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									Mutual funds
.        Topic

1.         Introduction
Mutual funds

2.       How Mutual Funds Work

3.       History of Mutual Funds

4.       Structure of Indian Mutual Fund Industry

5.       Fund Structure and Constituents

6.       How does a mutual fund collect money

7.       NAV

8.       Regulatory Aspect

9.       Types of Mutual Funds

10.      Benefits of Mutual Funds

11.      Limitation of Mutual Funds

12.      Different Plans that Mutual Fund Offers

13.      Risk v/s Reward

14.      Types of Risk

15.      Market Trend

16.      Recent Trend

17.      Global Scenario

18.      Future Scenario

19.      Mutual Fund In Asset Management

20.      Report on mutual fund (2008-2009)

21.      Phases of growth of mutual fund.

22.      Mutual fund vs. foreign institutional

23.      Top ten mutual fund schemes.
Mutual funds

Mutual Funds: An overview


             A Mutual Fund is a trust that collects the savings of a
number of investors who share a common financial goal. Mutual
fund offers a simple and effective way to put money in a number of
financial investments that no one investor could afford. The money
thus collected is invested by the fund manager in different types of
securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The
income earned through these investments and the capital
appreciations realized by the scheme are shared by its unit holders in
proportion to the number of units owned by them (pro rata).

         There are some things in LIFE that GROW faster than your
savings. Your EXPENSES, for instance. In today’s world of inflation
and spiraling costs, you need to invest your savings wisely so that you
get good returns consistently .your end objective is to maximize
returns while minimizing risk. A judicious mix of mutual funds give
you a short at growth in any market condition while reducing
portfolio risk through diversification .

         Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed portfolio at a relatively low cost. Anybody
with an investible surplus of as little as a few thousand rupees can
invest in Mutual Funds. Each Mutual Fund scheme has a defined
investment objective and strategy.
Mutual funds

                                Executive summary

                  The project has been undertaken with the objective
of understanding the various aspects of Mutual funds and the
method of evaluating the Performance of the fund. The concept of
Mutual fund is explained which is followed by History of Mutual
funds, the Structure of the industry and Structure of the Mutual

                    The various types of Mutual funds have been
discussed in brief followed by merits and Demerits of investing in
Mutual Funds and the various investment options available to the
investors. The various risk associated with investing in Mutual Funds
to investors are discussed in brief.

                   The Market Trends in the Mutual Fund Industry
has been described followed by the recent trend in Mutual Fund. The
Global Scenario and future Scenario has been discussed..
Mutual funds

Objective of the project.

The objective of the project is to understand mutual funds, its
different schemes, benefits offered to its investors and its overall
functioning in India.

To know how does a mutual fund work.

How does the market trend keep on changing and on what basis?

How to make investments in market?

What are the risks and returns on investment?
Mutual funds

                    TYPES / CLASSIFICATION OF FUNDS:

                            Mutual      fund

  On the basis of                                      on the basis of

execution and operation                     and investment

      Close-ended                   open-ended

Income Growth             Balance     Specialized    Money

                           For example, a mutual fund could invest in
investors favorite stocks, which if you went to buy on your own
would cost lakes. But since several other like-minded investors invest
with other investors in the mutual fund, you get to own many of
investors favorite stocks without having to invest huge amounts.
Mutual funds

A mutual fund provides diversification, professional management
and liquidity. Diversification reduces the risk that negative
performance of one type of investment will result in a significant loss
to the mutual fund and erosion of investor

own money in the fund. Say an investor buy 100shares of ITC Rs.1,
00,000. ITC reports negative news and the share price 20%. You loose
Rs.20, 000

Had you invested in a mutual fund which had ITC among other
stocks, ITC’s fall could have been managed by another share’s risk or
at least the loss would not have been as large .The flip side of course
is that had the shares done well, the investor would have gained
handsomely whereas the gain would have been smaller for the
mutual fund. Unlike fixed deposits with banks or company deposits,
mutual funds shares /units can be sold back to the mutual fund and
the investor can withdraw funds in some cases by just making a
phone-call. A note of caution though-a funds unit price and return
will vary and the investor may have a gain or loss on selling his
mutual fund units. The flow chart below describes broadly the
working of a mutual fund:

                         Pool their

      Passed back to        money with

returns                investors               fund manager

                                              Invests in

               capital market                    securities
Mutual funds

 For a specified               or in


Take into consideration the present needs and future financial goals
and what are the money requirements.

The fund category for investors will depend on two prime factors:

Investment objective and time horizon

Personal risk taking ability

         Most of the time the investor gets swayed with market
trends and invest their money in investments, which don’t match
with either of the above parameters. What may be suitable to one
investor may not be suitable for another. Investments must reflect
investors risk personality and collectively perform to help them
achieve their financial objective. Today there are varied choices of
Mutual funds

schemes available to choose from. They offer investors different risk
levels, investment styles and objectives.

   Once the investor knows the category of funds that suits him, the
next step is to start deciding specific schemes. This is a very crucial
step because there are so many schemes on offer. The points to be
considered before deciding the scheme: -

Period of existence - - it is advisable to invest in schemes which has
been in existence long enough to have built a track record.

Past track record - - past is no guarantee for future but analyzing the
past thus gives an investor enough information to make a wise
decision. Based on this an investor can take a call on how the fund
has performed over various periods of market fluctuation, and
compare that with similar funds in the category.

Fund house - - to look at the credit worthiness of the fund house. The
quality of the service offered is also important. Incase of a foreign
fund house; assess how its schemes have performed overseas.

Portfolio Quality - - the most important thing to analyze in any fund
is its underlying investments. These investments and their quality will
determine the returns of the scheme. This information is fairly
available on the internet and funds also come out with regular news
letters, which disclose their portfolios.


Corpus size - - select a scheme with a decent corpus size. Small
corpus sizes are a problem when faced with redemption pressure in
times of panic as these results in distress sales where existing
investors lose out. Incase of debt funds, subscription to good
corporate issues start at very high lot sizes, which again may be
missed by small funds due to liquidity problem.
Mutual funds

 Adherence to its objectives - - while analyzing the scheme past
performance look into how often it has moved away from its
objective .it is very important for a scheme to stick to its objectives .
Like a debt fund can’t invest in equities when equities start
performing well .this is important to do because based on these
objectives the investor has to choose the goals.

Incentives - - some intermediaries offer incentive on investments.
The investors for that may upfront money get stocked with a bad
performing fund or a fund which does not match an investor’s

Fund managers objectives - - look into the past track record of the
fund managers with whom an investor is trusting his hard earned
Mutual funds


                 A large number of people

                  With money to invest buy

                Shares/units in a Mutual Fund

               Their pooled money has

                More buying power
Mutual funds

                The Fund Manager invests the money in

                A collection of stocks, bonds or other securities

                   Successful investment adds

                        Value to the fund

               Investors receive distributions

 Most investment professionals agree that it's smarter to own a
variety of stocks and bonds than to gamble on the success of a few.
Mutual funds

But diversifying can be tough because buying a portfolio of individual
stocks and bonds can be expensive. And knowing what to buy — and
when — takes time and concentration.

Mutual funds offer one solution: When you put money into a fund,
it's pooled with money from other investors to create much greater
buying power than you would have investing on your own. Since a
fund can own hundreds of different securities, its success isn't
dependent on how one or two holdings do. And the fund's
professional managers keep constant tabs on the markets, working
to adjust the portfolio for the strongest possible performance.


          A mutual fund makes money in two ways: by earning
dividends or interest on its investments and by selling investments
that have increased in price. The fund distributes, or pays out, its
profits (minus fees and expenses) to its investors.

Income distributions are from the money the fund earns on its
investments. Capital gain distributions are the profits from selling
investments. Different funds pay their distributions on different
schedules — from once a day to once a year. Many funds offer
investors the option of reinvesting all or part of their distributions to
Mutual funds

buy more shares in the fund. You pay taxes on the distributions you
receive from the fund, whether the money is reinvested or paid out
in cash. But if a fund loses more than it makes in any year, it can use
the loss to offset future gains. Until profits equal the accumulated
losses, distributions aren't taxable, although the share price may
increase to reflect the profits.


             Mutual funds are created by investment companies
(called mutual fund companies), brokerage houses and banks. Each
new fund has a professional manager, an investment objective, and a
plan, or investment program; it follows in building its portfolio. The
funds are marketed to potential investors with ads in the financial
press, through direct mailings and press announcements, and in
some cases with the support of registered representatives who make
commissions selling

History of Mutual Fund

Mutual Funds in India (1964-2000)

             The end of millennium marks 36 years of existence of
mutual funds in this country. The ride through these 36 years is not
been smooth. Investor opinion is still divided. While some are for
mutual funds others are against it.

UTI commenced its operations from July 1964 .The impetus for
establishing a formal institution came from the desire to increase the
Mutual funds

propensity of the middle and lower groups to save and to invest. UTI
came into existence during a period marked by great political and
economic uncertainty in India.

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


1999-2000 Year of the funds

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

business which would mean to increase asset base, and to get asset
base and investor base they had to be fully armed with a whole lot of
schemes for every investor .So new schemes for new IPO’s were
inevitable. The quest to attract investors extended beyond just new
schemes. The funds started to regulate themselves and were all out
on winning the trust and confidence of the investors under the aegis
of the Association of Mutual Funds of India (AMFI)

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

Mutual funds

                                        Indian MUTUAL FUNDS INDUSTRY

     UTI       PUBLIC SECTOR                                              PRIVATE SECTOR


Some of the AMCs operating currently are:

Name of the AMC                                                        Nature of

Alliance Capital Asset Management (I) Private                          Private foreign

Birla Sun Life Asset Management Company                                Private Indian

Bank of Baroda Asset Management Company                                Bank

Bank of India Asset Management Company                                 Bank

Canbank Investment Management Services                                 Bank
Mutual funds

Cholamandalam Cazenove Asset Management        Private foreign
Company Limited

Dundee Asset Management Company Limited        Private foreign

DSP Merrill Lynch Asset Management Company     Private foreign

Escorts Asset Management Limited               Private Indian

First India Asset Management Limited           Private Indian

GIC Asset Management Company Limited           Institution

IDBI Investment Management Company Limited     Institution

Indfund Management Limited                     Bank

ING Investment Asset Management Company        Private foreign
Private Limited

J M Capital Management Limited                 Private Indian

Jardine Fleming (I) Asset Management Limited   Private foreign

Kotak Mahindra Asset Management Company        Private Indian

Kothari Pioneer Asset Management Company       Private Indian

Jeevan Bima Sahayog Asset Management           Institution
Company Limited

Morgan Stanley Asset Management Company        Private foreign
Private Limited
Mutual funds

Punjab National Bank Asset Management              Bank
Company Limited

Reliance Capital Asset Management Company          Private Indian

State Bank of India Funds Management Limited       Bank

Shriram Asset Management Company Limited           Private Indian

Sun F and C Asset Management (I) Private Limited Private foreign

Sundaram Newton Asset Management Company           Private foreign

Tata Asset Management Company Limited              Private Indian

Credit Capital Asset Management Company            Private Indian

Templeton Asset Management (India) Private         Private foreign

Unit Trust of India                                Institution

Zurich Asset Management Company (I) Limited        Private foreign

.Structure of mutual funds in India

          Like other countries, India has a legal framework within
which mutual funds must be constituted. Unlike in the UK, where
two distinct ‘ trust’ and ‘corporate’ structures are followed with
separate regulations, in India, open and close end funds operate
Mutual funds

under the same regulatory structure, and are constituted along one
unique structure as unit trusts. A mutual fund in India is allowed to
issue open end and closed end schemes under a common legal
structure. The structure which is required to be followed by mutual
funds in India is laid down under SEBI ( Mutual fund) regulations,
199A mutual fund is normally formed as a Trust and is governed by a
Board of Trustees - see diagram below. The Trustees in turn appoint
an investment advisor to manage the various schemes launched by
the mutual fund. This investment advisor is called an Asset
Management Company (AMC). The AMC is responsible for marketing
and selling the schemes, investing the funds collected by it and
servicing the investors. The AMC is responsible to the Trustees and
has to take their approval for all major actions taken in connection
with the mutual fund. To help the AMC in its daily activities, it
appoints specialists in different areas - a Registrar & Transfer (R&T)
Agent , a Custodian and one or more Banks
Mutual funds

The Fund Sponsor

                  “Sponsor “is defined under SEBI regulations as any
person who, acting alone or in combination with another body
corporate, establishes a mutual fund. The sponsor of a fund is akin to
the promoter of a company as he gets the funds registered with SEBI.
The sponsor will form a trust and appoint board of trustees. The
sponsor will also generally appoint an asset management company as
fund managers. The sponsor either directly or acting through the
trustees, will also appoint a custodian to hold the fund assets. All
these appointments are made in accordance with SEBI regulations.

                 As per the existing SEBI regulations, for a person to
qualify as a sponsor, he must contribute at least 40% of the net
worth of the AMC and posses a sound financial track record over five
years prior to registration.

Mutual Fund as Trusts

                 It should be understood that a mutual fund is just “ a
pass through” vehicle. Under the Indian Trust Act, the Trust or the
Fund has no independent legal capacity itself, rather it is the trustee
or the trustees who have the legal capacity and therefore all acts in
relation to the trust are taken on its behalf by the trustees. The
trustees hold the unitholders money in fiduciary capacity i.e. the
money belongs to the unit holders and is entrusted to the fund for
the purpose of investment. In legal parlance, the investors or the unit
holders are the “ beneficial owners “ of the investment held by the
trust, even as these investments are held in the name of the trustees
on a day – to –day basis. Being a public trusts, mutual funds can
invite any number of investors as beneficial owners in their
investment schemes.
Mutual funds


                The trust – the mutual fund- may be managed by a
board of trustees- a body of individuals, or a Trust company- a
corporate body. Most of the funds in India are managed by Board of
Trustees. While the Board of Trustees is governed by the provisions
of the Indian Trusts Act, where the Trustee is a corporate body, it
would also be required to comply with the provisions of the
Companies Act, 1956.

                 The trust is created through a document called the
Trust Deed that is executed by the Fund Sponsor in favour of the
trustees. Clauses in the trust deed, inter alia, deal with the
establishment of the trust, the appointment of the trustees, their
powers and duties, and the obligations of the trustees towards unit
holders and the AMC.

                   The trustees must ensure that the investor’s
interest is safeguarded and that the AMC’s operations are along
professional lines. They must also ensure that the management of
the fund is in accordance with SEBI Regulations.

The Asset Management Company

                     The role of an AMC is to act as the Investment
Manager of the Trust. The sponsors or the trustees, if so authorized
by the trust deed appoint the AMC. The AMC so appointed is
required to be approved by SEBI. The AMC would, in the name of the
trust, float and then manage the different investment “schemes” as
per the SEBI regulations and as per the Investment Management
Agreement it signs with the trustees. The AMC of the mutual fund
must have a net worth of at least Rs. 10 crores at all times. The AMC
cannot act as trustee of any other mutual fund. The AMC must
always act in the interest of the unit holders and report to the
trustees with respect to its activities.
Mutual funds

Other fund constituents

Custodian and depositories

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

                    Transfer agents are responsible for issuing and
redeeming units of the mutual fund and provide other related
services such as preparation of transfer documents and updating
investor records.

How does a mutual fund collect funds?

           Mutual funds offer units or shares to the public by issuing
an offer document or prospectus. When an Asset management
company or a Fund Sponsor wishes to launch a new scheme of a
mutual fund, they are required to formulate the details of the
scheme and register it with SEBI before announcing the scheme and
inviting the investors to subscribe to the fund. The document
containing the details of the new scheme that the AMC or the
sponsor prepares for and circulates to the prospective investor is
called the Prospectus or the Offer Document. This document

1. The face value of each unit in terms of rupees

2. Objective of the scheme
Mutual funds

3. How the funds collected will be invested and what securities or
in what money market instruments

4.   Minimum amount of subscription per application

5.   Duration of the scheme

6.   Who can apply for units

7. Date of launching the scheme and the date upto which
applications will be received

8. Repurchase facility (if available) or arrangements proposed to
be made for listing the units on Stock Exchanges.

              Each scheme of the mutual funds should be registered
with the Securities and Exchange Board of India (SEBI). The funds give
wide publicity through newspapers about their schemes and make
arrangements for collecting the application money in important
centers in one or more banks. After the last date for receiving the
application is over, mutual funds collect all the applications,
scrutinize them and allot units to the applicants and issue them unit
certificates, which are evidence for owning the units.

              Mutual funds invest the funds collected from the public
according to the investment objectives stated in the offer
documents/ prospectus. Mutual funds are allowed to invest in a wide
range of securities in different industries with a view to spreading the
investment risk.

Net Asset Value (NAV)

                 The net asset value of the fund is the cumulative
market value of the assets fund net of its liabilities. In other words, if
the fund is dissolved or liquidated, by selling off all the assets in the
fund, this is the amount that the shareholders would collectively
own. This gives rise to the concept of net asset value per unit, which
is the value, represented by the ownership of one unit in the fund. It
Mutual funds

is calculated simply by dividing the net asset value of the fund by the
number of units. However, most people refer loosely to the NAV per
unit as NAV, ignoring the “per unit”. We also abide by the same

              The following are the regulatory requirements and
accounting definitions laid down by SEBI

NAV = Net Assets of the Scheme / Number of units outstanding

Market value of investments + Receivables + Other Accrued Income +
Other Assets – Accured expenses – Other Payables – Other Liabilities

Number of units outstanding as at the NAV date


NAV = Principle + Profit – Cost(companies expenses)

Calculation of NAV

          The most important part of the calculation is the valuation
of the assets owned by the fund. Once it is calculated, the NAV is
simply the net value of assets divided by the number of units
outstanding. The detailed methodology for the calculation of the
asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

•      Liquid assets/cash held, if any

•    Dividends/interest accrued Amount due on unpaid assets
Expenses accrued but not paid
Mutual funds

         For liquid shares/debentures, valuation is done on the basis
of the last or closing market price on the principal exchange where
the security is traded

         For illiquid and unlisted and/or thinly traded
shares/debentures, the value has to be estimated. For shares, this
could be the book value per share or an estimated market price if
suitable benchmarks are available. For debentures and bonds, value
is estimated on the basis of yields of comparable liquid securities
after adjusting for illiquidity. The value of fixed interest bearing
securities moves in a direction opposite to interest rate changes
Valuation of debentures and bonds is a big problem since most of
them are unlisted and thinly traded. This gives considerable leeway
to the AMCs on valuation and some of the AMCs are believed to take
advantage of this and adopt flexible valuation policies depending on
the situation.

          Interest is payable on debentures/bonds on a periodic basis
say every 6 months. But, with every passing day, interest is said to be
accrued, at the daily interest rate, which is calculated by dividing the
periodic interest payment with the number of days in each period.
Thus, accrued interest on a particular day is equal to the daily
interest rate multiplied by the number of days since the last interest
payment date.

          Usually, dividends are proposed at the time of the Annual
General meeting and become due on the record date. There is a gap
between the dates on which it becomes due and the actual payment
date. In the intermediate period, it is deemed to be “accrued”

  Expenses including management fees, custody charges etc. are
calculated on a daily basis.

A funds NAV is affected by four factors:

Purchase and sale of investment securities
Mutual funds

Valuation of all securities held

Other assets and liabilities

Units sold or redeemed

Regulatory Aspects

Schemes of a Mutual Fund

The asset management company shall launch no scheme unless the
trustees approve such scheme and a copy of the offer document has
been filed with the Board.

Every mutual fund shall along with the offer document of each
scheme pay filing fees.

The offer document shall contain disclosures which are adequate in
order to enable the investors to make informed investment decision
including the disclosure on maximum investments proposed to be
made by the scheme in the listed securities of the group companies
of the sponsor A close-ended scheme shall be fully redeemed at the
end of the maturity period. “Unless a majority of the unit holders
otherwise decide for its rollover by passing a resolution”.

The mutual fund and asset management company shall be liable to
refund the application money to the applicants,-

(i) If the mutual fund fails to receive the minimum subscription
amount referred to in clause (a) of sub-regulation (1);

(ii) If the moneys received from the applicants for units are in excess
of subscription as referred to in clause (b) of sub-regulation (1).

The asset management company shall issue to the applicant whose
application has been accepted, unit certificates or a statement of
accounts specifying the number of units allotted to the applicant as
Mutual funds

soon as possible but not later than six weeks from the date of closure
of the initial subscription list and or from the date of receipt of the
request from the unit holders in any open ended scheme.

Rules Regarding Advertisement:

The offer document and advertisement materials shall not be
misleading or contain any statement or opinion, which are incorrect
or false.

Investment Objectives and Valuation Policies:

The price at which the units may be subscribed or sold and the price
at which such units may at any time be repurchased by the mutual
fund shall be made available to the investors.

General Obligations:

Every asset management company for each scheme shall keep and
maintain proper books of accounts, records and documents, for each
scheme so as to explain its transactions and to disclose at any point
of time the financial position of each scheme and in particular give a
true and fair view of the state of affairs of the fund and intimate to
the Board the place where such books of accounts, records and
documents are maintained.

The financial year for all the schemes shall end as of March 31 of
each year. Every mutual fund or the asset management company
shall prepare in respect of each financial year an annual report and
annual statement of accounts of the schemes and the fund as
specified in Eleventh Schedule.
Mutual funds

Every mutual fund shall have the annual statement of accounts
audited by an auditor who is not in any way associated with the
auditor of the asset management company.

Procedure For Action In Case Of Default:

On and from the date of the suspension of the certificate or the
approval, as the case may be, the mutual fund, trustees or asset
management company, shall cease to carry on any activity as a
mutual fund, trustee or asset management company, during the
period of suspension, and shall be subject to the directions of the
Board with regard to any records, documents, or securities that may
be in its custody or control, relating to its activities as mutual fund,
trustees or asset management company.

Restrictions On Investments:

A mutual fund scheme shall not invest more than 15% of its NAV in
debt instruments issued by a single issuer, which are rated not below
investment grade by a credit rating agency authorized to carry out
such activity under the Act. Such investment limit may be extended
to 20% of the NAV of the scheme with the prior approval of the
Board of Trustees and the Board of asset management company.

A mutual fund scheme shall not invest more than 10% of its NAV in
unrated debt instruments issued by a single issuer and the total
investment in such instruments shall not exceed 25% of the NAV of
the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of asset
management company.

      No mutual fund under all its schemes should own more than
ten per cent of any company’s paid up capital carrying voting rights.

Such transfers are done at the prevailing market price for quoted
instruments on spot basis.
Mutual funds

The securities so transferred shall be in conformity with the
investment objective of the scheme to which such transfer has been

A scheme may invest in another scheme under the same asset
management company or any other mutual fund without charging
any fees, provided that aggregate interscheme investment made by
all schemes under the same management or in schemes under the
management of any other asset management company shall not
exceed 5% of the net asset value of the mutual fund.

The initial issue expenses in respect of any scheme may not exceed
six per cent of the funds raised under that scheme.

Every mutual fund shall buy and sell securities on the basis of
deliveries and shall in all cases of purchases, take delivery of relative
securities and in all cases of sale, deliver the securities and shall in no
case put itself in a position whereby it
has to make short sale or carry forward transaction or engage in
badla finance.

Every mutual fund shall, get the securities purchased or transferred
in the name of the mutual fund on account of the concerned scheme,
wherever investments are intended to be of long-term nature.

Pending deployment of funds of a scheme in securities in terms of
investment objectives of the scheme a mutual fund can invest the
funds of the scheme in short term deposits of scheduled commercial

No mutual fund scheme shall make any investment in;

Any unlisted security of an associate or group company of the
sponsor; or
Mutual funds

Any security issued by way of private placement by an associate or
group company of the sponsor; or

The listed securities of group companies of the sponsor which is in
excess of 30% of the net assets [of all the schemes of a mutual fund]

No mutual fund scheme shall invest more than 10 per cent of its NAV
in the equity shares or equity related instruments of any company.
Provided that, the limit of 10 per cent shall not be applicable for
investments in index fund or sector or industry specific scheme.

       Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure
and its investment objective.

By Structure:

Open-ended Funds

An open-end fund is one that is available for subscription all through
the year. These do not have a fixed maturity. Investors can
conveniently buy and sell units at Net Asset Value (“NAV”) related
prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally
ranging from 3 to 15 years. The fund is open for subscription only
during a specified period. 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 they 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
Mutual funds

stipulate that at least one of the two exit routes is provided to the

Interval Funds

Interval funds combine the features of open-ended and close-ended
schemes. They are open for sale or redemption during pre-
determined intervals at NAV related prices.

By Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the
medium to long- term. Such schemes normally invest a majority of
their corpus in equities. It has been proven that returns from stocks,
have outperformed most other kind of investments held over the
long term. Growth schemes are ideal for investors having a long-term
outlook seeking growth over a period of time.

Income Funds

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 and Government securities.
Income Funds are ideal for capital stability and regular income.

Balanced Funds
Mutual funds

The aim of balanced funds is to provide both growth and regular
income. Such schemes periodically distribute a part of their earning
and invest both in equities and fixed income securities in the
proportion indicated in their offer documents. In a rising stock
market, the NAV of these schemes may not normally keep pace, or
fall equally when the market falls. These are ideal for investors
looking for a combination of income and moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity,
preservation of capital and moderate income. These schemes
generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money.
Returns on these schemes may fluctuate depending upon the
interest rates prevailing in the market. These are ideal for Corporate
and individual investors as a means to park their surplus funds for
short periods.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws as the Government offers
tax incentives for investment in specified avenues. Investments made
in Equity Linked Savings Schemes (ELSS) and Pension Schemes are
allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act
also provides opportunities to investors to save capital gains u/s
54EA and 54EB by investing in Mutual Funds, provided the capital
asset has been sold prior to April 1, 2000 and the amount is invested
before September 30, 2000.

Special Schemes
Mutual funds

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in
the offer document. The investment of these funds is limited to
specific industries like InfoTech, FMCG, and Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular
index such as the BSE Sensex or the NSE 50

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified
industry or a group of industries or various segments such as ‘A’
Group shares or initial public offerings.

Benefits of Mutual Fund investment

Professional Management

Mutual Funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that
analyses the performance and prospects of companies and selects
suitable investments to achieve the objectives of the scheme.


Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the
same proportion. You achieve this diversification through a Mutual
Fund with far less money than you can do on your own.

Convenient Administration
Mutual funds

Investing in a Mutual Fund reduces paperwork and helps you avoid
many problems such as bad deliveries, delayed payments and follow
up with brokers and companies. Mutual Funds save your time and
make investing easy and convenient.

Return Potential

Over a medium to long-term, Mutual Funds have the potential to
provide a higher return as they invest in a diversified basket of
selected securities.

Low Costs

Mutual Funds are a relatively less expensive way to invest compared
to directly investing in the capital markets because the benefits of
scale in brokerage, custodial and other fees translate into lower costs
for investors.


In open-end schemes, the investor gets the money back promptly at
net asset value related prices from the Mutual Fund. In closed-end
schemes, the units can be sold on a stock exchange at the prevailing
market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.


You get regular information on the value of your investment in
addition to disclosure on the specific investments made by your
scheme, the proportion invested in each class of assets and the fund
manager’s investment strategy and outlook.


Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans, you can
Mutual funds

systematically invest or withdraw funds according to your needs and


Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small
investor to take the benefit of its investment strategy.

Choice of Scheme

Mutual Funds offer a family of schemes to suit your varying needs
over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within
the provisions of strict regulations designed to protect the interests
of investors. The operations of Mutual Funds are regularly monitored

Limitations of mutual funds

It is 100% true that globally, most mutual fund managers
underperform the asset class that they are investing in .This under
performance is largely the result of limitations inherent in the
concept of mutual funds. These limitations are as follows:

Wait time before investment:

It takes time for a mutual fund to invest money. Unfortunately, most
mutual funds receive money when markets are in a boom phase and
investors are willing to try out mutual funds. Since it is difficult to
invest all funds in one day, there is some money waiting to be
invested. Further, there may be a time lag before investment
Mutual funds

opportunities are identified. This ensures that the fund
underperforms the index.

Fund management costs:

The costs of the fund management process are deducted from the
fund. This includes marketing and initial costs deducted at the time
of entry itself, called “load”. Then there is the annual asset
management fee and expenses, together called the expense ratio.
Usually, the former is not counted while measuring performance,
while the latter is. A standard 2% expense ratio means that,
everything else being equal, the fund manager underperforms the
benchmark index by an equal amount.

Cost of churn:

 The portfolio of a fund does not remain constant. The extent to
which the portfolio changes is a function of the style of the individual
fund manager i.e. whether he is a buy and hold type of manager or
one who aggressively churns the fund. It is also dependent on the
volatility of the fund size i.e. whether the fund constantly receives
fresh subscriptions and redemptions. Such portfolio changes have
associated costs of brokerage, custody fees, registration fees etc.
which lowers the portfolio return commensurately.

Change of index composition:

 World over, the indices keep changing to reflect changing market
conditions. There is an inherent survivorship bias in this process, with
the bad stocks weeded out and replaced by emerging blue chips. This
is a severe problem in India with the Sensex having been changed
twice in the last 5 years, with each change being quite substantial.
Another reason for change index composition is Mergers &

Tendency to take conformist decisions:
Mutual funds

From the above points, it is quite clear that the only way a fund can
beat the index is through investment of some part of its portfolio in
some shares where it gets excellent returns, much more than the
index. This will pull up the overall average return. In order to obtain
such exceptional returns, the fund manager has to take a strong view
and invest in some uncommon or unfancied investment options.
They follow the principle “No fund manager ever got fired for
investing in Hindustan Lever” ie if something goes wrong with an
unusual investment, the fund manager will be questioned but if
anything goes wrong with the blue chip, then you can always blame it
on the “environment” or “uncontrollable factors” knowing fully well
that there are many other fund managers who have made the same
decision. Unfortunately, if the fund manager does the same thing as
several others of his class, chances are that he will produce average
results. This does not mean that if a fund manager takes “active”
views and invests in heavily researched “uncommon” ideas, the fund
will necessarily outperform the index.

Different plans that Mutual Funds offer

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns from
investments are reinvested and very few income distributions, if any,
are made. The investor thus only realises capital appreciation on the
investment. This plan appeals to investors in the high income
bracket. Under the dividend plan, income is distributed from time to
time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option for
reinvestment of income distribution. This is referred to as the
dividend reinvestment plan. Under this plan, dividends declared by a
fund are reinvested on behalf of the investor, thus increasing the
number of units held by the investors.
Mutual funds

Automatic Investment Plan

Under the Automatic Investment Plan (AIP) also called Systematic
Investment Plan (SIP), the investor is given the option for investing in
a specified frequency of months in a specified scheme of the Mutual
Fund for a constant sum of investment. AIP allows the investors to
plan their savings through a structured regular monthly savings

Automatic Withdrawal Plan

Under the Automatic Withdrawal Plan (AWP) also called Systematic
Withdrawal Plan (SWP), a facility is provided to the investor to
withdraw a pre-determined amount from his fund at a pre-
determined interval

Risk vs. Reward

                The first thing that has to be kept in mind before
investing is that when you invest in mutual funds, there is no
guarantee that the investor will end up with more money when you
withdraw your investment than what you started out with. That is
the potential of loss is always there. The loss of value in your
investment is what is considered risk in investing.

            Even so, the opportunity for investment growth that is
possible through investments in mutual funds far exceeds that
concern for most investors.

               At the cornerstone of investing is the basic principal that
Mutual funds

the greater the risk you take, the greater the potential reward. Or
stated in another way, you get what you pay for and you get paid a
higher return only when you’re willing to accept more volatility.

                 Risk then, refers to the volatility—the up and down
activity in the markets and individual issues that occurs constantly
over time. This volatility can be caused by a number of factors—
interest rate changes, inflation or general economic conditions. It is
this variability, uncertainty and potential for loss, that causes
investors to worry. We all fear the possibility that a stock we invest in
will fall substantially. But it is this very volatility that is the exact
reason that you can expect to earn a higher long-term return from
these investments than from a savings account.

                                                   Benefits offered
  Tolerance/Return Focus      Suitable Products
                                                   by MFs
Mutual funds

                             Bank/ Company
                                                 Liquidity, Better
  Low               Debt     FD, Debt based
                                                 Post-Tax returns

                              Balanced Funds,
                                                 Liquidity, Better
                    Partially Some Diversified
                                                 Post-Tax returns,
                    Debt, Equity Funds and
  Medium                                         Better
                    Partially some debt Funds,
                    Equity Mix of shares and
                              Fixed Deposits

                           Capital Market,      Diversification,
                           Equity Funds         Expertise in stock
  High              Equity
                           (Diversified as well picking, Liquidity,
                           as Sector)           Tax free dividends

Types of risks

      All investments involve some form of risk. These common types
of risk need to be considered and evaluated against potential
rewards when an investor selects an investment.

Market Risk

           At times the prices or yields of all the securities in a
particular market rise or fall due to broad outside influences. When
this happens, the stock prices of both an outstanding, highly
profitable company and a fledgling corporation may be affected. This
change in price is due to “market risk”. Also known as systematic risk.

Inflation Risk

           Sometimes referred to as “loss of purchasing power.”
Whenever inflation rises forward faster than the earnings on
Mutual funds

investment, there is the risk that investor actually be able to buy less,
not more. Inflation risk also occurs when prices rise faster than your

Credit Risk

             In short, how stable is the company or entity to which
an investor lends his money when he invests? How certain are
investors that they will be able to pay the interest they promised, or
repay their principal when the investment matures.

Interest Rate Risk

            Changing interest rates affect both equities and bonds in
many ways. Investors are reminded that “predicting” which way
rates will go is rarely successful. A diversified portfolio can help in
offsetting these changes.

Exchange risk

           A number of companies generate revenues in foreign
currencies and may have investments or expenses also denominated
in foreign currencies. Changes in exchange rates may, therefore,
have a positive or negative impact on companies which in turn would
have an effect on the investment of the fund.

Investment Risks

            The sectoral fund schemes, investments will be
predominantly in equities of select companies in the particular
sectors. Accordingly, the NAV of the schemes are linked to the equity
Mutual funds

performance of such companies and may be more volatile than a
more diversified portfolio of equities.

Changes in the Government Policy

              Changes in Government policy especially in regard to
the tax benefits may impact the business prospects of the companies
leading to an impact on the investments made by the fund.Effect of
loss of key professionals and inability to adapt business to the rapid
technological change.

              An industries’ key asset is often the personnel who run
the business i.e. intellectual properties of the key employees of the
respective companies. Given the ever-changing complexion of few
industries and the high obsolescence levels, availability of qualified,
trained and motivated personnel is very critical for the success of
industries in few sectors. It is, therefore, necessary to attract key
personnel and also to retain them to meet the changing environment
and challenges the sector offers. Failure or inability to attract/retain
such qualified key personnel may impact the prospects of the
companies in the particular sector in which the fund invests.

Market Trends

             Alone UTI with just one scheme in 1964, now competes
with as many as 400 odd products and 34 players in the market. In
spite of the stiff competition and losing market share, UTI still
remains a formidable force to reckon with.Last six years have been
the most turbulent as well as exiting ones for the industry. New
players have come in, while others have decided to close shop by
either selling off or merging with others. Product innovation is now
passé with the game shifting to performance delivery in fund
management as well as service. Those directly associated with the
Mutual funds

fund management industry like distributors, registrars and transfer
agents, and even the regulators have become more mature and

                 The industry is also having a profound impact on
financial markets. While UTI has always been a dominant player on
the bourses as well as the debt markets, the new generation of
private funds which have gained substantial mass are now seen
flexing their muscles. Fund managers, by their selection criteria for
stocks have forced corporate governance on the industry. By
rewarding honest and transparent management with higher
valuations, a system of risk-reward has been created where the
corporate sector is more transparent then before.

                Funds have shifted their focus to the recession free
sectors like pharmaceuticals, FMCG and technology sector. Funds
performances are improving. Funds collection, which averaged at less
than Rs100bn per annum over five-year period spanning 1993-98
doubled to Rs210bn in 1998-99. In the current year mobilization till
now have exceeded Rs300bn. Total collection for the current
financial year ending March 2000 is expected to reach Rs450bn.

             What is particularly noteworthy is that bulk of the
mobilization has been by the private sector mutual funds rather than
public sector mutual funds. Indeed private MFs saw a net inflow of
Rs. 7819.34 crore during the first nine months of the year as against a
net inflow of Rs.604.40 crore in the case of public sector funds.

                 Mutual funds are now also competing with
commercial banks in the race for retail investor’s savings and
corporate float money. The power shift towards mutual funds has
become obvious. The coming few years will show that the traditional
saving avenues are losing out in the current scenario. Many investors
are realizing that investments in savings accounts are as good as
locking up their deposits in a closet. The fund mobilization trend by
Mutual funds

mutual funds in the current year indicates that money is going to
mutual funds in a big way. The collection in the first half of the
financial year 1999-2000 matches the whole of 1998-99.

                    India is at the first stage of a revolution that has
already peaked in the U.S. The U.S. boasts of an Asset base that is
much higher than its bank deposits. In India, mutual fund assets are
not even 10% of the bank deposits, but this trend is beginning to
change. Recent figures indicate that in the first quarter of the current
fiscal year mutual fund assets went up by 115% whereas bank
deposits rose by only 17%. This is forcing a large number of banks to
adopt the concept of narrow banking wherein the deposits are kept
in Gilts and some other assets, which improves liquidity and reduces
risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be
ignored. It is just that Mutual Funds are going to change the way
banks do business in the future.

Banks v/s Mutual Funds

                BANKS                           MUTUAL FUNDS

Returns         Low                             Better

Administrative High                             Low

Risk            Low                             Moderate

Investment      Less                            More

Network         High penetration                Low but improving

Liquidity       At a cost                       Better

Quality of      Not transparent                 Transparent
Mutual funds


Interest       Minimum balance between Everyday
calculation    10th. & 30th. Of every month

Guarantee      Maximum Rs.1 lakh on            None

Recent trends in mutual fund industry

             The most important trend in the mutual fund industry is
the aggressive expansion of the foreign owned mutual fund
companies and the decline of the companies floated by nationalized
banks and smaller private sector players.

                Many nationalized banks got into the mutual fund
business in the early nineties and got off to a good start due to the
stock market boom prevailing then. These banks did not really
understand the mutual fund business and they just viewed it as
another kind of banking activity. Few hired specialized staff and
generally chose to transfer staff from the parent organizations. The
performance of most of the schemes floated by these funds was not
good. Some schemes had offered guaranteed returns and their
parent organizations had to bail out these AMCs by paying large
amounts of money as the difference between the guaranteed and
actual returns. The service levels were also very bad. Most of these
AMCs have not been able to retain staff, float new schemes etc. and
it is doubtful whether, barring a few exceptions, they have serious
plans of continuing the activity in a major way.

                The experience of some of the AMCs floated by
private sector Indian companies was also very similar. They quickly
realized that the AMC business is a business, which makes money in
the long term and requires deep-pocketed support in the
Mutual funds

intermediate years. Some have sold out to foreign owned companies,
some have merged with others and there is general restructuring
going on.

              The foreign owned companies have deep pockets and
have come in here with the expectation of a long haul. They can be
credited with introducing many new practices such as new product
innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they
have forced the industry to upgrade itself and service levels of
organizations like UTI have improved dramatically in the last few
years in response to the competition provided by these.

Global Scenario

Some basic facts-

The money market mutual fund segment has a total corpus of $ 1.48
trillion in the U.S. against a corpus of $ 100 million in India.

Out of the top 10 mutual funds worldwide, eight are bank-
sponsored. Only Fidelity and Capital are non-bank mutual funds in
this group.

In the U.S. the total number of schemes is higher than that of the
listed companies while in India we have just 277 schemes

Internationally, mutual funds are allowed to go short. In India fund
managers do not have such leeway.

In the U.S. about 9.7 million households will manage their assets on-
line by the year 2003, such a facility is not yet of avail in India.

On- line trading is a great idea to reduce management expenses from
the current 2 % of total assets to about 0.75 % of the total assets.

72% of the core customer base of mutual funds in the top 50-broking
firms in the U.S. are expected to trade on-line by 2003.
Mutual funds

Internationally, on- line investing continues its meteoric rise. Many
have debated about the success of e- commerce and its
breakthroughs, but it is true that this aspect of technology could and
will change the way financial sectors function. However, mutual
funds cannot be left far behind. They have realized the potential of
the Internet and are equipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell
transactions have already begun on the Net, while in India the Net is
used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs
and better services for all. A research agency that specializes in
internet technology estimates that over the next four years Mutual
Fund Assets traded on- line will grow ten folds from $ 128 billion to $
1,227 billion; whereas equity assets traded on-line will increase
during the period from $ 246 billion to $ 1,561 billion. This will
increase the share of mutual funds from 34% to 40% during the

Such increases in volumes are expected to bring about large changes
in the way Mutual Funds conduct their business.

Here are some of the basic changes that have taken place since the
advent of the Net.

Lower Costs: Distribution of funds will fall in the online trading
regime by 2003 . Mutual funds could bring down their administrative
costs to 0.75% if trading is done on- line. As per SEBI regulations ,
bond funds can charge a maximum of 2.25% and equity funds can
charge 2.5% as administrative fees. Therefore if the administrative
costs are low , the benefits are passed down and hence Mutual
Funds are able to attract mire investors and increase their asset base.
Mutual funds

Better advice: Mutual funds could provide better advice to their
investors through the Net rather than through the traditional
investment routes where there is an additional channel to deal with
the Brokers. Direct dealing with the fund could help the investor with
their financial planning.

In India , brokers could get more Net savvy than investors and could
help the investors with the knowledge through get from the Net.

New investors would prefer online : Mutual funds can target
investors who are young individuals and who are Net savvy, since
servicing them would be easier on the Net.

India has around 1.6 million net users who are prime target for these
funds and this could just be the beginning. The Internet users are
going to increase dramatically and mutual funds are going to be the
best beneficiary. With smaller administrative costs more funds would
be mobilized .A fund manager must be ready to tackle the volatility
and will have to maintain sufficient amount of investments which are
high liquidity and low yielding investments to honor redemption.

Net based advertisements: There will be more sites involved in ads
and promotion of mutual funds. In the U.S. sites like AOL offer
detailed research and financial details about the functioning of
different funds and their performance statistics. It is witnessing a
genesis in this area. There are many sites such as indiainfoline.com
and indiafn.com that are doing something similar and providing
advice to investors regarding their investments.

                In the U.S. most mutual funds concentrate only on
financial funds like equity and debt. Some like real estate funds and
commodity funds also take an exposure to physical assets. The latter
type of funds are preferred by corporate’s who want to hedge their
exposure to the commodities they deal with.
Mutual funds

For instance, a cable manufacturer who needs 100 tons of Copper in
the month of January could buy an equivalent amount of copper by
investing in a copper fund. For Example, Permanent Portfolio Fund, a
conservative U.S. based fund invests a fixed percentage of it’s corpus
in Gold, Silver, Swiss francs, specific stocks on various bourses around
the world, short –term and long-term U.S. treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious
metal funds and real estate funds (investing in real estate and other
related assets as well.).In India, the Canada based Dundee mutual
fund is planning to launch a gold and a real estate fund before the

In developed countries like the U.S.A there are funds to satisfy
everybody’s requirement, but in India only the tip of the iceberg has
been explored. In the near future India too will concentrate on
financial as well as physical functions.

Future Scenario

The asset base will continue to grow at an annual rate of about 30 to
35 % over the next few years as investor’s shift their assets from
banks and other traditional avenues. Some of the older public and
private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge
with stronger players in three to four years. In the private sector this
trend has already started with two mergers and one takeover. Here
too some of them will down their shutters in the near future to

But this does not mean there is no room for other players. The
market will witness a flurry of new players entering the arena. There
will be a large number of offers from various asset management
companies in the time to come. Some big names like Fidelity,
Principal, Old Mutual etc. are looking at Indian market seriously. One
Mutual funds

important reason for it is that most major players already have
presence here and hence these big names would hardly like to get
left behind.

A perceptible change is sweeping across the mutual fund landscape
in India. Factors such as changing investors' needs and their appetite
for risk, emergence of Internet as a powerful service platform, and
above all the growing commoditization of mutual fund products are
acting as major catalysts putting pressure on industry players to
formulate strategies to stay the course.

Increased deregulation of the financial markets in the country
coupled with the introduction of derivative products offers
tremendous scope for the industry to design and sell innovative
schemes to suit individual customer needs. As it is being increasingly
felt, with the commoditization of products looking imminent, service
to investor and performance would be major differentiators.

MF Industry

The Budget 2003-04 has brought some cheers to the mutual fund
industry. The budget has following proposals for the MF investors:

Investors, once again, will get the tax-free dividends from MF units.
Dividends from Equity Funds will be tax free While Debt Mutual
Funds have to pay distribution tax amounting to 12.5 percent of the
dividends declared.

Long-term capital gains tax on equity funds remains at 20 per cent
with indexation, or 10 per cent, whichever is lower. Investments
made in listed equity shares, for one year from April 2003, will be
exempted from long-term capital gains tax.
Mutual funds

Administered interest rates on PPF and small-savings have been
reduced by 1 per cent. Interest on Relief and Savings bonds will also
be reset accordingly. This is likely to give a boost to the debt market.

Personal Taxation

On the taxation front Budget 2003-04 has the following proposals –

Standard deduction for income tax raised to 40 % or Rs 30,000
whichever is lower, on income up to Rs 5 Lakh p.a.

Standard deduction for income exceeding Rs 5 Lakhs will be Rs

Exemption under Section 80L of the Income Tax Act increased to Rs
15,000, which includes Rs 3000 exclusively for interest from
Government securities.

Surcharge on corporate tax halved to 2.5 % from 5 %.

10 % surcharge for income above Rs 8.5 Lakh p.a.

Tax rebate u/s 88 to include expenditure on children’s education up
to Rs 12000 per child for a maximum of 2 children.

Tax rebate for senior citizens u/s 88 hiked from Rs 15,000 to Rs

Tax exemption on the interest payments on housing loans remains
unaltered to Rs 1.5 Lakh.

Dividend tax abolished in the hand of the taxpayer.

Long Term Capital Gains on shares removed.

VRS payments up to Rs 5 Lakh exempt from tax.

          Performance measures for mutual funds

Risk and investing go hand in hand. To know your funds
performance, apart from comparing the performance vi-a-vis the
Mutual funds

benchmarks, an investor should also make use of certain statistical
measures that make evaluation of a mutual fund even more precise.
Among the most commonly used ratios, there are six ratios, which
we come across very often but fail to understand their utility. They
are Standard Deviation, Beta, Sharpe, Alpha, Treynor and R-Squared.

Standard deviation: Standard deviation is a statistical measure of the
range of a fund's performance, and is reported as an annual number.
When a fund has a high standard deviation, its range of performance
has been very wide, indicating that there is a greater potential for

Beta: Another way to assess the Fund’s up and down movement is its
Beta measure. Beta measures the volatility of a fund relative to a
particular market benchmark i.e. how sensitive the fund is to market
movements. A Beta greater than 1 means that the fund is more
volatile than the benchmark. A Beta less than 1 means that the fund
is less volatile than the benchmark. For example, a Beta of 1.1 would
indicate that if the market goes up 10%, the fund might rise 11% and
vice versa in a down market.

Sharpe: The most common measure that combines both risk and
reward into a single indicator is the Sharpe Ratio. A Sharpe Ratio is
computed by dividing a fund’s return in excess of a risk-free return
(usually a 90-day Treasury Bill or SBI fixed deposit rate) by its
standard deviation. This measures the amount of return over and
above a risk-free rate against the amount of risk taken to achieve the
return. So if a fund produced a 20% return while the SBI fixed deposit
rate returned 6.5% and its standard deviation is 10%, its Sharpe Ratio
would be

(20 – 6.5) / 10 = 1.35.

Generally, there is no right or wrong Sharpe Ratio. The measure is
best used to compare one fund’s ratio with another, or to its peer
Mutual funds

group average. For similar funds, the higher the Sharpe Ratio, the
better a fund’s historical risk-adjusted performance.

Sharpe ratio = (Fund Average Return - Risk Free Return) / Standard
Deviation Of The Fund

R-Squared (R2) : The R-Squared measure reveals what percentage of
a fund’s movements can be related to movements in its benchmark
index. An R-Squared of 100 would mean that all of the fund’s
movements are perfectly explained by its benchmark; Index funds
normally achieve this ideal. A high R-squared means the beta on a
fund is actually a useful measurement. A low R-squared means
ignore the beta.

Alpha: The Alpha measure is less about risk than it is about "value
added." Alpha represents the difference between the performance
you would expect from a fund, given its Beta, and the actual returns
it generates. A high alpha (more than 1) means that the fund has
performed well. A negative alpha means the fund under performed.

Mathematically, Alpha= fund return - [Risk free rate + Beta of fund
(Benchmark return - Risk free return)]

Treynor: the Treynor ratio is similar to the Sharpe ratio. Instead of
comparing the fund’s risk adjusted performance to the risk free
return, it compares the fund’s risk adjusted performance of the
relative index.

Analysis of Mutual Funds Performance

Performance of some private Mutual Funds are measured based on
the following parameters:

Change in NAV
Mutual funds

Performances of a fund are measured by calculating the change in
the value of the NAV between the two dates in absolute and
percentage terms.

Formula:- for NAV changed in absolute terms:

(NAV at the end of the period) – ( NAV at the beginning of the period)

- for change in percentage terms:

(Absolute change in NAV / NAV at the beginning) * 100

Risk Free rate

The Risk free rate is the risk free annualized return which is the
average of 91 – day T-bill of each month. The return on NAV is
compared to Periodic Interest Rate. The monthly return is compared
with the Periodic interest rate. The difference between them is the
excess return . Geometric mean of the excess return is calculated.

Sharpe ratio:

1. Allows direct comparison of fund's risk-adjusted return regardless
of their volatilities and correlation with a benchmark.

2. A high Sharpe ratio means that the fund is able to deliver a lot of
return for its level of volatility.


There are three types of benchmarks that can be used to evaluate a
funds performance, relative to the market as a whole, relative to
other mutual funds and relative to other comparable financial
products or investment options open to the investors. The monthly
return , is compared with the Benchmark return and excess return is
calculated. The geometric mean of the excess return is calculated.
Mutual funds


HDFC MUTUL FUND “continuing a tradition of trust.”

HDFC has acquired some schemes of Zurich and have renamed as

 Zurich India equity fund          HDFC equity fund .

 Zurich India prudence fund         HDFC prudence fund.

 Zurich India builder fund          HDFC capital builder fund

 Zurich India tax saver             HDFC tax saver

 Zurich India top 200               HDFC top 200 fund

 Zurich India high interest fund    HDFC high interest fund

 Zurich India liquidity fund        HDFC cash management fund

 Zurich India sovereign guilt fund HDFC sovereign gilt fund

 Anytime mutual fund (ATMF) :-you can transact in the designated
schemes of HDFC mutual fund any time , any where through HDFC
bank and ICICI bank ATM’s across the country.

Debit credit facility : unit holder can avail of direct credit of
redemption proceeds/dividend payments (if any declare by the
trustee )with select banks.

Electronic clearing service (ECS): dividend , if any declared by the
trustee , can be credited to the unit holder’s bank account in select
Mutual funds

 HDFC Top 200 Fund: Consistent outperformed - To generate long
term capital appreciation from a portfolio of equity and equity linked

Prudential ICICI mutual fund ‘taking care of your investments.’

This organization is well known in the country with the operating
activities like banks , home loans, insurance ,mutual funds ,online
direct trading ,etc. The mutual funds organization is named as
prudential ICICI.

 There are around 10-12 schemes offered by this organization .This is
both debt and equity oriented. The NAV changes every business day.
Prudential ICICI schemes have designed its portfolio turnover stating
that it shall generally not exceed 10 times once the entire corpus is
invested and excluding the portfolio turnover caused on account of
fresh inflows into the scheme and money placed in call deposits. The
scheme to the customers is

liquid plan

short term plan

income plan

flexible income plan

gilt fund

balanced fund

monthly income plan

growth plan

dynamic plan

And plans relating to the specific categories of fund
Mutual funds

 Application forms are available at the stock exchange brokers ,
customer service center and at the corporate office of the AMC .

Purchase price = applicable NAV (1+entry load , if any )

Applicable NAV differs on every business day.

Depending on the lock-in period value is redeemed.

Redemption price =applicable NAV (1- exit load , if any )

Applicable NAV differs on every business day.

Other mutual fund providers:-

               Standard Chartered Mutual Fund is the country's only
fund house focused exclusively on debt schemes. A strong rally in
debt markets in the past two years has also helped this AMC to grow
at a rapid clip.

          In theory a mutual fund is made up of a number of small
investors. Financial results of mutual funds, however, reveal the
presence of investors who hold more than 25 per cent of NAV in a

              For measuring performance of fund arithmetic mean
and the geometric mean are calculated for the monthly return,
excess return over risk free return and excess return over the
benchmark return for different periods i.e. since inception, 1 year, 6
months, 3 months and for last 1 month. These were the parameters
for measuring the return of the fund. For the measuring the risk
associated with different funds, Standard Deviation of returns and
excess returns are calculated.
Mutual funds

The Analysis is done on the following funds




4. DSP






10. IDBI

11. TEMP. Gsec fund TP (G)
Mutual funds

Analysis of Gilt funds till Feb 2009

Top three mutual equity diversified funds based on return and risk

                Rank      Mutual equity

                1         Frinklin India Prima

                2         HDFC Top 200

                3         DSPML Opportunity
Top Mutual                                         balanced based
on Risk

               Rank       Balanced Funds
Mutual funds

                       1   HDFC Prudence

Top three medium Term Debt Funds based on Return

                   Rank    Medium Term Debt Funds

                   1       HDFC Income Fund

                   2       Templeton India Income

                   3       Sundaram Bond Saver

Top three long Term Gilt Funds

               1           FT India Gilt Fund

               2           Tata GSF

               3           Templeton India GSF


MF industry assets at an all-time high, post a successful bounceback
from October 2008

Liquidity crisis

The Indian mutual fund industry's average assets under management
(AAUM) have grown by 19 per cent since June 2008 to touch Rs 6.72
Mutual funds

trillion (including fund of funds) in June 2009. AAUM growth followed
a key stress point witnessed by the industry during the year in
October 2008, largely on account of the contagion effect of the
global liquidity and credit crisis. Timely measures to provide liquidity
and stimulus by the government and market regulators, coupled with
the up-tick in equity markets following the May 2009 elections
results played a significant role in helping the industry continue on its
growth trajectory.

The share of debt-oriented funds in industry assets increased to 73
per cent in May 2009 from 66 per cent a year ago. In contrast, the
share of equity-oriented funds has reduced to 26 per cent in May
2009 from 33 per cent a year ago, largely owing to mark to market
losses in equity funds as the equity markets had been performing
weakly for a large part of this period. Fixed income funds, on the
other hand, have seen net cash inflows of close to Rs 750 billion,
accounting for around 95 per cent of net cash inflows, for year
ending May 2009. The fixed income AAUM for the industry stood at
Rs 4.84 trillion in May 2009. Bank investment in mutual funds, as per
RBI data, toppedRs 1.23 trillion as on June 19, 2009, as compared to
less than Rs 100 billion in October 2008.

Reliance Mutual Fund dominated the assets chart throughout the
year and became the first fund house to cross the Rs 1 trillion AAUM
mark in May 2009. The largest ten fund houses held 78 per cent of
the assets, with the top five constituting 57 per cent. The trend of
increasing polarization in mutual fund assets to the top 10 fund
houses (35 fund houses in all) is clearly evident from the share of the
bottom 10 fund houses, which constitute less than 1 per cent of the
assets today.

Retail investor penetration was a topic of great interest during the
year with views and initiatives from both the regulators and the
market body, Association of Mutual Funds of India (AMFI). The latest
Economic Survey for 2008-09 highlighted the scope for expansion of
Mutual funds

the mutual fund industry since only 7.7 per cent of the total financial
savings were allocated to mutual funds in 2007-08. In a recent
release, AMFI too had stated that retail investors constituted only 21
per cent (majorly in equity funds) of the mutual fund industry AUM
as of March 2009.

CRISIL FundServices expects increasing investor awareness and
proactive steps from the regulator and AMFI towards instilling
transparency and good governance practices to enhance investor
confidence, thereby aiding increased participation from the retail
segment over the medium term.

Snapshot of Mutual fund performance


Mutual Fund AUM’s Growth

               Mar- Mar- Mar- Mar- Mar-
Month/Year                              Mar-04 Sep-04 4-Dec
               98   00   01   02   03
Mutual funds

MF AUM's       68984 93717 83131 94017 75306 137626 151141 149300

Change in %
                    26      13     12      25     45       9       1
over last yr

Source - AMFI

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets
like Fidelity Investments, US based, with over US$1trillion assets
under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing
these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US
having more than 800. There is a big scope for expansion.
Mutual funds

'B' and 'C' class cities are growing rapidly. Today most of the mutual
funds are concentrating on the 'A' class cities. Soon they will find
scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry
with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based


The origin of mutual fund industry in India is with the introduction of
the concept of mutual fund by UTI in the year 1963. Though the
growth was slow, but it accelerated from the year 1987 when non-
UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic
imporvements, both qualitywise as well as quantitywise. Before, the
monopoly of the market had seen an ending phase, the Assets Under
Management (AUM) was Rs. 67bn. The private sector entry to the
fund family rose the AUM to Rs. 470 bn in March 1993 and till April
2004, it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into
comparison, the total of it is less than the deposits of SBI alone,
constitute less than 11% of the total deposits held by the Indian
banking industry.

The main reason of its poor growth is that the mutual fund industry
in India is new in the country. Large sections of Indian investors are
Mutual funds

yet to be intellectuated with the concept. Hence, it is the prime
responsibility of all mutual fund companies, to market the product
correctly abreast of selling.

The mutual fund industry can be broadly put into four phases
according to the development of the sector. Each phase is briefly
described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned
under the Regulatory and administrative control of the Reserve Bank
of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by
UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700
crores of assets under management.

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

Entry of non-UTI mutual funds. SBI Mutual Fund was the first
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 in 1989 and
GIC in 1990. The end of 1993 marked Rs.47,004 as assets under
Mutual funds

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

With the entry of private sector funds in 1993, a new era started in
the Indian mutual fund industry, giving the Indian investors a wider
choice of fund families. Also, 1993 was the year in which the first
Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile
Kothari Pioneer (now merged with Franklin Templeton) was the first
private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The
industry now functions under the SEBI (Mutual Fund) Regulations

The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry
has witnessed several mergers and acquisitions. As at the end of
January 2003, there were 33 mutual funds with total assets of Rs.
1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of
assets under management was way ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust
of India with AUM of Rs.29,835 crores (as on January 2003). 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

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB
Mutual funds

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 AUM 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 major players in the Indian Mutual Fund Industry are:
Mutual funds


Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified
Undertaking of the Unit Trust of India effective from February 2003.
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.
Mutual funds

Future of Mutual Funds In India

Mutual Fund Assets Under Management (MF AUM)-Growth

Rs. 94017 crores and the percentage growth was 12 %.

In March 2003, the MF AUM was Rs. 75306 crores and the
percentage growth was 25 %.

In March 2004, the MF AUM was Rs. 137626 crores and the
percentage growth was 45 %.

In September 2004, the MF AUM was Rs. 151141 crores and the
percentage growth was 9 % in 6 months time.

In December 2004, the MF AUM was Rs. 149300 crores and the
percentage growth was 1 % in 2 months time.

Future of Mutual Funds In

In March 1998, the MF AUM was Rs. 68984 crores.

In March 2000, the MF AUM was Rs. 93717 crores and the
percentage growth was 26 %.

In March 2001, the MF AUM was Rs. 83131 crores and the percent
growth was 13 %.

Important aspects related to the future of mutual funds in India are -

The growth rate was 100 % in 6 previous years.

The saving rate in India is 23 %.
Mutual funds

There is a huge scope in the future for the expansion of the mutual
funds industry.


India mutual fund companies and foreign institutional investors (FII)
appear to be betting in opposite directions for most of the recent
Sensex growth.

Data highlights this trend:

1. When Sensex jumped from 14,000 to 15,000, FII sold shares (net
sales) worth 2372.10 crores while Indian mutual fund companies
bought shares worth Rs 2891 crores (Rs 1 crore = Rs 10 million; US$ 1
= Rs 39.3)

2. Between 15000 and 16000, FII bought shares worth Rs 7307 while
Indian mutual funds bought only Rs 667 crores

3. When Sensex moved from 16000 to 18000, FII bought shares
worth Rs 24,372.3 crores while mutual fund companies sold (net
sales) Rs 2182.21 crores

4. Between 18000 and 19000, FII bought Rs 7378.2 worth shares
while mutual funds sold (net sales) Rs 966.2 crores worth of shares 5.
Finally, when Sensex jumped from 19000 to 20 000, FII sold (net
sales) Rs 1281.1 worth of shares while Indian mutual funds bought
shares worth Rs 1515 crores.

Question arises as to why two groups of well researched/informed
institutional investors have bet on opposite sides in a stock market
that has grown to dizzying heights in a matter of months. It appears,
that mutual funds companies in India expected a correction in Sensex
Mutual funds

when the US sub-prime crisis hit in August - therefore they preferred
to lower exposure. While some market commentators expected FII
money running away from the US sub-prime mess to come to
emerging markets, the relative deluge in to India surprised many a
mutual fund pundit ! Domestic mutual funds, who were cashed up,
now appear to want to get into the market so as to meet
performance hurdles. Interestingly, FII money in the latest run up,
seems to be going the other way.

TOP SEVEN MUTUAL FUND SCEMES( Equity diversified fund)

HDFC Top 200 fund

DSP BR Top 100 equity fund

Birla sunlife frontline equity fund
Mutual funds

HDFC equity fund

Reliance Regular Saving fund

Religare PSU equity fund

Sundaram BNP Paribas


HDFC MF- MIP- Long term plan

Birla MIP

Reliance MIP



HDFC Children’s gift plan

ICICI Children’s gift plan

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