TABLE OF CONTENTS Sr. No.

1 1.1 1.2 1.3 1.4 2 2.1 2.2 2.3 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 4.5 4.6 5 5.1 5.2

Topic
PART A : PREFATORY ITEMS Title Page Table of Contents Acknowledgement Executive Summary PART B : HISTORY OF MUTUAL FUNDS Overview, Evolution of mutual fund Structure of mutual fund Regulatory Framework PART C: INTRODUCTION TO MUTUAL FUNDS Types of Mutual funds Investors & Investment options in Mutual fund Advantage & Disadvantages Tax Benefits in mutual fund PART D: MUTUAL FUND VS OTHER INVESTMENT AVENUES Various investment avenues Direct Equity Vs. Equity Mutual fund Bank deposit Vs. Debt Mutual fund Physical Gold Vs. Gold ETF Fixed Deposit Vs Fixed Maturity Plan (FMP) Fixed deposit Vs. Monthly Income Plan (MIP) PART E: NEW MUTUAL FUND PRODUCTS IN MARKETS ELSS Arbitrage Fund

Pg. Nos.

2 5 7 8 10 13 17 19 27 34 36 44 49 50 51 56 58 60 62

5.3 5.4 6 7 8 9

International Fund Real Estate Mutual Fund PART F: BEST PERFORMING MUTUAL FUNDS IN INDIA PART G: FUTURE SCENARIO PART H: CONCLUSION PART I: REFERENCE

63 66 69 78 80 81

EXECUTIVE SUMMARY
A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money

collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. This project attempts at giving a brief idea about how the mutual fund industry has evolved over the years and its working, various MF players currently in India and comparison of the features and performances of some of its schemes.

PART B HISTORY OF MUTUAL FUNDS

MUTUAL FUNDS: AN OVERVIEW One industry, which has undergone the most dramatic transformation in the post liberalization era of the nineties, is the financial services sector and in particular, the mutual funds industry. There has been a paradigm change in the quality and quantity of product and service offerings. The history of Indian mutual fund industry can be broadly divided into two phases: The period before liberalization when only public sector players existed with one dominate player Unit Trust of India. The post-liberalization era where the industry was opened up to private players. CONCEPT

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Process goes like many investor with common financial objective pool their money. Investors on a proportionate basis get mutual fund units for the sum contributed to the pool. The money collected from investor is invested in shares debentures and other securities by the fund manager. The fund manager realizes gains and losses and collects dividends or interest income. Any capital gain and losses from such investments are passed on to the investors in proportion of the number of units held by them. EVOLUTION 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 Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases 1. 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. 2. 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. 3. Third Phase 1993-1996 (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. 4. Fourth phase -1996-99 Since 1996 the mutual fund industry in India saw tighter regulation and higher growth. It scaled new heights in terms of mobilization of funds and number of players. Deregulation and liberalization of Indian economy had introduced competition and provided impetus to the growth of the industry. Finally most investors small & big started showing interest in mutual funds. Measures were taken both by SEBI to protect the investor, and by the government to enhance investors return through tax benefits. A comprehensive set of regulations for all mutual funds operation in india was introduced with SEBI (Mutual funds) regulations, 1996. these regulations set uniform standards for all funds. 5. Fifth Phase 1999-2004

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 Ltd, 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. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards. 6. Sixth phase From 2004 onwards The industry has lately witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of schemes of Alliance Mutual Fund by Birla Sun life, Sun F&C mutual fund by Principal and PNB mutual fund by principal. At the same time, more international players continue to enter India, including Fidelity, one of the largest funds in the world. The stage is set now for growth through consolidation and entry of new international and private sector players.

STRUCTURE OF A MUTUAL FUND IN INDIA Like other countries, India has a legal framework within which mutual funds must be constituted. Unlike in UK ,where two different structures trust andcorporateare allowed with separate regulations, depending on their nature-open-end or closed end, in India open end and closed end funds are constituted along one unique structure-as unit trusts. A mutual fund is allowed to issue open-end and closed-end schemes under a common legal structure. Like USA ,all funds are governed by the same regulations and the regulatory body, the SEBI.The structure that is required to be followed by mutual funds in India is laid down under SEBI(MUTUAL FUND)REGULATIONS,1996. A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making

investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. All mutual funds are required to be registered with SEBI before they launch any scheme. There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:

FUND SPONSER: The sponsor of a fund is akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor appoints a Board of Trustees. As per SEBI regulation for a person to qualify as a sponsor; he must contribute of at least 40% of the net worth of AMC & posses a sound financial track record over 5 years prior to registration. TRUSTS: A mutual fund in India is constituted in the form of a Public Trust created under the Indian Trusts Act 1882. Trust or the fund has no independent legal capacity itself, rather it is the trustees who have the legal capacity & therefore all acts in relation to the trust are taken on its behalf by the trustees. TRUSTEES:

Most of the funds in India are managed by the Board of Trustees. These trustees are governed by the provisions of the Companies Act, 1956. These trustees dont directly manage the portfolio of securities. For this specialist function, they appointment an AMC. The trustees being the primary guardian of the unit-holders funds & assets, so trustees have to be a person of a high repute & integrity. They must ensure that the investors interest is safeguarded & that the AMCs operations are along professional line. SEBI Regulations require that at least two thirds of the directors on board of trustee company must be independent i.e. they should not be associated with the sponsors. RIGHTS OF TRUSTEES: They appoint the AMC with the prior approval of SEBI. They approve each of the schemes floated by the AMC. They have the right to request any necessary information from the AMC concerning the operations of various schemes managed by the AMC as often as required to ensure that the AMC is in compliance with the Trust Deed &the regulation. They have right to take remedial action if they believe that the conduct of the funds business is not accordance with SEBI regulation. They have the right to ensure that, based on their quarterly review of the AMCs net worth; any shortfall in the net worth is made up by the AMC. OBLIGATION OF TRUSTEES: They must enter into an investment management agreement with the AMC. They must ensure that the funds transaction is in accordance with the trust deed. They are responsible for ensuring that the AMC has proper system & procedure in place & has appointed key personal including Fund manager & Compliance officer. They must ensure that the AMC is managing scheme independent of other activities & that the interest of unit-holders is not compromised with those of other schemes/activities. ASSET MANAGEMENT COMPANY(AMC): The role of an AMC is to act as the Investment Manager of the Trust. The AMC, in the name of the trust, float & then manage the different investment scheme as per SEBI regulations & as per the investment management agreement it signs with the trustees. The AMC of a mutual fund must have a net-worth of at least Rs. 10 crs. at all times. Directors of the AMC, both independent & non-independent, should have adequate professional experience in financial service & should be individual of high moral standing. To ensure independence, SEBI mandated that a minimum of 50% of the directors of the board of the AMC should be independent directors. The AMC cannot act as a trustee of any other mutual fund. OBLIGATION OF THE AMC &ITS DIRECTORS:

AMC & its directors must ensure that: 1. Investment of funds is in accordance with SEBI regulation & the trust deed. 2. They take responsibility for the acts of its employees & other whose services it has procured. 3. They are answerable to the trustees & must submit quarterly reports to them on AMC activities & compliance with SEBI regulation. 4. They dont undertake any other activity conflicting with managing the fund. 5. They will float scheme only after obtaining the prior approval of the trustees &SEBI. 6. If AMC uses the services of a sponsor, associate or employees, it must make appropriate disclosure to unit-holders, including the amount of brokerage or commission paid. 7. They will make the required disclosures to the investors in areas such as calculation of NAV & repurchase price. 8. Each days NAV is updated on AMFIs website by 8 p.m. of the relevant day.

CUSTODIAN & DEPOSITERS: Mutual funds are in the business of buying & selling of securities in large volumes. Handling these securities in terms of physical delivery & eventual safekeeping is therefore a specialized activity. The custodian is appointed by the board of trustees for safekeeping of physical securities or participating in any clearing system through approved depository companies on the behalf of the mutual fund in case of dematerialized securities. The custodian should be an entity independent of the sponsors is required to be registered with SEBI. A mutual funds dematerialized securities holding is held by a depository through a Depository participants. Mutual funds physical securities are held by a custodian.

BANKERS: A funds activities involve dealing with money on a continuous basis primarily with respect to buying & selling units, paying for investment made, receiving the proceeds on sale of investments & discharging its obligations towards operating expenses. A funds bankers therefore play a crucial role with respect to its financial dealing by holding its bank accounts & providing it with remittance service.

TRANSFR AGENT: They are responsible for issuing & redeeming units of the mutual fund & provide other related services such as preparation of transfer documents & updating investor records.

DISTRIBUTERS:

Since, mutual fund operates as collective investment vehicles, on the Principle of accumulating funds from a large numbers of investors & then investing on a big scale. For these activities, distributors are appointed. Anyone from individual agent to large bank can become distributor.

REGULATORY FRAMEWORK (1) SEBI: SEBI is the apex regulator of all entities that raise funds in the capital market or invest in capital market securities. Mutual funds have emerged as an important institutional investor in capital market securities. Hence, they come under the purview of SEBI. SEBI require all mutual funds to be registered with them. It issues guidelines for all mutual fund operations including where they can invest, what investment limits & restriction must be complied with, how they should make disclosure of information to the investor protection. (2) RBI : MONEY MARKET REGULATOR AS SUPERVISOR OF BANK-OWNED MUTUAL FUND: Operation of bank-owned mutual funds is governed by guidelines issued by the RBI. But is important to note that Bank-owned MF is under the joint supervision of both RBI & SEBI. It is generally understood that all market

related & investor related activities of the funds are to be supervised by SEBI, while any issue concerning the ownership of the AMCs by bank fall under the regulatory ambit of RBI. AS SUPERVISOR OF MONEY MARKET MUTUAL FUND: RBI is the only govt. 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 the entities that operate in the money market, be it bank or companies that issue securities such as certificate of deposit or commercial paper or bank & mutual funds who are allowed to borrow from or lend in the call money market. MINISTRY OF FINANCE : The ministry of finance, which is charged with implementing the govt. policies, ultimately supervises both the RBI & the SEBI. Besides being the ultimate policy making & supervising entity, the MoF has also been playing the role of an Appellate Authority for any major disputes over the SEBI guidelines. COMPANY LAW BOARD : Mutual Fund, AMC & Corporate trustees are companies registered under companies Act, 1956 & therefore answerable to regulatory authorities empowered by the Companies Act. STOCK EXCHANGE : Stock Exchange is self-regulatory organization 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 through a listing agreement between the fund & stock-exchange. (3) OFFICE OF THE PUBLIC TRUSTEE : Mutual fund, being public trust is governed by Indian Trust Act, 1882. The Board of Trustees or the trustee company is accountable to thee office of public trustee, which in turn reports to the charity commissioner.

PART C INTRODUCTION TO MUTUAL FUNDS

TYPES OF MUTUAL FUND SCHEMES Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

I] Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period . The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic

repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

II] Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Equity funds are of different types. These are following: (a)AGGRESSIVE GROWTH FUNDS: This type of funds target maximum capital appreciation ,invest in less researched stock that are considered to have future growth potential & may adopt speculative investment strategies to attain their objective of high return for the investors. Examples: Birla Midcap Fund, Franklin India Prima Fund, HDFC Capital Builder Fund, Kotak Opportunities Fund. (b) GROWTH FUNDS: These types of funds invest in companies whose earning are expected to rise at an above avg. rate. These companies may be operating in sectors like technology considered to have a growth potential, but not entirely unproven & speculative .The primary objective of growth fund is capital appreciation over three to five years span. Examples: Pru ICICI Power Fund, Kotak 30 Fund, Magnum Equity Fund, Tata Growth Fund, Principal Growth Fund. (c) SPECIALTY FUNDS: These funds have a narrow portfolio orientation & invest in companies that meet pre-defined criteria. These are also of different types:-.

 SECTOR FUNDS: These funds portfolios consist of investment in only one industry or sector of the market such as IT or Pharma or FMCG. Since sector funds dont diversify into multiple sectors; they carry a higher level of sector & company specific risk than diversified equity funds. Examples: Pru ICICI FMCG Fund, Pru ICICI Technology Fund, Kotak Technology Fund, Tata Infrastructure Fund. OFFSHORE FUNDS: These funds invest in equities in one or more foreign countries there by achieving diversification across the countrys border. However they also have additional risks such as the foreign exchange rate risk & their performance depend on the economic condition of the country they invest in. 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 share are not very liquid in market. OPTION INCOME FUNDS: These funds write options on a significant of their portfolio. These funds invest in large dividend paying companies & then sell options against their position. (d) DIVERSIFIED EQUITY FUNDS: A fund that seeks to invest only in equity, but is not focused on any one or few sectors or shares may be a termed a diversified equity fund. ELSS:AN INDIAN VARIANT 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 the investor to claim income tax rebate, but usually has a lock-in period. Generally, such funds would be in the diversified equity fund category. (e) EQUITY INDEX FUNDS: These funds track the performance of a specific stock market index. The objective of these funds is to match the performance of stock market by tracking an index that represents the overall market. Examples: Prudential ICICI SPIcE Fund, Magnum Index Fund, Birla Index Fund, Tata Index Fund. (f) VALUE FUNDS: These funds try to seek out fundamentally sound companies whose shares are currently underpriced in the market. These funds will add only those shares to their portfolio that are selling at low price-earning ratios, low market to book value ratios & are undervalued by other yardsticks. Examples: Prudential ICICI Discovery Fund, Templeton India Growth Fund.

(g) EQUITY INCOME FUNDS/DIVIDEND YIELD FUNDS: These funds are designed to give the investors a high level of current income along with some steady capital appreciation, investing mainly in shares of companies with high dividends yields. These funds are therefore less volatile &less risky than nearly all other equity funds. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Examples-Pru ICICI Income Plan, Reliance Medium Term Fund, Magnum Income Fund, Principal Income Fund. (1)DIVERSIFIED DEBT FUNDS: A debt fund that invests in all available type of debt securities, issued by entities across all industries & sectors is a properly diversified debt fund. A diversified debt fund has the benefit of risk reduction through diversification & sharing of any default-related losses by a large number of investors. (2) FOCUSSED DEBT FUNDS: These types of funds have a narrower focus, with less diversification in its investment. These types of funds invest only in corporate debt & bonds or only in tax-free infrastructure or municipal bonds. (3)HIGH YIELD DEBT FUNDS: These type of funds seek to obtain higher interest return by investing in debt instrument that are considered below investment grade. Clearly, these funds are exposed to higher risk. Examples: Birla Dividend Yield Plus, Tata Dividend Yield Fund. Balanced Fund A balanced fund is one that has a portfolio comprising debt instrument, convertible securities, pref. shares, equity shares The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Examples: Pru ICICI Balance Plan, Kotak Balanced Fund, Birla Balance Fund, Tata Balanced Fund, Principal Fund. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments which generally mean securities of less than 1 year maturity such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Examples- PruICICI Liquid Fund, Reliance Short Term Fund, Reliance Liquid Fund, Kotak Liquid Fund, Magnum Insta Cash Fund, Principal Cash Management Fund, UTI Money Market Fund. III] OTHER SCHEMES Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Examples- Pru ICICI Gilt-Treasury Fund, Pru ICICI Gilt-Investment Fund, Reliance Gilt Securities Fund, Kotak Gilt Fund, Magnum Gilt Fund, Birla Gilt Plus Fund, UTI G-Securities Fund. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Sector specific funds/schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods

(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme. When a fund invests in tax-exempt securities, it is called TAX-EXEMPT FUNDS. When a fund invests in a taxable securities, it is called NON- TAX-EXEMPT FUNDS. In India, after the 1999 Union Govt. Budget all the dividend income received from any of the mutual funds is tax-free in the hands of investors. However funds other than equity funds have to pay distribution tax before distributing income to investors. Fund of Funds (FoF) scheme A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe. Load / No-load Fund scheme A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

There are different types of loads: a) FRONT-END or ENTRY LOAD: The load charge to the investor at the time of his entry into scheme is called a Front-end or entry load. b) DEFERRED LOAD: The load amount charged to the scheme over a period of time is called a Deferred load. c) BACK- END or EXIST LOAD: The load that investor pays at the time of his exist is called a Back-End or Exist Load. Funds that charges front-end, back-end or deferred loads are called LOAD FUNDS. SEBI regulations allow AMC to recover loads from investor up to a certain limit. This limit currently stands at 6%. This means that initial issue expenses shouldnt 6% of the initial corpus mobilized during the initial offer period.

INDIAN VARIANTS Assured return schemes Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year. These types of funds are prevalent in India. These type of funds offered assured return scheme to investors. Returns are indicated in advance for all the future years of these closed-end schemes. If there is any shortfall, it is borne by sponsors. Examples: Monthly Income Plan of UTI. Pru ICICI MIP, Reliance MIP, Magnum MIP, Birla MIP. FIXED TERM PLAN SERIES: A mutual fund scheme normally is either open-end or closed-end. Fixed term Plan series offer a combination of both these features to investors as a series of plans are offered & units are issued at frequent intervals for short plan duration.

WHO CAN INVEST IN MUTUAL FUNDS IN INDIA: Mutual Funds in India are open to investment by (a) Residents Including (1)Resident Indian Individuals

(2) Indian Companies (3) Indian Trusts/ Charitable Institutions (4) Bank (5) Non-Banking Finance Companies (6) Insurance companies (7) Provident Funds (b) Non-Residents Including (8) NRIs (9) Overseas Corporate Bodies (c) Foreign Entities,viz (10) FIIs registered with SEBI Foreign citizen/entities are however not allowed to invest in mutual funds in India.

INVESTMENT OPTIONS OF A MUTUAL FUND Growth Option No dividend to Unit Holders. Income will remain reinvested and reflected in NAV. Benefit of long - term capital gains for Unit holders where units are redeemed after one year date of purchase.

 Dividend Option Dividend out of the net surplus as approved by the Trustees Balance of net surplus to be ploughed back and reflected in NAV. Quantum & frequency of distribution may vary between various plans. Options for investors to choose between quarterly, semiannual and annual dividend.

Dividend Reinvestment Investor can reinvest dividend in additional units. Dividend automatically reinvested in the respective in the respective Plans at the first exdividend NAV. Dividend reinvested shall be constructive payment of dividend to Unit Holders and will be tax exempt in the hands of Unit holders.

There exists a provision in many mutual fund forms which asks you whether you want your dividend reinvested. This was a good provision when there was no tax on dividends and the long term capital gains tax was not zero. Then, it was better for you to have shown the income as dividend and reinvest it: that way you avoided paying long term capital gains tax. However, now the situation is reversed - we have zero long-term capital gains tax and there is tax on dividends received. Hence, this option does not make sense under any circumstance though some fund houses still carry it as a legacy option.

SYSTEMATIC INVESTMENT PLAN (SIP) This is the simplest manner of investing in a mutual fund. You have a certain sum of money (lets say, Rs 100) and you want to invest it in one go. You approach the mutual fund company with your cheque for the amount you want to invest. The main risk with this investing strategy is that you are locked in to the valuations of the underlying security as on a particular date. If, for example, the prices were to go down from this point, you

would lose money on the entire investment. Similarly, if you have timed the investment right, you will see a good rise on your entire investment. In order to avoid the risk mentioned above, you can instead invest the sum over a period of time. Mutual funds allow you to periodically invest in them (lets say 5 investments of Rs 20 each). You can invest on a weekly, monthly or quarterly basis with the mutual funds. SIP allows to invest a fixed amount on monthly / quarterly basis at NAV based prices This way you will avoid the risk of locking in to one single valuation but you will get an 'average' of the valuations on the various dates that you invest. SIP is very helpful in a volatile market. Since you invest a fixed amount, you buy more of the security when its prices fall and less when it is more expensive. Mutual funds define the dates on which you can make the regular investments (typically 1st/7th/15th/21st of every month). If you are a salaried employee, you will realize that you have surplus monthly savings and hence this can become a preferred option for you. You receive your salary on the 5th of the month and hence you can make the investment every 7th of the month. You can fill the SIP application form and inform the mutual fund that you want to invest on 7th every month. Almost all mutual funds provide an Electronic Clearing Scheme (ECS) with the major banks: this means that you can sign an order to your bank that you allow the mutual fund company to take a specified sum of money from your bank account on specified dates for a specified period. This saves you the hassle of signing post dated cheques or of sending cheques on a periodic basis to the mutual fund.

RUPEE COST AVERAGING It's hard to time markets Make no mistake, it's hard to time when to enter and exit markets. Financial markets are made up of a host of different investors. There are large institutions, such as fund managers, as well as companies, brokers and individual investors. Over the long-term, markets can do well but in the short term, prices fluctuate on the basis of fundamental news, market sentiment, expectations, rumour and competitor activity. Sometimes the herd' mentality can set in. When the news about a

particular stock is good, investors buy in. Even though the price keeps rising, buyers keep buying, as nobody is sure when the price has peaked. Similarly, when prices are falling, nervous investors sell in an attempt to cut their losses. There are statistical measures and yardsticks, such as price-earning ratios, which help determine the true value of a stock or bond, but as the boom and bust in Internet stocks has proven, rational measures are often ignored and sentiment can take over. Deciding when to invest in this environment can be a stressful task. If the market is doing well you may fear that you're buying when prices are too high. By contrast, when the market is falling, there is a reluctance to invest due to fears that it may fall further. So what should an investor do to avoid having to make these timing decisions? The Markets are volatile: they move up and down in an unpredictable manner Invest a fixed amount, at regular, predetermined intervals and use the market fluctuations to your benefit How does it help you: You buy more more when the market is down You buy less when the market is up Over time the market fluctuations are averaged Most likely you will realize a saving on the cost per unit This leads to HIGHER RETURNS Difficult to predict the market and know when to Buy Low, Sell High, hence invest Systematically Takes advantage of Rupee Cost Averaging: buy more when the price is low and buy less when its high Low maintenance, payments are made automatically Contribute as little as Rs. 500 every month Instills investing discipline: no temptation to time the market

Why investing regularly, works? Investing on a regular basis removes the stress of timing the market because you are employing the concept of Rupee Cost Averaging. If you are an investor in mutual funds it means that you buy more units when the purchase price is low and fewer units when the purchase price is high. The trick to all this is to remember that it's not the price you pay for each unit that matters. It's the average price per unit over time that determines your overall return.

By investing regularly, Ajay bought units as the price was falling and was able to benefit from price appreciation as the market recovered. So Ajay has avoided the stress of timing the market but has still done very well on his investment. The key Rupee Cost Averaging which, in simple terms, just means investing regularly.

SYSTEMATIC TRANSFER PLAN (STP): In the above example, if you had a lump sum of money and wanted to do an SIP, you would have to park your extra money (i.e., Rs 80, which is Rs 100 minus the first installment of Rs 20) somewhere. Mutual funds, realizing this issue, offer an STP. Here, you can invest the entire sum of money (Rs 100) with the fund: you put in Rs 20 in the equity fund, while putting the extra sum (Rs 80) in cash or debt funds. Over the next four months, you can request the fund to transfer Rs 20 (plus the gains/losses) each month to the equity fund. This saves you the hassle of creating a communication between your mutual fund and your bank through ECS. Similarly, if you believe that you would gradually want to move your exposure in IT to lets say, pharma, you can create an STP between your investments in the IT fund and the pharma fund. This way you do not suddenly shift exposure in one go, but do it gradually. If you are approaching a milestone, you can use this instrument to move your exposure from equity to debt funds so that you have more certainty around the final figure that you will receive.

SYSTEMATIC WITHDRAWAL PLAN (SWP) This is, as the name suggests, the reverse of the STP. Here you gradually withdraw money from the mutual fund. Assume you need Rs 20 over the next 5 months and you have Rs 100 invested in a mutual fund. You can request the mutual fund to return 1/5th of your money (including the gains/losses) every month for the next five months. If your bank account details are provided, the fund will deposit the

money directly in your bank account. This is typically used when you are nearer to a milestone or during your retirement. Facility for Unit holders to withdraw a specified sum each month Ideal for investors who invest a lump sum amount and withdraw regularly for their needs Minimum interval between two withdrawals will be one month Withdrawals converted into units at applicable NAV based prices to be subtracted from the balance units to the credit of Unit holder The Fund can close the account if the balance in Unit holders account falls below the minimum prescribed

WHAT IS NET ASSET VALUE (NAV) OF A SCHEME? The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is

the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis daily or weekly - depending on the type of scheme. The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable. NAV= Net asset value of the scheme/ number of units outstanding, i.e. (market value of investments + receivables+ other accured income+ other assets- accured expensesother payables- other liabilities) No.of units outstanding on the valuation date. If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV? Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below. Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes. On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He

may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

ADVANTAGES OF MUTUAL FUNDS The primary advantages of investing in a Mutual Fund are: Affordability: Almost everyone can buy mutual funds. Even for a sum of Rs 1,000 an investor can invest in a mutual fund. Professional Management: For an average investor, it is a difficult task to decide what securities to buy, how much to buy and when to sell. By buying a mutual fund, you acquire a professional fund manager who manages your money. This is the person who decides what to buy for you, when to buy it and when to sell. The fund manager takes these decisions after doing adequate research on the economy, industries and companies, before buying stocks or bonds. Most mutual fund companies charge a small fee for providing this service which is called the management fee. Reduction /Diversification of risks: According to finance theory, when your investments are spread across several securities, your risk reduces substantially. A mutual fund is able to diversify more easily than an average investor across several companies, which an ordinary investor may not be able to do. With an investment of Rs. 5000, you can buy stocks in some of the top Indian companies through a mutual fund, which may not be possible to do as an individual investor.

Liquidity: Unlike several other forms of savings like the public provident fund or National Savings Scheme, you can withdraw your money from a mutual fund on immediate basis. Tax benefits: Mutual funds have historically been more efficient from the tax point of view. A debt fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to an individual investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend tax on dividends from an equity fund for individual investor. Convenient Administration- mutual fund management companies offer many investor services that a direct investor cannot get. Within the same fund family, investor can easily transfer/switch their holdings from one scheme to another. They can also invest or withdraw their money at regular intervals in most open ended schemes. Other advantages are as follows: Return Potential Lower transaction Costs Transparency Flexibility

 Choice of schemes Well regulated

LIMITATIONS OF MUTUAL FUNDS No control over cost: an investor in mutual fund has any control over the overall cost of investing. He pays investment management fees as long as he remains with the fund in return for the professional management & research. Fees are usually payable as a percentage of the value of his investments, whether the fund value is rising or declining. A MF investor also pays fund distribution costs, which he would not incur in direct investing. However; this cost is often less than the cost of direct investing by the investors. Besides, the regulators have prescribed a ceiling on the maximum expenses that the fund managers can charge to the schemes. Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice to achieve his objective, quite similar to the situation when he has to select individual shares or bonds to invest in. No tailor made portfolios: investors who invest on their own can make their own portfolio of share, bonds and other securities. Investing through funds means he delegates his decision to the fund managers. High network individuals or large corporate investors may find it difficult in achieving their objectives.

TAX BENEFITS TO THE INVESTOR The tax benefits offered to investors often is an important consideration while deciding on the appropriate investment. DIVIDENDS RECEIVED FROM MUTUAL FUNDS Generally, income earned by any mutual fund registered with SEBI is exempt from tax.

After the 1999/2000 budget, to avoid double taxation, the investors are totally exempt from paying any tax on the dividend income they receive from the mutual funds However, income distributed to unit-holders by a closed-end or debt fund is liable to a dividend distribution tax at a rate stipulated by the government. This tax is not applicable to distributions made by open-end equity-oriented funds. So, the income distributed by a fund is exempted in the hands of investors and there is no TDS on any income distribution by mutual fund. The amount of dividend that the fund pays out depends on the gains that it has made, and here too, the fund manager/the Asset Management Company can decide to return only part of the gains. A fund cannot dip into its corpus to pay dividend. For example, assume the fund collects Rs 10 from you and at the end of one year, the fund value has risen to Rs 11. The fund can declare a dividend of any amount up to Re 1. It cannot go beyond Re 1 because then it will have to dip into its original corpus, which it is not allowed to do. Assume that your fund declares a dividend of Re 0.8. When a non-equity oriented mutual fund declares dividend, it pays a tax of 15% (+10% surcharge and 3% cess, totaling to 15%*1.1*1.03=16.995%) on the dividend amount. Hence, in this example, the fund will need to pay Rs 0.14 (Rs. 0.8*16.995%) as dividend distribution tax. However, once this tax is paid, the dividend received is tax free in the hands of the investor. Recently, this dividend distribution tax has been increased to 25% in case of liquid funds. The value of the fund (and your investment) will fall from Rs. 11 to Rs. 10.06 (i.e. Rs. 11 Rs. 0.8 Rs. 0.14). This is an important point because many people do not realize that dividends reduce the value of the investment and also because dividend is considered as tax free. Clearly, your money is refunded to you and also the same goes from your investment to pay the dividend distribution tax. However, if an equity fund were to declare a dividend, there is no dividend distribution tax. Hence, when a mutual fund declares Rs 0.8 as dividend, you receive Rs 0.8 and the NAV falls to Rs 10.2.

THE IMPACT ON THE FUND AND THE INVESTOR Although this tax is payable by the fund on its distributions and out of its income, the investor pays indirectly since the funds NAV and therefore the value of his investment will come down by the amount of tax paid by the fund. For ex: If a closed-end or debt fund declares a dividend distribution of Rs.100, Rs.10 (if the tax rate is 10%) will be taxed in the hands of the fund. While the investor will get Rs.100, the fund will have Rs.10 less to invest. The funds current cash flow will diminish by the said amount paid as tax and its impact will be reflected in the lower value of the funds NAV and hence investors investment on a compounded basis in future periods.

 Since the tax is on distributions, it makes income schemes less attractive in comparison to growth schemes, because the objective of income schemes is to pay regular dividends. The fund cannot avoid the tax even if the investor chooses to reinvest the distribution back into the fund. For example: The investor will still have to pay Rs.10 tax on the announced distribution, even if the investor chooses to reinvest his dividends in the concerned scheme. If you do not want the investment back on a regular basis but would rather wait till the end of your planning horizon for the investment, then you should choose the 'growth option.' This option means that the gains that the fund makes are retained in the fund and are invested on your behalf. Taking the earlier example, the fund will reflect as Rs. 11 as your balance in the fund at the end of the year. However, you will receive nothing from the mutual fund as current income. Note that because nothing is paid to you, you do not need to pay anything to the government as taxes. If you sell a mutual fund with 'growth' option, you will have to pay the government capital gains taxes. CAPITAL GAINS ON SALE OF UNITS If the investor sells his units and earns capital gains, the investor is subject to capital gains tax as under: If the units are not held for more than 12 months, they will be treated as short term capital asset, otherwise as long term capital asset. (This period is 36 months for assets other than shares and listed securities) Long term capital gains (Tax-free) A few types of long-term gains on mutual fund holdings are tax-free in nature. This is applicable for equity oriented mutual fund units, which will mean coverage of diversified equity schemes, balanced funds (65 per cent or more assets in equity), sector schemes, index funds among others. If the units in these schemes are held for a period of more than a year, then the gains will qualify for zero tax. Any long term capital gain arising from the sale of units of an equity oriented scheme where such transaction is chargeable to STT shall be exempted from tax u/s10 (38). Consider a case where an investor has bought 1,000 units in an equity oriented fund at Rs. 15 per unit on August 3, 2005. If he sells the units on March 12, 2007 then the period is more than a year so the gain is long-term capital gains. If the sale price is Rs 25 per unit then the gain of Rs 10,000 (1000 units * Rs 10 profit per unit) is tax-free. Long term capital gains (Taxable)

Mutual fund units held by an individual that are not in equity oriented schemes but say in an income scheme or a monthly income plan, then the long term capital gains are taxable. In order to qualify for LTCG, the units have to be held for more than a year. In this case there is a choice of rates for the individual as to whether they want to pay 20 per cent with indexation or 10 per cent without indexation. Whichever option is more beneficial to the taxpayer, the capital gains tax liability shall be computed accordingly Capital gains = sales consideration-(cost of acquisition +cost of improvements +cost of transfer) If the units were held for over one year, the investor gets the benefit of indexation, which means his purchase price is marked up by an inflation index, so his capital gains amount is less than otherwise. Purchase price of a long term capital asset after indexation is computed as, Cost of Acquisition or improvement = Actual Cost of Acquisition or improvement * Cost Inflation Index for year of transfer /Cost Inflation index for year of acquisition or improvement or for 1981, whichever is later. Suppose an investor buys 1,000 units in a debt oriented fund at Rs 10 per unit in June 2002 and sells all of them in September 2004 at Rs 14.5 per unit. In such a situation the individual will have to make two calculations. Since the holding of the units is for more than a year the nature of this is long term capital gains. First consider the gain without the benefit of indexation. The total gain comes to Rs 4,500 (1,000 units * Rs 4.5 being the profit). The tax on this would be 10 per cent without indexation that is Rs 450. In the second calculation, take the cost inflation index, which will raise the cost of purchase for the individual. You can come across the indexation rates from the CII charts issued by the tax department. Here the applicable index numbers are 447 for 2002-03 (financial year of purchase) and 480 (financial year of sale) for 2004-05. Thus the cost becomes Rs 10,738 (Rs 10,000 X 480/447). The profit comes to Rs 3762 and the tax at 20 per cent of this at Rs 752. Since the tax in the first working at Rs 450 is lower the individual can choose this as the tax to be paid. Short-term gains If an equity oriented fund is sold within a year of purchase then the gains that arise are referred to as short term capital gains and are taxed at 10 per cent. Consider an investor who buys 1,000 units of an equity fund at Rs 24 per unit and sells them after four months at Rs 29 per unit. In this case the profit is Rs 5,000 and the tax on this will come to Rs 500 at 10 per cent. Tax on short term capital gain Any short term capital gain arising from the transfer of a unit of an equity oriented fund shall be liable to tax @10% if the following conditions are satisfied:

1] The transaction of sale should take place through a recognized stock exchange 2] Such transaction is chargeable to STT. The short term gains that occur on debt oriented funds will have a different impact as this will be added to the income of the individual. Depending upon the tax slab that the individual falls under, the appropriate tax would be calculated. For instance, if a person buys 1,000 units of a debt oriented mutual fund at Rs 12 in June 2006 and then sells it for Rs 13 in December 2006 then the gain of Rs 1,000 is short term in nature. If the individual has a total income of Rs 350,000 then this will be added to the total income and in effect the tax on this Rs 1,000 will be at the highest slab of 30 per cent. IN BRIEF, As per Section 10(38) of the Act, long term capital gain arising from the sale of units of equity oriented fund is exempt from tax. However the unit holder will have to pay securities Transaction Tax (STT) of 0.20 % on the value of sale. Long Term Capital Gains Tax on Funds other than Equity Oriented. Long-term capital gains arising from the sale of units on any Funds other than Equity Oriented will be chargeable under Sec.112 of the act at the rate of 20 % after Indexation benefit or 10 % flat on the Gains Short Term Capital Gains Tax on Equity Oriented Mutual Fund. As per sec.111A, short term capital gain arising from the sale of units of equity oriented fund wherein such transaction is chargeable to securities transaction tax (STT). The Tax on Short Term Capital gains is at the rate of 10 % Short Term Capital Gains on Equity Funds: 10 % plus STT@0.20 % Short Term Capital Gains Tax on Funds other than Equity Oriented. Short Term Capital Gains in respect of units held for not more than 12 months is added to the total income of the assessee and taxed at the applicable slab rates specified by the Act. GROWTH IN ASSETS UNDER MANAGEMENT Status of Mutual Funds for the period Dec 31,09 Jan 31, 2010 Assets Under Mgmt as on Jan 31 , as on Dec 31 , Inflow/ 2010 2009 Outflow

Category

Sales New schemes

A B C D

Mutual Fund Houses Bank Sponsored Institutions Private Sector & Joint Venture I Indian II Predominantly Indian III Predominantly Foreign Grand Total (A+B+C+D)

3730 0 0 1241 524 0 1765

780126.17 124027 47440 246358 269629 24130 711584

645845.14 127604 51502 259155 280941 24318 743520

134281.04 -3577 -4062 -12797 -11312 -188 -31936

Source: http://www.mutualfundsindia.com/corpus

PLAYERS IN MF INDUSTRY IN INDIA A. Bank Sponsored 1. Joint Ventures - Predominantly Indian - Canara Robeco Asset Management Company Limited - SBI Funds Management Private Limited 2. Joint Ventures - Predominantly Foreign - Baroda Pioneer Asset Management Company Limited 3. Others

- UTI Asset Management Company Ltd B. Institutions - LIC Mutual Fund Asset Management Company Limited C. Private Sector 1. Indian - Axis Asset Management Company Ltd. - Benchmark Asset Management Company Pvt. Ltd. - Deutsche Asset Management (India) Pvt. Ltd. - Edelweiss Asset Management Limited - Escorts Asset Management Limited - IDFC Asset Management Company Private Limited - JM Financial Asset Management Private Limited - Kotak Mahindra Asset Management Company Limited(KMAMCL) - L&T Investment Management Limited - Motilal Oswal Asset Management Company Limited - Peerless Funds Management Co. Ltd. - Quantum Asset Management Co. Private Ltd. - Reliance Capital Asset Management Ltd. - Religare Asset Management Company Limited - Sahara Asset Management Company Private Limited - Tata Asset Management Limited - Taurus Asset Management Company Limited 2. Foreign AIG Global Asset Management Company (India) Pvt. Ltd. FIL Fund Management Private Limited Fortis Investment Management (India) Pvt. Ltd. Franklin Templeton Asset Management (India) Private Limited Goldman Sachs Asset Management (India) Private Limited Mirae Asset Global Investments (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian Birla Sun Life Asset Management Company Limited DSP BlackRock Investment Managers Private Limited HDFC Asset Management Company Limited ICICI Prudential Asset Mgmt.Company Limited Sundaram BNP Paribas Asset Management Company Limited

4. Joint Ventures - Predominantly Foreign - AEGON Asset Management Company Pvt. Ltd.

Bharti AXA Investment Managers Private Limited HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. JPMorgan Asset Management India Pvt. Ltd. Morgan Stanley Investment Management Pvt.Ltd. Principal Pnb Asset Management Co. Pvt. Ltd.

PART D: MUTUAL FUND VS OTHER INVESTMENT AVENUES

DIFFERENT INVESTMENT OPTIONS AVAILABLE WITH INVESTOR Public provident fund Public provident fund is a government oglibation, hence virtually risk-free. PPF carries tax free interest of 8% p.a. and contributions up to Rs 70000/- are eligible for tax rebate under section 80C. Public Provident fund (PPF) was one to the best options available to the small investor until recently. However, finance acts over the years have reduced the yield on PPF from 12% to 8%. An individual is allowed only one account in his name. The scheme requires annual contributions(between Rs.500 and Rs. 70000) to be made over 16 yrs, with the option to withdraw 50% of the 4th year balance in the 7th year. Assured tax-free interest,

which can be compounded over 16 years, makes this scheme an attractive option. However, restrictions on withdrawal reduce liquidity for the investor. Indira and Kisan Vikas Patra These were originally introducted as post office schemes in order to tap savings in rural India, but also became popular with urban investors. However their current yield (*% over 6 years, fully taxable) has made them unattractive. Nevertheless, indira vikas patra continues to appeal to investor with investible cash, who prefer to invest without being indentified. Consequently, they are easily transferable and liquid. RBI relief bonds Relief bonds issued by the Reserve Bank India have become a popular investment option for high net worth individuals in an era of declining interest rates and volatile equity markets. They currently pay interest at 8%, which is now taxable(in the past, the interest used to be tax-free), and have a maturity period of 5 years. They are virtually free of any risk of default, as the RBI is the central bank of the country and issues these bonds on behalf of the government of India. Other schemes from national savings organization Besides PPF and Indira vikas Patras, the NSO offers schemes such as post office accounts, recurring deposits and the scheme for retiring government employees. However these schemes have ceased to be attractive after the advent of PPF and institutional bonds. Government securities This is a government paper normally issued on long term basis and defines the yield curve to a great extend. Primary dealers specially appointed for this purpose deal in government securities. For individual investor, although direct investment in government securities is possible, the amount required for direct investments can be large. Hence, for small investor, they are best accessible through mutual funds. Life insurance Life insurance in India was the monopoly of the life insurance corporation of India(LIC) until recently, when the government opened the market to private players. A without profits policy purchased by an individual promises to pay a certain sun\m of money( the sum assured) to his survivor nominated by him in the event of his death within a specified period( the term of the policy). If the individual survives the term of the policy, he does not receive anything. A with profit not only pays the sum assured in the event of death during the policy term, but also pays a bonus as declared by LIC from year to year. If the individual survives the term of the policy, he receives the sum assured plus bonus accrued. Most policies require the individual to pay a fixed premium on a yearly basis. If the individual decides to discontinue the policy during the tenure, he would be entitled to the policys surrender value, which is a percent of premium paid till date. In India, life insurance is viewed more as an investment option than as a vehicle for risk protection. In fact, very few individuals evaluate the need for insurance. Instead, they tend to opt for it on account of tax benefits. Premium paid on life insurance qualifies for

deduction under section 80C and proceeds at the time od death or maturity are exempt from tax. Certain investors prefer life insurance because it acts as a forced saving( the policy would lapse if annual premium is not paid to the insurance company).however, a careful evaluation of life insurance reveals that the opportunity cost is significant when compared to other secure investments such as PPF. It is important for an individual to evaluate the need for insurance with respect to his earning potential and the financial impact on his depandants in the event of his ultimately death. Proceeds in the event of his surviying the term of the policy do not make insurance a worthwhile investment. Surrender values paid by the insurance companies are not attractive leading to a lengthy lock-in-period. Many plans also offer very little flexibility. Therefore, an investor would be well advised to buy insurance, not just as an investment, but mainly to provide for his dependants in case of his untimely death. A recent phenomenon of convergence between the mutual funds and the insurance companies has been the development of unit linked insurance plans offered by both insurance companies and the fund AMCs. These schemes combine the benefits of mutual funds investing with the added benefit of protection through insurance cover. In these schemes, investor have the option to choose from a variety of different investment plans with different asset allocation percentages between equities and debt. At the same time, life insurance cover is part of the plan. Physical assets: Gold and Real Estate Indians are the largest investors in gold in its various forms. Investment in gold is not subject to erosion on account of rupee depreciation, which is perhaps its biggest advantage. Historically, gold has been perceived as a hedge against inflation or as a means of security in bad times. Hence, investors do not always lookfor returns while investing in gold. Recently the government has deregulated the import of gold significantly. Nevertheless, it is the average Indians obsession with Gold that has maintained its place as a key investment option. Earlier the government had permitted banks to issue gold bonds. These bonds represent securitization of gold. Investors can hold these bonds and earn some returns, instead of holding the metal and incur csts and risks associated with storage. The instrument is still in its infancy. Recently the Union Finance Minister has announced Gold Linked Unit Scheme to be launched by mutual funds in India. Investor can now hold interest in gold through mutual fundunits. Real estate has also been a preferred investment alternative with the Indian Investor. However the capital required is often beyond the means of the small individual investor. Also the real estate market has been in a recession for the past few years and even during the upswing. It is not easy to liquidate holdings quickly at an appropriate price. Even high net worth individuals have tended to keep away from real estate purely as a form of investment. Once again for those investor who like investing in real estate an attractive option may emerge soon with some AMCs planning to offer Real Estate Mutual Funds- an indirect form of investing that still offers to the investors benefits of both real estate investing and mutual fund investing. Banks

Bank deposits have been a favored investment option with the Indian investor, mainly because of the liquidity and safety benefits they offer. Most Indian banks are promoted either by the government or by leading financial institutions. The liquidity and safety offered by banks does however come at a price. Yields on bank deposits are negligible after inflation and tax. While the return of the capital is guaranteed by the bank, deposit is not a secured investment, its perceived safety coming from the soundness of the bank management or ownership. Investors should be advised to park only a part of their savings in bank deposits. Corporate Securities available in the capital market include equity instrument, debt instruments and quasi debt-quasi equity instrument issued by companies. Equity instrument are in the form of shares in companies either issued privately and unlisted, or issued publicly and listed on a stock exchanges. The investor may acquire such shares, either at the time of the initial public offering by the company or subsequently, through the stock exchange at which they are listed. The benefit of investing of equities is the high growth potential that this avenue offers. Also the listing at stock exchange ensures a high degree of liquidity. Historically, equities have yielded the highest return as compared to othe investment options. However for the individual investor, it is a challenge to identify shares which are likely to appreciate in value, and even if he succeeds in doing so, he may be unable to raise capital that is required to develop a diversified portfolio. Besides a risk averse investor should be advised to refrain from investing heavily in the equity market. The corporate borrowers comprises also issue debenture paying fixed rates of interest. In India, these debentures are generally secured by the assets of the borrower. However credit standing of the borrower has to be determined with the help of the credit rating that a particular debenture issue is given by a rating agency. Companies pay different rates of interest depending upon how strong their rating or their market acceptance is. Borrowers with lower rating need to pay higher interest. Companies can also issue unsecured bonds, like FIs though the instrument will not be called a debenture. Both bonds and debentures may be subscribed to either in a private placement or in a public issue. Many companies privately issue debt securities with less than 18 months maturity, as such issues are exempt from the requirement of credit rating. Investors need to be extremely careful about such investment and need to be sure that the issuing company is really creditworthy. Public issues and other private issues have to be rated so some guidance is available to the investor to judge the risk of default by the borrower. Investing in company fixed deposits is yet another avenue available in the market. While company fixed deposits may carry a higher rate of interest as compared to bank deposits, they are also an unsecured investment. Each company deposits deposit must be evaluated with reference to the risk rating assigned to them by credit rating agencies such as Crisil, ICRA and CARE. Also the tax effect could make the net returns on these instruments less attractive than other debt instruments. Financial Institutions

In the past finacial institutions such as ICICI and IDBI have issued bonds on a regular basis. These bonds may be general purpose bonds issued to augment the issuers resources. Or they may have been issued with the intent of financing infrastructure development in the country. The bonds have usually offered two options. One option allows the investor to receive periodic interest payments *(monthly, quarterly, and annually) over the term of the instrument. The deep discount option does not pay interest on a periodic basis. Instead it yoelds a redemption value which is higher than the issue price, the difference being chargeable to tax as interest. Both options qualify for tax deduction under section 80C of the income tax act. Deduction of interest income under section 80C is not applicable. Institution bond schemes have usually had 3,5,10 and 15 year matrities with annualized compounded returns ranging between 12.5% to ubder 10% lately. A savvy investment approach can make these bonds a very attractive investment option (refer shanbhags investment planner) it must be noted that these bonds are unsecured. Mutual funds the best investment option From the comparative analysis provided above, it emerges that each investment alternative has its strengths and weakness. Some options seek to achieve superior returns (e.g. equity), but with correspondingly higher risk. Others provide safety(such as PPF), but at the expense of liquidity and growth. Options such as bank deposits offer safety and liquidity, but at the cost of return. Mutual funds seek to combine the advantages of investing in each of these alternatives while dispensing with the shortcomings. Clearly, it is in the investors interest to focus his investment on mutual funds.

COMPARING RETURNS OF MUTUAL FUND WITH OTHER ASSET CLASSES

Investment Options
Inflation PPF Gold Bank FD G-sec Equity 0% 2% 4% 6%

9.89% 8% 7.50% 6.50% 8% 16%

8% Returns 10% 12% 14% 16%

COMPARING RISK-RETURN PROFILE OF DIFFERENT ASSET CLASSES Category Equity FI Bonds Corp Debentures Co. deposits Return High Moderate High Moderate Moderate low Safety Low High Volatility High Liquidity High Low or

Moderate Moderate

Moderate Moderate Low Low High High High High Low Low Low Low Low High Moderate Low

Fixed Moderate Moderate Low High High Moderate Moderate low Moderate low High low High High

Bank Deposits PPF Life insurance Gold Real Estate Mutual Funds

Moderate Moderate Low

Moderate High High

Moderate High

Among all the asset classes available mutual fund gives the best combination of risk-return. It has other features also which makes them attractive. But this features also varies within different mutual fund schemes. Direct Equity investment versus Mutual Fund investments Investors have the option to invest directly in equities through the stock market instead of investing through mutual funds. However a practical evaluation reveals that mutual funds are indeed a more recommended options for the individual investor. Here is a comparison between the two options: Identifying stocks that have growth potential is a difficult process involving detailed research and monitoring of the market. Mutual fundd specialize in this area and possess the requisite resources to carry out research and continuous monitoring. This is clearly beyond the capability of most individual investors. Another critical element towards successful equity investing is diversification. A diversified portfolio serves to minimize the risk by ensuring that a downtrend in some securities/sector is offset by a upswing in the others. Clearly, diversification requires substantial investment that may be beyond the means of most individual investors. Mutual funds pool the resources of many investors and thus have the funds necessary to build a diversified portfolio, and by investing even a small amount in a mutual fund, an investor can, through his proportionate share, reap the benefit of diversification. Mutual fund specialize in the business of investment management, and therefore employ professional management for carrying out their activities. Professional management ensures that the best investment avenues are tapped with the aid of comprehensive information and detailed research. It also ensures that expenses are kept under tight control and market opportunities are fully utilized. An investor who opts for direct investing loses out on these benefits. Mutual fund focus their investment activities based on investment objectives such as income, growth or tax savings. An investor can choose a fund that has investment objectives in line with his objectives. Therefore, funds provide the investor the vehicle to attain his objectives in a planned manner. Mutual funds offer liquidity through listing on stock exchanges (for closed-end funds) and repurchase options (for open-end funds). In case of direct equity investing, several stocks are often not traded for long periods. While some closedend funds may not be traded frequently, they are nevertheless more liquid than many stocks. In any case, all funds provide one of the two avenues fro liquidity. Direct equity investing involves a high level of transaction costs per rupee invested in the form of brokerage, commission, stamp duty, etc. while mutual fund charge a

management fee, they succeed in transaction cost under control because of the economies of scale they enjoy. In terms of convenience, mutual funds score over direct equity investing. Funds serve investor not only through their investor services networks but also through associates such as bank and other distributors. Many fund allows investor flexibility to switch between schemes from the same family of funds. They also provide facility like cheque writing and accumulation plans. These benefits are not matched by direct equity investing.

It is clear that investing through mutual funds ia far superior to direct investing except perhaps for the investor who has a truly large portfolio and the time, knowledge and resources required for direct investing. Bank deposit versus Debt Mutual Funds It needs to be understood that bank deposit caters to a segment of the investor class that looks for safety and accepts a relatively lower returns. Equity funds cannot clearly be compared with the bank deposits, as investor can expect higher returns from equity funds only at the risk of losing part of the capital also. Given the risks, Indian investors are currently investing heavily in debt funds. However, before a bank depositor considers shifting his funds to debt funds, he should compare the two in a meaningful manner. A bank deposit is guaranteed by the bank for repayment of principal and interest. Any risks associated with investment of the investor funds have to be borne by the bank. The depositor has a contractual commitment from the bank to pay. A mutual fund, on the other hand, invest at the investor. Hence, there is no contractual guarantee for repayment of principal or interest to the investor. The bank depositor does not directly hold the bank portfolio of investments, as he does in case of a fund. The investor needs to assess the risk in terms of the credit rating of the bank, which provides an indication of the financial soundness of the bank. In case of investment in debt funds, however only a few debt funds in India are rated by a credit rating agency. Where a fund rating is available, it is a useful guide for the investor to know the risk level of the fund, in all other cases of unrated funds, the investor has to assess the risk on the portfolio held by the fund. The investor needs to know whether the fund invest in high quality assets or lower rated debt. Unlike in case of bank deposits, therefore, the investor needs to know his own investment objective and risk appetite before investing in a debt fund. The expected rturns will be commensurate with the level; of risk assumed by the fund. It can be seen that the bank deposits are totally free from risk, while generally giving lower returns. A conservative debt fund can give higher returns than a bank deposit, even if there is no contractual guarantee as in a deposit. Investor seeking higher returns from the capital market securities, a diversified debt portfolio while still investing small amounts, a portfolio that matches his objective and risk appetite is well advised to consider part of his investment in debt funds. Physical gold vs Gold Exchange-Traded Mutual Fund

Meaning of Gold ETF Investors can buy and sell the units of Gold ETF (Exchange Traded Funds) directly on the stock exchange through a SEBI registered broker. Gold ETFs give an opportunity to investor to invest in standard gold bullion (0.995 purity) neither taking the physical delivery of gold nor compromising with its quality. A gold exchange-traded fund (or GETF) is an exchange-traded fund (ETF) that aims to track the price of gold. Gold exchange-traded funds are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of October 2009, gold ETFs held 1,750 tonnes of gold in total for private and institutional investors.[1] There are also closed-end funds (CEF's) and exchange-traded notes (ETN's) that aim to track the gold price. Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Such instruments do not necessarily hold physical gold. For example, gold ETN's generally track the price of gold using derivatives. All exchange-traded gold instruments, including those that hold physical gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself. Fees charged to Gold ETF Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. Investment objective ETFS Physical Gold (PHAU) are designed to offer investors a simple, cost-efficient and secure way to access the precious metals market. PHAU is intended to provide investors with a return equivalent to movements in the gold spot price less fees. Purpose The strategy behind a gold ETF is to track and reflect the price of gold. While the assets in the fund are backed by the commodity, the intent is not for an investors to own gold. A gold ETF gives an investor an opportunity to gain exposure to the performance of gold.

Difference between Gold ETFs and Physical Gold

Parameter Holding Transparency Pricing Sale Wealth Tax

Gold ETFs Dematerialized Form Very High

Physical Gold Coin, bar etc. Very Low

Will be traded at NSE/BSE, so, Not Transparent transparent Can be done on the exchange Based on set of conditions itself No Yes If sold before 3 years High

Short Term Capital If sold before 1 year Gain Tax Impurity Risk Nil

Benefits of Gold ETFs over Physical Gold

No risk of storing the investment and its security Higher liquidity and easy to buy or sell

Taxation Implications of Gold ETFs ETFs are taxed on the same lines as of debt mutual funds. Following is the taxation slab: Category Short Term Capital Gain Tax As per income tax slabs 30% NRI As income slabs per tax Long Term Capital Gain Tax 10% or 20% with indexation 10% or 20% with indexation 10% or 20% with indexation Dividend Distribution Tax 25% Security Transaction Tax 0.125% at redemption 0.125% at redemption 0.125% at redemption

Individual

Corporate

25%

25%

Observations about Gold ETFs - 1

Based on the above chart, we can make the following observations:

Gold ETFs in India have performed exceptionally well when the market has fallen as shown by the green line (an over performance of 15.52% in 3 months). However, Gold ETFs in India tend to under perform the Sensex ( 9.18% in 1 month) during the bull run in the stock market. (In India, gold ETFs are recently launched. Therefore, up to 6 months performance is compared.)

Observations about Gold ETFs - 2 Over the period of 6 months (2nd August 2007 - 5th February 2008) 2nd August 2007 Equity (Sensex) Rs 100,000 5th February Absolute 2008 Gain Rs 124,540 Rs 24,540 Rs 29,920 Rs 5,380 % Gain 24.54% 29.92% 5.38%

Gold (Gold Rs 100,000 Rs 129,920 ETFs) Absolute Out performance (Gold ETFs over Sensex)

Therefore, following are the important points: Gold proves out to be a secure asset class at the time of market downfall In last 6 months, though the market moved northwards most of the time, a steep fall in January pulled down the aggregate returns with a higher percentage. An investor would have gained Rs 5380 more if invested in Gold ETFs and not in Sensex. This is due to exceptionally good performance of Gold ETFs in India in Jan 08 even though this asset class was under performing during Oct-Dec 07 Facts about Gold ETFs During the Jan 08 market fall During the market fall last month, the indices (Sensex and Nifty) have seen a steep fall of approx. (-9.78%) and (-12.60%). Following this fall, equity diversified funds have also seen a downtrend of around (-15.67%) on an average. Contrary to this, Gold ETFs have delivered positive returns and also over performed the equity indices. Gold ETFs have returned approx. 3.77% in the month of January when the markets have shown negative sentiments. Observations Gold ETF is an advisable asset class that can be a part of investor's portfolio to add to the diversification. These are low cost instruments and highly transparent. Especially with the negative sentiments in today's market, gold is a secure asset class. This asset class can bring stability and security in a well diversified portfolio.

Advantages Gold tends to rise when the dollar is weak, so if your investment portfolio has risk to the dollars downside, purchasing a gold ETF may help you hedge that exposure. Selling a gold ETF can help if your exposure is to the upside. A gold ETF is a commodity exchange traded fund that can be used to hedge gold commodity risk or gain exposure to gold itself. If an investor has risk when the price of gold rises, owning a gold ETF can help reduce risk on that position. Or if after ample research an investor decides to short gold, trading an inverse gold ETF may be a quick way to put on that position. And while gold is a commodity ETF, it can act as an industry ETF as well. For example, if an investor wants to gain exposure to the gold mining industry, owning a gold ETF may be an investment strategy that can fit his or her portfolio. While there are individual gold-mining stocks like Barrick Gold (ABX) and precious metals indexes like the XAU, a gold ETF may be a simpler or more diverse way to make an investment in the gold mining industry. There are a lot of benefits that come with ETFs and therefore sometimes they are a solid tool to have in ones investment arsenal. Gold ETFs can also be applied as a hedge for regional risk or to gain foreign exposure. If a certain country is solely dependent on gold as its main source of income, and investor with risk in that country can short a gold ETF as protection. So if gold drops, the short ETF position will help lessen the loss.

What is an FMP? FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date ie that run for a fixed period of time. This period could range from one month to as long as two-years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you. FMPs do not invest in equity. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations. 1. Tenure FMPs have a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days. Some even have a three or five-year time frame. Recently, Birla launched such a plan for 18 months and 36 months. At the end of this period, the scheme matures, just a like a fixed deposit. 2. Investments FMPs invest in fixed income instruments, like bonds, government securities, money market instruments (very short-term fixed return investments), to name a few. FMP 91 days v/s Fixed Deposits Dividend Option (Individuals) Investment Amount Rs 100,000 Post Expense 10.25% Indicative Yield Maturity Value Gain=Maturity Value - Investment Amount Tax Rate Tax Post Tax Gains Post Tax annualised returns 102,555 2,555 Dividend Option (Corporates) Rs 100,000 10.25% 102,555 2,555 Fixed Deposits

Rs 100,000 10.25% Rs 102,555 2,555

14.16% Rs 317 Rs 2,239 9.29%

22.66% Rs 472 Rs 2,083 8.62%

33.99% Rs 869 Rs 1,687 6.94%

Why FMPs are more lucrative than Bank FDs? Lately the interest rates on bank deposits have increased leading many investors to wonder whether a simple Bank Fixed Deposit (FD) would serve better than having to go through the process of investing in an FMP. Though Bank FDs and FMPs currently offer a similar rate of return; the tax impact tilts the scales in favour of the FMP. Interest on Bank FDs is fully taxable whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The Distribution Tax rate @14.16 per cent or the capital gains tax rate @10 per cent are lower than the income tax rate, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have the edge over Bank FDs. How do they differ from income funds? An income fund will invest in the same instruments like an FMP. But an open ended income fund will not have a fixed tenure. Because the tenure of the scheme is fixed, it makes investing easier for the fund manager. He can invest in instruments that will mature around the same time the scheme matures, in one go. So a fund manager with an FMP of a five-year maturity, for instance, will invest only in instruments that have a five-year maturity. Similarly, a one-year FMP will invest in one-year maturity investments. Because of this, he can even give an indicative return (though he cannot assure one) unlike an income fund.

Monthly income plan

MIPs are debt-oriented funds with a mandate to invest a portion (generally upto 20 per cent) of their assets in equities. They operate on the proposition of combining the power of equities with the stability of debt. As the name suggests, MIPs are intended to offer monthly income. However like other market-linked investment avenues, this income is not assured. The distribution of income (in form of dividends) is a factor of availability of distributable surplus. MIPs are designed with the explicit objective of giving a regular return (in the form of an income) to investors. The periodicity of returns depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly and annual options. Investors who choose the growth option, will be obviously not be entitled for a return by way of dividend, but will get a return in the form of capital appreciation. MIPs Vs Bank FDs Return on FDs are assured, unlike MIPs. So the FD depositor is sure of the bank shelling out the monthly interest amount. To that extent an FD (monthly income option) scores over MIPs for the very safe investor. Moreover, unlike MIPs, FDs are rated by agencies and this enables the investor to determine the investment avenue that best suits his risk profile. However, while MIPs may not be rated, the intelligent investor can check the ratings of the MIPs investments (be it in bonds, debentures) and determine a good MIP. The tax-efficient option MIPs score over comparable investment avenues in tax efficiency. MIPs are more tax efficient than bank FDs as mutual fund dividends are tax-free in the hands of the investor. Income from bank FDs are exempt up to Rs 9,000 (under Section 80L), beyond which they are taxed depending on the tax bracket of the individual. The MIP appeal MIPs definitely have a future given its wide-ranging appeal to conservative and aggressive investors. The potential for such a product is very much there, as it offers stable returns with the additional incentive of higher returns

PART E: NEW MUTUAL FUND PRODUCTS IN MARKETS

Other new mutual fund products in market ELSS Mutual Fund - A Tax Saver & wealth generator

Most of the tax saving instruments under Section 80C are savings oriented instruments with returns after adjusting for inflation either in the negative or slightly positive. The exceptions to this are the ULIPs (Life and Pension Funds) and the ELSS Mutual Funds. The advantage with ELSS compared to the ULIPs is the frequency (mostly a single investment or a monthly investment for a year) and term for investment, for getting good returns. What is an ELSS? An ELSS (Equity Linked Savings Scheme) is a mutual fund that has to invest a minimum of 80% in Equity Shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a 3 year lock-in period for the ELSS mutual funds. Post the 36 months, the funds remain invested and work like any other open-ended mutual fund. Why an ELSS? It has been an established fact that in the long run equity gives a much higher inflation adjusted returns when compared to any other investment except for maybe real estate. The top 5 ELSS funds have given returns from 22% to 26% compounded annually over the years. ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1L. This gives the tax payers benefits from 10% to 30% (excluding the educational cess) based on their current tax slab. The return (maturity and the dividend [(if opted for]) from the ELSS is also tax free under the present EEE (Exempt - Exempt - Exempt) regime. The 3 year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund one tends to withdraw in case of any monetary requirement. The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures. The above logic is proved in the higher returns achieved by the ELSS funds when compared to the market returns. Wealth creation because of this is much better than most of the other mutual funds.

Options with the ELSS

Salaried people with a tight budget can opt for a monthly investment (SIP using ECS). The automatic investment from the bank through ECS makes it an easy way to invest. Those who want an income in between can opt for the dividend option. This is particularly suitable for senior citizens. Also, the ELSS gives a tax free return compared to a bank or company deposit, which is taxable. Limitations with ELSS The investment in an ELSS cannot be switched or closed before the 3 years are completed form the date of investment. During market downturns, this becomes a limitation as one can only sit and watch the funds go down. One has the option of averaging when the market goes down, but an investment to save tax may not be required in the year in which the market is going down. The lock-in works negatively also for the monthly investment because the lock-in is calculated from the date of the investment and not from the date the scheme was started. This means that the 12th month's investment can be withdrawn only on the 48th month. This is a disadvantage compared to ULIPs, where the lock-in is from the date of start of the scheme. ELSS - a favoured option Most fund houses start an ELSS regular investment at Rs.500/- per month. Single investments start generally at Rs.5000/-. This makes ELSS accessible to all tax payers. With the compulsory lock-in giving better returns than other investments, even the most risk averse can look at an exposure to the ELSS fund for their tax benefits.

ARBITAGE FUND Arbitrage involves simultaneous purchase and sale of equivalent instruments from two or more markets to benefit from a discrepancy in their prices. Arbitrage funds in India mainly take

advantage of opportunities between equity cash and future markets .Though some funds do seek to generate returns from arbitrage in debt market. This strategy normally acts as a shield against market volatility as both buying and selling transactions offset each other. Features Of Arbitrage Fund Objective- seek to generate returns from arbitrage opportunities in market.

Investment strategy- buy stocks in cash markets and sell futures, to take arbitrage advantage.(when arbitrage opportunities are not available they allocate funds to short term debt money market instruments) Asset allocation- equity & related instruments, derivatives, short term debt & money market instruments. Benefits of Arbitrage Funds over Liquid Funds Generally Arbitrage funds (equity arbitrage funds) are taxed like equity funds at 15% for short-term capital gains and no Dividend Distribution Tax (DDT); however, 28% is deducted from liquid funds as dividend distribution tax (DDT). Though Some funds having higher proportion of debt in their portfolio may be treated as debt fund for taxation Thus generally arbitrage funds have a tax advantage over liquid funds. Liquid funds are not allowed to invest in papers exceeding maturity of 91 days, which further affects their returns. Thus, recent regulations in liquid funds limit their capacity to deliver higher returns. Current market volatility provides ample opportunities for arbitrage, which allows arbitrage funds to be better placed to generate comparatively higher returns. Tax Implications Dividend Dividends will be tax free in the hands of the Distribution Tax investor. Short Term Equity STCG tax-15.45 % Capital Gains Debt STCG tax-30.90 % Long Term Equity-NIL Capital Gains Debt-20.60% with Indexation and 10.30 % without Indexation Who should invest in arbitrage Funds? Investors who are risk averse & those who want a balance of safety, returns & liquidity. Looking for potentially higher returns compared to a liquid /money market fund. For investors who want to protect their portfolio from downside risk, these funds are excellent portfolio diversifiers. INTERNATIONAL MUTUAL FUND Growth in various regions international mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater

portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining. However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar. In recent years international mutual funds have gained popularity. This can be attributed to removal of trade barriers and expansion of economies, which has sparked off of the world. Investing In International Mutual Funds Investing in international mutual funds has two faces. First is buying funds from US based companies that buy and manage portfolio in internationally listed stocks/securities. These companies are governed by regulations of SEC (Securities and Exchange Commission) Second is buying mutual funds from international non US companies. A word of caution before investing even in best international mutual funds - Unlike domestic mutual funds investment, international investments entail additional risk factors such as economic and political in addition to risk of FOREX value (simply put: foreign currency exchange value) fluctuations. Why invest in international stock funds? These days, we live in a truly global economy. Invest solely in domestic stock funds, and your portfolio may be missing out. For many investors, international funds can be a good way to diversify their existing portfolios. International funds invest in markets outside india, by holding in their portfolio one or more of the following: Equity of companies listed abroad ADRs and GDRs of Indian companies Debt of companies abroad ETFs of other countries Units of passive index funds in other countries Units of actively managed mutual funds in other countries

International equity funds may also hold some of their portfolio in Indian equity or debt. They can hold some portion of the portfolio in money market instruments to manage liquidity.

 International funds can invest in: o o o o o o o o o ADRs/GDRs issued by Indian or Foreign companies Equity of overseas companies Initial and follow on public offerings Foreign debt securities in the countries with fully convertible currencies Short term as well as long term debt instruments Money market instruments and repos Government securities Derivatives only for hedging and portfolio rebalancing Short term deposits with banks overseas

International funds can invest in other countries mutual funds subject to the following: Such funds or units are registered with overseas regulators Restriction of not investing over 5% I another fund will not apply for such investments in overseas funds. Total management fees of the overseas fund and the Indian international fund to not exceed limits prescribed by SEBI. A specific fund manger to be identified for managing the assets invested overseas. The overseas investment limit for resident individuals has gone up from $25000 to $200000 per year. The aggregate ceiling for overseas investment by Indian mutual funds is US$7 bn. Within the overall limit of US$7 billion, mutual funds can make overseas investment, subject to a maximum of us $300 million per mutual fund. The overall ceiling for investment in overseas ETFs that invest in securities is US$1 billion subject to ma maximum of US$50 million per mutual fund. Tax aspects

The definition of equity-oriented funds in the Income Tax Act refers only to investment in equity shares of domestic companies. International funds that invest in equity shares overseas, will not be classified as equity-oriented funds for purposes of taxation. If an international fund invests at least 65% of net asstes in domestic equity, and the rest abroad, it will be treated as an equity-oriented fund. Rewards Portfolio diversification from exposure to global markets Low correlation with domestic markets Benefits from investing in asset classes not availale domestically Opportunity to improve long term portfolio performance from picking global leaders. Risks Political events and macro economic factors cause investments to decline in value. Investments value will be impacted by changes in exchange rates. Countries may change their investment policy towards global investors.
Conclusion While investments in all mutual funds involve risk, investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuations and changes in political, regulatory or economic conditions. All of these factors may result in greater share-price volatility. These risks are magnified in emerging or developing markets due to their less established markets and economies. International equity mutual funds may not be appropriate for very conservative investors, but for those seeking to broadly diversify their portfolios to include the global investment universe, and willing to bear a higher degree of risk, they can literally offer a world of opportunities.

REAL ESTATE MUTUAL FUND

India Real Estate Fund has recorded a sharp increase due to the high returns it defers as is apparent from the super-inflated real estate bubble in India. Attracted due to the high returns the Real Estate Venture Funds are coming in India with great zeal. The real state sector in the country is rising to unprecedented heights and is a potential funds investment prospect. The entry of real estate funds in the already over-heated realty market is bound to cause quite a stir. Since April 2004, India Government has liberalized the laws controlling and regulating the foreign investments in India and real estate funds in the country. This has tremendously encouraged the flow of funds into the real estate sector in the country. Security and Exchange Board of India (SEBI) has also allowed Venture Fund Investment in the local real estate market in the country. Owing to this, the investment of Foreign Direct Investments (FDI) and other foreign liquidity funds have seen a consistent rise of 40 - 45% per year. The Real Estate Mutual Funds cater to the need for the investments in the real estate sector. The REMF are mutual funds, which are used to raise money for real estate sector projects. Real Estate Mutual Funds (REMF) are mutual funds used for the purpose of investment in the real estate property, either directly or indirectly. The guidelines and provisions pertaining to the Real Estate Mutual Funds are provided by the Securities Exchange Board of India (SEBI), under the Mutual Funds Regulations, 1996. The Real Estate Mutual Funds are structured to be close-ended and net asset value (NAV) of the scheme of the Real Estate Mutual Funds is to be announced regularly. OVERVIEW The introduction of the Real Estate Mutual Funds has caused a certain amount of stimulation in the real estate sector. The main objective of the Real Estate Mutual Funds is to raise funds for the expansion of the retail businesses by means of real estate development. The introduction of REMF would provide required capital for the development of retail infrastructure. Different national and international financial institutions are competing in the real estate market in India. The REMF functions like any other mutual funds, but the difference lies in the modes of investment. In case of mutual funds the investment are made in common stock or bonds, but in case of Real Estate Mutual Funds the investments are made directly on development of property. With the introduction of the Real Estate Mutual Funds, the constructors are looking at quality standards as the foremost parameters. These funds would acquire real estate assets by means of aiming at the developing markets. The Real Estate Mutual Funds is expected to enhance the quality of the housing projects. FEATURES OF REMFS

REMFs have recently been permitted to set up in India. 75% of income is to be generated from property and property-related securities. Indian REMFs can invest in property directly. REMFs allowed to invest in MBS and other securitized products. If REMF focuses on MBS, these funds will be more like a REIT; if they focus on appreciation and growth, they may offer participation in property gains. It is important to study the source of income of a REMF like: o Rental o Interest capital appreciation RISKS IN REAL ESTATE INVESTMENTS Income structure o Cash flows and interest rate risk o Prepayment risks from securitized bonds o Default risk Growth structure o Less volatile compared to equity o May entail longer waiting period ADVANTAGE REMFs will provide an additional and cheaper source of capital to the industry. This capital can even be used to finance land purchase. This will be a boon to the industry, as banks do not provide land finance. As REMFs will be listed on exchanges, they will render more liquidity, transparency and price efficiency in the industry. And, of course, REMFs provide an excellent exit mechanism for developers and investors. This is by way of transferring developed properties to REMFs For a small investor, investing in property will now become affordable, owing to a substantial reduction in minimum investment size. Buying a REMF unit will be far cheaper than buying a small office or residential property in a tier-II city. Thus, there are now minimal entry barriers and no leasing or maintenance hassles. Additionally, there will be more liquidity as REMFs will be listed on exchanges. DISADVANTAGE But while property rental income provides an element of stability, REMFs are still susceptible to fall in property prices. The real estate sector in India is characterized by low liquidity and price inefficiencies. Thus, the sector will take some time to mature. Funds are going to be close-ended with minimum three-year duration. Real estate sector projects have higher gestation periods. Thus, investors have to be patient and cannot expect quick bucks.

PART F: BEST PERFORMING FUNDS IN MUTUAL FUND INDUSTRY

RELIANCE GROWTH EQUITY DIVERSIFIED

Current Stats & Profile Latest NAV 52-Week High 52-Week Low Fund Category Type Launch Date Risk Grade Return Grade Net Assets (Cr) Benchmark Month Quarter Year 436.5663 (18/03/10) 442.8952 (18/01/10) 195.733 (20/03/09) Equity: Diversified Open End October 1995 Average Above Average 6,733.41 (28/02/10) BSE 100

Trailing Returns As on 18 Mar 2010 Year to Date 1-Month 3-Month 1-Year 3-Year 5-Year Return Since Launch Fund 2.16 3.96 6.41 122.73 20.67 28.89 29.86

BEST AND

WORST PERFORMANCE

Best (Period) 50.82 (03/12/1999 - 04/01/2000) 86.37 (05/10/1999 - 04/01/2000) 229.36 (04/01/1999 - 04/01/2000)

Worst (Period) -32.65 (24/09/2008 - 24/10/2008) -44.99 (22/02/2000 - 23/05/2000) -56.73 (13/03/2000 - 13/03/2001)

FUND STYLE ASSET ALLOCATION

As on 28/02/10 Equity Debt Others % Net Assets 89.95 0 10.05

TRAILING RETURNS
As of 18 Mar 2010 Year-to-Date 1-Week 1-Month Fund Return 2.16 0.96 3.96 Category Return 0.49 1 4.47 S&P CNX Nifty 0.86 2.19 7.33 Sensex 0.31 2.05 7.3

3-Month 1-Year 2-Year 3-Year 5-Year

6.41 122.73 17.09 20.67 28.89

4.14 104.53 9.53 13.25 20.93

5.18 87.71 7.58 13.28 19.99

4.78 95.16 8.68 12.12 21.19

RELATIVE PERFORMANCE (FUND VS CATEGORY AVERAGE)

Reliance Growth weathered the market crash with some aggressive calls and a diversified portfolio Sunil Singhania has done an excellent job of managing a huge corpus and delivering admirably. In the 13 years of its existence, Reliance Growth has underperformed the annual category average just twice (1998 and 2000). As per the July portfolio, the fund manager was most concentrated on Financials with an 11 per cent exposure to the sector, up from 7 per cent in March 2009. Software followed at 7.41 per cent with picks likes HCL Technologies, Infosys and Financial Technologies India. Over the past one year, the average allocation to large caps has been 42 per cent. Investors looking for a mid-cap offering that delivers but does not compromise on risk should consider this option. The aim is to maintain a stable fund with the objective of creating value over the long term, says Singhania. With a 5-year trailing return of 35.20 per cent (August 31, 2009), he has achieved what he set out to do.

Current Stats & Profile Latest NAV 52-Week High 52-Week Low Fund Category Type Launch Date Risk Grade Return Grade Net Assets (Cr) Benchmark 1641.1044 (19/03/10) 1803.3416 (03/12/09) 1389.3831 (17/04/09) Gold ETF Open End February 2007 Not Rated Not Rated 723.07 (28/02/10) --

GOLD BENCHMARK ETF GOLD ETF

As on 19 Mar 2010

Fund -0.61 -0.3 -1.23 7.61 20.06 -20.21

Category -0.63 -0.3 -1.25 7.42 20.06 ---

Trailing returns

Year to Date 1-Month 3-Month 1-Year 3-Year 5-Year Return Since Launch

Best and Worst Performance

Month Quarter Year

Best (Period) 27.62 (10/09/2008 10/10/2008) 33.92 (17/12/2007 17/03/2008) 54.92 (16/07/2007 15/07/2008)

Worst (Period) -20.96 (10/10/2008 11/11/2008) -12.21 (25/07/2008 24/10/2008) 2.20 (24/02/2009 - 24/02/2010)

Relative Performance (Fund Vs Category Average)

HDFC MIP LONG-TERM- MIP

Current Stats & Profile Latest NAV 52-Week High 52-Week Low Fund Category Type Launch Date Month Risk Grade Return Quarter Grade Net Assets (Cr) Benchmark 21.0039 (19/03/10) 21.0039 (19/03/10)

Trailing returns
Fund 1.25 1.83 1.99 35.45 12.81 13.13 12.54 Category 0.91 1.39 1.63 17.07 8.82 8.81 --

As on 19 Mar 2010 Year to Date Best and 15.6015 (20/03/09) 1-Month Worst Hybrid: Monthly 3-Month Performance Income 1-Year Open End 3-Year Best (Period) Worst (Period) December 2003 9.69 (20/03/2009 -8.46 5-Year (26/09/2008 Above Average Return 21/04/2009) 27/10/2008) Since 23.31 (09/03/2009 -9.34 Launch (02/09/2008 High 10/06/2009) 02/12/2008) 4,435.96 (28/02/10) Crisil MIP BI

Year

42.27 (20/11/2008 20/11/2009)

-13.69 (19/11/2007 18/11/2008)

Fund style
Asset Allocation

Relative Performance (Fund Vs Category Average)

Trailing Returns
NSE G-Sec VR Comp. MIP 0.91As 0.46 0.84 0.4 28/02/10 -0.07 0.77 on % Net Assets 1.39 0.61 2.81 Equity 21.61 1.63 0.99 2.54 Debt 74.26 17.07 19.24 Others 1.52 4.13 8.41 5.34 7.71 8.82 6.71 9.18 8.81 4.4 8.79

As of 19 Mar 2010 Year-to-Date 1-Week 1-Month 3-Month 1-Year 2-Year 3-Year 5-Year

Fund Return 1.25 0.3 1.83 1.99 35.45 15.09 12.81 13.13

Category Return

With average assets under management (AAUM) of Rs 960.39 crore (June 30, 2009), its the biggest player in the Monthly Income Plan (MIP) category. Its annual performance is more or less in line with the category average. But over the long-run, it has delivered an annualised 3-year return of 12 per cent (June 30, 2009), while the category average

stood at 9 per cent. It also curtailed its fall to a lower level by delivering -8.24 per cent in 2008 (category average: -10.95%). Looking at the historical performance, the fund has paid a dividend since inception almost every single month. Though it skipped dividend for two months in 2008 (October and November), it later rewarded investors with a high dividend of 2.40 per cent (December 2008). Although the fund has managed to keep its expense consistently below 2 per cent, its slightly higher when compared to its peers.

MAGNUM TAXGAIN -ELSS

Current Stats & Profile Latest NAV 57.75 (19/03/10) Trailing Returns 52-Week As on 19 Mar 2010 High 59.25 (06/01/10) 52-Week Low 29.04 (20/03/09) Best and Year to Date Fund Equity: Tax 1-Month Worst Category Planning 3-Month Performance Type Open End 1-Year Launch Date March 1993 3-Year Best (Period) Worst (Period) Risk Grade Below Average 5-Year Month 60.94 (03/12/1999 -52.41 (31/03/2000 Return Grade Average Return Since 04/01/2000) 02/05/2000) Net Assets Launch Quarter 117.12 (03/12/1999 -61.55 (25/02/2000 (Cr) 5,210.26 (28/02/10) 03/03/2000) 26/05/2000) Benchmark BSE 371.36 (05/03/1999 100 Year -74.61 (13/03/2000 06/03/2000) 13/03/2001)

Fund -0.03 6.18 3.4 97.84 11.61 26.32 19.55

Category 1.2 6.34 4.68 101.38 12.64 19.25 -

FUND STYLE

As on 28/02/10 % Net Assets Equity 91.73 Debt 1.14 Others 7.13

Asset allocation

Relative Performance (Fund Vs Category Average

Trailing Returns S&P CNX Nifty 1.19 2.45 8.63 5.52 87.48 7.27 12.68 20.07

As of 19 Mar 2010 Year-to-Date 1-Week 1-Month 3-Month 1-Year 2-Year 3-Year 5-Year

Fund Return -0.03 1.12 6.18 3.4 97.84 9.22 11.61 26.32

Category Return 1.2 1.49 6.34 4.68 101.38 10.24 12.64 19.25

Sensex 0.65 2.4 8.56 5.13 95.28 8.27 11.61 21.28

In the recent rally from March 9 - June 30, 2009, the fund has managed to beat its category, although by a small margin. Its timely shift to equity and presence in metals, financial and engineering sectors helped it gain 68 per cent (category: 67%). Its conservative tilt may appeal to investors looking for a tax saving avenue in turbulent market conditions.

UTI SPREAD- ARBITRAGE FUND

Current Stats & Profile 13.3447 Latest NAV (19/03/10) 13.3627 52-Week High (15/02/10) 12.7012 52-Week Low (20/03/09) Hybrid: Fund Category Arbitrage Type Open End Launch Date June 2006 Risk Grade Low Return Grade High 498.68 Net Assets (Cr) (28/02/10) Benchmark Best (Period) Crisil Liquid 1.49 (24/12/2007 Month 23/01/2008) 3.47 (16/10/2008 Quarter 15/01/2009) 10.92 (17/01/2008 Year 16/01/2009)

Trailing returns
Be st and As on 19 Mar 2010 Year to Date 1-Month 3-Month 1-Year 3-Year 5-Year Return Since Launch Fund 0.59 -0.08 0.53 5.09 8.06 -8.01 Category 0.62 0.06 0.56 3.81 6.74 6.62 -

Worst Performance Worst (Period) -0.10 (10/02/2010 12/03/2010) 0.44 (17/12/2009 18/03/2010) 5.08 (18/03/2009 18/03/2010)

FUND STYLE Asset allocation

As on 28/02/10 Equity

% Net Assets 77.41

One of the best Debt 17.55 performing arbitrage funds, it was a Others 5.04 category topper in 2008 with a return of 10.60 per cent. Right from January 2008 till March 2009, the fund has outperformed the category average in 12 months. And, the average outperformance has always been higher (average of 22bps) than that of the underperformance (4bps).
Relative Performance (Fund Vs Category Average)

That is definitely a reward for its bold stance that often goes against the general market trend. Since September 2007 there has been constant reduction in its equity allocation despite being more or less hedged at all times. This cautious move saved it from the bloodbath in the equity market and enabled it to participate in the debt rally of 2008. At the end of September 2007, the fund had an exposure of 32.37 per cent to financial sector which dropped in December 2007 (19.36%) and January 2008 (5.19%). Energy dropped dramatically between December 2007 (25.89%) and January 2008 (3.23%). Currently it is only invested in energy (5.76%), finance (1.54%) and technology (0.42%).

FUTURE SCENARIO OF MUTUAL FUND INDUSTRY IN INDIA

MF industry set to double by 2010 This industry, worth around Rs2000bn will keep on growing at the CAGR of around 17%, according to a study conducted by ASSOCHAM. The size of mutual fund industry is expected to be worth Rs4000bn by 2010 from its current level of over Rs2000bn as this industry will keep growing at a CAGR of around 17%, according to a Study conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) on `Mutual Fund : Futures Wealth Creator and Wealth Saviour. The Study which released on Saturday (8th April) at a Seminar on Multiply your Wealth with Mutual Funds and Investors Protection by Company Affairs Minister, Mr. P C Gupta, says that investors in future will prefer mutual funds for their investment destination than choosing to park their surpluses in stock markets because of safer returns and lower degree of risk as compared to other markets. The ASSOCHAM Study has the compilation of observations made by over 210 investors across the country in which over 80% have exuded confidence that the volumes of Indian mutual fund industry will keep flourishing in future as investors will have wider belief and faith in mutual funds units. It may be mentioned here that since 1987, its size was Rs.10bn which went up to Rs.41bn in 1991 and subsequently touched a figure of Rs.720 bn in 1998. Since than this figure has kept ballooning, revealing the efficiency of growth in the mutual fund industry which at current level is estimated to be over Rs.2000bn. The study highlights that mutual funds will be one of the major instruments of wealth creation and wealth saving in the years to come, giving positive results. The consistency in the performance of the Mutual Funds has been a major factor for attracting many investors. The Indian mutual funds industry has been growing at a healthy pace of 16.68% for the past eight years and the trend will move northward. Changing scenario of the market, government and related authorities will also add a lot to the uplift of the Mutual Funds industry. The presence of intelligent investors has already made the investment market scenario fiercely competitive, with in increased number of foolproof high-yielding investment opportunities. The industry has also witnessed several mergers and acquisitions. ASSOCHAM Study of investors also revealed that Mutual Funds will be available in a wide range of schemes, providing investment opportunities to all categories of the investors such as shares of corporate firms, commodities and debt instruments. The Study has revealed the futuristic nature of investors; they invest for future security and certainty (54%). However, there were some investors who invest in order to meet their current requirements (38%). In addition, it has been clearly indicated by the respondents that investments that are longterm are preferred more (54%) over medium-term (23%) and short-term investments (23%). It has also been perceived during the survey that complete information about the investment instrument and about the company of related mutual funds is required by the investors in order to take their investment decision. Investors are keen to remain updated regarding the latest trends being followed in the market so as to take full benefits of the market conditions.

It also discloses that Mutual Funds are open to various kinds of risk: international risk, national risk, policy related risk, etc. The major risk faced by the investors is of uncertain market conditions that are hard to predict. The reasons could be attributed to the volatility/fluctuations in the market. Another large risk observed is the change in government policy, the changes could be either by government or RBI on Mutual Fund related policies or the economy as a whole that affect the Mutual Funds market. On the basis of ASSOCHAM Study, it has been observed that investors have now changed their view about the stock market. Unlike earlier, investors have now developed more confidence and trust in the stock market functioning. Among all the different areas of investment it was found that investors are attracted more towards IT sector, followed by Banking, Drugs & Pharma, Automobiles, Petro & Gas, Infrastructure, Telecom, Engineering, Textile and Steel.

CONCLUSION

An Indian investor who is looking forth to an investment which allows him to beat the inflation rate, and still not expose him to aggravated risks, and helps him achieve his financial plan, has his work cut out. The stock markets have shown high volatility and the risks associated with direct equity investments have escalated too, in such a scenario one investment choice that really stands apart is mutual funds. A professionally managed mutual fund industry has emerged as the most appropriate investment vehicle for small investors, who neither have the in-depth knowledge nor the resources to build a safe and diversified portfolio that have the potential to provide steady returns over a long period of time. Investors lately have recognized the benefits of investing through mutual funds .The growing dominance of the mutual funds is clearly evident in the capital markets. Fund houses which are sitting on huge amount of cash - collected during their respective new fund offerings - have been using any dip in the market lately to enter into a big way, in turn providing a cushion to the markets. The investors loss of confidence in mutual funds since 2000, when most of the scheme lost money, has been regained due to the good performance from 2003 till now, and the past has been forgotten. Investors have started realizing the important of mutual funds as an investment avenue which offer everything an investor looks for which includes convenience, transparency, professional management, risk containment and above all decent returns. The journey has just begun and industry is poised to turn a new leaf as witnessed by the increasing penetration and awareness of mutual funds products across the nation. MFs are also doing their best to allure investors by offering innovative products. The mutual funds industry has grown by leaps and bounds in last couple of years. Following the strengthening of regulatory framework there is now greater transparency and credibility in the functioning of mutual funds and has been successful in regaining investors faith. But to sustain the momentum it should start focusing on the areas where greater accountability and transparency could propel the industry towards a new growth trajectory. As of now big challenge for the mutual fund industry is to mount on investor awareness and to spread further to the semi-urban and rural areas. These initiatives would help towards making the Indian mutual fund industry more vibrant and competitive. To make this happen it calls for a greater role not only part of the regulator but also on industry and distributors and ensure that investor confidence is maintained through consistent performance and best business practices.

BIBLIOGRAPHY NCFM Study Material (AMFI Mutual Fund Guide)

http://www.mutualfundsindia.com http:// www.amfiindia.com http://www.sebi.gov.in

http://www.valueresearchonline.com