Mutual Fund Industry in India by Mahesh Shinde

MUTUAL FUND INDUSTRY IN INDIA
CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The
income earned through these investments and the capital appreciation realized is
shared by its unit holders in proportion to the number of units owned by them.
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 basket of
securities at a relatively low cost. The flow chart below describes broadly the
working of a mutual fund:
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HISTORY OF MUTUAL FUNDS:
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 The Reserve
Bank. The history of mutual funds in India can be broadly divided into four
distinct phases:-
First Phase 1964-87:- Unit Trust of India (UTI) was established on 1963
by an Act of Parliament. It was set up by the Reserve Bank of India and
functioned under the Regulatory and administrative control of the Reserve
Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of
assets under management.
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 Canbank 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.
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Third Phase 1993-2003:- (Entry of Private Sector Funds) 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. Also,
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. The
number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. 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, 541 crores of assets under management was way ahead of
other mutual funds.
Fourth Phase 20032006 :- In February 2003, following the repeal of the

Unit Trust of India Act 1963 UTI was bifurcated into two separate entities.
One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs.29, 835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain
other schemes. The Specified Undertaking of Unit Trust of India,
functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual
Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by
SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the
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Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which
had in March 2000 more than Rs.76, 000 crores of assets under management
and with the setting up of a UTI Mutual Fund, conforming to the SEBI
Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of September,
2004, there were 29 funds, which manage assets of Rs.153108 crores under
421 schemes. The graph indicates the growth of assets over the years.
Current Phase 2010 onwards: - The mutual fund industry in India has
come a long way. Significant spurts in size were noticed in the late 80s,
when public sector mutual funds were first permitted, and then in the mid-
90s, when private sector mutual funds commenced operations. In the last
few years, institutional distributors increased their focus on mutual funds.
The emergence of stock exchange brokers as an additional channel of
distribution, the continuing growth in convenience arising out of
technological developments, and higher financial literacy in the market
should drive the growth of mutual funds in future. AUM of the industry, as
of February 2010 has touched Rs 766,869 crore from 832 schemes offered
by 38 mutual funds. These weredistributed as follows: (Source:
www.amfiindia.com)
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Open- Close- Interval Total %

Ended Ended
Income 441422 26203 8759 476384 62.1%
Equity 148726 19621 325 168672 22.0%
Balanced 15277 1864 - 17141 2.2%
Money 73030 - - 73030 9.5%
Market
Gilt 3171 - - 3171 0.4%
ELSS-Equity 19617 3047 - 22664 3.0%
Gold ETF 1583 - - 1583 0.2%
Other ETFs 1342 - - 1342 0.2%
Overseas 2882 - - 2882 0.4%
Total 707050 50735 9084 766869 100.0%
% 92.2% 6.6% 1.2% 100%
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ORGANISATION OF MUTUAL FUND:
A mutual fund is set up in the form of a trust, which has sponsor, trustees,
Asset Management Company (AMC) and custodian. The trust is established
by a sponsor or more than one sponsor who is like promoter of a company.
The trustees of the mutual fund hold its property for the benefit of the unit
holders. Asset Management Company (AMC) approved by SEBI manages
the funds by making investments in various types of securities. Custodian,
who is registered with SEBI, holds the securities of various schemes of the
fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance
and compliance of SEBI Regulations by the mutual fund.
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SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered with SEBI
before they launch any scheme. However, Unit Trust of India (UTI) is not
registered with SEBI (as on January 15, 2002).
Mutual Fund Custodian:
A trust company, bank or similar financial institution responsible for holding

and safeguarding the securities owned within a mutual fund. A mutual fund's
custodian may also act as the mutual fund's transfer agent, maintaining
records of shareholder transactions and balances. Also refers to as a "mutual
fund corporation".
Since a mutual fund is essentially a large pool of funds from many different
investors, it requires a third-party custodian to hold and safeguard the
securities that are mutually owned by all the fund's investors. This structure
mitigates the risk of dishonest activity by separating the fund managers from
the physical securities and investor records.
Sponsor:
Sponsor is the person who acting alone or in combination with another body
corporate establishes a mutual fund. Sponsor must contribute atleast 40% of
the net worth of the Investment Managed and meet the eligibility criteria
prescribed under the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996.The Sponsor is not responsible or liable for any loss or
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shortfall resulting from the operation of the Schemes beyond the initial
contribution made by it towards setting up of the Mutual Fund.
Trust:
The Mutual Fund is constituted as a trust in accordance with the provisions

of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered
under the Indian Registration Act, 1908.
Trustee:
Trustee is usually a company (corporate body) or a Board of Trustees (body of

individuals). The main responsibility of the Trustee is to safeguard the
interest of the unit holders and ensure that the AMC functions in the interest
of investors and in accordance with the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed
and the Offer Documents of the respective Schemes.
Asset Management Company (AMC):
The AMC is appointed by the Trustee as the Investment Manager of the Mutual
Fund. The AMC is required to be approved by the Securities and Exchange
Board of India (SEBI) to act as an asset management company of the Mutual
Fund. The AMC must have a net worth of at least 10 crore at all times.
Registrar and Transfer Agent :
The AMC if so authorized by the Trust Deed appoints the Registrar and
Transfer Agent to the Mutual Fund. The Registrar processes the application
form, redemption requests and dispatches account statements to the unit
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holders. The Registrar and Transfer agent also handles communications with
investors and updates investor records.
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REGULATORY FRAMEWORK
(1) SEBI: SEBI is the apex regulator of all entities that raise funds in the capital market or
invest in capital market securities. Mutual funds have emerged as an important
institutional investor in capital market securities. Hence, they come under the purview of
SEBI. SEBI require all mutual funds to be registered with them. It issues guidelines for
all mutual fund operations including where they can invest, what investment limits &
restriction must be complied with, how they should make disclosure of information to the
investor protection.
(2) RBI : MONEY MARKET REGULATOR
(A) AS SUPERVISOR OF BANK-OWNED MUTUAL FUND: Operation of bank-owned

mutual funds is governed by guidelines issued by the RBI. But is important to note that
Bank-owned MF is under the joint supervision of both RBI & SEBI.It is generally
understood that all market related & investor related activities of the funds are to be
supervised by SEBI, while any issue concerning the ownership of the AMCs by bank fall
under the regulatory ambit of RBI.
(B) AS SUPERVISOR OF MONEY MARKET MUTUAL FUND: RBI is the only govt.
agency that is charged with the sole responsibility to control the money supply in the country.
Therefore, it has the sole supervisory responsibility over all the entities that operate in the
money market, be it bank or companies that issue securities such as certificate of deposit or
commercial paper or bank & mutual funds who are allowed to borrow from or lend in the call
money market.
(3) MINISTRY OF FINANCE :The ministry of finance, which is charged with

implementing the govt. policies, ultimately supervises both the RBI & the SEBI.
Besides being the ultimate policy making & supervising entity, the MoF has also been
playing the role of an Appellate Authority for any major disputes over the SEBI
guidelines.
(4) COMPANY LAW BOARD :Mutual Fund, AMC & Corporate trustees are companies
registered under companies Act, 1956 & therefore answerable to regulatory authorities
empowered by the Companies Act.
(5) STOCK EXCHANGE :Stock Exchange is self-regulatory organization supervised by

SEBI. Many closed-end schemes of mutual funds are listed on one or more stock-
exchanges. Such schemes are subject to regulation by the concerned stock-exchange
through a listing agreement between the fund & stock-exchange.
(6) OFFICE OF THE PUBLIC TRUSTEE :Mutual fund, being public trust is governed by
Indian Trust Act, 1882. The Board of Trustees or the trustee company is accountable to
thee office of public trustee, which in turn reports to the charity commissioner
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WHO CAN INVEST IN MUTUAL FUNDS IN INDIA:

Mutual Funds in India are open to investment by
(a) Residents Including
(1)Resident Indian Individuals

(2) Indian Companies
(3) Indian Trusts/ Charitable Institutions
(4) Bank
(5) Non-Banking Finance Companies
(6) Insurance companies
(7) Provident Funds
(b) Non-Residents Including
(8) NRIs
(9) Overseas Corporate Bodies
(c) Foreign Entities,viz
(10) FIIs registered with SEBI

Foreign citizen/entities are however not allowed to invest in mutual funds in India.
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Net Asset Value (NAV): Definition"

Definition:The Net Asset Value, or NAV, is simply a measure of the
current rupee value of one share of a mutual fund. It's the fund's assets
minus its liabilities divided by the number of outstanding shares.
NAVs are calculated at the end of each trading day. If the NAV increases,
then it means the value of your holdings increase (if you are a shareholder).
Net asset value (NAV):

In simple words, NAV of a mutual fund is nothing but its PRICE PER
UINT. The NAV of mutual fund is to be calculated on a daily basis that is
based on its performance with relation to other mutual funds. Technically
speaking NAV of a 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. However, most people refer loosely to the NAV per unit as NAV,
ignoring the per unit. NAV is computed on a daily basis for Open-ended
funds and on a weekly basis for Close-ended listed funds whereas for close-
ended unlisted funds NAV is computed once a month or once in 3 month as
permitted by SEBI.
Thus, if one sees a fund NAV as Rs. 10, then one can expect to buy the fund
for Rs. 10 or sell it for Rs.10 (although some loaded funds dont follow this
logic). Since mutual funds hold a number of securities, the net asset value
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must be calculated at the end of the day on daily basis (as opposed to stocks
that change prices by the second).
CALCULATING NET ASSET VALUE (NAV):

Calculating mutual fund net asset values is easy. Simply take the current
market value of the fund's net assets (securities held by the fund minus any
liabilities) and divide by the number of shares outstanding. So if a fund had
net assets of Rs. 50 crore and there are 10 lakh shares of the fund, then the
price per share (or NAV) is Rs. 50.00.
The Following Formula Is Utilized For Calculating NAV Per Unit:
NAV = Total Assets Total Liabilities

Total no. Of outstanding shares
HOW TO USE THE NET ASSET VALUES:
NAVs are helpful in keeping an eye on your mutual fund's price movement,
but NAVs are not the best way to keep track of performance. The reason
for this is mutual fund distribution. Mutual funds are forced by law to
distribute at least 90% of its' realized capital gains and dividend income each
year. When a fund pays out this distribution, the NAV drops by the amount
paid. This is important because an investor may become frightened when
they see their fund's NAV drop by Rs 3 even though they haven't lost any
money (the Rs. 3 was paid out to the shareholder).
The most important thing to keep in mind is that NAVs change daily and
are not a good indicator on how your portfolio is doing because things like
distributions mess with the NAV (it also makes mutual funds hard to track).
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SECURITIES AND EXCHANGE BOARD OF INDIA

INVESTMENT MANAGEMENT DEPARTMENT
Status of Mutual Funds for the period April 2011 - Feb 2012
(Figures in Rs. Crore)
Private Public Sector Mutual Funds Grand Total

Sector Mutual
Funds
UTI Others Sub-total A+B
(i) (ii) (i)+(ii)
A B
Mobilisation of
Funds 5,130,191.70 473,351.05 555,640.50 1,028,991.56 6,159,183.26
Repurchase
/ Redemption
Amt. 5,080,721.60 463,895.79 552,823.67 1,016,719.46 6,097,441.05
Net Inflow/
Outflow (-ve) of
funds 49,470.10 9,455.26 2,816.84 12,272.10 61,742.20
Cumulative
Position of net
assets as on 549,855.21 62,737.22 62,645.99 125,383.21 675,238.42
Feb 29, 2012
81.43 9.29 9.28 18.57 100.00
Net assets of Rs. 6264.78 crores pertaining to Funds of Funds Schemes for Feb '12 is not
included in the above data.
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TYPES OF MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. The table below gives an overview into the existing types
of schemes in the Industry.
MUTUAL FUND SCHEMES
BY STRUCTURE ON INVESTMENT OBJECTIVE OTHER SCHEMES

- Open-ended schemes -Growth schemes -Tax-saving schemes
- Closed-ended schemes - Income schemes - Special schemes:
- Balanced schemes - Index schemes
- Money market schemes - Sector specific
-Exchange traded fund
I] Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently
buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.
The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open
for subscription only during a specified period at the time of launch of the scheme. 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 the units 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 i.e. either repurchase facility or
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through listing on stock exchanges. These mutual funds schemes disclose NAV generally on
weekly basis.
II] Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended schemes
as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such
schemes normally invest a major part of their corpus in equities. Such funds have comparatively
high risks. These schemes provide different options to the investors like dividend option, capital
appreciation, etc. and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for investors having a
long-term outlook seeking appreciation over a period of time.
Equity funds are of different types. These are following:
(a)AGGRESSIVE GROWTH FUNDS:

This type of funds target maximum capital appreciation ,invest in less researched stock that
are considered to have future growth potential & may adopt speculative investment strategies
to attain their objective of high return for the investors.
Examples: Birla Midcap Fund, Franklin India Prima Fund, HDFC Capital Builder Fund,
Kotak Opportunities Fund.
(b) GROWTH FUNDS:

These types of funds invest in companies whose earning are expected to rise at an above avg.
rate. These companies may be operating in sectors like technology considered to have a
growth potential, but not entirely unproven & speculative .The
primary objective of growth fund is capital appreciation over three to five years span.
Examples: Pru ICICI Power Fund, Kotak 30 Fund, Magnum Equity Fund, Tata Growth
Fund, Principal Growth Fund.
(c) SPECIALTY FUNDS:

These funds have a narrow portfolio orientation & invest in companies that meet pre-defined
criteria.
These are also of different types:-.
(i)SECTOR FUNDS:
These funds portfolios consist of investment in only one industry or sector of the market such
as IT or Pharma or FMCG. Since sector funds dont diversify into multiple sectors; they
carry a higher level of sector & company specific risk than diversified equity funds.
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Examples:Pru ICICI FMCG Fund, Pru ICICI Technology Fund, Kotak Technology Fund,
Tata Infrastructure Fund.
(ii)OFFSHORE FUNDS:
These funds invest in equities in one or more foreign countries there by achieving
diversification across the countrys border.
However they also have additional risks such as the foreign exchange rate risk & their
performance depend on the economic condition of the country they invest in.
(iii)SMALL-CAP EQUITY FUNDS:

These funds invest in shares of companies with relatively lower market capitalization than
that of big, blue chip companies. They may thus be more volatile than other funds, as smaller
companies share are not very liquid in market.
(iv)OPTION INCOME FUNDS:

These funds write options on a significant of their portfolio. These funds invest in large
dividend paying companies & then sell options against their position.
(d) DIVERSIFIED EQUITY FUNDS:

A fund that seeks to invest only in equity, but is not focused on any one or few sectors or shares
may be a termed a diversified equity fund.
ELSS:AN INDIAN VARIANT

In India, investors have been given tax concessions to encourage them to invest in equity markets
through these special schemes. Investment in these schemes entitles the investor to claim income
tax rebate, but usually has a lock-in period. Generally, such funds would be in the diversified
equity fund category.
(e) EQUITY INDEX FUNDS:

These funds track the performance of a specific stock market index. The objective of these
funds is to match the performance of stock market by tracking an index that represents the
overall market.
Examples: Prudential ICICI SPIcE Fund, Magnum Index Fund, Birla Index Fund, Tata Index
Fund.
(f) VALUE FUNDS:

These funds try to seek out fundamentally sound companies whose shares are currently
under-priced in the market. These funds will add only those shares to their portfolio that are
selling at low price-earning ratios, low market to book value ratios & are undervalued by
other yardsticks.
Examples: Prudential ICICI Discovery Fund, Templeton India Growth Fund.
(g) EQUITY INCOME FUNDS/DIVIDEND YIELD FUNDS:

These funds are designed to give the investors a high level of current income along with
some steady capital appreciation, investing mainly in shares of companies with high
dividends yields.
These funds are therefore less volatile &less risky than nearly all other equity funds.
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Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures, Government
securities and money market instruments. Such funds are less risky compared to equity schemes.
These funds are not affected because of fluctuations in equity markets. However, opportunities
of capital appreciation are also limited in such funds. The NAVs of such funds are affected
because of change in interest rates in the country. If the interest rates fall, NAVs of such funds
are likely to increase in the short run and vice versa. However, long term investors may not
bother about these fluctuations.
Examples-Pru ICICI Income Plan, Reliance Medium Term Fund, Magnum Income Fund,
Principal Income Fund.
(1)DIVERSIFIED DEBT FUNDS:

A debt fund that invests in all available type of debt securities, issued by entities across all
industries & sectors is a properly diversified debt fund.
A diversified debt fund has the benefit of risk reduction through diversification & sharing of
any default-related losses by a large number of investors.
(2) FOCUSSED DEBT FUNDS:

These types of funds have a narrower focus, with less diversification in its investment. These
types of funds invest only in corporate debt & bonds or only in tax-free infrastructure or
municipal bonds.
(3)HIGH YIELD DEBT FUNDS:

These type of funds seek to obtain higher interest return by investing in debt instrument that
are considered below investment grade. Clearly, these funds are exposed to higher risk.
Examples: Birla Dividend Yield Plus, Tata Dividend Yield Fund.
Balanced Fund
A balanced fund is one that has a portfolio comprising debt instrument, convertible securities,
pref. shares, equity shares The aim of balanced funds is to provide both growth and regular
income as such schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking for moderate
growth. They generally invest 40-60% in equity and debt instruments. These funds are also
affected because of fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds.
Examples: Pru ICICI Balance Plan, Kotak Balanced Fund, Birla Balance Fund, Tata
Balanced Fund, Principal Fund.
Money Market or Liquid Fund
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These funds are also income funds and their aim is to provide easy liquidity, preservation of
capital and moderate income. These schemes invest exclusively in safer short-term instruments
which generally mean securities of less than 1 year maturity such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money, government securities, etc. Returns on
these schemes fluctuate much less compared to other funds. These funds are appropriate for
corporate and individual investors as a means to park their surplus funds for short periods.
Examples- PruICICI Liquid Fund, Reliance Short Term Fund, Reliance Liquid Fund, Kotak
Liquid Fund, Magnum Insta Cash Fund, Principal Cash Management Fund, UTI Money
Market Fund.
III] OTHER SCHEMES
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default
risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic
factors as is the case with income or debt oriented schemes.
Examples- Pru ICICI Gilt-Treasury Fund, Pru ICICI Gilt-Investment Fund, Reliance Gilt
Securities Fund, Kotak Gilt Fund, Magnum Gilt Fund, Birla Gilt Plus Fund, UTI G-
Securities Fund.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P
NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage
comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or
fall in the index, though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms. Necessary disclosures in this regard are made in the offer
document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on
the stock exchanges.
Sector specific funds/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. They may also seek advice of an expert.
Tax Saving Schemes
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These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act,
1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity
Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax
benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth
opportunities and risks associated are like any equity-oriented scheme.
When a fund invests in tax-exempt securities, it is called TAX-EXEMPT FUNDS. When a fund
invests in a taxable securities, it is called NON- TAX-EXEMPT FUNDS.
In India, after the 1999 Union Govt. Budget all the dividend income received from any of the
mutual funds is tax-free in the hands of investors. However funds other than equity funds have to
pay distribution tax before distributing income to investors.
Fund of Funds (FoF) scheme
A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds
is known as a FoF scheme. AnFoF scheme enables the investors to achieve greater
diversification through one scheme. It spreads risks across a greater universe.
Load / No-load Fund scheme
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one
LOAD AND TYPES OF LOAD:
Load is a charge collected by a mutual fund on units.

It is of three types.
LOAD
CONTINGENT
ENTRY LOAD EXIT LOAD DEFERRED SALES
LOAD (CDSL)
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Entry Load: When a charge is collected at the time of entering into a

scheme it is called as entry load or front end load or sales load. The entry
load percentage is added to the NA at the time of allotment of units.
Exit Load: An Exit load or Back-end load or repurchase load is a charge

that is collected at the time of redeeming or for transfer between schemes.
(Switch). The exit load percentage is deducted from the NAV at the time of
redemption or transfer between schemes.
Contingent Deferred Sales Load (CDSL): The load amounts charged to

units when recovered at various period of time is called as deferred load.
This load reduces the redemption proceeds paid out to the outgoing
investors. Depending on how many years the investor stays with the fund,
some funds may charge different mounts of loads to the investor- the longer
the investor stays with the fund, lesser is the amount of exit load charged to
him. This is called Contingent the Deferred Sales Charge (CDSC) and
Contingent Deferred Sales Load (CDSL).
Some schemes do not charge any load (i.e. Sell/repurchase at NAV) and are
called No Load Schemes.
INVESTMENT OPTIONS OF A MUTUAL FUND

Growth Option
No dividend to Unit Holders.
Income will remain reinvested and reflected in NAV.
Benefit of long - term capital gains for Unit holders where units are redeemed after one
year date of purchase.
Dividend Option
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Dividend out of the net surplus as approved by the Trustees
Balance of net surplus to be ploughed back and reflected in NAV.
Quantum & frequency of distribution may vary between various plans.
Options for investors to choose between quarterly, semiannual and annual dividend.
Dividend Reinvestment
Investor can reinvest dividend in additional units.
Dividend automatically reinvested in the respective in the respective Plans at the first ex-
dividend NAV.
Dividend reinvested shall be constructive payment of dividend to Unit Holders and will
be tax exempt in the hands of Unit holders.
There exists a provision in many mutual fund forms which asks you whether you want your
dividend reinvested. This was a good provision when there was no tax on dividends and the long
term capital gains tax was not zero.
Then, it was better for you to have shown the income as dividend and reinvest it: that way you
avoided paying long term capital gains tax.
However, now the situation is reversed - we have zero long-term capital gains tax and there is tax
on dividends received. Hence, this option does not make sense under any circumstance though
some fund houses still carry it as a legacy option.
SYSTEMATIC INVESTMENT PLAN (SIP)
This is the simplest manner of investing in a mutual fund. You have a certain sum of money (lets
say, Rs 100) and you want to invest it in one go. You approach the mutual fund company with
your cheque for the amount you want to invest.
The main risk with this investing strategy is that you are locked in to the valuations of the
underlying security as on a particular date. If, for example, the prices were to go down from this
point, you would lose money on the entire investment. Similarly, if you have timed the
investment right, you will see a good rise on your entire investment.
In order to avoid the risk mentioned above, you can instead invest the sum over a period of time.
Mutual funds allow you to periodically invest in them (lets say 5 investments of Rs 20 each).
22
You can invest on a weekly, monthly or quarterly basis with the mutual funds. SIP allows to
invest a fixed amount on monthly / quarterly basis at NAV based prices
This way you will avoid the risk of locking in to one single valuation but you will get an
'average' of the valuations on the various dates that you invest.
SIP is very helpful in a volatile market. Since you invest a fixed amount, you buy more of the
security when its prices fall and less when it is more expensive.
Mutual funds define the dates on which you can make the regular investments (typically
1st/7th/15th/21st of every month). If you are a salaried employee, you will realize that you have
surplus monthly savings and hence this can become a preferred option for you. You receive your
salary on the 5th of the month and hence you can make the investment every 7th of the month.
You can fill the SIP application form and inform the mutual fund that you want to invest on 7 th
every month.
Almost all mutual funds provide an Electronic Clearing Scheme (ECS) with the major banks:
this means that you can sign an order to your bank that you allow the mutual fund company to
take a specified sum of money from your bank account on specified dates for a specified period.
This saves you the hassle of signing post datedcheques or of sending cheques on a periodic basis
to the mutual fund.
RUPEE COST AVERAGING
It's hard to time markets
Make no mistake, it's hard to time when to enter and exit markets. Financial markets are made up
of a host of different investors. There are large institutions, such as fund managers, as well as
companies, brokers and individual investors. Over the long-term, markets can do well but in the
short term, prices fluctuate on the basis of fundamental news, market sentiment, expectations,
rumour and competitor activity. Sometimes the herd' mentality can set in. When the news about
a particular stock is good, investors buy in. Even though the price keeps rising, buyers keep
buying, as nobody is sure when the price has peaked. Similarly, when prices are falling, nervous
investors sell in an attempt to cut their losses. There are statistical measures and yardsticks, such
as price-earning ratios, which help determine the true value of a stock or bond, but as the boom
and bust in Internet stocks has proven, rational measures are often ignored and sentiment can
take over. Deciding when to invest in this environment can be a stressful task. If the market is
doing well you may fear that you're buying when prices are too high. By contrast, when the
market is falling, there is a reluctance to invest due to fears that it may fall further. So what
should an investor do to avoid having to make these timing decisions?
The Markets are volatile: they move up and down in an unpredictable manner
23
Invest a fixed amount, at regular, predetermined intervals and use the market fluctuations
to your benefit
How does it help you:
You buy more more when the market is down
You buy less when the market is up
Over time the market fluctuations are averaged
Most likely you will realize a saving on the cost per unit
This leads to HIGHER RETURNS
Difficult to predict the market and know when to Buy Low, Sell High, hence invest
Systematically
Takes advantage of Rupee Cost Averaging: buy more when the price is low and buy less
when its high
Low maintenance, payments are made automatically
Contribute as little as Rs. 500 every month
Instills investing discipline: no temptation to time the market
Why investing regularly, works?
Investing on a regular basis removes the stress of timing the market because you are
employing the concept of Rupee Cost Averaging. If you are an investor in mutual funds it
means that you buy more units when the purchase price is low and fewer units when the
purchase price is high. The trick to all this is to remember that it's not the price you pay for each
unit that matters. It's the average price per unit over time that determines your overall return.
By investing regularly, Ajay bought units as the price was falling and was able to benefit from
price appreciation as the market recovered. So Ajay has avoided the stress of timing the market
but has still done very well on his investment. The key Rupee Cost Averaging which, in simple
terms, just means investing regularly.
SYSTEMATIC TRANSFER PLAN (STP):
In the above example, if you had a lump sum of money and wanted to do an SIP, you would have
to park your extra money (i.e., Rs 80, which is Rs 100 minus the first installment of Rs 20)
somewhere.
Mutual funds, realizing this issue, offer an STP. Here, you can invest the entire sum of money
(Rs 100) with the fund: you put in Rs 20 in the equity fund, while putting the extra sum (Rs 80)
in cash or debt funds.
Over the next four months, you can request the fund to transfer Rs 20 (plus the gains/losses) each
month to the equity fund. This saves you the hassle of creating a communication between your
mutual fund and your bank through ECS.
Similarly, if you believe that you would gradually want to move your exposure in IT to lets say,
pharma, you can create an STP between your investments in the IT fund and the pharma fund.
24
This way you do not suddenly shift exposure in one go, but do it gradually. If you are
approaching a milestone, you can use this instrument to move your exposure from equity to debt
funds so that you have more certainty around the final figure that you will receive.
SYSTEMATIC WITHDRAWAL PLAN (SWP)
This is, as the name suggests, the reverse of the STP. Here you gradually withdraw money from
the mutual fund. Assume you need Rs 20 over the next 5 months and you have Rs 100 invested
in a mutual fund.
You can request the mutual fund to return 1/5th of your money (including the gains/losses) every
month for the next five months. If your bank account details are provided, the fund will deposit
the money directly in your bank account. This is typically used when you are nearer to a
milestone or during your retirement.
Facility for Unit holders to withdraw a specified sum each month
Ideal for investors who invest a lump sum amount and withdraw regularly for their needs
Minimum interval between two withdrawals will be one month
Withdrawals converted into units at applicable NAV based prices to be subtracted from
the balance units to the credit of Unit holder
The Fund can close the account if the balance in Unit holders account falls below the
minimum prescribed
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ADVANTAGES OF MUTUAL FUND:
If mutual fund is emerging as the favorite investment vehicle, it is because of

the many advantages it has over other forms and avenues of investing,
particularly for the investor who has limited resources available in terms of
capital and ability to carry out detailed research and market monitoring. The
following are the major advantages offered by mutual funds to all investors:
1. Professional Management: Even if the investor has a big amount of capital

available to him, he benefits from the professional management skills
brought in by the fund in the management of the investors portfolio. The
investment skills, along with the needed research into available investment
options, ensure a much better return than what an investor can manage on
his own. Few investors have the skills and resources of their own to succeed
in todays fast-moving, global and sophisticated markets.
2. Reduction/Diversification of Risk:An investor in a mutual fund acquires a

diversified portfolio, no matter how small his investment. Diversification
reduces the risk of loss, as compared to investing directly in one or two
shares or debentures or other instruments. When an investor invests directly,
all the risk of potential loss is his own. While investing in the pool of funds
with other investors, any loss in one or two securities is also shared by other
investors. This risk reduction is one of the most important benefits of a
collective investment vehicle like mutual fund.
3. Reduction in Transaction Costs: What is true of risk is also true of the

transaction costs. A direct investor bears all the costs of investing such as
26
brokerage or custody of securities. When going through a fund, he has the

benefit of economies of scale; the funds pay lesser costs because of larger
volumes, a benefit passed on to its investors.
4. Liquidity: Often investors hold shares or bonds they cannot directly, easily
and quickly sell. Investment in mutual fund, on the other hand, is more
liquid. An investor can liquidate the investment by selling the units to the
fund if it is an open-ended fund, or by selling the units in the stock market if
the fund is a closed-ended fund, since closed-end funds have to be listed on a
stock exchange, in any case, the investor in a closed-ended fund receives the
sale proceeds at the end of a period specified by the mutual fund or the stock
exchange.
5. Flexibility: Mutual fund management companies offer many investor

services that a direct market investor cannot get. Within the same fund
family, investors can easily transfer/switch their holdings from one scheme
to another. They can also invest or withdraw their money as regular
investors in most open-ended schemes.
6. Convenience: Mutual fund investment process has been made further more
convenient with the facility offered by funds for investors to buy or sell their
units through the internet or email or using other communication means.
7. Regulated Operations: Mutual fund industry is well regulated; all funds are
registered with SEBI, which lays down rules to protect the investors. Thus,
investors also benefit from the safety of a regulated investment environment.
27
8. Higher Returns: As these funds are well managed and well diversified,
they tend to perform better than market over longer period of time; there is
potential for the unit holders to get better returns compared to fixed income
avenues over longer period of time.
9. Tax Benefits: Mutual funds enjoy tax benefits on the incomes received by
them as well as on capital gains. The unit holders also enjoy certain tax
benefit on the income earned, the capital gains made, and on amount
invested in certain types of funds.
10.Transparency:The investors get updated market information from the

funds. The fund managers also share the information about the schemes in
the transparent manner, with all material facts required by regulators to be
disclosed to the investors. The NAVs of open-ended funds are disclosed on
a monthly basis ensuring transparency to the investors.
28
DISADVANTAGES OF INVESTING IN MUTUAL

FUND
While the benefits of investing through mutual funds far outweigh the
disadvantages, an investor and his advisor will do well to be aware of a few
shortcomings of using the mutual fund as an investment vehicle.
1. No Control Over Costs: An investor in a mutual fund has any control over
the overall cost of investing. He pays investment management fees as long
as he remains with fund, albeit in return for the professional management
and research. Fees are usually payable as a percentage of the value of his
investments, whether the fund value is rising or declining. A mutual fund
investor also pays fund distribution cost, which he would not incur in direct
investing. However, this shortcoming only means that there is a cost to
obtain the benefits of mutual fund services, and this cost is often less than
the cost of direct investing by the investors. Besides, the regulators have
prescribed a ceiling on the maximum expenses that the fund managers can
charge to the schemes, thus limiting the investors expense of investing
through mutual funds.
2. No Tailor-made Portfolios: Investors who invest on their own can build

their own portfolios of shares, bonds and other securities. Investing through
funds means that he delegates this decision to the fund managers. High-net-
worth individuals or large corporate investors may find this to be a
constraint in achieving their objectives. However, most mutual funds help
investor overcome this constraint by offering families of schemes a large
number of different schemes within the same fund. In each schemes there
29
are various plans and options. An investor can choose from different
investment schemes/plans/options and construct an investment portfolio that
meets his investment objectives.
3. Managing a Portfolio of Funds: Availability of a large number of options

from mutual funds can actually mean too much choice for the investor. He
may again need advice on how to select a fund to achieve his objectives,
quite similar to the situation when he has to select individual shares or bonds
to invest in. Fortunately, India now has a large number of AMFI registered
and tested fund distributors and financial planners who are capable of
guiding the investors.
30
PLAYERS IN MF INDUSTRY IN INDIA
ABN Amro MF
AIG global inv
Benchmark MF
Birla Sunlife MF
BOB MF
CanaraRobeco MF
DBS Chola MF
Deutsche MF
DSP Merrill Lynch Fund Managers
Escorts MF
Fidelity MF
Franklin Templeton MF
HDFC MF
HSBC MF
ICICI Prudential MF
ING Vysya MF
JM financial MF
JP Morgan MF
Kotak Mahindra MF
LIC MF
Lotus India
Mirae
Morgan Stanley MF
Principal PNB MF
Quantum MF
Reliance Capital MF
Sahara MF
Standard chartered
SBI MF
Sundaram BNP Paribas MF
Tata MF
Taurus MF
UTI MF
UTI SUUTI
31
TAX BENEFITS TO THE INVESTOR

The tax benefits offered to investors often is an important consideration while deciding on the
appropriate investment.
DIVIDENDS RECEIVED FROM MUTUAL FUNDS

Generally, income earned by any mutual fund registered with SEBI is exempt from tax.
After the 1999/2000 budget, to avoid double taxation, the investors are totally exempt from
paying any tax on the dividend income they receive from the mutual funds
However, income distributed to unit-holders by a closed-end or debt fund is liable to a dividend
distribution tax at a rate stipulated by the government. This tax is not applicable to distributions
made by open-end equity-oriented funds.
So, the income distributed by a fund is exempted in the hands of investors and there is no TDS
on any income distribution by mutual fund.
The amount of dividend that the fund pays out depends on the gains that it has made, and here
too, the fund manager/the Asset Management Company can decide to return only part of the
gains. A fund cannot dip into its corpus to pay dividend.
For example, assume the fund collects Rs 10 from you and at the end of one year, the fund value
has risen to Rs 11. The fund can declare a dividend of any amount up to Re 1. It cannot go
beyond Re 1 because then it will have to dip into its original corpus, which it is not allowed to
do.
Assume that your fund declares a dividend of Re 0.8. When a non-equity oriented mutual fund
declares dividend, it pays a tax of 15% (+10% surcharge and 3% cess, totaling to
15%*1.1*1.03=16.995%) on the dividend amount. Hence, in this example, the fund will need to
pay Rs 0.14 (Rs. 0.8*16.995%) as dividend distribution tax.
However, once this tax is paid, the dividend received is tax free in the hands of the investor.
Recently, this dividend distribution tax has been increased to 25% in case of liquid funds.
The value of the fund (and your investment) will fall from Rs. 11 to Rs. 10.06 (i.e. Rs. 11 Rs.
0.8 Rs. 0.14). This is an important point because many people do not realize that dividends
reduce the value of the investment and also because dividend is considered as tax free. Clearly,
your money is refunded to you and also the same goes from your investment to pay the dividend
distribution tax.
However, if an equity fund were to declare a dividend, there is no dividend distribution tax.
Hence, when a mutual fund declares Rs 0.8 as dividend, you receive Rs 0.8 and the NAV falls to
Rs 10.2.
32
THE IMPACT ON THE FUND AND THE

INVESTOR
Although this tax is payable by the fund on its distributions and out of its income, the
investor pays indirectly since the funds NAV and therefore the value of his investment
will come down by the amount of tax paid by the fund.
For ex: If a closed-end or debt fund declares a dividend distribution of Rs.100, Rs.10 (if the tax
rate is 10%) will be taxed in the hands of the fund. While the investor will get Rs.100, the fund
will have Rs.10 less to invest. The funds current cash flow will diminish by the said amount paid
as tax and its impact will be reflected in the lower value of the funds NAV and hence investors
investment on a compounded basis in future periods.
Since the tax is on distributions, it makes income schemes less attractive in comparison to
growth schemes, because the objective of income schemes is to pay regular dividends.
The fund cannot avoid the tax even if the investor chooses to reinvest the distribution
back into the fund.
For example: The investor will still have to pay Rs.10 tax on the announced distribution, even if
the investor chooses to reinvest his dividends in the concerned scheme.
If you do not want the investment back on a regular basis but would rather wait till the end of
your planning horizon for the investment, then you should choose the 'growth option.' This
option means that the gains that the fund makes are retained in the fund and are invested on your
behalf.
Taking the earlier example, the fund will reflect as Rs. 11 as your balance in the fund at the end
of the year. However, you will receive nothing from the mutual fund as current income. Note
that because nothing is paid to you, you do not need to pay anything to the government as taxes.
If you sell a mutual fund with 'growth' option, you will have to pay the government capital gains
taxes.
33
CAPITAL GAINS ON SALE OF UNITS

If the investor sells his units and earns capital gains, the investor is subject to capital gains tax
as under:
If the units are not held for more than 12 months, they will be treated as short term capital asset,
otherwise as long term capital asset. (This period is 36 months for assets other than shares and
listed securities)
Long term capital gains (Tax-free)
A few types of long-term gains on mutual fund holdings are tax-free in nature. This is applicable
for equity oriented mutual fund units, which will mean coverage of diversified equity schemes,
balanced funds (65 per cent or more assets in equity), sector schemes, index funds among others.
If the units in these schemes are held for a period of more than a year, then the gains will qualify
for zero tax.
Any long term capital gain arising from the sale of units of an equity oriented scheme where
such transaction is chargeable to STT shall be exempted from tax u/s10 (38).
Consider a case where an investor has bought 1,000 units in an equity oriented fund at Rs. 15 per
unit on August 3, 2005. If he sells the units on March 12, 2007 then the period is more than a
year so the gain is long-term capital gains. If the sale price is Rs 25 per unit then the gain of Rs
10,000 (1000 units * Rs 10 profit per unit) is tax-free.
Long term capital gains (Taxable)
Mutual fund units held by an individual that are not in equity oriented schemes but say in an
income scheme or a monthly income plan, then the long term capital gains are taxable. In order
to qualify for LTCG, the units have to be held for more than a year.
In this case there is a choice of rates for the individual as to whether they want to pay 20 per cent
with indexation or 10 per cent without indexation. Whichever option is more beneficial to the
taxpayer, the capital gains tax liability shall be computed accordingly
Capital gains = sales consideration-(cost of acquisition +cost of improvements +cost of transfer)

If the units were held for over one year, the investor gets the benefit of indexation, which
means his purchase price is marked up by an inflation index, so his capital gains amount is less
than otherwise.
Purchase price of a long term capital asset after indexation is computed as,
Cost of Acquisition or improvement = Actual Cost of Acquisition or improvement * Cost

Inflation Index for year of transfer /Cost Inflation index for year of acquisition or improvement
or for 1981, whichever is later.
34
Suppose an investor buys 1,000 units in a debt oriented fund at Rs 10 per unit in June 2002 and
sells all of them in September 2004 at Rs 14.5 per unit. In such a situation the individual will
have to make two calculations.
Since the holding of the units is for more than a year the nature of this is long term capital gains.
First consider the gain without the benefit of indexation. The total gain comes to Rs 4,500 (1,000
units * Rs 4.5 being the profit). The tax on this would be 10 per cent without indexation that is
Rs 450.
In the second calculation, take the cost inflation index, which will raise the cost of purchase for
the individual. You can come across the indexation rates from the CII charts issued by the tax
department.
Here the applicable index numbers are 447 for 2002-03 (financial year of purchase) and 480
(financial year of sale) for 2004-05. Thus the cost becomes Rs 10,738 (Rs 10,000 X 480/447).
The profit comes to Rs 3762 and the tax at 20 per cent of this at Rs 752. Since the tax in the first
working at Rs 450 is lower the individual can choose this as the tax to be paid.
Short-term gains
If an equity oriented fund is sold within a year of purchase then the gains that arise are referred
to as short term capital gains and are taxed at 10 per cent. Consider an investor who buys 1,000
units of an equity fund at Rs 24 per unit and sells them after four months at Rs 29 per unit. In this
case the profit is Rs 5,000 and the tax on this will come to Rs 500 at 10 per cent.
Tax on short term capital gain

Any short term capital gain arising from the transfer of a unit of an equity oriented fund shall be
liable to tax @10% if the following conditions are satisfied:
1] The transaction of sale should take place through a recognized stock exchange
2] Such transaction is chargeable to STT.
The short term gains that occur on debt oriented funds will have a different impact as this will be
added to the income of the individual. Depending upon the tax slab that the individual falls
under, the appropriate tax would be calculated.
For instance, if a person buys 1,000 units of a debt oriented mutual fund at Rs 12 in June 2006
and then sells it for Rs 13 in December 2006 then the gain of Rs 1,000 is short term in nature. If
the individual has a total income of Rs 350,000 then this will be added to the total income and in
effect the tax on this Rs 1,000 will be at the highest slab of 30 per cent.
35
IN BRIEF,
As per Section 10(38) of the Act, long term capital gain arising from the sale of units of equity
oriented fund is exempt from tax. However the unit holder will have to pay securities
Transaction Tax (STT) of 0.20 % on the value of sale.
Long Term Capital Gains Tax on Funds other than Equity Oriented.
Long-term capital gains arising from the sale of units on any Funds other than Equity Oriented
will be chargeable under Sec.112 of the act at the rate of 20 % after Indexation benefit or 10 %
flat on the Gains
Short Term Capital Gains Tax on Equity Oriented Mutual Fund.
As per sec.111A, short term capital gain arising from the sale of units of equity oriented fund
wherein such transaction is chargeable to securities transaction tax (STT). The Tax on Short
Term Capital gains is at the rate of 10 %
Short Term Capital Gains on Equity Funds: 10 % plus STT@0.20 %
Short Term Capital Gains Tax on Funds other than Equity Oriented.
Short Term Capital Gains in respect of units held for not more than 12 months is added to the
total income of the assessee and taxed at the applicable slab rates specified by the Act.
36
MEASURING & EVALUATING MUTUAL FUND

PERFORMANCE
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on
daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes.
The NAVs of mutual funds are required to be published in newspapers. The NAVs are also
available on the web sites of mutual funds. All mutual funds are also required to put their NAVs
on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus
the investors can access NAVs of all mutual funds at one place.
The mutual funds are also required to publish their performance in the form of half-yearly results
which also include their returns/yields over a period of time i.e. last six months, 1 year, 3
years, 5 years and since inception of schemes. Investors can also look into other details like
percentage of expenses of total assets as these have an affect on the yield and other useful
information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the unit
holders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being
published by the financial newspapers on a weekly basis. Apart from these, many research
agencies also publish research reports on performance of mutual funds including the ranking
of various schemes in terms of their performance. Investors should study these reports and keep
themselves informed about the performance of various schemes of different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds under
the same category. They can also compare the performance of equity oriented schemes with the
benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or
exit from a mutual fund scheme.
The investors must read the offer document of the mutual fund scheme very carefully. They may
also look into the past track record of performance of the scheme or other schemes of the same
mutual fund. They may also compare the performance with other schemes having similar
investment objectives. Though past performance of a scheme is not an indicator of its future
performance and good performance in the past may or may not be sustained in the future, this is
one of the important factors for making investment decision. In case of debt oriented schemes,
apart from looking into past returns, the investors should also see the quality of debt instruments
which is reflected in their rating. A scheme with lower rate of return but having investments in
better rated instruments may be safer. Similarly, in equities schemes also, investors may look for
quality of portfolio. They may also seek advice of experts.
37
MEASURING FUND PERFORMANCE:

(1) CHANGE IN NAV:
If an investor want to compare the return on investment between two dates, he can simply use the
per unit NAV at the beginning & the end periods & calculate the change in the value of the NAV
between the two dates in absolute & % terms.
Formulae- Absolute change in NAV/NAV at the beginning*100.
Limitations: But this measure does not always give the correct picture, in cases where the fund
has distributed to investors a significant amount of dividend in the interim period. Therefore, it is
suitable for evaluating growth funds & accumulation plans of debt & equity funds, but should be
avoided for income funds & funds with withdrawal plan.
(2) TOTAL RETURN:
This measure corrects the shortcomings of the NAV change measure, by taking account of the
dividends distributed by the fund between two NAV dates & adding them to the NAV change to
arrive at the total return.
Formula for Total return is:
[(Distribution + change in NAV)/ NAV at the beginning]*100
Total Return is a measure suitable for all type of funds. Performance of different type of funds
can be compared on the basis of total return.
Limitations: But this measure ignores the fact that distributed dividends also get reinvested if
received during the year.
(3)RETURN ON INVESTMENT or TOTAL RTN. WITH DIVIDENDS REINVESTED

AT NAV:
The shortcomings of the simple total return is overcome by computing the total return with
reinvestment of dividends in the fund itself at the NAV on the date of distribution.
Formulae- {(Units Held + div/ ex-dNAV) *end NAV} - Begin NAV/ Begin NAV*100.
(4) EXPENSES RATIO:
A wise man once said: ''There is no free lunch on Wall Street.'' This holds true for investing in a
mutual fund too. Like a doctor who charges you for his service, mutual funds too charge a fee for
managing your money. This involves the fund management fee, agent commissions, registrar
fees, and selling and promoting expenses. All this falls under a single basket called expense ratio
or annual recurring expenses that is disclosed every March and September and is expressed as a
percentage of the fund's average weekly net assets.
38
Expense ratio states how much you pay a fund in percentage term every year to manage your
money. For example, if you invest Rs. 10,000 in a fund with an expense ratio of 1.5 per cent,
then you are paying the fund Rs. 150 to manage your money. In other words, if a fund earns 10
per cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor.
Expenses ratio is an indicator of the funds efficiency & cost-effectiveness. It must be evaluated
in the light of the fund size, avg. account size & portfolio composition- equity or fixed income.
E.g. funds with small corpus size will have a higher expenses ratio affecting rather than large
corpus fund.
If a funds income levels or return are small then expenses ratio becomes important & difference
of even 0.5% between two funds can affect investors return.
A lower expense ratio does not necessarily mean that it is a better-managed fund. A good fund is
one that delivers good return with minimal expenses.
(5) PORTFOLIO TURNOVER RATIO:
It measures the amount of buying & selling of securities done by a fund. It defined as the lesser
of assets purchased or sold divided by the funds net assets.
This ratio measures how many times the fund manager turn over his portfolio by buying or
selling of securities in the market. A 100% turnover implies that the manager replaced his entire
portfolio by buying or selling of securities in the market.
This % turnover is a good indicator of the extent to which the fund is active in terms of its
dealing on the market. However, high turnover ratio also indicates high transaction costs charged
to the fund.
This ratio would be most relevant to analyze in case of equity & balance funds, particularly those
that derive a large part of their income from active trading.
In comparison a passively managed fund, such as an index fund, will have a lower turnover rate
compared to an active fund as it has to just mirror the index. The only trading here will be due to
investments, redemptions and changes in the index. Also, it is not meaningful to use turnover
ratio for new schemes, which are not fully invested. As the scheme is deploying its assets there
will be more transactions, at least buy orders, as compared to a fund` which is fully invested.
Turnover ratio is less relevant for incomefunds as brokerage costs are much lower, and hence
they will have a lower potential to eat into returns. So, even though gilt funds may have equally
high turnover as compared to equity funds, the impact of this turnover is much less.
Is a high turnover bad? Well, that depends on what it achieves. If high turnover can generate
high returns, then there should be no problems. The problem arises when a fund is trading
heavily and not generating commensurate returns.
39
(6) TRANSACTION COSTS:
It include all expenses related to trading such as the brokerage, commissions paid, stamp duty on
transfers, registrars fees & custodian fees. Transaction costs, therefore have a significant bearing
on fund performance & its total return. Funds with small size or small return have to be judged
more on their expenses ratio & transaction cost.
(7) FUND SIZE:
Fund size also affects performance. Small funds are easier to maneuver & can achieve their
objectives in a focused manner with limited holding.
Large funds benefit from economies of scale with lower expenses & superior fund management
skills. There can be no definition of what is a small fund or big fund, as small & big are relative
term.
(8) CASH HOLDINGS:
Mutual fund allocates their assets among equity shares, debt securities & cash/ bank deposits.
The % of a funds portfolio held in cash equivalents can be important element in its successful
performance.
A large cash holding allows the fund to strengthen its position in preferred securities without
liquidating its other portfolio. Cash also allow the fund a cushion against decline in the market
prices of shares or bonds.
But the fund also guard against large, consistent net redemption because these not only indicate
dissatisfaction on the part of investors, but also force the fund to maintain large cash resources
lowering the return on the portfolio.
(9) BORROWING BY MUTUAL FUNDS:
In India, mutual funds are not allowed to borrow to increase their corpus. SEBI Regulations
allow mutual funds to borrow only for the purpose of meeting temporary liquidity needs for a
period not exceeding 6 months & to the extent of 20% of its net assets. Hence, it would be
uncommon to see fund schemes with borrowings on their balance sheets & if borrowings are
seen, caution may need to be exercised in evaluating the fund performance.
40
EVALUATING FUND PERFORMANCE:

There are 2 types of benchmark that can be used to evaluate a funds performance. These are:
Relative To Market As A Whole

Relative To Other Mutual Funds
Benchmarking Relative To The Market:
(a) EQUITY FUNDS:
If investors were to choose an Equity Index Fund; he can expect to get the same return on the
equity index used by the fund as its benchmark, called the Base Index. This is the passive
investment style. The fund would invest in the index stocks & expects its NAV changes to
mirror the change in the index itself. The fund & therefore the investor would not expect to beat
the benchmark, but merely earn the same return as the index. In case of Index Funds, the
benchmark is clear & pre-specified by the fund manager in the advance.
Active Equity Funds: If an investor holds such an actively managed equity fund, the fund
manager would not specify in advance the benchmark to evaluate his expected performance as in
case of an Index Fund. The appropriate index to be used to evaluate a broad based equity fund is
decided on the basis of the size & the composition of the funds portfolio. If the fund in question
has a large portfolio, a broader market index like BSE100 or200 or NSE100 may have to be used
as the benchmark rather than S&P CNX NIFTY. An actively managed fund expects to be able to
beat index. In India, benchmarking for the retail investors is done using a menu of indices in
combination. Agencies such as Credence prefer the BSE200 because of its broad-based nature.
For sector funds, the S&P CNX Sectoral Indices have been preferred.
(b) DEBT FUNDS-
In practice, no appropriate debt index is available in India to be used for benchmark debt funds.
ISECs I-BEX index is often used by some analysts. In any case, any benchmark for debt-fund
must have the same portfolio composition & the same maturity profile as the fund itself, to be
comparable.
(c) MONEY MARKET FUNDS-
Performance of money market funds is usually benchmarked against the government securities
of approved maturities. In India, JP Morgan has developed a T (Treasury) Bill Index.
41
(2) Benchmarking Relative To Other Similar Mutual Funds :
It is extremely important to ensure that comparisons are meaningful. Only funds with similar
characteristics can be compared. The following are some of the important criteria for comparison
of fund performance:
The investment objectives & risk profiles of two funds being compared must be same.
Portfolio composition of two funds should be similar.
In case of Debt funds the credit quality & maturity profile should be similar.
Size of two funds should be similar because one big & one small may not give
comparable performance.
Expenses ratio could also be an important factor in comparing two funds performance,
which will be impacted with high & low expenses rate.
(3) Evaluating the Fund Manager/AMC:
The investor must evaluate the fund managers track record, how his schemes have performed
over the years.
It is important to note that investment decision based on good past performance is not guarantee
for future performance. It is better to trust a fund with a good track record & backed by good
management instead of investing in a new fund in the same category.
In the final analysis, AMC & their managers out to be judged on consistency in the returns
obtained & performance record against competing managers running similar fund.
Fund management is a fairly creative and personality-oriented activity. This may not be true of
some types of funds like shorter-term fixed-income funds and, of course, index funds, but
equity investment is more of an art than a science. When you are buying a fund because you like
its track record, what you are actually buying is a fund manager's (or sometimes a fund
management team's) track record. What you need to make sure is that the fund manager who was
responsible for the part of the fund's track record that you are buying into is still there. A high-
performance equity fund with a new manager is a like a new fund.
42
VITAL STATS: ALPHA AND BETA

Alpha is part of what is called modern portfolio theory, a set of techniques that analyse investing
in a somewhat academic manner. Alpha is used along with beta and R-squared.
Beta is a measure of the sensitivity of a fund to its index. It shows the relation between the funds
returns and that of its index. A beta of 1.2 means that the fund tends to rise and drop 20 per cent
more than the index does.
Beta cannot be used in isolation. Another indicator called R-squared has to be used to validate
beta. Thus a 1.2 beta fund is more volatile than a fund with a beta of one. Beta is therefore a
measure of volatility. You are taking a higher risk in investing in such a fund.
Why would you, the well-informed and goal-oriented investor, take such a risk? Surely, to be
able to earn higher returns. How would you know if the returns from a high-beta fund are enough
to justify the higher risk that it entails? That's where alpha comes in.
Alpha tells you whether that fund has produced returns justifying the risks it is taking by
comparing its actual return to the one 'predicted' by the beta. Say, a fund can be expected to
earnbased on its betaa return of 15 per cent in a given year. However, it actually fetches you
18 per cent. Then the alpha of the fund is simply 18 - 15 = 3, that is, 3.
Alpha can be seen as a measure of a fund manager's performance. This is what the fund has
earned over and above (or under) what it was expected to earn. Thus, this is the value added (or
subtracted) by the fund manager's investment decisions. This can be clearly seen from the fact
that Index funds always haveor should have, if they track their index perfectlyan alpha of
zero.
Thus, a passive fund has an alpha of zero and an active fund's alpha is a measure of what the
fund manager's activity has contributed to the fund's returns. On the whole a positive alpha
implies that a fund has performed better than expected, given its level of risk. So higher the alpha
better are returns.
One crucial issue that impacts all three is how closely the chosen benchmark actually correlates
with the fund you are examining. The lower the R-squaredmeaning the less the correlation
between the fund and its indexthe less meaningful are the beta and alpha.
43
Mutual Fund Risk:

Risk
Every type of investment, including mutual funds, involves risk. Risk refers to
the possibility that you will lose money (both principal and any earnings) or
fail to make money on an investment. A fund's investment objective and its
holdings are influential factors in determining how risky a fund is. Reading
the prospectus will help you to understand the risk associated with that
particular fund.
Generally speaking, risk and potential return are related. This is the risk/return
trade-off. Higher risks are usually taken with the expectation of higher
returns at the cost of increased volatility. While a fund with higher risk has
the potential for higher return, it also has the greater potential for losses or
negative returns. The school of thought when investing in mutual funds
suggests that the longer your investment time horizon is the less affected you
should be by short-term volatility. Therefore, the shorter your investment
time horizon, the more concerned you should be with short-term volatility
and higher risk.
Following is a glossary of some risks to consider when investing in mutual

funds.
Call Risk: - The possibility that falling interest rates will cause a bond issuer
to redeemor callits high-yielding bond before the bond's maturity date.
Country Risk: - The possibility that political events (a war, national
elections), financial problems (rising inflation, government default), or
44
natural disasters (an earthquake, a poor harvest) will weaken a country's

economy and cause investments in that country to decline.
Credit Risk: - The possibility that a bond issuer will fail to repay interest
and principal in a timely manner. Also called default risk.
Currency Risk: - The possibility that returns could be reduced for
Americans investing in foreign securities because of a rise in the value of the
U.S. dollar against foreign currencies. Also called exchange-rate risk.
Income Risk: - The possibility that a fixed-income fund's dividends will
decline as a result of falling overall interest rates.
Industry Risk: - The possibility that a group of stocks in a single industry
will decline in price due to developments in that industry.
Inflation Risk: - The possibility that increases in the cost of living will
reduce or eliminate a fund's real inflation-adjusted returns.
Interest Rate Risk: - The possibility that a bond fund will decline in value
because of an increase in interest rates.
Manager Risk: - The possibility that an actively managed mutual fund's
investment adviser will fail to execute the fund's investment strategy
effectively resulting in the failure of stated objectives.
Market Risk: - The possibility that stock fund or bond fund prices overall
will decline over short or even extended periods. Stock and bond markets
tend to move in cycles, with periods when prices rise and other periods when
prices fall.
Principal Risk: - The possibility that an investment will go down in value,
or "lose money," from the original or invested amount.
45
How do mutual funds earn money?
A mutual fund is a means of investing that enables individuals to share the

risks of investing with other investors. All contributors to the fund
experience an equal share of gains and losses for each dollar invested. A
mutual fund owns the securities of several corporations. A mutual fund
pools money from hundreds and thousands of investors to construct a
portfolio of stocks, bonds, real estate, or other securities, according to the
kind of investments the mutual fund trades. Investors purchase shares in the
mutual fund as if it was an individual security. Fund managers hired by the
mutual fund company are paid to invest the money that the investors have
placed in the fund. Heeding the adage "Don't put all your eggs in one
basket", the holders of mutual fund shares are able to gain the advantage of
diversification which might be beyond their financial means individually.
46
The Indian Mutual Fund Industry The Current State
The Indian mutual fund industry has evolved from

asingleplayermonopolyin1964toafastgrowing,competitivemarketonthebackof
astrongregulatory framework.
AUM Growth:
TheAssetsunderManagement(AUM)havegrownatarapidpaceoverthepa
stfewyears,ataCAGRof35percentforthefive-
yearperiodfrom31March2005to31March2009.Overthe10-
yearperiodfrom1999to2009encompassingvariedeconomiccycles,theindustryg
rewat22percentCAGR2.ThisgrowthwasdespitetwofallsintheAUM-
thefirstbeingaftertheyear2001duetothedotcombubbleburst,andthesecondin20
08consequenttotheglobaleconomiccrisis(thefirstfallinAUMinMarch2003arisi
ngfromtheUTIsplit).
47
AUM Base and Growth Relative To the GlobalIndustry

Indiahasbeenamongstthefastestgrowingmarketsformutualfundssince20
04;inthefive-
yearperiodfrom2004to2008(asofDecember)theIndianmutualfundindustrygre
wat29percentCAGRasagainsttheglobalaverageof4percent3.Overthisperiod,th
emutualfundindustryinmaturemarketsliketheUSandFrancegrewat4percent,wh
ilesomeoftheemergingmarketsviz.ChinaandBrazilexceededthegrowthwitness
edintheIndianmarket.
However,despiteclockinggrowthratesthatareamongstthehighestinthew
orld,theIndianmutualfundindustrycontinuestobeaverysmallmarket;comprisin
g0.32percentshareoftheglobalAUMofUSD18.97trillion as of December2008.
AUM to GDP Ratio
48
The ratio of AUM to Indias GDP, gradually increasedfrom 6 percent

in 2005 to 11 percent in 2009. Despitethis however, this continues to be
significantly lowerthan the ratio in developed countries, where the
AUMaccounts for 20-70 percent of the GDP.
49
Future of Mutual Funds in India

Growth Drivers
Althoughseveralmacroeconomicanddemographicfactorsaffectthegrowthofthe
industry,thekeyunderlyingdriverforallthecategoriesoffundsisthekeyeconomic
indicatortheGDPgrowthrate.
Thegrowthdriversforcustomersegmentshavebeenlistedinthetablebelowalong
withtheexpectedimpactofeachontheAUM.
FUTURE OUTLOOK
Intheeventofaquickeconomicrevivalandpositivereinforcementofgrowth
driversidentified,KPMGinIndiaisoftheviewthattheIndianmutualfundindustry
maygrowattherateof22-
25percentintheperiodfrom2010to2015,resultinginAUMofINR16,000to18,00
0billionin2015.
50
Key growth drivers for this scenario include:

Increasedretailinvestorparticipationwithapreferenceformutualfundsoverothe
rassetclassesperceivedtobemorerisky.Thiscouldresultinthefulfillmentofgrowi
ngfinancialaspirations,enabledbyrisingdisposableincomesandincreasedfinanc
ialsavings
InnovationsindistributiondrivenbyincreaseinthenumberofcertifiedIFAsandba
nkssellingmutualfundsfocusingonTier2andTier3towns
Increaseininstitutionalparticipationtriggeredbyrisingcorporaterevenueswithin
creasedeconomicactivity.
Intheeventofarelativelyslowereconomicrevivalresultingintheidentifiedgrowth
driversnotreachingtheirfullpotential,KPMGinIndiaisoftheviewthattheIndian
mutualfundindustrymaygrowintherangeof15-
51
18percentintheperiodfrom2010to2015,resultinginAUMofINR15,000to17,00
0billionin2015.
Keyfactorsdrivingthegrowthin spiteoftheslowrevivaloftheeconomyinclude:
Incrementalincreaseinretailinvestorparticipationowingtolimitedfocusbeyond
Tier2townsandlimitedeffortstodrawriskaversecustomersoftraditionalproducts
underthefoldofmutualfunds
Tighteningofliquidityleadingtobetteryieldsoninstrumentsliquidfundsinvestin,
therebydrivinginvestmentsfromtheinstitutionalinvestors.
52
Product innovation is expected to be limited:
Highmarginproductssuchasequityandselectdebtproductslikelytocontinuetoc
ontributeasignificantshareofindustryAUM
FlexibilityinproductpricingbyAMCsexpectedtobepermittedbasedonthetypeof
servicesoffered
EmergingproductcategoriessuchasETFs,Multimanagerfunds,REMFs,outcom
e-orientedfundssuchasprincipal-protected,taxmanagedandinflation-
indexedfunds,expectedtohavemarginalshareofAUMinspiteofrapidgrowth.
PossibilityofintroducingmandatoryratingformutualfundproductsthroughRatin
gagencieslikelytoincreaseinvestorconfidence
Effortsexpectedtobeundertakenfordevelopingawellstructuredandwellmanage
dregulated,debtmarketwhichshouldincreaseindepth.
Massive expansion is expected in the mutual fund distributionnetwork:
Thepublicsectornetworkofnationalizedbanksandpostofficesarelikelytoincrea
setheirfocusonthedistributionofmutualfunds
Entryofpublicsectorbanksasmutualfundmanufacturersareexpectedtoincreaset
heirfocusonmutualfunddistribution
53
IFAsareexpectedtoemergeasadominantchannelfocusedonincreasingpenetrati
on,andwillthereforehavetofocusoninitiativestodevelopandsupportthischannel
(forexample,recruitmentandtrainingsupport)
IFAchannelsareexpectedtowitnessgrowthatafasterpacethanbanks
PrivatebanksprovidingfinancialadvicetoHNIsexpectedtomarginallyincreaseth
eirmarketshare
Distributorslikelytoexplorethepossibilityofinnovationssuchasacommononline
platformandtheusageofdebitandcreditcardsfortransactions
AMCsareexpectedtoinvestinchannelinnovationsuchasMobileandInternetservi
ces.Mobiletelephonyenablingmobiletransactionsforthepurchaseandsaleofmut
ualfundsandSMS-basedservicesisexpectedtorevolutionizetheindustry.
The regulatory and compliance framework for mutual funds is likely

toget aligned with the frameworks across the financial services
spectrum:
RegulatorsacrossFinancialservicesspectrumviz.mutualfundsandcapitalmark
ets,pension,insuranceandbankingexpectedtoworktowardsharmonizationofpol
icies,withsupportfromindustrybodiesliketheCIIandtherespectiveindustryasso
ciations
Thrustoftheregulatoryandcomplianceframeworkexpectedtobeonenhancingres
ilienceandsustainability,investorprotectionandgoodgovernancegoingforward.
54
Reasons for slow growth of Mutual Finds in India

1. Low Levels of Customer Awareness
Low customer awareness levels and financial literacy pose the biggest
challenge to channelizing household savings into mutual funds. IIMS
Dataworks data released in 2007 establishes that a low awareness level among
retail investors has a direct bearing on the low mutual fund off-take in the retail
segment.
The general lack of understanding of mutual fund products amongst Indian

investors is pervasive in metros and Tier 2 cities alike and majority of them
draw little distinction in their approach to investing in mutual funds and direct
stock market investments. A large majority of retail investors lack an
understanding of risk-return, asset allocation and portfolio diversification
concepts.
Low awareness of SIPs in India has resulted in a majority of thecustomers

investing in a lump sum manner.
55
2. Limited Focus on Increasing Retail Penetration

The Indian mutual fund industry had limited focus on building retail AUM and
has only recently stepped up efforts to augment branch presence in Tier 2 and
Tier 3 towns. Players have historically garnered AUM by targeting the
institutional segment that comprises 63 percent AUM share as at March 2008.
Large ticket size, tax arbitrage available to corporates on investing in money

market mutual funds, easy accessibility to institutional customers concentrated
in Tier 1 cities are the factors instrumental in mutual fund houses focusing on
the institutional segment. Building retail AUM requires significant distribution
capability and a wide footprint to be able to penetrate into Tier 2 and Tier 3
towns, which AMCs have recently started focusing on. Institutional AUM,
however, makes the industry vulnerable to the possibility of sudden redemption
pressures that impact the fund performance.
3. Limited Focus beyond the Top 20 Cities

The mutual fund industry has continues to have limited penetration beyond the
top 20 cities. Cities beyond Top 20 only comprise approximately 10 percent of
the industry AUM as per industry practitioners. The retail population residing in
Tier 2 and Tier 3 towns, even if aware and willing, are unable to invest in
mutual funds owing to limited access to suitable distribution channels and
investor servicing. The distribution network of most mutual fund houses is
largely focused on the Top 20 cities given the high cost associated with deeper
penetration into Tier 2 and Tier 3 towns. However, some of the mutual fund
houses have begun focusing on cities beyond the Top 20 by building their
56
branch presence and strengthening distribution reach through non-branch

channels.
4. Limited Innovation in Product Offerings

The Indian mutual fund industry has largely been product-led and not
sufficiently customer focused. The popularity of NFOs triggered a proliferation
of schemes with a large number of non-differentiated products. The industry
has had a limited focus on innovation and new product development, thereby
catering to the limited needs of the customer. Products that cater specifically to
customer life stage needssuch as education, marriage, and housing are yet to
find their way in the Indian market.
Despite the regulations for Real Estate Mutual Funds (REMF) being introduced
in 2008, the market is still awaiting the first REMF launch. Further, relatively
nascent product categories viz. multi-manager fundsthat are among the most
popular hybrid funds globally have not grown in India owing to the prevailing
taxation structure.
The Indian mutual fund industry offers limited investment options viz. capital
guarantee products for the Indian investors, a large majority of whom are risk
averse. The Indian market is still to witness the launch of green funds, socially
responsible investments, fund of hedge funds, enhanced money market funds,
renewable and energy/ climate change funds.
5. Limited Flexibility in Fees and Pricing Structures

The fee structure in the Indian mutual fund industry enjoys little flexibility
unlike developed markets where the level of management fees depend on a
57
variety of factors such as the investment objective of the fund, fund assets, fund
performance, the nature and number of services that a fund offers. While the
expenses have continuously risen, the management fee levels have remained
stagnant.
Distributors are compensated for their services through a fixed charge in the
form of entry load and additional fees as considered appropriate by the AMC.
Regardless of the quality of advice and service provided, the commission
payable by the mutual fund customer to the distributors is fixed.
6. Limited Customer Engagement

Mutual fund distributors have been facing questions on their competence,
degree of engagement with customer and the value provided to the customer. In
the absence of a framework to regulate distributors, both the distributors and the
mutual fund houses have exhibited limited interest in continuously engaging
with customers post closure of sale as the commissions and incentives had been
largely in the form of upfront fees from product sales (although trail
commissions have also been paid in limited instances regardless of the service
rendered). As a result of the limited engagement, there have been rising
instances of mis-selling to customers.
7. Limited Focus of the Public Sector Network on Distribution of Mutual

Funds
Public sector banks with a large captive customer base, significant reach
beyond the Top 20 cities in semi-urban and rural areas, and the potential to
build the retail investor base, have so far played a very limited role in mutual
funds distribution.
58
The India Post network operating the largest postal network in the world
majority of which is in rural areas, is stated to have 250 post offices selling
mutual funds of five AMCs only; further most of the post offices selling mutual
funds are located in Tier 1 and Tier 2 cities which are already been catered to,
by national level and other distributors24. India Post with its customer base of
170 million account holders and branch network of over 154,000 branches,
doubling the size of all bank branches put together is a formidable channel
which has been under utilized to date for mutual fund distribution25. The postal
network also serves as a means to facilitate inclusive and equitable growth to all
regions and social groups by providing them with access to financial products
such as mutual funds.
Further the credibility enjoyed by the Nationalized Banks, Regional Rural

Banks and Cooperative Banks in the rural hinterland has not been fully
leveraged to target the retail segment.
8. Multiple Regulatory Frameworks Governing Financial Services Sector

Verticals
The regulatory and compliance requirements vary across verticals within the
financial services sector specifically mutual funds, insurance and pension funds
each of which are governed by an independent regulatory framework and are
competing for the same share of the customers wallet. The mutual fund
industry lacks a level playing field in comparison with other verticals within the
financial services sector.
59
The mandatory PAN card requirement for investing in mutual funds is

perceived to restrict significant potential of the mutual fund industry in being
able to tap small ticket investors from investing in mutual funds. On the other
hand, ULIPs which are deemed to be competing products do not have the
mandatory PAN requirement.
While the payment for investment into mutual funds can be made only through
banking facilities, the purchase of ULIPs can be undertaken through cash.
The recently introduced NPS regulations requiring the AMCs to create a

separate legal entity for pension funds management have created an additional
cost structure for the mutual fund players.
Outsourcing funds management in excess of INR 80 billion by insurance

companies is not permitted and thus restricts an additional revenue opportunity
for the mutual fund industry.
In summary, the challenges and issues faced by the Indian mutual fund industry
will need to be addressed at the earliest to ensure long term sustained, profitable
growth of the industry.
60
CONCLUSION
Mutual funds have become a preferred investment vehicle in todays times.
This is because they present an opportunity to the ordinary investor to invest
indirectly in the stock, bond and money markets. Investors on their own
have little or inclination to research individual stocks or sectors. Professional
fund managers employed by mutual funds do this job. Also a single person
cant diversify his portfolio and invest in multiple high-priced stocks for the
sole reason that he may not have the sufficient resources. Here again,
investing through MF route enables an investor to invest in many good
stocks and reap benefits even through a small investment. It is said that
almost everyone in America owns a mutual fund scheme. This proves the
popularity of mutual funds. Since mutual funds are capital market players
they come under the regulatory jurisdiction of SEBI. SEBI has laid down
certain guidelines for mutual funds that they are expected to follow. Thus,
the set up of a legal structure, which has enough teeth safeguard investors
interest, ensures that the investors are not cheated out of their hard-earned
money. As we have learned before, the investment goals vary from person
61
to person. While somebody wants security, others might give more weight
age to returns alone. Somebody else might want to plan for his childs
education while somebody might be saving for the proverbial rainy day or
even life after retirement. Indian MF industry offers a plethora of schemes
and d serves broadly all types of investors. Thus one can say that the appeal
of mutual funds cuts across investor classes. In other developed countries,
Mutual funds attract much more investments as compared to the banking
sector but in India the case is reverse. We lack awareness about the benefits
that are offered by these schemes. It is time that investors irrespective of the
risk capacities, make intelligent decisions to generate better returns and
mutual funds is definitely one of the ways to go about it.
62
BIBLIOGRAPHY
1) Indian Mutual Fund Industry

TheFutureinaDynamicEnvironmentOutlookfor2015
2) AMFI-Mutual Fund (Basic) Module by NCFM
3) AMFI-Mutual Fund (Dealers) Module by NCFM
4) NISM module
WEB SITES:
1) www.reliancemutual.com
2) www.assetmanagement.abnamro.co.in
3) www.principalindia.com
63

Mutual Fund Industry in India by Mahesh Shinde

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MUTUAL FUND INDUSTRY IN INDIA

HISTORY OF MUTUAL FUNDS:

Second Phase 1987-1993:- (Entry of Public Sector Funds) 1987 marked

Fourth Phase 20032006 :- In February 2003, following the repeal of the

Open- Close- Interval Total %

ORGANISATION OF MUTUAL FUND:

Mutual Fund Custodian:

A trust company, bank or similar financial institution responsible for holding

The Mutual Fund is constituted as a trust in accordance with the provisions

Trustee is usually a company (corporate body) or a Board of Trustees (body of

Asset Management Company (AMC):

Registrar and Transfer Agent :

(2) RBI : MONEY MARKET REGULATOR

(A) AS SUPERVISOR OF BANK-OWNED MUTUAL FUND: Operation of bank-owned

(3) MINISTRY OF FINANCE :The ministry of finance, which is charged with

(5) STOCK EXCHANGE :Stock Exchange is self-regulatory organization supervised by

WHO CAN INVEST IN MUTUAL FUNDS IN INDIA:

(a) Residents Including

(1)Resident Indian Individuals

(b) Non-Residents Including

(c) Foreign Entities,viz

(10) FIIs registered with SEBI

Net Asset Value (NAV): Definition"

Net asset value (NAV):

CALCULATING NET ASSET VALUE (NAV):

NAV = Total Assets Total Liabilities

SECURITIES AND EXCHANGE BOARD OF INDIA

Private Public Sector Mutual Funds Grand Total

TYPES OF MUTUAL FUND SCHEMES

MUTUAL FUND SCHEMES

BY STRUCTURE ON INVESTMENT OBJECTIVE OTHER SCHEMES

I] Schemes according to Maturity Period:

Open-ended Fund/ Scheme

Close-ended Fund/ Scheme

II] Schemes according to Investment Objective:

Growth / Equity Oriented Scheme

Equity funds are of different types. These are following:

(a)AGGRESSIVE GROWTH FUNDS:

(b) GROWTH FUNDS:

(c) SPECIALTY FUNDS:

(iii)SMALL-CAP EQUITY FUNDS:

(iv)OPTION INCOME FUNDS:

(d) DIVERSIFIED EQUITY FUNDS:

ELSS:AN INDIAN VARIANT

(e) EQUITY INDEX FUNDS:

(f) VALUE FUNDS:

(g) EQUITY INCOME FUNDS/DIVIDEND YIELD FUNDS:

Income / Debt Oriented Scheme

(1)DIVERSIFIED DEBT FUNDS:

(2) FOCUSSED DEBT FUNDS:

(3)HIGH YIELD DEBT FUNDS:

Money Market or Liquid Fund

III] OTHER SCHEMES

Sector specific funds/schemes

Tax Saving Schemes

Fund of Funds (FoF) scheme

Load / No-load Fund scheme

LOAD AND TYPES OF LOAD:

Load is a charge collected by a mutual fund on units.

Entry Load: When a charge is collected at the time of entering into a

Exit Load: An Exit load or Back-end load or repurchase load is a charge

Contingent Deferred Sales Load (CDSL): The load amounts charged to

INVESTMENT OPTIONS OF A MUTUAL FUND

No dividend to Unit Holders.