CHAPTER-1

INTRODUCTION

UNDERSTANDING MUTUAL FUND

Introduction:
Mutual fund is a trust that pools money from a group of investors (sharing
common financial goals) and invest the money thus collected into asset classes that match
the stated investment objectives of the scheme. Since the stated investment objectives of
a mutual fund scheme generally form the basis for an investor's decision to contribute
money to the pool, a mutual fund can not deviate from its stated objectives at any point of
time.

Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than what an
investor can manage on his own. The capital appreciation and other incomes earned from
these investments are passed on to the investors (also known as unit holders) in
proportion of the number of units they own.
 When an investor subscribes for the units of a mutual fund, he becomes
part owner of the assets of the fund in the same proportion as his contribution amount put
up with the corpus (the total amount of the fund). Mutual Fund investor is also known as
a mutual fund shareholder or a unit holder. Any change in the value of the investments
made into capital market instruments (such as shares, debentures etc) is reflected in the
Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual
Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the
market value of scheme's assets by the total number of units issued to the investors.

For example:
A. If the market value of the assets of a fund is Rs. 100,000
B. The total number of units issued to the investors is equal to 10,000.
C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
D. Now if an investor 'X' owns 5 units of this scheme
E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held
multiplied by the NAV of the scheme)

Definition:

An open-ended fund operated by an investment company which raises money

from shareholders and invests in a group of assets, in accordance with a stated set of
objectives. mutual funds raise money by selling shares of the fund to the public, much
like any other type of company can sell stock in itself to the public.

Mutual funds then take the money they receive from the sale of their shares
(along with any money made from previous investments) and use it to purchase various
investment vehicles, such as stocks, bonds and money market instruments. In return for
the money they give to the fund when purchasing shares, shareholders receive an equity
position in the fund and, in effect, in each of its underlying securities.

For most mutual funds, shareholders are free to sell their shares at any time,
although the price of a share in a mutual fund will fluctuate daily, depending upon the
performance of the securities held by the fund. Benefits of mutual funds include
diversification and professional money management. Mutual funds offer choice,
liquidity, and convenience, but charge fees and often require a minimum investment. A
closed-end fund is often incorrectly referred to as a mutual fund, but is actually an
investment trust.

There are many types of mutual funds, including aggressive growth fund, asset
allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone
fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund,
growth and income fund, hedge fund, income fund, index fund, international fund,
money market fund, municipal bond fund, prime rate fund, regional fund, sector fund,
specialty fund, stock fund, and tax-free bond fund.

Mutual Fund Industry in India

The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual
fund industry in the year 1963. The primary objective at that time was to attract the small
investors and it was made possible through the collective efforts of the Government of
India and the Reserve Bank of India. The history of mutual fund industry in India can be
better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India - 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the
year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it
continued to operate under the regulatory control of the RBI until the two were de-linked
in 1978 and the entire control was transferred in the hands of Industrial Development
Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme
1964 (US-64), which attracted the largest number of investors in any single investment
scheme over the years.

UTI launched more innovative schemes in 1970s and 80s to suit the needs of
different investors. It launched ULIP in 1971, six more schemes between 1981-84,
Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986,
Mastershare (Inida's first equity diversified scheme) in 1987 and Monthly Income
Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under
management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993

 The Indian mutual fund industry witnessed a number of public sector players
entering the market in the year 1987. In November 1987, SBI Mutual Fund from the
State Bank of India became the first non-UTI mutual fund in India.

SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual
Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and
PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about
80% market share.

Amount Assets Under Mobilisation as % of

1992-93
Mobilised Management gross Domestic Savings
UTI 11,057 38,247 5.2%
Public Sector 1,964 8,757 0.9%
Total 13,021 47,004 6.1%

Phase III. Emergence of Private Sector Funds - 1993-96

The permission given to private sector funds including foreign fund management
companies (most of them entering through joint ventures with Indian promoters) to enter
the mutual fund industry in 1993, provided a wide range of choice to investors and more
competition in the industry. Private funds introduced innovative products, investment
techniques and investor-servicing technology. By 1994-95, about 11 private sector funds
had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from the
SEBI after the year 1996. The mobilization of funds and the number of players operating
in the industry reached new heights as investors started showing more interest in mutual
funds.

Investors' interests were safeguarded by SEBI and the Government offered tax
benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations,
1996 was introduced by SEBI that set uniform standards for all mutual funds in India.
The Union Budget in 1999 exempted all dividend incomes in the hands of investors from
income tax. Various Investor Awareness Programmes were launched during this phase,
both by SEBI and AMFI, with an objective to educate investors and make them informed
about the mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special
legal status as a trust formed by an Act of Parliament. The primary objective behind this
was to bring all mutual fund players on the same level. UTI was re-organised into two
parts:

1. The Specified Undertaking,

2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its
past schemes (like US-64, Assured Return Schemes) are being gradually wound up.
However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a
significant growth in mobilization of funds from investors and assets under management
which is supported by the following data:

GROSS FUND MOBILISATION (RS. CRORES)

PUBLIC PRIVATE
FROM TO UTI TOTAL
SECTOR SECTOR
01-April-98 31-March-99 11,679 1,732 7,966 21,377
01-April-99 31-March-00 13,536 4,039 42,173 59,748
01-April-00 31-March-01 12,413 6,192 74,352 92,957
01-April-01 31-March-02 4,643 13,613 1,46,267 1,64,523
01-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,979
01-Feb.-03 31-March-03 * 7,259* 58,435 65,694
01-April-03 31-March-04 - 68,558 5,21,632 5,90,190
01-April-04 31-March-05 - 1,03,246 7,36,416 8,39,662
 01-April-05 31-March-06 - 1,83,446 9,14,712 10,98,158

ASSETS UNDER MANAGEMENT (RS. CRORES)

AS ON UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL
31-March-99 53,320 8,292 6,860 68,472

Phase V. Growth and Consolidation - 2004 Onwards

The industry has also witnessed several mergers and acquisitions recently,
examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life,
Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund.
Simultaneously, more international mutual fund players have entered India like Fidelity,
Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006.
This is a continuing phase of growth of the industry through consolidation and entry of
new international and private sector players.

Benefits & risk:

Mutual funds have traditionally been the go-to investment choice for people who
would like a better and relatively safer return on their money. For one, mutual funds can
offer diversification, something that cannot be expected in some types of investments.
 However, they do carry some amount of risk. If youre thinking of investing in
mutual funds, here are some risks and benefits to consider:

Benefits of investing in mutual funds

Mutual fund investments are diversified, meaning, the holdings are spread out
across multiple types of businesses and industries. This helps minimize losses should one
or two business or industry sectors fail.

Mutual funds are also relatively affordable, allowing small amounts of

investments to be pooled. In case of an emergency, its easy for investors to cash in their
shares inclusive of charges and fees, of course.

Mutual funds are also managed by professionals (often referred to as money

managers) who are experienced at researching and selecting the best investments to make
the fund grow.

Some risks:

When investing in mutual funds, know that all control is relinquished to the fund
managers. That means only the fund managers will decide on the type of investments that
are included in a portfolio.

There are also costs associated with these funds, such as annual fees and sales
charges. These costs will be charged even if the fund performs badly. Interest payment or
dividends can also rise and fall, depending on how the market behaves.

ADVANTAGES OF MUTUAL FUND

S.
Advantage Particulars
No.
Mutual Funds invest in a well-diversified portfolio of securities
Portfolio
1. which enables investor to hold a diversified investment portfolio
Diversification
(whether the amount of investment is big or small).
Fund manager undergoes through various research works and has
Professional
2. better investment management skills which ensure higher returns
Management
to the investor than what he can manage on his own.
 Investors acquire a diversified portfolio of securities even with a
3. Less Risk small investment in a Mutual Fund. The risk in a diversified
portfolio is lesser than investing in merely 2 or 3 securities.
Low Due to the economies of scale (benefits of larger volumes),
4. Transaction mutual funds pay lesser transaction costs. These benefits are
Costs passed on to the investors.
An investor may not be able to sell some of the shares held by
5. Liquidity him very easily and quickly, whereas units of a mutual fund are
far more liquid.
>Mutual funds provide investors with various schemes with
different investment objectives. Investors have the option of
Choice of
6. investing in a scheme having a correlation between its investment
Schemes
objectives and their own financial goals. These schemes further
have different plans/options
Funds provide investors with updated information pertaining to
7. Transparency the markets and the schemes. All material facts are disclosed to
investors as required by the regulator.
Investors also benefit from the convenience and flexibility offered
by Mutual Funds. Investors can switch their holdings from a debt
8. Flexibility scheme to an equity scheme and vice-versa. Option of systematic
(at regular intervals) investment and withdrawal is also offered to
the investors in most open-end schemes.
Mutual Fund industry is part of a well-regulated investment
environment where the interests of the investors are protected by
9. Safety
the regulator. All funds are registered with SEBI and complete
transparency is forced.

DISADVANTAGES OF MUTUAL FUND

S. Disadvantage Particulars
No.
Costs Control Investor has to pay investment management fees and fund
Not in the distribution costs as a percentage of the value of his investments
1.
Hands of an (as long as he holds the units), irrespective of the performance of
Investor the fund.
The portfolio of securities in which a fund invests is a decision
taken by the fund manager. Investors have no right to interfere in
No Customized
2. the decision making process of a fund manager, which some
Portfolios
investors find as a constraint in achieving their financial
objectives.
Difficulty in Many investors find it difficult to select one option from the
Selecting a plethora of funds/schemes/plans available. For this, they may
3.
Suitable Fund have to take advice from financial planners in order to invest in
Scheme the right fund to achieve their objectives.

Development of mutual funds in India:

Potential of Indian Mutual Funds Industry

The Indian mutual funds industry has been experiencing a rapid growth due to
infrastructural development, personal financial assets getting augmented and increased
foreign participation. The risk appetite of the middle class investors has been increasing,
income has been going up, investors being made aware of the potential of the mutual
fund industry all these have been making India a preferred Mutual Fund investment
destination when compared to other investment vehicles like Fixed Deposits (FDs) and
postal savings. The diversified portfolio is another reason for the investors to get allured
by the Mutual Fund Investment India.
Growth of Indian MF Industry:

1. The Indian mutual funds retail market, which at present is growing at a CAGR of
around 30%, is estimated to reach US$ 300 Billion by 2015

2. Income and growth MF schemes made up for the bulk Assets under Management
(AUM) in India..

3. Private sector Asset Management Companies (AMCs) account for majority of mutual
fund sales in India (around 84% on March 31, 2008).
 The growth path of Mutual Fund Investment India is attributed to the high saving
pattern in India. This is a healthy status of the MF industry in India when compared to
Japan, France and China. The Mutual fund sector in India though has huge potential, yet
the limited participation of the rural sector will always act as a deterrent factor.

The other hurdles in this regard are lack of awareness, inferior distribution
channel and limited banking services in the rural regions. The best instrument of
investing money nowadays is the mutual fund. Investing in a stock market has become
risky these days due to the high volatility in the market.

Regulatory framework:

SEBI, the regulatory authority for the Indian Mutual fund industry has
consistently introduced several regulatory measures and amendments in order to protect
the interests of small investors. The Securities Exchange Board of India (Mutual Funds)
Regulations, 1996, is the principal regulation for the Mutual fund industry in India. This
was amended several times with the latest amendment being issued in 2006.

The key provisions of the SEBI Regulations, 1996 include:

All the schemes to be launched by the AMC needs to be approved by the Board of
Trustees and copies of offer documents of such schemes are to be filed with SEBI.
The offer documents shall contain adequate disclosures to enable the investors to
make informed decisions.
The listing of close-ended schemes is mandatory and they should be listed on a
recognized stock exchange within six months from the closure of subscription.
However, the listing is not mandatory in case (i) the scheme provides for monthly
income or caters to senior citizens, women, and children and physically
handicapped; (ii) if the scheme discloses details of repurchase in the offer
document; or (iii) if the scheme opens for repurchase within six months of closure
of subscription.
Units of a close-ended scheme can be opened for sale or redemption at a
predetermined fixed interval if the minimum and maximum amount of sale,
redemption and periodicity is disclosed in the offer document.
Units of a close-ended scheme can be converted into an open-ended scheme with
the consent of a majority of the unit-holders and disclosure is made in the offer
document about the option and period of conversion.
Units of close-ended scheme may be rolled over by passing a resolution by a
majority of the shareholders.
No scheme other than unit-linked scheme can be opened for subscription for more
than 45 days. Further, the minimum subscription and the extent of over-
subscription that is intended to be retained should be specified in the offer
document. In the case of over-subscription, all applicants applying up to 5,000
units must be given full allotment subject to over subscription.
 The AMC is required to refund the application money if minimum subscription is
not received, and also the excess over subscription within six weeks of closure of
subscription.
A close-ended scheme shall be wound up on redemption date, unless it is rolled
over, or if 75% of the unit-holders of a scheme pass a resolution for winding up of
the scheme; if the trustees on the happening of any event require the scheme to be
wound up; or if SEBI, so directs in the interest of investors.

Some of the provisions in the SEBI Regulations, 1996 were amended in the
guidelines issued in 2001-02. Highlights of SEBI Guidelines (2001-02) relating to
mutual funds are as follows:

Initial offer period to be reduced to a maximum of 30 days from 45 days.

To invest in mortgage backed securities of investment grade given by credit rating
agency.
To identify and make provision for the non-performing assets (NPAs) according
to criteria for classification of NPAs and treatment of income accrued on NPAs.
All the schemes shall be launched within six months from the date of letter
containing observations from SEBI on the scheme offer document.
To disclose large unit-holdings in the scheme, which are over 25% of the NAV.

In addition, the SEBI took various measures and issued guidelines to facilitate
operations of mutual funds. As part of these measures, mutual funds were allowed to
invest in foreign debt securities in the countries with full convertible currencies and with
highest foreign currency credit rating by accredited credit rating agencies. They were also
allowed to invest in government securities where the countries are AAA rated.

Moreover, guidelines were issued for valuation of unlisted equity shares in order to
bring about uniformity in the calculation of NAVs of mutual fund schemes. In order to
allow mutual funds to invest in both gold and gold related instruments, the SEBI
amended its regulation in 2006.

The amended regulation, Securities and Exchange Board of India (Mutual Funds)
(Amendment) Regulation, 2006 permits introduction of Gold Exchange Traded Fund
(GETF) Schemes by mutual fund. The new mutual fund scheme can invest primarily in
gold and gold related instruments, subject to certain investment restrictions.

Current scenario of mutual fund industry in India:

The Indian Mutual fund industry has witnessed considerable growth since its
inception in 1963. The assets under management (AUM) have surged to Rs 4,173 bn in
Mar-09 from just Rs 250 mn in Mar-65. In a span of 10 years (from 1999 to 2009), the
industry has registered a CAGR of 22.3%, albeit encompassing some shortfalls in AUM
due to business cycles.
 The impressive growth in the Indian Mutual fund industry in recent years can
largely be attributed to various factors such as rising household savings, comprehensive
regulatory framework, favourable tax policies, introduction of several new products,
investor education campaign and role of distributors.

In the last few years, households income levels have grown significantly, leading
to commensurate increase in households savings. Household financial savings (at current
prices) registered growth rate of around 17.4% on an average during the period FY04-
FY08 as against 11.8% on an average during the period FY99-FY03. The considerable
rise in households financial savings, point towards the huge market potential of the
Mutual fund industry in India.

Besides, SEBI has introduced various regulatory measures in order to protect the
interest of small investors that augurs well for the long term growth of the industry. The
tax benefits allowed on mutual fund schemes (for example investment made in Equity
Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the
Income Tax Act) also have helped mutual funds to evolve as the preferred form of
investment among the salaried income earners.

Besides, the Indian Mutual fund industry that started with traditional products like
equity fund, debt fund and balanced fund has significantly expanded its product portfolio.
Today, the industry has introduced an array of products such as liquid/money market
funds, sector-specific funds, index funds, gilt funds, capital protection oriented schemes,
special category funds, insurance linked funds, exchange traded funds, etc.

It also has introduced Gold ETF fund in 2007 with an aim to allow mutual funds
to invest in gold or gold related instruments. Further, the industry has launched special
schemes to invest in foreign securities. The wide variety of schemes offered by the Indian
Mutual fund industry provides multiple options of investment to common man.
 With a strong growth in the AUM of domestic Mutual fund industry, the ratio of
AUM to GDP increased gradually from 4.7% in 2001 to 8.5% in 2009. The share of
mutual funds in households financial savings also witnessed a substantial increase to
7.7% in 2008 as against 1.3% in 2001.

The investor-wise pattern of asset-holding as well as investors accounts reveals

that individual investors account for almost 96.75% of total investors account and
contribute Rs 1552.8 bn which is 37.0% of the total net assets as on March 31, 2009. The
comparatively lower share of net assets of individual investors in total net assets is
mainly because of lower penetration of mutual fund as an investment instrument among
working population (age group 18-59 years).
 A majority of investors in the age group 18-59 years are not aware of mutual
funds or of investing in mutual funds through Systematic Investment Plan (SIP).
However, take up of mutual fund as an investment opportunity by individual investors,
particularly in Tier 2 and Tier 3 towns, is expected to increase in the near future.

Corporate/institutions sector on the other hand, though account for only 1.2% of
the total number of investors accounts in Mutual funds industry, contribute as much as
56.3% to the total net assets of the industry as on March 31, 2009. Despite a rise in net
FII inflows in the domestic mutual funds, FIIs constitute a very small percentage of
investors accounts (0.0003%) and contribute Rs 49.83 bn to the total net assets (1% of
total net assets of the Indian Mutual fund industry as on March 31, 2009).

The net resource mobilisation of domestic mutual funds which registered strong
growth in FY2000 due to the tax incentives announced in the Union Budget for FY2000,
witnessed a sharp decline in FY01. The decline in resource mobilisation in FY01 was
primarily due to the bearish trend in the domestic stock markets and problems in UTI.
The resource mobilisation continued to remain at low level upto FY05.

In FY05 resource mobilisation by mutual funds declined by almost 95.3% on

account of redemption pressures on income, gilt and equity-linked saving schemes
subsequent to shift of resources in favour of small saving schemes that offered attractive
tax adjusted rates of return. Mutual funds mobilised huge amount of resources under
liquid/money market schemes & growth/equity oriented schemes, while resource
mobilisation under debt schemes experienced sharp fall due to change in interest rate
scenario.

While, the resource mobilisation by mutual funds witnessed strong growth during
FY06-FY07 and in the period Apr-Aug 07 due to buoyant capital market conditions, the
eruption of sub-prime mortgage crisis during Sep-07 and consequent volatility witnessed
in the domestic stock markets led to decline in resource mobilisation. The net resource
mobilisation of mutual funds turned negative as there was a net outflow of Rs 282.97 bn
during FY09 as against a net inflow of Rs 1,538.01 bn during FY08.

The uncertain conditions in stock markets coupled with redemption pressures

from banks and corpoates amidst tight liquidity conditions resulted in significant
outflows during the months of Jun-08 (Rs 392.3 bn), Sep-08 (Rs 456.5 bn) and Oct-08
(458 bn). This led the RBI to announce various liquidity augmentation measures to
provide liquidity support to mutual funds through banks.

With the easing of overall liquidity conditions, net resource mobilisation by

mutual funds again turned positive between the period Dec-08 to Feb-09. Further, with
liquidity conditions remaining comfortable and stock markets registering strong gains,
the net resource mobilisation by mutual funds grew considerably during the first quarter
of FY10.

The data reveals that the increase in revenue and profitability of the Mutual fund
industry has not been commensurate with the AUM growth in past few years. The
increased expenditure on marketing, distribution and administration exerted upward
pressure on the operating expenses, thereby impacting AMCs margins. The operating
expenses as a percentage of AUM rose from 41 basis points in FY04 to 113 basis points
in FY08.

Impact of the Global Financial Crisis

Deepening of the global financial crisis during September 2008, which resulted in
liquidity crunch world-over, had dampening impact of the Indian Mutual fund industry.
With the drying up of credit inflows from banks and external commercial borrowings
route, mutual funds witnessed redemption pressure from corporates.

Although the mutual funds promised immediate redemption, their assets were
relatively illiquid. Besides, mutual funds faced problems such as maturity mismatches
between assets & liabilities of mutual funds, shift from mutual funds to bank deposits in
view of the comparatively higher interest rates being offered by banks and freezing up of
money markets due to lack of buyers for assets like certificates of deposits of private
sector banks.

During Apr-Sep 08, net mobilisation of funds by mutual funds declined sharply
by 97.7% to Rs 24.8 bn due to uncertain conditions prevailing in the domestic stock
markets. The redemption pressures witnessed by mutual funds led to net outflows under
both the income/debt-oriented schemes and growth/equity-oriented schemes. Further, the
AUM of Mutual fund industry contracted by 20.7% from Rs 5,445.4 bn as on August 31,
2008 to Rs 4,319.0 bn as on October 31, 2008. During the same period, liquid and debt
schemes which contribute more than 65% to the total AUM witnessed a decline of 19%
in AUM.

In an endeavour to ease liquidity pressures in the system and restore stability in the
domestic financial markets, the RBI announced a slew of measures. The key measures
announced by the RBI include:

The RBI decided to conduct a special 14 day repo at 9% per annum for a notified
amount of Rs 200 bn from October 14, 2008 with a view to enable banks to meet
the liquidity requirements of mutual funds.
Scheduled Commercial Banks (SCBs) and All India term lending and refinancing
institutions were allowed to lend against and buy back CDs held by mutual funds
for a period of 15 days.
As a temporary measure, banks were allowed to avail of additional liquidity
support exclusively for the purpose of meeting the liquidity requirements of
mutual funds to the extent of up to 0.5% of their net demand and time liabilities
(NDTL). Accordingly on November 1, 2008, it was decided to extend this facility
and allow banks to avail liquidity support under the LAF through relaxation in the
maintenance of SLR to the extent of up to 1.5% of their NDTL. This relaxation in
SLR was provided for the purpose of meeting the funding requirements of NBFCs
and mutual funds.
The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund)
Regulations, 1996 was enhanced from 20% of net asset of the scheme to 40% of
net asset of the scheme to those mutual funds who approached SEBI. This
enhanced borrowing limit was made available for a period of six months and
could be utilised for the purpose of redemptions/ repurchase of units.
 In order to moderate the exit from close ended debt schemes and in the interest of
those investors who choose to remain till maturity and with a view to ensure that
the value of debt securities reflects the current market scenario in calculation of
NAV, the discretion given to mutual funds to mark up/ mark down the benchmark
yields for debt instruments of more than 182 days maturity was enhanced from
150 basis points to 650 basis points.

The significant reduction in CRR & SLR, net injection of Rs 9,279 bn through the
repo window during Oct-08, the repurchase of MSS bonds worth Rs 200 bn along with
the earlier mentioned liquidity augmentation measures helped to ease liquidity pressures
for domestic mutual funds. The data reveals that about 18 mutual funds borrowed from
banks. Further, the increase of borrowing limits enabled the mutual funds to meet
redemption pressures without engaging in a large scale sale of assets which could have
caused systemic instability. As on November 10, 2008, 15 mutual funds had been
extended the enhanced borrowing limit as per their requests made to SEBI.

However, with some recovery in the Indian financial markets as well as improvement
in the liquidity conditions, the RBI in its Q2 FY10 review of monetary policy withdrew
some liquidity boosting measures that were introduced as a part of monetary stimulus in
FY09. The special term repo facility for SCBs, for funding to NBFCs, mutual funds, and
housing finance companies was terminated.

Future of Mutual Funds In India:

The Future of Mutual Funds In India suggests that the industry has got huge
scopes of development in the times to come.

The Future of Mutual Funds In India is quite bright. Mutual Funds are one of the
most popular forms of investments as these funds are diversification, professional
management, and liquidity. In the year 2004, the mutual fund industry in India was worth
Rs 1,50,537 crores. The mutual fund industry is expected to grow at a rate of 13.4% over
the next 10 years.

Mutual funds assets under management (MF AUM) growth:

In March 2000, the MF AUM was Rs. 93717 crores and the percentage growth
was 26 %.
In March 2001, the MF AUM was Rs. 83131 crores and the percentage growth
was 13 %.
In March 2002, the MF AUM was Rs. 94017 crores and the percentage growth
was 12 %.
In March 2003, the MF AUM was Rs. 75306 crores and the percentage growth
was 25 %.
In March 2004, the MF AUM was Rs. 137626 crores and the percentage growth
was 45 %.
 In September 2004, the MF AUM was Rs. 151141 crores and the percentage
growth was 9 % in 6 months time.
In December 2004, the MF AUM was Rs. 149300 crores and the percentage
growth was 1 % in 2 months time.

Future of mutual funds in India-facts on growth:

Important aspects related to the future of mutual funds in India are:

1. The growth rate was 100% in 6 previous years.

2. The saving rate in India is 23%.
3. There is a huge scope in the future expansion of the mutual funds
industry.
4. A number of foreign-based assets management companies are
venturing into Indian markets.
5. The Securities Exchange Board of India has allowed the
introduction of commodity mutual funds.
6. The emphasis is being given on the effective corporate governance
of mutual funds.
7. The Mutual Funds in India has the scope of penetrating into the
rural and semi urban areas.
8. Financial planners are introduced into the market, which would
provide the people with better financial planning.

Registration of mutual funds:

Application for registration

1. An application for registration of a mutual fund shall be made to the Board in

Form A by the sponsor.

Application fee to accompany the application

2. Every application for registration under regulation 1 shall be accompanied by

non-refundable application fee as specified in the Second Schedule.

Application to conform to the requirements

3. An application, which is not complete in all respects shall be liable to be

rejected. Provided that, before rejecting any such application, the applicant shall be given
an opportunity to complete the Board may specify such formalities within such time as.

Furnishing information
 4. The Board may require the sponsor to furnish such further information or
clarification as may be required by it.

Eligibility criteria

5. For the purpose of grant of a certificate of registration, the applicant has to

fulfill the following, namely: -

(a) The sponsor should have a sound track record and general reputation of
fairness and integrity in all his business transactions;

Explanation: For the purposes of this clause "sound track record" shall mean the
sponsor should, -

i. Be carrying on business in financial services for a period of not

less than five years; and

ii. The net worth is positive in all the immediately preceding five
years; and
iii. The net worth in the immediately preceding year is more than the
capital contribution of the sponsor in the asset management company; and
iv. The sponsor has profits after providing for depreciation, interest
and tax in three out of the immediately preceding five years, including the fifth
year.

(a) The applicant is a fit and proper person

(b) In the case of an existing mutual fund, such fund is in the form of a trust and
the Board has approved the trust deed;

(c) The sponsor has contributed or contributes at least 40% to the net worth of the
asset management company; Provided that any person who holds 40% or more of the net
worth of an asset management company shall be deemed to be a sponsor and will be
required to fulfill the eligibility criteria specified in these regulations;

(d) The sponsor or any of its directors or the principal officer to be employed by
the mutual fund should not have been guilty of fraud or has not been convicted of an
offense involving moral turpitude or has not been found guilty of any economic offence.

(e) Appointment of trustees to act as trustees for the mutual fund in accordance
with the provisions of the regulations;

(f) Appointment of asset Management Company to manage the mutual fund and
operate the scheme of such funds in accordance with the provisions of these regulations;
 (g) Appointment of a custodian in order to keep custody of the securities and carry
out the custodian activities as may be authorized by the trustees.

Consideration of application

6. The Board may on receipt of all information decide the application.

Grant of Certificate of Registration

7. The Board may register the mutual fund and grant a certificate in Form B on
the applicant paying the registration fee as specified in Second Schedule.

Terms and conditions of registration

8. The registration granted to a mutual fund under regulation 7, shall be subject to

the following terms and conditions: -

(a) The trustees, the sponsor, the asset management company and the custodian
shall comply with the provisions of these regulations;

(b) The mutual fund shall forthwith inform the Board, if any information or
particulars previously submitted to the Board was misleading or false in any material
respect

(c) The mutual fund shall forthwith inform the Board, of any material change in
the information or particulars previously furnished, which have a bearing on the
registration granted by it;

(d) Payment of fees as specified in the regulations and the Second Schedule.

Rejection of application

9. Where the sponsor does not satisfy the eligibility criteria mentioned in
regulation 5, the Board may reject the application and inform the applicant of the same.

Payment of service fee

10. A mutual fund shall pay before the 15th April each year a service fee as
specified in the Second Schedule for every financial year from the year following the
year of registration.
 Provided that the Board may, on being satisfied with the reasons for the delay
permit the mutual fund to pay the service fee at any time before the expiry of two months
from the commencement of the financial year to which such fee relates.

Failure to pay service fee

11. The Board may not permit a mutual fund that has not paid service fee to
launch any scheme.

Investments in mutual funds:

Mutual Funds over the years have gained immensely in their popularity. Apart
from the many advantages that investing in mutual funds provide like diversification,
professional management, the ease of investment process has proved to be a major
enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse
options, investors needs to choose a mutual fund that meets his risk acceptance and his
risk capacity levels and has similar investment objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs
to evaluate and consider various factors before making an investment decision. Since not
everyone has the time or inclination to invest and do the analysis himself, the job is best
left to a professional. Since Indian economy is no more a closed market, and has started
integrating with the world markets, external factors which are complex in nature affect us
too. Factors such as an increase in short-term US interest rates, the hike in crude prices,
or any major happening in.

Asian market have a deep impact on the Indian stock market. Although it is not
possible for an individual investor to understand Indian companies and investing in such
an environment, the process can become fairly time consuming. Mutual funds (whose
fund managers are paid to understand these issues and whose Asset Management
Company invests in research) provide an option of investing without getting lost in the
complexities.

Most importantly, mutual funds provide risk diversification: diversification of a

portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to
reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily
well qualified to apply the theories of portfolio structuring to our holdings and hence
would be better off leaving that to a professional. Mutual funds represent one such
option.

Lastly, Evaluate past performance, look for stability and although past
performance is no guarantee of future performance, it is a useful way to assess how well
or badly a fund has performed in comparison to its stated objectives and peer group. A
good way to do this would be to identify the five best performing funds (within your
selected investment objectives) over various periods, say 3 months, 6 months, one year,
two years and three years. Shortlist funds that appear in the top 5 in each of these time
horizons as they would have thus demonstrated their ability to be not only good but also,
consistent performers.

An investor can choose the fund on various criteria according to his investment
objective, to name a few:
Thorough analysis of fund performance of schemes over the last few years
managed by the fund house and its consistent return in the volatile market.
The fund house should be professional, with efficient management and
administration.
The corpus the fund is holding in its scheme over the period of time.
Proper adequacies of disclosures have to seen and also make a note of any hidden
charges carried by them.
The price at which you can enter/exit (i.e. entry load / exit load) the scheme and
its impact on overall return.

HOWTOINVEST INMUTUALFUNDS:

Step One: Identify your investment needs.

Your financial goals will vary, based on your age, lifestyle, financial
independence, family commitments, level of income and expenses among many other
factors. Therefore, the first step is to assess your needs. Begin by asking yourself these
questions:

1. What are my investment objectives and needs?

Probable Answers: I need regular income or need to buy a home or finance a
wedding or educate my children or a combination of all these needs.

2.How much risk am I willing to take?

Probable Answers: I can only take a minimum amount of risk or I am willing to

accept the fact that my investment value may fluctuate or that there may be a short-term
loss in order to achieve a long term potential gain.

3.What are my cash flow requirements?

Probable Answers: I need a regular cash flow or I need a lump sum amount to
meet a specific need after a certain period or I dont require a current cash flow but I want
to build my assets for the future.

By going through such an exercise, you will know what you want out of your
investment and can set the foundation for a sound Mutual Fund Investment strategy.

Step Two - Choose the right Mutual Fund.

 Once you have a clear strategy in mind, you now have to choose which Mutual
Fund and scheme you want to invest in. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of other schemes
managed by the same Fund
Manager. Some factors to evaluate before choosing a particular Mutual Fund are:

The track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same.
How well the Mutual Fund is organized to provide efficient, prompt and
personalized service.
Degree of transparency as reflected in frequency and quality of their
communications.

Step three: - Select the ideal mix of Schemes.

Investing in just one Mutual Fund scheme may not meet all your investment
needs. You may consider investing in a combination of schemes to achieve your specific
goals.

Step Four:-Invest regularly

For most of us, the approach that works best is to invest a fixed amount at specific
intervals, say every month. By investing a fixed sum each month, you get fewer units
when the price is high and more units when the price is low, thus bringing down your
average cost per unit. This is called rupee cost averaging and do investors all over the
world follow a disciplined investment strategy. With many open-ended schemes offering
systematic investment plans, this regular investing habit is made easy for you.

Step five:- Keep your taxes in mind

As per the current tax laws, Dividend/Income Distribution made by mutual funds
is exempt from Income Tax in the hands of investor. However, in case of debt schemes
Dividend/ Income Distribution is subject to Dividend Distribution Tax. Further, there are
other benefits available for investment in Mutual Funds under the provisions of the
prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant
for specific advice to achieve maximum tax efficiency by investing in mutual funds.

Step Six:- Start early

It is desirable to start investing early and stick to a regular investment plan. If you
start now, you will make more than if you wait and invest later. The power of
compounding lets you earn income on income and your money multiplies at a
compounded rate of return.
Step Seven:- The final step

All you need to do now is to get in touch with a Mutual Fund or your advisor and
start investing. Reap the rewards in the years to come. Mutual Funds are suitable for
every kind of investor whether starting a career or retiring, conservative or risk taking,
growth oriented or income seeking.

YOUR RIGHTS AS A MUTUAL FUND UNITHOLDER:

As a unit holder in a Mutual Fund scheme coming under the SEBI (Mutual Funds)
Regulations, you are entitled to:

1. Receive unit certificates or statements of accounts confirming your title within 30 days
from the date of closure of the subscription under open-ended schemes or within 6 weeks
from the date your request for a unit certificate is received by the Mutual Fund.
2. Receive information about the investment policies, investment objectives, financial
position and general affairs of the scheme.
3. Receive dividend within 30 days of their declaration and receive the redemption or
repurchase proceeds within 10 working days from the date of redemption or repurchase.
4.Vote in accordance with the Regulations to: a. changes the Asset Management
Company; b.wind up the schemes.
5. Receive communication from the Trustees about change in the fundamental attributes
of any scheme or any other changes, which would modify the scheme and affect the
interest of the unit holders and to have option to exit at prevailing Net Asset Value
without any exit load in such cases.
6. Inspect the documents of the Mutual Funds specified in the schemes offer document.

In addition to your rights, you can expect the following from Mutual Funds:

To publish their NAV, in accordance with the regulations: daily, in case of open-
ended schemes and once a week, in case of close ended schemes.

To disclose your schemes entire portfolio twice a year, unaudited financial results
half yearly and audited annual accounts once a year.

In addition many mutual funds send out newsletters periodically. To adhere to a

Code of Ethics, which requires that investment, decisions are taken in the best interest of
the unit holders.
 Frequently Used Terms

Net Asset Value (NAV

Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by the number of
units outstanding on the Valuation Date.

Sale Price

Is the price you pay when you invest in a scheme? Also called Offer Price. It may
include a sales load.

Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may
include a back-end load. This is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on maturity. Such prices are NAV related.

Sales Load

Is a charge collected by a scheme when it sells the units. Also called, Front-end
load. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

 Is a charge collected by a scheme when it buys back the units from the unit
holders?