ACKNOWLEDGEMENT

I take this opportunity to thank Prof. P.C.Basu my internal guide for

his valuable guidance.

I am also obliged to the staff of the library of NIMIMS for their sincere

support.

In the end I wish to thank all those who directly or indirectly helped

me in completing the project.

HISTORY OF MUTUAL FUNDS IN INDIA

PROJECT GUIDE: P.C. BASU

PREPARED BY:
SONALI MITRA
MFM III B- YEAR 1999-2002
ROLL NO:105

2
INDEX

Introduction

1. The Basics

2. Emergence of Mutual Funds in India

3. Mutual Funds in India - Revisited

4. 1999 – Year of the funds

5. Mutual funds and the Budget 2000-2001, 1999-2000

6. Mutual Funds and its Tax Implications for small investors

7. Various Regulatory Measures

8. Some Major Mutual Funds in India:

UTI

SBI Mutual Fund

ICICI PRU Mutual Funds

9. Extracts and Press Releases

3
10. Conclusion

Glossary

Select Bibliography

Introduction :
The Indian Economy is under transition on account of the ongoing structural adjustments
programmes and liberalisation. Economic transition is usually marked by changes in the
market mechanism, institutional integration, market regulation, relocation of savings and
investment, and changes in intersectoral relationships. These changes often include
negativity and shake the investors confidence in the capital market. Mutual funds as
efficient allocator of resources play a crucial role in this transitional period.
Unfortutnately, however, not only has the importance of Mutual Funds been recognised
but there has also been a lack of understanding about the effective role of Mutual Funds
in the Indian Market Scenario.
Moreover, the social, psycological and economic fundamentals which have a strong
bearing on the success of the Mutual Fund Industry in India are often missing.
My main objective is to study the trends in the Mutual Fund Industry right from its
inception in India and to suggest certain investment techniques and strategies keeping in
mind the various regulations. In order to achieve this, it is most important to rectify the
prevailing environment of information about the mutual fund industry and that individual
investors are educated about the unique advantages of mutual fund investing in a
deregulated, high-risk, competitive market.
Although I have primarily focussed on issues relating to the mutual fund industry in
India, I have drawn from the experience of some developed countries like USA, UK and
Japan, where I felt a comparision was necessary.
This project is mainly divided into 10 chapters.Chapter 1 discusses about the basics of a
Mutual Fund, the relationship between mutual funds and financial markets and includes
as overview of the emerging charecteristics of the Indian Mutual Fund Market.

4
Chapter 2, includes the Emergence of Mutual Fund Industry since 1964-2000 in detail.
The Unit trust of India , the first mutual fund of India, was promoted as a part of the
overall development strategy of the eraly 1960`s. However the subsequent development
of the industry was influenced by the changing economic environment and market
pressures. These developmental aspects have also been discussed in this chapter.
Chapter 3, gives a bird-view of the Happenings of the Mutual Fund Industry in India-
Revisited
Chapter 4, talks about the Year 1999 which saw immense future potential and
developments in this sector. This year signaled the year of resurgence of mutual funds
and the regaining of investor confidence in these MF’s . But, the sole factor that gave
revival to the Mutual Fund Industry was the Union Budget.
Chapter 5, covers the influence of the budget of 2000-2001 and 1999-2000 on the mutual
funds Industry.
Chapter 6, discusses the tax implications of Mutual Funds for small, individual investors
Chapter 7, puts emphasis on the various regulations set up by SEBI, P K Kaul
Committee, SEBI Advisory Committee, Melagm Committee, Tarapore Committee.
Chapter 8, discusses some major Mutual Funds in India such as UTI Mutual Fund, SBI
Mutual fund, ICICI Prudential Mutual Fund etc.
Chapter 9, contains certain extracts and press releases
Chapter 10, summaries the major observations of this study and indicates what measures
ae necessary for the healthy growth of Mutual Funds in India

This project also includes a glossary of mutual fund terminology and a selective
bibliiography.
I must admitt that inspite of my best efforts there may be other important issues which
have not been discussed.

5
The Basics
What is a Mutual Fund?
A Mutual Fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The fund belongs to all
investors with each investor's ownership depending on the proportion of his contribution
to the fund, i.e. the more the contribution the higher the ownership and vice versa.
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 invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciation realized by the scheme are shared
by its unit holders in proportion to the number of units owned by them (pro rata). Thus a
Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively low
cost. Anybody with an invincible surplus of as little as a few thousand rupees can invest
in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and
strategy.

A mutual fund is the ideal investment vehicle for today’s complex and modern financial
scenario. Markets for equity shares, bonds and other fixed income instruments, real
estate, derivatives and other assets have become mature and information driven. Price
changes in these assets are driven by global events occurring in faraway places. A typical
individual is unlikely to have the knowledge, skills, inclination and time to keep track of
events, understand their implications and act speedily. An individual also finds it difficult

6
to keep track of ownership of his assets, investments, brokerage dues and bank
transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The large
pool of money collected in the fund allows it to hire such staff at a very low cost to each
investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas -
research, investments and transaction processing. While the concept of individuals
coming together to invest money collectively is not new, the mutual fund in its present
form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the
Second World War. Globally, there are thousands of firms offering tens of thousands of
mutual funds with different investment objectives. Today, mutual funds collectively
manage almost as much as or more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically, it
pre specifies the investment objectives of the fund, the risk associated, the costs involved
in the process and the broad rules for entry into and exit from the fund and other areas of
operation. In India, as in most countries, these sponsors need approval from a regulator,
SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the
sponsor and its financial strength in granting approval to the fund for commencing
operations.

A sponsor then hires an asset management company to invest the funds according to the
investment objective. It also hires another entity to be the custodian of the assets of the
fund and perhaps a third one to handle registry work for the unit holders (subscribers) of
the fund.

In the Indian context, the sponsors promote the Asset Management Company also, in
which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the
Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the
Birla Sun Life Asset Management Company Ltd., which has floated different mutual
funds schemes and also acts as an asset manager for the funds collected under the
schemes.

7
Emergence of Mutual Funds

Mutual funds now represent perhaps the most appropriate investment opportunity for
most investors; as financial markets become more complicated and sophisticated,
investors need a financial intermediary who provides the required knowledge and
professional expertise on successful investing. It is no wonder then that in the
birthplace of Mutual Funds – the U.S.A.- the fund industry has already overtaken
the banking industry, more funds being under mutual fund management than
deposited with Banks.

The Indian Mutual Fund industry has already started opening up many of the exciting
investment opportunities to Indian investors. We have started witnessing the
phenomenon of more savings now being entrusted to the funds than to the banks.
Despite the continuos growth in the industry, mutual funds are still a new
financial intermediary in India. Hence, it is important that the investors, the
mutual fund agents /distributors, the investment advisors and even the fund
employees acquire better knowledge of what mutual funds are, what they cannot,
and how they function differently from other intermediaries such as the banks.

The 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 reserve Bank of India and the Government of India.

8
 The objective then was to attract the small investors and introduce them to market
investments. Since then, the history of mutual funds in India can be broadly
divided into three distinctb phases.

Phase I: 1964-87 (Unit trust of India)

This phase spans from 1964-1987. In 1963, UTI was established by an Act of Parliament
and given a monopoly. Operationally, U TI was set up by the Reserve Bank of
India, but was later delinked from RBI. The first, and still one of the largest
schemes, launched by UTI was Unit Scheme 1964. Over the years, US-64
attracted, and probably still has, the largest number of investors in any single
investment scheme. It was also at least partially the first open-end scheme in the
country, now moving towards becoming fully open-end.

Later in 1970s and 1980s, UTI started innovating and offering different schemes to suit
the needs of different classes of investors. Unit Linked Insurance Plan(ULIP) was
launched in 1971. Six new schemes were introduced between 1981 and 1984.
During 1984-87, new schemes like Children`s Gift Growth fund (1986) and
Mastershare (1987) were launched. Mastershare could be termed as the first
diversified equity investment scheme in India. The first Indian offshore fund,
India Fund, was launched in August 1986. During 1990s, UTI catered to the
demand for income-oriented schemes by launching Monthly Income Schemes, a
somewhat unusual mutual fund product offering” assured terms”.

The mutual fund Industry in India not only started with UTI, but still counts UTI as its
largest player with the largest corpus of investible funds among all mutual funds
currently operating in India. Until 1980`s, UTI`s operations in the stock market
often determined the direction of market movements. Now, many Indian investors
have taken to direct investing on the stock markets. Foreign and other institutional
players have been brought in. So direct influence of UTI on the markets may be
less than before, though it remains the largest player in the fund industry. In
absolute terms, the investible funds corpus of even UTI was still relatively small

9
 at about Rs 600 crores in 1984. But, at the end of this Phase One, UTI had grown
large as evidenced by the following statistics:

1987-88
Amount Assets Under Mobilisation as %
Mobilised(Rs Crores Mangement(Rs Crores) Gross Domestic
Savings
UTI 2,175 6,700 3.1%
Total 2,175 6,700 3.1%

Phase 2- 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, Public Sector mutual funds, bringing in competition.
With the opening up of the economy, many public sector banks and financial institutions
were allowed to establish mutual funds. The State Bank of India established the first non-
UTI mutual fund- SBI Mutual Fund – in November 1987. This was followed by Canbank
Mutual Fund (launched in December 1987), LIC Mutual Fund (launched 1989), and
Indian Bank Mutual Fund (launched in 1990) followed by Bank of India Mutual Fund,
GIC Mutual Fund and PNB Mutual Fund. These mutual funds helped enlarge the investor
community and the investible funds. From 1987 to 1992-93, the fund industry expanded
nearly seven times interms of Assets Under Management as seen in the following figures:

1992-93

Amount Assets Under Mobilisation as % of

Mobilised Management Gross Domestic
(Rs Crores) (Rs Crores) Savings

10
UTI 11,057 38,247 5.2%
Public Sector 1,964 8,757 0.9%
Total 13,021 47,004 6.1%

During this period, investors were shifting away from bank deposits to mutual funds, as
they started allocating larger part of their financial assets and savings (5.2% in 1992,
3.1% in 1988) to fund investments. UTI was still the largest segment of the industry,
although with nearly 20% market share ceded to the Public Sector Funds.

The Indian Mutual fund has passed through three phases. The second phase is between
1987 and 1993 during which period 8 funds were established (6 by banks and one each
by LIC and GIC). The total assets under management had grown to Rs. 61,028/- crores at
the end of 1994 and the number of schemes were 167.

Phase 3: 1993-1996 (Emergence of Private Funds)

A new era in the mutual fund industry began with the permission granted for the entry of
private sector funds in 1993, giving the Indian investors a broader choice of `fund
families` and increasing competition for the existing public sector funds. Quite
significantly, foreign fund management companies were also allowed to operate mutual
funds, most of them coming into India through product innovations, investment
management techniques and investor servicing technology that makes the Indian mutual
fund industry today a vibrant and growing financial intermediary.

During the year 1993-94, five private sector mutual funds launched their schemes
followed by six others in1994-95. Initially, the mobilization of funds by the private
mutual funds was slow. But, this segment of the fund industry now has been witnessing
much greater investor confidence in them. One influencing factor has been the
development of a SEBI driven regulatory framework for mutual funds. But another
important factor has been the steadily improving performance of several funds

11
themselves. Investors in India now clearly see the benefits of investing through mutual
funds and have started becoming selective.

The third phase began with the entry of private and foreign sectors in the Mutual fund
industry in 1993. Kothari Pioneer Mutual fund was the first fund to be established
by the private sector in association with a foreign fund.

Phase 4: 1996 ( SEBI Regulation for Mutual Funds)

The entire mutual fund industry in India, despite initial hiccups, has since scaled new
heights in terms of mobilisation of funds and number of players. Deregulation and
liberalisation of the Indian economy has introduced competition and provided impetus to
the growth of the industry. Finally, most investors-small or large-have started shifting
towards mutual funds as opposed to banks or direct market investments.

More investor friendly regulatory measures have been taken both by SEBI to protect the
investor and by the Government to enhance investors` returns through tax
benefits. A comprehensive set of regulations for all mutual funds operating in
India has been accomplished with SEBI (Mutual Fund) Regulations, 1996. These
regulations set uniform standards for all funds and will eventually be applied in
full to Unit trust of India as well, even though UTI is governed by its own UTI
Act. In fact, UTI has been voluntarily adopting SEBI guidelines for most of its
schemes. Similarly, the 1999 Union Government Budget took a big step in
examining all mutual fund dividends from income tax in the hands of investors.
Both the 1996 regulations and the 1999 Budget must be considered of historic
importance, given their far-reaching impact on the fund industry and investors.

The mutual fund industry seems to mark the beginning of a new phase in its history, a
phase of significant growth in terms of assets under management. Consider the
growth in assets as seen in the figures below:

1998-99

12
 Amount Assets Under Mobilization as % of
Mobised Management Gross Domestic
(Rs Crores) (Rs Crores) Savings
UTI 11,679 53,320 2.79%

Public Sector 1,732 8,292 0.08%

Private Sector 7,966 6,860 1.14%

Total 21,377 68,472 5.1%

April-Oct 99

Amount Assets Under

Mobised Management

(Rs Crores) (Rs Crores)

UTI 8,312 64,276

Public Sector 1,222 8,656

Private Sector 13,789 14,017

Total 23,323 86,949

(Source: Association of Mututal Funds In India)

The size of the industry is growing rapidly, as seen by the figure of assets under
management which have gone from over 68,000 crores to nearly 87,000 crores in
just one year. Within the growing industry, by March 1999, UTI`s share of
mobilisations has decreased to 55% (from 85% in 1992-93), while the share of the

13
 private sector stood at 37%. During April to October 1999, the private sector
accounted for 59% of mobilizations. Mobilizations during the period of 7 months
in fact exceeded the same for the whole year of 1998-99. It is also clear that the
enhanced share of the private sector is explained not only by the growing appetite
for mutual funds, but also by the growing acceptance of the private sector funds.

As at the end of financial year 2000 (31st March) 32 funds were functioning with Rs.
1,13,005 crores as total assets under management. As on August end 2000, there
were 33 funds with 391 schemes and assets under management with Rs. 1,02,849
crores.

The Securities and Exchange Board of India (SEBI) came out with comprehensive
regulation in 1993 which defined the structure of Mutual Fund and Asset
Management Companies for the first time

Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the
private players has risen rapidly since then.

Currently there are 34 Mutual Fund organizations in India managing over Rs. 1,02,000/-
crores.

Kotak Mutual Fund has declares dividend (On Oct 31 , 2001)

Kotak Mahindra Mutual Fund has declared dividend under its, K Gilt Unit Scheme‘98
Savings Plan and K Liquid schemes. The fund house has paid out a dividend of 0.70
percent or Rs.0.070 per unit on a face 10 under the open-ended gilt scheme. While under
the Dividend – Reinvestment Plan of the Liquid scheme there has been a pay out 0.130
percent or Rs. 0.0130 per unit on a face value of Rs. 10. The record date for the dividend
declaration has been fixed as Oct 28, 2001. The open-ended Gilt Fund, which was
launched in Dec 1998, has generated a one-year return of 9.92 percent.

14
Mutual Funds In India – Revisited (1964 - 2000)
The end of millennium marks 36 years of existence of mutual funds in this country. The
ride through these 36 years is not been smooth. Investor opinion is still divided. While
some are for mutual funds others are against it.

UTI commenced its operations from July 1964 .The impetus for establishing a formal
institution came from the desire to increase the propensity of the middle and lower groups
to save and to invest. UTI came into existence during a period marked by great political
and economic uncertainty in India. With war on the borders and economic turmoil that
depressed the financial market, entrepreneurs were hesitant to enter capital market.
The already existing companies found it difficult to raise fresh capital, as investors did
not respond adequately to new issues. Earnest efforts were required to canalize savings of
the community into productive uses in order to speed up the process of industrial growth.
The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would
be "open to any person or institution to purchase the units offered by the trust. However,
this institution as we see it, is intended to cater to the needs of individual investors, and
even among them as far as possible, to those whose means are small."

15
His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill
the twin objectives of mobilizing retail savings and investing those savings in the capital
market and passing on the benefits so accrued to the small investors.

UTI commenced its operations from July 1964 " with a view to encouraging savings and
investment and participation in the income, profits and gains accruing to the Corporation
from the acquisition, holding, management and disposal of securities." Different
provisions of the UTI Act laid down the structure of management, scope of business,
powers and functions of the Trust as well as accounting, disclosures and regulatory
requirements for the Trust.

One thing is certain – the fund industry is here to stay. The industry was one-entity show
till 1986 when the UTI monopoly was broken when SBI and Canbank mutual fund
entered the arena. This was followed by the entry of others like BOI, LIC, GIC, etc.
sponsored by public sector banks. Starting with an asset base of Rs. 25 crore in 1964 the
industry has grown at a compounded average growth rate of 27% to its current size of
Rs.90000 crore.

The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs).
From one player in 1985 the number increased to 8 in 1993. The party did not last long.
When the private sector made its debut in 1993-94, the stock market was booming.

The opening up of the asset management business to private sector in 1993 saw
international players like Morgan Stanley, Jardine Fleming, JP Morgan, George Soros
and Capital International along with the host of domestic players join the party. But for
the equity funds, the period of 1994-96 was one of the worst in the history of Indian
Mutual Funds.

16
1999—YEAR OF THE FUNDS

Mutual funds have been around for a long period of time to be precise for 36 yrs but the
year 1999 saw immense future potential and developments in this sector. This year
signaled the year of resurgence of mutual funds and the regaining of investor confidence
in these MF’s. This time around all the participants are involved in the revival of the
funds ----- the AMC’s, the unit holders, the other related parties. However the sole factor
that gave lifer to the revival of the funds was the Union Budget. The budget brought
about a large number of changes in one stroke. An insight of the Union Budget on mutual
funds taxation benefits is provided later.

It provided centre stage to the mutual funds, made them more attractive and provides
acceptability among the investors. The Union Budget exempted mutual fund dividend
given out by equity-oriented schemes from tax, both at the hands of the investor as well
as the mutual fund. No longer were the mutual funds interested in selling the concept of
mutual funds they wanted to talk business which would mean to increase asset base, and
to get asset base and investor base they had to be fully armed with a whole lot of schemes
for every investor .So new schemes for new IPO’s were inevitable. The quest to attract
investors extended beyond just new schemes. The funds started to regulate themselves

17
and were all out on winning the trust and confidence of the investors under the aegis of
the Association of Mutual Funds of India (AMFI)

One cam say that the industry is moving from infancy to adolescence, the industry is
maturing and the investors and funds are frankly and openly discussing difficulties
opportunities and compulsions.

Mutual Funds and the Budget 2000-2001,1999-2000 :

Mutual Funds and the Budget 2000-2001:

Important measures :

• Deletion of sections 54 EA and 54 EB of the Income Tax Act, 1961.

• The above two sections provided relief from capital gains tax if investments were
made in specified securities and locked in for a period of 3 years in the case of
54EA and 7 years in the case of 54EB. Mutual fund units were one of the
specified securities and this resulted in a lot of money realised as profit from sale
of securities being reinvested in the market through mutual funds.

With the withdrawal of the exemption to mutual funds, investors have lost out on
a very viable alternative for tax saving and funds also would be faced with the
problem of ‘hot money’ as there would no longer be any lock in period for
investments. It is estimated that 54EA investments formed approximately 15% of
the corpus.

• Increase in dividend tax from 10% to 20% for debt funds.

18
The existing dividend tax payable by debt schemes has been doubled to 20%. This would
lead to a reduction in returns available to investors by approximately 1.5% from the
average of approximately 14%. This is expected to hurt retail investment in debt schemes
and could lead to a pull out and reduced mobilization. Two implications of this move
could be:

• Reinvestment of dividends by investors; since capital gains would be taxed at a

lower rate as compared to dividend, investors would prefer to reinvest dividend
and earn long-term capital appreciation.

• Switch over from debt to equity schemes; since open ended equity schemes are
free from paying dividend tax, these schemes could attract some of the investment
that is pulled out from debt schemes.

Instead of taxing debt schemes so as to bring parity between the banks and mutual funds,
it is widely felt that the finance minister could have simply extended some of the benefits
enjoyed by mutual funds to banks and FIs. The experience with mutual funds has in any
case shown that turning dividends tax free in the hands of investors has simply improved
collections, widened the tax base and reduced procedural delays.

Mutual funds and the Budget 1999-2000

The Union Budget of India, 1999 presented in Parliament on February 27 has brought
good things for mutual fund investors. The budget aims at making mutual funds tax
friendly for the individual investor, resulting in large inflows into the capital markets
through mutual funds.

19
Mutual Funds and its Tax Implications on small investors:

includes

 Income Received From Mutual Funds

 Tax implication for income received on open-end equity oriented scheme

 Tax implication for income received from schemes other than open-end equity
oriented scheme

 Distribution Tax

 Long Term Capital Gains arising from sale of mutual fund units

Income Received From Mutual Funds

The Finance Bill has made income (i.e. dividends) received from all mutual funds tax
free in the hands of investors. Effective April 1, 1999 (i.e. assessment year 2000-2001)
investors need not pay any tax on dividend received from a mutual fund. For the investor
it does not matter what kinds of mutual fund scheme they have invested in. Dividend
whether received from equity, equity & debt or a debt scheme will all be tax-free for the
investor. Since investors shall be receiving tax-free dividends, the benefits of section 80L

20
will no longer be relevant to mutual funds. Section 80L allowed you to take a deduction
of up to Rs. 15,000 (of which Rs.3,000 was specifically reserved for mutual funds) for
dividends received from mutual funds together income from other securities. Now that
investors will receive tax-free dividends from mutual funds, Section 80L is no longer
applicable to dividends from them.

While dividends in the hands of the investor are free from tax, mutual funds are now
required to pay a "distribution tax" of 10%. For financial year 1999-2000, however, only
distributions made after June 1, 1999 will be subject to the tax. The good news is that the
distribution tax does not have to be paid on all types of mutual fund schemes. Effective
April 1,1999, for a period of three years, open-end equity oriented schemes will be
exempt from paying the distribution tax.

Tax implication for income received on open-end equity oriented scheme:

As per the Finance Bill, income distributed under the US-64 scheme and other open-
ended equity oriented scheme of UTI and Mutual Funds would be exempt from the levy
of this tax for a period of three financial years starting from 1.4.1999. An open-end equity
oriented scheme is defined as one where more than 50% of the scheme's investible funds
are invested in domestic equities. The 50% is computed taking the annual average of the
monthly averages of the scheme's equity holdings. The monthly average, in turn, is
calculated by taking the opening and closing percentage of a particular month's equity
holdings.

Tax implication for income received from schemes other than open-end equity
oriented scheme

By definition all schemes that are not open-end equity oriented schemes must pay a
distribution tax. This tax has been fixed at 10%. In fact, the actual tax will be 11% since
the mutual fund must pay a 10% surcharge as well. Difference Between TDS and
Distribution Tax

21
The distribution tax is different from "TDS" or tax deducted at source. In the case of
TDS, the fund deducts tax and deposits it with the Government. This tax is deducted by
the fund from income payable to the investor and the investor gets credit of the same
while filing his annual return of tax. In cases where the investor is not liable to pay tax he
may claim an exemption from TDS by filing a Form 15H with the fund. Distribution tax
is, however, a tax that has to be paid by the fund, not the investor. It is not a direct tax
paid by the investor therefore, he cannot file for exemption from distribution tax. Hence,
while the dividend pay out will be tax-exempt in the hands of the investors, in all
schemes where the mutual fund has to pay a distribution tax, the dividend pay out will be
affected to that extent by the 11% distribution tax.

Long Term Capital Gains arising from sale of mutual fund units

As per the current provisions of the budget, long term capital gains arising from the sale
of listed securities and shares as defined under the Securities Contracts (Regulation) Act,
1956 (SCRA) are now chargeable to tax at a maximum rate of 10 %. As per the earlier
Income Tax law, long-term capital gains from shares and securities were taxed at 20 per
cent after giving benefit of cost inflation indexation. The present budget capped capital
gains tax at 10 per cent for securities as defined under Section 2(h) of SCRA and listed in
recognised stock exchanges in India. The benefit of cost indexation, however, would not
be available in such cases. That is, persons would have the option of either availing of
cost indexation on the capital gains and paying 20 per cent capital gains tax or paying a
flat rate of 10 per cent without cost indexation. As a result, the maximum capital gains
tax payable has been capped at 10 per cent. The finance ministry is considering extending
the benefit of the 10 % cap on long term capital gains tax to units of all mutual funds.
Since the definition of securities in the SCRA Act does not include units issued by
mutual funds, these do not get the benefit of the capping of capital gains tax. However,
UTI may get this benefit as the SCRA definition includes all 'securities issued by a body
corporate' and UTI is one by statute.

22
Important :The above is a general description of the tax laws. Tax laws may change in
the future and the applicability of these laws may vary from person to person, depending
on your particular circumstances. You should consult with your own tax advisor with
respect to the tax benefits available from a mutual fund investment

Various Regulatory Measures:

 Amendments to the Securities and Exchange Board of India (Mutual Funds)

Regulations, 1996

 P K Kaul Committee Report

 Sebi Advisory Committee Report

 Findings from Malegam Committee Report

 ENS Economic Bureau Report

 Findings from Tarapore Committee Report

Amendments to the Securities and Exchange Board of India (Mutual Funds)

Regulations, 1996

The mutual funds have become an important vehicle for mobilisation of savings
particularly from the household sector. The SEBI has been taking steps towards
improving the standards of disclosure for mutual funds, introducing prudential norms to

23
prevent misuse of funds by the asset management companies and to afford a greater
degree of protection to the investors. Simultaneously with the introduction of stringent
regulations to raise the compliance standards, the SEBI has been seeking to give greater
degree of freedom to fund managers to structure their schemes according to investor
preferences. With this end in view the SEBI has further amended the Mutual Fund
Regulations which were notified in 1996. The salient features of the amendments are
given in the box 1.7:

Box I.7: Amendments to the Mutual Fund Regulations

• Aggregate investment by a mutual fund in listed and /or to be listed securities of

group companies of the sponsor shall not exceed 25 per cent of the net assets of
all schemes of the fund. Asset Management Companies (AMCs) will not be
required to disclose in the scheme offer document, the maximum investments
proposed to be made by the scheme in the securities of the group companies of
the sponsor and also, the aggregate investment already made by all existing
schemes in group companies. The AMCs must submit quarterly reports to the
trustees on transactions in the securities of group companies during the quarter,
and trustees will have to specifically comment on such transactions recorded in
the half yearly reports which they would submit to SEBI. Mutual funds have been
prohibited from making investments in unlisted/privately placed securities of
associate/group companies of the sponsor.

• Security transactions with associate brokers shall not exceed 5 per cent of the
quarterly business done by the mutual fund. In case of transactions undertaken
with any non-associate broker, if this 5 per cent limit is exceeded, AMCs will be
required to record in writing the justification for exceeding the limit and report
this to the trustees on a quarterly basis.

• Unitholders' approval will no longer be required for rollover of schemes and for
converting close-ended into open-ended schemes, provided the unitholders are
given an option to redeem their holdings in full at NAV based prices.

24
 • Independent trustees who are not associated with the sponsor shall now constitute
two third of the Board of Trustees instead of the earlier provision of 50 per cent.

• Memorandum containing key information must accompany all application forms

of mutual fund schemes to ensure adequate disclosures to investors.

• Full portfolio disclosure in the Annual Report of Mutual Funds is now mandatory.

• The auditors will now be required to comment on the compliance of the

regulations and investor’s grievances and redressal thereof by the mutual funds.

Standard offer document and memorandum containing key information

The SEBI prepared a standard offer document which prescribes the minimum disclosure
requirements to be contained in the offer document of any mutual fund scheme. In
addition, an abridged offer document i.e. the memorandum containing key information,
which must accompany all scheme application forms in terms of sub regulation (4) of
regulation 29 of the Regulations, has also been standardized. Both these documents have
strengthened the disclosure standards in the offer documents of mutual fund schemes,
thereby enabling the investors to take informed investment decisions.

Both these documents were prepared on the basis of broad based views and comments
from the Association of Mutual Funds of India and Price Waterhouse LLP, from various
Investors' Associations and retail investors contacted through press. The standard offer
document and memorandum mandate the following disclosures;

• Submission of the Due Diligence Certificate by the AMC to the SEBI and
reproduction of its contents in the offer document.

• Standard as well as scheme specific risk factors.

• in the case of assured return schemes, past history of the mutual fund in meeting
assurances under such schemes as well as the resources available to the guarantors
on the basis of which guarantee is being provided for the new scheme.

• fundamental attributes of the scheme.

25
 • details of the trustees/members of the Board of Directors of the trustee
company/AMC as well as a note on the activities of the sponsor and its financial
performance for the last three fiscal years.

• transactions with associates undertaken by the mutual fund for the last three years.

• year-wise disclosure of past performance of all schemes launched during the last
three fiscal years on the basis of historical per unit statistics including annualized
return for all schemes (excluding redeemed schemes).

• all cases of penalties awarded by any financial regulatory body, any pending
material litigation proceedings, criminal cases or economic offence cases and any
enquiry/adjudication proceedings under the SEBI Act and the regulations made
thereunder, that are in progress against the sponsor or any of its associates
including the AMC/Trustee company/Board of Trustees or any of the directors or
key personnel (specifically the fund managers) of the AMC.

P.K. Kaul Committee :

A Committee was set up under the Chairmanship of Mr. P.K. Kaul to recommend the
manner of discharge of responsibilities by the trustees as laid down in regulation 18 of
the SEBI (Mutual Funds) Regulations, 1996. Apart from making recommendations, the
committee would also be devising a model MIS system particularly at the AMC and the
trustee level, recommending clarifications regarding the manner of compliance with some
of the provisions of the Regulations and additionally, study the feasibility of organising
mutual funds alternatively as companies and the applicability of the Indian Trusts Act
vis-a-vis Trustees. Working group on overseas investments by mutual funds

The Reserve Bank of India (RBI) in its credit policy announced in October 1997, that all
the SEBI registered mutual funds and fund managers would be permitted to invest in
overseas markets, initially within an overall limit of USD 500 million and a ceiling for
individual fund at USD 50 million and within such limits as announced by the RBI from
time to time. In this context, the SEBI set up a working group to frame the modalities and
guidelines for investment by domestic mutual funds in the overseas markets. Various

26
issues such as appointment of overseas advisers and global custodians, fee structure and
restrictions on overseas investments are being considered by the working group.

Action taken against asset management companies of mutual funds

• There was a delay of 30 days in listing the units of one mutual fund scheme on the
stock exchange for violation of the provisions of the SEBI Act and the Securities
and Exchange Board of India (Mutual Funds) Regulations, 1996. The case was
referred for adjudication. Another case, where the inspection report observed
certain irregularities is being referred for adjudication/enquiry.

• On account of deteriorating financial position, violation of RBI directions and

various irregularities committed by the sponsors of GFC Mutual Fund and Asia
Pacific Mutual Fund, the Chairman, SEBI, passed orders prohibiting them from
launching any schemes. Both the Funds were prohibited from undertaking any
activity under the Regulations.

• On account of financial irregularities and illegalities committed by the CRB

Capital Markets Limited which is also the sponsor of CRB Mutual Fund, (action
has been initiated by the RBI against this NBFC), the SEBI took up the matter
with the trustees of the Fund. However, the trustees did not respond to the notice
issued by the SEBI. Therefore, under Section I (B) of the SEBI Act, 1992, the
Chairman passed an order prohibiting the Fund from launching any further
scheme and from dealing with the securities and funds of the scheme till further
orders. Hon'ble Bombay High Court appointed a provisional administrator for
CRB Mutual Fund. The SEBI is working out a scheme to protect the interests of
the unitholders.

• Difficulties faced by assured return schemes

• In 1992, LIC Mutual Fund had launched two schemes - Dhanvarsha 4 and 5. On
account of adverse market conditions, there had been a steep decline in the NAVs
of both the schemes. Consequently, there was a deficit of Rs. 190 crore. in
meeting the redemption benefits as assured in the offer documents. The sponsor -

27
 LIC, voluntarily decided to meet the shortfall. This was to be effected by means
of a scheme of arrangement, whereby the Mutual Fund would allot to LIC, on the
due dates of redemption of these two schemes, special units against payment of
funds by the LIC, which would be equal to the redemption obligations under these
schemes. In the process, all assets of the schemes would stand transferred to LIC.
The units would be managed by the AMC and can be redeemed by the LIC as and
when it desires. As the arrangement offered by the LIC was in the interest of
unitholders, the SEBI allowed the scheme.

Another scheme, Ind Jyothi of Indian Bank Mutual Fund, launched prior to the
notification of the 1993 Regulations, was unable to pay assured returns for the year 1996-
97 and 1997-98 to the investors due to inadequacy of distributable profits. The SEBI
advised the Fund to meet the assurances and finally, the sponsor of the Fund - Indian
Bank agreed to pay the assured returns. In case of their Ind Prakash scheme also, the
SEBI had advised them to pay returns to the unitholders as mentioned in the offer
document. Similarly upon the SEBI's advice, PNB Mutual Fund paid assured returns on
guaranteed schemes, and the sponsor, Punjab National Bank was required to meet the
shortfall.
In the case of Festival Boinanza Growth Scheme of BOI Mutual Fund, the sponsor -
Bank of India met the shortfall that arose at the time of redemption of the scheme. IDBI’s
control over UTI likely to end soon.

Sebi Adisory Committee Report on Mutual Funds held JANUARY 9, 2001

The SEBI Advisory Committee on Mutual Funds met today and made the following
decisions:

1. Guidelines for investment / trading in securities by employees of AMCs and

mutual fund trustee companies.

The Committee approved the guidelines for investment/ trading in securities by

employees of AMCs and mutual fund trustee companies so as to avoid any conflict of
interest or any abuse of an individual's position and also to ensure that the employees of

28
AMCs and trustee companies should not take undue advantage of price sensitive
information about any company.

The committee decided that access persons i.e. the employees who have access to
investment decisions of the mutual fund should take prior approval before making any
investments. Other employees who do not have such access will be required to report
their transactions. Access persons will also be prohibited from making profits by selling
securities within 60 days of buying them.

The boards of AMC and trustee company will review the procedures concerning personal
investments by the employees and any violations requiring remedial action. Any such
violation and action taken by the mutual fund would be required to be reported to SEBI in
the periodical reports

2. Simplifying the format for half-yearly unaudited results by mutual funds

At present the mutual funds are required to publish unaudited financial results in the
newspapers, before the expiry of two months from the close of each half year i.e. on 31st
March and on 30th September in the prescribed format.

From the half-yearly unaudited financial reports currently being published by the mutual
funds, it has been observed that the reports are too cumbersome and as a result the
investors may not be getting any meaningful information from the disclosures in the
reports. Moreover, in many cases the print of such advertisements is so small that it is not
readable.

In order to provide the investor with some meaningful information about the operations
of the mutual fund, the Committee approved a simplified format for the half -yearly
unaudited results. The mutual funds would now be required to disclose unit capital,
reserves, performance in terms of dividend and rise/fall in NAV during the half-year
period, percentage of management fees and recurring expenses to the net assets,
investment made in associate companies, payment made to associate companies, details
of large holdings, etc. Thus the investors would get all relevant information in a concise
format. A copy of the format is enclosed in the annexure.

29
The mutual funds would now be required to publish the disclosures within one month of
the close of each half-year. The funds would also be required to publish the half-yearly
results in at least 7 point font with proper spacing for easy readability.

3. Reporting of securities transactions by directors of Asset Management Companies

According to SEBI Regulations, the directors of the AMC are required to file a statement
of holdings in securities with the trustees at the end of each financial year. Thus, they are
not required to disclose the details of their purchase and sale transactions in securities
during the course of the year.

The committee decided that the directors of AMC should be required to file the details of
their purchase and sale transactions in securities on a quarterly basis. As in the case of
trustees, they may report only those transactions which exceed the value of Rs. 1 lakh.

4. Updating the offer document on a continuous basis by mutual funds

It has been observed that the disclosures in the offer document of open ended schemes
are not updated periodically and new investors have to refer the offer document prepared
at the time of launch of the scheme for making an investment decision. Over a period of
time, there may be various changes of material nature like constitution of the AMC,
imposing or enhancing entry or exit loads, change in the key personnel of the AMC
especially the fund manager, addition of new plans in the existing scheme, change in
management/controlling interest, fresh adjudication cases referred by SEBI, penalties
imposed, etc.

Considering the fact that the offer document or the memorandum containing key
information is the main basis of reference for any investor who intends to invest in a
scheme, the committee decided that the offer document should be revised and updated at
least once in two years. Till the time the offer document is revised and reprinted, an
addendum giving details of the changes may be attached to offer documents and abridged
offer documents. The addendum may be circulated to all the distributors/brokers so that
the same can be attached to all offer documents and abridged offer documents already in
stock. The addendum will also be sent to the existing unitholders.

30
After completion of one year by any open ended scheme, the condensed financial
information of the scheme as per format specified in the standard offer document will be
included in the offer document and this information will also be updated in the
subsequent years in the form of addendum to the offer document till the time new revised
offer document is printed.

The applicability of loads will now be disclosed in the statements of accounts or in the
covering letter issued to the unitholders.

The purpose of the above measures is that the investors get all material information
before they take investment decisions.
5. Time frame for despatch of dividend warrants

As per the provisions of Regulation 53 (A), all mutual funds are required to despatch
dividend warrants to the unitholders within 42 days of the declaration of the dividend.
The committee decided that the present requirement of 42 days should be reduced to 30
days so that the investor gets dividends within a shorter time period.

6. Serial Plans launched by mutual funds

A number of mutual funds have launched serial plans under the existing gilt schemes,
liquid/money market schemes and debt schemes. These plans of different maturity
periods - quarterly, half-yearly, yearly, etc. - are being launched as a part of main
schemes. The committee decided that such plans, which have substantially different
characteristics from the main scheme, should not be launched as part of an on-going open
ended scheme. These plans should be launched as separate schemes.

7. Mutual funds investing abroad

The committee decided that the present limit of 2.5% of recurring expenses chargeable by
a mutual fund scheme can be enhanced to a maximum of 3% for that part of investment
which is made in overseas securities (whenever permitted by the Government).

8. Regulatory framework for distributors and intermediaries engaged in mutual funds and
certification.

31
The committee decided that the mutual funds should adopt the certification of agents and
distributors for mutual fund schemes by the AMFI on a voluntary basis. Over a period of
time, such certification may be made mandatory.

Findings from Malegam Committee Report:

Indian Express

MUMBAI, AUG 5: TERM lending institution IDBI’s control over Unit Trust of India
(UTI) will come to an end very soon. The Trust, under the new management headed by
M Damodaran, is in discussion with the Malegam Committee to adopt a different
structure as part of the ongoing clean-up exercise at the mutual fund behemoth.

Although UTI holds around Rs 57,000 crore assets, its capital is only Rs 5 crore. Of this,
IDBI currently owns 50 per cent while the balance is held by LIC, SBI, GIC and other
commercial banks and institutions. Currently, IDBI has four nominees on the 9-member
board of trustees of UTI. The chairman and executive trustee are appointed by the IDBI
in consultation with the Central Government.

Said UTI chief Damodaran: “UTI Act will be amended making several changes in the
structure of the Trust. I hope it will be tabled in the winter session of Parliament. We are
waiting for Malegam Committee to suggest various proposals. We will work out a
suitable structure after that. UTI could be delinked from the IDBI.”

Damodaran said the Malegam Committee is seized of the matter and the entire
organisation would be restructured within a year’s time. “The restructuring of UTI is the
necessity and the Malegam Committee will give us the roadmap about how to go about
it,”the Damodaran told the Indian Express.

The UTI chairman also denied that the privatisation of the UTI will solve the problem of
the organization. “I do not think just because private sector takes over the fund will start
making money.

32
There are numerous examples of private sector mutual fund failing to live up to the
promises made to small investors.”

UTI, which has a structure different from the three-tiered structure of other mutual funds
in India, was established by the government under a special Act—the Unit Trust of India
Act, 1963 as a corporate body.

A major argument of other mutual funds and financial experts is to bring UTI structure in
line with other mutual funds. All the chairmen of UTI in the last 10 years were against
coming under Sebi and changing the structure.

There was also centralisation of power which was abused allegedly by former chairman
PS Subramanyam who is now in jail along with two executive directors.

The UTI Act stipulates that there would be an executive committee which shall consist of
the chairman of the board, executive trustee UTI’s net inflow falls by 93 pc in last fiscal

Private mutual funds gain at the cost of UTI

ENS Economic Bureau Report

New Delhi, May 17: Unit Trust of India’s (UTI) cup of woes seems to be far from over.
While the Joint Parliamentary Committee (JPC) on Thursday stated that the leading
mutual fund can come under scrutiny for its role in the stock market scam, according to
recently released data of Securities and Exchange Board of India (Sebi), UTI’s net inflow
in the fiscal 2000-01 has dipped by around 93 per cent compared to the inflow in the
previous fiscal.

Net inflow of UTI in 2000-01 stood at Rs 323 crore as against Rs 4,548 crore in 1999-
2000 UTI mopped up Rs 12,413 crore from the market while redeeming units worth Rs
12,090 crore leading to a net inflow of just Rs 323 crore in 2000-01.

Public sector funds, excluding UTI, saw a net outflow of funds worth Rs 1,044.5 crore,
which is up by 40.21 per cent over the net outflow of Rs 744.92 crore in 1999-2000.

33
However, private sector mutual funds’ seems to have gained at the cost of UTI and their
net mobilisation was Rs 9,849.57 crore, which is over 30 times more that what UTI
collected. With their impressive performance, private sector funds have increased their
market share to 28.64 per cent of the total net assets of the Rs 90,586.87 crore mutual
fund industry as compared to 23.32 per cent in 1999-2000 and a meager 9.97 per cent in
1998-99.

On the other hand, share of UTI in total net assets has come down to 64.04 per cent from
67 per cent in 1999-00 and 77.94 per cent in 1998-99. However, the share of public
sector funds also has similarly gone down from 12.09 per cent in 1998-99 to 9.68 per cent
in 1999-00 and 7.32 per cent in 2000-01.

As on March 31, 2001, total mutual funds net assets were to the tune of Rs 90,586.87
crore which is a drop of 16.08 per cent over Rs 1,07,946.1 crore the year before. On the
other hand, the total net mobilisation by the industry for 2000-01 was Rs 9,128.07 crore
as against Rs 18,969.88 crore the year before, which implies a drop of almost 52 per cent.

The fall in net mobilizations was due to the fact that while total mobilizations of the
industry managed to grow by 51.78 per cent to Rs 92,957.39 crore, the redemption’s saw
a 98.31 per cent increase to Rs 83,829.32 crore as a result of which there was a fall of 52
per cent in net mobilizations.

The drop of almost 93 per cent net mobilization by UTI follows massive erosion in its
performance in 1998-99 wherein, the leading MF saw a Rs 2,737.53 crore net outflow of
funds. The dominance of private sector funds can be seen from the fact that while UTI
has managed to increase its net assets from Rs 53,145 crore as on March 31, 1999 to Rs
58,016.72 crore as on March 31, 2001, private sector funds have grown from Rs 6,797.16
crore to Rs 25,942.14 crore during the same period.

• Public sector funds, on the other hand, have reduced their net assets from Rs
8,250.65 crore as on March 31, 1999 to Rs 6,628.01 crore on March 31, 2001

Findings from Tarapore Committee Report:

Bar FIs, COs from investing in US-64: Tarapore panel

34
 New Delhi, Our Bureau

The Tarapore Committee has found that there was no breach of confidential information
leading to huge redemptions of almost Rs 4,000 crore in April and May in US-64.

The committee, in its report, has made a radical recommendation that institutions and
corporates should be barred from investing in the scheme. It believes that as long as they
are allowed to invest, the scheme will continue to face volatility.

The committee had been asked by finance Minister Yashwant Sinha to examine whether
there was a breach of confidentiality behind the large-scale redemptions prior to the
announcement of a freeze on redemptions. There was a huge pubic outcry that big
investors got out of US-64 in the nick of time with the help of privileged information.

In its investigations, the committee found that large redemptions in May were made both
by individuals and institutions. While redemptions by individuals rose from Rs 193 crore
in April, 2001 to Rs 1,485.6 crore in May 2001, those by institutions rose in the same
period from Rs 232 crore to Rs 2,281 crore.

The redemptions during April and May by institutions covered 183 entities which
comprised 129 corporates, 47 banks and 7 public sector units.

The largest redemptions during the period were by State Bank of India at Rs 354 crore,
Tata Power at Rs 256 crore, Bombay Dyeing at Rs 191 crore, Bank of Baroda at Rs 150
crore, Telco at Rs 136 crore, Peerless at Rs 105 crore, ICICI Bank at Rs 104 crore, Bank
of India at Rs 74 crore, and Bank of Maharashtra at Rs 64 crore.

Other large redemptions included those by National Housing Bank, Corporation Bank,
Bharat Electronics, SIDBI, Punjab and Sind Bank, Union Bank of India, Bajaj Auto,
Dena Bank, DCB, Karnataka Bank, IL&FS, Britannia, Nagarjuna Fertiliser Sahara India,
Indo Gulf Corporation.

35
The committee found that as the move to an NAV-based system was imminent,
expectations of a lower redemption rate was common. In the circumstance, an exodus
from the scheme was inevitable.

The usual 10 paise monthly repurchase price increase for US-64 was reduced to 5 paise
in May 2001 and the closure was announced from June 2001.

Tarapore panel picks holes in UTI investments in Essar Steel, Zee Tele
NEW DELHI

ET TEAM

The Tarapore committee report has found prima facie discrepancies in the UTI
investments made in Essar Steel, Zee Telefilms, SSI, Visualsoft, and Global
Telesystems. The panel has suggested a thorough on-site audit of these investments to
investigate further.

The panel has also recommended that the UTI investments in Reliance Industries be
referred straight to a pre-investigative body without an audit. It also suggested audits
in case of Reliance Petroleum and Reliance Capital. The committee has noted that
investments in all three were imprudent but UTI made profits in case of both RIL and
RPL.

The committee has noted that an investment of Rs 300 crore in NCDs of Essar Steel
was done at a time when the financial position of the company was deteriorating and
the circumstances which weighed with the UTI in sanctioning a further investment of
Rs 300 crore were not discussed in the internal office note in the memorandum placed
before the executive committee. This was an attempt at evergreening which was not
approved by the executive committee, it says

On the investment of Rs 25 crore in non-convertible debentures it says that while the

earlier equity holding was stated to be have depreciated substantially, the reasons for
accepting the condition of conversion into equity at par was not clear.

36
Again the reasons which weighed with the UTI in making a further investment of Rs
25 crore when the company was in default and had even failed to repay the earlier
investments under NCDs of Rs 300 crore are not clear.

On Global Telesystems, the company has said that the transactions of sale purchase
undertaken in the scrip were beyond the powers of the concerned functionaries. It is
not clear as to who authorised the build up of these large positions. It has also said
that the build up of a portfolio in Global Tele appears to have facilitated the upward
trend in its prices and the decisions not to off-load the stock to book profits, when the
prices were favorable, or cut losses in adverse circumstances, do raise some doubts.

On investments in Visual software, the committee has noted that the build up of
portfolio was not backed by any internal process notes or any regular delegation of
powers to the fund managers for investment decisions in the stock market.

It says that the revised research report dated July 19, 1999, submitted to the UTI
chairman was in fact a blanked permission to move along with the market even if the
price was manipulated and not based on the realistic prices assessed on the financial
strength of the company. It facilitated a free play in the market for UTI’s fund
managers, it has concluded.

On the investments in Zee Telefilms, the Tarapore panel has reported that though the
UTI’s portfolio held at the end of June 2000 had depreciated by Rs 294 crore, it did
not pick up the market signals and did not conduct any study of the shares before
augmenting its stock of the company. As a result, in the subsequent year, it not only
booked a loss of Rs 11 crore but its holding at the end of June 2001 stood depreciated
by Rs 658 crore.

37
SOME MAJOR MUTUAL FUNDS IN INDIA:

UTI-An Overview

The mutual fund industry in India began with the setting up of the Unit Trust In India
(UTI) in 1964 by the Government of India. During the last 36 years, UTI has
grown to be a dominant player in the industry with assets of over Rs. 76,547
Crores as of March 31, 2000. The UTI is governed by a special legislation, the
Unit Trust of India Act, 1963. In 1987 public sector banks and insurance
companies were permitted to set up mutual funds and accordingly since 1987, 6
public sector banks have set up mutual funds. Also the two Insurance companies
LIC and GIC established mutual funds. Securities Exchange Board of India
(SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time
established a comprehensive regulatory framework for the mutual fund industry.
Since then several mutual funds have been set up by the private and joint sectors

38
UTI takes a serious look at restructuring: accepts Malegam committee report
(On Oct 31 , 2001)
The Unit trust of India has accepted the recommendations of the Malegam Committee.
This is a move in the right direction. The institution would be restructured into a three-
tier organization. They would have a sponsor, trustee and an asset management company
just like any other mutual fund. The fund has decided to offload 60 percent stakes of the
sponsoring company to a strategic partner and there is a possibility of roping in a foreign
strategic partner. An independent valuer may value UTI. And among other things various
other legislatures, particularly the UTI Act may be amended.
Chola Gilt Savings Plan declares dividend (On Oct 31 , 2001)
Chola Gilt Savings Plan has declared a dividend of 0.80 percent or Re.0.080 per unit on a
face value of Rs. 10. The record date for the dividend declaration has been set as Oct 26,
2001. The Ex-dividend Nav as on Oct 29, 2001 is Rs.10.2225. The open-ended Gilt fund
was launched in Mar last year. The main aim of the fund is to generate returns from a
portfolio which is free from credit risk.The portfolio will target an average maturity not
exceeding 3 years.

UTI holding stocks of 1000 unlisted firms (On Oct 30 , 2001)

As per findings of the Tarapore committee the Unit Trust of India, has allegedly made
investments in over 1000 unlisted companies in the last decade. These investments were
made in the form of equity or non-convertible debentures at a high premium. The
committee, which has been carrying out the inquiry for the last three months has
highlighted the lack of a transparent decision making process, concentrated in the hands
of a few top level officials. Our honorable Finance minister set up the committee in July
this year to initiate an independent inquiry into issue of insider trading and commercial
decision of UTI. The complied report is likely to submitted sometime this week.

UTI introduces first Touch Screen Kiosk (On Oct 30 , 2001)

Unit Trust of India, the largest mutual fund in India has introduced TSK, a touch screen
kiosk system. TSK will enable the existing investors to obtain information on UTI

39
schemes, which will disseminate information on schemes, NAVs including the historical
NAVs, taxation on investments in UTI schemes, NRI investments, Branch network, etc.
It will also provide a tool- return calculator, with which investors can calculate returns for
a chosen period of time. The fund house will also have the feature of a detailed portfolio
information for investors. It further plans to provide customer centric account information
on these Kiosks and information on the schemes on a real-time basis in future. The TSK
system has been structured to provide the information of pre and post sales services in
three phases, the first phase will provide all the product details including the objective of
the scheme and portfolios and would be displayed along with the UTI branch network
details and contact numbers. The second phase will provide investors the facility for
online query (including complaints and suggestions) for all investments made with UTI.
For the matter, UTI is planning to introduce an interface, which would connect investor-
based databases on various schemes with the browser based query system or generic
system. In the third phase, UTI plans to integrate the all the data information of all the
schemes into the Generic System Database. It would enable the investing public to do
online financial transactions such as Sale, Transfer, Repurchase, etc. of units using their
personalized Smart Cards / Debit Cards / Credit Cards on various UTI schemes. At
present, only the first phase development has been completed and tested. In order to offer
investors, the best services, UTI intends to make these kiosks transaction based, where
the investor can buy or repurchase UTI Schemes.

SBI MUTUAL FUNDS:

SBIMF - Pioneer bank sponsored mutual fund

In 1987, sensing the need for an investment alternative, the State Bank of India launched
SBI Mutual Fund, making it the pioneer bank sponsored mutual fund in an untapped field
with a huge potential.

40
Today the Fund has an investor base of over 2.8 million spread over 23 schemes. With a
large network of collecting branches and investor service centers, SBI Mutual Fund
constantly endeavors to get closer to its growing family of investors.

Establishment

SBI Mutual Fund has grown tremendously in terms of corpus as well as number of
investors. Today, it is the largest bank sponsored mutual fund with an investor base of 2.8
million. SBI Mutual Fund has launched 20 schemes, of which 7 have been redeemed,
yielding handsome returns. Today, the fund manages over Rs. 2,500 crores.

SBI Mutual Fund is also the first bank sponsored mutual fund to launch an offshore fund,
the India Magnum Fund, with a corpus of $206 million.

With the largest network (over 34 collecting branches and 21 Investor Service Centres)
SBI Mutual Fund constantly endeavors to get closer to its growing family of investors.

Pedigree
SBI Mutual Fund draws strength from India's premier and largest bank; the State Bank of
India. Set up on July 1, 1955, the State Bank of India is the largest banking operation in
the country.

Through years of commitment to service and national development, SBI has grown into
an instrument of social change. Today, it has 8691 branches in India (excluding over
3850 branches of banking subsidiaries) and 49 offices in 33 countries spread over all time
zones

PRUDENTIAL ICICI:

Prudential ICICI Asset Management Company, (55%:45%) a joint venture between

Prudential, UK's leading insurance company and ICICI, India's premier financial
institution.

41
The joint venture was formed with the key objective of providing the Indian investor
mutual fund products to suit a variety of investment needs. The AMC has already
launched a range of products to suit different risk and maturity profiles. Click here to
learn more about the products.

Prudential ICICI Asset Management Company Limited has a networth of about Rs. 58.13
crore (1 crore = 10 million) as of March 31, 2000. Both Prudential and ICICI have a
strategic long-term commitment to the rapidly expanding financial services sector in
India.

KEY INDICATORS:
As of May 1998 As on November 30,2001
Assets under Management Rs. 160 crore Rs.7022.47 crores
Number of Funds Managed 2 13

Prudential ICICI Asset Management Company, (55%:45%) a joint venture between

Prudential, UK's leading insurance company and ICICI, India's premier financial
institution.

The joint venture was formed with the key objective of providing the Indian investor
mutual fund products to suit a variety of investment needs. The AMC has already
launched a range of products to suit different risk and maturity profiles.

KOTHARI PIONEER

Pioneer ITI is India's first mutual fund in the private sector. Today, we manage Rs.3497
crores in assets for over 740,000* investors across a range of growth, balanced, income,
liquid and tax saving funds. In the open end equity funds category, we lead in terms of
assets, and have emerged as the most preferred fund house in India. Today, 1 out of 2
investors in open end equity funds chooses a Pioneer ITI scheme.

Ever since we launched our first two funds, Bluechip and Prima, in October 1993, we
have been recognized as an innovative fund that provides superior investment results,

42
exemplary service, complete product choice and total transparency in the way we operate
and invest.

Pioneer ITI is a joint venture between Pioneer, one of America’s oldest mutual funds and
ITI, one of India's established finance companies. Pioneer helped found the modern
mutual fund industry in the US in 1928, and has operations in several countries across the
globe.

Pioneer has recently become part of the UniCredito Italiano Group - one of Italy's largest
banking companies with over USD 150 billion in assets and 3500 branches and formed a
powerful global asset management company, Pioneer Global Asset Management, with a
strong base in both the US and Europe and assets under management of over USD 100
billion(as on December 2000).

The Investment Trust of India was established in 1946 and is one of India's well-known
and highly regarded financial services company.

EXTRACTS AND PRESS RELEASES:

PRUICICI MF :

Monday, November 19, 2001

PRUDENTIAL ICICI mutual fund has entered into talks with the Bombay Stock
Exchange and the National Stock Exchange to streamline the process of data
transfer between the various players in the mutual fund business, say
reports. These include brokers, custodians, stock exchanges and mutual
funds.

The current process of data transfer is cumbersome and increases cost for
mutual funds. While brokers place orders for mutual funds through the

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screen-based system of the stock exchanges, the same data is communicated
to mutual funds in physical form.

This data is again converted into electronic form for verification and is
used to calculate the daily NAV. As this has to be released by 8 p.m. every
day there is tremendous pressure on brokers to meet the requirements on
mutual funds. Also, as this data has to be keyed in again personnel have to
be hired by mutual funds, thus increasing their costs.

Prudential ICICI mutual fund has therefore proposed that the details of the
trades done on stock exchanges should be obtained in an electronic form
thus doing away with the practice of verification of the physical contract
notes.

At a later stage the fund has proposed that that all entities in the mutual
fund business will exchange data on a shared system with each player adding
value to the data placed by the previous player.

PRUICICI CLEARING THE WAY:

Sunday, November 04, 2001

Prudential ICICI Mutual Fund has launched a short-term plan under its Income Plan. The
scheme was open for subscription in the initial offer period on October 18 and 19. The
fund would invest in debt securities for the medium term with maturity of between three
to six months with lower level of volatility. The plan is intended to offer
investors a basket of debt products of various tenures.

MARKET MECHANICS:Cashing in(PRUICICI)

Thursday, September 20, 2001

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Should you invest in equity, debt or stay liquid at a time when every
market instrument seems to be erratic? Today, this is the biggest dilemma
that mutual fund managers are facing. For instance, till Monday, the BSE
Sensex was plummeting since a section of the managers preferred to stay
liquid (investing money in call market) and picking value stocks very
selectively. But on Tuesday, the Sensex showed a relief rally.

Given the fact that some equity prices have been touching all-time lows and
some premium quality scrips are available at bargain basement prices, fund
managers are also taking this opportunity to churn portfolios. Says a fundmanager at
IDBI Principal Mutual Fund: "Over the last one week we have
exited sectors like IT which are sensitive to events happening in the
global arena. At the same time, we have entered other sectors such as
pharma and old economy stocks where we feel that the valuations are good
and the potential bright."

IDBI Principal Growth Fund had 15 per cent in cash before the Manhattan
tragedy. Subsequently, this has been reduced to around 9 per cent, through
a change in the investment strategy. Most funds have been doing the same
thing: cashing out of certain stocks, booking losses and then investing the
proceeds in safer sectors like pharma, consumer durables and the
manufacturing sector.

Pru-ICICI Mutual Fund has around 9 per cent cash in its income fund. Some
aggressive funds are even less liquid with around 5 to 7 per cent cash
holdings at the moment. One state-run mutual fund has liquidity worth 20
per cent. "We are mostly investing in the call money market and selectively
buying value stocks," says the chief of the fund. The trend to stay in cash
was more pronounced a week ago, when some of the funds had cash levels
between 15 and 20 per cent. The scene has changed, as a fund manager puts
it: "The mandate given to us is to manage equity (or debt) and not cash."
The cashing out is not described as "panic selling" to minimise further

45
losses but rather generating cash through strategic sales to invest in
other scrips which would give them returns in the future.

Fund managers are playing the game of selling at a loss with panache.
Imagine a scenario where a manager had entered a scrip at Rs 100; the value
has gone down to Rs 80. He exits booking a loss of Rs 20 and then enters
again when the scrip price goes down further to Rs 60.

This recent practice of funds exiting debt (becoming net sellers) and
putting money in equity (becoming net buyers) is not as yet a trend, feel
mutual fund analysts. Sanjay Garodia, fund manager in Pru-ICICI, points out
that the decision whether to invest or exit debt or equity is a function of
the corpus of the scheme (fund) as well as the kind of scheme it is and the
fund's compulsions such as redemptions or dividend payments. "One cannot go
by short-term movements and extrapolate a trend out of it," he says.
Changing market dynamics could reverse the entire process in a day.

Considering the attractive valuations of equity, it makes sense for funds

to cash out of debt, make some profits in the process and put money into
equity. The fact that funds need to exit debt shows that not many of them
are flush with cash. There's another dimension to this. The market has been
expecting interest rates to rise, in which case the net asset values of
income funds would take a beating. In such a scenario, it is better to exit
when the NAVs are still high and put the money in low quoted scrips.

Fund managers also point out that it is almost impossible to have a uniform
strategy when it comes to managing portfolios since they have to take into
account not only the asset allocation and the sectoral allocation but also
the individual scrips within each sector.

New UTI structure to result in lower returns (UTI)

Economic Times
November 06, 2001

46
THE FEES charged by the country’s largest mutual fund, Unit Trust of India to its
schemes could see a quantum jump, if the new avatar of UTI is adopted.

"UTI’s total expenses to assets ratio is currently one of the lowest in the world," said UTI
chairman M Damodaran This is because UTI currently apportions only its fixed and
recurring costs to the schemes managed by it and does not aim to make a profit. This cost
reimbursement is accomplished by way of a 0.25 per cent contribution schemes make to
the Development Reserve Fund (DRF) of the Trust.

The Rs 1,535-crore DRF owns the infrastructure used by UTI in its operations. Apart
from this contribution to the DRF, schemes are charged a 0.1 per cent contribution to UTI
staff welfare fund. Expert’s estimate that the cost charged by UTI to its schemes would
go up by about a per cent or so after privatization.

This is because the asset management company which will manage the schemes of UTI,
will have to earn a reasonable return on the capital employed, as 60 per cent of its shares
are to be offered to the public.

The AMC will also have to plan for repayment and debt servicing on nearly Rs 850 crore
of bonds it shall issue to Unit Scheme 1964 in return for the scheme transferring assets of
its DRF to it.

The Malegam committee appointed by the UTI board to suggest changes required to
enable UTI to compete in the 21st century have said that, ‘the income of the AMC after
expenses and interest on the bonds issued to US-64 should be sufficient to service the
share capital.’

This would imply that the return to unit-holders would decline by an amount equivalent
to the rise in costs, unless the new management is able to provide superior returns to
shareholders.

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Based on its size, UTI could charge total expenses of up to 1.5 per cent of assets managed
by it on debt oriented schemes whose size exceeds Rs 700 crore.

On equity oriented schemes it would be permitted by Sebi regulations to charge a trifle

higher at 1.75 per cent of assets under management for schemes with size above Rs 700
crore. For smaller schemes the level of expenses allowed is higher.

Even if one assumes that the average fees charged by the proposed AMC are one per cent
of assets managed, then it would generate a gross income of close to Rs 500 crore on Rs
50,000 crore of assets under management.

Based on UTI’s current expenditure levels, about Rs 250 crore of expenses would have to
be deducted from the gross income to arrive at the earnings before interest and taxation.
The balance Rs 250 crore of earnings before interest and tax, would have to interest
payments on bonds worth Rs 900 crore issued to US-64.
Assuming a 10 per cent interest rate, the annual interest burden of Rs 90 crore would
have to be met from earning before interest and tax.

This would leave a net sum of Rs 160 crore as at the pre-tax level. Since a 10.4 per cent
return on equity may not be adequate to service such a large share capital investment and
the public shareholders, it’s clear that the fees charged to the schemes would have to rise
to ensure that investors are enticed to pick up shares in the asset management company’s
proposed public issue of shares worth a face value of Rs 600 crore, say industry watchers.

48
CONCLUSION:
It will be noticed that Mutual funds in India have been wrongly promoted as an
alternative to equity investing, thus creating very high expectations in the minds of
investors. In a falling market these expectations have been belied. Only the pure equity
schemes can be compared with the stock market index. Therefore, returns from mutual
funds cannot really be compared with the stock market index. Ignorance of these facts,
coupled with aggressive selling , have left many mutual funds unable to offer promised
returns, thus driving away many first time investors.
The success of mutual funds depends to a great extent on institutional efforts. There is an
urgent need to promote professional and institutional fund distributors and placement
agencies. However individual investors could also decide independently the right funds to
invest in after a detailed study in the trends of the Mutual Fund Market. So, how does one
find the right funds to invest in. Given a wide choice of over 300 funds the task can be
pretty daunting. However a good starting point would be the historic returns. While past

49
performance is no guarantee of the future returns but it can be a good starting point. Look
for funds that have been more consistent in their performance. For instance if there are
two funds A and B and the yearly return for fund A for the last five years is: 45%, -10%,
85%, -12%, 70%, and that for fund B is 32%, 12%, 48%, 23%, 45%.
Then some one might just look at the last one-year’s performance and say that fund A is
better. But looking back at the last five years, one finds that it is fund B which is actually
better. If an investor had invested Rs. One lakh in both funds five years ago, then fund A
would have grown to Rs.3.61 lakhs, while his investment under fund B would have
grown to Rs.3.90 lakh. However, had he invested one year ago fund A would have
definitely given better returns. But then what if the investor had invested in the year for
which the return was negative. He would have lost some of his capital in the following
year. Since we cannot time the market, it is better to go in for funds, which are less
volatile, or in other words, where the performance is more consistent.
The investment strategy suggested would be:
Investment strategy can be divided into 3 times zones. Short term, Medium term and long
term. The choice of the mutual fund would depend upon the time factor. The investment
pattern could be as shown in the following table. Liquid funds or money market funds
can be used as substitute to your savings bank account as they offer superior returns with
equal safety and liquidity. For investment having duration of 1 to 2 years income fund are
the best option. The degree of safety is higher in income fund and they can be good
substitute to bank fixed deposits. For investors who are looking for long-term capital
growth, equity funds are the best option as equity funds give best returns over long-term
period. If a person is interested in getting above average return and is not averse to taking
higher risk, he can invest in sectoral funds. Again, as in equity funds investment in
sectoral funds will also bear fruits over a long period.
The echo of boom in equity market is being felt in the returns being given by Mutual
Funds. But we should not get lost in the glitter of equities. If one is new to investing in
equities then do not straight away jump to sectoral funds. One should form a proper
harmony between different fund classes like debt, balanced and equities. One should
invest in accordance with one’s goals.

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The volatility is the way of life with equity markets. One should not get panicky with
falling equity market. The temptation to withdraw should be resisted. If you have made
one investment you should stick to it and should not change your investment mix due to
change in flow of market, patience is the key word for investing in equities.
History has shown that only those investors have made profit in equity markets who
have dared to go against the tide. It means if market is going up and your fund is
gaining. This is the time not to put in more money but to book profit and get out of the
fund. Alternatively, when market is moving southwards, it is the time when you can
invest more money because it is at this point that fund’s NAV would be low and its units
will be cheaper to purchase.
Stock market are expected to be stable over medium to long term. Hence, one can take
reasonable exposure in equity funds depending upon his risk profile. Sectoral funds
should be last among all options. Among sectoral funds information technology is
expected to be highly volatile but growth will be there. Basic industries is the sector
having good prospects in future, as economic recovery will gain momentum.
Systematic investment in a fund can do wonder for you even if you do not posses big
amounts for making investments. One can average the cost of his units, which in effect
will be lower than the average amount price. This is because market fluctuations will help
the investor acquire units at different prices.
The most important aspect while chosing the right fund is to look inside the fund:
Looking at the returns is just the starting block. More important is the fact where is the
return coming from. Take a look at the portfolio of the fund and see where the fund
manager has invested ones money. If one is investing in a general-purpose equity fund,
then it should be one. In case the fund has a high concentration of its investment in one or
two stocks or sectors, then it might not be the right fund for you. On the other hand if you
are particularly bullish about a sector and the fund is also over-weight in that sector, then
it is the right fit for an investor. Or else one might like to look at a sector fund. Similarly,
in a debt fund you need to look at the average maturity of the portfolio and the rating
profile. Some funds may be giving higher than average returns by investing in slightly
higher risk paper. Nothing wrong in that. But then one must be aware of the risks and
willing enough to take them. More than that looking inside a funds portfolio actually tells

51
you whether one`s diversification across a group of funds was relevant or not. If one
diversify across three funds and each has the top five sectors as common, and 50 per cent
stocks in common, then probably the diversification is not good enough. Look at the top
holdings within each funds portfolio, add the weights and see how much hit would one
take if that one company were to go bust. If this is more than 10 per cent of one`s
portfolio, then you need to diversify, unless one is are very-very positive about this
company. And even if one is, he should be prepared for the worst, while hoping for the
best.

I would also like to conclude by saying that the Indian Mutual Funds should give up their
complacent and defensive attitude and be ready to take a position in the global market.
Market trend shows that India beyond 2001 would become a major world market and
foreign funds would continue to flow along with the flow of foreign mutual funds and
fund managers. This would lead to increased competition. Therefore, the domestic Indian
funds need to think from a competitive edge.

ANNEXURE:

LIST OF A FEW FUNDS ALONG WITH ITS FUND MANAGERS:

Fund name
Major Schemes
Fund manager
Alliance Capital Mutual Fund
1)Alliance ’95 Fund

2)Alliance Equity Fund

3) Alliance Liquid Income Fund

Birla Mutual
1) Birla Advantage Fund

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2) Birla Income Plus

Kothari Pioneer Mutual Fund

1)Kothari Pioneer Prima Plus

2)Kothari Pioneer Blue Chip

SBI Mutual Fund

1)SBI Magnum Multiplier Scheme’90

2)SBI Magnum Taxgain Scheme 1993

3) SBI Magnum Bond Fund

4) SBI Rising Income Scheme

Prudential - ICICI
1) Prudential ICICI Growth Plan

2) ICICI Premier

DSP Merrill Lynch Fund

DSP Merrill Lynch Equity Fund
Morgan Stanley
Morgan Stanley Growth Fund
Tata Mutual Fund

Tata Balanced Fund Market Trends

HDFC Mutual Fund

HDFE Gilt Fund long-term
HDFC Gilt Fund Short-term
HDFC Growth Fund
Reliance Growth Fund
Reliance Income Fund
JM Balanced Fund Dividend
JM Balanced Fund Growth
Pioneer ITI FMCG
Pioneer ITI Childrens Asset

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Tempelton Frank India
Tempelton Frank India Balanced
Tempelton India Liquid Fund
Tempelton India Balanced Fund
UTI Equity Tax Savings Plan
UTI Master Growth
UTI Master Index Fund
Zurich India Equity Fund
Zurich India Prudent
Zurich India Tax Saver Fund

GLOSSARY:

AMFI- Association of Mutual Funds in India

AMC`s- Asset Management Companies
CO`s- Companies
FI`s- Financial Institutions
GIC- General Insurance Corporation of India
IPO`s- Initial Public Offerings
IDBI- Industrial Development Bank of India
LIC- Life Insurance Corporation of India
MF`s- Mutual Funds

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NCD`s-
NAV- Net Asset Value
PMF- Public Sector Mutual Fund
RBI- Reserve Bank of India
SEBI- Securities Exchange Board of India
UTI- Unit Trust of India

SELECT BIBLIOGRAPHY:

Association of Mutual Funds in India Compiled by D.C. Anjaria and Dhaivat Anjaria
Mutual Funds in India `Marketing Strategies and Investment Practices by H. Sadhak
Mutual Funds Fact Book- Industry Trend and Statistics, Investment Company Institute
(1991), Washington
A study on the Evaluation of the Peformance of Mutual Funds in India, by Kale, Sumita
ans S. Uma

Also, derivations from various journals, newspapers and websites have been made:

55
Economic Times, Financial Times, Intelligent Investor, Business India,
www.amfiindia.com, www.sebi.com, www.hometrade.com, www.indiatimes.com etc.

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