Kamal (Final)

MMS Semester IV
“MUTUAL FUNDS industry IN

INDIA”
Final project submitted in part completion of the degree M.M.S
To G.N.I.M.S
By
KAMALJEET KAUR SAINI
Under the guidance of Prof.Ajmera
Guru Nanak Institute of Management Studies

Matunga, Mumbai
March 2010
Certificate
This is to certify that the final project presented by Kamaljeet Kaur Saini to G.N.I.M.S in
part completion of the degree of MMS under the title “Mutual Funds Industry in India”
has been done under my guidance.
The project is in the nature of original work that has not so far been submitted for any
degree of this University / Institute. References of work and relative sources of information
have been given at the end of the project.
Signature of the Candidate,
Kamaljeet Kaur Saini
Forwarded through Research Guide,
Signature of the Guide,
Prof. Ajmera
GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 2

Acknowledgement
This project on “Mutual Funds in India” is a result of co-operation, hard work and good
wishes of many people. I, student of Guru Nanak Institute of Management Studies would
like to thank my Project Guide PROF. AJMERA for his involvement in my project work &
timely assessment that provided me inspiration & valued guidance throughout my study.
I also take this opportunity to express my sincere gratitude to the library staff who has
provided me right information & study material at the right time.
I am also thankful to all those seen & unseen hands & heads which have been of direct or
indirect help in the completion of this project work.
KAMALJEET KAUR SAINI
STUDENT - FINANCE

INDEX
1 Introduction to mutual funds 5
2 History of mutual funds 7
3 Advantages & disadvantages 10
4 Structure of mutual funds 12
5 Types of mutual funds 14
6 Online mutual funds 24
7 The AFMI code of ethics 27
8 Basis for evaluating mutual funds performance 32
9 The Indian mutual fund industry: Current state 39
10 Challenges & issues 50
11 Vital tips on mutual funds 54
12 Best practices for mutual funds 57
13 Selecting the right mutual fund 59
14 Mutual fund industry update 2010: Regulatory revision 60

15 7 mutual fund investing mistakes to avoid 61
Why NRIs/PIOs should invest directly in Indian mutual

16 63
funds
17 Future perspectives of mutual fund in India 68
18 Reference 72

INTRODUCTION TO MUTUAL FUNDS
Once you've decided to invest in the stock market, mutual funds are an easy way to own stocks
without worrying about choosing individual stocks.
But what is a mutual fund? It's not complicated. A dictionary definition of a mutual fund might
go something like this: 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 objective of a
mutual fund scheme generally forms 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)
You can make money from a mutual fund in three ways:
• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly
all of the income it receives over the year to fund owners in the form of a distribution.
• If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
• If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or to reinvest
the earnings and get more shares.
History of the Indian Mutual Fund Industry:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases:
• First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up
by the Reserve Bank of India and functioned under the Regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management.
• Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation
of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June
1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund
(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up
its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.
• Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer

(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.
• Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among different
private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth.
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 35 funds as at the end of March 2009. This is a continuing
phase of growth of the industry through consolidation and entry of new international and
private sector players.
The graph indicates the growth of assets over the years.
Advantages and Disadvantages of Mutual Funds:

Advantages of Mutual Funds:
• Professional Management: - The primary advantage of funds (at least theoretically) is the
professional management of your money. Investors purchase funds because they do not
have the time or the expertise to manage their own portfolio. A mutual fund is a
relatively inexpensive way for a small investor to get a full-time manager to make and
monitor investments.
• Portfolio Diversification: - By owning shares in a mutual fund instead of owning
individual stocks or bonds, your risk is spread out. The idea behind diversification is to
invest in a large number of assets so that a loss in any particular investment is minimized
by gains in others. In other words, the more stocks and bonds you own, the less any one
of them can hurt you. Large mutual funds typically own hundreds of different stocks in
many different industries. It wouldn't be possible for an investor to build this kind of a
portfolio with a small amount of money.
• Economies of Scale: - Because a mutual fund buys and sells large amounts of securities
at a time, its transaction costs are lower than you as an individual would pay.
• Liquidity: - Because a mutual fund buys and sells large amounts of securities at a time,
its transaction costs are lower than you as an individual would pay.
• Tax Benefits: - Dividends are tax free for all equity & balanced schemes. The Union
Budget 2005-06 has made investments in ELSS eligible for inclusion in the Rs.1 lakh
limit that will be deducted while computing taxable income u/s 80C.
• Simplicity: - Buying a mutual fund is easy. Pretty well any bank has its own line of
mutual funds, and the minimum investment is small. Most companies also have
automatic purchase plans whereby as little as Rs. 500 can be invested on a monthly basis.
• Less Risk: - Investors acquire a diversified portfolio even with a small investment in
mutual funds. The risk in a diversified portfolio is lesser than investing in merely 2 or 3
securities.
• Choice of Schemes: - Mutual funds provide investors with various schemes with different
investment objectives. Investors have the option in a scheme having a correlation
between its investment objectives and their own financial goals. These schemes further
have different plans and options.

• Transparency: - Mutual funds provide investors with updated information pertaining to
the markets and the schemes. All material facts are disclosed to the investors as required
by the regulator.
• Flexibility: - Investors also benefit from the convenience and flexibility offered by
mutual funds. Investors can switch their holdings from a debt 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-ended schemes.
• Safety: - Mutual Fund industry is a part of a well regulated investment environment
where the interests of the investors are protected by the regulator. All funds are registered
with SEBI and complete transparency is forced.
Disadvantages of Mutual Funds:
• Costs Control not in the hands of an Investor: - Investor has to pay investment
management fees and fund distribution costs as a percentage of his investments (as long
as he holds the units), irrespective of the performance of the fund.
• No Customized Portfolio: - The portfolio of securities in which a mutual fund invests is a
decision taken by the fund manager. Investors have no right to interfere in the decision
making process of a fund manager, which some investors find it as a constraint in
achieving their financial objectives.
• Difficulty in selecting a suitable fund scheme: - Many investors find it difficult to select
one option from the plethora of funds/schemes/options available. For this, they may have
to take the advice from financial planners in order to invest in the right scheme to achieve
their financial objectives.
STRUCTURE OF MUTUAL FUND: -

There are many entities involved and the diagram below illustrates the structure of mutual
funds:-
• SEBI: - The regulation of mutual funds operating in India falls under the preview of
authority of the “Securities and Exchange Board of India” (SEBI). Any person
proposing to set up a mutual fund in India is required under the SEBI (Mutual Funds)
Regulations, 1996 to be registered with the SEBI.
• Sponsor: - The sponsor should contribute at least 40% to the net worth of the AMC.
However, if any person holds 40% or more of the net worth of an AMC shall be deemed
to be a sponsor and will be required to fulfill the eligibility criteria in the Mutual Fund
Regulations. The sponsor or any of its directors or the principal officer employed by the
mutual fund should not be guilty of fraud or guilty of any economic offence.

• Trustees: - The mutual fund is required to have an independent Board of Trustees, i.e.
two third of the trustees should be independent persons who are not associated with the
sponsors in any manner. An AMC or any of its officers or employees are not eligible to
act as a trustee of any mutual fund. The trustees are responsible for - inter alia – ensuring
that the AMC has all its systems in place, all key personnel, auditors, registrar etc. have
been appointed prior to the launch of any scheme.
• Asset Management Company (AMC): - The sponsors or the trustees are required to
appoint an AMC to manage the assets of the mutual fund. Under the mutual fund
regulations, the applicant must satisfy certain eligibility criteria in order to qualify to
register with SEBI as an AMC.
1. The sponsor must have at least 40% stake in the AMC.
2. The chairman of the AMC is not a trustee of any mutual fund.
3. The AMC should have and must at all times maintain a minimum net worth of Rs.
100 crore.
4. The director of the AMC should be a person having adequate professional
experience.
5. The board of directors of such AMC has at least 50% directors who are not
associate of or associated in any manner with the sponsor or any of its
subsidiaries or the trustees.
• Transfer Agents: - The transfer agent is contracted by the AMC and is responsible for
maintaining the register of investors / unit holders and every day settlements of purchases
and redemption of units. The role of a transfer agent is to collect data from distributors
relating to daily purchases and redemption of units. In India, there are two transfer
agents, namely Karvy Computershare Pvt. Ltd. and Computer Age Management Services
(CAMS) with whom all the mutual funds are associated.
• Custodian: - The mutual fund is required, under the Mutual Fund Regulations, to appoint
a custodian to carry out the custodial services for the schemes of the fund. Only
institutions with substantial organizational strength, service capability in terms of
computerization and other infrastructure facilities are approved to act as custodians. The
custodian must be totally delinked from the AMC and must be registered with SEBI.

• Unit Holders: - They are the parties to whom the mutual fund is sold. They are ultimate
beneficiary of the income earned by the mutual funds.
TYPES OF MUTUAL FUNDS: -

General Classification of Mutual Funds:
1. Open-end Funds and Closed-end Funds:
Funds that can sell and purchase units at any point in time are classified as Open-end
Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because
of continuous selling (to investors) and repurchases (from the investors) by the fund. An
open-end fund is not required to keep selling new units to the investors at all times but is
required to always repurchase, when an investor wants to sell his units. The NAV of an
open-end fund is calculated every day.
Funds that can sell a fixed number of units only during the New Fund Offer (NFO)
period are known as Closed-end Funds. The corpus of a Closed-end Fund remains
unchanged at all times. After the closure of the offer, buying and redemption of units by
the investors directly from the Funds is not allowed. However, to protect the interests of
the investors, SEBI provides investors with two avenues to liquidate their positions:
• Closed-end Funds are listed on the stock exchanges where investors can buy/sell
units from/to each other. The trading is generally done at a discount to the NAV
of the scheme. The NAV of a closed-end fund is computed on a weekly basis
(updated every Thursday).
• Closed-end Funds may also offer "buy-back of units" to the unit holders. In this
case, the corpus of the Fund and its outstanding units do get changed.
2. Load Funds and No-Load Funds:

Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio
churning, fund manager's salary etc. Many funds recover these expenses from the
investors in the form of load. These funds are known as Load Funds. A load fund may
impose following types of loads on the investors:
• Entry Load - Also known as Front-end load, it refers to the load charged to an investor at
the time of his entry into a scheme. Entry load is deducted from the investor's contribution
amount to the fund.
• Exit Load - Also known as Back-end load, these charges are imposed on an investor
when he redeems his units (exits from the scheme). Exit load is deducted from the redemption
proceeds to an outgoing investor.
• Deferred Load - Deferred load is charged to the scheme over a period of time.
• Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit
load reduces as the investor stays longer with the fund. This type of load is known as Contingent
Deferred Sales Charge.
All those funds that do not charge any of the above mentioned loads are known as No-
load Funds.
3. Tax-exempt Funds and Non-Tax-exempt Funds:
Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-
end equity oriented funds are exempt from distribution tax (tax for distributing income to
investors). Long term capital gains and dividend income in the hands of investors are tax-
free.
Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all
funds, except open-end equity oriented funds are liable to pay tax on distribution income.
Profits arising out of sale of units by an investor within 12 months of purchase are
categorized as short-term capital gains, which are taxable. Sale of units of an equity
oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the
redemption proceeds to an investor.

Broad Classification of Mutual Funds:
• Equity Funds: - Equity funds are considered to be the more risky funds as compared to
other fund types, but they also provide higher returns than other funds. It is advisable that
an investor looking to invest in an equity fund should invest for long term i.e. for 3 years
or more. There are different types of equity funds each falling into different risk bracket.
In the order of decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds: - In Aggressive Growth Funds, fund managers aspire
for maximum capital appreciation and invest in less researched shares of
speculative nature. Because of these speculative investments Aggressive Growth
Funds become more volatile and thus, are prone to higher risk than other equity
funds.
b. Growth Funds: - Growth Funds also invest for capital appreciation (with time
horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in
the sense that they invest in companies that are expected to outperform the market
in the future. Without entirely adopting speculative strategies, Growth Funds
invest in those companies that are expected to post above average earnings in the
future.
c. Speciality Funds: - Speciality Funds have stated criteria for investments and their
portfolio comprises of only those companies that meet their criteria. Criteria for
some speciality funds could be to invest/not to invest in particular
regions/companies. Speciality funds are concentrated and thus, are comparatively
riskier than diversified funds.. There are following types of speciality funds:
i. Sector Funds: - Equity funds that invest in a particular sector/industry of

the market are known as Sector Funds. The exposure of these funds is
limited to a particular sector (say Information Technology, Auto, Banking,
Pharmaceuticals or Fast Moving Consumer Goods) which is why they are
more risky than equity funds that invest in multiple sectors.
ii. Foreign Securities Funds: - Foreign Securities Equity Funds have the
option to invest in one or more foreign companies. Foreign securities
funds achieve international diversification and hence they are less risky
than sector funds. However, foreign securities funds are exposed to
foreign exchange rate risk and country risk.
iii. Mid-Cap or Small-Cap Funds: - Funds that invest in companies having
lower market capitalization than large capitalization companies are called
Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap
companies is less than that of big, blue chip companies (less than Rs. 2500

crores but more than Rs. 500 crores) and Small-Cap companies have
market capitalization of less than Rs. 500 crores. Market Capitalization of
a company can be calculated by multiplying the market price of the
company's share by the total number of its outstanding shares in the
market. The shares of Mid-Cap or Small-Cap Companies are not as liquid
as of Large-Cap Companies which gives rise to volatility in share prices of
these companies and consequently, investment gets risky.
iv. Option Income Funds: - While not yet available in India, Option Income
Funds write options on a large fraction of their portfolio. Proper use of
options can help to reduce volatility, which is otherwise considered as a
risky instrument. These funds invest in big, high dividend yielding
companies, and then sell options against their stock positions, which
generate stable income for investors.
d. Diversified Equity Funds: - Except for a small portion of investment in liquid

money market, diversified equity funds invest mainly in equities without any
concentration on a particular sector(s). These funds are well diversified and
reduce sector-specific or company-specific risk. However, like all other funds
diversified equity funds too are exposed to equity market risk. One prominent
type of diversified equity fund in India is Equity Linked Savings Schemes
(ELSS). As per the mandate, a minimum of 90% of investments by ELSS should
be in equities at all times. ELSS investors are eligible to claim deduction from
taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the investor before
the expiry of the lock-in period makes him liable to pay income tax on such
income(s) for which he may have received any tax exemption(s) in the past.
e. Equity Index Funds: - Equity Index Funds have the objective to match the
performance of a specific stock market index. The portfolio of these funds
comprises of the same companies that form the index and is constituted in the
same proportion as the index. Equity index funds that follow broad indices (like
S&P CNX Nifty, Sensex) are less risky than equity index funds that follow

narrow sectoral indices (like BSE BANKEX or CNX Bank Index etc). Narrow
indices are less diversified and therefore, are more risky.
f. Value Funds: - Value Funds invest in those companies that have sound
fundamentals and whose share prices are currently under-valued. The portfolio of
these funds comprises of shares that are trading at a low Price to Earning Ratio
(Market Price per Share / Earning per Share) and a low Market to Book Value
(Fundamental Value) Ratio. Value Funds may select companies from diversified
sectors and are exposed to lower risk level as compared to growth funds or
speciality funds. Value stocks are generally from cyclical industries (such as
cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it
is advisable to invest in Value funds with a long-term time horizon as risk in the
long term, to a large extent, is reduced.
g. Equity Income or Dividend Yield Funds: - The objective of Equity Income or
Dividend Yield Equity Funds is to generate high recurring income and steady
capital appreciation for investors by investing in those companies which issue
high dividends (such as Power or Utility companies whose share prices fluctuate
comparatively lesser than other companies' share prices). Equity Income or
Dividend Yield Equity Funds are generally exposed to the lowest risk level as
compared to other equity funds.
• Debt/Income Funds: - Funds that invest in medium to long-term debt instruments issued
by private companies, banks, financial institutions, governments and other entities
belonging to various sectors (like infrastructure companies etc.) are known as Debt /
Income Funds. Debt funds are low risk profile funds that seek to generate fixed current
income (and not capital appreciation) to investors. In order to ensure regular income to
investors, debt (or income) funds distribute large fraction of their surplus to investors.
Although debt securities are generally less risky than equities, they are subject to credit
risk (risk of default) by the issuer at the time of interest or principal payment. To
minimize the risk of default, debt funds usually invest in securities from issuers who are
rated by credit rating agencies and are considered to be of "Investment Grade". Debt

funds that target high returns are more risky. Based on different investment objectives,
there can be following types of debt funds:
a. Diversified Debt Funds: - Debt funds that invest in all securities issued by entities
belonging to all sectors of the market are known as diversified debt funds. The
best feature of diversified debt funds is that investments are properly diversified
into all sectors which results in risk reduction. Any loss incurred, on account of
default by a debt issuer, is shared by all investors which further reduces risk for
an individual investor.
b. Focused Debt Funds: - Unlike diversified debt funds, focused debt funds are
narrow focus funds that are confined to investments in selective debt securities,
issued by companies of a specific sector or industry or origin. Some examples of
focused debt funds are sector, specialized and offshore debt funds, funds that
invest only in Tax Free Infrastructure or Municipal Bonds. Because of their
narrow orientation, focused debt funds are more risky as compared to diversified
debt funds. Although not yet available in India, these funds are conceivable and
may be offered to investors very soon.
c. High Yield Debt funds: - As we now understand that risk of default is present in
all debt funds, and therefore, debt funds generally try to minimize the risk of
default by investing in securities issued by only those borrowers who are
considered to be of "investment grade". But, High Yield Debt Funds adopt a
different strategy and prefer securities issued by those issuers who are considered
to be of "below investment grade". The motive behind adopting this sort of risky
strategy is to earn higher interest returns from these issuers. These funds are more
volatile and bear higher default risk, although they may earn at times higher
returns for investors.
d. Assured Return Funds: - Although it is not necessary that a fund will meet its
objectives or provide assured returns to investors, but there can be funds that
come with a lock-in period and offer assurance of annual returns to investors
during the lock-in period. Any shortfall in returns is suffered by the sponsors or
the Asset Management Companies (AMCs). These funds are generally debt funds
and provide investors with a low-risk investment opportunity. However, the

security of investments depends upon the net worth of the guarantor (whose name
is specified in advance on the offer document). To safeguard the interests of
investors, SEBI permits only those funds to offer assured return schemes whose
sponsors have adequate net-worth to guarantee returns in the future. In the past,
UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that
assured specified returns to investors in the future. UTI was not able to fulfill its
promises and faced large shortfalls in returns. Eventually, government had to
intervene and took over UTI's payment obligations on itself. Currently, no AMC
in India offers assured return schemes to investors, though possible.
e. Fixed Term Plan Series: - Fixed Term Plan Series usually are closed-end schemes
having short term maturity period (of less than one year) that offer a series of
plans and issue units to investors at regular intervals. Unlike closed-end funds,
fixed term plans are not listed on the exchanges. Fixed term plan series usually
invest in debt / income schemes and target short-term investors. The objective of
fixed term plan schemes is to gratify investors by generating some expected
returns in a short period.
• Gilt Funds: - Also known as Government Securities in India, Gilt Funds invest in
government papers (named dated securities) having medium to long term maturity
period. Issued by the Government of India, these investments have little credit risk (risk
of default) and provide safety of principal to the investors. However, like all debt funds,
gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities
are inversely related and any change in the interest rates results in a change in the NAV
of debt/gilt funds in an opposite direction.
• Money Market / Liquid Funds: - Money market / liquid funds invest in short-term
(maturing within one year) interest bearing debt instruments. These securities are highly
liquid and provide safety of investment, thus making money market / liquid funds the
safest investment option when compared with other mutual fund types. However, even
money market / liquid funds are exposed to the interest rate risk. The typical investment
options for liquid funds include Treasury Bills (issued by governments), Commercial
papers (issued by companies) and Certificates of Deposit (issued by banks).

• Hybrid Funds: - As the name suggests, hybrid funds are those funds whose portfolio
includes a blend of equities, debts and money market securities. Hybrid funds have an
equal proportion of debt and equity in their portfolio. There are following types of hybrid
funds in India:
a. Balanced Funds: - The portfolio of balanced funds includes assets like debt
securities, convertible securities, and equity and preference shares held in a
relatively equal proportion. The objectives of balanced funds are to reward
investors with a regular income, moderate capital appreciation and at the same
time minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon.
b. Growth-and-Income Funds: - Funds that combine features of growth funds and
income funds are known as Growth-and-Income Funds. These funds invest in
companies having potential for capital appreciation and those known for issuing
high dividends. The level of risks involved in these funds is lower than growth
funds and higher than income funds.
c. Asset Allocation Funds: - Mutual funds may invest in financial assets like equity,
debt, money market or non-financial (physical) assets like real estate,
commodities etc.. Asset allocation funds adopt a variable asset allocation strategy
that allows fund managers to switch over from one asset class to another at any
time depending upon their outlook for specific markets. In other words, fund
managers may switch over to equity if they expect equity market to provide good
returns and switch over to debt if they expect debt market to provide better
returns. It should be noted that switching over from one asset class to another is a
decision taken by the fund manager on the basis of his own judgment and
understanding of specific markets, and therefore, the success of these funds
depends upon the skill of a fund manager in anticipating market trends.
• Commodity Funds: - Those funds that focus on investing in different commodities (like
metals, food grains, crude oil etc.) or commodity companies or commodity futures
contracts are termed as Commodity Funds. A commodity fund that invests in a single
commodity or a group of commodities is a specialized commodity fund and a commodity

fund that invests in all available commodities is a diversified commodity fund and bears
less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds
(that invest in gold, gold futures or shares of gold mines) are common examples of
commodity funds.
• Real Estate Funds: - Funds that invest directly in real estate or lend to real estate
developers or invest in shares/securitized assets of housing finance companies, are known
as Specialized Real Estate Funds. The objective of these funds may be to generate regular
income for investors or capital appreciation.
• Exchange Traded Funds: - Exchange Traded Funds provide investors with combined
benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow
stock market indices and are traded on stock exchanges like a single stock at index linked
prices. The biggest advantage offered by these funds is that they offer diversification,
flexibility of holding a single share (tradable at index linked prices) at the same time.
Recently introduced in India, these funds are quite popular abroad.
• Fund of Funds: - Mutual funds that do not invest in financial or physical assets, but do
invest in other mutual fund schemes offered by different AMCs, are known as Fund of
Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund
schemes, just like conventional mutual funds maintain a portfolio comprising of
equity/debt/money market instruments or non financial assets. Fund of Funds provide
investors with an added advantage of diversifying into different mutual fund schemes
with even a small amount of investment, which further helps in diversification of risks.
However, the expenses of Fund of Funds are quite high on account of compounding
expenses of investments into different mutual fund schemes.

ONLINE MUTUAL FUNDS: -
Working of Online Mutual Fund: -
The entire process of buying mutual fund units online through the company’s website is as
shown below: -
Open www.click2profit.in
Click on Apply Mutual

Fund Online
Enter User-Id and Password
Select the AMC
Click on Purchase of
respective AMC
Cancel Yes
Final
Select from the list of Confirmati
various funds of the AMC on
Place the order Accept Terms and

Conditions
Enter the Amount Funds Transfer Online

Proceed for Confirmation
Transaction Booked
• First of all, the investor has to go to the company’s website for buying units of the
Mutual Fund.
• Then the investor has to click on Apply Online Mutual Fund option.
• Then the website asks for the username id and password which were given to the
investors by the company at the time of account opening.
• As soon as you enter the username and password, the system authenticates the password
and then directs you to the main page where there is a list of AMC’s to choose from.
• As you click on a particular AMC, the system displays the various schemes and funds
available from that AMC.
• Then you have select the fund or scheme and enter the amount to be invested.
• Once you have entered the amount, the system asks for confirmation. Once you confirm
the order, fund transfer takes place and your transaction is booked.
Similarly, the process of redemption of Mutual Fund units takes place in the same manner and
here the amount received is directly credited to your bank account. Also, the option of switching
is given.
As soon as the amount is received by the system, the transfer of mutual fund units takes place
which will be explained with the help of following diagram.
Client Bank A/c Client
Broker Pool A/c
Broker System
AMC

Registrar and Transfer
Agents
Advantages of Online Mutual Fund: -
• Hassle Free and Zero paper work (after registration).

• Online fund transfer.
• Online portfolio viewing and tracking.
• Automatic updation of allotment status.
• Direct credit of shares, units to demat account and/or refund in bank account of the
client..
• Single registration for trading, IPO and Mutual Fund (Online Trading Clients).
• In-depth analysis of Mutual Funds (on the website www.click2profit.in).
• Client can apply for a fund by just sitting at his home or office. They don’t need to go to
broker’s desk.
• Applying for mutual funds online can save huge amounts of expenses incurred on
printing application forms.
Disadvantages of Online Mutual Fund: -
• Internet connectivity is a big problem as many of the investors don’t have internet
connection at their residence and office.
• Many times it may happen that an investor wants to redeem his units but could not do so
if a system failure occurs.
• The applicants have to be careful about online funds transfer as there are chances of
someone hacking through their username and password.

THE AMFI CODE OF ETHICS
One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the
investors’ interest by defining and maintaining high ethical and professional standards in the
mutual fund industry. The AMFI Code of Ethics, “The ACE” for short, sets out the standards of
good practices to be followed by the Asset Management Companies in their operations and in
their dealings with investors, intermediaries and the public. SEBI (Mutual Funds) Regulation
1996 requires all Asset Management Companies and Trustees to abide by the Code of conduct as
specified in the Fifth Schedule to the Regulation. The AMFI Code has been drawn up to
supplement that schedule, to encourage standards higher than those prescribed by the
Regulations for the benefit of investors in the mutual fund industry.
1.0 INTEGRITY
1.1 Members and their key personnel, in the conduct of their business shall observe high
standards of integrity and fairness in all dealings with investors, issuers, market intermediaries,
other members and regulatory and other government authorities.
1.2 Mutual Fund Schemes shall be organized, operated, managed and their portfolios of
securities selected, in the interest of all classes of unit holders and not in the interest of sponsors
directors of Members members of Board of Trustees or directors of the Trustee company brokers
and other market intermediaries associates of the Members a special class selected from out of
unitholders
2.0 DUE DILIGENCE

2.1 Members in the conduct of their Asset Management business shall at all times render high
standards of service. Exercise due diligence. Exercise independent professional judgement.
2.2 Members shall have and employ effectively adequate resources and procedures which are
needed for the conduct of Asset Management activities.

3.0 DISCLOSURES
3.1 Members shall ensure timely dissemination to all unitholders of adequate, accurate, and
explicit information presented in a simple language about the investment objectives, investment
policies, financial position and general affairs of the scheme.
3.2 Members shall disclose to unitholders investment pattern, portfolio details, ratios of expenses
to net assets and total income and portfolio turnover wherever applicable in respect of schemes
on annual basis.
3.3 Members shall in respect of transactions of purchase and sale of securities entered into with
any of their associates or any significant unitholder. submit to the Board of Trustees details of
such transactions, justifying its fairness to the scheme. disclose to the unitholders details of the
transaction in brief through annual and half yearly reports.
3.4 All transactions of purchase and sale of securities by key personnel who are directly involved
in investment operations shall be disclosed to the compliance officer of the member at least on
half yearly basis and subsequently reported to the Board of Trustees if found having conflict of
interest with the transactions of the fund.
4.0 PROFESSIONAL SELLING PRACTICES

4.1 Members shall not use any unethical means to sell, market or induce any investor to buy their
products and schemes4.2 Members shall not make any exaggerated statement regarding
performance of any product or scheme.
4.3 Members shall endeavor to ensure that at all times investors are provided with true and
adequate information without any misleading or exaggerated claims to investors about their
capability to render certain services or their achievements in regard to services rendered to other
clients, investors are made aware of attendant risks in members’ schemes before any investment
decision is made by the investors, copies of prospectus, memoranda and related literature is
made available to investors on request,adequate steps are taken for fair allotment of mutual fund
units and refund of application moneys without delay and within the prescribed time limits and,
complaints from investors are fairly and expeditiously dealt with.
4.4 Members in all their communications to investors and selling agents shall not present a
mutual fund scheme as if it were a new share issue not create unrealistic expectations not
guarantee returns except as stated in the Offer Document of the scheme approved by SEBI, and

in such case, the Members shall ensure that adequate resources will be made available and
maintained to meet the guaranteed returns. convey in clear terms the market risk and the
investment risks of any scheme being offered by the Members. not induce investors by offering
benefits which are extraneous to the scheme. not misrepresent either by stating information in a
manner calculated to mislead or by omitting to state information which is material to making an
informed investment decision.
5.0 INVESTMENT PRACTICES

5.1 Members shall manage all the schemes in accordance with the fundamental investment
objectives and investment policies stated in the offer documents and take investment decisions
solely in the interest of the unitholders.
5.2 Members shall not knowingly buy or sell securities for any of their schemes from or to any
director, officer, or employee of the member any trustee or any director, officer, or employee of
the Trustee Company
6.0 OPERATIONS
6.1 Members shall avoid conflicts of interest in managing the affairs of the schemes and shall
keep the interest of all unitholders paramount in all matters relating to the scheme.
6.2 Members or any of their directors, officers or employees shall not indulge in front running
(buying or selling of any securities ahead of transaction of the fund, with access to information
regarding the transaction which is not public and which is material to making
an investment decision, so as to derive unfair advantage).
6.3 Members or any of their directors, officers or employees shall not indulge in self dealing
(using their position to engage in transactions with the fund by which they benefit unfairly at the
expense of the fund and the unitholders) 6.4 Members shall not engage in any act, practice or
course of business in connection with the purchase or sale, directly or indirectly, of any security
held or to be acquired by any scheme managed by the Members, and in purchase, sale and
redemption of units of schemes managed by the Members, which is fraudulent, deceptive or
manipulative.
6.5 Members shall not, in respect of any securities, be party to- creating a false market,

price rigging or manipulation passing of price sensitive information to brokers, Members of
stock exchanges and other players in the capital markets or take action which is unethical or
unfair to investors.
6.6 Employees, officers and directors of the Members shall not work as agents/ brokers for
selling of the schemes of the Members, except in their capacity as employees of the Member or
the Trustee Company.
6.7 Members shall not make any change in the fundamental attributes of a scheme, without the
prior approval of unitholders except when such change is consequent on changes in the
regulations.
6.8 Members shall avoid excessive concentration of business with any broking firm, and
excessive holding of units in a scheme by few persons or entities.
7.0 REPORTING PRACTICES

7.1 Members shall follow comparable and standardized valuation policies in accordance with the
SEBI Mutual Fund Regulations.
7.2 Members shall follow uniform performance reporting on the basis of total return.
7.3 Members shall ensure schemewise segregation of cash and securities accounts.
8.0 UNFAIR COMPETITION

Members shall not make any statement or become privy to any act, practice or competition,
which is likely to be harmful to the interests of other Members or is likely to place other
Members in a disadvantageous position in relation to a market player or investors, while
competing for investible funds.
9.0 OBSERVANCE OF STATUTES, RULES AND REGULATIONS

Members shall abide by the letter and spirit of the provisions of the Statutes, Rules and
Regulations which may be applicable and relevant to the activities carried on by the Members.
10.0 ENFORCEMENT
Members shall: widely disseminate the AMFI Code to all persons and entities covered by it
make observance of the Code a condition of employment make violation of the provisions of the

code, a ground for revocation of contractual arrangement without redress and a cause for
disciplinary action require that each officer and employee of the Member sign a statement that
he/ she has received and read a copy of the Code establish internal controls and compliance
mechanisms, including assigning supervisory responsibility designate one person with primary
responsibility for excercising compliance with power to fully investigate all possible violations
and report to competent authority file regular reports to the Trustees on a half yearly and annual
basis regarding observance of the Code and special reports as circumstances require maintain
records of all activities and transactions for at least three years, which records shall be subject to
review by the Trustees dedicate adequate resources to carrying out the provisions of the Code
11.0 DEFINITIONS
When used in this code, unless the context otherwise requires
(a) AMFI : “AMFI” means the Association of Mutual Funds in India
(b) Associate : “Associate” means and includes an ‘associate’ as defined in regulation 2(c) of
SEBI (Mutual Fund) Regulations 1996.
(c) Fundamental investment policies : The “fundamental investment policies” of a scheme
managed by a member means the investment objectives, policies, and terms of the scheme, that
are considered fundamental attributes of the scheme and on the basis of which unitholders have
invested in the scheme.
(d) Member : A “member” means the member of the Association of Mutual Funds in India.
(e) SEBI : “SEBI” means Securities and Exchange Board of India.
(f) Significant Unitholder : A “Significant Unitholder” means any entity holding 5% or more of
the total corpus of any scheme managed by the member and includes all entities directly or
indirectly controlled by such a unitholder.
(g) Trustee : A “trustee” means a member of the Board of Trustees or a director of the Trustee
Company.
(h) Trustee Company : A “Trustee Company” is a company incorporated as a Trustee Company
and set up for the purpose of managing a mutual fund.

Basis for Evaluating Mutual fund Performance:
Evaluation Parameters
Following are the evaluation parameters on the basis of which the analysis and comparison of
various equity schemes is done.
Net Asset Value (NAV)
The value of a collective investment fund based on the market price of securities held in its
portfolio. NAV per share is calculated by dividing net assets of the scheme /number of Units
outstanding.
Assets under Management
It is used to gauge how much money a fund is managing. Mutual Funds use this as a measure of
success and comparison against their competitors; in lieu of revenue or total revenue they use
total 'assets under management'.
The difference between two AUM balances consists of market performance gains/(losses),
foreign exchanges movements, net new assets (NNA) inflow/(outflow) and structural effects of
the company. Investors are mainly interested in the NNA, which indicate how much money from
clients had been newly invested. Furthermore, it's common to calculate the key figure 'NNA
growth', which shows the NNA in relation of the previous AUM balance (annualized).
Expense Ratio
Expense ratio states how much you pay a fund in percentage term every year to manage your
money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then
you are paying the fund Rs 150 to manage your money. In other words, if a fund earns 10 per
cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor.
Funds' NAVs are reported net of fees and expenses; therefore, it is necessary to know how much

the fund is deducting. Since this is charged regularly (every year), a high expense ratio over the
long-term may eat into your returns massively through power of compounding. Different funds
have different expense ratios. But the Securities & Exchange Board of India has stipulated a
limit that a fund can charge. Equity funds can charge a maximum of 2.5 per cent, whereas a debt
fund can charge 2.25 per cent of the average weekly net assets.
The largest component of the expense ratio is management and advisory fees. From management
fee an AMC generates profits. Then there are marketing and distribution expenses. All those
involved in the operations of a fund like the custodian and auditors also get a share of the pie.
Interestingly, brokerage paid by a fund on the purchase and sale of securities is not reflected in
the expense ratio. Funds state their buying and selling price after taking the transaction cost into
account. Recently, funds have launched institutional plans for big-ticket investors, where the
expense ratio is relatively lower than normal funds. This is because the cost of servicing is low
due to larger investment amount, which means lower expenses. A lower expense ratio does not
necessarily mean that it is a better-managed fund. A good fund is one that delivers a good return
with minimal expenses.
Portfolio Turnover
Each buys and sell transaction in the stock markets involves a brokerage cost. This brokerage
cost has to be borne by the mutual fund, which in turn passes it on to its investors. So investors
have to pay for the trading carried out by the fund on their behalf. Obviously, higher the volume
of trading, greater will be the associated costs. And greater trading costs can definitely reduces
returns. So how does one know how much the fund manager is trading? The answer to this
question is provided by the turnover ratio. The turnover ratio represents the percentage of a
fund's holdings that change every year. To put it simply, a turnover rate of 100 per cent implies
that the fund manager has replaced his entire portfolio during the period given. Higher the
turnover ratio, greater is the volume of trading carried out by the fund.
Is a high turnover bad? Well, that depends on what it achieves. If high turnover can generate
high returns, then there should be no problems. The problem arises when a fund is trading
heavily and not generating commensurate returns. The turnover ratio is more important for

equity funds where the trading cost of equities is substantial. So, each time a fund manager buys
and sells, he has to keep in mind that the cost of buying and selling will eat into the fund's
returns.
Standard Deviation
Standard deviation is a measure of total risks of a fund. In other words it measures the volatility
of returns of a fund. It indicates the tendency of the funds NAV to rise and fall in a short period.
It measures the extent to which the NAV fluctuates as compared to the average returns during a
period.
A fund that has a consistent four –year return of 3% for example would have a mean or average,
of 3%. The standard deviation for this fund would then be zero because the fund's return in any
given year does not differ from its four year mean of 3%. On the other hand, a fund that in each
of the last four years returned -5%, 17%, 2%, and 30% will have a mean return of 11%. The fund
will also exhibit a high standard deviation because each year the return of the fund differs from
the mean return. The fund is therefore more risky because it fluctuates widely between negative
and positive returns within a shorter period. A higher standard deviation means that the returns
of the fund have been more volatile than a fund having low standard deviation. In other words
high standard deviation means high risk.
Sharpe Ratio
The Sharpe ratio represents trade off between risk and returns. At the same time it also factors in
the desire to generate returns, which are higher than those from risk free returns. Mathematically
the Sharpe ratio is the returns generated over the risk free rate, per unit of risk. Risk in this case
is taken to be the fund's standard deviation. As standard deviation represents the total risk
experienced by a fund, the Sharpe ratio reflects the returns generated by undertaking all possible
risks. It is thus one single number, which represents the trade off between risks and returns. A
higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk.
Sharpe ratio provides an unbiased look into fund's performance. This is because they are based
solely on quantitative measures. However, these do not account for any risks inherent in a funds

portfolio. For example, if a fund is loaded with technology stocks and the sector is performing
well, then all quantitative measures will give such a fund high marks. But the possibility of the
sector crashing and with it the fund sinking is not calculated. In view of these possibilities
quantitative tools should be used along with information on the nature of the funds strategies, its
fund management style and risk inherent in the portfolio. Quantitative tools can be used for
screening but they should not be the only indicator of a fund's performance.
The Sharpe ratio is one of the most useful tools for determining a fund's performance. This
measure is used the world over and there is no reason why you as an in investor should not use
it.
Beta
Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex
moves by 25 per cent, a fund's beta number will tell you whether the fund's returns will be more
than this or less. The beta value for an index itself is taken as one. Equity funds can have beta
values, which can be above one, less than one or equal to one. By multiplying the beta value of a
fund with the expected percentage movement of an index, the expected movement in the fund
can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten
per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly, if
the market loses ten per cent, the fund should lose 12 per cent.
Each dot represents a fund's returns plotted against the market returns in the same period. The
line is the beta of these returns. While the beta is same in both, it is far more representative of the
returns in the left graph then right one. This shows that a fund with a beta of more than one will
rise more than the market and also fall more than market. Clearly, if you would like to beat the

market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such
a fund will also fall more than the market on the way down.
Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way
down. When safety of investment is important, a fund with a beta of less than one is a better
option. Such a fund may not gain much more than the market on the upside; it will protect
returns better when market falls.
Essentially, beta expresses the fundamental trade-off between minimizing risk and maximizing
return. A fund with a beta of 1 will historically move in the same direction of the market. A beta
above 1 is more volatile than the overall market, while a beta below 1 is less volatile. So while
you can expect a high return from a fund that has a beta of 2, you will have to expect it to drop
much more when the market falls. The effectiveness of the beta depends on the index used to
calculate it. It can happen that the index bears no correlation with the movements in the fund.
R-squared
But the problem with beta is that it depends on the index used to calculate it. It can happen that
the index bears no correlation with the movements in the fund. Thus, if beta is calculated for
large cap fund against a mid-cap index, the resulting value will have no meaning. This is because
the fund will not move in tandem with the index. Due to this reason, it is essential to take a look
at a statistical value called R-squared along with beta. The R-squared value shows how reliable
the beta number is. R-squared values range between 0 and 100, where 0 represents the least
correlation and 100 represents full correlation. If a fund's beta has an R-squared value that is
close to 100, the beta of the fund should be trusted. On the other hand, an R-squared value that is
close to 0 indicates that the beta is not particularly useful because the fund is being compared
against an inappropriate benchmark.
Thus, an index fund investing in the Sensex should have an R-squared value of one when
compared to the Sensex. For equity diversified funds, an R-squared value greater than 0.8 is
generally accepted to mean that the underlying beta value is reliable and can be used for the
fund.

P/E Ratio
A valuation ratio of a company's current share price compared to its per-share earnings. It is
calculated as:
Also sometimes known as "price multiple" or "earnings multiple". Companies with higher
growth rates command higher P/E ratios. Confidence that a company will improve its
profitability or remain profitable generally results in a higher P/E ratio. If profits are threatened
or weak, the P/E ratio is likely to drop.
P/B Ratio
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the
current closing price of the stock by the latest quarter's book value per share. It is also called as
"Price to Equity Ratio". It is calculated as:
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that
something is fundamentally wrong with the company. As with most ratios, this varies by
industry. This ratio also gives some idea of whether you're paying too much for what would be
left if the company went bankrupt immediately.
How to calculate the growth of your Mutual Fund investments ?

Let's assume that Mr. Gupta has purchased Mutual Fund units worth Rs. 10,000 at an NAV of
Rs. 10 per unit on February 1. The Entry Load on the Mutual Fund was 2%. On September 15,

he sold all the units at an NAV of Rs 20. The exit load was 0.5%.
His growth/ returns is calculated as under:
1. Calculation of Applicable NAV and No. of units purchased:
a. Amount of Investment = Rs. 10,000

b. Market NAV = Rs. 10
c. Entry Load = 2% = Rs. 0.20
d. Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
e. Actual Units Purchased = (a) / (d) = 980.392 units.

2. Calculation of NAV at the time of Sale
a. NAV at the time of Sale = Rs 20

b. Exit Load = 0.5% or Rs.0.10
c. Applicable NAV = (a) – (b) = Rs. 19.90

3. Returns/Growth on Mutual Funds
a. Applicable NAV at the time of Redemption = Rs. 19.90

b. Applicable NAV at the time of Purchase = Rs. 10.20
c. Growth/ Returns on Investment = {(a) – (b)/(b) * 100} = 95.30%

The Indian Mutual Fund Industry – The Current
State
The Indian mutual fund industry has evolved from a single player monopoly in 1964 to a fast
growing, Competitive market on the back of a strong regulatory framework.
AUM Growth
The Assets under Management (AUM) have grown at a rapid pace over the past few years, at a
CAGR of 35 percent for the five-year period from 31 March 2005 to 31 March 20091. Over the
10 year period from 1999 to 2009 encompassing varied economic cycles, the industry grew at 22
percent CAGR. This growth was despite two falls in the AUM – the first being after the year
2001 due to the dotcom bubble burst, and the second in 2008 consequent to the global economic
crisis (the first fall in AUM in March 2003 arising from the UTI split).
AUM Base and Growth Relative To the Global Industry
India has been amongst the fastest growing markets for mutual funds since 2004; in the five-year
period from 2004 to 2008 (as of December) the Indian mutual fund industry grew at 29 percent
CAGR as against the global average of 4 percent. Over this period, the mutual fund industry in

mature markets like the US and France grew at 4 percent, while some of the emerging markets
viz. China and Brazil exceeded the growth witnessed in the Indian market. However, despite
clocking growth rates that are amongst the highest in the world, the Indian mutual fund industry
continues to be a very small market; comprising 0.32 percent share of the global AUM of USD
18.97 trillion as of December 2008.
AUM to GDP Ratio
The ratio of AUM to India’s GDP, gradually increased from 6 percent in 2005 to 11 percent in
2009. Despite this however, this continues to be significantly lower than the ratio in developed
countries, where the AUM accounts for 20-70 percent of the GDP.

Share of Mutual Funds in Household Financial Savings
Investment in mutual funds in India comprised 7.7 percent of the gross household financial
savings in FY 2008, a significant increase from 1.2 percent in FY 2004. The households in India
continue to hold 55 percent of their savings in fixed deposits with banks, 18 percent in insurance
and 10 percent in currency as of FY 2008.
In 2008, the UK had more than thrice the investments into mutual funds as a factor of total
household savings (26 percent), than India had in the same time period. As of December 2008,
UK households held 61 percent of the total savings in bank deposits, 11.6 percent in equities and
1 percent in bonds.

Profitability
The increase in revenue and profitability in the Indian mutual fund industry has not been
commensurate with the AUM growth in the last 5 years. The AUM grew at 35 percent CAGR in
the period from March 2005 to 2009, while the profitability of AMCs – which is defined as PBT
as a percentage of the AUM – declined from 24 bps in FY 2004 to 14 bps in FY 2008.
During FY 2004 and FY 2008, the investment management fee as a percent of average AUM
was in the range of 55 to 58 bps (small increase to 64 bps in FY 2006) due to the industry focus
on the underlying asset mix comprising relatively low margin products being targeted at the
institutional segment.
The operating expenses, as a percentage of AUM, rose from 41 bps in FY 2004 to 113 bps in
FY 2008 largely due to the increased spend on marketing, distribution and administrative
expenses impacting AMC margins. Rising cost pressures and decline in profitability have
impacted the entry plans of global players eyeing an Indian presence.
The growth in AUM accompanied by a decline in profitability necessitates an analysis of the

underlying characteristics that have a bearing on the growth and profitability of the Indian
mutual fund industry.

The Indian Mutual Fund Industry – Key Characteristics
Customers
The Indian mutual fund industry has significantly high ownership from the institutional
investors. Retail investors comprising 96.86 percent in number terms held approximately 37

percent of the total industry AUM as at the end of March 2008, significantly lower than the retail
participation in the US at 82 percent of AUM as at December 2008.
Out of a total population of 1.15 billion, the total number of mutual fund investor accounts in
India as of 31 March 2008 was 42 million (the actual number of investor is estimated to be lower
as investors hold multiple folios)13. In the US, an estimated 92 million individual investors
owned mutual funds out of a total population of 305 million in 2008.
As per the Invest India Incomes and Savings Survey 2007 of individual wage earners in the age
group 18 to 59 years conducted by IIMS Dataworks, only 1.6 percent invested in mutual funds.
Ninety percent of the savers interviewed were not aware of mutual funds or of investing in
mutual funds through a Systematic Investment Plan (SIP). The mutual fund penetration among
the paid Indian workforce with annual household income less than INR 90,000 was 0.1 percent.
In the last few years, the retail investor participation, in particular, in Tier 2 and Tier 3 towns,
has been on the rise aided by the buoyant equity markets.
Products
The Indian mutual fund industry is in a relatively nascent stage in terms of its product offerings,
and tends to compete with products offered by the Government providing fixed guaranteed

returns. As of December 2008, the total number of mutual fund schemes was 1,002 in
comparison to 10,349 funds in the US.
Debt products dominate the product mix and comprised 49 percent of the total industry AUM as
of FY 2009, while the equity and liquid funds comprised 26 percent and 22 percent respectively.
Open-ended funds comprised 99 percent of the total industry AUM as of March 2009.
As of December 2008, the US mutual fund market comprised money market funds, equity funds,
debt/ bond funds and hybrid funds at 40, 39, 16 and 5 percent of the total AUM respectively.
While traditional vanilla products dominate in India, new product categories viz. Exchange
Traded Funds (ETFs), Gold ETFs, Capital Protection and Overseas Funds have gradually been
gaining popularity. As of March 2009, India had a total of 16 ETFs (0.3 percent of total AUM)
while the US had a total of 728 ETFs as of December 2008.
Markets
While the mutual fund industry in India continues to be metro and urban centric, the mutual
funds are beginning to tap Tier 2 and Tier 3 towns as a vital component of their growth strategy.
The contribution of the Top 10 cities to total AUM has gradually declined from approximately
92 percent in 2005 to approximately 80 percent currently.
Distribution Channels

As of March 2009, the mutual fund industry had 92,499 registered distributors as compared to
approximately 2.5 million insurance agents19. The Independent Financial Advisors (IFAs) or
Individual distributors, corporate employees and corporate comprised 73, 21 and 6 percent
respectively of the total distributor base. Banks in general, foreign banks and the leading new
private sector banks in particular, dominate the mutual fund distribution with over 30 percent
AUM share. National and Regional Distributors (including broker dealers) together with IFAs
comprised 57 percent of the total AUM as of 2007. The public sector banks are gradually
enhancing focus on mutual fund distribution to boost their fee income.
Industry Structure
The Indian mutual fund industry currently consists of 38 players that have been given regulatory
approval by SEBI. The industry has witnessed a shift has changed drastically in favour of private
sector players, as the number of public sector players reduced from 11 in 2001 to 5 in 2009.

The public sector has gradually ceded market share to the private sector. Public sector mutual
funds comprised 21 percent of the AUM in 2009 as against 72 percent AUM share in 2001.
The industry concentration has been stagnant in the four-year period from 2005 to 2008; the top
5 players comprising 50-52 percent of industry AUM. However, as of March 2009, the share of

Top 5 players increased to 58 percent, as against 38 percent in the US. The AUM share of the
Top 10 players has consistently been in the vicinity of 75 percent.
The mutual fund houses based on product portfolio and distribution strategy, the key elements of
competitive strategy, can be segmented into three categories:
• The market leaders having presence across all product segments
• Players having dominant focus on a single product segment – debt or equity
• Players having niche focus on an emerging product category or distribution channels.
The market leaders have focused across product categories for a more diversified AUM base
with an equitable product mix that helps maintain a consistent AUM size.
Although the Indian market has relatively low entry barriers given the low minimum networth
required to venture into mutual fund business, existence of a strong local brand and a wide and
deep distribution footprint are the key differentiators.
Operations
The Indian mutual fund industry while on a high growth path needs to address efficiency and
customer centricity. AMCs have successfully been using outsourced service providers such as
custodians, Registrar and Transfer Agents (R&T) and more recently, fund accountants, so that
mutual funds can focus on core aspects of their business such as product development and
distribution. Functions that have been outsourced are custody services, fund services, registrar
and transfer services aimed at investor servicing and cash management. Managing costs and
ensuring investor satisfaction continue to be the key goals for all mutual funds today.
However, there is likely to be scope for optimising operations costs given the trend of rising
administrative and associated costs as a percentage of AUM.
Regulatory Framework
The Indian mutual fund industry in terms of regulatory framework is believed to match up to the
most developed markets globally. The regulator, Securities and Exchange Board of India (SEBI),

has consistently introduced several regulatory measures and amendments aimed at protecting the
interests of the small investor that augurs well for the long term growth of the industry.
The implementation of Prevention of Money Laundering (PMLA) Rules, the latest guidelines
issued in December 2008, as part of the risk management practices and procedures is expected to
gain further momentum. The current Anti Money Laundering (AML) and Combating Financing
of Terrorism (CFT) measures cover two main aspects of Know Your Customer (KYC) and
‘suspicious transaction monitoring and reporting’.
The regulatory and compliance ambit seeks to dwell on a range of issues including the financial
capability of the players to ensure resilience and sustainability through increase in minimum
networth and capital adequacy, investor protection and education through disclosure norms for
more information to investors, distribution related regulations aimed at introducing more
transparency in the distribution system by reducing the information gap between investors and
distributors, and by improving the mechanism for distributor remuneration.
The success of the relatively nascent mutual fund industry in India, in its march forward, will be
contingent on further evolving a robust regulatory and compliance framework that in supporting
the growth needs of the industry ensures that only the fittest and the most prudent players
survive.

Challenges and Issues :
While the Indian mutual fund industry has grown at an impressive rate in the last few years, the
recent developments of the past few months triggered by the global financial crisis have
impacted the fortunes of the industry resulting in AUM decline, adversely impacting the revenue
and profitability
Low Levels of Customer Awareness
Low customer awareness levels and financial literacy pose the biggest challenge to channelising
household savings into mutual funds. IIMS Dataworks data released in 2007 establishes that low
awareness levels among retail investors has a direct bearing on the low mutual fund offtake in
the retail segment.
The general lack of understanding of mutual fund products amongst Indian investors is pervasive
in metros and Tier 2 cities alike and majority of them draw little distinction in their approach to
investing in mutual funds and direct stock market investments. A large majority of retail
investors lack an understanding of risk-return, asset allocation and portfolio diversification
concepts.

Low awareness of SIPs in India has resulted in a majority of the customers investing in a lump
sum manner.
Limited Focus on Increasing Retail Penetration
The Indian mutual fund industry had limited focus on building retail AUM and has only recently
stepped up efforts to augment branch presence in Tier 2 and Tier 3 towns. Players have
historically garnered AUM by targeting the institutional segment that comprises 63 percent
AUM share as at March 2008.
Large ticket size, tax arbitrage available to corporates on investing in money market mutual
funds, easy accessibility to institutional cutomers concentrated in Tier 1 cities are the factors
instrumental in mutual fund houses focussing on the institutional segment. Building retail AUM
requires significant distribution capability and a wide footprint to be able to penetrate into Tier 2
and Tier 3 towns, which AMCs have recently started focusing on. Institutional AUM, however,
makes the industry vulnerable to the possibility of sudden redemption pressures that impact the
fund performance.
Limited Focus Beyond the Top 20 Cities
The mutual fund industry has continues to have limited penetration beyond the top 20 cities.
Cities beyond Top 20 only comprise approximately 10 percent of the industry AUM as per
industry practitioners. The retail population residing in Tier 2 and Tier 3 towns, even if aware
and willing, are unable to invest in mutual funds owing to limited access to suitable distribution
channels and investor servicing. The distribution network of most mutual fund houses is largely
focused on the Top 20 cities given the high cost associated with deeper penetration into Tier 2
and Tier 3 towns. However, some of the mutual fund houses have begun focussing on cities
beyond the Top 20 by building their branch presence and strengthening distribution reach
through non-branch channels.
Limited Innovation in Product Offerings
The Indian mutual fund industry has largely been product-led and not sufficiently customer
focused. The popularity of NFOs triggered a proliferation of schemes with a large number of
non-differentiated products. The industry has had a limited focus on innovation and new product

development, thereby catering to the limited needs of the customer. Products that cater
specifically to customer life stage needs such as education, marriage, and housing are yet to find
their way in the Indian market.
Despite the regulations for Real Estate Mutual Funds (REMF) being introduced in 2008, the
market is still awaiting the first REMF launch. Further, relatively nascent product categories viz.
multi-manager funds that are among the most popular hybrid funds globally have not grown in
India owing to the prevailing taxation structure.
The Indian mutual fund industry offers limited investment options viz. capital guarantee
products for the Indian investors, a large majority of whom are risk averse. The Indian market is
still to witness the launch of green funds, socially responsible investments, fund of hedge funds,
enhanced money market funds, renewable and energy/ climate change funds.
Limited Flexibility in Fees and Pricing Structures
The fee structure in the Indian mutual fund industry enjoys little flexibility unlike developed
markets where the level of management fees depend on a variety of factors such as the
investment objective of the fund, fund assets, fund performance, the nature and number of
services that a fund offers. While the expenses have continuously risen, the management fee
levels have remained stagnant.
Distributors are compensated for their services through a fixed charge in the form of entry load
and additional fees as considered appropriate by the AMC. Regardless of the quality of advice
and service provided, the commission payable by the mutual fund customer to the distributors is
fixed.
Limited Customer Engagement
Mutual fund distributors have been facing questions on their competence, degree of engagement
with customer and the value provided to the customer.
In the absence of a framework to regulate distributors, both the distributors and the mutual fund
houses have exhibited limited interest in continuously engaging with customers post closure of

sale as the commissions and incentives had been largely in the form of upfront fees from product
sales (although trail commissions have also been paid in limited instances regardless of the
service rendered). As a result of the limited engagement, there have been rising instances of mis-
selling to customers.
Limited Focus of the Public Sector Network on Distribution of Mutual Funds
Public sector banks with a large captive customer base, significant reach beyond the Top 20
cities in semi-urban and rural areas, and the potential to build the retail investor base, have so far
played a very limited role in mutual funds distribution.
The India Post network operating the largest postal network in the world majority of which is in
rural areas, is stated to have 250 post offices selling mutual funds of five AMCs only; further
most of the post offices selling mutual funds are located in Tier 1 and Tier 2 cities which are
already been catered to, by national level and other distributors. India Post with its customer base
of 170 million account holders and branch network of over 154,000 branches, doubling the size
of all bank branches put together is a formidable channel which has been under utilised to date
for mutual fund distribution. The postal network also serves as a means to facilitate inclusive and
equitable growth to all regions and social groups by providing them with access to financial
products such as mutual funds.
Further the credibility enjoyed by the Nationalised Banks, Regional Rural Banks and
Cooperative Banks in the rural hinterland has not been fully leveraged to target the retail
segment.
Multiple Regulatory Frameworks Governing Financial Services Sector Verticals
The regulatory and compliance requirements vary across verticals within the financial services
sector specifically mutual funds, insurance and pension funds each of which are governed by an
independent regulatory framework and are competing for the same share of the customer’s
wallet. The mutual fund industry lacks a level playing field in comparison with other verticals
within the financial services sector.
The mandatory PAN card requirement for investing in mutual funds is perceived to restrict
significant potential of the mutual fund industry in being able to tap small ticket investors from

investing in mutual funds. On the other hand, ULIPs which are deemed to be competing products
do not have the mandatory PAN requirement.
While the payment for investment into mutual funds can be made only through banking
facilities, the purchase of ULIPs can be undertaken through cash.
The recently introduced NPS regulations requiring the AMCs to create a separate legal entity for
pension funds management has created an additional cost structure for the mutual fund players.
Outsourcing funds management in excess of INR 80 billion by insurance companies is not

permitted and thus restricts an additional revenue opportunity for the mutual fund industry.
In summary, the challenges and issues faced by the Indian mutual fund industry will need to be
addressed at the earliest to ensure long term sustained, profitable growth of the industry.
Vital Tips on Mutual Funds:
Watch out for risks associated with Mutual Funds
Some types of mutual funds are more risky than others. Therefore, its important to know
what the risks are and what your risk capacity is. Generally speaking, equity funds are the
most risky. Debt funds are safer and money market funds are the safest. However, there
is a relationship between risk and returns. Money market funds give you the lowest return
because of their low risk. Equity funds will give you the chance of highest return to
match their high risk.
Some funds can balance their risks by investing in a combination of equity and debt
instruments. The upside will not be as good as an equity fund, but the downside is
protected because of the debt exposure in the fund.
Always read the fund's offer document. Also, you should ask your agent about the kind
of risks in the recommended fund.

Stay invested for longer period of time
You should invest for at least 3-5 year time horizon, if investing in an equity fund,
otherwise you will not enjoy the full benefit of your equity exposure. Don't make the
mistake of selling all your equity funds if the market corrects. By waiting for a 3 year
period you will give yourself enough time to not only recover your losses, but also
increase your returns.
For debt funds, the duration of holding can be lower because your returns are capped by
the interest that the debt securities will be paying the fund.
For money market funds, these are funds that you should invest in for short-term liquidity
or cash needs
Watch out for fees associated with Mutual Funds
Entry load:
Fees paid when you invest in a fund. As per the revised SEBI regulation, the entry load
on all the mutual fund schemes has been abolished with effect from 1st August 2009
Exit load:
Fees charged when you sell your units. (Equity: 0.5% to 1% if withdrawn within one
year, Nil if withdrawn after one year; Debt: Nil to 0.6% if withdrawn within one year, Nil
if withdrawn after one year; Money Market: Nil)
Annual management fees:
Annual management fees paid to the asset management company. (Depending upon type
of fund (equity or debt), these fees range between 1.0% and 2.5% of assets under
management (AUM), depending on fund type and AUM in the fund)

Annual management fees result in a lower NAV at the end of the year.
Always consider tax implications of your investments
Like other investments, mutual funds also have tax implications. Each time you sell your
units or receive dividends, there could be a tax liability associated with such transactions.
So, be careful about when you are exiting your investments as you might incur a cash
outflow to the Income Tax Authority
Low NAV doesn't mean cheap mutual fund
It is a popular misconception that low mutual fund NAV means cheap fund and so a fund
with a low NAV is better than a high NAV. For instance, many feel that Rs 10 NFO is a
good fund to invest because you are getting it for cheap.
On the contrary, a high NAV just means that the fund owns securities that have risen in
value since the fund started investing in them.

Best Practices for Mutual Funds:
• Understand your risk profile, read the offer documents to see if the fund objectives
match your needs
• Build a strong foundation of funds as the basis of your portfolio before you diversify
within growth or sectoral fund
Sectoral funds in India will give you a concentrated exposure to a particular sector, e.g.,
infrastructure, IT etc. If this kind of fund is the only fund you own, then that can be risky.
You should add a sectoral fund in your mutual funds portfolio only if the portfolio is well
diversified based on the investor’s risk profile and time horizon.
• Buy and hold equity funds, don't churn
Do not sell funds just because your agent asks you to sell one fund and invest in another
fund. Ask them for reasons why you should switch. Churning will make you poor and
your agent rich! And you might incur tax consequences as well
• Avoid NFOs

NFOs or new fund offerings become very popular because they get a lot of marketing
publicity when a new fund is launched. NFOs should be avoided for a few reasons:
o Often you will end up paying higher fees in an NFO

o NFOs have no track record, so you have no way knowing how well the fund will
perform across market cycles, how good the risk management systems are or how
good the back office and administration of the fund house is. For instance, if you
have to go to a doctor for some trouble in your kidney, would you rather go to a
new doctor with no track record, or would you go to a 10 year veteran who has
experience and track record in dealing with patients like you.
• Revisit your asset allocation periodically
Due to market movements, you might end up having a higher or lower exposure to
certain industries or assets than what you had set out for. Therefore, just like you go for a
regular health check, review your asset allocation across your mutual funds periodically.
Once every 6-12 months is good period.
• Avoid investing in too many different funds - preferably not more than 5-7 funds
Overdiversification can also be bad for you. So do not duplicate by buying two different
infrastructure funds or have too many balanced funds. If you have more than 10 funds,
after a while you will realize that you do not have time to manage all the paperwork
related to all the funds and you will need a full time assistant just to manage your
accounts

Selecting The Right Mutual Fund :
There are over 750 different mutual funds in India today and about 35 different companies that
run these funds. So, how will you choose which fund to invest in?
Firstly, know your own needs. Are you investing to fulfill a short-term or a long-term goal? Or,
are you investing just because you heard in your office cafeteria that you should invest in a
certain fund? Not all mutual funds serve the same purpose, so you should know why you are
investing. If you want capital appreciation for your son's education 20 years from now, you
should not invest in a bond fund. However, if you want to save and protect your capital for
funding your son's education in 2 years time, then you should consider a conservative fund like a
bond or money market fund, which will also give you some income
Secondly, this brings us to time horizon. What period are you ready to invest in the market for?
Equity funds should be held for at least 3-5 years because equities are long-term investment
vehicles. Debt or money market funds, however, can be invested in for shorter periods of time.

Thirdly, how comfortable are you with the promoter of the fund? Many new companies are
starting fund houses. Many of them will not be as successful as the ones that already have a
successful track record that they have built over the past 5-10 years. So, invest in mutual funds
that have been launched by companies that have a track record and are not new into the Indian
market.
Finally, many investors look at past performance and assume that the fund will continue to
return the same in the future. This is not always true and can often be wrong. Any fund can do
well over a short-term because luck and other factors can come into play. So, do not choose a
fund to invest in just because it has done well in the recent past. You should be interested in the
long term performance of the fund. Invest in funds that have done well across market cycles and
investment cycles.
Mutual Fund Industry Update 2010: Regulatory

Revisions :
Revised Guidelines for change of Mutual Fund Distributor
• In order to avoid hardships faced by investors for changing the existing mutual fund
distributor, SEBI reinforced that no NOC is required if the customer has signed the intent
of change of distributor.
• Majority of AMCs are advised by SEBI to ensure compliance with respect to regulation
for change of distributor. AMCs are now required to act on the instruction/intent of
investor for the change of his/her existing distributor without forcing the investor to
present NO Objection Certificate (NOC) to the AMC.
AMCs required to comply with the SEBI’s circular on Anti Money Laundering (AML)

• All Asset Management Companies are advised by SEBI to confirm if all the investor
related documents (KYC, POA etc) are maintained with them. If not, then trustees of the
mutual funds are advised to ensure the following:
o No further commission/brokerage shall be paid to the distributor till he maintains
and submits the complete investor’s documentation with the AMC.
o Take immediate steps to obtain all supporting documents in respect of past
transactions.
• In addition, SEBI requires Trustee of the mutual fund house to confirm that steps have
been taken to address the issues discussed above.
7 Mutual Fund Investing Mistakes to Avoid:
The equity markets have been on the rise. New Fund Offers are again the rage. And once again,
you feeling tempted to invest in mutual funds so that you don't miss the boat. At times like this
its important to keep the following tips in mind, so that you do the right thing with your money.
1. Invest in Funds backed by experienced Asset Management Companies and Asset

Managers: If you had the choice, you'd probably go to an experienced doctor rather than
someone fresh out of medical school. Same with mutual funds. Invest through an
experienced asset management company and a fund manager, both of whom have
operating and investment history in India.
2. Cheapest is not the best: This is probably the most common and silly mistake that
investors make when investing in mutual funds. For some reason they think that a Rs 10
net asset value (NAV) is better than a Rs 20 existing fund of the same category and type
because the former is cheaper. What matters is the amount of money you are putting in.

Rs 1 lakh put into a either fund will grow the same amount assuming that both funds
invested in the same underlying securities. So, whether Rs 10 grows to Rs 12, a 20%
increase, or Rs 20 goes to Rs 24, it's the same thing.
3. Don't invest in a new fund if a previous one of the same category exists: At the time
of a new fund's launch, there is a lot of hype created through advertising aimed at
enticing you to invest. However, there might be a fund of this type already existing,
which might be a better option because it has had an operating history for a while, as well
as proven risk management experience in that category. You are better off avoiding the
new fund at launch and investing in the older fund of the same category.
4. Understand your risk appetite: Not all medicines are suited to all patients. Some
patients can handle a higher dosage depending upon their age, their allergies, their size
etc. Similarly, not all mutual funds are meant for everyone. Before you invest blindly,
understand the risks involved and evaluate whether you can handle the risks associated
with the fund and its underlying exposure.
5. Build a strong foundation: Just like a house needs a strong foundation, so does your
mutual fund portfolio. You need to make sure you have a safe and stable exposure to
index funds, large cap diversified funds before you start exposing yourself to sector and
industry specific funds, which are usually of a higher risk.
6. Be realistic about returns: Trees don't grow to the sky, and neither do stock market
returns. Be realistic about what returns you can expect. Your money is unlikely to double
in the next two years through mutual funds, and don't fall for the salesmanship of your
advisor.
7. Give your money the chance to compound: By chopping and changing your portfolio
and getting in and out of funds frequently you are disturbing the process of compounding
and not giving your money the ability to grow. Be patient, even if in the short term a fund
might not be doing well.

Why NRIs/PIOs should Invest Directly in Indian
Mutual Funds
Introduction
• Direct investment in Indian mutual funds is preferred over investment in India dedicated
Exchange Traded Funds (ETFs) available in the US because of diversification benefits.
India dedicated ETFs generally have concentrated portfolios with limited investment
options (US ADRs)
• Past performance of Indian mutual funds has been better than that of India dedicated
ETFs
• Investing in Indian mutual funds is tax efficient because of tax free dividend income and
zero long term capital gain tax
Limitations in India Dedicated ETFs

Diversification • India dedicated ETFs invest primarily in ADRs or GDRs, of

Indian companies. Since the number of Indian companies with
these GDR and ADR offerings are limited, ADR (12 Indian
companies) and GDR (< 70 Indian companies), the investment
opportunities for India dedicated ETFs are limited
• Therefore, the portfolio lacks diversification and tends to be

concentrated with a limited basket of stocks
Dividend Reinvestment • Indian mutual funds generally provide an option for dividend
Option to be reinvested in the fund without charging any entry load
unlike India dedicated ETFs where dividends declared are not
allowed to be reinvested directly
Units Allotted • Investors can hold units up to four decimal places (i.e. fraction
of shares) in case of Indian mutual funds unlike India
dedicated ETFs where these are sold in whole shares.
Performance of India Dedicated ETFs Compared with Indian Mutual Funds
• Indian diversified equity mutual funds have performed much better than the India
dedicated ETFs in the U.S.
• Certain Indian mutual funds have not only out performed India dedicated ETFs but also
the BSE Sensex

Fund Name 1st Jan 2004 31st Jan 2008 Absolute % Compounded
(Rs) (Rs) Gain Annualized
Growth Rate %
Morgan Stanley India 10000 14593 45.93% 9.71%
Investment Fund (ETF)
Blackstone India Fund (ETF) 10000 17681 76.81% 14.99%
Franklin India Blue Chip 10000 26560 165.6% 27.05%
Fund

HDFC Growth Fund 10000 28139 181.4% 28.86%
Kotak 30 10000 41728 317.3% 41.93%
SBI Magnum Equity 10000 29666 196.66% 30.43%
BSE Sensex 10000 29285 192.85% 30.33%
Tax Implications for Equity Oriented Indian Mutual funds: for Non Resident Indians
(NRIs/PIOs)
• The Indian taxation norms are relatively lenient with tax free dividend income and zero
long term capital gains tax in case of equity oriented mutual funds
• While investing in US based ETFs, NRIs needs to follow relatively high taxation slabs as
indicated below
Category India* USA

Short Term Capital Gains Tax 15%** As per income tax slabs up to 35%
Long Term Capital Gains Tax 5% - for tax payers in 10% and
15% tax brackets
Nil
15% - for tax payers in 25%, 28%,
33% and 35% tax brackets
Tax on Dividends 5% - for tax payers in 10% and
15% tax brackets
Nil
15% - for tax payers in 25%, 28%,
33% and 35% tax brackets
* While there is a double taxation treaty between the US and India there might be some tax
implications in the US. Please consult your local tax consultant for the same.
* * There is an education cess of 3% on the tax amount that is levied at all income levels.
Expenses/Cost involved
India Dedicated closed ended ETFs 1% - 1.5%
Open Ended Indian Mutual Funds 2.5%
Open Ended Indian Index Funds 1% - 1.5%

Investment Options for NRIs/PIOs in the U.S.
1. India Dedicated Exchange Traded Funds (ETFs) - How they work?
• ETFs are closed ended funds bought and sold on a stock exchange
• The price of the fund on the stock exchange is different from the NAV of the fund and
the differential is the discount or premium to the book value
• ETFs invest at least 65% of total assets in Indian companies through American (ADR) or
Global Depository Receipts (GDR)
• In addition, they have a mandate to invest in preference shares, convertible debentures
and share purchase warrants
2. Indian Mutual Funds (Introduction and Requirements)
Introduction:
• NRIs/PIOs can invest in Indian mutual funds under general exemption granted by RBI
• NRIs/PIOs can invest in all Indian mutual funds except in funds promoted by Asset
Management Companies based in the U.S. (Fidelity, Franklin Templeton and HSBC)
Requirements:
• Permanent Account Number (PAN) card and Know Your Customer (KYC) registration is
mandatory
• Opening an NRE Account in India is advisable in order to retain the option of repatriating
money invested in India
• It is advisable to appoint a local representative in India to sign and transact on one's

behalf. This could save delays and the hassle and cost of sending documents through
courier

FUTURE PERSPECTIVES OF MUTUAL FUNDS IN
INDIA:
The future looks bright for the industry in India going by a recent study conducted by the
associated chamber of commerce and industry of India (Assocham) and the AMFI. The report
predicts that the mutual funds industry is expected to jump sharply from its present share of 6%
in gdp to 40% in the next 10 years, provided the country’s growth rate consistently exceeds at
the rate of 6% per annum. The report says that by 2014, the size of mutual fund industry is
estimated to go up to over RS.1,65,00 cr. It suggests that India is going to follow the pattern seen
in the developed markets such as the US where the size of the industry is 70% of the GDP. The
world size of the industry is about 37% of GDP. The study further suggests that the emerging
trends in the mutual funds industry indicate that future investments will drastically pour into the
industry, which will automatically enlarge its share in the country’s GDP. It says that the
growing preference for the mutual funds has resulted in the management of mutual funds
growing eightfold in five years from March 1999 to December 2003 and at the same time the
share of mutual fund industry in the global pie has grown twofold.
The study says that the shift in investor’s preference towards mutual fund has been facilitated by
fiscal incentives, increasing returns from debt mutual funds investments due to the secular
decline in interest rates, availability of various choices to investors, gradual change in the risk
profile of the investors as well as the attempts by industry to put in place an appropriate
regulatory environment. the study further highlights that while the Indian mutual fund industry
has grown in size by about 200% from march 1993 (Rs.470 bn) to December 2003 (Rs.1,400 bn)
in terms of assets under management, the assets under management of the sector excluding UTI
have grown eightfold from Rs.152 bn in march 1991 to Rs.1,203 bn as in December
2003.however,at the same time ,the industry also faces some challenges. A survey report by
global consultancy firms KPMG and CREATE identifies several key challenges before the
investment management industry worldwide, which holds good for the mutual fund industry as
well.

The report titled, “Revolutionary Shifts, Evolutionary responses: global investment management
in 2000s,” that a steep change is needed in the way investment management business is run. This
is imperative given the significant changes in the business environment. The report suggests that
there are fundamental choices to be made; either go global or become an effective niche player.
it says that it is clear that some firms are positioned to ride out the storm and succeed in the long-
term.the rest needs to change their culture and business model or merge or ultimately fail. The
reports representing funds under management of nearly €19 tn, from a balanced cross-section of
the industry and the most comprehensive study of its ,kind, presents the condensed views of
senior executives of 185 investment management funds in 20 countries on the state and future
direction of the global industry. It identifies the following key issues facing in the industry:
Lack of focus: Too many products were launched without regard to customer needs, risk
exposures and cost economics.
Unclear value proposition: The proposition on investment and service was either unclear or not
fully honored.
OVER EMPHASIS ON FUNDS UNDER MANAGEMENT (FUM)
Inability to scale up: Size invites complexity; complexity begets inefficiencies in many large
firms where diseconomies of scale kicked in early.
Under performance: A majority of performances were outperformed by the passives over a

long stretch, yet they continued to earn higher charges.
Inflated egos: Pay escalated; bonuses were either guaranteed or linked to FUM; irrespective of
merit, fame and fortune became another uncertainty.
Concealed tribalism: Rapid growth created bottlenecks, giving rise to a blame culture between
front, middle and back offices.

Strategic vacuum: Business strategy had more hype than contents; it happened on the hoof,
with no reality check.
Leadership vacuum: As many investment professionals turned into business leaders, the buzz
of the investment function was often confused with leadership.
The report states that while investment management companies have recognized these failings
and are seeking to address them, the market place in which they operate many deficiencies as
well. Consumers were mesmerized by the relentless rise in equity prices and became
undiscerning in evaluating many products. The trustees approach to managing pension funds
assets worth billions of dollars started to creak as investment returns turned negative exposing
the true risks. It further states that regulatory and accounting rules came under scrutiny, as
investment risk became a real issue for the first time in many years. how to present information
to quantify these risks is a matter o hot debate, as for example, the new accounting standards in
the UK have demonstrated. Investor education remains a critical issue for governments and the
industry, adds the report.
The domestic fund industry faces certain other challenges as well. factors such as opening up the
derivatives market for participation by mutual funds, which provides them with the opportunity
to hedge investment-related risks arising out of increased market volatility and increased
dominance of FIIs I the Indian capital markets poses a significant challenge to the mutual funds
players. Further, the funds being allowed to invest in securities abroad, though on one hand has
opened new vistas for growth, on the other hand it has exposed the industry to various risks
entailed in investing abroad; notable being the foreign currency risks and volatility in the stock
market concerned. Against this background, it appears that the task before the industry is
twofold-performs and penetrates. To conclude there is no doubt that mutual funds industry in
India has come a long way witnessing significant structural changes from a monolithic structure
to a competitive one. With the Indian economy on a high growth trajectory, improved corporate
performance, ongoing economic reforms, rising income and savings levels make the industries
future look bright. However, this would not mean survival for all. The competition is going to be
tough. And; size is going to play an important role in the game of survival. There is no doubt that
those with capabilities-both in terms of size of the assets under management and investment
skills-are going to rule the investment management scene.

REFERENCE:
 Securities & portfolio management by V.A.Avadhani
 Mutual funds (ICFAI)
 Mutual funds in India (ICFAI)
 How Mutual Funds Work by A. J. Friedman & Russ Wiles
 Investopedia .com
 Mutual funds India. com
 Money.outlookindia.com

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MMS Semester IV

“MUTUAL FUNDS industry IN

Final project submitted in part completion of the degree M.M.S

KAMALJEET KAUR SAINI

Under the guidance of Prof.Ajmera

Guru Nanak Institute of Management Studies

Signature of the Candidate,

Kamaljeet Kaur Saini

Forwarded through Research Guide,

Signature of the Guide,

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 2

KAMALJEET KAUR SAINI

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 3

1 Introduction to mutual funds 5

2 History of mutual funds 7

3 Advantages & disadvantages 10

4 Structure of mutual funds 12

5 Types of mutual funds 14

6 Online mutual funds 24

7 The AFMI code of ethics 27

8 Basis for evaluating mutual funds performance 32

9 The Indian mutual fund industry: Current state 39

10 Challenges & issues 50

11 Vital tips on mutual funds 54

12 Best practices for mutual funds 57

13 Selecting the right mutual fund 59

14 Mutual fund industry update 2010: Regulatory revision 60

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 4

Why NRIs/PIOs should invest directly in Indian mutual

17 Future perspectives of mutual fund in India 68

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 5

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 6

A. If the market value of the assets of a fund is Rs. 100,000

You can make money from a mutual fund in three ways:

History of the Indian Mutual Fund Industry:

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 7

• First Phase – 1964-87

• Second Phase – 1987-1993 (Entry of Public Sector Funds)

• Third Phase – 1993-2003 (Entry of Private Sector Funds)

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 8

• Fourth Phase – since February 2003

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 9

The graph indicates the growth of assets over the years.

Advantages and Disadvantages of Mutual Funds:

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 10

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 11

Disadvantages of Mutual Funds:

STRUCTURE OF MUTUAL FUND: -

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 12

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES Page 13

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TYPES OF MUTUAL FUNDS: -

1. Open-end Funds and Closed-end Funds:

2. Load Funds and No-Load Funds:

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3. Tax-exempt Funds and Non-Tax-exempt Funds:

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i. Sector Funds: - Equity funds that invest in a particular sector/industry of

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d. Diversified Equity Funds: - Except for a small portion of investment in liquid

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