MUTUAL FUND
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CHAPTER 1
MUTUAL FUND
Source:http://beginnersinvest.about.com
1.1 INTRODUCTION TO MUTUAL FUNDS:
There are many investment avenues available in the financial market for an
investor. Investors can invest in bank deposits, corporate debentures and bonds,
post office saving schemes etc. where, there is low risk together with low return.
They may invest in stock of companies where the risk is high and sometimes the
returns are also proportionately high. For retail investors, who do not have the time
and expertise to analyze and invest in stock, Mutual Funds is a viable investment
alternative. This is because Mutual Funds provide the benefit of cheap access to
expensive stocks. A Mutual Fund is a collective investment vehicle formed with the
specific objective of raising money from a large number of individuals and investing it
according to a pre-specified objective, with the benefits accrued to be shared among
the investors on a pro-rata basis in proportion to their investment. According to
Encyclopedia Americana, “Mutual funds are open end investment companies that
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invest shareholders? money in portfolio or securities. They are open ended in that
they normally offer new shares to the public on a continuing basis and promise to
redeem outstanding shares on any business day.” According to Securities and
Exchange Board of India Regulations, 1996 a mutual fund means “a fund established
in the form of trust to raise money through the sale of units to the public or a section
of the public under one or more schemes for investing in securities, including money
market instruments”.
A Mutual Fund is a trust registered with the Securities and Exchange Board of
India (SEBI) which pools up the money from individual/corporate investors and
invests the same on behalf of the investors/units holders, in equity shares,
government securities, bonds, call money market etc. The income earned through
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these investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. This pooled income is
professionally managed on behalf the unit-holders, and each investor holds a
proportion of the portfolio.
1.2 DEFINITION:
“Mutual funds are collective savings and investment vehicles where savings of
small (or sometimes big) investors are pooled together to invest for their mutual
benefit and returns distributed proportionately”.
“A mutual fund is an investment that pools your money with the money of an
unlimited number of other investors. In return, you and the other investors each own
shares of the fund. The fund's assets are invested according to an investment
objective into the fund's portfolio of investments. Aggressive growth funds seek
long-term capital growth by investing primarily in stocks of fast-growing smaller
companies or market segments. Aggressive growth funds are also called capital
appreciation funds??
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1.3 OPERATIONAL FLOW OF MUTUAL FUND:
The following diagram depicts the operational flow of Mutual Fund
Source:http://www.nrimutualfunds.com
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http://www.nrimutualfunds.com
The mutual fund collects money directly or through brokers from investors. The
money is invested in various instruments depending on the objective of the scheme.
The income generated by selling securities or capital appreciation of these securities
is passed on to the investors in proportion to their investment in the scheme. The
investments are divided into units and the value of the units will be reflected in Net
Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme
minus its liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the valuation date. Mutual fund companies
provide daily net asset value of their schemes to their investors. NAV is important, as
it will determine the price at which you buy or redeem the units of a scheme.
Depending on the load structure of the scheme, you have to pay entry or exit load.
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1. 4 ADVANTAGES OF MUTUAL FUNDS:
If mutual funds are emerging as the favorite investment vehicle, it is because of
the many advantages they have over other forms and the avenues of investing,
particularly for the investor who has limited resources available in terms of capital
and the ability to carry out detailed research and market monitoring. The following
are the major advantages offered by mutual funds to all investors:
1. Portfolio Diversification:
Each investor in the fund is a part owner of all the fund?s assets, thus enabling him
to hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.
2. Professional Management:
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Even if an investor has a big amount of capital available to him, he benefits from
the professional management skills brought in by the fund in the management of the
investor?s portfolio. The investment management skills, along with the needed
research into available investment options, ensure a much better return than what an
investor can manage on his own. Few investors have the skill and resources of their
own to succeed in today?s fast moving, global and sophisticated markets.
3. Reduction/Diversification of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether
he places a deposit with a company or a bank, or he buys a share or debenture on his
own or in any other from. While investing in the pool of funds with investors, the
potential losses are also shared with other investors. The risk reduction is one of the
most important benefits of a collective investment vehicle like the mutual funds.
4. Reduction of Transaction Costs:
What is true of risk as also true of the transaction costs? The investor bears all the
costs of investing such as brokerage or custody of securities. When going through a
fund, he has the benefit of economies of scale; the funds pay lesser costs because of
larger volumes, a benefit passed on to its investors.
5. Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
When they invest in the units of a fund, they can generally cash their investments any
time, by selling their units to the fund if open-ended, or selling them in the market if
the fund is close-end. Liquidity of investment is clearly a big benefit.
6. Convenience and Flexibility:
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Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holding from one
scheme to the other; get updated market information and so on.
7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the
assessment of all Unit holders. However, as a measure of concession to Unit holders
of open-ended equity-oriented funds, income distributions for the year ending March
31, 2003, will be taxed at a concessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000
from the Total Income will be admissible in respect of income from investments
specified in Section 80L, including income from Units of the Mutual Fund. Units of the
schemes are not subject to Wealth-Tax and Gift-Tax.
8. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
9. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI.
10. Transparency:
You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.
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1.5 DISADVANTAGES OF INVESTING THROUGH
MUTUAL FUNDS:
1. No Control over Costs:
An investor in a mutual fund has no control of the overall costs of investing. The
investor pays investment management fees as long as he remains with the fund,
albeit in return for the professional management and research. Fees are payable
DISADVANTAGES OF MUTUAL FUND INVESTMENT
1. NO CONTROL OVER COST
2. NO TAILOR MADE PORTFOLIO
3. MANAGINGA PORTFOLIO OF FUNDS
4.WISDOM OF PROFESSIONAL MANAGEMENT
5.NO CONTROL
6. DILUTION
7. BURRIED COSTS
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even if the value of his investments is declining. A mutual fund investor also pays
fund distribution costs, which he would not incur in direct investing. However, this
shortcoming only means that there is a cost to obtain the mutual fund services.
2. No Tailor-Made Portfolio:
Investors who invest on their own can build their own portfolios of shares and
bonds and other securities. Investing through fund means he delegates this decision
to the fund managers. The very-high-net-worth individuals or large corporate
investors may find this to be a constraint in achieving their objectives. However,
most mutual fund managers help investors overcome this constraint by offering
families of funds- a large number of different schemes- within their own management
company. An investor can choose from different investment plans and constructs a
portfolio to his choice.
3. 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 on how to select a fund to achieve his objectives,
quite similar to the situation when he has individual shares or bonds to select.
4. The Wisdom of Professional Management:
That's right, this is not an advantage. The average mutual fund manager is no
better at picking stocks than the average nonprofessional, but charges fees.
5. No Control:
Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car
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6. Dilution:
Mutual funds generally have such small holdings of so many different stocks that
insanely great performance by a fund's top holdings still doesn't make much of a
difference in a mutual fund's total performance.
7. Buried Costs:
Many mutual funds specialize in burying their costs and in hiring salesmen who do
not make those costs clear to their clients.
Source:http://wealth18.com
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CHAPTER 2
EVOLUTION OF MUTUAL FUNDS
2.1 HISTORY OF MUTUAL FUNDS IN INDIA
The mutual fund industry in India started in 1963 with the formation of Unit Trust
of India, at the initiative of the Reserve Bank and the Government of India. The
objective then was to attract the small investors and introduce them to the market
investments. Since then, the history of mutual funds in India can be broadly divided
into four distinct phases.
HISTORY OF MUTUAL FUNDS.
PHASE
1
• ESTABLISHMENT AND GROWTH (1964-1987)
PHASE
2
• ENTRY OF PUBLIC SECTOR FUNDS (1987-1933)
PHASE
3
• ENTRY OF PRIVATE SECTOR FUNDS (1993-2003)
PHASE
4
• GROWTH AND SEBI REGULATION (SINCE FEBRUARY
2003)
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PHASE I: 1964 – 1987 (UNIT TRUST OF INDIA):
This phase spans from 1964 to 1987. In 1963, UTI was established by an act of
parliament and given a monopoly. Operationally, UTI was set up by Reserve Bank of
India, but was later delinked from the RBI. The first and still one of the largest
scheme, launched by UTI was Unit Scheme 1964. Over the years, US – 64 attracted,
and probably still has the largest number of investors in any single investment
scheme. It was also at least partially the first open – end scheme in the country.
Later in 1970s and 1980s, UTI started innovating and offering different schemes
to suit the needs of different class of investors. Unit Linked Insurance Plan (ULIP)
was launched in 1971. Six new schemes were introduced between 1981 and 1984.
During 1984 – 87, new schemes like Children?s Gift Growth Fund (1986) and Master
share (1987) were launched. Master share could be termed as the first diversified
equity investment scheme in India. The first Indian offshore fund, India fund, was
launched in August 1986. During 1990?s, UTI catered to the demands for income-
oriented schemes by launching Monthly Income Schemes, a somewhat unusual
mutual fund product offering, “assured returns”.
The mutual fund industry in India not only started with UTI, but still counts as its
largest player with the largest corpus of investible funds among all mutual funds
currently operating in India. Until 1980s, UTI?s operations in the stock market often
determined the direction of market movements. Foreign and other situational players
have been brought in. so direct influence of UTI on the markets may be less than
before, though it remains largest player in industry. In absolute terms, the investible
funds corpus of even UTI was still relatively small at about Rs.600 crores in 1984.
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1987 – 1988
AMOUNT
MOBILISED
(Rs Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OFGROSS DOMESTIC
SAVINGS
UTI 2,175.00 6,700.00 3.1%
TOTAL 2,175.00 6,700.00 3.1%
SOURCE: AMFI WORKBOOK
PHASE II: 1987 – 1993 (Entry of Public Sector Funds):
1987 marked the entry of non – UTI, public sector mutual funds, bringing in
competition. With the opening up of the economy, many public sector banks and
financial institution were allowed to establish mutual funds. The State Bank of India
established the first non – UTI mutual fund – SBI Mutual Fund – in November 1987.
This was followed by Canbank Mutual Fund (launched December 1987), LIC Mutual
Fund (launched in 1989) and Indian Bank Mutual Fund (launched in 1990) followed by
Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual
funds helped enlarge the investor community and the investible funds. From 1987-
1992/93, the fund industry expanded nearly seven times in turns of assets under
management.
During this period, investors were shifting away from bank deposits to mutual funds,
as they started allocating larger part of their financial assets and savings (5.2%in
1992, 3.1%1988) to fund investments. UTI was still the largest segment of the
industry, although with nearly 20% market share ceded to the public sector mutual
funds.
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1992 – 1993
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OFGROSS
DOMESTICSAVINGS
UTI 11,057.00 38,247.00 5.2%
PUBLIC
SECTOR
1,964.00 8,757.00 0.9%
TOTAL 13,021.00 47,004.00 6.1%
SOURCE: AMFI WORKBOOK
PHASE III: 1993-1996 (Emergence of Private Sector Funds)
A new era in the mutual funds industry began with the permission granted for the
entry of private sector funds in 1993, giving the Indian investors a broader choice of
„fund families? and increasing competition for the public sector funds. Quite
significantly, foreign fund management companies were also allowed to operate
mutual funds, most of them coming into India through their joint ventures with Indian
promoters. These private funds have brought in with them the latest product
innovations, investment management techniques and investor servicing technology
that makes the Indian mutual fund industry today a vibrant and growing financial
intermediary.
During the year1993-94, five private sector mutual funds launched their schemes
followed by six others in 1994-95. Initially the mobilization of funds by the private
mutual funds was slow. But this segment of the fund industry now has been
witnessing much greater investor confidence in them. One influencing factor has
been the development of a SEBI driven regulatory framework for mutual funds. But
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another important factor has been the steadily improving performance of several
funds themselves. Investors in India now clearly see the benefits of investing through
mutual funds and have started becoming selective.
The entire mutual fund industry in India, despite initial hiccups, has since scaled
new heights in terms of mobilization of funds and number of players. Deregulation
and liberalization of the Indian economy has introduced competition and provided
impetus to the growth of the industry. Finally, most investors- small or large-have
started shifting towards mutual funds as opposed to banks or direct market
investments.
More investor friendly regulatory measures have been taken both by SEBI to
protect the investor and by the government to enhance investors? returns through
tax benefits. A comprehensive set of regulations for all mutual funds operating in
India has been accomplished with SEBI (Mutual Fund) regulations, 1996. These
regulations set uniform standards for all funds and eventually be applied in full to
Unit Trust of India as well, even though its own UTI Act governs UTI. Infact, UTI has
been voluntarily adopting SEBI guidelines for most of its schemes. Similarly, the 1999
Union Government Budget took a big step in exempting all mutual fund dividends
from income tax in the hands of the investors.
The mutual fund industry in 1999 seems to mark the beginning of a new phase in
its history, a phase of significant growth in terms of assets under management.
The size of the industry is growing rapidly, as seen by the figure of assets under
management, which have gone from over 68,000crores to nearly 87,000crores in just
one year. Within the growing industry, by March 1999; UTIS share of mobilization had
decreased to 55%(from 85% in 1992-93), while the share of the private sector stood
at 37%. During April to October 1999, the sector accounted for 59% of mobilizations.
Mobilizations during this period of 7 months in fact exceeded the same for the whole
of 1998-99.it is also clear that the enhanced share of the private sector is explained
not only by the growing appetite for mutual funds, but also by the growing
acceptance of the private sector funds.
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1998 – 1999
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS % OF
GROSS
DOMESTICSAVINGS
UTI 11,679.00 53,320.00 2.79%
PUBLIC
SECTOR
1,732.00 8,292.00 0.08%
PRIVATE
SECTOR
7,966.00 6,860.00 1.14%
TOTAL 21,377.00 68,472.00 5.1%
SOURCE: AMFI WORKBOOK
PHASE IV: 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 schemes, 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, 000crores
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
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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 as at the end of March
2007, there were 30 mutual funds, which managed assets of rs.3, 26,388 crores
under 756 schemes.
The graph indicates the growth of assets over the years.
GROWTH IN ASSETS UNDER MANAGEMENT
SOURCE: AMFI WORKBOOK
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking
of the Unit Trust of India effective from February 2003. The Assets under
management of the Specified Undertaking of the Unit Trust of India has therefore
been excluded from the total assets of the industry as a whole from February 2003
onwards.
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2.2 FUTURE OF MUTUAL FUND INDUSTRY IN INDIA
The Indian mutual fund industry is passing through a transformation. On one side
it has seen a number of regulatory developments while on the other the overall
economy is just recovering from the global crisis of 2008. The regulatory changes
have been made keeping in mind the best interests of the investors. However, like all
changes these changes will take time to be adapted by industry, intermediaries and
the investing public at large. The industry is looking forward to early resolution of
certain inter-regulatory issues requiring Government / Court intervention. Market
participants are waiting to see how the industry adapts to these changes, while
trying to maintain its pace of growth. Mutual funds are restructuring their business
models to provide for increased efficiencies and investor satisfaction. The industry
also faces a number of issues which are characterized by lack of investor
awareness, low penetration levels, high dependence on corporate sector and
spiraling cost of operations. The Growth rate of the industry therefore needs to be
seen from this perspective. Though, it is commendable to note, that, Assets Under
Management have managed to record a compounded growth of 28% over 2006-2010,
however, the AUM of Equity Funds and Balanced Funds where retail investors invest
have only grown by 20% in the same period. The net sales of Equity/Balanced funds
in 2009-10 have been one of the lowest in recent years. India has vast growth
potential backed by a resilient economy, commensurate with an accelerated GDP
growth rate of 7.4%, high rate of household savings and investments. This report by
PwC seeks to outline the current state of the industry, with its growth drivers and
continuing challenges. It also seeks to draw a comparison with other global
economies, the business and regulatory trends which have been impacting this
industry with a snapshot of some of the regulatory changes anticipated around the
corner.
According to report of Business maps of India, Important aspects related to the
future of mutual funds in India are -
? The growth rate was 100 % in 6 previous years.
? The saving rate in India is 23 %.
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? There is a huge scope in the future for the expansion of the mutual funds
industry.
? A number of foreign based assets management companies are venturing into
Indian markets.
? The Securities Exchange Board of India has allowed the introduction of
commodity mutual funds.
? The emphasis is being given on the effective corporate governance of Mutual
Funds.
? The Mutual funds in India has the scope of penetrating into the rural and semi
urban areas.
? Financial planners are introduced into the market, which would provide the
people with better financial planning.
According to RNCOS research report titled “Current and Future outlook of Mutual
Fund Industry”, key finding are –
? The Indian mutual funds retail market, growing at a Compounded Annual Growth
Rate (CAGR) of about 30%, is forecasted to reach US$ 300 Billion by 2015.
Income and growth schemes made up for majority of Assets under Management
(AUM) in the country.
? At about 84% (as on March 31, 2008), private sector Asset Management
Companies account for majority of mutual fund sales in India. Individual
investors make up for 96.86% of the total number of investor accounts and
contribute 36.9% of the net assets under management.
? Based on KPMG report titled “Indian Mutual Fund Industry – The Future in a
Dynamic Environment Outlook for 2015” key results are-
? KPMG in India is of the view that the industry AUM is likely to continue to grow in
the range of 15 to 25 percent from the period 2010 to 2015 based on the pace of
economic growth. In the event of a quick economic revival and positive
reinforcement of growth drivers identified, KPMG in India is of the view that the
Indian mutual fund industry may grow at the rate of 22 to 25 percent in the
period from 2010 to 2015, resulting in AUM of INR 16,000 to 18,000 billion in
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2015. In the event of a relatively slower economic revival resulting in the
identified growth drivers not reaching their full potential, KPMG in India is of the
view that the Indian mutual fund industry may grow in the range of 15 to 18
percent in the period from 2010 to 2015, resulting in AUM of INR 15,000 to
17,000 billion in 2015.
? Industry profitability may reduce further as revenues shrink and operating costs
escalate. Product innovation is expected to be limited. Market deepening and
widening is expected with the objective of increased retail penetration and
participation in mutual funds. The regulatory and compliance framework for
mutual funds is likely to get aligned with the other frameworks across the
financial services sector.
http://www.nidhiconsultants.com
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2.3 ORGANISATIONAL STRUCTURE OF MUTUAL FUNDS
IN INDIA
SPONSOR
TRUSTEES
CUSTODIAN
ASSET MANAGEMENT COMPANY
DISTRIBUTORS/AGENTS
BANKER
REGISTRAR AND
TRANSFER AGENT
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I. TRUSTEES
h ttp://www.iasplus.com
Trustees are an important link in the working of any mutual fund. They are
responsible for ensuring that investors? interests in a scheme are taken care of
properly. They do this by a constant monitoring of the operations of the various
schemes. In return for their services, they are paid trustee fees, which are normally
charged to the scheme.
A. Appointment of Trustees:
As per regulations, for a person to qualify as a sponsor, he must contribute at
least 40% of the net worth of the asset management company (AMC) and possess
a sound financial record over five year?s period prior to registration.
? Who can become a trustee?
? A person of ability, integrity and standing; and
? Who has not been found guilty of moral turpitude; and
? Who has not been convicted of any economic offense or violation of any
securities laws; and
? Who has furnished the particulars required under regulations?
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An AMC or any of its officers or employers or employees is not eligible to act as
a trustee of any mutual fund. No person who is appointed as a trustee of a mutual
fund can be appointed as a trustee of any other mutual fund unless such a person
is an independent trustee and he/she has taken prior approval of the mutual fund
of which he is a trustee.
B. Rights and Obligations of the trustees
The trustees are accountable for the funds and property of the respective
schemes. They should hold the same in trust for the benefit of the unit holders in
accordance with SEBI regulations and provisions of the trust deed.
(1) The trustees and the asset management company should enter into an
investment management agreement.
(2) The investment management agreement should contain such clauses as are
mentioned in the Fourth Schedule and such other clauses as are necessary
for the purpose of making investments.
i. Trustees ensure that the systems, processes and personnel are in place
ii. Trustees watch that the AMC acts in the interest of the unit holder
iii. Unit holders consent
iv. Regular monitoring
v. Unit holder?s grievances
vi. Reporting to SEBI
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II. ASSET MANAGEMENT COMPANY (AMC)
http://www.canstockphoto.com
The asset management company carries out the business of the mutual fund. The
AMC shall not undertake any other business activities except activities in the nature
of management and advisory services to offshore funds, pension funds, provident
funds, venture capital funds, management of insurance funds, financial consultancy
and exchange of research on commercial basis, if any of such activities are not in
conflict with the activities of the mutual fund.
The AMC is appointed by the sponsor or if so authorized by the trust deed, the
trustee, the appointment can be terminated by majority of the trustees or by 75%
of Unit holders of the scheme.
A. ELIGIBILITY CRITERIA FOR APPOINTMENT OF AMC:
The directors of an AMC should have adequate professional experience in finance
and financial services related field and not found guilty of moral turpitude or
convicted of any economic offence or violation of any securities laws. The key
persons should not been found guilty of moral turpitude or convicted of
economic offence or violation of securities laws, have at least fifty percent directors,
MUTUAL FUND
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who are not associate of, or associated in any manner with, the sponsor or any of its
subsidiaries or the trustees. The chairman of the asset management company should
not be a trustee of any mutual fund and the asset management company should have
a net worth of not less than rupees ten crores.
B. AMC RESPONSIBILITIES FOR THE ACT OF ITS EMPLOYEES:
The asset management company should take all reasonable steps and exercise
due diligence to ensure that the investment of funds pertaining to any scheme is not
contrary to the provisions of these regulations and the trust deed. It should exercise
due diligence and care in all its investment decisions as would be exercised by other
persons engaged in the same business. The asset management company should be
responsible for the acts of commissions or omissions by its employees or the
persons whose services have been procured by the asset management company. It
should submit to the trustee?s quarterly reports of each year on its activities and the
compliance with these regulations. The trustees at the request of the asset
management company may terminate the assignment of the asset management
company at any time: Provided that such termination should become effective only
after the trustees have accepted the termination of assignment and communicated
their decision in writing to the asset management company. Notwithstanding
anything contained in any contract or agreement or termination, the asset
management company or its directors or other officers should not be absolved of
liability to the mutual fund for their acts of commission or omissions, while holding
such position or office.
C. ASSET MANAGEMENT FEE:
For carrying out asset management activities, AMC charges fee to the schemes it
manages, within the ceiling prescribed under regulations. Other constituent of
mutual fund.
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III. SPONSORS
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Sponsor is the company, which sets up the Mutual Fund as per the provisions laid
down by the Securities and Exchange Board of India (SEBI). SEBI mainly fixes the
criteria of sponsors based on sufficient experience, net worth, and past track record.
IV. CUSTODIAN / DEPOSITORY
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The custodian maintains custody of the securities in which the scheme invests.
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This ensures an ongoing independent record of the investments of the scheme. The
custodian also follows up on various corporate actions, such as rights, bonus and
dividends declared by investee companies. At present, when the securities are being
dematerialized, the role of the depository for such independent record of
investments is growing. No custodian in which the sponsor or its associates hold 50
percent or more of the voting rights of the share capital of the custodian or where 50
per cent or more of the directors of the custodian represent the interest of the
sponsor or its associates shall act as custodian for a mutual fund constituted by the
same sponsor or any of its associates or subsidiary company.
V. REGISTRARS
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An investor?s holding in mutual fund schemes is typically tracked by the schemes?
Registrar and Transfer Agent (R & T). Some AMC?S prefer to handle this role on their
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own instead of appointing R & T. The Registrar or the AMC as the case may be
maintains an account of the investors? investments and disinvestments from the
schemes. Requests to invest more money into a scheme or to redeem money against
existing investments in a scheme are processed by the R & T.
VI. DISTRIBUTORS
http://www.eyedetec.com
Distributors earn a commission for bringing investors into the schemes of a
mutual fund. This commission is an expense for the scheme. Depending on the
financial and physical resources at their disposal, the distributors could be:
A) Tier 1 distributors who have their own or franchised network reaching out to
investors all across the country; or 6
B) Tier 2 distributors who are generally regional players with some reach within their
region; or
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C) Tier 3 distributors who are small and marginal players with limited reach. The
distributors earn a commission from the AMC.
VII. BANKER:
http://www.clker.com
A Fund?s activities involve dealing in money on a continuous basis primarily with
respect to buying and selling units, paying for investment made, receiving the
proceeds from sale of the investments and discharging its obligations towards
operating expenses. Thus the Fund?s banker plays an important role to determine
quality of service that the fund gives in timely delivery of remittances etc.
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CHAPTER 3
CLASSIFCATION OF MUTUAL FUND PRODUCTS
3.1 TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. thus mutual funds has
Variety of flavors, Being a collection of many stocks, an investors can go for picking
a mutual fund might be easy. There are over hundreds of mutual funds scheme to
choose from. It is easier to think of mutual funds in categories, mentioned below.
MUTUAL FUND
32
A) BY STRUCTURE
Source:http://ablamc.com
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the Mutual Fund through periodic repurchase at
NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes
is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and
MUTUAL FUND
33
close-ended schemes. The units may be traded on the stock exchange or may be
open for sale or redemption during pre-determined intervals at NAV related prices.
B) BY NATURE
1. EQUITY FUND:
Source:http://www.wlivenews.com
These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund
manager?s outlook on different stocks. The Equity Funds are sub-classified
depending upon their investment objective, as follows:
1.1 Aggressive Growth Funds –
In Aggressive Growth Funds, fund managers aspire for maximum capital
appreciation and invest in less researched shares of speculative nature. Because of
these speculative investments Aggressive Growth Funds become more volatile and
thus, are prone to higher risk than other equity funds.
1.2 Growth Funds –
Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years)
but they are different from Aggressive Growth Funds in the sense that they invest in
MUTUAL FUND
34
companies that are expected to outperform the market in the future. Without entirely
adopting speculative strategies, Growth Funds invest in those companies that are
expected to post above average earnings in the future.
1.3 Equity Income or Dividend Yield Funds –
The objective of Equity Income or Dividend Yield Equity Funds is to generate high
recurring income and steady capital appreciation for investors by investing in those
companies which issue high dividends (such as Power or Utility companies whose
share prices fluctuate comparatively lesser than other companies' share prices).
Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest
risk level as compared to other equity funds.
1.4 Diversified Equity Funds –
Except for a small portion of investment in liquid money market, diversified equity
funds invest mainly in equities without any concentration on a particular sector(s).
These funds are well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to equity
market risk. One prominent type of diversified equity fund in India is Equity Linked
Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by
ELSS should be in equities at all times. ELSS investors are eligible to claim deduction
from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the investor before the
expiry of the lock-in period makes him liable to pay income tax on such income(s) for
which he may have received any tax exemption(s) in the past.
1.5 Equity Index Funds –
Equity Index Funds have the objective to match the performance of a specific stock
market index. The portfolio of these funds comprises of the same companies that
form the index and is constituted in the same proportion as the index. Equity index
funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity
index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index
etc.). Narrow indices are less diversified and therefore, are more risky.
MUTUAL FUND
35
1.6 Value Funds –
Value Funds invest in those companies that have sound fundamentals and whose
share prices are currently under-valued. The portfolio of these funds comprises of
shares that are trading at a low Price to Earnings Ratio (Market Price per Share /
Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value
Funds may select companies from diversified sectors and are exposed to lower risk
level as compared to growth funds or specialty funds. Value stocks are generally
from cyclical industries (such as cement, steel, sugar etc.) Which make them volatile
in the short-term? Therefore, it is advisable to invest in Value funds with a long-term
time horizon as risk in the long term, to a large extent, is reduced.
1.7 Specialty Funds –
Specialty Funds have stated criteria for investments and their portfolio comprises of
only those companies that meet their criteria. Criteria for some specialty funds could
be to invest/not to invest in particular regions/companies. Specialty funds are
concentrated and thus, are comparatively riskier than diversified funds. There are
following types of specialty funds.
1.8Sector Funds -
Equity funds that invest in a particular sector/industry of the market are known as
Sector Funds. The exposure of these funds is limited to a particular sector (say
Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer
Goods) which is why they are more risky than equity funds that invest in multiple
sectors.
1.9 Foreign Securities Funds -
Foreign Securities Equity Funds have the option to invest in one or more foreign
companies. Foreign securities funds achieve international diversification and hence
they are less risky than sector funds. However, foreign securities funds are exposed
to foreign exchange rate risk and country risk.
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36
1.10 Mid-Cap or Small-Cap Funds -
Funds that invest in companies having lower market capitalization than large
capitalization companies are called Mid-Cap or Small-Cap Funds. Market
capitalization of Mid-Cap companies is less than that of big, blue chip companies
(less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies
have market capitalization of less than Rs. 500 crores. Market Capitalization of a
company can be calculated by multiplying the market price of the company's share
by the total number of its outstanding shares in the market. The shares of Mid-Cap or
Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise
to volatility in share prices of these companies and consequently, investment gets
risky.
1.11 Option Income Funds -
While not yet available in India, Option Income Funds write options on a large
fraction of their portfolio. Proper use of options can help to reduce volatility, which is
otherwise considered as a risky instrument. These funds invest in big, high dividend
yielding companies, and then sell options against their stock positions, which
generate stable income for investors.
Equity investments are meant for a longer time horizon, thus Equity funds rank high
on the risk-return matrix.
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2. DEBT FUNDS:
Source:http://www.rediff.com
The objective of these Funds is to invest in debt papers. Government authorities,
private companies, banks and financial institutions are some of the major issuers of
debt papers. By investing in debt instruments, these funds ensure low risk and
provide stable income to the investors. Debt funds are further classified as:
2.1 Gilt Funds:
Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are
associated with Interest Rate risk. These schemes are safer as they invest in papers
backed by Government.
2.2 Income Funds:
Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.
2.3 Monthly Income Plans (MIPs):
Invests maximum of their total corpus in debt instruments while they take minimum
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exposure in equities. It gets benefit of both equity and debt market. These scheme
ranks slightly high on the risk-return matrix when compared with other debt
schemes.
2.4 Short Term Plans (STPs):
Meant for investment horizon for three to six months. These funds primarily invest in
short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).
Some portion of the corpus is also invested in corporate debentures.
2.5 Liquid Funds:
Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant
for short-term cash management of corporate houses and are meant for an
investment horizon of 1day to 3 months. These schemes rank low on risk-return
matrix and are considered to be the safest amongst all categories of mutual funds.
3. BALANCED FUNDS:
Source:http://articles.economictimes.indiatimes.com
MUTUAL FUND
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As the name suggest they, are a mix of both equity and debt funds. They invest in
both equities and fixed income securities, which are in line with pre-defined
investment objective of the scheme. These schemes aim to provide investors with the
best of both the worlds. Equity part provides growth and the debt part provides
stability in returns.
Further the mutual funds can be broadly classified on the basis of investment
parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined
in the objectives of the fund. The investor can align his own investment needs with
the funds objective and invest accordingly.
C) BY INVESTMENT OBJECTIVE:
1. GROWTH SCHEMES:
Growth Schemes are also known as equity schemes. The aim of these schemes is to
provide capital appreciation over medium to long term. These schemes normally
invest a major part of their fund in equities and are willing to bear short-term decline
in value for possible future appreciation.
2. INCOME SCHEMES:
Income Schemes are also known as debt schemes. The aim of these schemes is to
provide regular and steady income to investors. These schemes generally invest in
fixed income securities such as bonds and corporate debentures. Capital
appreciation in such schemes may be limited.
3. BALANCED SCHEMES:
Balanced Schemes aim to provide both growth and income by periodically
distributing a part of the income and capital gains they earn. These schemes invest in
both shares and fixed income securities, in the proportion indicated in their offer
documents (normally 50:50).
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40
4. MONEY MARKET SCHEMES:
Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments,
such as treasury bills, certificates of deposit, commercial paper and inter-bank call
money.
5. LOAD FUNDS:
A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and
exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a
good performance history.
6. NO-LOAD FUNDS:
A No-Load Fund is one that does not charge a commission for entry or exit. That is,
no commission is payable on purchase or sale of units in the fund. The advantage of a
no load fund is that the entire corpus is put to work.
OTHER SCHEMES
1. TAX SAVING SCHEMES:
http://www.trackmystatus.in
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed
MUTUAL FUND
41
from time to time. Under Sec.88 of the Income Tax Act, contributions made to any
Equity Linked Savings Scheme (ELSS) are eligible for rebate.
2. INDEX SCHEMES:
Index schemes attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the total holding
will be identical to the stocks index weightage. And hence, the returns from such
schemes would be more or less equivalent to those of the Index.
3. SECTOR SPECIFIC SCHEMES:
These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. E.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.
4. Commodity Funds
Source:http://www.valuewalk.com
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Those funds that focus on investing in different commodities (like metals, food
grains, crude oil etc.) Or commodity companies or commodity futures contracts are
termed as Commodity Funds. A commodity fund that invests in a single commodity or
a group of commodities is a specialized commodity fund and a commodity fund that
invests in all available commodities is a diversified commodity fund and bears less
risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that
invest in gold, gold futures or shares of gold mines) are common examples of
commodity funds.
5. REAL ESTATE FUNDS
Source:http://urbanupdate.in
Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized
MUTUAL FUND
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Real Estate Funds. The objective of these funds may be to generate regular income
for investors or capital appreciation.
6. EXCHANGE TRADED FUNDS (ETF)
Source:http://articles.economictimes.indiatimes.com
Exchange Traded Funds provide investors with combined benefits of a closed-end
and an open-end mutual fund. Exchange Traded Funds follow stock market indices
and are traded on stock exchanges like a single stock at index linked prices. The
biggest advantage offered by these funds is that they offer diversification, flexibility
of holding a single share (tradable at index linked prices) at the same time. Recently
introduced in India, these funds are quite popular abroad.
MUTUAL FUND
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7. FUND OF FUNDS
Source:http://www.vitt.in
Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different amcs, are known as Fund of Funds.
Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes,
just like conventional mutual funds maintain a portfolio comprising of
equity/debt/money market instruments or non-financial assets. Fund of Funds
provide investors with an added advantage of diversifying into different mutual fund
schemes with even a small amount of investment, which further helps in
diversification of risks. However, the expenses of Fund of Funds are quite high on
account of compounding expenses of investments into different mutual fund
schemes.
MUTUAL FUND
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8. Gold Exchange Traded Funds (GETFS)
Source:http://www.thirukochi.co.in
Gold Exchange Traded Funds offer investors an innovative, cost efficient and
secure way to access the gold market. Gold etfs are intended to offer investors a
means of participating in the gold bullion market by buying and selling units on the
Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India,
Benchmark GETF, opened for subscription on February 15, 2007 and listed on the
NSE on April 17, 2007.
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3.2 Systematic Investment Plan (SIP)
Source:http://www.investmentyogi.com
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing
money in mutual funds. SIP allows you to invest a certain pre-determined amount at a
regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach
towards investments and helps you inculcate the habit of saving and building wealth
for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your
bank account and invested into a specific mutual fund scheme. You are allocated
certain number of units based on the ongoing market rate (called NAV or net asset
value) for the day. Every time you invest money, additional units of the scheme are
purchased at the market rate and added to your account. Hence, units are bought at
different rates and investors benefit from Rupee-Cost Averaging and the Power of
Compounding.
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? Rupee-Cost averaging
With volatile markets, most investors remain skeptical about the best time to invest
and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt
out of the guessing game. Since you are a regular investor, your money fetches more
units when the price is low and lesser when the price is high. During volatile period, it
may allow you to achieve a lower average cost per unit.
? Power of Compounding
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He,
who understands it, earns it… He who doesn't... Pays it." The rule for compounding is
simple - the sooner you start investing, the more time your money has to grow.
Example
if you started investing Rs. 10000 a month on your 40
th
birthday, in 20 years? time you
would have put aside Rs. 24 lakh. If that investment grew by an average of 7% a year,
it would be worth Rs. 52.4 lakh when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would
add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of
7%, you would have Rs. 1.22 Cr on your 60
th
birthday - more than double the amount
you would have received if you had started ten years later!
Other Benefits of Systematic Investment Plans
? Disciplined Saving - Discipline is the key to successful investments. When you
invest through SIP, you commit yourself to save regularly. Every investment is a step
towards attaining your financial objectives.
? Flexibility - While it is advisable to continue SIP investments with a long-term
perspective, there is no compulsion. Investors can discontinue the plan at any time.
One can also increase/ decrease the amount being invested.
? Long-Term Gains - Due to rupee-cost averaging and the power of compounding
sips have the potential to deliver attractive returns over a long investment horizon.
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? Convenience - SIP is a hassle-free mode of investment. You can issue a standing
instruction to your bank to facilitate auto-debits from your bank account.
Sips have proved to be an ideal mode of investment for retail investors who do not
have the resources to pursue active investments.
3.3 SYSTEMATIC WITHDRAWAL PLAN (SWP)
Source:http://myinvestmentideas.com
In essence, SWP is the reverse of SIP. Where in SIP you look at accumulating a
corpus by making regular investments into a fund, in SWP you regularly withdraw a
fixed amount of money from a fund. The amount to be withdrawn and the frequency
are fixed by the investor. So you can have a monthly, quarterly or annual frequency
for any fixed amount that you wish to receive. Mr. Gupta would be very happy to
receive a fixed amount in his account every month, when he retires. Anchal is
currently on a sabbatical to bring up her baby. She would be thrilled to put her
savings to use for generating a small regular income flow for herself. SWP can help
MUTUAL FUND
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Mr. Gupta and Anchal plan their cash flows. This is one of the many methods
available for generating a regular income from your savings.
Let us look at some examples of how this strategy will work. Say Mr.Gupta has Rs.10
lakh which he wants to use for generating income through SWP. Let?s look scenarios
with investments in three different type of funds.
Amount Invested: Rs 10 lakh
Systematic withdrawal amount: Rs 10000 per month
Date of SWP: 2nd of every month
Start of SWP: 02 Feb 2010
End of SWP: 20 Feb 2013
Total amount withdrawn: Rs 240000
For simplicity we have taken three funds from the same fund house and not
considered taxation in these calculations. Balance in Folio as on 4 Feb 2013:
HDFC Top 200 Fund (G): Rs 9.07 lakh
HDFC MIP LTP (G): Rs 8.71 lakh
HDFC Income Fund (G): Rs 8.39 lakh
(Source: Calculators mutualfundsindia.com)
? BENEFITS:
1. Regularity:
With an SWP, you are assured of getting a fixed amount at your pre-determined
frequency. The problem with other options like a monthly income plans, which pay
dividends, is that the amount and the frequency of the payouts is not fixed.
Sometimes, if there is no appreciation which can be distributed, you might have no
dividends to be paid. Hence every month you will have different amounts coming in
and some month there might be no money received.
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2. Taxation:
SWP is better from the taxation point of view too. In debt funds dividends are paid
after deduction of dividend distribution tax (DDT) of 13.5%. So that will be your tax in
case you depend on dividend income from your debt mutual funds. In case of SWP,
you will pay a short term capital gain (STCG) or a long term capital gains tax (LTCG).
Though STCG may be more expensive as it is on the income slab of the investor,
LTCG will be beneficial as it is a fixed rate of 10% or 20% with indexation. Things get
better in case of SWP from equity funds. As the long term capital gains from equity
mutual funds are exempt in case of holding beyond a year, you end up paying no tax
on the withdrawals.
3. Inflation Protection:
Most of the fixed income instruments do not offer inflation beating returns. So,
though the principal may be secure, the income might fall short of needs in future.
Here again SWP scores in terms of generating returns to keep up with inflation
especially if you opt for an equity fund. The only drawback in the SWP is that it will at
some point eat into your capital. But judicious mix of investment instruments will
ensure that your primary goal of income generation will be met without you running
out of money in times of need. So the conclusion is that SWP is a noteworthy strategy
to use for generation of regular income in various scenarios.
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3.4 SYSTEMATIC TRANSFER PLAN (STP)
Source:http://www.fundsindia.com
STP is a variant of SIP. STP is essentially transferring investment from one asset or
asset type into another asset or asset type. The transfer happens gradually over a
period.
? STP and its importance
Systematic Transfer Plan is of two types; fixed STP, and capital appreciation STP. A
fixed STP is where investors take out a fixed sum from one investment to another. A
capital appreciation STP is where investors take the profit part out of one investment
and invest in the other.
Example of STP
Suppose you have invested 5 lakh in debt funds because you thought market is
trading at close to peak. The PE ratio of the market is 25 and hence you think that fall
is imminent. Hence you invested your money in debt fund. Now assume that your
MUTUAL FUND
52
prophecy was right and the market indeed fell to a level where you can make entry to
equities. However, there are overall weak sentiments which may push market further
down. What is the best strategy in this case?
You can take out 5 lakh out of debt fund and invest in equity oriented mutual fund.
The risk is that if the market goes further down, your fund value will also fall. This is a
risky strategy. Moreover, if the weak sentiments prolong for some time, you will lose
on the opportunity cost because your money is stuck with an investment which has
gone down in value.
There is other way which can really minimize the risk. The way is called STP. In this
case, you can withdraw a fixed amount from your debt fund investment and invest in
equity oriented fund. This can go on for several months depending upon your choice.
For example, if you want to continue STP for 3 years, you can direct your fund to do
this and the fund will withdraw money automatically from your debt fund and put into
equity oriented fund every month. What this strategy achieves is that it essentially
acts as a defense against any adverse movement of the market.
You can see that even when the market is losing value at the rate of 1% per month,
the STP plan has worked as a defense against the fall. Even after 12 successive falls,
the return after 12 months is 9.56% which is quite good. Had this been done in a lump
MUTUAL FUND
53
sum amount of 5 lakh, here is the payoff. The investor has actually lost 11.36% over
the same period. This is the advantage of STP.
The fundamental idea remains the same. The only difference in capital appreciation
STP is that only the profit part of the investment is transferred in the other asset. For
example, the investor has invested 5 lakh in debt fund. In a month, suppose the
return is 1%. This means that his investment has grown by Rs 5000. Investor will take
out this money and invest in equity fund. This strategy is good for conservative
investors who want to protect their principal and take risk with the returns.
? Important points to keep in mind
STP is a possibly the second best investment strategy after SIP. It is one of the best
risk mitigation strategies of the market. Investors though should keep the following
points in mind.
First, STP is a risk mitigation strategy. It will protect you from any adverse loss to a
large extent. Investors should be clear about this. All risk mitigation strategies cap
the loss but also reduce returns when market is bullish.
MUTUAL FUND
54
Second, investors need to follow it with discipline. STP, just like SIP, benefits only
when followed properly. Breaking STP because of short term market movement or
interest rate movement will only harm your investment in long term.
Finally, you need to understand the assets and the stages they are in. For example, it
would be unwise to transfer money from debt to equity when the market is closer to
peak value. Similarly, it would be counter-productive to transfer money from equity
to debt when the market is close to bottom.
http://typicalpinaylikes.blogspot.in/
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CHAPTER 4
INVESTEMNT PROCEDURE IN MUTUAL FUNDS
4.1 Offer document:
An offer document is issued when the amcs make New Fund Offer (NFO). It?s
advisable to every investor to ask for the offer document and read it before investing.
An offer document consists of the following:
Standard Offer Document for Mutual Funds (SEBI Format)
? Summary Information
? Glossary of Defined Terms
? Risk Disclosures
? Legal and Regulatory Compliance
? Expenses
? Condensed Financial Information of Schemes
? Constitution of the Mutual Fund
? Investment Objectives and Policies
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? Management of the Fund
? Offer Related Information.
4.2 Key Information Memorandum:
A key information memorandum, popularly known as KIM, is attached along with the
mutual fund form. And thus every investor gets to read it. Its contents are:
1 Name of the fund.
2. Investment objective
3. Asset allocation pattern of the scheme.
4. Risk profile of the scheme
5. Plans & options
6. Minimum application amount/ no. Of units
7. Benchmark index
8. Dividend policy
9. Name of the fund manager(s)
10. Expenses of the scheme: load structure, recurring expenses
11. Performance of the scheme (scheme return v/s. Benchmark return)
12. Year- wise return for the last 5 financial years
MUTUAL FUND
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4.3 STEPS IN MUTUAL FUND INVESTMENT:
Steps One - Identify your investment needs.
Your financial goals will vary, based on your age, lifestyle, financial independence,
family commitments, level of income and expenses among many other factors.
Therefore, the first step is to assess your needs. Begin by asking yourself these
questions:
1. What are my investment objectives and needs?
Probable Answers: I need regular income or need to buy a home or finance a
wedding or educate my children or a combination of all these needs.
2. How much risk am I willing to take?
7. REVIEW AND STRATEGY.
6. COMMENCEMENT OF INVESTMENT
5. COST AND TAX IMPLICATIONS
4. REGULAR INVESTMENT
3. SELECTION OF MIX
2. CHOOSING THE APPROPRIATE FUND
1.IDENTIFICATION OF NEEDS
MUTUAL FUND
58
Probable Answers: I can only take a minimum amount of risk or I am willing to accept
the fact that my investment value may fluctuate or that there may be a short term loss
in order to achieve a long term potential gain.
3. What are my cash flow requirements?
Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a
specific need after a certain period or I don?t require a current cash flow but I want to
build my assets for the future.
By going through such an exercise, you will know what you want out of your
investment and can set the foundation for a sound Mutual Fund Investment strategy.
Step Two - Choose the right Mutual Fund.
Once you have a clear strategy in mind, you now have to choose which Mutual Fund
and scheme you want to invest in. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of other
schemes managed by the same Fund Manager. Some factors to evaluate before
choosing a particular Mutual Fund are:
? The track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
? How well the Mutual Fund is organized to provide efficient, prompt and
personalized service.
? Degree of transparency as reflected in frequency and quality of their
communications.
Step Three - Select the ideal mix of Schemes.
Investing in just one Mutual Fund scheme may not meet all your investment needs.
You may consider investing in a combination of schemes to achieve your specific
goals.
MUTUAL FUND
59
The following charts could prove useful in selecting a combination of schemes that
satisfy your needs.
MUTUAL FUND
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MUTUAL FUND
61
MUTUAL FUND
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Step four - Invest regularly
For most of us, the approach that works best is to invest a fixed amount at specific
intervals, say every month. By investing a fixed sum each month, you get fewer units when
the price is high and more units when the price is low, thus Bringing down your average
cost per unit. This is called rupee cost averaging and is a disciplined investment strategy
followed by investors all over the world. With many open-ended schemes offering
systematic investment plans, this regular investing habit is made easy for you.
Step Five - Keep your taxes in mind
As per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt
from Income Tax in the hands of investor. However, in case of debt schemes
Dividend/Income Distribution is subject to Dividend Distribution Tax. Further, there are
other benefits available for investment in Mutual Funds under the provisions of the
prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant
for specific advice to achieve maximum tax efficiency by investing in mutual funds.
Step six - Start early
It is desirable to start investing early and stick to a regular investment plan. If you start
now, you will make more than if you wait and invest later. The power of compounding lets
you earn income on income and your money multiplies at a compounded rate of return.
Step Seven - The final step
All you need to do now is to get in touch with a Mutual Fund or your advisor and start
investing. Reap the rewards in the years to come. Mutual Funds are suitable for every
kind of investor whether starting a career or retiring, conservative or risk taking, growth
oriented or income seeking.
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63
4.4 CRITERIA FOR SELECTING MUTUAL FUND:
http://www.thewealthwisher.com
MUTUAL FUND
64
1. Financial profile
Mutual funds offer a whole bouquet of products such as aggressive equity funds,
index funds, gilt funds, income funds, liquid funds, gold funds, thematic funds, etc. -
the list is quite exhaustive. But beware! You don?t have to buy all these types of funds.
As you would observe, all funds have a specific objective, a specific risk profile, a
specific liquidity profile and a specific time profile. Hence, it is not possible that all
funds will match your needs, risk-appetite, investment horizon etc. Therefore, you
must first decide on the types of funds that would suit your needs. Only then should
you start selecting the best funds within those categories.
2. Past performance
CRITERIA FOR
SELECTING
OF MUTUAL
FUND
1. FINANCIAL
PROFILE
2. PAST
PERFORMANCE
3. PORTFOLIO
CHARACTERIST
ICS
4.IS THE AMU
APPROPRIATE?
5. FUND
HOUSE/FUND
MANAGER
6. RISK
PARAMETER
7. ANNUAL
RECURRING
EXPENSES
8. ENTRY/ EXIT
LOAD
9. NAV IS
MEANINGLESS
NUMBER
10. DIVIDEND
OR GROWTH
MUTUAL FUND
65
The past performance of the fund is one of the most important criteria in fund
selection. It is true that a fund?s good performance in the past does not guarantee that
in future too it will do well. However, history also shows that funds with consistently
good performance - good here means in the top quartile and not necessarily the top
performer - can be expected to be among the top in their category in future too.
Similarly, a fund with poor performance will find it extremely difficult to move to the
top quartile and remain there. Therefore, don?t chase the top performers of the year.
Instead, focus on funds that have delivered good returns consistently.
3. Portfolio characteristics
Characteristics of a portfolio will also play an important role in fund selection. For
example, the percentage of top 5 or 10 holding will determine how diversified or
concentrated a particular fund is. If about more than 60-70% of the corpus is invested
in just 5 shares or bonds, the portfolio would be comparatively riskier than a fund with
just 20-30% corpus in 5 scripts. Typically, an aggressive equity fund would have higher
turnover ratio. Comparatively speaking this is perfectly fine. But an index fund with a
higher turnover ratio vis-vis its peers could be a cause for concern.
4. Is the AUM appropriate?
There is, of course, no mathematical rule that would suggest the best size for a
given mutual fund. In other words, there is no guarantee that if a fund?s assets under
management (AUM) are less (or more) than a specific level, only then will it perform
well. Having said that, Aum could be an important factor in the fund?s overall
performance! In all probability, a very small fund will not be able to diversify itself
reasonable well. It will also find it difficult to make the best of the investment
opportunities available. As such, the performance could be very erratic, one year they
would be the best performers and the next the worst. It would be preferable to avoid
them. A fund too large could also be an issue. Since a fund cannot invest more than
10% of its corpus in one company, a very large fund would invariably have too many
MUTUAL FUND
66
companies in its portfolio. This could affect its overall performance.
5. The fund house/fund manager
Investment is both a science and an art. Good research teams i.e. the science part
of investing, are necessary in identifying the opportunities available in the market.
However, if you give the same set of scrips to two different people, they could deliver
vastly different returns. This means that apart from knowing what the good stocks are,
you need something more. This something more is the art of investing. When to
buy/sell/hold; how a fund manager reacts to market volatilities; how s/he responds to
the pressure of performance; and such other psychological aspects have a very
important role to play. As such, you have to consider the fund manager?s past
performance before investing. That apart you should also evaluate the particular fund
house - how many funds does it offer, how many of these are good performers, how
much Aum does it manage, what are the service standards, etc.
6. Risk parameters
Two funds may deliver the same returns. But the better of the two would be the one
that does so: - by taking lesser risk (i.e. It has a higher sharp ratio) - more
consistently (i.e. It has lower standard deviation) - with less volatility than the market
(i.e. It has a lower beta) therefore, after you have short-listed the funds based on the
performance, portfolio, fund house etc., check the risk parameters and opt for those
that tend to deliver good returns despite taking lesser risks.
7. Annual recurring expenses
The expenses that will eat into your returns in an mf would typically include
management fees, custodial fees, marketing & selling expenses, trustee fees, audit
fees etc. But before you get worried, you will be glad to know that the association of
mutual funds in India (amfi) and sebi have simplified the issue of expenses. They have
MUTUAL FUND
67
specified the maximum limit that a fund can charge as overall expenses by whatever
name it may be called. For example, the maximum expense ratio for an equity fund is
fixed at 2.50%, for debt funds at 2.25%, for index funds at 1.5%, for fund of funds at
0.75%, etc. It goes without saying that lower the expenses the better it is. But beware!
Don?t give too much weightage to the expenses. Other parameters, discussed above,
are far more important than expenses that anyway are quite reasonable.
8. Entry / Exit Loads:
As per the recent regulation, sebi has mandated that with effect from august 1,
2009 there will be no entry loads for all mutual fund schemes. Exit load: this is the load
payable when you sell of your mf units. The exit load is generally payable only if you fail
to satisfy certain pre-specified conditions. Therefore, in most cases you may not find a
compulsory exit load, but what is termed as contingent deferred sales charge (cdsc)
and payable:
? if you sell a debt fund before 6 months or some such period
? If you sell equity fund before 1 year or some such period a lower load is better.
However, since the load is nominal, sometimes even paying higher loads may be
alright if the fund?s performance and other factors are very good.
9. NAV Is A Meaningless Number
The NAV of the fund has no impact on the returns it will deliver in the future. Let?s
assume you plan to invest in an index fund and you have two choices - fund a is a new
fund with an NAV of RS. 10, which will mimic the nifty and a fund b, which is an existing
nifty index fund with an NAV of RS. 200. Suppose you invest RS. 10,000 in fund A and
Rs. 10,000 in fund B. You will get 1000 units of fund a and 20 units of fund b. After 1
year, the nifty has appreciated by 25%, which means that both funds would have also
appreciated by 25%, as they are a replica of the nifty. So after 1 year, the nav of fund a
would become Rs. 12.50 and that of fund b rs. 250. But what is the value of your two
investments? Fund a would now be Rs. 12,500 (1000 units * rs. 12.50/unit) and fund b
MUTUAL FUND
68
also would be rs. 12,500 (20 units * Rs. 250/unit). The bottom line is that don?t bother
about the nav of a mutual fund, as you might do for the price of a share.
10. Dividend or growth?
Like nav, it is immaterial whether you choose the dividend option or growth option
as far as the performance of the fund is concerned. In fact, even though you have
different options, the underlying fund is the same. As such, the basic returns from all
the three options i.e. Growth or dividend payout or dividend reinvestment will be the
same. However, the final returns in your hand could be different due to taxation. Tax
rates are different, depending on whether you get this return in the form of dividend or
capital gains. Therefore, the post-tax returns in your hand may vary depending on your
tax profile. As such, you have to choose the option from the point of view of where your
tax will be minimal and not from the point of view of the returns. To keep things simple,
just remember to opt for growth option if your investment horizon is more than 1 year
and dividend option for less than 1 year (assuming you are in the highest tax bracket).
MUTUAL FUND
69
CHAPTER 5
RIGHTS AND DUTIES OF INVESTORS
5.1 WHO IS AN INVESTOR?
Source:http://www.ic.or.th
Every investor, given his/her financial position and personal disposition, has a certain
inclination to take risk. The hypothesis is that by taking an incremental risk, it would be
possible for the investor to earn an incremental return. Mutual fund is a solution for
investors who lack the time, the inclination or the skills to actively manage their
investment risk in individual securities. They delegate this role to the mutual fund,
while retaining the right and the obligation to monitor their investments in the scheme.
In the absence of a mutual fund option, the money of such “passive” investors would lie
either in bank deposits or other „safe? investment options, thus depriving them of the
possibility of earning a better return. Investing through a mutual fund would make
economic sense for an investor if his/her investment, over medium to long term,
fetches a return that is higher than what would otherwise have earned by investing
directly
MUTUAL FUND
70
5.2 WHO CAN INVEST IN MUTUAL FUNDS?
I. RESIDENTS:
Adult individuals holding singly or jointly
Key points:
a) Minors can invest through parents or guardians.
b) Maximum joint owners can be 3.
? Hindu undivided family through their head, Karta.
ELIGIBLE
BUYER
RESIDENTS
FII'S
MFA'S
OVERSEAS
FINANCIAL
ORGANISATION
NRI'S/OCB'S
MUTUAL FUND
71
? Companies/corporate bodies/banks/non-banking financial institutes / aop?s/boi?s /
religious trusts/charitable trust/societies registered under societies registration
act, 1960.
Key points:
All these entities can purchase units of mf subject to permission from constituent
document.
? Mutual funds registered under sebi.
? Army / air force / navy or other paramilitary units and bodies created by such
institution besides other institutions.
II. FII?S
Foreign institution investors registered with sebi.
III. MFA?S
Multilateral funding agencies (mfas)/ bodies corporate registered outside India with
permission of government of India / reserve bank of India.
IV. OVERSEAS FINANCIAL ORGANISATION:
Overseas financial organization which have entered into arrangement for investment
in India.
Key points:
Mutual funds should be registered with sebi and investment arrangement should be
approved by central government.
V. NRI?S/OCB?S:
NRI?S /OCB?S /FII?S and person of Indian origin residing abroad on a full repatriation
basis/non-repatriation basis.
MUTUAL FUND
72
5.3 RIGHTS OF INVESTORS IN RESPECT OF SERVICE
STANDARD
Investor is entitled to following rights as per regulation of SEBI:
? Investors are entitled to receive dividends declared in a scheme within 30 days
? Redemption proceeds have to be sent to investors within 10 days
? If an investor fails to claim the dividend or redemption proceeds he
? Has the rights to claim it up to a period of 3 years from the due date at the then
prevailing NAV.
? Mutual funds have to allot units within 30 days of the IPO and also
? Open the scheme for redemption, if it is an open -ended scheme
? Mutual funds have to publish their half yearly results in at least one
? National daily and publish their entire portfolios, at least once in 6 months. Such
disclosure should be done within 30 days from 6 monthly account closing dates of
the fund.
? Trustees will have to ensure that any information having a material impact on the
unit holder?s investments should be made public by the mutual fund.
? If 75% of the unit holders so decide, that the scheme can be wound
? Up then the meeting of unit holders can be called and appointment of the AMC of
the mutual fund can be terminated
? If there is any change in the fundamental attributes of the scheme, the unit holders
have to be notified through a letter.
? They also have a right to repurchase at NAV without any load, before such change
is affected.
? Unit holders have the right to inspect certain documents
5.4 LIMITATIONS OF INVESTOR RIGHTS
Investors cannot lodge complaints against the Trustees (with the Registrar of Public
Trusts) or the AMC with the Company Law Board (CLB). Investors cannot lodge
MUTUAL FUND
73
complaints with SEBI for noncompliance. Investors cannot be compensated if the
performance of the fund is below expectations.
5.5 DISTRIBUTION CHANNELS IN THE MUTUAL FUND
INDUSTRY:
The role of the distribution channels remains critical as it helps stave off
competition by maintaining relationship, providing advisory services and customizing
need based solution. The success of any mutual funds depends upon appropriate
distribution channels 47. In India, amcs work with five distinct distribution channels
those are direct, banking, retail, corporate and individual financial adviser etc. This is
depicted in the Figure
Multi-Channel Distribution
Source: ICI Investment Company Institute
MUTUAL FUND
74
The Direct Channels
http://www.nrsec.com/
In the direct channel, customers invest in the schemes directly through amcs. In most
cases, the company does not provide any investment advice, so these investors have
to carry out their own research and select schemes themselves. The fund companies
provide several tools to investors who invest through this channel. This includes
monthly account statement, processing of transaction, and maintenance of records.
In this channel most investors can invest through websites, or receive information
through telephonic services provided by the company. About 10-20% of the total sales
of an amcs come through this direct channel.
The Banking Channel
http://www.imgneed.com/
MUTUAL FUND
75
The large customer bases of banks, in developed countries, have played an important
role in the selling mfs. In the recent years, this channel has also opened up in India.
Banks operating in India, including Public sector, private and foreign banks have
established tie-up with various fund companies for providing distribution of various
mutual funds schemes.
The banking channel is likely to develop as the most vital Distribution channel for fund
companies as there are several reasons for the same. Customers remain invested in
banks for long periods of time and therefore banks maintain a relationship of trust with
their customers.
Customers rely on advice provided to them by bankers as they are always on the
lookout for better investment avenues. Bankers are guiding customers about various
funds. An additional advantage that banks provide is that the concerned customer
becomes a permanent contact of the banks and therefore can be reached during
launch of (new fund offer) Nfo or new schemes any time in the future. As per the survey
conducted by halder (2008), 14.7% percent of the people were informed about various
funds through their banks.
The Retail Channel
http://www.dreamstime.com
MUTUAL FUND
76
A customer can deal directly with a sub broker belonging to a distribution company,
instead of taking trouble of dealing with several agents. Distribution companies sell
the schemes of several fund houses simultaneously and brokerage is paid by the amcs
whose funds they sell.
The retail channel offers the benefits of specialist knowledge and established client
contact and therefore private fund houses generally prefer this channel. Some of the
major players in India in this channel are Karvey, Bajaj capital, and integrated
enterprise etc50 .the key factor for this channel to sell a company?s fund is the
brokerage earned through selling mutual fund products. The banking and retail
channel generally contribute to about 50-70% of the total asset under management
(Aum)
The corporate channel
http://www.flytravelchannel.com/
The corporate channel includes a variety of institutions that invest in shares on the
company’s name. These are businesses, trust, and even state and local governments.
For institutional investors, fund managers prefer to create special funds and share
classes. Corporate can either invest directly in mutual funds, or through an
intermediary such as a distribution house or a bank. Corporate have varying degree of
awareness about mutual fund products and are well versed with the performance and
composition of various funds. In order to provide information to such clients, fund
MUTUAL FUND
77
companies usually organize presentation for these companies or set-up meetings with
the finance manager.
Individual financial advisors (ifa) or agents
http://wallpaper222.com
Relationship plays an important role while selling mutual fund products. An agent is an
essential channel between investors and the mutual fund products. The ifa channel is
the oldest channel for distribution and was widely employed at the time when uti
monopoly was in the market. An agent is who basically acts as an interface between
the customer and the fund house. There is a unique system in place in India, wherein
several sub-brokers are working under one main broker.
The huge network of sub-brokers, thus ensure larger market penetration and
geographic coverage. As per amfi, over one-lakh agents are registered to sell mutual
funds products to various categories of investors.
These agents advise the customers on the kind of product that caters to the need of
the client.
MUTUAL FUND
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5.6 RISK INVOLVED IN MUTUAL FUND:
Mutual funds investment is subject to market risks. As mutual funds investment is
made primarily in the capital market they are subject to various kinds of risks. The
following are some of the risks associated with the investment in mutual funds.
1. Market Risk
The net asset values of mutual funds may rise and fall dramatically which may be due
to prevailing market conditions. This is known as Market risk.
2. Credit Risk
The debt servicing ability (may it be interest payments or repayment of principal) of a
company through its cash flows determines the Credit risk faced by the company. This
credit risk is measured by independent rating agencies like CRISIL who rate
companies and their paper. An “AAA” rating is considered the safest whereas a “D”
rating is considered Poor credit quality.
MUTUAL FUND
79
3. Inflation Risk
Inflation is the loss of purchasing power over time. Many times people make
conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment.
This happens when inflation grows faster than the return on investment.
4. Interest Rate Risk
In a free market economy interest rates are difficult if not impossible to predict.
Changes in interest rates affect the prices of bonds as well as equities. If interest rates
rises the prices of bonds fall and vice versa.
Equity might be negatively affected in a rising interest rate environment.
5. Political/ Government Policy Risk
Changes in government policy and political decision can change the investment
environment. They can create a positive environment for investment or vice versa.
Thus the growth and development of mutual funds depends to a large extent on the
policy of the government.
6. Liquidity Risk
Liquidity risk arises when it becomes difficult to sell the securities that one has
purchased. Liquidity Risk can be partly mitigated by diversification, staggering of
maturities as well as internal risk controls that lean towards purchase of liquid
securities.
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CHAPTER 6
MEASURING RETURNS ON MUTUAL FUND AND NAV
6.1 NET ASSET VALUE (NAV):
Since each owner is a part owner of a mutual fund, it is necessary to establish the
value of his part. In other words, each share or unit that an investor holds needs to be
assigned a value. Since the units held by investor evidence the ownership of the fund?s
assets, the value of the total assets of the fund when divided by the total number of
units issued by the mutual fund gives us the value of one unit. This is generally called
the Net Asset Value (NAV) of one unit or one share. The value of an investor?s part
ownership is thus determined by the NAV of the number of units held.
Calculation of NAV:
Let us see an example. If the value of a fund?s assets stands at Rs. 100 and it has 10
investors who have bought 10 units each, the total numbers of units issued are 100,
and the value of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3
units, the value of his ownership of the fund will be Rs. 30.00(1000/100*3). Note that
the value of the fund?s investments will keep fluctuating with the market-price
movements, causing the Net Asset Value also to fluctuate. For example, if the value of
our fund?s asset increased from Rs. 1000 to 1200, the value of our investors holding of
3 units will now be (1200/100*3) Rs. 36. The investment value can go up or down,
depending on the markets value of the fund?s assets.
6.2 Costs associated:
Expenses:
AMCs charge an annual fee, or expense ratio that covers administrative expenses,
salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the
AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense
ratio is typically to the size of the funds under management and not to the returns
MUTUAL FUND
81
earned. Normally, the costs of running a fund grow slower than the growth in the fund
size - so, the more assets in the fund, the lower should be its expense ratio
Loads:
Entry Load/Front-End Load (0-2.25%) -it?s the commission charged at the time of
buying the fund to cover the cost of selling, processing etc.
Exit Load/Back- End Load (0.25-2.25%)-it is the commission or charged paid when an
investor exits from a mutual fund; it is imposed to discourage withdrawals. It may
reduce to zero with increase in holding period.
6.3 Measuring and evaluating mutual funds? performance:
Every investor investing in the mutual funds is driven by the motto of either wealth
creation or wealth increment or both. Therefore it?s very necessary to continuously
evaluate the funds? performance with the help of factsheets and newsletters, websites,
newspapers and professional advisors like SBI mutual fund services. If the investors
ignore the evaluation of funds? performance then he can lose hold of it any time. In this
ever-changing industry, he can face any of the following problems:
1. Variation in the funds? performance due to change in its management/ objective.
2. The funds? performance can slip in comparison to similar funds.
3. There may be an increase in the various costs associated with the fund.
4. Beta, a technical measure of the risk associated may also surge.
5. The funds? ratings may go down in the various lists published by independent rating
agencies.
6. It can merge into another fund or could be acquired by another fund house.
6.4 Performance measures:
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82
Equity funds: the performance of equity funds can be measured on the basis of: NAV
Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and
Distributions, Computing Total Return (Per Share Income and Expenses, Per Share
Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover
Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.
Debt fund: likewise the performance of debt funds can be measured on the basis of:
Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations,
NPAs, besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be measured on
the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.
6.5 PORTFOLIO ANALYSIS TOOLS:
With the increasing number of mutual fund schemes, it becomes very difficult for an
investor to choose the type of funds for investment. By using some of the portfolio
analysis tools, he can become more equipped to make a well informed choice. There
are many financial tools to analyze mutual funds. Each has their unique strengths and
limitations as well. Therefore, one needs to use a combination of these tools to make a
thorough analysis of the funds.
The present market has become very volatile and buoyant, so it is getting difficult for
the investors to take right investing decision. So the easiest available option for
investors is to choose the best performing funds in terms of “returns” which have
yielded maximum returns.
But if we look deeply to it, we can find that the returns are important but it is also
important to look at the „quality? of the returns. „Quality? determines how much risk a
fund is taking to generate those returns. One can make a judgment on the quality of a
fund from various ratios such as standard deviation, SHARPE ratio, beta, TREYNOR
measure, R-squared, alpha, portfolio turnover ratio, total expense ratio etc.
MUTUAL FUND
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Now I have compared two funds of SBI on the basis of standard deviation, beta, R-
squared, SHARPE ratio, portfolio turnover ratio and total expense ratio. So before
going into details, let?s have a look at these ratios:
? Standard deviation:
In simple terms standard deviation is one of the commonly used statistical
parameter to measure risk, which determines the volatility of a fund. Deviation is
defined as any variation from a mean value (upward & downward). Since the markets
are volatile, the returns fluctuate every day. High standard deviation of a fund implies
high volatility and a low standard deviation implies low volatility.
? Beta analysis:
Beta is used to measure the risk. It basically indicates the level of volatility
associated with the fund as compared to the market. In case of funds, as compared
the market. In case of funds, beta would indicate the volatility against the benchmark
index. It is used as a short term decision making tool. A beta that is greater than 1
means that the fund is more volatile than the benchmark index, while a beta of less
than 1 means that the fund is more volatile than the benchmark index. A fund with a
beta very close to 1 means the fund?s performance closely matches the index or
benchmark.
The success of beta is heavily dependent on the correlation between correlation
between a fund and its benchmark. Thus, if the fund?s portfolio doesn?t have a relevant
benchmark index then a beta would be grossly inappropriate. For example if we are
considering a banking fund, we should look at the beta against a bank index.
? R-Squared (R2):
R squared is the square of „R? (i.e.; coefficient of correlation). It describes the level
of association between the fund?s market volatility and market risk. The value of R-
squared ranges from 0 to 1. A high R- squared (more than 0.80) indicates that beta can
be used as a reliable measure to analyze the performance of a fund. Beta should be
MUTUAL FUND
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ignored when the r-squared is low as it indicates that the fund performance is affected
by factors other than the markets.
For example:
Case 1 Case 2
R2 0.65 0.88
B 1.2 0.9
In the above table R2 is less than 0.80 in case1, implies that it would be wrong to
mention that the fund is aggressive on account of high beta. In case 2, the r- squared is
more than 0.85 and beta value is 0.9. It means that this fund is less aggressive than the
market.
? Sharpe Ratio:
Sharpe ratio is a risk to reward ratio, which helps in comparing the returns given by
a fund with the risk that the fund has taken. A fund with a higher Sharpe ratio means
that these returns have been generated taking lesser risk. In other words, the fund is
less volatile and yet generating good returns. Thus, given similar returns, the fund with
a higher Sharpe ratio offers a better avenue for investing. The ratio is calculated as:
Sharpe ratio = (Average return- risk free rate) / standard deviation
6.6 PORTFOLIO TURNOVER RATIO:
Portfolio turnover is a measure of a fund's trading activity and is calculated by
dividing the lesser of purchases or sales (excluding securities with maturities of less
than one year) by the average monthly net assets of the fund. Turnover is simply a
measure of the percentage of portfolio value that has been transacted, not an
indication of the percentage of a fund's holdings that have been changed. Portfolio
turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%,
then, means the fund has bought and sold all its positions within the last year.
Turnover is important when investing in any mutual fund, since the amount of turnover
affects the fees and costs within the mutual fund.
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6.7 TOTAL EXPENSES RATIO:
A measure of the total costs associated with managing and operating an
investment fund such as a mutual fund. These costs consist primarily of
management fees and additional expenses such as trading fees, legal fees, auditor
fees and other operational expenses. The total cost of the fund is divided by the fund's
total assets to arrive at a percentage amount, which represents the TER:
Total expense ratio = (Total fund Costs/ Total fund Assets)
Performance report and portfolio analysis of magnum equity
fund and magnum multiplier plus against their benchmark
BSE100:
YTD 1M 3M 6M 1Y 3Y 5Y
Magnum
equity
fund
-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%
Magnum
multiplier
plus
-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%
Benchma
rk
BSE100
-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%
Now in the above table, we have two funds from SBI i.e.; magnum equity fund and
magnum multiplier plus following the same benchmark i.e.; BSE 100. In this case, we
have compared their returns during various time periods. We have their returns YTD,
MUTUAL FUND
86
during last 1 month, 3month, 6 months, 1 year, 3 year and 5 year. If we look at a long
term perspective, then magnum multiplier plus totally outperformed both magnum
equity fund as well as BSE 100. In case of 5 year returns, neither the benchmark nor
the magnum equity fund stands anywhere near multiplier plus. It is greater than equity
fund by 10.35% and from benchmark by 15.07%. But in case of 3 year returns, surely
multiplier plus gave the maximum return but it fell sharply in comparison to its 5 yr.
return. A 45.28% return scored over equity fund just by a margin of 0.21% and
benchmark by a mere 4.28%. Now moving down to 1 yr. return, we can clearly see that
BSE 100 emerges as a true winner. The benchmark gave a return of 30.71% but both
the funds failed to match it even.
But the ultimate surprise comes when we look at the data of last 6 months. Here not
only the fund managers failed to beat or match the market. Rather they also performed
as laggards, giving negative returns. When the BSE 100 gave returns of 11.47%, these
funds were trailing by 29.47% and 26.65% which is a huge figure. In the last 3 months
too, both the funds were behind bse100 but all the three gave negative returns and the
difference between them and benchmark was narrowed down. Again, during last 1
month return of all three got positive but the funds always remained behind the
benchmark. The bse 100 outscored multiplier plus and equity fund by 6.17% and 2.72%
respectively. Similarly, the YTD return of all 3 is negative even then the benchmark is
at a better position than the funds.
From the following analysis we can infer that in spite of all the steps taken; it is not
always possible for the fund managers to always beat the market. Also, the past
performance just tells the background and history of the fund, by looking at it we
cannot interpret that the fund will perform in the same way in the future too.
MUTUAL FUND
87
The data can be presented in the form of a graph as follow:
Quantitative data:
Ratios Magnum equity fund Magnum multiplier plus
Standard deviation 26.00% 26.90%
Beta 0.96% 0.95%
r-squared
0.84%
Sharpe ratio 1.46% 1.42%
Portfolio turnover 31% 25%
Total expense ratio 2.5% 2.5%
6.8 CONCEPT OF BENCHMARKING FOR PERFORMANCE EVALUATION:
Every fund sets its benchmark according to its investment objective. The fund?s
performance is measured in comparison with the benchmark. If the fund generates a
greater return than the benchmark then it is said that the fund has outperformed
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
magnum equity
magnum multiplier
bse 100
MUTUAL FUND
88
benchmark , if it is equal to benchmark then the correlation between them is exactly
1. And if in case the return is lower than the benchmark then the fund is said to be
underperformed.
Some of the benchmarks are:
1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU,
BSE 500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total
Return Index JPM T-bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments? Interest Rates as Benchmarks,
JPM T- Bill Index
To measure the fund?s performance, the comparisons are usually done with:
i) With a market index.
ii) Funds from the same peer group.
iii) Other similar products in which investors invest their funds.
Analysis:
? We can see that the standard deviation of both the funds are more or less same
even then the S.D of multiplier plus is greater than that of equity fund by 0.90%.
Generally higher the SD higher is the risk and vice-versa. Therefore, magnum
multiplier plus is riskier than magnum equity fund.
? The beta of magnum equity fund is higher than that of magnum multiplier plus.
Therefore, equity fund is more volatile than multiplier plus. But beta of both the
funds is smaller than 1 that means both the funds are less volatile than the market
index. As r- squared values are more than 0.80 in both the cases, we can rely on the
usage of beta for the analysis of these funds.
? A look at the Sharpe ratio indicates that magnum equity has outperformed
multiplier plus. A higher Sharpe ratio of equity fund depicts that these return have
MUTUAL FUND
89
been generated taking lesser risk than the multiplier plus. It is less volatile than the
other.
? R-squared of both the funds are greater than 0.80. It indicates that beta can be
used as a reliable measure to analyze the performance of these funds. Magnum
equity fund?s R- squared is higher. So its beta is more reliable.
? Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It
mean the manager is frequently churning the portfolio of equity fund than of
multiplier plus. It may lead to an increase in expenses but could be ignored if could
generate higher return by changing the composition of portfolio.
? Total expense ratio of both the funds are same i.e.; 2.5%
The form of a chart:
sd beta r-squared sharpe portfolio expenses
equity fund 26.00% 0.96% 0.93% 1.46% 31% 2.50%
multiplier plus 26.90% 0.95% 0.84% 1.42% 25% 2.50%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
A
x
i
s
T
i
t
l
e
Chart Title
MUTUAL FUND
90
CHAPTER 7
ROLE OF SEBI AND AMFI IN MUTUAL FUND INDUSTRY
Source:http://www.1sourceohs.com
7.1 ROLE OF AMFI IN MUTUAL FUND INDUSTRY
The Association of Mutual Funds in India
(AMFI) is dedicated to developing the Indian Mutual Fund Industry on professional,
healthy and ethical lines and to enhance and maintain standards in all areas with a
view to protecting and promoting the interests of mutual funds and their unit holders.
AMFI, the association of SEBI registered mutual funds in India of all the registered
Asset Management Companies, was incorporated on August 22, 1995, as a non-profit
organization. As of now, all the 44 Asset Management Companies that are registered
with SEBI are its members.
Objectives:
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91
? To define and maintain high professional and ethical standards in all areas of
operation of mutual fund industry.
? To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and asset
management including agencies connected or involved in the field of capital markets
and financial services.
? To interact with the Securities and Exchange Board of India (SEBI) and to represent
to SEBI on all matters concerning the mutual fund industry.
? To represent to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.
? To undertake nationwide investor awareness programme so as to promote proper
understanding of the concept and working of mutual funds.
? To disseminate information on Mutual Fund Industry and to undertake studies and
research directly and/or in association with other bodies.
? To take regulate conduct of distributors including disciplinary actions (cancellation
of ARN) for violations of Code of Conduct.
? To protect the interest of investors/unit holders.
7.2 AMFI CODE OF ETHICS:
Source:http://reportingalliance.org
One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the
investors? interest by defining and maintaining high ethical and professional standards
MUTUAL FUND
92
in the mutual fund industry. In pursuance of this objective, AMFI had constituted a
Committee under the Chairmanship of Shri A. P. Pradhan with Shri S. V. Joshi, Shri C.
G. Parekh and Shri M. Laxman Kumar as members. This Committee, working in close
co-operation with Price Waterhouse–LLP under the FIRE Project of USAID, has drafted
the Code, which has been approved and recommended by the Board of AMFI for
implementation by its members. I take opportunity to thank all of them for their efforts.
The AMFI Code of Ethics, “The ACE” for short, sets out the standards of good
practices to be followed by the Asset Management Companies in their operations and
in their dealings with investors, intermediaries and the public. SEBI (Mutual Funds)
Regulation 1996 requires all Asset Management Companies and Trustees to abide by
the Code of conduct as specified in the Fifth Schedule to the Regulation. The AMFI
Code has been drawn up to supplement that schedule, to encourage standards higher
than those prescribed by the Regulations for the benefit of investors in the mutual fund
industry.
7.3 ROLE OF SEBI IN MUTUAL FUND:
An index fund scheme? means a mutual fund scheme that invests in securities in the
same proportion as an index of securities;” A mutual fund may lend and borrow
securities in accordance with the framework relating to short selling and securities
lending and borrowing specified by the Board. “A mutual fund may enter into short
selling transactions on a recognized stock exchange, subject to the framework
relating to short selling and securities lending and borrowing specified by the Board.”
“Provided that in case of an index 13 fund scheme, the investment and advisory fees
shall not exceed three fourths of one percent (0.75%) of the weekly average net
assets.??
Every mutual fund shall buy and sell securities on the basis of deliveries and shall in
all cases of purchases, take delivery of relevant securities and in all cases of sale,
deliver the securities: Provided that a mutual fund may engage in short selling of
securities in accordance with the framework relating to short selling and securities
lending and borrowing specified by the Board: Provided further that a mutual fund may
MUTUAL FUND
93
enter into derivatives transactions in a recognized stock exchange, subject to the
framework specified by the Board.”
Source:http://www.canstockphoto.com
MUTUAL FUND
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CHAPTER 8
CASE STUDY
Franklin Templeton Investment India
VISION
To be the premier global investment management organization by offering high quality
investment solutions, providing outstanding service and attracting, motivating and
retaining talented individuals.
MUTUAL FUND
95
INTRODUCTION
Franklin Templeton's association with India dates back to more than a decade as an
investor. As part of the group's major thrust on investing in markets around the world,
the India office was set up in 1996 as Templeton Asset Management India Pvt. Limited.
It flagged off the mutual fund business with the launch of Templeton India Growth Fund
in September 1996, and since then the business has grown at a steady pace.
Since starting its operations in India, Franklin Templeton has invested a
considerable amount of time, effort and resources towards investor and distributor
education, the belief being - to be successful in the long term, the fundamentals need
to be corrected, at whatever cost! This has resulted in various advertising campaigns
aimed at educating investors, participation in seminars and distributor training
programs. Franklin Templeton has played a pivotal role in steering the industry to its
current stage, and as long term players, we continue to strive to achieve the objective
of 'making mutual funds an investment of choice' for both individual and institutional
investors. In July 2002, Franklin Templeton India acquired Pioneer ITI, another leading
fund house in India to create an organization with rich investment experience over
market cycles, one of the most comprehensive product portfolios, footprint across the
country and an in-house shareholder servicing function. The huge synergies that
existed in the two organizations have helped the business grow at a rapid pace,
catapulting the company to among the top two fund houses in India.
FRANKLIN TEMPLETON INVESTMENT SCHEMES
It is their belief that individuals differ in their investment needs based on personal
financial goals. So they recommend us that we should, at the very beginning identify
our own financial goals, be it planning for our children's education or a comfortable
retired life. After defining these, one needs to plan for them in an organized manner
and look at investments that help achieve these goals. Investment experts recommend
that growth investments such as equity funds and stocks are a good choice for long
term needs (five years or more), income funds for medium-term needs and liquid funds
for short-term requirements.
MUTUAL FUND
96
The investment pyramid above illustrates a variety of investment options available.
The investments at the top of the pyramid provide greater opportunity for long-term
capital growth, while the investments at the bottom generally provide greater potential
for current income and preservation of capital. In addition to providing one with the
flexibility to create an investment plan based on individual financial goals, Mutual
funds also offer other benefit.
VISIT TO Franklin Templeton Mutual Fund
To understand and study the mutual funds concept in detail, I visited the Franklin
Templeton Asset Management Pvt.Ltd. at Bandra-Kulra complex (Head Office) on 27
th
August 2015. I interviewed Mr.Juzer Tambawalla (Marketing Manager) he spared
MUTUAL FUND
97
some of his valuable time to explain in brief about the mutual fund system in their
organization & he also answered to my questions.
The following are the questions asked to Mr. Juzer Tambawalla:-
1. Farhana (I asked): What is a Mutual Fund?
Mr. Juzer replied: A Mutual Fund is an investment tool that allows small investors
access to a well-diversified portfolio of equities, bonds and other securities. The
beauty of mutual funds is that anyone with an investible surplus of a few hundred
rupees can invest and reap returns as high as those provided by the equity markets
or have a steady and comparatively secure investment as offered by debt
instruments.
2. I asked: What does a Mutual Fund do with investor's money?
Mr. Juzer replied: Anybody with an investible surplus can invest in mutual funds. A
Mutual Fund invests the pool of money collected from the investors in a range of
securities comprising equities, debt, etc. after charging for the AMC fees.
3. I asked: What is Net Asset Value (NAV)?
Mr. Juzer replied: Net asset value (NAV) represents the market value of all assets per
unit, held by the fund. For an investor, it simply signifies the current value of his or
her investment in the fund.
4. I asked: Is there a guaranteed return on the mutual funds?
Mr. Juzer replied: No, we do not give any guarantees on the returns on any of our
funds.
5. I asked: What are the types of returns one can expect from a Mutual Fund?
Mr. Juzer replied: Mutual Funds give returns in two ways - Capital Appreciation or
Dividend Distribution. An increase in the value of the units of the fund is known as
capital appreciation. The profit earned by the fund is distributed among unit holders
in the form of dividends is called Dividend distribution.
MUTUAL FUND
98
6. I asked: Are mutual funds insured?
Mr. Juzer replied: No. Mutual fund units are not insured. There is no guarantee that
when you sell your shares, you will receive what you paid for them. However,
because mutual fund investments are more risky than insured investments, they
generally offer potential for higher long-term returns.
7. I asked: Why one should invest in mutual funds?
Mr. Juzer replied: Mutual funds have qualified professionals who manage the fund for
investors. Mutual funds minimize risk by creating a diversified portfolio while
providing the necessary liquidity.
8. I asked: Why should one invest in Franklin Templeton Mutual Funds?
Mr. Juzer replied: In India, Franklin Templeton Investments is one of the largest Asset
management companies with over Rs. 26,469crores of assets for over 20 lakh
investor accounts. It offers 240 products worldwide and has 60 years of experience
in international investment management.
9. I asked: TAX implications for the mutual fund
Mr. Juzer replied: Tax benefit to the Fund. Templeton Mutual Fund is registered with
SEBI and as such, the entire income of the Fund is exempt from income tax under
Section 10(23D) of the Act and is entitled to receive income without any deduction of
tax at source.
MUTUAL FUND
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SURVEY REPORT
THE PERCENTAGE OF PEOPLE WHO ARE AWARE ABOUT MUTUAL FUNDS.
AMONG THE PEOPLE AWARE, PERCENTAGE OF PEOPLE INVESTED.
98% OF PEOPLE ARE
AWARE OF MUTUTAL
FUNDS
2% OF PEOPLE ARE
NOT AWARE OF
MUTUAL FUNDS
54%ARE INTVESTED
46% ARE NOT
INVESTED
MUTUAL FUND
100
PEOPLE INTERESTED IN INVESTING IN MUTUAL FUNDS
PEOPLE WHO ARE INTERESTED,WHICH MUTUAL FUND DO THEY PREFER
68% OF PEOPLE
INTERESTED IN
INVESTING
32% OF PEOPLE NOT
INTERESTED IN
INVESTING
0%
10%
20%
30%
40%
50%
60%
70%
FRANKLIN
TEMPLETON
MUTUAL FUND
RELIANCE
MUTUAL FUND
SBI MUTUAL
FUND
OTHER FUNDS
MUTUAL FUND
101
PEOPLE PREFER MUTUAL FUND BECAUSE OF:-
PEOPLE PREFERING DIFFERENT MODE OF PAYEMENT
Analysis
From the Survey it is concluded that most of the people are aware about Mutual
Funds. Among the people who are interested in investing, are mostly keen to invest
in Franklin Mutual fund on monthly basis plan.
64% PREFER BECAUSE
OF HIGH RETURN
36% PREFER BECAUSE
OF LOW RISK
46% ONE TIME
INVESTMENT
54% SIP(MONTHLY
INCOME PLAN)
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QUESTIONNAIRE
A study of preferences of the investors for investment in mutual funds.
1. Personal Details:
(A). Name:-
(B). Add: - Phone:-
(c). Age:-
2. Do you know what Mutual Funds are?
Y Yes No
3. Have you invested in Mutual Funds?
Yes No
4. Do you plan to invest in Mutual Funds in future?
Yes No
5. Which Mutual Fund would you like to prefer for investing –
Reliance Mutual Fund. Franklin Templeton Mutual Fund.
SBI Mutual Fund. Other Mutual Funds.
MUTUAL FUND
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6. Why would you prefer, Mutual Funds, because of –?
Higher Returns. Low Risk.
7. What types of schemes would you prefer?
SIP (Monthly Investment Plan) One Time Investment
Comment
MUTUAL FUND
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ARTICLES ON MUTUAL FUNDS
SOURCE: TIMES OF INDIA
ECONOMIC TIMES
MUTUAL FUND
105
Quotes of Franklin & Templeton Franklin
“A famous investor once said the key to success was simple: „buy straw hats in the
winter.? And that?s what we try to do. We buy things when they are out of favor,
believing we will be rewarded for patience and foresight.
~ Bill Lippmann
[President of advisory services and portfolio
manager.]
Templeton
“Investors are the people who buy for fundamental values. Speculators are
those who buy in the hope of selling later to someone else at high prices.”
~ Sir John Templeton
Founder and Former Chairman
[He is no longer affiliated with the Templeton
organization.]
Mutual Series
“We care about what companies would be worth if they were put up for auction
and sold. And we want to buy it for 60% of that.”
~ Michael Price
[Chairman of the board of Franklin Mutual Series
Fund.]
MUTUAL FUND
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RECOMMENDATIONS AND SUGGESTIONS
After a thorough study and analysis of the data and information, the following are
the few recommendations and suggestions, if adopted, would definitely benefit the
financial market, which is in its booming stage, in the short run and in the long run as
well. Recommendations and suggestions are normally given when there are some
problems or difficulties lying in the market. Here in this research report my
recommendations and suggestions are totally based on the facts, reactions, attitudes,
perceptions, and many other things of the respondents which I have received from
them during my research work. The recommendation part of this research work has
three parts only, which I feel can push the mutual fund market to a higher level.
The three parts are –
1. Market Development
2. Marketing techniques
3. Marketing plans
1. Market development:
My consumer survey has revealed the fact that the market for mutual fund is still in
its expansion stage. Hence the companies have to do a lot of things and activities to
develop the market for mutual fund in this capital city. Because the market
development is as important as STP of any marketing plan. Market development means
doing anything and everything for the growth of the mutual fund industry. Hence in the
following ways the market of mutual fund can be developed more significantly:
Awareness:
MUTUAL FUND
107
Awareness of mutual fund products must be increased in this city. The awareness
can be enhanced in the following ways---
? Conference or seminars on ?mutual funds? can be conducted on regular basis.
This will no doubt increase the awareness of mutual fund in the minds of the
investors.
? All the companies must join hands and work together for this.
Customer education:
As the awareness of mutual funds is still improving in this market, companies
should give focus on ?customer education?. For this purpose again the conference
and seminars can be the best way towards educating the customers. Again free
training programme to the agents can be fruitful.
Government intermediation:
Government must also work together with the mutual fund companies in promoting
the concept of mutual fund.
Confidence building activities:
People in this city are not confident in investing their money in mutual funds. Hence
there is a need to do something which will build the confidence in the minds of the
investors. Hence the confidence building activities must be carried out the mutual fund
companies. Because most of the people think that investing in mutual funds is a very
risky affair. In the following ways the confidence can be increased in the minds of the
people.
? As the common person has blind faith in all the government institutions, hence they
have to come forward and convey the message that investing in mutual fund is not
that risky.
? The present performance of the mutual funds is very good indeed. And the
companies should cash in on this opportunity. The performance of the mutual funds
can be published in the local and
MUTUAL FUND
108
? Other newspapers and magazines, journals. This will no doubt induce the investors
towards investing in mutual funds.
? Case study of the investors who have been benefited in investing in mutual funds
can be published in the newspapers, magazines and journals.
2. Marketing techniques:
While the Mutual in India has seen dramatic improvements in quantity as well as
quality of product and service offerings over the past decade. One of the primary
reasons for this slow growth is the fact that mutual funds are a new concept in India,
which needs to be still understood by large sections of Indian investors. In this
scenario, the mutual fund companies have the onerous responsibility of not just selling
mutual fund products, but marketing „them correctly.
3. Marketing plans:
Booklets on mutual funds can be distributed at free of cost to the common people
with the newspapers, magazines, journals. This will help in attitude formation of the
investors.
Companies must focus on tailored made mutual fund schemes rather than on the
traditional products/ schemes.
Unlike the case of insurance where there is a restriction on certain age of the
investors to invest on insurance, there is no such restriction on investing in mutual
fund. An investor of any age bracket can invest in mutual fund. Hence the strong and
efficient CRM can prove to be very fruitful.
Selling of mutual funds only through agents and the branch will not serve the
purpose. Distribution network should be increased. Here aggressive strategy must be
taken by a company in selling mutual funds. This will only be possible when the
investors are well familiar with the concept of mutual funds and its advantages and
MUTUAL FUND
109
? As selling of financial products requires well trained people, the companies must
provide proper training to the agents and financial planners. For this training
institute must be opened in this township.
? Continuous brand building activities must be carried out by the companies. For this
purpose companies should initiate some sort of promotional activities like, ads in
newspapers, magazines, journals.
? Educational institutes must start some professional courses on mutual funds and
other finance specialized courses. This will create some sort awareness about the
mutual funds.
? Mutual fund companies must tie up with other financial institute like banks, post
office for reaching to the mass people. Because these financial institutes have
tremendous reach to the mass people in our country. As a result mutual fund
companies can have easy access to the common people. The companies must go in
for this kind of strategic alliance with other companies as well. Because strategic
alliance not only benefit the companies but help in developing the market also.
Handsome incentive:
Push selling of mutual funds products must be stressed on. This push selling
must be done through agents and financial planners. Handsome incentives and
commission will no doubt motivate them to push sell the mutual funds.
Attractive schemes:
As the maximum number of investors of mutual funds in this city are confined to
the business class and upper social class category. Common people rarely invest in
mutual funds. Hence the different attractive schemes can be launched to attract the
common people towards mutual fund investment. These schemes are for promotional
purpose only. The main purpose of these schemes are to draw retail investors towards
the mutual funds investment.
The following are some of the schemes:
MUTUAL FUND
110
? For opening of new savings bank account, certain units of mutual funds of a
company (strategic alliance company) can be given at free of cost to the account
holder. This will no doubt make the people more familiar with the concept of mutual
funds.
? On buying of one or some life insurance policies, again certain units of mutual fund
can be given at free of cost to the policy holders this will ultimate lead to the mutual
fund buying habit of the common people.
? Again each car loan or other kind loan of a certain amount will get the loan taker
certain units of mutual funds absolutely free of cost.
Sponsorship of management events:
As we all know that management institutes and universities and other educational
institutes are the production houses of the business managers. In these institutes,
several kind of management activities going on throughout the year. The companies
must cash this opportunities to make them know to the students and to the people who
are associated with these institutes. Companies can sponsor some of the management
events of these institutes. This will again lead to the communication of the products of
the companies.
MUTUAL FUND
111
CONCLUSION
We can infer from the analysis that the concept of mutual fund is still in its growing
phase. With the growing importance of mutual fund in other areas in the country, this
place is witnessing the same rate of growth in mutual funds. Apart from these facts the
following are some other important facts which can easily be inferred from the paper---
? Huge opportunities of Mutual funds exist. In short the market in this city is a
growing market
? As because many companies exist in this market, competition is cut to throat.
? Mindsets of the investors are not towards mutual funds. They still think of investing
in traditional investment alternatives. Customers are not properly educated about
the mutual funds.
? Few private sectors banks like ICICI, HDFC, UTI, ING VYSYA etc. sell mutual funds
through their branches only.
? Specialized agents of mutual funds are rarely seen. Financial advisors are not seen
there who can educate the investors.
? Posters, banners or other promotional activities are rarely seen in this market.
? Mutual fund companies do not have aggressive strategies.
? Insurance products are and can be the main competitors of mutual funds.
? Mutual fund investors are confined to the upper-middle and upper social class in
this market. Upper-lower class and lower-upper class people are still untouched.
? More than half of the respondents have wrong perception about the mutual funds.
They feel mutual funds are very risky investment alternative
? Most of the respondents are satisfied with their current return from their
investment. Most of the respondents neither do nor want to take risk in investing
their money in mutual funds.
MUTUAL FUND
112
BIBLIOGRAPHY
? BOOKS REFERRED
o Mutual fund management – ATUL A. SATHE
o AMFI Mutual Fund Test – Workbook.
o Financial services and management- Gordon And Natarajan
? MAGAZINES
o OUTLOOK MONEY
o INVESTIME (VOL8)
? NEWSPAPERS
o ECONOMICS TIMES
o TIMES OF INDIA
o Pamphlets and newsletters from Franklin Templeton.
? OTHERS
o Literature from Stock Holding Corporation of India.
o Key Information Memorandum – Templeton Mutual Fund.
o Fact sheet of Templeton Mutual Fund.
MUTUAL FUND
113
WEBLOGRAPHY
o Web site – www.templetonindia.com
o Web site – www.amfiindia.com
o Web site – www.rbi bulletin.com
o Web site – www.moneycontrol.com
o Web site – www.amfiindia.com
o Web site – www.onlineresearchonline.
doc_397632886.pdf
1
CHAPTER 1
MUTUAL FUND
Source:http://beginnersinvest.about.com
1.1 INTRODUCTION TO MUTUAL FUNDS:
There are many investment avenues available in the financial market for an
investor. Investors can invest in bank deposits, corporate debentures and bonds,
post office saving schemes etc. where, there is low risk together with low return.
They may invest in stock of companies where the risk is high and sometimes the
returns are also proportionately high. For retail investors, who do not have the time
and expertise to analyze and invest in stock, Mutual Funds is a viable investment
alternative. This is because Mutual Funds provide the benefit of cheap access to
expensive stocks. A Mutual Fund is a collective investment vehicle formed with the
specific objective of raising money from a large number of individuals and investing it
according to a pre-specified objective, with the benefits accrued to be shared among
the investors on a pro-rata basis in proportion to their investment. According to
Encyclopedia Americana, “Mutual funds are open end investment companies that
MUTUAL FUND
2
invest shareholders? money in portfolio or securities. They are open ended in that
they normally offer new shares to the public on a continuing basis and promise to
redeem outstanding shares on any business day.” According to Securities and
Exchange Board of India Regulations, 1996 a mutual fund means “a fund established
in the form of trust to raise money through the sale of units to the public or a section
of the public under one or more schemes for investing in securities, including money
market instruments”.
A Mutual Fund is a trust registered with the Securities and Exchange Board of
India (SEBI) which pools up the money from individual/corporate investors and
invests the same on behalf of the investors/units holders, in equity shares,
government securities, bonds, call money market etc. The income earned through
MUTUAL FUND
3
these investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. This pooled income is
professionally managed on behalf the unit-holders, and each investor holds a
proportion of the portfolio.
1.2 DEFINITION:
“Mutual funds are collective savings and investment vehicles where savings of
small (or sometimes big) investors are pooled together to invest for their mutual
benefit and returns distributed proportionately”.
“A mutual fund is an investment that pools your money with the money of an
unlimited number of other investors. In return, you and the other investors each own
shares of the fund. The fund's assets are invested according to an investment
objective into the fund's portfolio of investments. Aggressive growth funds seek
long-term capital growth by investing primarily in stocks of fast-growing smaller
companies or market segments. Aggressive growth funds are also called capital
appreciation funds??
MUTUAL FUND
4
1.3 OPERATIONAL FLOW OF MUTUAL FUND:
The following diagram depicts the operational flow of Mutual Fund
Source:http://www.nrimutualfunds.com
MUTUAL FUND
5
http://www.nrimutualfunds.com
The mutual fund collects money directly or through brokers from investors. The
money is invested in various instruments depending on the objective of the scheme.
The income generated by selling securities or capital appreciation of these securities
is passed on to the investors in proportion to their investment in the scheme. The
investments are divided into units and the value of the units will be reflected in Net
Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme
minus its liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the valuation date. Mutual fund companies
provide daily net asset value of their schemes to their investors. NAV is important, as
it will determine the price at which you buy or redeem the units of a scheme.
Depending on the load structure of the scheme, you have to pay entry or exit load.
MUTUAL FUND
6
1. 4 ADVANTAGES OF MUTUAL FUNDS:
If mutual funds are emerging as the favorite investment vehicle, it is because of
the many advantages they have over other forms and the avenues of investing,
particularly for the investor who has limited resources available in terms of capital
and the ability to carry out detailed research and market monitoring. The following
are the major advantages offered by mutual funds to all investors:
1. Portfolio Diversification:
Each investor in the fund is a part owner of all the fund?s assets, thus enabling him
to hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.
2. Professional Management:
MUTUAL FUND
7
Even if an investor has a big amount of capital available to him, he benefits from
the professional management skills brought in by the fund in the management of the
investor?s portfolio. The investment management skills, along with the needed
research into available investment options, ensure a much better return than what an
investor can manage on his own. Few investors have the skill and resources of their
own to succeed in today?s fast moving, global and sophisticated markets.
3. Reduction/Diversification of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether
he places a deposit with a company or a bank, or he buys a share or debenture on his
own or in any other from. While investing in the pool of funds with investors, the
potential losses are also shared with other investors. The risk reduction is one of the
most important benefits of a collective investment vehicle like the mutual funds.
4. Reduction of Transaction Costs:
What is true of risk as also true of the transaction costs? The investor bears all the
costs of investing such as brokerage or custody of securities. When going through a
fund, he has the benefit of economies of scale; the funds pay lesser costs because of
larger volumes, a benefit passed on to its investors.
5. Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
When they invest in the units of a fund, they can generally cash their investments any
time, by selling their units to the fund if open-ended, or selling them in the market if
the fund is close-end. Liquidity of investment is clearly a big benefit.
6. Convenience and Flexibility:
MUTUAL FUND
8
Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holding from one
scheme to the other; get updated market information and so on.
7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the
assessment of all Unit holders. However, as a measure of concession to Unit holders
of open-ended equity-oriented funds, income distributions for the year ending March
31, 2003, will be taxed at a concessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000
from the Total Income will be admissible in respect of income from investments
specified in Section 80L, including income from Units of the Mutual Fund. Units of the
schemes are not subject to Wealth-Tax and Gift-Tax.
8. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
9. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI.
10. Transparency:
You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.
MUTUAL FUND
9
1.5 DISADVANTAGES OF INVESTING THROUGH
MUTUAL FUNDS:
1. No Control over Costs:
An investor in a mutual fund has no control of the overall costs of investing. The
investor pays investment management fees as long as he remains with the fund,
albeit in return for the professional management and research. Fees are payable
DISADVANTAGES OF MUTUAL FUND INVESTMENT
1. NO CONTROL OVER COST
2. NO TAILOR MADE PORTFOLIO
3. MANAGINGA PORTFOLIO OF FUNDS
4.WISDOM OF PROFESSIONAL MANAGEMENT
5.NO CONTROL
6. DILUTION
7. BURRIED COSTS
MUTUAL FUND
10
even if the value of his investments is declining. A mutual fund investor also pays
fund distribution costs, which he would not incur in direct investing. However, this
shortcoming only means that there is a cost to obtain the mutual fund services.
2. No Tailor-Made Portfolio:
Investors who invest on their own can build their own portfolios of shares and
bonds and other securities. Investing through fund means he delegates this decision
to the fund managers. The very-high-net-worth individuals or large corporate
investors may find this to be a constraint in achieving their objectives. However,
most mutual fund managers help investors overcome this constraint by offering
families of funds- a large number of different schemes- within their own management
company. An investor can choose from different investment plans and constructs a
portfolio to his choice.
3. 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 on how to select a fund to achieve his objectives,
quite similar to the situation when he has individual shares or bonds to select.
4. The Wisdom of Professional Management:
That's right, this is not an advantage. The average mutual fund manager is no
better at picking stocks than the average nonprofessional, but charges fees.
5. No Control:
Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car
MUTUAL FUND
11
6. Dilution:
Mutual funds generally have such small holdings of so many different stocks that
insanely great performance by a fund's top holdings still doesn't make much of a
difference in a mutual fund's total performance.
7. Buried Costs:
Many mutual funds specialize in burying their costs and in hiring salesmen who do
not make those costs clear to their clients.
Source:http://wealth18.com
MUTUAL FUND
12
CHAPTER 2
EVOLUTION OF MUTUAL FUNDS
2.1 HISTORY OF MUTUAL FUNDS IN INDIA
The mutual fund industry in India started in 1963 with the formation of Unit Trust
of India, at the initiative of the Reserve Bank and the Government of India. The
objective then was to attract the small investors and introduce them to the market
investments. Since then, the history of mutual funds in India can be broadly divided
into four distinct phases.
HISTORY OF MUTUAL FUNDS.
PHASE
1
• ESTABLISHMENT AND GROWTH (1964-1987)
PHASE
2
• ENTRY OF PUBLIC SECTOR FUNDS (1987-1933)
PHASE
3
• ENTRY OF PRIVATE SECTOR FUNDS (1993-2003)
PHASE
4
• GROWTH AND SEBI REGULATION (SINCE FEBRUARY
2003)
MUTUAL FUND
13
PHASE I: 1964 – 1987 (UNIT TRUST OF INDIA):
This phase spans from 1964 to 1987. In 1963, UTI was established by an act of
parliament and given a monopoly. Operationally, UTI was set up by Reserve Bank of
India, but was later delinked from the RBI. The first and still one of the largest
scheme, launched by UTI was Unit Scheme 1964. Over the years, US – 64 attracted,
and probably still has the largest number of investors in any single investment
scheme. It was also at least partially the first open – end scheme in the country.
Later in 1970s and 1980s, UTI started innovating and offering different schemes
to suit the needs of different class of investors. Unit Linked Insurance Plan (ULIP)
was launched in 1971. Six new schemes were introduced between 1981 and 1984.
During 1984 – 87, new schemes like Children?s Gift Growth Fund (1986) and Master
share (1987) were launched. Master share could be termed as the first diversified
equity investment scheme in India. The first Indian offshore fund, India fund, was
launched in August 1986. During 1990?s, UTI catered to the demands for income-
oriented schemes by launching Monthly Income Schemes, a somewhat unusual
mutual fund product offering, “assured returns”.
The mutual fund industry in India not only started with UTI, but still counts as its
largest player with the largest corpus of investible funds among all mutual funds
currently operating in India. Until 1980s, UTI?s operations in the stock market often
determined the direction of market movements. Foreign and other situational players
have been brought in. so direct influence of UTI on the markets may be less than
before, though it remains largest player in industry. In absolute terms, the investible
funds corpus of even UTI was still relatively small at about Rs.600 crores in 1984.
MUTUAL FUND
14
1987 – 1988
AMOUNT
MOBILISED
(Rs Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OFGROSS DOMESTIC
SAVINGS
UTI 2,175.00 6,700.00 3.1%
TOTAL 2,175.00 6,700.00 3.1%
SOURCE: AMFI WORKBOOK
PHASE II: 1987 – 1993 (Entry of Public Sector Funds):
1987 marked the entry of non – UTI, public sector mutual funds, bringing in
competition. With the opening up of the economy, many public sector banks and
financial institution were allowed to establish mutual funds. The State Bank of India
established the first non – UTI mutual fund – SBI Mutual Fund – in November 1987.
This was followed by Canbank Mutual Fund (launched December 1987), LIC Mutual
Fund (launched in 1989) and Indian Bank Mutual Fund (launched in 1990) followed by
Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual
funds helped enlarge the investor community and the investible funds. From 1987-
1992/93, the fund industry expanded nearly seven times in turns of assets under
management.
During this period, investors were shifting away from bank deposits to mutual funds,
as they started allocating larger part of their financial assets and savings (5.2%in
1992, 3.1%1988) to fund investments. UTI was still the largest segment of the
industry, although with nearly 20% market share ceded to the public sector mutual
funds.
MUTUAL FUND
15
1992 – 1993
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OFGROSS
DOMESTICSAVINGS
UTI 11,057.00 38,247.00 5.2%
PUBLIC
SECTOR
1,964.00 8,757.00 0.9%
TOTAL 13,021.00 47,004.00 6.1%
SOURCE: AMFI WORKBOOK
PHASE III: 1993-1996 (Emergence of Private Sector Funds)
A new era in the mutual funds industry began with the permission granted for the
entry of private sector funds in 1993, giving the Indian investors a broader choice of
„fund families? and increasing competition for the public sector funds. Quite
significantly, foreign fund management companies were also allowed to operate
mutual funds, most of them coming into India through their joint ventures with Indian
promoters. These private funds have brought in with them the latest product
innovations, investment management techniques and investor servicing technology
that makes the Indian mutual fund industry today a vibrant and growing financial
intermediary.
During the year1993-94, five private sector mutual funds launched their schemes
followed by six others in 1994-95. Initially the mobilization of funds by the private
mutual funds was slow. But this segment of the fund industry now has been
witnessing much greater investor confidence in them. One influencing factor has
been the development of a SEBI driven regulatory framework for mutual funds. But
MUTUAL FUND
16
another important factor has been the steadily improving performance of several
funds themselves. Investors in India now clearly see the benefits of investing through
mutual funds and have started becoming selective.
The entire mutual fund industry in India, despite initial hiccups, has since scaled
new heights in terms of mobilization of funds and number of players. Deregulation
and liberalization of the Indian economy has introduced competition and provided
impetus to the growth of the industry. Finally, most investors- small or large-have
started shifting towards mutual funds as opposed to banks or direct market
investments.
More investor friendly regulatory measures have been taken both by SEBI to
protect the investor and by the government to enhance investors? returns through
tax benefits. A comprehensive set of regulations for all mutual funds operating in
India has been accomplished with SEBI (Mutual Fund) regulations, 1996. These
regulations set uniform standards for all funds and eventually be applied in full to
Unit Trust of India as well, even though its own UTI Act governs UTI. Infact, UTI has
been voluntarily adopting SEBI guidelines for most of its schemes. Similarly, the 1999
Union Government Budget took a big step in exempting all mutual fund dividends
from income tax in the hands of the investors.
The mutual fund industry in 1999 seems to mark the beginning of a new phase in
its history, a phase of significant growth in terms of assets under management.
The size of the industry is growing rapidly, as seen by the figure of assets under
management, which have gone from over 68,000crores to nearly 87,000crores in just
one year. Within the growing industry, by March 1999; UTIS share of mobilization had
decreased to 55%(from 85% in 1992-93), while the share of the private sector stood
at 37%. During April to October 1999, the sector accounted for 59% of mobilizations.
Mobilizations during this period of 7 months in fact exceeded the same for the whole
of 1998-99.it is also clear that the enhanced share of the private sector is explained
not only by the growing appetite for mutual funds, but also by the growing
acceptance of the private sector funds.
MUTUAL FUND
17
1998 – 1999
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS % OF
GROSS
DOMESTICSAVINGS
UTI 11,679.00 53,320.00 2.79%
PUBLIC
SECTOR
1,732.00 8,292.00 0.08%
PRIVATE
SECTOR
7,966.00 6,860.00 1.14%
TOTAL 21,377.00 68,472.00 5.1%
SOURCE: AMFI WORKBOOK
PHASE IV: 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 schemes, 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, 000crores
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
MUTUAL FUND
18
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 as at the end of March
2007, there were 30 mutual funds, which managed assets of rs.3, 26,388 crores
under 756 schemes.
The graph indicates the growth of assets over the years.
GROWTH IN ASSETS UNDER MANAGEMENT
SOURCE: AMFI WORKBOOK
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking
of the Unit Trust of India effective from February 2003. The Assets under
management of the Specified Undertaking of the Unit Trust of India has therefore
been excluded from the total assets of the industry as a whole from February 2003
onwards.
MUTUAL FUND
19
2.2 FUTURE OF MUTUAL FUND INDUSTRY IN INDIA
The Indian mutual fund industry is passing through a transformation. On one side
it has seen a number of regulatory developments while on the other the overall
economy is just recovering from the global crisis of 2008. The regulatory changes
have been made keeping in mind the best interests of the investors. However, like all
changes these changes will take time to be adapted by industry, intermediaries and
the investing public at large. The industry is looking forward to early resolution of
certain inter-regulatory issues requiring Government / Court intervention. Market
participants are waiting to see how the industry adapts to these changes, while
trying to maintain its pace of growth. Mutual funds are restructuring their business
models to provide for increased efficiencies and investor satisfaction. The industry
also faces a number of issues which are characterized by lack of investor
awareness, low penetration levels, high dependence on corporate sector and
spiraling cost of operations. The Growth rate of the industry therefore needs to be
seen from this perspective. Though, it is commendable to note, that, Assets Under
Management have managed to record a compounded growth of 28% over 2006-2010,
however, the AUM of Equity Funds and Balanced Funds where retail investors invest
have only grown by 20% in the same period. The net sales of Equity/Balanced funds
in 2009-10 have been one of the lowest in recent years. India has vast growth
potential backed by a resilient economy, commensurate with an accelerated GDP
growth rate of 7.4%, high rate of household savings and investments. This report by
PwC seeks to outline the current state of the industry, with its growth drivers and
continuing challenges. It also seeks to draw a comparison with other global
economies, the business and regulatory trends which have been impacting this
industry with a snapshot of some of the regulatory changes anticipated around the
corner.
According to report of Business maps of India, Important aspects related to the
future of mutual funds in India are -
? The growth rate was 100 % in 6 previous years.
? The saving rate in India is 23 %.
MUTUAL FUND
20
? There is a huge scope in the future for the expansion of the mutual funds
industry.
? A number of foreign based assets management companies are venturing into
Indian markets.
? The Securities Exchange Board of India has allowed the introduction of
commodity mutual funds.
? The emphasis is being given on the effective corporate governance of Mutual
Funds.
? The Mutual funds in India has the scope of penetrating into the rural and semi
urban areas.
? Financial planners are introduced into the market, which would provide the
people with better financial planning.
According to RNCOS research report titled “Current and Future outlook of Mutual
Fund Industry”, key finding are –
? The Indian mutual funds retail market, growing at a Compounded Annual Growth
Rate (CAGR) of about 30%, is forecasted to reach US$ 300 Billion by 2015.
Income and growth schemes made up for majority of Assets under Management
(AUM) in the country.
? At about 84% (as on March 31, 2008), private sector Asset Management
Companies account for majority of mutual fund sales in India. Individual
investors make up for 96.86% of the total number of investor accounts and
contribute 36.9% of the net assets under management.
? Based on KPMG report titled “Indian Mutual Fund Industry – The Future in a
Dynamic Environment Outlook for 2015” key results are-
? KPMG in India is of the view that the industry AUM is likely to continue to grow in
the range of 15 to 25 percent from the period 2010 to 2015 based on the pace of
economic growth. In the event of a quick economic revival and positive
reinforcement of growth drivers identified, KPMG in India is of the view that the
Indian mutual fund industry may grow at the rate of 22 to 25 percent in the
period from 2010 to 2015, resulting in AUM of INR 16,000 to 18,000 billion in
MUTUAL FUND
21
2015. In the event of a relatively slower economic revival resulting in the
identified growth drivers not reaching their full potential, KPMG in India is of the
view that the Indian mutual fund industry may grow in the range of 15 to 18
percent in the period from 2010 to 2015, resulting in AUM of INR 15,000 to
17,000 billion in 2015.
? Industry profitability may reduce further as revenues shrink and operating costs
escalate. Product innovation is expected to be limited. Market deepening and
widening is expected with the objective of increased retail penetration and
participation in mutual funds. The regulatory and compliance framework for
mutual funds is likely to get aligned with the other frameworks across the
financial services sector.
http://www.nidhiconsultants.com
MUTUAL FUND
22
2.3 ORGANISATIONAL STRUCTURE OF MUTUAL FUNDS
IN INDIA
SPONSOR
TRUSTEES
CUSTODIAN
ASSET MANAGEMENT COMPANY
DISTRIBUTORS/AGENTS
BANKER
REGISTRAR AND
TRANSFER AGENT
MUTUAL FUND
23
I. TRUSTEES
h ttp://www.iasplus.com
Trustees are an important link in the working of any mutual fund. They are
responsible for ensuring that investors? interests in a scheme are taken care of
properly. They do this by a constant monitoring of the operations of the various
schemes. In return for their services, they are paid trustee fees, which are normally
charged to the scheme.
A. Appointment of Trustees:
As per regulations, for a person to qualify as a sponsor, he must contribute at
least 40% of the net worth of the asset management company (AMC) and possess
a sound financial record over five year?s period prior to registration.
? Who can become a trustee?
? A person of ability, integrity and standing; and
? Who has not been found guilty of moral turpitude; and
? Who has not been convicted of any economic offense or violation of any
securities laws; and
? Who has furnished the particulars required under regulations?
MUTUAL FUND
24
An AMC or any of its officers or employers or employees is not eligible to act as
a trustee of any mutual fund. No person who is appointed as a trustee of a mutual
fund can be appointed as a trustee of any other mutual fund unless such a person
is an independent trustee and he/she has taken prior approval of the mutual fund
of which he is a trustee.
B. Rights and Obligations of the trustees
The trustees are accountable for the funds and property of the respective
schemes. They should hold the same in trust for the benefit of the unit holders in
accordance with SEBI regulations and provisions of the trust deed.
(1) The trustees and the asset management company should enter into an
investment management agreement.
(2) The investment management agreement should contain such clauses as are
mentioned in the Fourth Schedule and such other clauses as are necessary
for the purpose of making investments.
i. Trustees ensure that the systems, processes and personnel are in place
ii. Trustees watch that the AMC acts in the interest of the unit holder
iii. Unit holders consent
iv. Regular monitoring
v. Unit holder?s grievances
vi. Reporting to SEBI
MUTUAL FUND
25
II. ASSET MANAGEMENT COMPANY (AMC)
http://www.canstockphoto.com
The asset management company carries out the business of the mutual fund. The
AMC shall not undertake any other business activities except activities in the nature
of management and advisory services to offshore funds, pension funds, provident
funds, venture capital funds, management of insurance funds, financial consultancy
and exchange of research on commercial basis, if any of such activities are not in
conflict with the activities of the mutual fund.
The AMC is appointed by the sponsor or if so authorized by the trust deed, the
trustee, the appointment can be terminated by majority of the trustees or by 75%
of Unit holders of the scheme.
A. ELIGIBILITY CRITERIA FOR APPOINTMENT OF AMC:
The directors of an AMC should have adequate professional experience in finance
and financial services related field and not found guilty of moral turpitude or
convicted of any economic offence or violation of any securities laws. The key
persons should not been found guilty of moral turpitude or convicted of
economic offence or violation of securities laws, have at least fifty percent directors,
MUTUAL FUND
26
who are not associate of, or associated in any manner with, the sponsor or any of its
subsidiaries or the trustees. The chairman of the asset management company should
not be a trustee of any mutual fund and the asset management company should have
a net worth of not less than rupees ten crores.
B. AMC RESPONSIBILITIES FOR THE ACT OF ITS EMPLOYEES:
The asset management company should take all reasonable steps and exercise
due diligence to ensure that the investment of funds pertaining to any scheme is not
contrary to the provisions of these regulations and the trust deed. It should exercise
due diligence and care in all its investment decisions as would be exercised by other
persons engaged in the same business. The asset management company should be
responsible for the acts of commissions or omissions by its employees or the
persons whose services have been procured by the asset management company. It
should submit to the trustee?s quarterly reports of each year on its activities and the
compliance with these regulations. The trustees at the request of the asset
management company may terminate the assignment of the asset management
company at any time: Provided that such termination should become effective only
after the trustees have accepted the termination of assignment and communicated
their decision in writing to the asset management company. Notwithstanding
anything contained in any contract or agreement or termination, the asset
management company or its directors or other officers should not be absolved of
liability to the mutual fund for their acts of commission or omissions, while holding
such position or office.
C. ASSET MANAGEMENT FEE:
For carrying out asset management activities, AMC charges fee to the schemes it
manages, within the ceiling prescribed under regulations. Other constituent of
mutual fund.
MUTUAL FUND
27
III. SPONSORS
http://s595.photobucket.com
Sponsor is the company, which sets up the Mutual Fund as per the provisions laid
down by the Securities and Exchange Board of India (SEBI). SEBI mainly fixes the
criteria of sponsors based on sufficient experience, net worth, and past track record.
IV. CUSTODIAN / DEPOSITORY
http://blog.betterfinancialeducation.com
The custodian maintains custody of the securities in which the scheme invests.
MUTUAL FUND
28
This ensures an ongoing independent record of the investments of the scheme. The
custodian also follows up on various corporate actions, such as rights, bonus and
dividends declared by investee companies. At present, when the securities are being
dematerialized, the role of the depository for such independent record of
investments is growing. No custodian in which the sponsor or its associates hold 50
percent or more of the voting rights of the share capital of the custodian or where 50
per cent or more of the directors of the custodian represent the interest of the
sponsor or its associates shall act as custodian for a mutual fund constituted by the
same sponsor or any of its associates or subsidiary company.
V. REGISTRARS
http://psicologia-introduccion.blogspot.in/
An investor?s holding in mutual fund schemes is typically tracked by the schemes?
Registrar and Transfer Agent (R & T). Some AMC?S prefer to handle this role on their
MUTUAL FUND
29
own instead of appointing R & T. The Registrar or the AMC as the case may be
maintains an account of the investors? investments and disinvestments from the
schemes. Requests to invest more money into a scheme or to redeem money against
existing investments in a scheme are processed by the R & T.
VI. DISTRIBUTORS
http://www.eyedetec.com
Distributors earn a commission for bringing investors into the schemes of a
mutual fund. This commission is an expense for the scheme. Depending on the
financial and physical resources at their disposal, the distributors could be:
A) Tier 1 distributors who have their own or franchised network reaching out to
investors all across the country; or 6
B) Tier 2 distributors who are generally regional players with some reach within their
region; or
MUTUAL FUND
30
C) Tier 3 distributors who are small and marginal players with limited reach. The
distributors earn a commission from the AMC.
VII. BANKER:
http://www.clker.com
A Fund?s activities involve dealing in money on a continuous basis primarily with
respect to buying and selling units, paying for investment made, receiving the
proceeds from sale of the investments and discharging its obligations towards
operating expenses. Thus the Fund?s banker plays an important role to determine
quality of service that the fund gives in timely delivery of remittances etc.
MUTUAL FUND
31
CHAPTER 3
CLASSIFCATION OF MUTUAL FUND PRODUCTS
3.1 TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. thus mutual funds has
Variety of flavors, Being a collection of many stocks, an investors can go for picking
a mutual fund might be easy. There are over hundreds of mutual funds scheme to
choose from. It is easier to think of mutual funds in categories, mentioned below.
MUTUAL FUND
32
A) BY STRUCTURE
Source:http://ablamc.com
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the Mutual Fund through periodic repurchase at
NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes
is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and
MUTUAL FUND
33
close-ended schemes. The units may be traded on the stock exchange or may be
open for sale or redemption during pre-determined intervals at NAV related prices.
B) BY NATURE
1. EQUITY FUND:
Source:http://www.wlivenews.com
These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund
manager?s outlook on different stocks. The Equity Funds are sub-classified
depending upon their investment objective, as follows:
1.1 Aggressive Growth Funds –
In Aggressive Growth Funds, fund managers aspire for maximum capital
appreciation and invest in less researched shares of speculative nature. Because of
these speculative investments Aggressive Growth Funds become more volatile and
thus, are prone to higher risk than other equity funds.
1.2 Growth Funds –
Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years)
but they are different from Aggressive Growth Funds in the sense that they invest in
MUTUAL FUND
34
companies that are expected to outperform the market in the future. Without entirely
adopting speculative strategies, Growth Funds invest in those companies that are
expected to post above average earnings in the future.
1.3 Equity Income or Dividend Yield Funds –
The objective of Equity Income or Dividend Yield Equity Funds is to generate high
recurring income and steady capital appreciation for investors by investing in those
companies which issue high dividends (such as Power or Utility companies whose
share prices fluctuate comparatively lesser than other companies' share prices).
Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest
risk level as compared to other equity funds.
1.4 Diversified Equity Funds –
Except for a small portion of investment in liquid money market, diversified equity
funds invest mainly in equities without any concentration on a particular sector(s).
These funds are well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to equity
market risk. One prominent type of diversified equity fund in India is Equity Linked
Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by
ELSS should be in equities at all times. ELSS investors are eligible to claim deduction
from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the investor before the
expiry of the lock-in period makes him liable to pay income tax on such income(s) for
which he may have received any tax exemption(s) in the past.
1.5 Equity Index Funds –
Equity Index Funds have the objective to match the performance of a specific stock
market index. The portfolio of these funds comprises of the same companies that
form the index and is constituted in the same proportion as the index. Equity index
funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity
index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index
etc.). Narrow indices are less diversified and therefore, are more risky.
MUTUAL FUND
35
1.6 Value Funds –
Value Funds invest in those companies that have sound fundamentals and whose
share prices are currently under-valued. The portfolio of these funds comprises of
shares that are trading at a low Price to Earnings Ratio (Market Price per Share /
Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value
Funds may select companies from diversified sectors and are exposed to lower risk
level as compared to growth funds or specialty funds. Value stocks are generally
from cyclical industries (such as cement, steel, sugar etc.) Which make them volatile
in the short-term? Therefore, it is advisable to invest in Value funds with a long-term
time horizon as risk in the long term, to a large extent, is reduced.
1.7 Specialty Funds –
Specialty Funds have stated criteria for investments and their portfolio comprises of
only those companies that meet their criteria. Criteria for some specialty funds could
be to invest/not to invest in particular regions/companies. Specialty funds are
concentrated and thus, are comparatively riskier than diversified funds. There are
following types of specialty funds.
1.8Sector Funds -
Equity funds that invest in a particular sector/industry of the market are known as
Sector Funds. The exposure of these funds is limited to a particular sector (say
Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer
Goods) which is why they are more risky than equity funds that invest in multiple
sectors.
1.9 Foreign Securities Funds -
Foreign Securities Equity Funds have the option to invest in one or more foreign
companies. Foreign securities funds achieve international diversification and hence
they are less risky than sector funds. However, foreign securities funds are exposed
to foreign exchange rate risk and country risk.
MUTUAL FUND
36
1.10 Mid-Cap or Small-Cap Funds -
Funds that invest in companies having lower market capitalization than large
capitalization companies are called Mid-Cap or Small-Cap Funds. Market
capitalization of Mid-Cap companies is less than that of big, blue chip companies
(less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies
have market capitalization of less than Rs. 500 crores. Market Capitalization of a
company can be calculated by multiplying the market price of the company's share
by the total number of its outstanding shares in the market. The shares of Mid-Cap or
Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise
to volatility in share prices of these companies and consequently, investment gets
risky.
1.11 Option Income Funds -
While not yet available in India, Option Income Funds write options on a large
fraction of their portfolio. Proper use of options can help to reduce volatility, which is
otherwise considered as a risky instrument. These funds invest in big, high dividend
yielding companies, and then sell options against their stock positions, which
generate stable income for investors.
Equity investments are meant for a longer time horizon, thus Equity funds rank high
on the risk-return matrix.
MUTUAL FUND
37
2. DEBT FUNDS:
Source:http://www.rediff.com
The objective of these Funds is to invest in debt papers. Government authorities,
private companies, banks and financial institutions are some of the major issuers of
debt papers. By investing in debt instruments, these funds ensure low risk and
provide stable income to the investors. Debt funds are further classified as:
2.1 Gilt Funds:
Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are
associated with Interest Rate risk. These schemes are safer as they invest in papers
backed by Government.
2.2 Income Funds:
Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.
2.3 Monthly Income Plans (MIPs):
Invests maximum of their total corpus in debt instruments while they take minimum
MUTUAL FUND
38
exposure in equities. It gets benefit of both equity and debt market. These scheme
ranks slightly high on the risk-return matrix when compared with other debt
schemes.
2.4 Short Term Plans (STPs):
Meant for investment horizon for three to six months. These funds primarily invest in
short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).
Some portion of the corpus is also invested in corporate debentures.
2.5 Liquid Funds:
Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant
for short-term cash management of corporate houses and are meant for an
investment horizon of 1day to 3 months. These schemes rank low on risk-return
matrix and are considered to be the safest amongst all categories of mutual funds.
3. BALANCED FUNDS:
Source:http://articles.economictimes.indiatimes.com
MUTUAL FUND
39
As the name suggest they, are a mix of both equity and debt funds. They invest in
both equities and fixed income securities, which are in line with pre-defined
investment objective of the scheme. These schemes aim to provide investors with the
best of both the worlds. Equity part provides growth and the debt part provides
stability in returns.
Further the mutual funds can be broadly classified on the basis of investment
parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined
in the objectives of the fund. The investor can align his own investment needs with
the funds objective and invest accordingly.
C) BY INVESTMENT OBJECTIVE:
1. GROWTH SCHEMES:
Growth Schemes are also known as equity schemes. The aim of these schemes is to
provide capital appreciation over medium to long term. These schemes normally
invest a major part of their fund in equities and are willing to bear short-term decline
in value for possible future appreciation.
2. INCOME SCHEMES:
Income Schemes are also known as debt schemes. The aim of these schemes is to
provide regular and steady income to investors. These schemes generally invest in
fixed income securities such as bonds and corporate debentures. Capital
appreciation in such schemes may be limited.
3. BALANCED SCHEMES:
Balanced Schemes aim to provide both growth and income by periodically
distributing a part of the income and capital gains they earn. These schemes invest in
both shares and fixed income securities, in the proportion indicated in their offer
documents (normally 50:50).
MUTUAL FUND
40
4. MONEY MARKET SCHEMES:
Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments,
such as treasury bills, certificates of deposit, commercial paper and inter-bank call
money.
5. LOAD FUNDS:
A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and
exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a
good performance history.
6. NO-LOAD FUNDS:
A No-Load Fund is one that does not charge a commission for entry or exit. That is,
no commission is payable on purchase or sale of units in the fund. The advantage of a
no load fund is that the entire corpus is put to work.
OTHER SCHEMES
1. TAX SAVING SCHEMES:
http://www.trackmystatus.in
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed
MUTUAL FUND
41
from time to time. Under Sec.88 of the Income Tax Act, contributions made to any
Equity Linked Savings Scheme (ELSS) are eligible for rebate.
2. INDEX SCHEMES:
Index schemes attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the total holding
will be identical to the stocks index weightage. And hence, the returns from such
schemes would be more or less equivalent to those of the Index.
3. SECTOR SPECIFIC SCHEMES:
These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. E.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time.
4. Commodity Funds
Source:http://www.valuewalk.com
MUTUAL FUND
42
Those funds that focus on investing in different commodities (like metals, food
grains, crude oil etc.) Or commodity companies or commodity futures contracts are
termed as Commodity Funds. A commodity fund that invests in a single commodity or
a group of commodities is a specialized commodity fund and a commodity fund that
invests in all available commodities is a diversified commodity fund and bears less
risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that
invest in gold, gold futures or shares of gold mines) are common examples of
commodity funds.
5. REAL ESTATE FUNDS
Source:http://urbanupdate.in
Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized
MUTUAL FUND
43
Real Estate Funds. The objective of these funds may be to generate regular income
for investors or capital appreciation.
6. EXCHANGE TRADED FUNDS (ETF)
Source:http://articles.economictimes.indiatimes.com
Exchange Traded Funds provide investors with combined benefits of a closed-end
and an open-end mutual fund. Exchange Traded Funds follow stock market indices
and are traded on stock exchanges like a single stock at index linked prices. The
biggest advantage offered by these funds is that they offer diversification, flexibility
of holding a single share (tradable at index linked prices) at the same time. Recently
introduced in India, these funds are quite popular abroad.
MUTUAL FUND
44
7. FUND OF FUNDS
Source:http://www.vitt.in
Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different amcs, are known as Fund of Funds.
Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes,
just like conventional mutual funds maintain a portfolio comprising of
equity/debt/money market instruments or non-financial assets. Fund of Funds
provide investors with an added advantage of diversifying into different mutual fund
schemes with even a small amount of investment, which further helps in
diversification of risks. However, the expenses of Fund of Funds are quite high on
account of compounding expenses of investments into different mutual fund
schemes.
MUTUAL FUND
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8. Gold Exchange Traded Funds (GETFS)
Source:http://www.thirukochi.co.in
Gold Exchange Traded Funds offer investors an innovative, cost efficient and
secure way to access the gold market. Gold etfs are intended to offer investors a
means of participating in the gold bullion market by buying and selling units on the
Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India,
Benchmark GETF, opened for subscription on February 15, 2007 and listed on the
NSE on April 17, 2007.
MUTUAL FUND
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3.2 Systematic Investment Plan (SIP)
Source:http://www.investmentyogi.com
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing
money in mutual funds. SIP allows you to invest a certain pre-determined amount at a
regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach
towards investments and helps you inculcate the habit of saving and building wealth
for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your
bank account and invested into a specific mutual fund scheme. You are allocated
certain number of units based on the ongoing market rate (called NAV or net asset
value) for the day. Every time you invest money, additional units of the scheme are
purchased at the market rate and added to your account. Hence, units are bought at
different rates and investors benefit from Rupee-Cost Averaging and the Power of
Compounding.
MUTUAL FUND
47
? Rupee-Cost averaging
With volatile markets, most investors remain skeptical about the best time to invest
and try to 'time' their entry into the market. Rupee-cost averaging allows you to opt
out of the guessing game. Since you are a regular investor, your money fetches more
units when the price is low and lesser when the price is high. During volatile period, it
may allow you to achieve a lower average cost per unit.
? Power of Compounding
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He,
who understands it, earns it… He who doesn't... Pays it." The rule for compounding is
simple - the sooner you start investing, the more time your money has to grow.
Example
if you started investing Rs. 10000 a month on your 40
th
birthday, in 20 years? time you
would have put aside Rs. 24 lakh. If that investment grew by an average of 7% a year,
it would be worth Rs. 52.4 lakh when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would
add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of
7%, you would have Rs. 1.22 Cr on your 60
th
birthday - more than double the amount
you would have received if you had started ten years later!
Other Benefits of Systematic Investment Plans
? Disciplined Saving - Discipline is the key to successful investments. When you
invest through SIP, you commit yourself to save regularly. Every investment is a step
towards attaining your financial objectives.
? Flexibility - While it is advisable to continue SIP investments with a long-term
perspective, there is no compulsion. Investors can discontinue the plan at any time.
One can also increase/ decrease the amount being invested.
? Long-Term Gains - Due to rupee-cost averaging and the power of compounding
sips have the potential to deliver attractive returns over a long investment horizon.
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? Convenience - SIP is a hassle-free mode of investment. You can issue a standing
instruction to your bank to facilitate auto-debits from your bank account.
Sips have proved to be an ideal mode of investment for retail investors who do not
have the resources to pursue active investments.
3.3 SYSTEMATIC WITHDRAWAL PLAN (SWP)
Source:http://myinvestmentideas.com
In essence, SWP is the reverse of SIP. Where in SIP you look at accumulating a
corpus by making regular investments into a fund, in SWP you regularly withdraw a
fixed amount of money from a fund. The amount to be withdrawn and the frequency
are fixed by the investor. So you can have a monthly, quarterly or annual frequency
for any fixed amount that you wish to receive. Mr. Gupta would be very happy to
receive a fixed amount in his account every month, when he retires. Anchal is
currently on a sabbatical to bring up her baby. She would be thrilled to put her
savings to use for generating a small regular income flow for herself. SWP can help
MUTUAL FUND
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Mr. Gupta and Anchal plan their cash flows. This is one of the many methods
available for generating a regular income from your savings.
Let us look at some examples of how this strategy will work. Say Mr.Gupta has Rs.10
lakh which he wants to use for generating income through SWP. Let?s look scenarios
with investments in three different type of funds.
Amount Invested: Rs 10 lakh
Systematic withdrawal amount: Rs 10000 per month
Date of SWP: 2nd of every month
Start of SWP: 02 Feb 2010
End of SWP: 20 Feb 2013
Total amount withdrawn: Rs 240000
For simplicity we have taken three funds from the same fund house and not
considered taxation in these calculations. Balance in Folio as on 4 Feb 2013:
HDFC Top 200 Fund (G): Rs 9.07 lakh
HDFC MIP LTP (G): Rs 8.71 lakh
HDFC Income Fund (G): Rs 8.39 lakh
(Source: Calculators mutualfundsindia.com)
? BENEFITS:
1. Regularity:
With an SWP, you are assured of getting a fixed amount at your pre-determined
frequency. The problem with other options like a monthly income plans, which pay
dividends, is that the amount and the frequency of the payouts is not fixed.
Sometimes, if there is no appreciation which can be distributed, you might have no
dividends to be paid. Hence every month you will have different amounts coming in
and some month there might be no money received.
MUTUAL FUND
50
2. Taxation:
SWP is better from the taxation point of view too. In debt funds dividends are paid
after deduction of dividend distribution tax (DDT) of 13.5%. So that will be your tax in
case you depend on dividend income from your debt mutual funds. In case of SWP,
you will pay a short term capital gain (STCG) or a long term capital gains tax (LTCG).
Though STCG may be more expensive as it is on the income slab of the investor,
LTCG will be beneficial as it is a fixed rate of 10% or 20% with indexation. Things get
better in case of SWP from equity funds. As the long term capital gains from equity
mutual funds are exempt in case of holding beyond a year, you end up paying no tax
on the withdrawals.
3. Inflation Protection:
Most of the fixed income instruments do not offer inflation beating returns. So,
though the principal may be secure, the income might fall short of needs in future.
Here again SWP scores in terms of generating returns to keep up with inflation
especially if you opt for an equity fund. The only drawback in the SWP is that it will at
some point eat into your capital. But judicious mix of investment instruments will
ensure that your primary goal of income generation will be met without you running
out of money in times of need. So the conclusion is that SWP is a noteworthy strategy
to use for generation of regular income in various scenarios.
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3.4 SYSTEMATIC TRANSFER PLAN (STP)
Source:http://www.fundsindia.com
STP is a variant of SIP. STP is essentially transferring investment from one asset or
asset type into another asset or asset type. The transfer happens gradually over a
period.
? STP and its importance
Systematic Transfer Plan is of two types; fixed STP, and capital appreciation STP. A
fixed STP is where investors take out a fixed sum from one investment to another. A
capital appreciation STP is where investors take the profit part out of one investment
and invest in the other.
Example of STP
Suppose you have invested 5 lakh in debt funds because you thought market is
trading at close to peak. The PE ratio of the market is 25 and hence you think that fall
is imminent. Hence you invested your money in debt fund. Now assume that your
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52
prophecy was right and the market indeed fell to a level where you can make entry to
equities. However, there are overall weak sentiments which may push market further
down. What is the best strategy in this case?
You can take out 5 lakh out of debt fund and invest in equity oriented mutual fund.
The risk is that if the market goes further down, your fund value will also fall. This is a
risky strategy. Moreover, if the weak sentiments prolong for some time, you will lose
on the opportunity cost because your money is stuck with an investment which has
gone down in value.
There is other way which can really minimize the risk. The way is called STP. In this
case, you can withdraw a fixed amount from your debt fund investment and invest in
equity oriented fund. This can go on for several months depending upon your choice.
For example, if you want to continue STP for 3 years, you can direct your fund to do
this and the fund will withdraw money automatically from your debt fund and put into
equity oriented fund every month. What this strategy achieves is that it essentially
acts as a defense against any adverse movement of the market.
You can see that even when the market is losing value at the rate of 1% per month,
the STP plan has worked as a defense against the fall. Even after 12 successive falls,
the return after 12 months is 9.56% which is quite good. Had this been done in a lump
MUTUAL FUND
53
sum amount of 5 lakh, here is the payoff. The investor has actually lost 11.36% over
the same period. This is the advantage of STP.
The fundamental idea remains the same. The only difference in capital appreciation
STP is that only the profit part of the investment is transferred in the other asset. For
example, the investor has invested 5 lakh in debt fund. In a month, suppose the
return is 1%. This means that his investment has grown by Rs 5000. Investor will take
out this money and invest in equity fund. This strategy is good for conservative
investors who want to protect their principal and take risk with the returns.
? Important points to keep in mind
STP is a possibly the second best investment strategy after SIP. It is one of the best
risk mitigation strategies of the market. Investors though should keep the following
points in mind.
First, STP is a risk mitigation strategy. It will protect you from any adverse loss to a
large extent. Investors should be clear about this. All risk mitigation strategies cap
the loss but also reduce returns when market is bullish.
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54
Second, investors need to follow it with discipline. STP, just like SIP, benefits only
when followed properly. Breaking STP because of short term market movement or
interest rate movement will only harm your investment in long term.
Finally, you need to understand the assets and the stages they are in. For example, it
would be unwise to transfer money from debt to equity when the market is closer to
peak value. Similarly, it would be counter-productive to transfer money from equity
to debt when the market is close to bottom.
http://typicalpinaylikes.blogspot.in/
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CHAPTER 4
INVESTEMNT PROCEDURE IN MUTUAL FUNDS
4.1 Offer document:
An offer document is issued when the amcs make New Fund Offer (NFO). It?s
advisable to every investor to ask for the offer document and read it before investing.
An offer document consists of the following:
Standard Offer Document for Mutual Funds (SEBI Format)
? Summary Information
? Glossary of Defined Terms
? Risk Disclosures
? Legal and Regulatory Compliance
? Expenses
? Condensed Financial Information of Schemes
? Constitution of the Mutual Fund
? Investment Objectives and Policies
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? Management of the Fund
? Offer Related Information.
4.2 Key Information Memorandum:
A key information memorandum, popularly known as KIM, is attached along with the
mutual fund form. And thus every investor gets to read it. Its contents are:
1 Name of the fund.
2. Investment objective
3. Asset allocation pattern of the scheme.
4. Risk profile of the scheme
5. Plans & options
6. Minimum application amount/ no. Of units
7. Benchmark index
8. Dividend policy
9. Name of the fund manager(s)
10. Expenses of the scheme: load structure, recurring expenses
11. Performance of the scheme (scheme return v/s. Benchmark return)
12. Year- wise return for the last 5 financial years
MUTUAL FUND
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4.3 STEPS IN MUTUAL FUND INVESTMENT:
Steps One - Identify your investment needs.
Your financial goals will vary, based on your age, lifestyle, financial independence,
family commitments, level of income and expenses among many other factors.
Therefore, the first step is to assess your needs. Begin by asking yourself these
questions:
1. What are my investment objectives and needs?
Probable Answers: I need regular income or need to buy a home or finance a
wedding or educate my children or a combination of all these needs.
2. How much risk am I willing to take?
7. REVIEW AND STRATEGY.
6. COMMENCEMENT OF INVESTMENT
5. COST AND TAX IMPLICATIONS
4. REGULAR INVESTMENT
3. SELECTION OF MIX
2. CHOOSING THE APPROPRIATE FUND
1.IDENTIFICATION OF NEEDS
MUTUAL FUND
58
Probable Answers: I can only take a minimum amount of risk or I am willing to accept
the fact that my investment value may fluctuate or that there may be a short term loss
in order to achieve a long term potential gain.
3. What are my cash flow requirements?
Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a
specific need after a certain period or I don?t require a current cash flow but I want to
build my assets for the future.
By going through such an exercise, you will know what you want out of your
investment and can set the foundation for a sound Mutual Fund Investment strategy.
Step Two - Choose the right Mutual Fund.
Once you have a clear strategy in mind, you now have to choose which Mutual Fund
and scheme you want to invest in. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of other
schemes managed by the same Fund Manager. Some factors to evaluate before
choosing a particular Mutual Fund are:
? The track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
? How well the Mutual Fund is organized to provide efficient, prompt and
personalized service.
? Degree of transparency as reflected in frequency and quality of their
communications.
Step Three - Select the ideal mix of Schemes.
Investing in just one Mutual Fund scheme may not meet all your investment needs.
You may consider investing in a combination of schemes to achieve your specific
goals.
MUTUAL FUND
59
The following charts could prove useful in selecting a combination of schemes that
satisfy your needs.
MUTUAL FUND
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MUTUAL FUND
61
MUTUAL FUND
62
Step four - Invest regularly
For most of us, the approach that works best is to invest a fixed amount at specific
intervals, say every month. By investing a fixed sum each month, you get fewer units when
the price is high and more units when the price is low, thus Bringing down your average
cost per unit. This is called rupee cost averaging and is a disciplined investment strategy
followed by investors all over the world. With many open-ended schemes offering
systematic investment plans, this regular investing habit is made easy for you.
Step Five - Keep your taxes in mind
As per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt
from Income Tax in the hands of investor. However, in case of debt schemes
Dividend/Income Distribution is subject to Dividend Distribution Tax. Further, there are
other benefits available for investment in Mutual Funds under the provisions of the
prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant
for specific advice to achieve maximum tax efficiency by investing in mutual funds.
Step six - Start early
It is desirable to start investing early and stick to a regular investment plan. If you start
now, you will make more than if you wait and invest later. The power of compounding lets
you earn income on income and your money multiplies at a compounded rate of return.
Step Seven - The final step
All you need to do now is to get in touch with a Mutual Fund or your advisor and start
investing. Reap the rewards in the years to come. Mutual Funds are suitable for every
kind of investor whether starting a career or retiring, conservative or risk taking, growth
oriented or income seeking.
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4.4 CRITERIA FOR SELECTING MUTUAL FUND:
http://www.thewealthwisher.com
MUTUAL FUND
64
1. Financial profile
Mutual funds offer a whole bouquet of products such as aggressive equity funds,
index funds, gilt funds, income funds, liquid funds, gold funds, thematic funds, etc. -
the list is quite exhaustive. But beware! You don?t have to buy all these types of funds.
As you would observe, all funds have a specific objective, a specific risk profile, a
specific liquidity profile and a specific time profile. Hence, it is not possible that all
funds will match your needs, risk-appetite, investment horizon etc. Therefore, you
must first decide on the types of funds that would suit your needs. Only then should
you start selecting the best funds within those categories.
2. Past performance
CRITERIA FOR
SELECTING
OF MUTUAL
FUND
1. FINANCIAL
PROFILE
2. PAST
PERFORMANCE
3. PORTFOLIO
CHARACTERIST
ICS
4.IS THE AMU
APPROPRIATE?
5. FUND
HOUSE/FUND
MANAGER
6. RISK
PARAMETER
7. ANNUAL
RECURRING
EXPENSES
8. ENTRY/ EXIT
LOAD
9. NAV IS
MEANINGLESS
NUMBER
10. DIVIDEND
OR GROWTH
MUTUAL FUND
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The past performance of the fund is one of the most important criteria in fund
selection. It is true that a fund?s good performance in the past does not guarantee that
in future too it will do well. However, history also shows that funds with consistently
good performance - good here means in the top quartile and not necessarily the top
performer - can be expected to be among the top in their category in future too.
Similarly, a fund with poor performance will find it extremely difficult to move to the
top quartile and remain there. Therefore, don?t chase the top performers of the year.
Instead, focus on funds that have delivered good returns consistently.
3. Portfolio characteristics
Characteristics of a portfolio will also play an important role in fund selection. For
example, the percentage of top 5 or 10 holding will determine how diversified or
concentrated a particular fund is. If about more than 60-70% of the corpus is invested
in just 5 shares or bonds, the portfolio would be comparatively riskier than a fund with
just 20-30% corpus in 5 scripts. Typically, an aggressive equity fund would have higher
turnover ratio. Comparatively speaking this is perfectly fine. But an index fund with a
higher turnover ratio vis-vis its peers could be a cause for concern.
4. Is the AUM appropriate?
There is, of course, no mathematical rule that would suggest the best size for a
given mutual fund. In other words, there is no guarantee that if a fund?s assets under
management (AUM) are less (or more) than a specific level, only then will it perform
well. Having said that, Aum could be an important factor in the fund?s overall
performance! In all probability, a very small fund will not be able to diversify itself
reasonable well. It will also find it difficult to make the best of the investment
opportunities available. As such, the performance could be very erratic, one year they
would be the best performers and the next the worst. It would be preferable to avoid
them. A fund too large could also be an issue. Since a fund cannot invest more than
10% of its corpus in one company, a very large fund would invariably have too many
MUTUAL FUND
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companies in its portfolio. This could affect its overall performance.
5. The fund house/fund manager
Investment is both a science and an art. Good research teams i.e. the science part
of investing, are necessary in identifying the opportunities available in the market.
However, if you give the same set of scrips to two different people, they could deliver
vastly different returns. This means that apart from knowing what the good stocks are,
you need something more. This something more is the art of investing. When to
buy/sell/hold; how a fund manager reacts to market volatilities; how s/he responds to
the pressure of performance; and such other psychological aspects have a very
important role to play. As such, you have to consider the fund manager?s past
performance before investing. That apart you should also evaluate the particular fund
house - how many funds does it offer, how many of these are good performers, how
much Aum does it manage, what are the service standards, etc.
6. Risk parameters
Two funds may deliver the same returns. But the better of the two would be the one
that does so: - by taking lesser risk (i.e. It has a higher sharp ratio) - more
consistently (i.e. It has lower standard deviation) - with less volatility than the market
(i.e. It has a lower beta) therefore, after you have short-listed the funds based on the
performance, portfolio, fund house etc., check the risk parameters and opt for those
that tend to deliver good returns despite taking lesser risks.
7. Annual recurring expenses
The expenses that will eat into your returns in an mf would typically include
management fees, custodial fees, marketing & selling expenses, trustee fees, audit
fees etc. But before you get worried, you will be glad to know that the association of
mutual funds in India (amfi) and sebi have simplified the issue of expenses. They have
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67
specified the maximum limit that a fund can charge as overall expenses by whatever
name it may be called. For example, the maximum expense ratio for an equity fund is
fixed at 2.50%, for debt funds at 2.25%, for index funds at 1.5%, for fund of funds at
0.75%, etc. It goes without saying that lower the expenses the better it is. But beware!
Don?t give too much weightage to the expenses. Other parameters, discussed above,
are far more important than expenses that anyway are quite reasonable.
8. Entry / Exit Loads:
As per the recent regulation, sebi has mandated that with effect from august 1,
2009 there will be no entry loads for all mutual fund schemes. Exit load: this is the load
payable when you sell of your mf units. The exit load is generally payable only if you fail
to satisfy certain pre-specified conditions. Therefore, in most cases you may not find a
compulsory exit load, but what is termed as contingent deferred sales charge (cdsc)
and payable:
? if you sell a debt fund before 6 months or some such period
? If you sell equity fund before 1 year or some such period a lower load is better.
However, since the load is nominal, sometimes even paying higher loads may be
alright if the fund?s performance and other factors are very good.
9. NAV Is A Meaningless Number
The NAV of the fund has no impact on the returns it will deliver in the future. Let?s
assume you plan to invest in an index fund and you have two choices - fund a is a new
fund with an NAV of RS. 10, which will mimic the nifty and a fund b, which is an existing
nifty index fund with an NAV of RS. 200. Suppose you invest RS. 10,000 in fund A and
Rs. 10,000 in fund B. You will get 1000 units of fund a and 20 units of fund b. After 1
year, the nifty has appreciated by 25%, which means that both funds would have also
appreciated by 25%, as they are a replica of the nifty. So after 1 year, the nav of fund a
would become Rs. 12.50 and that of fund b rs. 250. But what is the value of your two
investments? Fund a would now be Rs. 12,500 (1000 units * rs. 12.50/unit) and fund b
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also would be rs. 12,500 (20 units * Rs. 250/unit). The bottom line is that don?t bother
about the nav of a mutual fund, as you might do for the price of a share.
10. Dividend or growth?
Like nav, it is immaterial whether you choose the dividend option or growth option
as far as the performance of the fund is concerned. In fact, even though you have
different options, the underlying fund is the same. As such, the basic returns from all
the three options i.e. Growth or dividend payout or dividend reinvestment will be the
same. However, the final returns in your hand could be different due to taxation. Tax
rates are different, depending on whether you get this return in the form of dividend or
capital gains. Therefore, the post-tax returns in your hand may vary depending on your
tax profile. As such, you have to choose the option from the point of view of where your
tax will be minimal and not from the point of view of the returns. To keep things simple,
just remember to opt for growth option if your investment horizon is more than 1 year
and dividend option for less than 1 year (assuming you are in the highest tax bracket).
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CHAPTER 5
RIGHTS AND DUTIES OF INVESTORS
5.1 WHO IS AN INVESTOR?
Source:http://www.ic.or.th
Every investor, given his/her financial position and personal disposition, has a certain
inclination to take risk. The hypothesis is that by taking an incremental risk, it would be
possible for the investor to earn an incremental return. Mutual fund is a solution for
investors who lack the time, the inclination or the skills to actively manage their
investment risk in individual securities. They delegate this role to the mutual fund,
while retaining the right and the obligation to monitor their investments in the scheme.
In the absence of a mutual fund option, the money of such “passive” investors would lie
either in bank deposits or other „safe? investment options, thus depriving them of the
possibility of earning a better return. Investing through a mutual fund would make
economic sense for an investor if his/her investment, over medium to long term,
fetches a return that is higher than what would otherwise have earned by investing
directly
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5.2 WHO CAN INVEST IN MUTUAL FUNDS?
I. RESIDENTS:
Adult individuals holding singly or jointly
Key points:
a) Minors can invest through parents or guardians.
b) Maximum joint owners can be 3.
? Hindu undivided family through their head, Karta.
ELIGIBLE
BUYER
RESIDENTS
FII'S
MFA'S
OVERSEAS
FINANCIAL
ORGANISATION
NRI'S/OCB'S
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71
? Companies/corporate bodies/banks/non-banking financial institutes / aop?s/boi?s /
religious trusts/charitable trust/societies registered under societies registration
act, 1960.
Key points:
All these entities can purchase units of mf subject to permission from constituent
document.
? Mutual funds registered under sebi.
? Army / air force / navy or other paramilitary units and bodies created by such
institution besides other institutions.
II. FII?S
Foreign institution investors registered with sebi.
III. MFA?S
Multilateral funding agencies (mfas)/ bodies corporate registered outside India with
permission of government of India / reserve bank of India.
IV. OVERSEAS FINANCIAL ORGANISATION:
Overseas financial organization which have entered into arrangement for investment
in India.
Key points:
Mutual funds should be registered with sebi and investment arrangement should be
approved by central government.
V. NRI?S/OCB?S:
NRI?S /OCB?S /FII?S and person of Indian origin residing abroad on a full repatriation
basis/non-repatriation basis.
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5.3 RIGHTS OF INVESTORS IN RESPECT OF SERVICE
STANDARD
Investor is entitled to following rights as per regulation of SEBI:
? Investors are entitled to receive dividends declared in a scheme within 30 days
? Redemption proceeds have to be sent to investors within 10 days
? If an investor fails to claim the dividend or redemption proceeds he
? Has the rights to claim it up to a period of 3 years from the due date at the then
prevailing NAV.
? Mutual funds have to allot units within 30 days of the IPO and also
? Open the scheme for redemption, if it is an open -ended scheme
? Mutual funds have to publish their half yearly results in at least one
? National daily and publish their entire portfolios, at least once in 6 months. Such
disclosure should be done within 30 days from 6 monthly account closing dates of
the fund.
? Trustees will have to ensure that any information having a material impact on the
unit holder?s investments should be made public by the mutual fund.
? If 75% of the unit holders so decide, that the scheme can be wound
? Up then the meeting of unit holders can be called and appointment of the AMC of
the mutual fund can be terminated
? If there is any change in the fundamental attributes of the scheme, the unit holders
have to be notified through a letter.
? They also have a right to repurchase at NAV without any load, before such change
is affected.
? Unit holders have the right to inspect certain documents
5.4 LIMITATIONS OF INVESTOR RIGHTS
Investors cannot lodge complaints against the Trustees (with the Registrar of Public
Trusts) or the AMC with the Company Law Board (CLB). Investors cannot lodge
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complaints with SEBI for noncompliance. Investors cannot be compensated if the
performance of the fund is below expectations.
5.5 DISTRIBUTION CHANNELS IN THE MUTUAL FUND
INDUSTRY:
The role of the distribution channels remains critical as it helps stave off
competition by maintaining relationship, providing advisory services and customizing
need based solution. The success of any mutual funds depends upon appropriate
distribution channels 47. In India, amcs work with five distinct distribution channels
those are direct, banking, retail, corporate and individual financial adviser etc. This is
depicted in the Figure
Multi-Channel Distribution
Source: ICI Investment Company Institute
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The Direct Channels
http://www.nrsec.com/
In the direct channel, customers invest in the schemes directly through amcs. In most
cases, the company does not provide any investment advice, so these investors have
to carry out their own research and select schemes themselves. The fund companies
provide several tools to investors who invest through this channel. This includes
monthly account statement, processing of transaction, and maintenance of records.
In this channel most investors can invest through websites, or receive information
through telephonic services provided by the company. About 10-20% of the total sales
of an amcs come through this direct channel.
The Banking Channel
http://www.imgneed.com/
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The large customer bases of banks, in developed countries, have played an important
role in the selling mfs. In the recent years, this channel has also opened up in India.
Banks operating in India, including Public sector, private and foreign banks have
established tie-up with various fund companies for providing distribution of various
mutual funds schemes.
The banking channel is likely to develop as the most vital Distribution channel for fund
companies as there are several reasons for the same. Customers remain invested in
banks for long periods of time and therefore banks maintain a relationship of trust with
their customers.
Customers rely on advice provided to them by bankers as they are always on the
lookout for better investment avenues. Bankers are guiding customers about various
funds. An additional advantage that banks provide is that the concerned customer
becomes a permanent contact of the banks and therefore can be reached during
launch of (new fund offer) Nfo or new schemes any time in the future. As per the survey
conducted by halder (2008), 14.7% percent of the people were informed about various
funds through their banks.
The Retail Channel
http://www.dreamstime.com
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A customer can deal directly with a sub broker belonging to a distribution company,
instead of taking trouble of dealing with several agents. Distribution companies sell
the schemes of several fund houses simultaneously and brokerage is paid by the amcs
whose funds they sell.
The retail channel offers the benefits of specialist knowledge and established client
contact and therefore private fund houses generally prefer this channel. Some of the
major players in India in this channel are Karvey, Bajaj capital, and integrated
enterprise etc50 .the key factor for this channel to sell a company?s fund is the
brokerage earned through selling mutual fund products. The banking and retail
channel generally contribute to about 50-70% of the total asset under management
(Aum)
The corporate channel
http://www.flytravelchannel.com/
The corporate channel includes a variety of institutions that invest in shares on the
company’s name. These are businesses, trust, and even state and local governments.
For institutional investors, fund managers prefer to create special funds and share
classes. Corporate can either invest directly in mutual funds, or through an
intermediary such as a distribution house or a bank. Corporate have varying degree of
awareness about mutual fund products and are well versed with the performance and
composition of various funds. In order to provide information to such clients, fund
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companies usually organize presentation for these companies or set-up meetings with
the finance manager.
Individual financial advisors (ifa) or agents
http://wallpaper222.com
Relationship plays an important role while selling mutual fund products. An agent is an
essential channel between investors and the mutual fund products. The ifa channel is
the oldest channel for distribution and was widely employed at the time when uti
monopoly was in the market. An agent is who basically acts as an interface between
the customer and the fund house. There is a unique system in place in India, wherein
several sub-brokers are working under one main broker.
The huge network of sub-brokers, thus ensure larger market penetration and
geographic coverage. As per amfi, over one-lakh agents are registered to sell mutual
funds products to various categories of investors.
These agents advise the customers on the kind of product that caters to the need of
the client.
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5.6 RISK INVOLVED IN MUTUAL FUND:
Mutual funds investment is subject to market risks. As mutual funds investment is
made primarily in the capital market they are subject to various kinds of risks. The
following are some of the risks associated with the investment in mutual funds.
1. Market Risk
The net asset values of mutual funds may rise and fall dramatically which may be due
to prevailing market conditions. This is known as Market risk.
2. Credit Risk
The debt servicing ability (may it be interest payments or repayment of principal) of a
company through its cash flows determines the Credit risk faced by the company. This
credit risk is measured by independent rating agencies like CRISIL who rate
companies and their paper. An “AAA” rating is considered the safest whereas a “D”
rating is considered Poor credit quality.
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3. Inflation Risk
Inflation is the loss of purchasing power over time. Many times people make
conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment.
This happens when inflation grows faster than the return on investment.
4. Interest Rate Risk
In a free market economy interest rates are difficult if not impossible to predict.
Changes in interest rates affect the prices of bonds as well as equities. If interest rates
rises the prices of bonds fall and vice versa.
Equity might be negatively affected in a rising interest rate environment.
5. Political/ Government Policy Risk
Changes in government policy and political decision can change the investment
environment. They can create a positive environment for investment or vice versa.
Thus the growth and development of mutual funds depends to a large extent on the
policy of the government.
6. Liquidity Risk
Liquidity risk arises when it becomes difficult to sell the securities that one has
purchased. Liquidity Risk can be partly mitigated by diversification, staggering of
maturities as well as internal risk controls that lean towards purchase of liquid
securities.
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CHAPTER 6
MEASURING RETURNS ON MUTUAL FUND AND NAV
6.1 NET ASSET VALUE (NAV):
Since each owner is a part owner of a mutual fund, it is necessary to establish the
value of his part. In other words, each share or unit that an investor holds needs to be
assigned a value. Since the units held by investor evidence the ownership of the fund?s
assets, the value of the total assets of the fund when divided by the total number of
units issued by the mutual fund gives us the value of one unit. This is generally called
the Net Asset Value (NAV) of one unit or one share. The value of an investor?s part
ownership is thus determined by the NAV of the number of units held.
Calculation of NAV:
Let us see an example. If the value of a fund?s assets stands at Rs. 100 and it has 10
investors who have bought 10 units each, the total numbers of units issued are 100,
and the value of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3
units, the value of his ownership of the fund will be Rs. 30.00(1000/100*3). Note that
the value of the fund?s investments will keep fluctuating with the market-price
movements, causing the Net Asset Value also to fluctuate. For example, if the value of
our fund?s asset increased from Rs. 1000 to 1200, the value of our investors holding of
3 units will now be (1200/100*3) Rs. 36. The investment value can go up or down,
depending on the markets value of the fund?s assets.
6.2 Costs associated:
Expenses:
AMCs charge an annual fee, or expense ratio that covers administrative expenses,
salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the
AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense
ratio is typically to the size of the funds under management and not to the returns
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81
earned. Normally, the costs of running a fund grow slower than the growth in the fund
size - so, the more assets in the fund, the lower should be its expense ratio
Loads:
Entry Load/Front-End Load (0-2.25%) -it?s the commission charged at the time of
buying the fund to cover the cost of selling, processing etc.
Exit Load/Back- End Load (0.25-2.25%)-it is the commission or charged paid when an
investor exits from a mutual fund; it is imposed to discourage withdrawals. It may
reduce to zero with increase in holding period.
6.3 Measuring and evaluating mutual funds? performance:
Every investor investing in the mutual funds is driven by the motto of either wealth
creation or wealth increment or both. Therefore it?s very necessary to continuously
evaluate the funds? performance with the help of factsheets and newsletters, websites,
newspapers and professional advisors like SBI mutual fund services. If the investors
ignore the evaluation of funds? performance then he can lose hold of it any time. In this
ever-changing industry, he can face any of the following problems:
1. Variation in the funds? performance due to change in its management/ objective.
2. The funds? performance can slip in comparison to similar funds.
3. There may be an increase in the various costs associated with the fund.
4. Beta, a technical measure of the risk associated may also surge.
5. The funds? ratings may go down in the various lists published by independent rating
agencies.
6. It can merge into another fund or could be acquired by another fund house.
6.4 Performance measures:
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Equity funds: the performance of equity funds can be measured on the basis of: NAV
Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and
Distributions, Computing Total Return (Per Share Income and Expenses, Per Share
Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover
Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.
Debt fund: likewise the performance of debt funds can be measured on the basis of:
Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations,
NPAs, besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be measured on
the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.
6.5 PORTFOLIO ANALYSIS TOOLS:
With the increasing number of mutual fund schemes, it becomes very difficult for an
investor to choose the type of funds for investment. By using some of the portfolio
analysis tools, he can become more equipped to make a well informed choice. There
are many financial tools to analyze mutual funds. Each has their unique strengths and
limitations as well. Therefore, one needs to use a combination of these tools to make a
thorough analysis of the funds.
The present market has become very volatile and buoyant, so it is getting difficult for
the investors to take right investing decision. So the easiest available option for
investors is to choose the best performing funds in terms of “returns” which have
yielded maximum returns.
But if we look deeply to it, we can find that the returns are important but it is also
important to look at the „quality? of the returns. „Quality? determines how much risk a
fund is taking to generate those returns. One can make a judgment on the quality of a
fund from various ratios such as standard deviation, SHARPE ratio, beta, TREYNOR
measure, R-squared, alpha, portfolio turnover ratio, total expense ratio etc.
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Now I have compared two funds of SBI on the basis of standard deviation, beta, R-
squared, SHARPE ratio, portfolio turnover ratio and total expense ratio. So before
going into details, let?s have a look at these ratios:
? Standard deviation:
In simple terms standard deviation is one of the commonly used statistical
parameter to measure risk, which determines the volatility of a fund. Deviation is
defined as any variation from a mean value (upward & downward). Since the markets
are volatile, the returns fluctuate every day. High standard deviation of a fund implies
high volatility and a low standard deviation implies low volatility.
? Beta analysis:
Beta is used to measure the risk. It basically indicates the level of volatility
associated with the fund as compared to the market. In case of funds, as compared
the market. In case of funds, beta would indicate the volatility against the benchmark
index. It is used as a short term decision making tool. A beta that is greater than 1
means that the fund is more volatile than the benchmark index, while a beta of less
than 1 means that the fund is more volatile than the benchmark index. A fund with a
beta very close to 1 means the fund?s performance closely matches the index or
benchmark.
The success of beta is heavily dependent on the correlation between correlation
between a fund and its benchmark. Thus, if the fund?s portfolio doesn?t have a relevant
benchmark index then a beta would be grossly inappropriate. For example if we are
considering a banking fund, we should look at the beta against a bank index.
? R-Squared (R2):
R squared is the square of „R? (i.e.; coefficient of correlation). It describes the level
of association between the fund?s market volatility and market risk. The value of R-
squared ranges from 0 to 1. A high R- squared (more than 0.80) indicates that beta can
be used as a reliable measure to analyze the performance of a fund. Beta should be
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ignored when the r-squared is low as it indicates that the fund performance is affected
by factors other than the markets.
For example:
Case 1 Case 2
R2 0.65 0.88
B 1.2 0.9
In the above table R2 is less than 0.80 in case1, implies that it would be wrong to
mention that the fund is aggressive on account of high beta. In case 2, the r- squared is
more than 0.85 and beta value is 0.9. It means that this fund is less aggressive than the
market.
? Sharpe Ratio:
Sharpe ratio is a risk to reward ratio, which helps in comparing the returns given by
a fund with the risk that the fund has taken. A fund with a higher Sharpe ratio means
that these returns have been generated taking lesser risk. In other words, the fund is
less volatile and yet generating good returns. Thus, given similar returns, the fund with
a higher Sharpe ratio offers a better avenue for investing. The ratio is calculated as:
Sharpe ratio = (Average return- risk free rate) / standard deviation
6.6 PORTFOLIO TURNOVER RATIO:
Portfolio turnover is a measure of a fund's trading activity and is calculated by
dividing the lesser of purchases or sales (excluding securities with maturities of less
than one year) by the average monthly net assets of the fund. Turnover is simply a
measure of the percentage of portfolio value that has been transacted, not an
indication of the percentage of a fund's holdings that have been changed. Portfolio
turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%,
then, means the fund has bought and sold all its positions within the last year.
Turnover is important when investing in any mutual fund, since the amount of turnover
affects the fees and costs within the mutual fund.
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6.7 TOTAL EXPENSES RATIO:
A measure of the total costs associated with managing and operating an
investment fund such as a mutual fund. These costs consist primarily of
management fees and additional expenses such as trading fees, legal fees, auditor
fees and other operational expenses. The total cost of the fund is divided by the fund's
total assets to arrive at a percentage amount, which represents the TER:
Total expense ratio = (Total fund Costs/ Total fund Assets)
Performance report and portfolio analysis of magnum equity
fund and magnum multiplier plus against their benchmark
BSE100:
YTD 1M 3M 6M 1Y 3Y 5Y
Magnum
equity
fund
-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%
Magnum
multiplier
plus
-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%
Benchma
rk
BSE100
-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%
Now in the above table, we have two funds from SBI i.e.; magnum equity fund and
magnum multiplier plus following the same benchmark i.e.; BSE 100. In this case, we
have compared their returns during various time periods. We have their returns YTD,
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during last 1 month, 3month, 6 months, 1 year, 3 year and 5 year. If we look at a long
term perspective, then magnum multiplier plus totally outperformed both magnum
equity fund as well as BSE 100. In case of 5 year returns, neither the benchmark nor
the magnum equity fund stands anywhere near multiplier plus. It is greater than equity
fund by 10.35% and from benchmark by 15.07%. But in case of 3 year returns, surely
multiplier plus gave the maximum return but it fell sharply in comparison to its 5 yr.
return. A 45.28% return scored over equity fund just by a margin of 0.21% and
benchmark by a mere 4.28%. Now moving down to 1 yr. return, we can clearly see that
BSE 100 emerges as a true winner. The benchmark gave a return of 30.71% but both
the funds failed to match it even.
But the ultimate surprise comes when we look at the data of last 6 months. Here not
only the fund managers failed to beat or match the market. Rather they also performed
as laggards, giving negative returns. When the BSE 100 gave returns of 11.47%, these
funds were trailing by 29.47% and 26.65% which is a huge figure. In the last 3 months
too, both the funds were behind bse100 but all the three gave negative returns and the
difference between them and benchmark was narrowed down. Again, during last 1
month return of all three got positive but the funds always remained behind the
benchmark. The bse 100 outscored multiplier plus and equity fund by 6.17% and 2.72%
respectively. Similarly, the YTD return of all 3 is negative even then the benchmark is
at a better position than the funds.
From the following analysis we can infer that in spite of all the steps taken; it is not
always possible for the fund managers to always beat the market. Also, the past
performance just tells the background and history of the fund, by looking at it we
cannot interpret that the fund will perform in the same way in the future too.
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The data can be presented in the form of a graph as follow:
Quantitative data:
Ratios Magnum equity fund Magnum multiplier plus
Standard deviation 26.00% 26.90%
Beta 0.96% 0.95%
r-squared
0.84%
Sharpe ratio 1.46% 1.42%
Portfolio turnover 31% 25%
Total expense ratio 2.5% 2.5%
6.8 CONCEPT OF BENCHMARKING FOR PERFORMANCE EVALUATION:
Every fund sets its benchmark according to its investment objective. The fund?s
performance is measured in comparison with the benchmark. If the fund generates a
greater return than the benchmark then it is said that the fund has outperformed
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
magnum equity
magnum multiplier
bse 100
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88
benchmark , if it is equal to benchmark then the correlation between them is exactly
1. And if in case the return is lower than the benchmark then the fund is said to be
underperformed.
Some of the benchmarks are:
1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU,
BSE 500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total
Return Index JPM T-bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments? Interest Rates as Benchmarks,
JPM T- Bill Index
To measure the fund?s performance, the comparisons are usually done with:
i) With a market index.
ii) Funds from the same peer group.
iii) Other similar products in which investors invest their funds.
Analysis:
? We can see that the standard deviation of both the funds are more or less same
even then the S.D of multiplier plus is greater than that of equity fund by 0.90%.
Generally higher the SD higher is the risk and vice-versa. Therefore, magnum
multiplier plus is riskier than magnum equity fund.
? The beta of magnum equity fund is higher than that of magnum multiplier plus.
Therefore, equity fund is more volatile than multiplier plus. But beta of both the
funds is smaller than 1 that means both the funds are less volatile than the market
index. As r- squared values are more than 0.80 in both the cases, we can rely on the
usage of beta for the analysis of these funds.
? A look at the Sharpe ratio indicates that magnum equity has outperformed
multiplier plus. A higher Sharpe ratio of equity fund depicts that these return have
MUTUAL FUND
89
been generated taking lesser risk than the multiplier plus. It is less volatile than the
other.
? R-squared of both the funds are greater than 0.80. It indicates that beta can be
used as a reliable measure to analyze the performance of these funds. Magnum
equity fund?s R- squared is higher. So its beta is more reliable.
? Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It
mean the manager is frequently churning the portfolio of equity fund than of
multiplier plus. It may lead to an increase in expenses but could be ignored if could
generate higher return by changing the composition of portfolio.
? Total expense ratio of both the funds are same i.e.; 2.5%
The form of a chart:
sd beta r-squared sharpe portfolio expenses
equity fund 26.00% 0.96% 0.93% 1.46% 31% 2.50%
multiplier plus 26.90% 0.95% 0.84% 1.42% 25% 2.50%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
A
x
i
s
T
i
t
l
e
Chart Title
MUTUAL FUND
90
CHAPTER 7
ROLE OF SEBI AND AMFI IN MUTUAL FUND INDUSTRY
Source:http://www.1sourceohs.com
7.1 ROLE OF AMFI IN MUTUAL FUND INDUSTRY
The Association of Mutual Funds in India
(AMFI) is dedicated to developing the Indian Mutual Fund Industry on professional,
healthy and ethical lines and to enhance and maintain standards in all areas with a
view to protecting and promoting the interests of mutual funds and their unit holders.
AMFI, the association of SEBI registered mutual funds in India of all the registered
Asset Management Companies, was incorporated on August 22, 1995, as a non-profit
organization. As of now, all the 44 Asset Management Companies that are registered
with SEBI are its members.
Objectives:
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91
? To define and maintain high professional and ethical standards in all areas of
operation of mutual fund industry.
? To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and asset
management including agencies connected or involved in the field of capital markets
and financial services.
? To interact with the Securities and Exchange Board of India (SEBI) and to represent
to SEBI on all matters concerning the mutual fund industry.
? To represent to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.
? To undertake nationwide investor awareness programme so as to promote proper
understanding of the concept and working of mutual funds.
? To disseminate information on Mutual Fund Industry and to undertake studies and
research directly and/or in association with other bodies.
? To take regulate conduct of distributors including disciplinary actions (cancellation
of ARN) for violations of Code of Conduct.
? To protect the interest of investors/unit holders.
7.2 AMFI CODE OF ETHICS:
Source:http://reportingalliance.org
One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the
investors? interest by defining and maintaining high ethical and professional standards
MUTUAL FUND
92
in the mutual fund industry. In pursuance of this objective, AMFI had constituted a
Committee under the Chairmanship of Shri A. P. Pradhan with Shri S. V. Joshi, Shri C.
G. Parekh and Shri M. Laxman Kumar as members. This Committee, working in close
co-operation with Price Waterhouse–LLP under the FIRE Project of USAID, has drafted
the Code, which has been approved and recommended by the Board of AMFI for
implementation by its members. I take opportunity to thank all of them for their efforts.
The AMFI Code of Ethics, “The ACE” for short, sets out the standards of good
practices to be followed by the Asset Management Companies in their operations and
in their dealings with investors, intermediaries and the public. SEBI (Mutual Funds)
Regulation 1996 requires all Asset Management Companies and Trustees to abide by
the Code of conduct as specified in the Fifth Schedule to the Regulation. The AMFI
Code has been drawn up to supplement that schedule, to encourage standards higher
than those prescribed by the Regulations for the benefit of investors in the mutual fund
industry.
7.3 ROLE OF SEBI IN MUTUAL FUND:
An index fund scheme? means a mutual fund scheme that invests in securities in the
same proportion as an index of securities;” A mutual fund may lend and borrow
securities in accordance with the framework relating to short selling and securities
lending and borrowing specified by the Board. “A mutual fund may enter into short
selling transactions on a recognized stock exchange, subject to the framework
relating to short selling and securities lending and borrowing specified by the Board.”
“Provided that in case of an index 13 fund scheme, the investment and advisory fees
shall not exceed three fourths of one percent (0.75%) of the weekly average net
assets.??
Every mutual fund shall buy and sell securities on the basis of deliveries and shall in
all cases of purchases, take delivery of relevant securities and in all cases of sale,
deliver the securities: Provided that a mutual fund may engage in short selling of
securities in accordance with the framework relating to short selling and securities
lending and borrowing specified by the Board: Provided further that a mutual fund may
MUTUAL FUND
93
enter into derivatives transactions in a recognized stock exchange, subject to the
framework specified by the Board.”
Source:http://www.canstockphoto.com
MUTUAL FUND
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CHAPTER 8
CASE STUDY
Franklin Templeton Investment India
VISION
To be the premier global investment management organization by offering high quality
investment solutions, providing outstanding service and attracting, motivating and
retaining talented individuals.
MUTUAL FUND
95
INTRODUCTION
Franklin Templeton's association with India dates back to more than a decade as an
investor. As part of the group's major thrust on investing in markets around the world,
the India office was set up in 1996 as Templeton Asset Management India Pvt. Limited.
It flagged off the mutual fund business with the launch of Templeton India Growth Fund
in September 1996, and since then the business has grown at a steady pace.
Since starting its operations in India, Franklin Templeton has invested a
considerable amount of time, effort and resources towards investor and distributor
education, the belief being - to be successful in the long term, the fundamentals need
to be corrected, at whatever cost! This has resulted in various advertising campaigns
aimed at educating investors, participation in seminars and distributor training
programs. Franklin Templeton has played a pivotal role in steering the industry to its
current stage, and as long term players, we continue to strive to achieve the objective
of 'making mutual funds an investment of choice' for both individual and institutional
investors. In July 2002, Franklin Templeton India acquired Pioneer ITI, another leading
fund house in India to create an organization with rich investment experience over
market cycles, one of the most comprehensive product portfolios, footprint across the
country and an in-house shareholder servicing function. The huge synergies that
existed in the two organizations have helped the business grow at a rapid pace,
catapulting the company to among the top two fund houses in India.
FRANKLIN TEMPLETON INVESTMENT SCHEMES
It is their belief that individuals differ in their investment needs based on personal
financial goals. So they recommend us that we should, at the very beginning identify
our own financial goals, be it planning for our children's education or a comfortable
retired life. After defining these, one needs to plan for them in an organized manner
and look at investments that help achieve these goals. Investment experts recommend
that growth investments such as equity funds and stocks are a good choice for long
term needs (five years or more), income funds for medium-term needs and liquid funds
for short-term requirements.
MUTUAL FUND
96
The investment pyramid above illustrates a variety of investment options available.
The investments at the top of the pyramid provide greater opportunity for long-term
capital growth, while the investments at the bottom generally provide greater potential
for current income and preservation of capital. In addition to providing one with the
flexibility to create an investment plan based on individual financial goals, Mutual
funds also offer other benefit.
VISIT TO Franklin Templeton Mutual Fund
To understand and study the mutual funds concept in detail, I visited the Franklin
Templeton Asset Management Pvt.Ltd. at Bandra-Kulra complex (Head Office) on 27
th
August 2015. I interviewed Mr.Juzer Tambawalla (Marketing Manager) he spared
MUTUAL FUND
97
some of his valuable time to explain in brief about the mutual fund system in their
organization & he also answered to my questions.
The following are the questions asked to Mr. Juzer Tambawalla:-
1. Farhana (I asked): What is a Mutual Fund?
Mr. Juzer replied: A Mutual Fund is an investment tool that allows small investors
access to a well-diversified portfolio of equities, bonds and other securities. The
beauty of mutual funds is that anyone with an investible surplus of a few hundred
rupees can invest and reap returns as high as those provided by the equity markets
or have a steady and comparatively secure investment as offered by debt
instruments.
2. I asked: What does a Mutual Fund do with investor's money?
Mr. Juzer replied: Anybody with an investible surplus can invest in mutual funds. A
Mutual Fund invests the pool of money collected from the investors in a range of
securities comprising equities, debt, etc. after charging for the AMC fees.
3. I asked: What is Net Asset Value (NAV)?
Mr. Juzer replied: Net asset value (NAV) represents the market value of all assets per
unit, held by the fund. For an investor, it simply signifies the current value of his or
her investment in the fund.
4. I asked: Is there a guaranteed return on the mutual funds?
Mr. Juzer replied: No, we do not give any guarantees on the returns on any of our
funds.
5. I asked: What are the types of returns one can expect from a Mutual Fund?
Mr. Juzer replied: Mutual Funds give returns in two ways - Capital Appreciation or
Dividend Distribution. An increase in the value of the units of the fund is known as
capital appreciation. The profit earned by the fund is distributed among unit holders
in the form of dividends is called Dividend distribution.
MUTUAL FUND
98
6. I asked: Are mutual funds insured?
Mr. Juzer replied: No. Mutual fund units are not insured. There is no guarantee that
when you sell your shares, you will receive what you paid for them. However,
because mutual fund investments are more risky than insured investments, they
generally offer potential for higher long-term returns.
7. I asked: Why one should invest in mutual funds?
Mr. Juzer replied: Mutual funds have qualified professionals who manage the fund for
investors. Mutual funds minimize risk by creating a diversified portfolio while
providing the necessary liquidity.
8. I asked: Why should one invest in Franklin Templeton Mutual Funds?
Mr. Juzer replied: In India, Franklin Templeton Investments is one of the largest Asset
management companies with over Rs. 26,469crores of assets for over 20 lakh
investor accounts. It offers 240 products worldwide and has 60 years of experience
in international investment management.
9. I asked: TAX implications for the mutual fund
Mr. Juzer replied: Tax benefit to the Fund. Templeton Mutual Fund is registered with
SEBI and as such, the entire income of the Fund is exempt from income tax under
Section 10(23D) of the Act and is entitled to receive income without any deduction of
tax at source.
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SURVEY REPORT
THE PERCENTAGE OF PEOPLE WHO ARE AWARE ABOUT MUTUAL FUNDS.
AMONG THE PEOPLE AWARE, PERCENTAGE OF PEOPLE INVESTED.
98% OF PEOPLE ARE
AWARE OF MUTUTAL
FUNDS
2% OF PEOPLE ARE
NOT AWARE OF
MUTUAL FUNDS
54%ARE INTVESTED
46% ARE NOT
INVESTED
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PEOPLE INTERESTED IN INVESTING IN MUTUAL FUNDS
PEOPLE WHO ARE INTERESTED,WHICH MUTUAL FUND DO THEY PREFER
68% OF PEOPLE
INTERESTED IN
INVESTING
32% OF PEOPLE NOT
INTERESTED IN
INVESTING
0%
10%
20%
30%
40%
50%
60%
70%
FRANKLIN
TEMPLETON
MUTUAL FUND
RELIANCE
MUTUAL FUND
SBI MUTUAL
FUND
OTHER FUNDS
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PEOPLE PREFER MUTUAL FUND BECAUSE OF:-
PEOPLE PREFERING DIFFERENT MODE OF PAYEMENT
Analysis
From the Survey it is concluded that most of the people are aware about Mutual
Funds. Among the people who are interested in investing, are mostly keen to invest
in Franklin Mutual fund on monthly basis plan.
64% PREFER BECAUSE
OF HIGH RETURN
36% PREFER BECAUSE
OF LOW RISK
46% ONE TIME
INVESTMENT
54% SIP(MONTHLY
INCOME PLAN)
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QUESTIONNAIRE
A study of preferences of the investors for investment in mutual funds.
1. Personal Details:
(A). Name:-
(B). Add: - Phone:-
(c). Age:-
2. Do you know what Mutual Funds are?
Y Yes No
3. Have you invested in Mutual Funds?
Yes No
4. Do you plan to invest in Mutual Funds in future?
Yes No
5. Which Mutual Fund would you like to prefer for investing –
Reliance Mutual Fund. Franklin Templeton Mutual Fund.
SBI Mutual Fund. Other Mutual Funds.
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6. Why would you prefer, Mutual Funds, because of –?
Higher Returns. Low Risk.
7. What types of schemes would you prefer?
SIP (Monthly Investment Plan) One Time Investment
Comment
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ARTICLES ON MUTUAL FUNDS
SOURCE: TIMES OF INDIA
ECONOMIC TIMES
MUTUAL FUND
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Quotes of Franklin & Templeton Franklin
“A famous investor once said the key to success was simple: „buy straw hats in the
winter.? And that?s what we try to do. We buy things when they are out of favor,
believing we will be rewarded for patience and foresight.
~ Bill Lippmann
[President of advisory services and portfolio
manager.]
Templeton
“Investors are the people who buy for fundamental values. Speculators are
those who buy in the hope of selling later to someone else at high prices.”
~ Sir John Templeton
Founder and Former Chairman
[He is no longer affiliated with the Templeton
organization.]
Mutual Series
“We care about what companies would be worth if they were put up for auction
and sold. And we want to buy it for 60% of that.”
~ Michael Price
[Chairman of the board of Franklin Mutual Series
Fund.]
MUTUAL FUND
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RECOMMENDATIONS AND SUGGESTIONS
After a thorough study and analysis of the data and information, the following are
the few recommendations and suggestions, if adopted, would definitely benefit the
financial market, which is in its booming stage, in the short run and in the long run as
well. Recommendations and suggestions are normally given when there are some
problems or difficulties lying in the market. Here in this research report my
recommendations and suggestions are totally based on the facts, reactions, attitudes,
perceptions, and many other things of the respondents which I have received from
them during my research work. The recommendation part of this research work has
three parts only, which I feel can push the mutual fund market to a higher level.
The three parts are –
1. Market Development
2. Marketing techniques
3. Marketing plans
1. Market development:
My consumer survey has revealed the fact that the market for mutual fund is still in
its expansion stage. Hence the companies have to do a lot of things and activities to
develop the market for mutual fund in this capital city. Because the market
development is as important as STP of any marketing plan. Market development means
doing anything and everything for the growth of the mutual fund industry. Hence in the
following ways the market of mutual fund can be developed more significantly:
Awareness:
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107
Awareness of mutual fund products must be increased in this city. The awareness
can be enhanced in the following ways---
? Conference or seminars on ?mutual funds? can be conducted on regular basis.
This will no doubt increase the awareness of mutual fund in the minds of the
investors.
? All the companies must join hands and work together for this.
Customer education:
As the awareness of mutual funds is still improving in this market, companies
should give focus on ?customer education?. For this purpose again the conference
and seminars can be the best way towards educating the customers. Again free
training programme to the agents can be fruitful.
Government intermediation:
Government must also work together with the mutual fund companies in promoting
the concept of mutual fund.
Confidence building activities:
People in this city are not confident in investing their money in mutual funds. Hence
there is a need to do something which will build the confidence in the minds of the
investors. Hence the confidence building activities must be carried out the mutual fund
companies. Because most of the people think that investing in mutual funds is a very
risky affair. In the following ways the confidence can be increased in the minds of the
people.
? As the common person has blind faith in all the government institutions, hence they
have to come forward and convey the message that investing in mutual fund is not
that risky.
? The present performance of the mutual funds is very good indeed. And the
companies should cash in on this opportunity. The performance of the mutual funds
can be published in the local and
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? Other newspapers and magazines, journals. This will no doubt induce the investors
towards investing in mutual funds.
? Case study of the investors who have been benefited in investing in mutual funds
can be published in the newspapers, magazines and journals.
2. Marketing techniques:
While the Mutual in India has seen dramatic improvements in quantity as well as
quality of product and service offerings over the past decade. One of the primary
reasons for this slow growth is the fact that mutual funds are a new concept in India,
which needs to be still understood by large sections of Indian investors. In this
scenario, the mutual fund companies have the onerous responsibility of not just selling
mutual fund products, but marketing „them correctly.
3. Marketing plans:
Booklets on mutual funds can be distributed at free of cost to the common people
with the newspapers, magazines, journals. This will help in attitude formation of the
investors.
Companies must focus on tailored made mutual fund schemes rather than on the
traditional products/ schemes.
Unlike the case of insurance where there is a restriction on certain age of the
investors to invest on insurance, there is no such restriction on investing in mutual
fund. An investor of any age bracket can invest in mutual fund. Hence the strong and
efficient CRM can prove to be very fruitful.
Selling of mutual funds only through agents and the branch will not serve the
purpose. Distribution network should be increased. Here aggressive strategy must be
taken by a company in selling mutual funds. This will only be possible when the
investors are well familiar with the concept of mutual funds and its advantages and
MUTUAL FUND
109
? As selling of financial products requires well trained people, the companies must
provide proper training to the agents and financial planners. For this training
institute must be opened in this township.
? Continuous brand building activities must be carried out by the companies. For this
purpose companies should initiate some sort of promotional activities like, ads in
newspapers, magazines, journals.
? Educational institutes must start some professional courses on mutual funds and
other finance specialized courses. This will create some sort awareness about the
mutual funds.
? Mutual fund companies must tie up with other financial institute like banks, post
office for reaching to the mass people. Because these financial institutes have
tremendous reach to the mass people in our country. As a result mutual fund
companies can have easy access to the common people. The companies must go in
for this kind of strategic alliance with other companies as well. Because strategic
alliance not only benefit the companies but help in developing the market also.
Handsome incentive:
Push selling of mutual funds products must be stressed on. This push selling
must be done through agents and financial planners. Handsome incentives and
commission will no doubt motivate them to push sell the mutual funds.
Attractive schemes:
As the maximum number of investors of mutual funds in this city are confined to
the business class and upper social class category. Common people rarely invest in
mutual funds. Hence the different attractive schemes can be launched to attract the
common people towards mutual fund investment. These schemes are for promotional
purpose only. The main purpose of these schemes are to draw retail investors towards
the mutual funds investment.
The following are some of the schemes:
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110
? For opening of new savings bank account, certain units of mutual funds of a
company (strategic alliance company) can be given at free of cost to the account
holder. This will no doubt make the people more familiar with the concept of mutual
funds.
? On buying of one or some life insurance policies, again certain units of mutual fund
can be given at free of cost to the policy holders this will ultimate lead to the mutual
fund buying habit of the common people.
? Again each car loan or other kind loan of a certain amount will get the loan taker
certain units of mutual funds absolutely free of cost.
Sponsorship of management events:
As we all know that management institutes and universities and other educational
institutes are the production houses of the business managers. In these institutes,
several kind of management activities going on throughout the year. The companies
must cash this opportunities to make them know to the students and to the people who
are associated with these institutes. Companies can sponsor some of the management
events of these institutes. This will again lead to the communication of the products of
the companies.
MUTUAL FUND
111
CONCLUSION
We can infer from the analysis that the concept of mutual fund is still in its growing
phase. With the growing importance of mutual fund in other areas in the country, this
place is witnessing the same rate of growth in mutual funds. Apart from these facts the
following are some other important facts which can easily be inferred from the paper---
? Huge opportunities of Mutual funds exist. In short the market in this city is a
growing market
? As because many companies exist in this market, competition is cut to throat.
? Mindsets of the investors are not towards mutual funds. They still think of investing
in traditional investment alternatives. Customers are not properly educated about
the mutual funds.
? Few private sectors banks like ICICI, HDFC, UTI, ING VYSYA etc. sell mutual funds
through their branches only.
? Specialized agents of mutual funds are rarely seen. Financial advisors are not seen
there who can educate the investors.
? Posters, banners or other promotional activities are rarely seen in this market.
? Mutual fund companies do not have aggressive strategies.
? Insurance products are and can be the main competitors of mutual funds.
? Mutual fund investors are confined to the upper-middle and upper social class in
this market. Upper-lower class and lower-upper class people are still untouched.
? More than half of the respondents have wrong perception about the mutual funds.
They feel mutual funds are very risky investment alternative
? Most of the respondents are satisfied with their current return from their
investment. Most of the respondents neither do nor want to take risk in investing
their money in mutual funds.
MUTUAL FUND
112
BIBLIOGRAPHY
? BOOKS REFERRED
o Mutual fund management – ATUL A. SATHE
o AMFI Mutual Fund Test – Workbook.
o Financial services and management- Gordon And Natarajan
? MAGAZINES
o OUTLOOK MONEY
o INVESTIME (VOL8)
? NEWSPAPERS
o ECONOMICS TIMES
o TIMES OF INDIA
o Pamphlets and newsletters from Franklin Templeton.
? OTHERS
o Literature from Stock Holding Corporation of India.
o Key Information Memorandum – Templeton Mutual Fund.
o Fact sheet of Templeton Mutual Fund.
MUTUAL FUND
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WEBLOGRAPHY
o Web site – www.templetonindia.com
o Web site – www.amfiindia.com
o Web site – www.rbi bulletin.com
o Web site – www.moneycontrol.com
o Web site – www.amfiindia.com
o Web site – www.onlineresearchonline.
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