CASE ON MUTUAL FUNDS WITH EMPHASIS ON RELIANCE MUTUAL FUND 1 OBJECTIVE OF THE STUDY

To give a brief idea about the Mutual Funds and its benefits available from Mutual Fund investment. To give an idea of the types of schemes available. To discuss about the market trends of Mutual Fund investment. To study some of the Reliance mutual fund schemes and analyze them.

2 MUTUAL FUND INDUSTRY IN INDIA 2.1 The Evolution The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canra bank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.

2.2 MUTUAL FUND CONCEPT

Mutual fund is a trust that pools money from a group of investors (sharing common financial goals) and invest the money thus collected into asset classes that match the stated investment objectives of the scheme. Since the stated investment objectives of a mutual fund scheme generally form the basis for an investor's decision to contribute money to the pool, a mutual fund can not deviate from its stated objectives at any point of time. Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder

Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

2.3 Structure of a Mutual Fund :

2.4 NATURE OF MUTUAL FUND

A common pool of money into which investors place their contributions to be invested in accordance with a stated objective. The ownership of the fund is joint or mutual & the fund belongs to all investors in the proportionate to contribution made by them.

Mutual Fund Operation Flow Chart

Most people have neither the time nor interest to research and select individual stocks and bonds for their investment portfolios, and that's where mutual funds come in. Mutual funds are composed of stocks, bonds and other assets, giving us diversification, which means a decline in value in any one stock or bond won't significantly hurt our overall return. A handful of wellchosen mutual funds or index funds can offer a diversified portfolio that allows the individual investor to spend his or her time on other pursuits. Thousands of mutual funds are available that can satisfy the objectives of different types of investors.

2.5 ADVANTAGES OF MUTUAL FUND

Sl. No. 1.

Advantage

Particulars Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small). Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own. Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities.

Portfolio Diversification Professional Management

2.

3.

Less Risk

4.

Due to the economies of scale (benefits of larger volumes), mutual Low Transaction funds pay lesser transaction costs. These benefits are passed on to the Costs investors. Liquidity An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid. Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. Investors also benefit from the convenience and flexibility offered by

5.

6.

Choice of Schemes

7. 8.

Transparency Flexibility

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-end schemes. Mutual Fund industry is 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.

9.

Safety

2.6 DISADVANTAGES OF MUTUAL FUND

Sl. No. 1. Disadvantage Particulars

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

2.

3.

3 VARIOUS INVESTMENT OPTIONS IN MUTUAL FUNDS:

To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include: i. Growth Option: Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV). ii. Dividend Payout Option: Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

iii. Dividend Re-investment Option: Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same. iv. Retirement Pension Option: Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporate participate for their employees. v. Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit. vi. Systematic Investment Plan (SIP): What is an SIP: To the first time investor, a successful wealth manager would recommend an SIP as the most popular and prudent way to invest in a Fund .So let us see what a Systematic Investment Plan mean. Key Points Under an SIP, the money is invested by the customer in committed installments over a certain period. For Example, Rs.5,000 every month over the next six months.The customer typically authorizes a monthly Auto Debit Facility to the account or may provide post-dated cheques for the monthly investment. Auto Debit Facility: It is a facility that debits your bank a/c automatically and the amounts get credited to your Mutual Fund a/c every month. As an investment Advisor, it is important to understand that it is quite impossible to time the market. Given the Volatility and vagaries of the financial markets especially the stockmarkets,it is much more prudent to invest in small amounts over a period of time . Advantage of SIP:

SIP helps one to cover both the ups and the downs across a period .Thus the average unit price comes down. Investor covers the rise and fall in the markets over the period of time.

The customer has no Lock-in period in an SIP and can continue to buy or sell into the fund.

vii. Systematic Withdrawal Plan (SWP): As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

4 RISK FACTORS OF MUTUAL FUNDS

i. The Risk-Return Trade-off: The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss. Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision. ii. Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk. iii. Credit Risk: The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A AAA rating is considered the safest whereas a D rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk. iv. Inflation Risk: Things you hear people talk about:"Rs. 100 today is worth more than Rs. 100 tomorrow."The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This

happens when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate this risk. v. Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk. vi. Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa. vii. Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities. Risk Hierarchy of Different Mutual Funds Thus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:

5 TYPES OF MUTUAL FUNDS:

5.1 General Classification of Mutual Funds Open-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.

Closed-end Funds 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:
1. 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). 2. 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. 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:

1. 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.
2. 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.
3. Deferred Load - Deferred load is charged to the scheme over a period of time. 4. 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.

No-load Funds All those funds that do not charge any of the above mentioned loads are known as Noload Funds. Tax-exempt Funds Funds that invest in securities free from tax are known as Tax-exempt Funds. All openend 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. Non-Tax-exempt Funds 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 shortterm 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.

6 About The Company Reliance Mutual Fund : Reliance Mutual Fund(RMF/Mutual Fund) is one of Indias leading Mutual Funds, with Average Assets Under Management(AAUM) of Rs.90,661 Corers and an investor count of over 73.04 lakh folios .(AAUM and investor count as of July-Sep11) Reliance Mutual Fund, a part of the Reliance Group, is one the fastest growing mutual funds in India .RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in 179 cities across the country .Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors .Reliance Capital Asset Management Limited (RCAM) is the asset manager of Reliance Mutual Fund.RCAM a subsidiary of Reliance Mutual Fund.RCAM a subsidiary of Reliance Capital Limited, which holds 92.93% of the paid-up capital of RCAM,the balance paid up capital being held by minority shareholders. Reliance Capital Ltd, is one of Indias leading and fastest growing private sector financial services companies and ranks among the top 3 private sector financial services and banking companies ,in terms of Networth.Reliance Capital Ltd has interests in asset management, life and general insurance ,private equity and proprietary investments ,stock broking and other financial services . Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act, 1882 with Reliance Capital Limited (RCL),as the Settler/Sponsor and Reliance Capital Trustee Co. Limited (RCTCL),as the Trustee. Reliance has been registered with the Securities & Exchange Board of India (SEBI) on June 30,1995.The name of Reliance capital Mutual Fund was changed to RMF and its effective from 11th March 2004 as per the SEBI guidelines.RMF was formed to launch various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities..

6.1 Sponsor

: Reliance Capital Limited

Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited, a subsidiary of Reliance Capital Limited, which holds 92.93% of the paid-up capital of Reliance Capital Asset Management Limited, the balance paid up capital being held by minority shareholders. Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL).The promoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited in a Non Banking Finance Company and is one of the Indias Leading and fastest growing financial service companies and ranks among the top three private sector financial services and banking companies in India, in terms of Net worth. Net worth of RCL is as follows

Particulars(Rs in Crores) Net worth Total Income Profit After Tax

2009-10 6885.70 2366.62 339.42

2008-09 6687.30 2974.85 968.02

2007-08 5927.50 2079.79 1025.45

Trustee

: Reliance Capital Trustee Co. Limited.

6.2 Investment Manager/AMC: Reliance Capital Asset Management Limited RCAM is an unlisted Public Limited Company incorporated under the companies Act,1956 on February 24 ,1995,having its registered office at Mumbai. RCAM has been appointed as the Asset Management company of RMF by the trustee of RMF vide Investment management Agreement(IMA) dated May 12,1995 and executed between reliance Capital Trustee Co. Limited and RCAM limited and amended on August 12,1997 amended on August 12,1997,January 20,2004 and February 2011 in line with SEBI (Mutual Funds) Regulations,1996. Statutory Details : The Sponsor, the trustee and the Investment Manager are Incorporated under the companies Act 1956.

6.3 Vision and Mission Statement of RCAM:

Vision Statement To be a globally respected wealth creator with an emphasis on customer care and a culture of good corporate governance. Mission Statement To create and nurture a world-class, high performance environment aimed at delighting our customers. 6.4 Reliance Mutual Fund Schemes and Tax Rates: Now , In this section we will see in detail about the Abridged Analysis of Open Ended Debt Schemes and Analysis of Equity Funds .Later on we will go through the details of Taxation of the Dividend and Capital Gain given to the investors in Reliance Mutual Fund.

6.4.1 Abridged Analysis of Open Ended Debt Scheme as on 31.10.2011

Name of the Scheme/Parameter Quarterly AAUM As on 30.09.2011 (Rs.Crs) Weighted Average Maturity (in days) Modified Duration(in days) Mark to Market (%) Weighted AverageYTM (%) Money Market Instruments (%) Floating Rate Instruments (%) Securitized Debt PTC (%) Corporate Debt (%) Cash & other Receivables (%) G secs (%) Equity (%) Total (%)

RLF

RLF: CP

RLF: TP 2,77 4 40

RMM RMT RFRF- RRSF- RST Fund 9,458 Fund 2,53 9 57 145 276 527 729 ST Plan 1,219 Debt 1,031 Fund 747

RDB Fund 46

RGS Fund 70

RI Fund 108

RMI Plan 6,466

12,23 3 43

3,91 7 44

3,16 6

3,17 2 1,94 9 85 8.73 0.00 0.00 0.00 0.00 14.9 5 85.0 5 0.00 100

3.44 3 2,18 4 101 9.42 3.62 0.00 0.00 58.0 7 -0.89 39.1 9 0.00 100

1,769

39 0 9.13 99.28 0.00 0.00 0.00 0.72 0.00 0.00 100

40 0 9.14 95.9 0 0.00 0.00 0.00 4.10 0.00 0.00 100

37 0 9.16 96.5 4 0.00 0.00 0.00 3.46 0.00 0.00 100

52 15 9.33 79.50 0.00 4.25 11.21 5.03 0.00 0.00 100

130 68 9.40 77.0 7 0.00 0.00 21.6 0 1.33 0.00 0.00 100

243 86 9.57 24.21 0.00 7.72 61.58 6.49 0.00 0.00 100

529 83 10.40 2.10 0.00 22.51 76.33 -0.94 0.00 0.00 100

607 84 9.28 4.45 0.00 21.8 4 61.9 4 4.48 7.29 0.00 100

2,03 6 96 9.21 7.34 0.00 0.00 53.3 1 2.35 37.0 0 0.00 100

1,128 72 9.49* 0.12 1.83 10.70 50.77 3.72 13.26 19.38 100

Money Market Instruments includes Commercial paper, Certificate of deposits & Treasury Bills .Equity includes Index, stock futures & equity shares. Corporate Debt includes debenture. *Weighted Average YTM for Debt portion of the portfolio. Where,

RLF Reliance Liquidity Fund, RLF-CP - Reliance Liquidity Fund Cash Plan. RLF TP Reliance Liquidity Fund Treasury Plan, RMM Fund Reliance Money Manager Fund,RMT Fund Reliance Medium Term Fund , RFRF-ST plan Reliance Floating Rate Fund Short Term Plan ,RRSF- Debt Reliance Regular Saving Fund Debt,RST Fund Reliance Short Term Fund, RDB Fund Reliance Dynamic Bond Fund ,RGF Securities Reliance Gilt Fund Securities, RI Fund Reliance Income Fund,RMI Plan Reliance Monthly Income Plan. 6.4.2 Abridged Analysis of Equity Funds August 2011 October 2011

6.4.3 Tax Rate:

Conclusion: From the above Details and the Analysis of Mutual Fund Industry in Detail We can notice that Reliance Mutual Fund is one of the leading firm in the Mutual Fund Industry with Net worth of around 9000 corers .Thus, our objectives are met under the above details and Discussions.