A Project work on Indian Mutual

Fund Industry

By Akshat Gaur
Department of Business Administration
Aligarh Muslim University
Aligarh
 CONCEPT OF MUTUAL FUND
A Mutual Fund is a common pool of money into which investors place their contributions that are to be
invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual”; the fund
belongs to all investors. A single investor’s ownership of the fund is in the same proportion as the amount
of the contribution made by him or her bears to the amount of the fund.
A mutual fund uses the money collected from investors to buy those assets which are specifically permitted
by its stated investment objective. Thus, an equity fund would buy mainly assets- ordinary shares,
preference shares, warrants etc. A bond fund would mainly buy debt instruments such as debentures, bonds,
or government securities. It is their contributions bears to the total contributions of all investors put
together.

When an investor subscribes to a mutual fund, he or she buy a part of the shares or the pool of funds that
are outstanding at that time. It is no difference from buying “shares” of a joint stock company, in which
case the purchase makes the investor a part of the company and its assets. In fact, in the U.S.A., a mutual
fund is constituted as an invested company and an investor “buys into the fund” meaning he buys the shares
of the fund. In India, a mutual fund is constituted as a Trust and the investor subscribes to the “units” issue
by the fund, which is where the term Unit Trust comes from. However, whether the investor gets fund
shares or units is only a matter of legal distinction. Investor any case, mutual fund shareholder or unit
holder is a part owner of the fund’s assets. Throughout this workbook, we have used the term unit holder to
denote the mutual fund investor, investor line with the common Indian usage of the term. The term Unit
holder includes the mutual fund account holder or closed end fund shareholder. A unit-holder investor Unit
Trust of India US-64 Scheme is the same as a UTI Master share-holder or an investor investor in an
Alliance or DSP Merrill Lynch or Prudential-ICICI or Tata or Templeton or SBI or any other fund
manager’s open-end or closed end scheme.

Since each owner is a part owner of a mutual fund, it is necessary to establish the value of his part. Investor
other words, each share or unit that an investor holds needs to be assigned a value. Since the units held by
an investor evidence the ownership of the fund’s assets, the value of the total assets of the fund when
divided by the total number of units issued by the mutual fund gives us the value of one unit. This is
generally called th Net Asset Value (NAV) of one unit or one share. The value of an investor’s part
ownership is thus determined by the NAV of the number of units held.

For example: If the value of a fund’s assets stands at Rs. 1000 and it has 10 investors who have brought 10
units each, the total number of units issued are 100, and the value of one unit is Rs. 10.00 (1000/100). The
value funds investments will keep on changing with the market price movements, causing the NAV also to
fluctuate. For example, if the value of our fund’s asstes increased from Rs. 1000 to Rs. 1200, the value of
our investor’s holding of 10 units will now be (1200/100*10) Rs. 120. the investment value can go up or
down, depending on the market value of the fund’s assets.

ADVANTAGES OF MUTUAL FUNDS

1. Portfolio Diversification
2. Professional management
3. Reduction/Diversification of risk
4. Reduction of transaction costs
5. Liquidity
6. Convenience and flexibility

DISADVANTAGES OF MUTUAL FUNDS

1. No control over costs

2. No trailor-made portfolio
3. Managing a portfolio of funds

HISTORY OF MUTUAL FUNDS IN INDIA

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative
of the Reserve Bank and the Government of India. The objective then was to attract the small investors and
introduce them the market investments. Since then, the history of mutual funds in India can be broadly
divided into three distict phases.

PHASE I- 1964-1987 (UNIT TRUST OF INDIA)

In 1963, UTI was established by an Act of Parliament and given a monopoly. Operationally, UTI was set
up by the Reserve Bank of India, but was later de-linked from the RBI. The first, and still one of the largest
schemes, launched by UTI was US-64. It was also at least partially the first open-end scheme in the
country.

Later in 1970s and 1980s, UTI started innovating and offering different schemes to suit the needs of
different classes of investors. Unit Linked Insurance Plan (ULIP) was launched in 1971. Sis new schemes
were introduced between 1981 and 1984. During 1984-87, new schemes like Children’s Gift Growth Fund
(1986) and Mastershare(1987) were launched. Mastershare could be termed as the first diversified equity
investment scheme in India. The first Indian offshore fund, India Fund, was launched in August 1986.
During 1990s, UTI catered the demand for income-oriented schemes by launching Monthly Income
Schemes, as somewhat unusual mutual fund product offering “assured returns”.
The mutual fund industry in India is not only started with UTI, but still counts UTI as a major player
operating in India. UTI’s operations in the stock market often determined the direction of market
movements. Now, many Indian investors have taken to direct investing on the stock markets. Foreign and
other institutional players have been brought in. So direct influence of UTI on the markets may be less then
before, though it remains a major player in the fund industry.

1987-88
Amount Mobilised Assets Under Management ( Rs.
(Rs. Crores) Crores)
UTI 2,175 6,700
Total 2,175 6,700

PHASE II- 1987-1993 (Entry of Public Sector Funds)

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

1992-1993
Amount Mobilized (Rs. Assets Under Management (Rs.
Crores) Crores)
UTI 11,057 38,247
Public Sector 1,964 8,757
Total 13,021 47,004

During this period, investors were shifting away from bank deposits to mutual funds, as they started
allocating larger part of their financial savings (5.2% in 1992, 3.1% in 1988) to fund investments.
UTI was still the largest5 segmentof the industry, although with nearly 20% market share ceded to
the Public Sector Funds.

PHASE III – 1993-1996 (Emergence of Private Funds)

A new era in the mutual fund industry began with the permission granted for the entry of private sector
funds in 1993, giving the Indian investors a broader choice of “fund families” and increasing competition
for the existing public sector funds. Quite significantly, foreign fund management companies were also
allowed to operate mutual funds, most of them coming into India trough their joint ventures with Indian
management techniques and investor servicing technology that make the India mutual fund industry today a
vibrant and growing financial intermediary.
During the year 1993-94, five private sector mutual funds launched their schemes followed by six other in
1994-95. Initially, the mobilization of funds by the private funds was slow. But, this segment of the fund
industry now has been witnessing much greater investor confidence in them. One influencing factor has
been the development of a SEBI driven regulatory framework for mutual funds. But another important
factor has been the steadily improving performance of several funds themselves. Investors in India now
clearly see the benefits of investing through mutual funds and have started becoming selective.

PHASE IV- 1996 ONWARDS (SEBI Regulation For Mutual Funds)

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

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

1999 marks the beginning of a new phase in the history of the mutual fund industry in India, a phase of
significant growth in terms of both amounts mobilized form investors and assets under management.
Consider the growth in assets as seen in the figures on the following page:

Gross Amount Mobilized (Rs. Assets Under Management

Crores) (Rs. Crores)
1998-99 1999-2000 1998-99 1999-2000
UTI 11,679 13,536 53,320 76,547
(77.87%) (67.57%)
Public Sector 1,732 4,039 8,292 11,412
(12.11%) (10.09%)
Private Sector 7,966 42,173 6,860 25,046
(10.02%) (22.16%)
Total 21,377 59,748 68,472 113,005
The size of the industry is growing rapidly, as seen by the figure of assets under management, which have
gone from over RS. 68,000 crores to Rs. 113,005 crores, a growth of nearly 60% in just 1 year.
Within the growing industry, by March 2000, the relative market shares of different players in terms of
amount mobilized and assets under management have undergone a significant change.

Mutual Fund Mobilisation and Assets

Under Maegement

100%

80%

1999-2000 Mobilisation
1987-88 Mobilisation

1992-93 Mobilisation

1998-99 Mobilisation
1999-2000 Assets
60% Private Players
1998-99 Assets
1987-88 Assets

1992-93 Assets

Public Players
40% UTI

20%

0%
Period

LIST OF PARTICIPANTS IN MUTUAL FUND INDUSTRY IN INDIA

Currently there are following entities that are offering different schemes in India. Their further
classification is done on the basis of sectors (i.e. public and private) and ownership:

1. ABN AMRO Mutual Fund

2. Alliance Capital Mutual Fund
3. Benchmark Mutual Fund
4. Birla Sun Life Mutual Fund
5. BOB Mutual Fund
6. Canbank Mutual Fund
7. Chola Mutual Fund
8. Deutsche Mutual Fund
 9. DSP Merrill Lynch Mutual Fund
10. Escorts Mutual Fund
11. Fidelity Mutual Fund
12. Franklin Templeton Mutual Fund
13. GIC Mutual Fund
14. HDFC Mutual Fund
15. HSBC Mutual Fund
16. ING Vysya Mutual Fund
17. JM Financial Mutual Fund
18. Kotak Mahindra Mutual Fund
19. LIC Mutual Fund
20. Morgan Stanley Mutual Fund
21. PRINCIPAL Mutual Fund
22. Prudential ICICI Mutual Fund
23. Reliance Mutual Fund
24. Sahara Mutual Fund
25. SBI Mutual Fund
26. Standard Chartered Mutual Fund
27. Sundaram Mutual Fund
28. Tata Mutual Fund
29. Taurus Mutual Fund
30. UTI Mutual Fund

A) Bank Sponsored
1. Joint Ventures - Predominantly Indian
a. SBI Funds Management Private Ltd.

2. Others
a. BOB Asset Management Co. Ltd.
b. Canbank Investment Management Services Ltd.
c. UTI Asset Management Co. Private Ltd.
B) Institutions
a. Jeevan Bima Sahayog Asset Management Co. Ltd.

C) Private Sector

1. Indian
a. Benchmark Asset Management Co. Private Ltd.
b. Cholamandalam Asset Management Co. Ltd.
c. Credit Capital Asset Management Co. Ltd.
d. Escorts Asset Management Ltd.
e. J. M. Financial Asset Management Private Ltd.
 f. Kotak Mahindra Asset Management Co. Ltd.
g. Reliance Capital Asset Management Ltd.
h. Sahara Asset Management Co. Private Ltd
i. Sundaram Asset Management Co. Ltd.
j. Tata Asset Management Ltd.

2. Joint Ventures - Predominantly Indian

a. Birla Sun Life Asset Management Co. Ltd.
b. DSP Merrill Lynch Fund Managers Ltd.
c. HDFC Asset Management Co. Ltd.
d. Prudential ICICI Asset Management Co. Ltd.

3. Joint Ventures - Predominantly Foreign

a. ABN AMRO Asset Management (India) Ltd.
b. Deutsche Asset Management (India) Private Ltd.
c. Fidelity Fund Management Private Ltd.
d. Franklin Templeton Asset Management (India) Private Ltd.
e. HSBC Asset Management (India) Private Ltd.
f. ING Investment Management (India) Private Ltd.
g. Morgan Stanley Investment Management Private Ltd.
h. Principal Pnb Asset Management Co. Private Ltd.
i. Standard Chartered Asset Management Co. Private Ltd.

CLASSIFICATION OF MUTUAL FUNDS

There are many types of mutual funds available to the investor. However, these different types of funds can
be grouped into certain classifications for better understanding. From investors perspective these can be
classifies into following three broad classes:

1. Close-end or Open-end Funds

 2. Load Funds or No-Load Funds
3. Tax-exempt Funds or Non-tax-exempt Funds.

Now we shall see the distinction of the funds in the above stated classes.

Close-end or Open-end Funds

An Open-end Fund is one that has units available for sale and repurchase at all times. AN investor can buy
or redeem units from the fund itself at a price based on the NAV per unit. NAV per unit is obtained by
dividing the amount of the market value of the fund’s assets(plus accrued income minus the fund’s
liabilities) by the number of units outstanding. The number of units outstanding goes up or down every
time the fund issues new units or repurchases existing units.
Note that an open-end fund is not obliged to keep selling/issuing new units at all times, and many
successful funds stop issuing further subscriptions from new investors after they reach a certain size and
think they cannot manage a larger fund without adversely affecting profitability. On the other hand, an
open-end fund rarely denies to its investors the facility to redeem existing units, subject to certain obvious
conditions.
For Example: Redemption is only possible after the investor’s cheque for initial subscription has cleared, or
until after any “Lock-in Period” specified by the fund is over, or only after the specified redemption period
for collection of funds.

Unlike an open-end fund, the “unit capital” f a “close-end Fund” is fixed, as it makes a one time sale of a
fixed number of units. Later on, unlike open-end funds do not allow investors to buy or redeem units
directly from the funds. However, to provide the much-needed liquidity to investors, many close-end funds
themselves listed in the stock exchange (s). Trading through a stock exchange enables the investor to buy
or sell units of a close-end mutual fund from each other, through a stockbroker, in the same fashion as
buying or selling shares of a company. The fund’s units may be traded at a discount or premium to NAV
based on investors’ perception about the fund’s future performance and other market factors affecting the
demand for or supply of fund’s units. Note that the number of outstanding units of a close-end fund does
not vary on account of trading in the fund’s at the stock exchange. On the other hand, funds often do offer
“Buy-back of fund shares/units”, thus offering another avenue for liquidity to close-end fund investors. In
this case, the mutual fund actually reduces the number of units outstanding with the investors.
Load Funds or No-load Funds

Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recovered from
the investors in different ways at different times. These usual ways in which a fund’s sales expenses may be
recovered from the investors are:
 • ENTRY LOAD (FRONT-END LOAD): At the time of investors’ entry into the
fund/scheme, by deducting a specific amount from his initial contribution, or
• DEFERRED LOAD: By charging the fund/scheme with a fixed amount each year, during
the stated number of years, or
• EXIT-LOAD (BACK-END LOAD): At the time of the investor’s exit from the
fund/scheme, by deducting a specified amount from the redemption proceeds payable to the
investor.

Funds that charge Front-end, Back-end or deferred load are called load funds. Funds that make no such
charge or loads for sale s expenses are called no-load funds.

SEBI has defined a “load” as one-time fee payable by the investor to allow the fund to meet initial
issue expenses including brokers’/agents’/distributors’ commissions, advertising and marketing
expenses.

An AMC that absorbs initial marketing expenses and does not charge the fund, would be considered a “no-
load fund” by SEBI.

LIMITS PRESCRIBED BY “SEBI” .

Initial issue expenses: Cannot exceed 6% of the initial corpus mobilized during the initial offer period.
Recurring expenses: Cannot exceed 2.5% of the average net assets (net assets < Rs. 100 Crores); 2.25%
(Rs.100 Crores < net assets < Rs. 400 Crores); 2.0% (Rs.400 Crores < net assets < Rs. 700 Crores); and
1.75% (net assets > Rs. 700 Crores).
In case the scheme intends to invest in Bonds, the maximum percentage limits are less by 0.25%. Further, if
an AMC had absorbed the initial issue expenses, it can charge an additional 1% of net assets as investment
management fees.

Tax-exempt or Non-tax-exempt Funds

Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. In the U.S.A., for
example, municipal bonds pay interest that is tax-free, while interest on corporate and other bonds is
taxable. In India, after the 1999 Union Government Budget, all the dividend income received from any of
the mutual funds is tax-free in the hands of the investor. However, funds other than Equity Funds have to
pay a distribution tax, before distributing income to the investors. In other words, equity mutual fund
schemes are tax-exempt investment avenues, while other funds are taxable for distributable income.

While Indian mutual funds currently offer tax-free income, any capital gains arising out of sale of fund
units are taxable. All these concessions alter the returns obtained from the investments. Hence,
classification of mutual funds from the taxability perspective has great significance for the investors.

MUTUAL FUND TYPES

After the generalized classification of the fund types as Open or Close-end Fund; Load or No-load Fund;
and Tax-exempt or Non-tax-exempt Fund, we will now distinguish the mutual funds on the basis of the
Investment objective and the type of securities they invest in.

Types of Funds by Nature of Investments

Mutual Funds may invest in equities, bonds or other fixed income securities, or short-term money market
securities. So we have Equity, Bond and Money Market Funds. All of them invest in financial assets.
But there are funds that invest in physical assets. For example, we may have Gold or other Precious Metal
Funds, or Real Estate Funds.

Types of Funds by Investment Objective

Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth Funds
invest for medium to long-term capital appreciation. Value Funds invest in equities that are considered
under-valued today, whose value will be unlocked in future.

Types of Funds by Risk Profile

The nature of a fund’s portfolio and its investment objective imply different levels of risk undertaken.
Funds are therefore often grouped in order of risk. Thus, Equity Funds have a greater risk of capital loss
than a Debt Fund that seeks to protect the capital while looking for income. Money Market Funds are
exposed to less risk then even the Bond Funds, since they invest in short-term fixed income securities, as
compared to longer-term portfolios of Bond Funds.
Fund managers often try to alter the risk profile of funds by suitably changing the investment objective. For
example, a fund house may structure an “Equity Income Fund” investing in shares that do not fluctuate
much in value and offer steady dividends- say Power Sector companies, or a Real Estate Income Fund that
invests only in income-producing assets. Balanced funds seek to produce a lower risk portfolio by mixing
Equity investments with Debt investments. Investors and their advisors need to understand both the
investment objective and the risk level of the different types of funds.
Money Market Funds

Often considered to be at the lowest rung in the order of risk level, Money Market Funds invest in
securities of a short-term nature, which generally means securities of less than one-year maturity. The
typical, short-term, interest-bearing instruments these funds invest in include Treasury Bills issued by the
government, Certificate of Deposits issued by the banks and Commercial Papers issued by companies.

Gilt Funds

Gilts are Government securities with medium to long-term maturities, typically of over one year (under
one-year instruments being money market securities). In India, we have now seen the emergence of
Government Securities or Gilt Funds that invest in Government paper called Dated Securities (Unlike
Treasury Bills that mature in less than one year). Since the issuer is the Government/s of India/States, these
funds have little risk of default and hence offer better protection of principal.

Debt Funds (or Income Funds)

Debt Funds are largely considered as Income Funds as they do not target capital appreciation, look for high
current income, and therefore distribute a substantial part of their surplus to investors. Income funds that
target returns substantially over market levels can face more risks. Different types of Debt Schemes are

given as follows:

1. Diversified Debt Funds: A Debt Fund invests in all types of available debt securities, issued
by entities across al industries and sectors is a properly diversified Debt Fund. A diversified Debt
fund has the benefit of risk reduction through diversification and sharing of any default-related
losses by a large number of investors. Hence a diversified debt fund is less risky than a narrow-
focused fund that invests in debt securities of a particular sector or industry.
2. Focused Debt Funds: Some debt funds have a narrower focus, with less diversification in its
investments. Examples include sector, specialized and offshore debt funds, Corporate Debentures
and Bonds, Tax Free Infrastructure or Municipal Bonds. One category of specialized funds invests
in the housing sector, but offers greater security and safety than other debt instruments, is the
Mortgage Backed Bond Funds: that invest in special securities created after securitisation of
loan receivables of housing finance companies. As the Indian financial markets witness the growth
of securitisation, such funds may appear on the mutual fund scene sooner rather than later.
3. High Yield Debt Funds: These funds seek to obtain higher interest returns by investing in debt
instruments that are considered “Below Investment Grade”. Clearly, these funds are exposed to
higher risk. In U.S.A., funds that invest in debt instruments that are not backed by tangible assets
and rated below investment grade are called JUNK BOND FUNDS. These funds tend to be more
 volatile than other debt funds, although they may earn higher returns as a result of the higher risks
take.
4. Assured Return Funds: Assured Return or Guaranteed Monthly Income Plans are essentially
Debt/Income Funds. Assured return debt funds certainly reduce the risk level considerably, as
compared to al other debt or equity funds, but only to the extent that the guarantor has the required
financial strength. Hence, the market regulator SEBI permits only those funds whose sponsors
have adequate net-worth to offer assurance of returns.
5. Fixed Term Plan Series: Fixed Term Plans are essentially closed-ended in nature, in that the
mutual fund AMC issues a fixed number of units for each series only once and closes the issue
after an initial offering period, like a close-end scheme offering. However, a closed-end scheme
would normally make one-time initial offering of units, for a fixed duration generally exceeding
one year. Investors have to hold the units until the end of the stated duration, or sell them on a
stock exchange if listed. Fixed Term Plans are closed-end, but usually for shorter term - less than a
year. Being of short duration, they are not listed on a stock exchange. Of course, like any closed-
end fund, each plan series can be wound up earlier, under certain regulatory conditions.

Equity Funds

As investors move from Debt Fund category to Equity Funds, they face increased risk level. However,
there is a lar4ge variety of Equity Funds and all of them are not equally risk-prone. Investors and their
advisors need to sort out and select the right equity fund that suits their risk appetite. Equity funds adopt
different investment strategies resulting in different levels of risk. Hence, they are generally separated into
different types in terms of their investment styles. Below are given some of the major types f equity funds,
arranged in order f higher to lower risk level.

1. Aggressive Growth Funds: As the name suggests, aggressive growth funds target maximum
capital appreciation, invest in less researched or speculative shares and may adopt speculative
investment strategies to attain their objective of high returns for the investor. Consequently, they
tend to be more volatile and riskier than other funds.
2. Growth Funds: Growth Funds invest in companies whose earnings are expected to rise at an
average rate. These companies may be operating in sectors like technology considered to have a
growth potential, but not entirely unproven and speculative. The primary objective of Growth
Funds is capital appreciation over a three to five year span. Growth Funds are therefore less
volatile than funds that target aggressive growth.
3. Specialty Funds: These funds have a narrow portfolio orientation and invest in only companies
that meet pre-defined criteria. Most specialty funds tend to be concentrated funds, since
diversification is limited to one type of investment.
 • Sector Funds: Sector Funds’ portfolios consist of investments in only industry or sector of
the market such as Information Technology, Pharmaceuticals or FMCG. Since sector funds do
not diversify into multiple sectors, they carry a higher level of sector and company specific
risk than diversified equity funds.
• Offshore Funds: These funds invest in equities in one or more foreign countries thereby
achieving diversification across the country’s borders. However they also have additional
risks- such as the foreign exchange rate risk- and their performance depends on the economic
conditions of the countries they invest in. Offshore Equity Funds may invest in a single
country (hence riskier) or many countries (hence more diversified).
• Small-Cap Equity Funds: These funds invest in shares of companies with relatively lower
market capitalization than that of big, blue chip companies. They may thus be more volatile
than other funds, as smaller companies’ shares are not very liquid in markets.
4. Diversified Equity Funds: A fund that seeks to invest only in equities, except for a very small
portion in liquid money market securities, but is not focused on any one or few sectors or shares,
may be termed a diversified equity fund. While exposed to all equity price risks, diversified equity
seek to reduce the sector or stock specific risks through diversification. They have mainly market
risk exposure. Such general purpose but diversified funds are clearly at the lower risk level than
growth funds.
• ELSS (Equity Linked Saving Scheme): In India, investors have been given tax concessions
to encourage them to invest in equity markets through these special schemes. Investment in
these schemes entitles investor to claim an income tax rebate, but usually has a lock-in period
before the end of which funds cannot be withdrawn. These funds are subject to the general
SEBI investment guidelines for all ‘equity’ funds, and would be in the Diversified Equity
Fund category.
• Equity Index Funds: An index fund tracks the performance of a specific stock market index.
The objective is to match the performance of the stock market by tracking an index that
represents the overall market. The fund invests in shares that constitute the index portfolio;
these funds take only the overall market risk, while reducing the sector and stock specific
risks through diversification.
• Value Funds: Value funds try to seek out fundamentally sound companies whose shares are
currently under priced in the market. Value funds will add only those shares to their portfolios
that are selling at low price-earnings ratios, low market to book value ratios and are
undervalued by other yardsticks. Value funds have the equity market price fluctuation risks,
but stands often at a lower end of the risk spectrum in comparison with the Growth Funds.
Value Stocks may be from a large number of sectors and therefore diversified. However,
value stocks often come from cyclical industries.
 • Equity Income Funds: Usually income funds are in the Debt Funds category, as they target
fixed income investments. However, there are equity funds that can be designed to give the
investor a high level of current income along with some steady capital appreciation, investing
mainly in shares of companies with high dividend yields. As an example, an Equity Income
Fund would invest largely in Power/Utility companies’ shares of established companies that
pay higher dividends and whose prices do not fluctuate as much as other shares. These equity

funds should therefore be less volatile and less risky than nearly al other equity funds.

Hybrid Funds- (Combination of Equity and Debt)

Many mutual funds mixes different types of securities (equity, debt, money market instruments etc.) in
their portfolios. Thus, most funds, equity or debt, always have some money market securities in their
portfolios as these securities offer the much-needed liquidity. However, money market holdings will
constitute a lower proportion in the overall portfolios of debt or equity funds. There are funds that,
however, seek to hold a relatively balanced holding of debt and equity securities in their portfolios. Such
funds are termed “Hybrid Funds” as they have a dual equity/bond focus. Some of the funds in this category
are described below.
1. Balanced Funds: A balanced fund is one that has a portfolio comprising debt instruments,
convertible securities, and preference and equity shares. Their assets are generally held in more or
less equal proportions between debt/money market securities and equities. By investing in a mix
of this nature, balanced funds seek to attain the objectives of income, moderate capital
appreciation and preservation of capital, and are ideal for investors with a conservative and long-
term orientation.
2. Growth-and-Income Funds: Unlike income-focused or growth-focused funds, these funds seek
to strike a balance between capital appreciation and income for the investor. Their portfolios are a
mix between companies with good dividend paying records and those with potential for capital
appreciation. These funds would be less risky than pure growth funds, though more risky than
income funds.
3. Asset Allocation Funds: Asset allocation of most funds is predetermined within certain
parameters. However, there do exist funds that follow variable asset allocation policies and move
in and out of an asset class (equity, debt, money market, or even non-financial assets) depending
upon their outlook for specific markets. These funds have objectives similar to balanced funds and
may seek to diversify into foreign equities, gold and real estate backed securities in addition to
debt instruments, convertible securities, preference and equity shares.
Commodity Funds

Commodity funds specialize in investing in different commodities directly or through shares of commodity
companies or through commodity futures contracts. Specialized funds may invest in a single commodity or
 a commodity group such as edible oils or grains, while diversified commodity funds spread their assets
over many commodities. A most common example of commodity funds is the so-called Precious Metals
Fund.

Real Estate Funds

Specialized Real Estate Funds would invest in Real Estate directly, or may fund real estate developers, or
lend to them, or buy shares of housing finance companies or may even buy their securitised assets. The
fund may have a growth orientation or seek to give investors regular income.

RISK HIERARCHY OF MUTUAL FUNDS

Money
Market Debt Equity Funds
Funds Funds

Risk Flexible
Hybrid Asset
Money Market Gilt Diversified
Focused
High Yield
Debt
Debt Allocation Equity
Diversified
Aggressive
Income
Level Funds Type Of Fund
Debt
Funds
Funds Funds
Growth/Income Growth
Equity
Funds
Funds
Funds
Funds
Gilt Funds Funds
Balanced Funds Value Funds
Index
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LEGAL AND REGULATORY ENVIRONMENT
Regulators In India
1. SEBI- the Capital Markets Regulator: The Government of India constituted Securities and
Exchange Board of India, by an Act of Parliament in 1992, as the Apex regulator of all that either raise
funds in the capital market or invest in capital market securities such as shares and debentures listed on
stock exchanges. Mutual funds have emerged as an important institutional investor in capital market
securities. Hence they come under the purview of SEBI, SEBI requires al mutual funds to be registered
with them. It issues guidelines for all mutual fund operations including where they can invest, what is
investment limits and restrictions must be complied with, how they should account for income and
expenses, how they should make disclosures of information to the investors and generally acts in the
interest of investor protection. Other entities that SEBI also regulates are companies when they issue
equity or debt, share registrars, custodians, bankers in the primary markets, stock exchanges and
brokers in the secondary markets, and foreign institutional investors such as FIIs, offshore mutual
funds with dedicated Indian mutual funds or venture capital investors.

2. RBI- The Money Market Regulator

a. RBI as Supervisor of Bank Owned Mutual Funds: The first non-UTI mutual funds were
started by public sector banks. Banks come under the regulatory jurisdiction of the RBI.
Therefore, the operations of bank-owned mutual funds are governed by guidelines issued by
the RBI. Subsequently, it has been clarified that all mutual funds, being primarily capital
market players, come under the regulatory umbrella of SEBI. Thus, the bank-owned funds
continue to be under the joint supervision of both the RBI and the SEBI. It is generally
understood that all market related and investor related activities of the funds are to be
supervised by SEBI, while any issues concerning the ownership of the AMCs by bank fall
under the regulatory ambit of the RBI.
b. RBI as Supervisor of Money Market Mutual Funds: RBI is the only Government agency
that is charged with the sole responsibility to control the money supply in the country.
Therefore, it has the sole supervisory responsibility over all entities that operate in the money
markets, be it banks and companies that issue securities such as certificates of deposits or
commercial paper, or banks and mutual funds who are allowed to borrow from or lend in the
call money market. For this reason, in the past, if a mutual fund manager offered a Money
Market Mutual Fund scheme, such as MMMF had to abide by the policies laid down by the
RBI. Thus, Money Market Mutual Funds were regulated by RBI guidelines dated 23-11-1995
specially issued for the purpose. Recently, it has been decided that MMMF’s of registered
mutual funds will be regulated by SEBI through the same guidelines issued for other mutual
funds, i.e. SABI (MF) Regulations, 1996. However, the RBI does retain the right to decide
whether mutual fund will be allowed to access the inter-bank call money market.
Accordingly, RBI has placed certain restrictions through the latest credit policy, with the
intention of moving towards a pure inter-bank call money market.
3. Ministry of Finance: The Ministry of Finance, which is charged with implementing the government
policies, ultimately supervises both the RBI and the SEBI. Besides being the ultimate policy making
and supervising entity, the MOF has also been playing the role of an Appellate Authority for any major
disputes over SEBI guidelines on certain specific capital market related guidelines- in particular any
case of insider trading or mergers and acquisitions.
4. Company Law Board, Department of Company Affairs and Registrar of Companies: Mutual
fund asset Management Companies and corporate trustees are companies registered under the
Companies Act, 1956 and are therefore answerable to regulatory authorities empowered by the
Companies Act.
The primary legal interface for all companies is the Registrar of Companies (RoC). The Department of
Company Affairs in turn supervises roCs. The DCA forms part of the Company Law Board, which is
part of the Ministry of Law and Justice of the Government of India.
The Roc ensures that the AMC, or the Trustee Company as the case may be is in compliance with all
Companies Act provisions. All AMC accounts and records are filed with the RoC, who may demand
additional information and documents from the company. The RoC plays the role of a watchdog with
respect to regulatory compliance by compliance by companies.
The overall responsibility for formulating and modifying regulation relating to companies lies with the
Department of Company Affairs (DCA). The DCA has legal powers to prosecute Company Directors
for failure to comply with any of the Companies Law Provisions, as also for non-repayment of deposits
or frauds and other offences.
The Company Law Board (CLB) is the apex regulatory authority under the Companies Act. While the
CLB guides the DCA, another arm of the CLB called the Company Law Bench is the Appellate
Authority for corporate offences.

5. Stock Exchanges: Stock Exchanges are self-regulatory organizations supervised by SEBI. Many
closed-end schemes of mutual funds are listed on one or more stock exchanges. Such schemes are
subject to regulation by the concerned stock exchange(s) through a listing agreement between the fund
and the stock exchange. Exchange Rules and the Companies acts provisions would generally decide on
trading, clearing, transfer and settlement of the buying and selling of mutual fund units on the markets.
Funds or AMCs do not get directly involved with purchases and sales of units of such listed close-end
schemes, as the registrars handle on such transfers as in case of shares.
THE PRESENT SCENARIO
During the past one year India has witnessed tremendous favorable changes for its economy. India has
gained much of the desired confidence of the foreign investors who pumped in whooping $ 10 Billions in
the Indian economy during the past one year. The Sensex climbed the new heights and crossed the 9400
point mark. The current market capitalization is in the tune of $ 500 Billions and became the third largest
market in Asia. The corporate profits contributed about 5% of the GDP. And 87 Indian companies are now
members of the Billion $ club.
Supported by this tremendous bullish run nearly all Mutual Funds paid the investors what they had not
expected.

SENSEX

10000
9500
9000
8500
Points

8000
7500
7000
6500
6000
5500

5
5

'0
'0

c
n

de
ja

Period
3

30

The sensex on 3rd, Jan 2005 was at 6679 point mark which crossed the 9000 mark on 28 th Nov, 2005 and
the year end close i.e. on 31st Dec, 2005 was 9393 mark.

The foreign investors have shown tremendous confidence in the Indian Economy and that is depicted by
the comparative position of India in comparison of S.E. Asia taken as a whole.

India In Comparison With S.E. Asia 2005

30
25
20 India
15 South East Asia
10
5
0
P/E (X) Return on equity Earnings growth
(%) (%)
The projections made for the next year also suggest this Bull Run to continue further in future and the
Indian economy will not loose its momentum.

India in Comparison with S.E.Asia 2006(E)

30
25
20
India
15
South East Asia
10
5
0
P/E (X) Return on equity Earnings growth
(%) (%)

The returns in various Mutual Fund schemes have seen a tremendous increase in their returns which can be
viewed in the following figures.
DEBT FUNDS-FLOATING RATE
Returns in % as on December 16, 2005 1 year
LEADERS
LIC MF Floating Rate Fund - ST 5.76
PRINCIPLE Floating Rate Fund - FMP - IP 5.74
Prudential ICICI LT FRF - Plan B 5.73
JM Floater Fund - LTP - Premium Plan 5.7
UTI Floating Rate Fund - STP 5.7
HSBC FRF - LTP - IP 5.62
JM Floate Fund - LTP 5.62
Tata FRF - ST - IP 5.62
ING Vysya FRF 5.61
Deutsche FRF 5.57
LAGGARDS
Tata FRF - LT 3.99
ABN AMRO FRF 4.96
Prudential ICICI FRF - Plan A 5.2
SBI Magnum Income - FRP - LT 5.2
Grindlays FRF - STP 5.24
Templeton Floating Rate Income LT 5.24
Prudential ICICI LT FRF - Plan A 5.27
HSBC FRF - STP 5.28
Grindlays FRF - STP-IP 5.29
Grindlays FRF - LTP 5.31

EQUITY DIVERSIFIED FUNDS 1 year

Return in % as on December 16, 2005
LEADERS
SBI Magnum Sector Umbrella - emerging Businesses 86.33
SBI Magnum Global Fund 94 81.95
SBI Magnum Sector Umbrella - Contra 80.28
SBI Magnum Multiplier plus 93 77.26
Prudential ICICI emerging STAR Fund 77.08
Relinace growth 73.91
Prudential ICICI discovery Fund 68.11
Congrowth Funds 67.45
HDFC Equity Funds 67.08
Franklin India Prima Funds 65.87
LAGGARDS
PRINCIPLE Global Opportunities Fund 17.12
LIC Equity Fund 26.3
UTI Master Growth 33.22
Birla Dividend Yield Plus 33.62
LIC MF Growth Fund 34.22
ING Vyasa Equity Fund 35.47
UTI Master share 35.52
Chola Opportunity Funds - Cumulative 36.71
Deusche Alpha equity Fund 37.12
UTI India Advantage Equity Fund 37.2

BALANECED FUNDS 1 year

Returns in % as on December 16, 2005
LEADERS
SBI Magnum Balanced Funds 53.64
HDFC Prudence Funds 50.84
Kotak Balanced Funds 46.98
Can Balanced Funds 46.68
Prudential ICICI Balanced Funds 43.51
BOB Balanced Fund 42.82
Escorts Balanced Fund 41.54
ING Vyasa Balanced Fund 37.03
Birla Sunlife 95 35.07
Tata Balanced Fund 34.25
LAGGARDS
Can Balanced Plan 14.91
Escorts Opportunities Fund 16.51
UTI Balanced Fund 25.45
Unit Scheme 2002 26.37
Birla Balanced Fund 27.17
Sundaram Balanced Fund 27.66
HDFC Balanced Fund 30.46
JM Balanced 31.83
PRINCIPAL Balanced Fund 31.86
LIC Balanced - Plan C (Growth) 32.33

TAX PLANNING FUNDS 1 year

Returns in % as on December 16, 2005
LEADERS
SBI Magnum Tax Gain Scheme 93 108.42
HDFC Tax Saver Fund 83.36
Prudential ICICI Tax Plan 75.34
ING Vyasa Tax Saving Fund 66.47
Sundaram Tax Saver 64.11
Canequity Tax Saver 60.49
Taurus Libra Tax Shield 60.42
Birla Equity Plan 58.53
HDFC Longterm Advantage Fund 57.96
LAGGARDS
LIC Tax Plan - Growth 25.26
Principal Personal Tax Saver 35.35
Birla Sunlife Tax Relief 96 36.29
Franklin India Index Tax Fund 38.49
Escort Tax - Plan Growth 43.37
PRINCIPAL Tax Saving Fund 49.53
UTI Equity Tax Saving Plan - Growth 50.59
Tata Tax Saving Fund 51.95
Franklin India Tax Shield - Growth 52.69

Investing in mutual funds is beneficial for a small investor as he may not be able to track the ups and downs
in the market on a continuous basis and cannot judge, when and where to invest. Since the stock market is
at tremendous height so there are chances of market take a bearish turn. So this is not a right time to invest
in the Equities so the mutual