become obvious. The coming few years
will show that the traditional saving avenues are losing out in the
current scenario. Many investors are realizing that investments in
savings accounts are as good as locking up their deposits in a closet.
The fund mobilization trend by mutual funds in the current year
24
indicates that money is going to mutual funds in a big way. The
collection in the first half of the financial year 1999-2000 matches the
whole of 1998-99.
25
Morgan Stanley Asset Management (I) Pvt. Ltd.
Morgan Stanley Dean Witter & Co. is a preeminent global financial
services firm that provides a wide range of services to major corporations,
governments, financial institutions and high-net-worth individuals
worldwide. With approximately 50,000 employees in 24 countries, the Firm
has a significant presence in every financial market. Morgan Stanley Dean
Witter (MSDW) Investment Management is the institutional asset
management division of MSDW & Co. MSDW Investment Management
was established in 1975 to help governments, corporations, pension funds
and non-profit organizations meet their long-term investment objectives.
MSDW Investment Management manages US$ 385 billion for institutional
and individual investors.
No. of schemes 1
No. of schemes including options 1
Equity Schemes 1
26
to act as the Asset Management Company (AMC) to the Fund. The AMC
has been appointed as the Investment Manager to the fund, MLAM holds
40% of the paid up share capital of the AMC, while the balance 60%
(approximately), is held by DSPML. The Investment Manager was
approved by SEBI to act as the AMC for the Mutual Fund.
DSP Merrill Lynch Asset Management (India) Ltd. has been changed its
name to DSP Merrill Lynch Investment Manager’s Ltd. w.e.f. 20th July
2003.
No. of schemes 8
No. of schemes including options 13
Equity Schemes 3
Debt Schemes 2
Short term debt Schemes 2
Equity & Debt 2
Gilt Fund 4
Birla Sun Life AMC Ltd. is a joint venture between Sun Life Assurance
Company of Canada and the Aditya Birla Group, one of Indian leading
Industrial houses.
Sun Life Assurance Company of Canada is a leading financial services
organization, providing a diversified range of risk management, wealth
management and money management products for individuals and
corporations worldwide. Sun Life commenced business in Canada in 1871,
and is headquartered in Toronto with major operations in Canada, United
States, United Kingdom and Asia Pacific. Sun Life has consistently earned
ratings that rank among the best in the North American financial services
sector. It has a major presence in the growing mutual fund markets
through MFS Investment Management in the U.S., and through Spectrum
27
United Mutual Funds in Canada. It is also active in the unit trust business
in the U.K., and its near term plans include consideration of mutual fund
offerings in the Philippines.
The Aditya Birla group is a multinational group consisting of the best
known companies in India in a range of key sectors like Textiles
(GRASIM), Rayon (Indian Rayon), Aluminum (HINDALCO), Petroleum
(MRPL), Finance (BGFL), Fertilizers (Indo-Gulf). Birla Mutual Fund offers
investment Schemes which aim to cater to every need of the investor.
Drawing on the expertise of a worldwide staff of over 10,000 people and a
network of more than 65,000 agents and distributors, Sun Life is
committed to providing not just products and services, but solutions for
clients financial and risk management needs.
No. of schemes 10
No. of schemes including options 20
Equity Schemes 8
Debt Schemes 2
Short term debt Schemes 2
Equity & Debt 2
Gilt Fund 6
Corpus under management 3742 Crore as on Jun 30, 2003
28
Short-term debt Schemes 2
Equity & Debt 1
Money Market 1
SUN F&C Asset Management (India) Pvt. Ltd. is an equal joint venture
between Foreign & Colonial Emerging Markets Ltd. U.K. and SUN
Securities (India) Pvt. Ltd. Foreign & Colonial, established in 1868, is one
of Europe s leading asset management groups. F&C is a part of Hypo
Bank, one of Germany s oldest and largest banks and has been investing
in the Indian stock markets since 1993. SSIL is an Indian subsidiary
company of Sun Group. Its activities consist of principal investment and
investment management operations in emerging markets and technologies
as well as international commercial activities.
SUN F&C currently manages and advises India Performance Fund (an
offshore fund), SUN F&C Value Fund (a domestic fund) and F&C
sponsored Indian Investment Company SICAV (INDICO).
No. of schemes 7
No. of schemes including options 12
Equity Schemes 4
Debt Schemes 5
Short term debt Schemes 2
Equity & Debt 1
29
Corpus under management 720 Crore as on May 31, 2003
30
Every year, millions of Indians entrust their savings to Unit Trust of India to
build up a financially secure future. This faith and confidence of investors
stem from UTI's commitment, as reflected in its long track record to ensure
its investors, safety, liquidity and attractive yield on their investments.
Set up in 1964, by an Act of Parliament, UTI Act 1963, UTI has grown into
one of the biggest players and carved out a special position in the Indian
capital market.
Today, UTI manages an aggregate portfolio of Rs. 72,698 Crore as on
31/12/1999 and services 45 million investor accounts under 90 saving
schemes catering to varying needs of different classes of investors.
Management:
31
Savings Plans and Funds:
UTI is a symbol of trust and confidence among Indian investors. In the last
seven years, the number of schemes managed by UTI increased from 35
to 92, while the number of unit holding accounts recorded a sevenfold
increase from 65 lakhs to over 450 lakhs.
32
Investors under various schemes of UTI are now serviced through 53 UTI
branches, 213 collection centers and offices of 6 Registrar and Transfer
Agencies appointed by UTI. Besides there are 52 franchises offices, which
accept applications and distribute certificates to unit holders. UTI has set
up its own associate company, UTI-Investor Services Limited (UTIISL), to
meet the growing needs of unit holder servicing.
UTI publishes weekly/daily NAVs for all its listed schemes and offers a
prospectus for every scheme. It also publishes half-yearly results for all
schemes and releases information on portfolio as also largest
shareholding for growth schemes and Unit Scheme 1964. UTI adheres to
disclosure requirements specified by SEBI.
Fund deployment:
Equity Investing:
More than fifty percent of total funds of UTI Schemes are invested in
equity. UTI is the largest operator in the Indian equity market with total
investments worth Rs 35,007.83 crores at book value. Its various funds
collectively hold stocks in more than 1500 Indian companies and account
for over 8 percent of the market capitalization of all listed scripts on the
Bombay Stock Exchange.
Corporate debt:
UTI is one of the main providers of debt finance to the corporate sector.
Investment in corporate debt instruments account for 38 percent of the
total investible funds. Credit market operations cover a range of
instruments including publicly issued and privately placed debentures,
bonds and medium term notes. UTI's debt portfolio quality is represented
by 98 percent performing assets.
33
UTI is also one of the largest investors, among non-banking institutions in
the money market. About 11 percent of the total investible funds are
accounted for by government paper and call deposits.
Investment guidelines:
Consistent with the UTI Act, UTI's investment decisions are guided by
investors' interests. UTI's operations are guided by UTI Act, 1963 and
UTI's investments are subject to prudential exposure norms and limits laid
down by UTI regulations. It cannot invest more than 10 percent of a
particular scheme corpus in the equity of any one company. UTI's
investment decisions are backed by inputs from independent group’s set-
up for equity research, investment appraisal and credit rating.
34
Global links:
UTI pioneered the offshore fund investment in Indian securities. The India
Fund launched in 1986 as a closed-end fund, became a multi-class open-
ended fund in 1994. Thereafter, in 1988 UTI floated the India Growth
Fund, which is listed, on the New York Stock Exchange. Both India Fund
and India Growth Fund have increased their corpus through rights issues.
Besides the Columbus India Fund, launched in 1994, UTI launched the
India Access Fund, an Indian Index Fund (tracking the NSE 50 index) in
1996.
To cater to various needs of NRI investors based in the Gulf region, UTI
has a Representative office at Dubai. The representative office covers all
the six GCC countries viz. UAE, Oman, Kuwait, Saudi Arabia, Qatar and
Bahrain. The Dubai office of UTI acts as a liaison office between our NRI
investors in the Gulf and UTI offices all over India. Besides providing
information on current and new schemes of
UTI, it also co-ordinates with UTI offices in India for all after-sale requests
of unit holders/agents.
In the recent past, UTI has extended its support to the development of Unit
Trusts in other developing countries, like Sri Lanka and Egypt. Besides
providing technical advice, UTI also participated in the equity capital of the
Unit Trust Management Company of Sri Lanka.
35
Research strength:
UTI has its own research set-up to deal with different areas. The areas of
research analysis cover macro economy, capital markets, financial sector
and mutual funds. Equity Research and Credit Rating groups also cover
industry and corporate performance.
Schemes offered:
No. of schemes 72
No. of schemes including options 115
Equity Schemes 31
Debt Schemes 69
Equity & Debt 3
Money Market 1
Gilt Fund 2
36
Schemes of a Mutual Fund:
General Obligations:
Every asset management company for each scheme shall keep and
maintain proper books of accounts, records and documents, for
each scheme so as to explain its transactions and to disclose at any
point of time the financial position of each scheme and in particular
give a true and fair view of the state of affairs of the fund and
37
intimate to the Board the place where such books of accounts,
records and documents are maintained.
The financial year for all the schemes shall end as of March 31 of
each year.
Every mutual fund shall have the annual statement of accounts
audited by an auditor who is not in any way associated with the
auditor of the asset management company.
Restrictions on Investments:
A mutual fund scheme shall not invest more than 15% of its NAV in
debt instruments issued by a single issuer, which are rated not
below investment grade by a credit rating agency authorized to carry
out such activity under the Act. Such investment limit may be
extended to 20% of the NAV of the scheme with the prior approval
of the Board of Trustees and the Board of asset Management
Company.
A mutual fund scheme shall not invest more than 10% of its NAV in
un rated debt instruments issued by a single issuer and the total
investment in such instruments shall not exceed 25% of the NAV of
the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of asset
Management Company.
No mutual fund under all its schemes should own more than ten per
cent of any company's paid up capital carrying voting rights.
Such transfers are done at the prevailing market price for quoted
instruments on spot basis.
The securities so transferred shall be in conformity with the
investment objective of the scheme to which such transfer has been
made.
A scheme may invest in another scheme under the same asset
management company or any other mutual fund without charging
any fees, provided that aggregate inter scheme investment made by
38
all schemes under the same management or in schemes under the
management of any other asset management company shall not
exceed 5% of the net asset value of the mutual fund.
The initial issue expenses in respect of any scheme may not exceed
six per cent of the funds raised under that scheme.
Every mutual fund shall buy and sell securities on the basis of
deliveries and shall in all cases of purchases, take delivery of
relative securities and in all cases of sale, deliver the securities and
shall in no case put itself in a position whereby
it has to make short sale or carry forward transaction or engage in
badla finance.
Every mutual fund shall, get the securities purchased or transferred
in the name of the mutual fund on account of the concerned
scheme, wherever investments are intended to be of long-term
nature.
Pending deployment of funds of a scheme in securities in terms of
investment objectives of the scheme a mutual fund can invest the
funds of the scheme in short term deposits of scheduled commercial
banks.
No mutual fund scheme shall make any investment in;
Any unlisted security of an associate or group company of the
sponsor; or
Any security issued by way of private placement by an associate or
group company of the sponsor; or
The listed securities of group companies of the sponsor which is in
excess of 30% of the net assets [of all the schemes of a mutual
fund]
No mutual fund scheme shall invest more than 10 per cent of its
NAV in the equity shares or equity related instruments of any
company. Provided that, the limit of 10 per cent shall not be
applicable for investments in index fund or sector or industry specific
scheme.
A mutual fund scheme shall not invest more than 5% of its NAV in
the equity shares or equity related investments in case of open-
ended scheme and 10% of its NAV in case of close-ended scheme.
39
Key Elements
Fund sponsor:
The Sponsor Company establishes the mutual fund in the form of a trust
and registers it with SEBI. The board of trustees holds the fund in trust for
unit holders and ensures compliance with SEBI regulations, trust deed
guidelines and the terms of the asset management agreement by the
AMC.
As an investor one should check the sponsors track record. Scrutiny of the
fund sponsor's track record may forewarn you against jolts like the CRB
scandal. Apart from a consistent track record, sponsors should have
requisite experience and background in managing mutual funds.
Fund manager:
40
Type of fund
Type of scheme
Mutual funds can offer different investment schemes. These schemes can
be classified as:
1. Growth Funds Investment objective:
Capital appreciation of equity shares Investment avenue: Equity shares
of companies with high growth potential
42
8. Hedge Funds Investment Objective:
To hedge risks in order to increase the value of the portfolio
Investment Avenue: Employ speculative trading principles - buy rising
shares and sell shares whose prices are likely to fall. As an investor
you should invest in schemes, which meet your criteria in terms of you
need for regular income, capital appreciation, and safety of principal.
AMCs charge a fee for managing the funds. As an investor in the fund we
must be aware of the fees and charges of the AMC. Two schemes with
more or less similar performances would generate different returns if one
of the two schemes charges high fees.
Tax implications
43
Service levels
Every fund is benchmarked against an index like the BSE Sensex, CNX
SNP 50, BSE 200, etc. As an investor you must track the funds
performance against the benchmark index. Also it could be useful for the
investor to compare its performance with other funds. /exit loads as they
could have a material impact on returns.
1500000
Gross Domestic
1000000 savings
20 03
6
20 01
20 04
20 05
-0
-
-
-
Mutual Funds
00
01
02
03
04
05
20
44
Graph Showing Company Net Flows
600
500
400
300
200
100
0
-100 2001-02 2002-03 2003-04 2004-05 2005-06
-200
45
Graph Showing Relation Between Market Indices And Mutual
Funds Sales
10000
8000
6000 BSE Sensex
NSE Index
4000
MF Sales
2000
0
02
03
6
05
v' 0
il'0
'
g'
ay
b'
r
No
Au
Fe
Ap
M
46
SWOT ANALYSIS OF MUTUAL FUNDS
47
Opportunities for Mutual Funds:
1.Only .5% of Indian savings is invested in mutual funds.
Therefore there is a large potential for the fund industry to
mobilize the savings of people into investments in MF’s.
2.Mutual funds are currently not allowed to invest in real estate.
MF making investments in property should be allowed.
Government is making necessary efforts.
48
Financial Aspects of Mutual Funds:
The net asset value of the fund is the cumulative market value of the
assets fund net of its liabilities. In other words, if the fund is dissolved or
liquidated, by selling off all the assets in the fund, this is the amount that
the shareholders would collectively own. This gives rise to the concept of
net asset value per unit, which is the value, represented by the ownership
of one unit in the fund. It is calculated simply by dividing the net asset
value of the fund by the number of units. However, most people refer
loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide
by the same convention.
Calculation of NAV
The most important part of the calculation is the valuation of the assets
owned by the fund. Once it is calculated, the NAV is simply the net value
of assets divided by the number of units outstanding. The detailed
methodology for the calculation of the asset value is given below.
49
+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
Expenses accrued but not paid
50
Systematic Investment Plan is normally offered by many open-ended
mutual funds in order to encourage regular investments. This plan allows
an investor to purchase additional units of the Scheme by investing fixed
amount of rupees every month/quarter. The beauty of the plan is that as
the market falls the number of units purchased by the investor increases
as the purchases are linked to the NAV. This concept is called Rupee Cost
Averaging. Rupee Cost Averaging does not guarantee a profit or protect
against a loss. Rupee Cost Averaging can smooth out the market's ups
and downs and reduce the risk of investing in volatile markets.
Price/Earnings Ratio:
Abbreviated as P/E Ratio or P/E. Sometimes referred to as the "multiple."
Calculated by dividing the stock's
current price by the company's current annual earnings per share, usually
from the last four quarters (known as the Trailing P/E Ratio), but
sometimes from the estimates of the earnings expected in the next four
quarters (the Projected P/E ratio), or from the sum of the last two actual
quarters and the estimates of the next two quarters. In and of itself, the
P/E Ratio tells very little, but can be usefully compared to the P/E Ratios of
other companies in the same industry, or to the market in general, or to the
company's own historical P/E Ratios, in order to determine how much the
market is currently willing to pay for a share of the company's earnings.
51
BY MARKET CAPITALISATION
Market capitalization: Stock Funds are often grouped by the size of the
companies they invest in big, small or tiny. By size we mean a company's
value on the stock market: the number of shares it has outstanding
multiplied by the share price. This is known as market capitalization.
E.g.: Franklin India Prima Fund, Kotak Mid-Cap, Magnum Global Fund,
Sundaram Select Mid Cap fund are some examples of mid cap funds.
c) Small Cap Funds:
Small cap funds invest in companies with a smaller market capitalization.
(Sundaram SMILE) - Sundaram Mutual Fund defined small caps as stocks
with a market capitalization of less than Rs 2 bn. investing in small cap
funds is fraught with considerable risk.
53
The volatility of the fund often depends on the aggressiveness
of the manager. Aggressive small-cap managers will buy hot
growth and technology companies, taking high risks in hopes
of high rewards. More conservative "value" managers will look
for companies that have been beaten down temporarily by the
stock market.
d) Multi/Flexi-Cap Funds:
Just about every second mutual fund IPO these days is a multi/flexi cap
fund.
54
HOW TO INVEST IN MUTUAL FUND
Step One - Identify the Investment needs: Our financial goals will vary,
based on the age, lifestyle, financial independence, family commitments,
and level of income and expenses among many other factors. Therefore,
the first step is to assess the needs. We can begin by defining the
investment objectives and needs, which could be regular income, buying a
home or finance a wedding or educate children etc.
Step Two - Choose the right Mutual Fund: The important thing is to
choose the right mutual fund scheme, which suits our requirements. The
offer document of the scheme tells us its objectives and provides
supplementary details like the track record of other schemes managed by
the same Fund Manager. Some factors to evaluate before choosing a
particular Mutual Fund are the track record of the performance of the fund
over the last few years. Other factors could be the portfolio allocation, the
dividend yield and the degree of transparency etc.
Step Three - Select the ideal mix of Schemes: Investing in just one
Mutual Fund scheme may not meet all the investment needs. We may
consider investing in a combination of schemes to achieve our specific
goals.
Step Four - Invest regularly: The best approach is to invest a fixed
amount at specific intervals, say every month. By investing a fixed sum
each month, we buy fewer units when the price is higher and more units
when the price is low, thus bringing down the average cost per unit. This is
called rupee cost averaging and is a disciplined investment strategy
followed by investors all over the world. We can also avail the systematic
investment plan facility offered by many open-end funds.
55
Step Five- Start early: It is desirable to start investing early and stick to a
regular investment plan. If we start now, we will make more than if we wait
and invest later. The power of compounding lets us earn income on
income and our money multiplies at a compounded rate of return.
Step Six - The final step: Finally we need to fill in the application forms of
various mutual fund schemes and start investing. We may reap the
rewards in the years to come. Mutual Funds are suitable for every kind of
investor - whether starting a career or retiring, conservative or risk taking,
growth oriented or income seeking.
56
COMPARATIVE ANALYSIS OF MUTUAL FUNDS
BETA
A Beta is a measure of risk that, when applied to investment portfolios,
provides useful statistical information. It compares a mutual fund's volatility
with that of a benchmark. If the beta of the stock is 1, it means that the
returns in the stock are highly correlated to the benchmark index.
A fund with a beta greater than 1 is considered more volatile than the
market; and a fund with a beta less than 1 means less volatile.
COMPARATIVE ANALYSIS
Comparison Chart
0.9
0.85
BETA
0.8 BETA
0.75
0.7
UTI HDFC CAPITAL RELIANCE
BUILDER GROWTH
Funds
57
Most mainstream equity funds have Betas in the range of .85 to 1.05
(fairly close to the 1.00 Beta represented by the market in the
aggregate). Especially conservative stock funds may register Betas
as low as .75, meaning that in a -10% market decline, their values
might be expected to fall -7.5%. Aggressive funds with Betas of 1.25
might see their values fall by -12.5%.
We can see that the betas of nearly all the funds are similar apart
from the beta of Pru-ICICI Growth, which has a very high beta,
which implies that the fund is very volatile.
An important point to be considered is that with different objectives,
the mid-cap and large cap betas also different. Large cap betas are
more towards market beta which implies that these funds have been
more stable unlike mid cap betas which are more volatile
ALPHA
Alpha is a financial term describing that part of an investor's return that is
due to the skills of the investment manager, as distinct from the return of
the market as a whole.
Alpha can provide a deeper perspective on the performance of
equity schemes to a mutual fund investor. While analyzing performance,
we would like to know how much of the return was attributable to the
market as a whole, and how much due to the manager's ability to select
stocks. Value Added by Fund Manager (or alpha) indicates the return that
is not attributable to the market, or in other words the added value the
manager achieved over and above the result of the market.
COMPARATIVE ANALYSIS:
58
A fund manager who reduces risks by booking profits has also to be
careful in reinvesting. If the reinvesting is badly managed, the returns may
not be superior. Then, despite a lower beta, the performance may be flat.
The measure `Alpha' indicates the value added by a fund manager.
Comparison Chart
3
2.5
2
ALPHA
1.5 ALPHA
1
0.5
0
UTI HDFC CAPITAL RELIANCE
BUILDER GROWTH
Funds
59
Again, in the mid cap funds also the alpha of reliance growth is the
maximum which can be attributed to the above reasons.
Another trend is that overall the alpha of mid-cap funds is higher as
compared to large cap funds. One reason could also be that in this
time period when the study was done, the mid cap funds were
performing quite well as compared to large cap funds.
SECTOR ALLOCATION
The division of an investment portfolio among major sectors usually to
diversify the risk.
STANDARD DEVIATION
60
The total risk of a given fund is measured in terms of standard deviation of
returns of the fund. Standard Deviation is a measure of scattering of the
values about the average (mean) value. It tells us how much the values
have deviated from the mean of the values. It is calculated by using
returns of the scheme i.e. the Net Asset Value (NAV), and is a measure of
the dispersion of the scheme's return around its average return.
Comparison Chart
8
7.8
7.6
7.4
7.2
S>D.
7 STANDARD DEVIATION
6.8
6.6
6.4
6.2
6
UTI HDFC RELIANCE
CAPITAL GROWTH
BUILDER
Funds
COMPARATIVE ANALYSIS
When used in relation to mutual funds, it tells about the volatility of the
scheme. The higher is the value, the more volatile are the returns and vice
versa.
mid cap funds are more volatile as compared to large cap funds.
61
In the large cap funds the highest standard deviation is of reliance
vision, reliance vision falls in the category of high risk and high
return.
SHARPE RATIO
Sharpe ratio, worked by Nobel Laureate Bill Sharpe, tries to quantify how a
fund performs relative to the risk it takes. It is a ratio of returns generated
by the fund over and above risk free rate of return and the total risk
associated with it (standard deviation). Symbolically it is written as:
SI =
( Ri − Rf )
σ
Where, SI= Sharpe Index
Ri = Return on the fund
Rf = risk free rate of return (e.g. a 90 day T-Bill)
σ = Standard Deviation
62
Comparison Chart
0.6
0.58
0.56
0.54
S.R.
SHARPE RATIO
0.52
0.5
0.48
0.46
UTI HDFC CAPITAL RELIANCE
BUILDER GROWTH
Funds
63
• Retail Investors prefer to invest in debt-based funds when they invest
for short periods and are looking for steady returns. On the contrary,
when they invest for long periods, they prefer to go for equity based
funds as it is seen that in the long period, equity funds out-perform debt
funds. This money is either from their capital gains or for some specific
purpose in the future like their child’s education, marriage, purchase of
house etc.
• Business Investors invest a lot in the end of June when Mutual Funds
are close to declaring dividends. This is because this gets them the
benefit of writing off their capital gains as follows –
1. Say the NAV per unit of the Mutual Fund is Rs. 20.00 at time
of purchase.
2. The business buys the Mutual Fund units at this price and
dividends are declared say Rs. 4.00 per unit.
3. Then after the cool off period when the Mutual Fund opens,
the NAV per unit is Rs. 16.00 per unit (Rs. 20.00 – Rs. 4.00
dividend declared).
4. The business then sells off the units at Rs. 16.00 per unit and
claims capital looses to the tune of Rs. 4.00 per unit, which can
be used by them to write off their capital profits.
5. This actually is not a capital loss as that amount has already
been reimbursed to the unit holder in terms of dividends.
64
• The outlook for the Mutual Fund Industry as predicted by the
representatives of the companies that I visited is very bright. They all
expect the market to go up by Diwali (Indian festival) and New Years
and also expect consumer awareness and interest to improve.
Efforts are being made by them to increase awareness and services
offered by them. All this would result in major increase in their
collections and of the industry as a whole. Also a large number of
new companies and schemes are soon going to be launched which
will increase the variety for consumers and also improve the quality
of services offered due to the increase in competition.
65
CONCEPT OF FINANCIAL PLANNING
An investor, depending on the age, risk taking ability and time horizon,
should accordingly put his/her money in different asset classes in the
proportion that suits their unique needs and requirements the best.
66
Risk Profiling:
Finally after analyzing the above parameters with the help of the personal
financial review we quantified the ability of the customer to take the
investment risk associated with the various financial assets. After this we
made 2-3 dummy portfolios suggesting suitable portfolio mix.
67
Recommendations:
References
1) Mr. Amit Chadha Finance Head (DXN Trading (I) Pvt. Ltd).
69