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					EXECUTIVE SUMMARY
A mutual fund is the ideal investment vehicle for today‘s 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.




1
MUTUAL FUNDS: AN OVERVIEW
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:




2
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‘ and‘corporate‘are
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:




3
(A) 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.

(B) 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.

(C) 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 don‘t 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 investor‘s
    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 AMC‘s 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.



4
(D) 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:
 Investment of funds is in accordance with SEBI regulation & the trust deed.
 They take responsibility for the acts of its employees & other whose services it has
  procured.
 They are answerable to the trustees & must submit quarterly reports to them on AMC
  activities & compliance with SEBI regulation.
 They don‘t undertake any other activity conflicting with managing the fund.
 They will float scheme only after obtaining the prior approval of the trustees &SEBI.
 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.
 They will make the required disclosures to the investors in areas such as calculation
  of NAV & repurchase price.
 Each day‘s NAV is updated on AMFI‘s website by 8 p.m. of the relevant day.


    (E)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.




5
(F)BANKERS:

    A fund‘s 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.

(G) 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.

(H) 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.




6
    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

    (A) 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.

    (B) 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.

    (3) 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.

    (4) 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.

    (5) 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.




7
    (6) 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.



    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.




8
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.



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


9
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.




10
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

First Phase – 1964-87

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

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

     1987 marked the entry of non- UTI, public sector mutual funds set up by
     public sector banks and Life Insurance Corporation of India (LIC) and
     General Insurance Corporation of India (GIC). SBI Mutual Fund was the
     first non- UTI Mutual Fund established in June 1987 followed by Canbank
     Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian
     Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual
     Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had
     set up its mutual fund in December 1990.

     At the end of 1993, the mutual fund industry had assets under management
     of Rs.47,004 crores.

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

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

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

     The number of mutual fund houses went on increasing, with many foreign
     mutual funds setting up funds in India and also the industry has witnessed


11
     several mergers and acquisitions. As at the end of January 2003, there
     were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit
     Trust of India with Rs.44,541 crores of assets under management was way
     ahead of other mutual funds.

     Fourth Phase – since February 2003

     In February 2003, following the repeal of the Unit Trust of India Act 1963
     UTI was bifurcated into two separate entities. One is the Specified
     Undertaking of the Unit Trust of India with assets under management of
     Rs.29,835 crores as at the end of January 2003, representing broadly, the
     assets of US 64 scheme, assured return and certain other schemes. The
     Specified Undertaking of Unit Trust of India, functioning under an
     administrator and under the rules framed by Government of India and does
     not come under the purview of the Mutual Fund Regulations.

     The second is the UTI Mutual Fund 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.




12
The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT




13
  Status of Mutual Funds for the period April 2007 – February 2008



                                                                (Figs in Rs. Crore)
                         Private Sector Public Sector Mutual Funds               Grand
                         Mutual Funds
                                                                                 Total
                                        UTI           Others       Sub-total

                                       (i)              (ii)             (i)+(ii)

                         A                                               B            A+B
Mobilisation of Funds

                         3392284.83    304035.33        295233.55        599268.88    3991553.71


Repurchase              / 3237246.65   288461.46        282840.98        571302.44    3808549.09
Redemption Amt.

Net Inflow/ Outflow      155038.19     15573.87         12392.57         27966.43     183004.62

(-ve) of funds
Cumulative Position of
net assets as on
February 29, 2008 (%) 459670.07        56625.35         46524.53         103149.88    562819.95

                         (81.67%)            (10.06%)      (8.27%)       (18.33%)

                                                                     Source: www.sebi.gov.in

  Note:



       1. Net assets of Rs. 3879.12 crores pertaining to Fund of Funds Schemes is not
            included in the above data.




  14
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.


                              MUTUAL FUND SCHEMES




BY STRUCTURE         ON INVESTMENT OBJECTIVE                  OTHER SCHEMES
- Open-ended schemes      -Growth schemes                      -Tax-saving schemes
- Closed-ended schemes    - Income schemes                     - Special schemes:
                           - Balanced schemes                 - Index schemes
                          - Money market schemes              - Sector specific
                                                               -Exchange traded fund


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 e.g. 5-7 years. 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.



15
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:-.

     (i) 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 don‘t diversify into
     multiple sectors; they carry a higher level of sector & company specific risk than
     diversified equity funds.



16
     Examples: Pru ICICI FMCG Fund, Pru ICICI Technology Fund, Kotak Technology
     Fund, Tata Infrastructure Fund.
     (ii)OFFSHORE FUNDS:
     These funds invest in equities in one or more foreign countries there by achieving
     diversification across the country‘s 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.

     (iii)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.

     (iv)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 under-priced 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.



17
      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.




18
      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




19
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.




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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 shouldn‘t 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.




21
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, semi–annual 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 ex-dividend 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.




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      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.




23
      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




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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.




25
      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 holder‘s account falls below
       the minimum prescribed




26
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.

     Other advantages are as follows:

        Convenient Administration
        Return Potential
        Lower transaction Costs
        Transparency
        Flexibility
        Choice of schemes
        Well regulated




27
LIMITATIONS OF MUTUAL FUNDS
      No control over cost: An investor in mutual fund has no 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.




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PLAYERS IN MF INDUSTRY IN INDIA


        ABN Amro MF
        AIG global inv
        Benchmark MF
        Birla Sunlife MF
        BOB MF
        Canara Robeco MF
        DBS Chola MF
        Deutsche MF
        DSP Merrill Lynch Fund Managers
        Escorts MF
        Fidelity MF
        Franklin Templeton MF
        HDFC MF
        HSBC MF
        ICICI Prudential MF
        ING Vysya MF
        JM financial MF
        JP Morgan MF
        Kotak Mahindra MF
        LIC MF
        Lotus India
        Mirae
        Morgan Stanley MF
        Principal PNB MF
        Quantum MF
        Reliance Capital MF
        Sahara MF
        Standard chartered
        SBI MF



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        Sundaram BNP Paribas MF
        Tata MF
        Taurus MF
        UTI MF
        UTI SUUTI




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.


30
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 fund‘s 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
fund‘s NAV and hence investor‘s 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.




31
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




32
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.




33
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.




34
MEASURING & EVALUATING MUTUAL FUND PERFORMANCE
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed
on daily basis in case of open-ended schemes and on weekly basis in case of close-ended
schemes. The NAVs of mutual funds are required to be published in newspapers. The
NAVs are also available on the web sites of mutual funds. All mutual funds are also
required to put their NAVs on the web site of Association of Mutual Funds in India
(AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds
at one place.

The mutual funds are also required to publish their performance in the form of half-yearly
results which also include their returns/yields over a period of time i.e. last six
months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also
look into other details like percentage of expenses of total assets as these have an affect
on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to
the unit holders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being
published by the financial newspapers on a weekly basis. Apart from these, many
research agencies also publish research reports on performance of mutual funds
including the ranking of various schemes in terms of their performance. Investors should
study these reports and keep themselves informed about the performance of various
schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds
under the same category. They can also compare the performance of equity oriented
schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to
enter or exit from a mutual fund scheme.



35
The investors must read the offer document of the mutual fund scheme very carefully.
They may also look into the past track record of performance of the scheme or other
schemes of the same mutual fund. They may also compare the performance with other
schemes having similar investment objectives. Though past performance of a scheme is
not an indicator of its future performance and good performance in the past may or may
not be sustained in the future, this is one of the important factors for making investment
decision. In case of debt oriented schemes, apart from looking into past returns, the
investors should also see the quality of debt instruments which is reflected in their rating.
A scheme with lower rate of return but having investments in better rated instruments
may be safer. Similarly, in equities schemes also, investors may look for quality of
portfolio. They may also seek advice of experts.




MEASURING FUND PERFORMANCE:

(1) CHANGE IN NAV:

If an investor want to compare the return on investment between two dates, he can simply
use the per unit NAV at the beginning & the end periods & calculate the change in the
value of the NAV between the two dates in absolute & % terms.
Formulae- Absolute change in NAV/NAV at the beginning*100.

Limitations: But this measure does not always give the correct picture, in cases where
the fund has distributed to investors a significant amount of dividend in the interim
period. Therefore, it is suitable for evaluating growth funds & accumulation plans of debt
& equity funds, but should be avoided for income funds & funds with withdrawal plan.

(2) TOTAL RETURN:

This measure corrects the shortcomings of the NAV change measure, by taking account
of the dividends distributed by the fund between two NAV dates & adding them to the
NAV change to arrive at the total return.
Formula for Total return is:
[(Distribution + change in NAV)/ NAV at the beginning]*100
Total Return is a measure suitable for all type of funds. Performance of different type of
funds can be compared on the basis of total return.

Limitations: But this measure ignores the fact that distributed dividends also get
reinvested if received during the year.

(3)RETURN ON INVESTMENT                    or   TOTAL      RTN.     WITH      DIVIDENDS
REINVESTED AT NAV:




36
The shortcomings of the simple total return is overcome by computing the total return
with reinvestment of dividends in the fund itself at the NAV on the date of distribution.
Formulae- {(Units Held + div/ ex-dNAV) *end NAV} - Begin NAV/ Begin NAV*100.

(4) EXPENSES RATIO:

A wise man once said: ''There is no free lunch on Wall Street.'' This holds true for
investing in a mutual fund too. Like a doctor who charges you for his service, mutual
funds too charge a fee for managing your money. This involves the fund management
fee, agent commissions, registrar fees, and selling and promoting expenses. All this falls
under a single basket called expense ratio or annual recurring expenses that is disclosed
every March and September and is expressed as a percentage of the fund's average
weekly net assets.


Expense ratio states how much you pay a fund in percentage term every year to manage
your money. For example, if you invest Rs. 10,000 in a fund with an expense ratio of 1.5
per cent, then you are paying the fund Rs. 150 to manage your money. In other words, if
a fund earns 10 per cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per
cent return for an investor.

Expenses ratio is an indicator of the fund‘s efficiency & cost-effectiveness. It must be
evaluated in the light of the fund size, avg. account size & portfolio composition- equity
or fixed income. E.g. funds with small corpus size will have a higher expenses ratio
affecting rather than large corpus fund.
If a fund‘s income levels or return are small then expenses ratio becomes important &
difference of even 0.5% between two funds can affect investor‘s return.

A lower expense ratio does not necessarily mean that it is a better-managed fund. A good
fund is one that delivers good return with minimal expenses.

(5) PORTFOLIO TURNOVER RATIO:

It measures the amount of buying & selling of securities done by a fund. It defined as the
lesser of assets purchased or sold divided by the fund‘s net assets.
This ratio measures how many times the fund manager turn over his portfolio by buying
or selling of securities in the market. A 100% turnover implies that the manager replaced
his entire portfolio by buying or selling of securities in the market.
This % turnover is a good indicator of the extent to which the fund is active in terms of
its dealing on the market. However, high turnover ratio also indicates high transaction
costs charged to the fund.
This ratio would be most relevant to analyze in case of equity & balance funds,
particularly those that derive a large part of their income from active trading.

In comparison a passively managed fund, such as an index fund, will have a lower
turnover rate compared to an active fund as it has to just mirror the index. The only



37
trading here will be due to investments, redemptions and changes in the index. Also, it is
not meaningful to use turnover ratio for new schemes, which are not fully invested. As
the scheme is deploying its assets there will be more transactions, at least buy orders, as
compared to a fund` which is fully invested. Turnover ratio is less relevant for income
funds as brokerage costs are much lower, and hence they will have a lower potential to
eat into returns. So, even though gilt funds may have equally high turnover as compared
to equity funds, the impact of this turnover is much less.

Is a high turnover bad? Well, that depends on what it achieves. If high turnover can
generate high returns, then there should be no problems. The problem arises when a fund
is trading heavily and not generating commensurate returns.




(6) TRANSACTION COSTS:

It include all expenses related to trading such as the brokerage, commissions paid, stamp
duty on transfers, registrar‘s fees & custodian fees. Transaction costs, therefore have a
significant bearing on fund performance & its total return. Funds with small size or small
return have to be judged more on their expenses ratio & transaction cost.

(7) FUND SIZE:

Fund size also affects performance. Small funds are easier to maneuver & can achieve
their objectives in a focused manner with limited holding.
Large funds benefit from economies of scale with lower expenses & superior fund
management skills. There can be no definition of what is a small fund or big fund, as
small & big are relative term.

(8) CASH HOLDINGS:

Mutual fund allocates their assets among equity shares, debt securities & cash/ bank
deposits. The % of a fund‘s portfolio held in cash equivalents can be important element in
its successful performance.
A large cash holding allows the fund to strengthen its position in preferred securities
without liquidating its other portfolio. Cash also allow the fund a cushion against decline
in the market prices of shares or bonds.
But the fund also guard against large, consistent net redemption because these not only
indicate dissatisfaction on the part of investors, but also force the fund to maintain large
cash resources lowering the return on the portfolio.

(9) BORROWING BY MUTUAL FUNDS:




38
In India, mutual funds are not allowed to borrow to increase their corpus. SEBI
Regulations allow mutual funds to borrow only for the purpose of meeting temporary
liquidity needs for a period not exceeding 6 months & to the extent of 20% of its net
assets. Hence, it would be uncommon to see fund schemes with borrowings on their
balance sheets & if borrowings are seen, caution may need to be exercised in evaluating
the fund performance.




EVALUATING FUND PERFORMANCE:
There are 2 types of benchmark that can be used to evaluate a fund‘s performance. These
are:

      Relative To Market As A Whole
      Relative To Other Mutual Funds

Benchmarking Relative To The Market:

(a) EQUITY FUNDS:

If investors were to choose an Equity Index Fund; he can expect to get the same return on
the equity index used by the fund as its benchmark, called the Base Index. This is the
passive investment style. The fund would invest in the index stocks & expects its NAV
changes to mirror the change in the index itself. The fund & therefore the investor would
not expect to beat the benchmark, but merely earn the same return as the index. In case of
‗Index Funds‘, the benchmark is clear & pre-specified by the fund manager in the
advance.

‘Active’ Equity Funds: If an investor holds such an actively managed equity fund, the
fund manager would not specify in advance the benchmark to evaluate his expected
performance as in case of an Index Fund. The appropriate index to be used to evaluate a
broad based equity fund is decided on the basis of the size & the composition of the
fund‘s portfolio. If the fund in question has a large portfolio, a broader market index like
BSE100 or200 or NSE100 may have to be used as the benchmark rather than S&P CNX
NIFTY. An actively managed fund expects to be able to beat index. In India,
benchmarking for the retail investors is done using a menu of indices in combination.



39
Agencies such as Credence prefer the BSE200 because of its broad-based nature. For
sector funds, the S&P CNX Sectoral Indices have been preferred.

(b) DEBT FUNDS-

 In practice, no appropriate debt index is available in India to be used for benchmark debt
funds. ISEC‘s I-BEX index is often used by some analysts. In any case, any benchmark
for debt-fund must have the same portfolio composition & the same maturity profile as
the fund itself, to be comparable.

(c) MONEY MARKET FUNDS-

Performance of money market funds is usually benchmarked against the government
securities of approved maturities. In India, JP Morgan has developed a T (Treasury) Bill
Index.



(2) Benchmarking Relative To Other Similar Mutual Funds :

It is extremely important to ensure that comparisons are meaningful. Only funds with
similar characteristics can be compared. The following are some of the important criteria
for comparison of fund performance:

      The investment objectives & risk profiles of two funds being compared must be
       same.
      Portfolio composition of two funds should be similar.
      In case of Debt funds the ‗credit quality‘ & ‗maturity profile‘ should be similar.
      Size of two funds should be similar because one big & one small may not give
       comparable performance.
      Expenses ratio could also be an important factor in comparing two fund‘s
       performance, which will be impacted with high & low expenses rate.


(3) Evaluating the Fund Manager/AMC:

The investor must evaluate the fund manager‘s track record, how his schemes have
performed over the years.
It is important to note that investment decision based on good past performance is not
guarantee for future performance. It is better to trust a fund with a good track record &
backed by good management instead of investing in a new fund in the same category.
In the final analysis, AMC & their managers out to be judged on consistency in the
returns obtained & performance record against competing managers running similar fund.

Fund management is a fairly creative and personality-oriented activity. This may not be
true of some types of funds like shorter-term fixed-income funds and, of course, index


40
funds, but equity investment is more of an art than a science. When you are buying a fund
because you like its track record, what you are actually buying is a fund manager's (or
sometimes a fund management team's) track record. What you need to make sure is that
the fund manager who was responsible for the part of the fund's track record that you are
buying into is still there. A high-performance equity fund with a new manager is a like a
new fund.




VITAL STATS: ALPHA AND BETA
Alpha is part of what is called modern portfolio theory, a set of techniques that analyse
investing in a somewhat academic manner. Alpha is used along with beta and R-squared.

Beta is a measure of the sensitivity of a fund to its index. It shows the relation between
the funds returns and that of its index. A beta of 1.2 means that the fund tends to rise and
drop 20 per cent more than the index does.

Beta cannot be used in isolation. Another indicator called R-squared has to be used to
validate beta. Thus a 1.2 beta fund is more volatile than a fund with a beta of one. Beta is
therefore a measure of volatility. You are taking a higher risk in investing in such a fund.

Why would you, the well-informed and goal-oriented investor, take such a risk? Surely,
to be able to earn higher returns. How would you know if the returns from a high-beta
fund are enough to justify the higher risk that it entails? That's where alpha comes in.

Alpha tells you whether that fund has produced returns justifying the risks it is taking by
comparing its actual return to the one 'predicted' by the beta. Say, a fund can be expected
to earn—based on its beta—a return of 15 per cent in a given year. However, it actually
fetches you 18 per cent. Then the alpha of the fund is simply 18 - 15 = 3, that is, 3.

Alpha can be seen as a measure of a fund manager's performance. This is what the fund
has earned over and above (or under) what it was expected to earn. Thus, this is the value
added (or subtracted) by the fund manager's investment decisions. This can be clearly
seen from the fact that Index funds always have—or should have, if they track their index
perfectly—an alpha of zero.


41
Thus, a passive fund has an alpha of zero and an active fund's alpha is a measure of what
the fund manager's activity has contributed to the fund's returns. On the whole a positive
alpha implies that a fund has performed better than expected, given its level of risk. So
higher the alpha better are returns.

One crucial issue that impacts all three is how closely the chosen benchmark actually
correlates with the fund you are examining. The lower the R-squared—meaning the less
the correlation between the fund and its index—the less meaningful are the beta and
alpha.




Comparative Analysis of performance of various schemes

Scheme 1 - HDFC Balance Fund -G
Scheme 2 - Pru ICICI Balance Fund-G


Scheme                          HDFC Balance Fund            Pru ICICI Balanced Fund

Category                        Hybrid: equity-oriented      Hybrid: equity oriented
Inception Date                  Aug-10-2000                  Oct-07-1999
Option plan/investment style    Growth                       Growth

Scheme Assets (Rs in cr.)       100.47 (as on 31-3-08)       345.8 as on Mar 31, 2008

                            For                   new
                            investors:Rs.5000
                            For               existing
Minimum application amount:                            5000
                            investors:Rs.1000
                            {in multiples of Rs.100
                            thereafter)
Lock-in-period:             nil




42
                                                                  Amount Bet. 0 to 49999999
                                      Amount Bet. 0 to
Entry Load(as a            %     of                              then Entry load is 2.25%. and
                                      49999999 then Entry load
applicable NAV):                                                 Amount       greater     than
                                      is 2.25%. and Amount
                                                                 50000000 then Entry load is
                                      greater than 50000000
                                                                 0%.
                                      then Entry load is 0%.
                                      2.25%
                                                                 If redeemed bet. 0 Months to 6
                                                                 Months; and Amount Bet. 0 to
Exit load(as a % of applicable                                   49999999 then Exit load is 1%. If
                                                                 redeemed bet. 6 Months to 12
NAV)                           Nil                               Months; and Amount Bet. 0 to
                                                                 49999999 then Exit load is 0.5%.
                                                                 and Amount greater than 50000000
                                                                 then Exit load is 0%.
Returns as on 2-4-08
(%)
1 months                              -9.31                      -10.52
6 months                              -2.40                      -8.13
 1 Year                               16.91                      10.46
 3 year                               18.95                      22.51
  5year                               27.06                      31.52
Return since launch                   17.53                      16.72
Expense ratio                         2.21                       2.22
Risk grade                            Average                    Average
Return grade                          Below average              Average
Portfolio turnover (%)                18.28%                     183%
P/E RATIO                             23.26                      33.61
P/B RATIO                             4.96                       5.66
Market cap (Rs. In crore)             10645.9                    30687.8
Average credit quality                AAA                        AAA
Std. dev.                             2.18                       2.55
Sharpe ratio                          0.20                       0.23
Treynor ratio                         0.52                       0.58
Sortino ratio                         0.31                       0.39
Beta                                  0.82                       1.02
Fund manager                          Chirag Setalvad            Pankaj kaji

Relative Performance (Fund Vs Category Average)
Relative performance (Fund vs Category average)
Rating: ***
R Category Average)




43
Rating: **




Scheme 1: HDFC NIFTY INDEX-G
Scheme2: UTI NIFTY INDEX-G

SCHEME                          HDFC NIFTY INDEX                     UTI NIFTY INDEX

Category                        Equity index                         Equity index
Investment style                Growth                               Growth
Inception Date                  July 2002                            March 2000
 Scheme Assets (Rs in cr)       38.94 as on Mar 31, 2008             798.01
Last dividend (Rs/Unit)         _                                    _
 Minimum          application   5000                                 5000
amount/initial inst.:
Lock-in-period:
Entry Load(as a % of            Nil                                  Nil
applicable NAV):

                                If redeemed bet. 0 Year to 1 Year;   If redeemed bet. 0 Days to 180
                                and Amount Bet. 0 to 500000          Days; and Amount Bet. 0 to
Exit   load(as   a   %    of    then Exit load is 1%. and Amount     999999 then Exit load is 1%. If



44
applicable NAV):             greater than 500001 then Exit   redeemed bet. 0 Days to 7 Days;
                             load is 0%.                     and   Amount      greater     than
                                                             1000000 then Exit load is 1%.
Returns as on 2-4-08(%)
                             -9.39                           -9.4
1 months
6 months                     -12.36                          -7.81
1 Year                       13.79                           22.15
 3 year                      27.59                           31.97
5year                        34                              37.79
Return since launch          27.94                           14.55
Expense ratio                1.5                             0.74
Risk grade                   Above average                   Average
Return grade                 Below average                   Average
Portfolio turnover (%)       143.66%                         73.33%
P/E ratio                    26.39                           26.58
P/B ratio                    5.9                             5.87
Market cap (Rs. In crores)   90667.85                        89698.1
Std. dev.                    3.43                            3.56
Sharpe ratio                 0.23                            0.24
Beta                         0.94                            0.97
Alpha                        -2.4                            0.62
R-squared                    0.98                            1
Treynor ratio                0.86                            0.90
Sortino ratio                0.38                            0.40
Portfolio manager            Vinay .R.Kulkarni               Swati Kulkarni




Relative performance (Fund vs Category average)

Rating: ***




Rating :**




45
Scheme 1: UTI EQUITY TAX SAVINGS
Scheme 2: LICMF TAX PLAN

SCHEME                          UTI      EQUITY         TAX LICMF TAX PLAN
                                SAVINGS
Category                        Equity:tax planning              Equity:tax planning
TYPE                            OPEN-END                         OPEN-END
Investment style                Growth                           Growth
Inception Date                  DEC-1999                         MAR-1997
 Scheme Assets (Rs in cr.)      353.67                           45.04
Last dividend (Rs/Unit)       20 % as on Nov 30, 2004            _
 Minimum          application 500                                500
amount/initial inst.:
Lock-in-period:
Entry Load(as a % of Amount Bet. 0 to 19999999 then              2.25
                              Entry load is 2.25%. and Amount
applicable NAV):              greater than 20000000 then Entry
                                load is 0%.



46
                               NIL                     NIL
Exit load(as a     %      of
applicable NAV):

Returns as on 2-4-08(%)
                               -12.21                  -15.14
1 months
6 months                      -10.6                          -14.16
1 Year                        25.89                          14.11
 3 year                       23.14                          16.65
5year                         36.37                          30.14
Return since launch           22.46                          9.3
Expense ratio                 2.33                           2.5
Portfolio turnover(%)         85.76                          59
P/E ratio                     30.23                          29.89
P/B ratio                     5.84                           5.03
Market cap(Rs. In crores)     26058.93                       20840.08
Std. dev.                     3.16                           3.35
Sharpe ratio                  0.26                           0.24
Beta                          0.85                           0.88
Alpha                         -3.83                          -11.48
R-squared                     0.86                           0.88
Treynor ratio                 0.98                           0.91
Sortino ratio                 0.42                           0.39
Portfolio manager             SWATI KULKARNI                 ASHISH KUMAR
*Returns upto 1 year are absolute and over 1 year are annualized.

Relative performance (Fund vs Category average)

Rating :**




Rating:*


47
Scheme 1: DBS CHOLA LIQUID FUND-G
Scheme 2: ICICI PRUDENTIAL LIQUID-G

SCHEME                          DBS CHOLA          LIQUID ICICI      PRUDENTIAL
                                FUND                      LIQUID

Category                        Debt :Ultra short term    Debt :Ultra short term
Type                            Open-end                  Open-end
Investment style
Inception Date                  Sep-2000                  Jun:1998
Scheme Assets (Rs in cr.)       405.01(29-2-08)           20927.39(29-2-08)
Benchmark                       Crisil liquid             Crisil liquid
Minimum           application   10000                     15000
amount/initial inst.:
Lock-in-period:
Entry Load(as a % of            Nil                       Nil


48
applicable NAV):
                              Nil                            Nil
Exit load(as a % of
applicable NAV):
Returns as on 3-4-08(%)
                              0.66                           0.66
1 months
6 months                      3.75                           3.81
1 Year                        7.38                           7.88
 3 year                       6.69                           6.74
5year                         5.93                           5.9
Return since launch           6.69                           7.23
Expense ratio                 0.31                           1.26
Portfolio turnover (%)        _                              48.2%
Std. dev.                     0.02                           0.02
Sharpe ratio                  1.51                           2.08
Beta                          0.04                           0.16
Alpha                         1.7                            1.88
R-squared                      0.01                          0.32
Treynor ratio                 0.74                           0.26
Sortino ratio                 2.76                           4

* Returns upto 1 year are absolute and over 1 year are annualised.




Relative performance (Fund vs Category average)

Rating :***




49
Rating :****




RECENT PERFORMANCE OF MUTUAL FUND INDUSTRY IN
INDIA

Should Fund Investors Worry?

    Exactly how badly has the recent downfall in stock prices hurt stock prices? A study
done by analysts at Value Research threw up some numbers that may come as a surprise
to those focused on the recent crash. The big news is hardly news-equity funds have had
a horrendous time in the recent times. In fact, it is a surprise how bad has the recent
quarter (January to March) been for equity funds. This three month period has generally
been the worst that equity funds have had since this decade began in January 2001. Funds
that we classify in the key 'Diversified Equity' category, which has the largest number of
funds (194) as well as the highest investor interest, lost an average of 28.3 per cent in just
these three months. This was far worse than the previous worst of the decade, when these
funds lost 16.9 per cent in the first three months of 2001.




50
    A comparison with the benchmark indices show up funds in an even worse light. Of
the 277 equity funds (which include diversified equity as well as other categories) that
were part of this study, only 35 outperformed their benchmarks while 242 failed to do so.
What's worse, of the 35 which beat the benchmark, a mere seven managed to do so by a
margin greater than five per cent. At the other end of the scale, as many as 142 funds
underperformed their benchmarks by more than five per cent. Of the small number of
funds that beat the benchmarks handsomely, a majority are those that also invest abroad.
This demonstrates the value of true diversification in bad times. However, even
international funds lost investors' money; they just lost less than domestically-focused
funds. In the entire list, the sole profit-making exception was DSP Merrill Lynch World
Gold Fund, which invests not in gold but in stocks of companies that are part of the
global gold mining and refining industry. In any case, the fact of this fund making a profit
is of not much practical use since such an exotic fund can only be a small percentage of
any real world portfolio.

 While equity funds are in some trouble, the normally staid world of debt funds is also
not in great shape. Even though debt fund numbers for the entire quarter look almost
normal, the month of March has come as a shock to investors who thought debt was a
safe harbour in which to ride out the equity storm. Worsening inflation numbers and the
resulting uncertainty on interest rates has seen the average returns of funds in the Medium
and Long-term government securities (gilts) category lose 1.1 per cent during March.
Even short-term gilt funds, which are supposed to be insulated from interest rate shocks
have had a poor month in which they have gained just 0.1 per cent with 6 of the 18 funds
in the category making losses.

   However, all is not doom and gloom. The good news is that when one looks at a longer
period of a year instead of a quarter, fund performance is still very strong and the losses
of this quarter have not come even close to wiping out the previous three quarters' gains.
Which means that the moral of the story is quite clear. Investors who have invested
steadily over a longer period are still fine. Which is just as it should be.
A LOW-IMPACT BUDGET

    As expected, this was a low-impact budget from an investment perspective. No
qualitative or quantitative change was made to the tax-saving investments .On the face of
it, the stock market's reaction to the budget has been negative. If one is to believe the
obvious explanation then a major culprit is the increased short term capital gains tax.
However, this increased tax will most likely not have any lasting impact on the markets.
The investing or trading behaviour of any market participant will not simply change
because this tax has gone up from 10 per cent to 15 per cent. However, it will mean that
when the time comes to pay the year's taxes, then traders will have to pull out that much
more cash to pay tax and in that sense it does reduce investible cash from stocks. The
increased short-term capital gains tax does increase the advantage that is represented by
mutual funds as opposed to trading in stocks oneself. When a mutual fund buys and sells
stocks, it does not pay any tax. Taxation comes in only when the fund investor redeems
his mutual fund investment. Earlier this was an advantage of 10 per cent, now its 15 per
cent.


51
 As an investor, the major impact will come from the farmers' loan waiver on banks as an
investment. Banks have been something of a star investment in the recent past. There are
mutual funds focused on banking and their performance has been far above that of any
other kind of mutual fund. Also, there are more than a few banking funds that are in the
process of being launched. The farmers‘ loan waiver will have a very deep impact on the
credit culture in parts of the banking market where public sector banks have to have a
strong presence. The idea that the government can step in and repay loans of a specific
category of borrowers is a moral hazard of no small proportion. There is a chance many
people around the country who will now stop repaying their loans and start agitating for
loan waivers. This loan waiver by itself has the capability for converting PSU bank
stocks and banking sector mutual funds into suspect investments.

 That said, the loan waiver will, for the time being, improve the balance sheets of banks.
In terms of actual funds flow, this means a huge chunk of cash being paid by the
government to the banks. And since these were loans that were probably never coming
back, it could well be a temporarily bonanza for banks. Of course, when they use the
money to dole out fresh loans, they'll probably be saying a final good bye to it.

 Till the next loan waiver, that is. This may have started a dubious new tradition that will
be hard for any future FM to put an end to.




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 : Future‘s 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



52
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 long-term 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



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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 -



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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 investor‘s 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
investor‘s 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

     1. NCFM Study Material (AMFI Mutual Fund Guide)

     2.http://www.mutualfundsindia.com

     3.http:// www.amfiindia.com

     4. http://www.sebi.gov.in



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     5.http://www.valueresearchonline.com




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