Mutual fund


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Mutual fund

  1. 1. MUTUAL FUNDS THE CONCEPT OF A MUTUAL FUND: A SUMMARY A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus “joint” or “mutual”; the fund belongs to all investors. A single investor’s ownership of the fund is in the same proportion as the amount of contribution made by him or her, bears to the total amount of the fund. A mutual fund uses the money collected from investors to buy those assets, which are specifically permitted by its stated investment objective. Thus, an equity fund would buy equity assets – ordinary shares, preference shares, warrants, etc. A bond fund would buy debt instruments such as debentures, bonds or government securities. It is in these assets, which are owned by the investors in the same proportion as their contribution bears to the total contribution of all the investors put together. 1
  2. 2. MUTUAL FUNDS When an investor subscribes to a mutual fund, he or she buys a part of the assets or the pool of funds, which are outstanding at that time. It is no different from buying “shares” of a joint stock company, in which case the purchase makes the investor a part owner of the company and it’s assets. In fact, in U.S.A., a mutual fund is constituted as an investment company and an investor “buys into the fund”, means he buys the shares of the fund. In India, a mutual fund is constituted as a Trust, and the investor subscribes to the “units” issued by the fund. In any case, a mutual fund shareholder or a unit holder is the part owner of the fund’s assets. A unit holder in Unit Trust of India US – 64 Scheme is the same as the UTI – Mastershare – holder or an investor in Alliance or DSP Merrill Lynch or Prudential – ICICI or Tata or Templeton or SBI or any other fund manager’s open ended or closed ended schemes. Since each owner is the 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 funds 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 no. of units held. 2
  3. 3. MUTUAL FUNDS 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 three distinct phases. 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, ands 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 3
  4. 4. MUTUAL FUNDS 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. 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. 4
  5. 5. MUTUAL FUNDS 1992 – 1993 AMOUNT MOBILISED (Rs. Crores) ASSETS UNDER MANAGEMENT (Rs. Crores) MOBILISATION AS % OF GROSS DOMESTIC SAVINGS 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 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. 5
  6. 6. MUTUAL FUNDS 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 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. 1998 - 1999 6
  7. 7. MUTUAL FUNDS AMOUNT MOBILISED (Rs. Crores) ASSETS UNDER MANAGEMENT (Rs. Crores) MOBILISATION AS % OF GROSS DOMESTIC SAVINGS 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 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.As at the end of March 2007, there were 30 Mutual Funds, which Managed assets of Rs. 3,26,388 crores under 756 schemes. 7
  8. 8. MUTUAL FUNDS The graph indicates the growth of assets over the years. GROWTH IN ASSETS UNDER MANAGEMENT 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. 8
  9. 9. MUTUAL FUNDS ADVANTAGES AND DISADVANTAGES OF INVESTING THROUGH 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 avenues of investing, particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and the market monitoring. In mutual funds individuals can expect higher returns and lower risk, whereas in other marketable instruments risk is much higher as fund is invested only in one sector. While the benefits of investing through mutual funds far outweigh the disadvantages, an investor and his advisor will do well to be aware of the few shortcomings of using the mutual funds investment vehicle. ADVANTAGES of investing through OF MUTUAL FUNDS 9
  10. 10. MUTUAL FUNDS Following are the major advantages offered by mutual funds to all investors:  Portfolio Diversification: Each investor in the fund is the 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.  Professional Management: 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.  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 buys a share or debenture on his own or in any other form. While investing in the pool of funds with other investors, the potential losses are also shared with other investors. This risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund.  Reduction of Transaction Cost: What is true of risk is also true of the transaction costs. The investor bears all the costs of investing such as brokerage or custody of securities. When going through mutual fund, he has the benefit of economies of scale; the funds pay lesser costs due to large volumes; a benefit passed on to its investors. 10
  11. 11. MUTUAL FUNDS  Liquidity: Often, investors hold shares or bonds they cannot directly, easily or quickly sell. When they invest in the units of a fund, they can generally cash their investment any time, by selling their units to the fund if open – ended, or selling them in the market if the fund is closed – ended. Liquidity on investment is clearly a big benefit.  Convenience and Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holdings from one scheme to another, get updated market information, and so on. 11
  12. 12. MUTUAL FUNDS DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS The following are some of the drawbacks of Mutual Funds:  No Control over Costs: An investor in a mutual fund has no control over the overall cost of investing. He pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even while the value of his investments may be declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investment. However, this shortcoming only means that there s a cost to obtain the benefits of mutual fund services.  No Tailor – made Portfolios: Investors who invest on their own can build their own portfolios of shares and bonds and other securities. Investing through funds means he has delegates this authority 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 no. of different schemes, within their own management company. An investor can choose from different investment plans and construct a portfolio of his own.  Managing a Portfolio of Funds: Availability of a large no. of funds can actually mean too much choice for an investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in. 12
  13. 13. MUTUAL FUNDS Structure of mutual funds  Sponsor: Sponsor as any person who either itself or in association with another body corporate establishes a mutual fund. Sponsor is that entity that sets up an mutual fund.He sets up a mutual fund to earn money by doing fund management. Largely, a sponsor can be compared to a promoter of a company  Trustees: Trustees manage the trust. Trustees are responsible to investors in the mutual funds. Trustees insure that the activities of the mutual fund are in accordance SEBI regulations, 1996. Trustees insure that the AMC’s have proper systems and procedures in place.  AMC: An asset management company is the company registered under the companies act, 1956. Sponsor creates the AMC and this is the entity, which manages the funds of the mutual fund. The mutual fund pays a small fee to the AMC for management of its fund. The AMC acts under the provision of trustees and is subject to the regulation to SEBI 13
  14. 14. MUTUAL FUNDS 14
  15. 15. MUTUAL FUNDS 15
  16. 16. MUTUAL FUNDS TYPES OF FUNDS A. By structure  Open – end Funds: An open – end fund is one that has units available for sale and repurchase at all times. An investor can buy or redeem units from the funds itself at a price based on the Net Asset Value (NAV) per unit. NAV per unit is the market value of the fund’s liabilities divided by the units outstanding. The number of units outstanding goes up or down every time the fund issues new units or repurchases existing units. In other words, the “unit capital” of an open – end mutual fund is not fixed but variable. The fund size and its total investment amount go up if more new subscriptions come in from new investors than redemptions by existing investors; the fund shrinks when redemptions of units exceeds fresh subscriptions. An open – end fund is not obliged to keep selling/ issuing new units at all times and many successful funds stop issuing further subscriptions from new investors after they reach a certain size and think they cannot manage a larger fund without adversely affecting profitability. On the other hand, an open – end fund rarely denies to its investors the facility to redeem existing units.  Close – end Funds: Unlike an open – end fund, the ‘unit capital’ of a closed – end fund is fixed, as it makes a one-time sale of fixed number of units. Later on, unlike open – end funds, close – end funds do not allow investors to buy or redeem units directly from the funds. However, to provide the much-needed liquidity to investors, many close – end funds get themselves listed on stock exchange (s). Trading through a stock exchange enables investors to buy or sell units of a close – end mutual fund from each other, through a stockbroker in the 16
  17. 17. MUTUAL FUNDS same fashion as buying or selling shares of a company. The fund units may be traded at a discount or premium or even at par to the NAV based on the investor’s perception about the fund’s future performance and other market factors affecting the demand for or supply of the fund’s units. The number of outstanding units of a closed end fund does not vary on account of trading in the fund’s units at the stock exchange.  Load and no-load funds: Marketing of a new mutual fund scheme involves initial expenses. These may be recovered from the investors in different ways and different times. Three different ways in which a funds sales expenses may be recovered from the investors are: -  At the time of investor’s entry into the fund, by deducting a specific amount from his initial contribution, or  By charging the fund / scheme with a fixed amount each year, during the stated number of years, or  At the time of the investor’s exit from the scheme, by deducting a specified amount from the redemption proceeds payable to the investor. These charges made by the fund managers to the investors to cover distribution/sales / marketing expenses are often called “loads”. The load charged to the investor at the time of his entry into a scheme is called a “front-end or entry load”. This is the first case above. The load amount charged to the scheme over a period of time is called a “differed load”. This is the second case above. The load that the investor pays at the time of his exit is called a “back-end or exit load this is the third case above. Some funds may also charge different amounts of loads to the investors. Depending upon how many years the investor has stayed with the fund; the longer the investor stays with the fund, less the amount of “exit load” he is charged. This is called “contingent deferred sales charges”. The front – end load amount is deducted from the initial contribution/ purchase amount paid by the Incoming investor, thus reducing his initial investment amount. Similarly exit loads would reduce the redemption proceeds paid out to the outgoing investor. if the sales charge is made on a differed basis directly to the scheme, the amount of load may not be 17
  18. 18. MUTUAL FUNDS apparent to the investor, as the scheme’s NAV would reflect the net amount after the deferred load. Funds that charge front – end, back – end or deferred loads are called load funds. Funds that make no such charges or loads for sales expenses are called “no - load funds”. An example: If an open –end fund’s NAV per unit is Rs.11, with a front load of 2%, the price at which an investor can buy a unit is Rs.11.22. Expressed another way, an investment of Rs.100 would not buy 100/11=9.9units,but only 100-2=98/11=8.9units. if the redemption price is Rs.10.70,with a back end load of 2%,the exit load charged by the fund amounts to Re.0.21; so net sales proceeds will be 10.70-0.21=10.49. Express another way, sale of 50units would not fetch 50*10.70=Rs.535, but only 50*10.49=Rs.524.5. From the investor’s perspective, it is important to note that loads are not charged only by open – end funds; even a closed – end fund can charge a load to cover the initial issue expenses. It is also important to note that there are other expenses such as the fund manager’s fees, which are charged to the investor on an ongoing basis, thus reducing the Net Asset Value of the fund. Some funds charge only an entry load, and some only an exit loads. Such funds may be thought of as partial load funds. Recently, a fund has started a new scheme with deferred load over future years. Some funds in India waive the initial issue expenses that are borne by the Asset Management Company or the sponsors, so the entire amount paid in by the investor gets invested without entry load deduction. At the same time, some of these no – front – load funds may charge exit loads from time to time. In other words, from time to time, a no – load fund may become a load fund. Note that a no – load fund only means that a fund that does not charge sales expenses. All funds still charge the schemes for management fees and other recurring expenses. 18
  19. 19. MUTUAL FUNDS  Tax – exempt and Non-Tax – exempt Funds When a fund invests in tax – exempt securities, it is called a tax – exempt fund. In India, the current situation is that all of the dividend income received from any of the mutual funds is tax free in the hands of the investor. However some funds have to pay a distribution tax, before distributing income to investors. In other words, after the 1999 Union Government budget in India, for most investors, most mutual fund schemes are tax – exempt investment avenues, making the distinction between tax – exempt and taxable funds a thin one. While Indian mutual funds currently offer tax–free income, any capital gains arising out of sale of fund units are taxable. All these tax considerations are important in the decision on where to invest as the tax – exemptions or concessions alter the returns obtained from these investments. Hence classification of funds from the taxability perspective has great significance for investors. 19
  20. 20. MUTUAL FUNDS MUTUAL FUND TYPES All mutual funds would either close – end or open – end, and either load or no – load. These classifications are general. For example – all open – end funds operate the same way; or in case of a loan – fund a deduction is made from investors’ subscription or redemption and only the net amount used to determine his number of shares purchased or sold. Once the fund classes have been reviewed, let us see the fund type in a more specific manner. Funds are now to be distinguished from each other on the basis of their investment objectives and the type of securities they invest in. The major types of fund available under the general classifications as made above are: Broad Fund Types by Nature of Investments Mutual funds may invest in equities, bonds or other fixed income securities, or short-term money market securities. So, we have Equity, Bond and Money Market Funds. All of them invest in financial assets. But there are funds that invest in physical assets. In that way we have Gold or other Precious Metals Funds, or Real Estate Funds. Broad Fund Types by Investment Objective Investors and the hence the mutual funds pursue different objectives while investing. Thus, Growth Funds invest for medium to long-term capital appreciation. Income Funds invest to generate regular income, and less for capital appreciation. Value Funds invest in equities that are considered under – valued today, but whose value will be unlocked in the future. 20
  21. 21. MUTUAL FUNDS Broad Funds Type by Risk Profile The nature of a fund’s portfolio and it’s investment objective imply different levels of risks undertaken. Funds are therefore often grouped in order of risk. Thus, Equity Funds have a greater risk of capital loss then a Debt – Fund that seeks to protect the capital while looking for income. Money Market Funds are exposed to fewer risks than even the Bond Funds, since they invest in short – term fixed income securities, as compared to longer – term portfolios of Bond Funds. By Investment Objective The followings are different mutual funds of different risk classification: MONEY MARKET FUNDS Often considered to be at the lowest rung in the order of risk level, money market funds invest in securities of a short-term nature, which generally means securities of less than one – year maturity. The typical, short – term, interest – bearing instruments these funds invest in include treasury bills issued by governments, certificates of deposits issued by banks and commercial paper issued by companies. In India, money market mutual funds also invest in the inter – bank call money market. The major strengths of money market funds are the liquidity and safety of the principle that the investors can normally expect from short – term investment. GILT FUNDS Gilts are government securities with medium to long-term maturities, typically of over one year (under one year instruments being money market securities). In India, we have now seen the emergence of Government Securities or Guilt Funds that invest in government papers called dated securities (unlike treasury bills which expire in less than a year). Since the issuer is the government/ s of India/ states, these funds have little risk of default and hence offer better 21
  22. 22. MUTUAL FUNDS protection of capital. However, investors have to recognize the potential changes in the values of debt securities held by the funds that are caused by changes in the market price of debt securities quoted on the stock exchange (just like equities). Debt securities’ prices fall when interest rate levels increase (and vice versa). DEBT FUNDS or [INCOME FUNDS] Next in the order of risk - level, there are the general category Debt Fund. Debt funds invest in debt securities issued by not only the government but also the private companies, banks and financial institutions and other entities such as infrastructure/ utilities. By investing in debt, these funds target low risk and stable income for the investor as their key objective. However, as compared to the money market funds, they do have a higher price fluctuation risk, since they invest in long-term securities. Similarly, as compared to Guilt Funds, general debt funds do have a higher risk of default by their borrowers. Debt Funds are largely considered as Income Funds as they do not target capital appreciation, look for high current income, and therefore distribute a substantial part of their surplus to investors. Income funds that target returns substantially above market levels can face more risks. Income funds falls largely in the category of Debt funds as they invest primarily in fixed income generating debt instruments. Here again, different investment objectives set by the fund managers would result in different risk profiles. Let us now analyze Debt funds in this light:  Diversified Debt Funds A debt fund that invests in all available types of debt securities, issued by entities across all industries and sectors is a properly diversified debt fund. While debt funds offer high income less risk than equity funds, investors need to recognize that debt securities are subject to risk of default by the issuer on payment of interest or principle. A diversified debt fund has the benefit of risk reduction through diversification and sharing of any default - related losses by a large number of investors. Hence a diversified debt fund is 22
  23. 23. MUTUAL FUNDS less risky than a narrow - focus fund that invests in debt securities of a particular sector or industry.  Focused Debt Funds Some debt funds have a narrower focus, with less diversification in it’s investments. Examples include sector, specialized and offshore debt funds. These funds are similar to the funds described later in the equity category except that debt funds have a substantial part of the portfolio invested in debt instruments and are therefore more income oriented and inherently less risky than equity funds. However, the Indian Financial Market have demonstrated that debt funds should not be automatically considered to be less risky than equity funds, as there have been relatively large defaults by issuer of debt and many funds have non - performing assets in their portfolios. It should also be noted that market values of debt securities will also fluctuate more as Indian debt markets witness more trading and interest rate volatility in the future. The central point to be noted is that focused debt funds are prone to greater risk than diversified debt funds. Other examples of focused funds include those that invest only in Corporate Debentures and only in Tax Free Infrastructure or Municipal Bonds. While these funds are entirely conceivable now, they may take some time to appear as the real choice of Indian investors. One category of specialized funds that invests in housing sector but offer greater security and safety than other debt instruments are the Mortgage Backed Bond Funds, that invests in special securities created after securitisation of and thus secured by loan receivables of housing finance companies. As the Indian Financial Markets witness the growth of securitisation, such funds may appear on the mutual funds scene sooner rather than later.  High Yield Debt Funds 23
  24. 24. MUTUAL FUNDS Usually, Debt Funds control the borrower default risk by investing in securities issued by borrowers who are rated by credit rating agencies and are considered to be of “investment grade”. There are, however, High Yield Debt Funds that seek to obtain higher interest returns by investing in debt instruments that are considered “below investment grade”. Clearly, these funds are exposed to higher risk. In the USA, funds that invest in debt instruments that are not backed by tangible assets and rated below investment grade (popularly known as junk bonds) are called junk bond funds. These funds tend to be more volatile than other debt funds, although they may earn higher returns as a result of the higher risks taken.  Assured Return Funds – An Indian Variant. Fundamentally, the mutual funds hold assets in trust for investors. All returns and risks are for account of the investor. The role of the fund manager is to provide the professional management service and to ensure the highest possible return consistent with the investment objective of the fund. The fund manager or the trustees or the sponsors do not give any guarantee on the minimum return to the investor. However in India, historically, UTI and other funds have offered “assured returns” schemes to the investors. The most popular variant of such schemes is the monthly income plans of UTI. Returns are indicated in advance for all of the future years of these closed - end schemes. If there is a shortfall, it is borne by the sponsors or managers – UTI in this example. Assured returns a guaranteed monthly income plans are essentially Debt/ Income Funds. To the extent that the guarantor has the required financial strength, assured return debt funds certainly reduce the risk level considerably, as compared to all other debt or equity funds. However the market regulator SEBI has been discouraging fund managers from offering assured returns schemes. If offered, explicit guarantee is required form a guarantor whose name is specified in advance in the offer document of the scheme. While assured Return Funds may certainly be considered to be the lowest risk type within the debt funds category, they are still not entirely risk – free, as the investors have to normally lock in their funds for the term of the scheme or at least a specified period such as three years. During this period, the financial markets may have moved and the 24
  25. 25. MUTUAL FUNDS investors may have lost the opportunity to obtain higher returns later in other debt or equity funds. Besides, the investor does carry some credit risk on the guarantor who must remain solvent enough to honor his guarantee during the lock – in period. EQUITY FUNDS As investors move from debt fund category to equity funds they face increased risk level. However, there are a large variety of equity funds and all of them are not equally risk prone. Investors and their advisors need not to sort out and select the right equity fund that suits their risk appetite. In the following section, we have presented the equity fund types, going from the highest risk level to the lowest level within this category. Before we look at the equity fund types in terms of risk level, we must understand where the risks equity funds come from and how they are different from debt funds. Equity funds invest a major portion of their corpus in equity shares issued by the companies, acquired directly in initial public offerings or through the secondary market. Equity funds would be exposed to the equity price fluctuations risk at the market level, at the industry or sector level and at the company-specific level. Equity funds’ net asset values fluctuate with all these price movements. These price movements are caused by all kinds of external factors, political and social as well as economic. The issuers of equity shares offer no guaranteed repayment as in case of debt instruments. Hence equity funds are generally considered at the higher end of the risk spectrum among all funds available in the market. On the other hand, unlike debt instruments that offer fixed amounts of repayments, equities can appreciate in value in line with the issuer’s earnings potential, and so offer the greatest potential for growth in capital. Equity funds adopt different investment strategies resulting in different levels of risk. Hence, they are generally separated into different types in terms of their investment styles. Some of the major types of equity funds arranged in order of higher to lower risk level: 25
  26. 26. MUTUAL FUNDS  Aggressive growth funds There are many types of stocks/shares available in the market; Blue Chips that are recognized market leaders, less researched stocks that are considered to have future growth potential and even some speculative stocks of somewhat unknown or unproven issuers. Fund managers seek out ant invest in different types of stocks in, line with their own perception of potential returns and appetite for risk. As the name suggests, aggressive growth funds target maximum capital appreciation, invest in less researched or speculative shares and may adopt speculative investment strategies to attain their objective of high returns for the investor. Consequently, they tend to be more volatile and riskier than other funds.  Growth funds Growth funds invest in companies whose earnings are expected to rise at an above average rate. These companies may be operating in sectors like technology considered having growth potential, but not entirely unproven and speculative. The primary objective of growth funds is capital appreciation over a three to five year span. Growth funds are therefore less volatile than funds that target aggressive growth. 26
  27. 27. MUTUAL FUNDS  Specialty funds These funds have a narrow portfolio orientation and invest in only companies that meet pre-defined criteria. For example, at the height of South African apartheid regime, many funds in the U.S offered plans that promised not to invest in South African companies. Some funds may build portfolios that will exclude tobacco companies. Funds that invest in particular regions such as the Middle East or the ASEAN countries are also an example of specialty funds. Within the specialty funds category, some funds may be broad- based in terms of the types of investments in the portfolio. However, most specialty funds tend to be concentrated funds, since diversification is limited to one type of investment, clearly concentrated specialty funds tend to be more volatile than diversified funds.  Sector funds: Sector funds portfolios consist of investments in only one industry or sector of the market such as information technology, pharmaceuticals or fast moving consumer goods that have recently been launched in India. Since sector funds do not diversify into multiple sectors, they carry a higher level of sector and company specific risk than diversified equity funds.  Offshore Funds: These invest in equities in one or more foreign countries thereby achieving diversification across the country’s borders. However they also have additional risks-such as the foreign exchange rate risk- and their performance depends on the economic conditions of the countries they invest in. offshore equity funds may invest in a single country (hence riskier) or many countries (hence more diversified).  Small-cap equity funds: These funds invest in shares of companies with relatively lower market capitalization than that of big, blue chips companies. They may thus be more volatile than other funds, as smaller companies’ shares are not very liquid in the markets. We can think of these funds as a segment of specialty funds. In terms of risk characteristics, small company 27
  28. 28. MUTUAL FUNDS funds may be aggressive- growth or just growth type. In terms of investment style, some of these funds may also be “value investors”.  Option income funds: These funds do not yet exist in India, but option income funds write options on a significant part of their portfolio. While options are viewed as risky instruments, they may actually help to control volatility, if properly used. Conservative option funds invest in large, dividend paying companies, and then sell options against their stock positions. This ensures a stable income stream in the form of premium income through selling options and dividends. When options no individual shares become available in India, such funds may be introduced.  Diversified equity funds: A fund that seeks to invest only in equities, except for a very small portion in liquid money market securities, but is not focused on any one or few sectors or shares, may be termed a diversified equity fund. While exposed to all equity price risks, diversified equity funds seek to regulate the sector or stock specific risks through diversification. They have mainly market risk exposure. Such general purpose but diversified funds are clearly at the lower risk level than growth funds.  Equity linked savings scheme: An Indian variant In India, the investors have been given tax concessions to encourage them to invest in equity markets through these special schemes. Investment in these schemes entitles the investor to claim an income tax rebate, but usually has a lock-in period before the end of which funds cannot be withdrawn. There are no specific restrictions on the investment objectives for the fund managers. Investors should clearly for where the fund management company proposes to invest and accordingly judge the level of risk involved. Generally, such funds would be in the Diversified Equity Fund Category.  Equity index funds: 28
  29. 29. MUTUAL FUNDS An index funds tracks the performance of a specific stock market index. The objective to match the performance of the stock market by tracking an index that represents the overall market. The fund invests in shares that constitute the index and in the same proportion as the index. Since they generally invest in a diversified market index portfolio, these funds take only the overall market risk, while reducing the sector and stock specific risks through diversification.  Value funds: The growth funds we reviewed above hold shares of companies with good or improving profit prospects, and aim primarily at capital appreciation. They concentrate on future growth prospects, may be willing to pay high price/earnings multiples for companies considered to have good potential. In contrast to the growth investing, other funds follow Value Investing approach. Value funds try to seek out fundamentally sound companies whose shares are currently under- priced in the market. Value funds will add only those shares to their portfolios that are selling at low-price earnings ratios, low market to book value ratios and are undervalued by other yardsticks Value funds have the equity market price fluctuation risks, but stand often at lower end of the risk spectrum in comparison with the growth funds. Value stocks may be from a large number of sectors and therefore diversified. However, value stocks often come from cyclical industries. The only example of a value Fund in India is Templeton fund, which has in its portfolio shares of cement/aluminum and other cyclical industries. Prices of such shares may fluctuate more than the overall market in both bull and bear markets, making such value funds more risky than diversified funds in the short term. However proponents of the value investing recommend it as a long-term approach. In the long term, Value Funds ought to be less risky than growth funds or even equity diversified funds.  Equity income funds: Usually income funds are in the debt funds category, as they target fixed income investments. However, they are equity funds that can be designed to give the investor a 29
  30. 30. MUTUAL FUNDS high level of current income along with some steady capital appreciation, investing mainly in shares of companies with high dividend yields. As an example, an equity income fund would invest largely in power/utility companies’ shares of established companies that pay higher dividends and whose price do not fluctuate as much as other shares. These equity funds should therefore be less volatile and less risky than nearly all other equity funds. HYBRID FUNDS – Quasi Equity / Quasi debt In terms of the nature of the financial securities held, there are three major mutual fund types: money market, debt and equity. Many mutual funds mix these different types of securities in their portfolios. Thus, most funds, equity or debt always have some money market securities in their portfolios as these securities offer the much-needed liquidity. However money market holdings will constitute a lower proportion in the overall portfolios of debt or equity funds. There are funds that, however, seek to hold a relatively balanced holding of debt and equity securities in their portfolios. Such funds are termed “hybrid funds” as they have a dual equity/bond focus. Some of the funds in this category are described below:  Balanced funds: A balanced fund is one that has a portfolio comprising debt instruments, convertible securities, and preference and equity shares. Their assets are generally held in more or less equal proportions between debt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain the objectives of income, moderate capital appreciation and preservation of capital, and are ideal for investors with a conservative and long-term orientation. The pyramid indicates the percent of money invested in Balanced Fund and a lesser portion in Growth Fund. This Fund holds a lesser risk as major portion is with INCOME, MONEY MARKET & BALANCED FUNDS. 30
  31. 31. MUTUAL FUNDS  Growth-and-income funds: Unlike income focused or growth focused funds we have seen, these funds seek to strike a balance between capital appreciation and income for the investor. Their portfolios are a mixed between companies with good dividend paying records and those with potential for capital appreciation. These funds would less risky than pure growth funds, though more risky than income funds. The Pyramid gives a clear picture about the Income Fund. In this Fund major portion of the Fund is invested in income & rest in BALANCED, MONEY MARKET & GROWTH FUNDS. 31
  32. 32. MUTUAL FUNDS  Asset allocation funds Normally, an equity fund will have its primary portfolio in equities most of the time. Similarly, a debt fund would not have major equity holdings. In other words, their “asset allocation” is predetermined within certain parameters. However, there do exist funds that follow variable asset allocation policies and move in and out of an asset class (equity, debt, money market, or even non-financial assets) depending upon their outlook for specific markets. In many ways, these funds have objectives similar to balanced funds and may seek to diversified into foreign equities, gold and real estate backed securities in addition to debt instruments, convertible securities, preference and equity shares. Asset allocation funds that follow more stable allocation policies (which hold relatively fixed proportion of specific categories) are more like balanced funds. On the other hand, funds that follow more flexible allocation policies (which vary their weightings depending upon the fund manager’s outlook) are more akin to aggressive growth or speculative funds. The former are for investors who low risk and stable return. The latter carry higher risk and potential for higher return because of the flexibility enjoyed by the fund managers. COMMODITY FUNDS While all the debt/equity/money market funds invest in financial assets, the mutual fund vehicle is suited for investment in any other- for example-physical assets. Commodities funds specialize in investing in different commodities directly or through shares of commodity companies or through commodity futures contracts. Socialized funds may invest in a single commodity or a common group such as edible oils or grains, while diversified commodity funds will spread their assets over many commodities. 32
  33. 33. MUTUAL FUNDS A most common example of commodity funds is the so-called precious metals funds. Gold funds invest in gold, gold futures or shares of gold mines. Other precious metals such as platinum or silver are also available in other countries. They may take exposure to more than one metal to get some benefit of diversification. In India, a gold fund may hold potential, given large public holding given large public holding and interest in gold. However commodity funds have not yet developed.  Real estate funds: Specialized real estate funds would invest in real estate directly, or may fund real estate developers, or lend to them, or buy shares of housing finance companies or even buy the securitised assets. Currently unavailable to Indian investors, such funds may soon be offered by leading housing finance companies such as HDFC. The funds may have growth orientation or seek to give investors regular income. Significance of various types of funds In this section we have developed an understanding of various mutual fund classifications and types. It must be appreciated that no specific class or type is universally accepted as the best option. Each type of funds comes with pros and cons and a unique risk-return relationship. It is up to the investor to decide the type that best suits his requirements and matches his objectives. This is covered in greater detail in subsequent chapters. You will notice some differences in the fund types and classification among different books or reading references. In this section, we have tried to follow one system of classification that we have considered as the most suitable for Indian conditions. The reader should not have too much difficulty in seeing the relatively minor differences in classification or names of fund types. To help get a better understanding, we have developed the enclosed chart that lists the mutual fund types in order of risk levels. 33
  34. 34. MUTUAL FUNDS Securities and Exchange Board of India (Mutual funds) Regulations, 1996 [Regulations 18(22), 25(16), 68(h)] Code of Conduct 1. Mutual fund schemes should not be organized, operated, managed or the portfolio of securities selected, in the interest of sponsors, directors of asset management 34
  35. 35. MUTUAL FUNDS companies, members of board of trustees or directors of trustee company, associated persons as [substituted for “or”] in the interest of special class of unit holders rather than in the interest of all classes of unit holders of the scheme. 2. Trustees and asset management companies must ensure the dissemination to all unit holders of adequate, accurate, explicit and timely information fairly presented in a simple language about the investment policies, investment objectives, financial position and general affairs of the scheme. 3. Trustees and asset management companies should avoid excessive concentration of business with broking firms, affiliates and also excessive holding of units in a scheme among a few investors. 4. Trustees and asset management companies must avoid conflicts of interest in management the affairs of the scheme and keep the interest of all unit holders paramount in all the matters. 5. Trustees and asset management companies must ensure scheme wise segregation of bank accounts (substituted for “cash”) and securities account. 6. Trustees and asset Management Company shall carry out the business and invest in accordance with the investment objectives stated in the offer document and take investment decision solely in the interest of unit holders. 7. Trustees and asset management companies must not use any unethical means to sell, market or induce any investors to buy their schemes. 8. Trustees and asset Management Company shall maintain high standard of integrity and fairness in all their dealings and in the conduct of their business. 35
  36. 36. MUTUAL FUNDS 9. Trustees and the asset management company shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgment. 10. The asset management company shall not make any exaggerated statement, whether oral or written, either about their qualification or capability to render investment management services or their achievements. SCHEMES PROVIDED BY Mr.Girish Kalra 36
  37. 37. MUTUAL FUNDS FRANKLIN TEMPLETON India LTD. Franklin Templeton 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. 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, 37
  38. 38. MUTUAL FUNDS 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. 38
  39. 39. MUTUAL FUNDS 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 benefits. Franklin Templeton offers different representative asset classes to cater to the varied investment goals of investors through the following open-ended schemes: *Franklin India Taxshield (FIT) The fund managers operate with an objective to provide medium to long term growth of capital along with income tax rebate. *Franklin India Bluechip Fund (FIBCF) The fund manager seeks steady and consistent growth by focusing on well established, large size companies. *Templeton India Growth Fund (TIGF) The fund manager aims to provide long-term capital appreciation from a portfolio invested predominantly in value-oriented stocks. *Franklin India Prima Plus( FIPP) The fund manager seeks capital appreciation over the long-term by focusing on wealth creating companies across all sectors. *Franklin India Flexi Cap Fund (FIFCF) The fund manager will invest in companies based on a research driven, bottom-up stock selection process, irrespective of their market capitalization and sectors. 39
  40. 40. MUTUAL FUNDS *Templeton India Equity Income Fund (TIEIF) The fund managers adopt a long term disciplined approach of investing and use the style of investing along with focus on stocks with attractive dividend yields, both in India and overseas. *Franklin Templeton India Balanced Fund (FIBF) The fund manager seeks to strike an optimum balance between growth and stability, by maintaining diversified portfolio of equities and managing interest rate movements and credit risk on the fixed income component. *Templeton India Pension Plan (TIPP) TIPP is an open ended tax saving scheme whose objective is to provide investors regular income under the Dividend Plan and capital appreciation under the Growth Plan. 40
  41. 41. MUTUAL FUNDS Franklin India Taxshield (FIT) Franklin India Taxshield (FIT) is an open ended Equity Linked Savings scheme with an objective to provide medium to long term growth of capital along with income tax rebate. The investment ranges are: Equities/Equity related instruments- Upto 100%, PSU Bonds / Debentures- Upto 20% and Money Market Instruments- Upto 20% Investment Focus FIT, an open end equity linked savings scheme, is an investment which not only helps you save on taxes but also has the potential to give you attractive returns with convenience and flexibility Investment Style The fund manager seeks steady growth by maintaining a diversified portfolio of equities across sectors and market cap ranges. Investment Objective: Aims to provide medium to long term growth of capital along with income tax rebate. Date of Allotment - April 10, 1999 Fund Manager - Anand Radhakrishnan Fund Size - Rs. 470.81 crores Load Structure Entry Load - 2.25% Exit Load - NIL Tax Benefits Investments will qualify for tax benefit under the Section 80C as per the income tax act. 41
  42. 42. MUTUAL FUNDS S E C TOR AL L OC ATION-TOTAL AS S E TS 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% FINANCE CONSTRUCTION INDUSTRIAL CAPITALGOODS MEDIA& ENTERTAINMENT CONSUMERNON- DURABLES CEMENT AUTO AMCILLARIES POWER HOTELS TELECOM SERVICES REST S E CTOR ALLOCATION- TOTAL AS S E TS Investment of this Fund is 91% with Equity, from which more amount of Fund is invested in Industrial Capital Goods & lesser with Pharmaceuticals. 42
  43. 43. MUTUAL FUNDS Franklin India Bluechip Fund (FIBCF) Investment Style The fund manager seeks steady and consistent growth by focusing on well established, large size companies. Investment Objective: Aims to provide medium to long term capital appreciation. Date of Allotment : December 1, 1993 Fund Manager : K.N. Sivasubramanian / Anand Radhakrishnan Fund Size : Rs. 2615.88 crores Load Structure Entry Load - 2.25% Exit Load - NIL 43
  44. 44. MUTUAL FUNDS S E C TOR AL L OC ATION-TOTAL AS S E TS 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% INDUSTRIALCAPITALGO ODS BANKS TELECOM SERVICESSOFTW ARE PETROLIUM PRODUCTS CONSUM ER NON-DURABLES FINANCE AUTOCOM ENT TEXTILEPRODUCTS REST The Equity holdings of the fund is 94%, from which more amount of Fund is invested Industrial Capital Goods and lesser portion in Textile Products. 44
  45. 45. MUTUAL FUNDS Templeton India Growth Fund (TIGF) Investment Style Templeton Equity Portfolio Managers adopt a long term disciplined approach to investing and use the widely known philosophy of ‘value investing’. Investment Objective : Seeks to provide long term capital growth. Date of Allotment - September 10, 1996 Fund Manager - Dr. J. Mark Mobius Fund Size - Rs. 333.61 crores NAV Performance Load Structure Entry Load Greater than Rs. 5 Crs : 2.25%; Less than Rs.5 Crs: Nil Exit Load : Less than Rs. 5 Crs :1% if Redeemed / switched-out within6 months of allotment; 0.5% if redeemed / switched out after months, but within 1 year of allotment. Greater than Rs.5 Crs : 1%(if redeemed /switched-out within 1 year of allotment). 45
  46. 46. MUTUAL FUNDS S E C TOR AL L OC ATION-TOTAL AS S E TS 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% PETROLIUMPRODUCTS FINANCE TELECOMSERVICES FERROUSMETALS CEMENT BANKS OIL SOFTWARE NON-FERROUSMETAL AUTO REST S E C TOR ALLOCATION-TOTAL AS S E TS The total Equity holdings of the fund is 97%, from which more amount of Fund is invested in Finance & Petroleum Products sector. 46
  47. 47. MUTUAL FUNDS Franklin India Prima Plus( FIPP) Investment Style The fund manager seeks capital appreciation over the long-term by focusing on wealth creating companies (companies that generate return on capital in excess of their cost of capital) across all sectors. Investment objective : Aims to provide growth of capital plus regular dividend. Date of Allotment - September 29, 1994 Fund Manager - Sukumar Rajah / Anand Radhakrishnan Fund Size - Rs. 1365.78 crores Load Structure Entry Load Less than Rs. 5 Crs : 2.25%; Greater than Rs.5 Crs : Nil Exit Load: Less than Rs. 5 Crs :1% if redeemed/switched-out within 6 months of allotment; Less than Rs. 5 Crs :0.5% if redeemed/ switched out after 6 months, but within 1 year of allotment. Greater than Rs.5 Crs : 1(if redeemed/switched-out within 1 year of allotment) 47
  48. 48. MUTUAL FUNDS S E C TOR AL L OC ATION-TOTAL AS S E TS 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% BANKS MEDIA&ENTERTAINMENT INDUSRIALCAPITAL GOODS FINANCE CONSUMERNON- DURABLES TELECOMSERVICES PETROLEUMPRODUCTS SOFTWARE CEMENT CONSTRUCTION REST S E CTOR ALLOC ATION-TOTAL AS S E TS The Equity holdings is 92%, from which more amount of Fund is invested in banking sector, whereas in Auto Ancillaries is very minute 48
  49. 49. MUTUAL FUNDS Templeton India Equity Income Fund (TIEIF) Investment Style Templeton Equity Portfolio Managers adopt a long term disciplined approach of investing and use the value style of investing along with focus on stocks with attractive dividend yields, both in India and overseas. Investment Objective : Seeks to provide a combination of regular income and long-term capital appreciation by investing primarily in stocks that have a current or potentially attractive dividend yield. Date of Allotment - May 18, 2006 Fund Manager - Dr. J. Mark Mobius Assisted by Chetan Sehgal, Vikas Chiranwal Fund Size - Rs. 1687.35 crores Load Structure Entry: Less than Rs. 5 Crs : 2.25%; Greater than Rs.5 Crs: Nil Exit: Less than Rs. 5 Crs :1% if redeemed/switched-out within 6 months of allotment; 0.5% if redeemed/switched out after6 months, but within 1 year of allotment Greater than Rs.5 Crs : 1%(if redeemed/switched-out within 1 year of allotment) 49
  50. 50. MUTUAL FUNDS S E C TOR AL L OC ATION-TOTAL AS S E TS 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% INDUSTRIALCAPITALGOODS BANKS SOFTW ARE TELECOM SERVICESCEM ENT CONSUM ER NON-DURABLES M EDIA & ENTERTAINM ENT INDUSTRIALPRODUCTS AUTO CONSTRUCTIO N REST S E C TOR ALLOC ATION- TOTAL AS S E TS The investment in Equity holdings is 92%, from which major portion is invested in Industrial Capital Goods in minor in Construction. 50
  51. 51. MUTUAL FUNDS Franklin Templeton India Balanced Fund (FTIBF) FT India Balanced Fund (FTIBF) is an open ended balanced scheme with an objective to provide long term growth of capital and current income. By investing in equity, equity related securities and fixed income instruments. The investment ranges are: Equities/Equity related instruments- 51% to 70%, Fixed Income and Money Market Instruments- 30% to 20%. including high quality securitised debt up to a maximum limit of 10% of the scheme’s corpus. Date of Allotment - December 10, 1999 Fund Managers - Anand RadhakrishnanSachin Padwal-Desai &Ninad Deshpande Fund Size - Rs. 284.05 crores Investment Objective FTIBF is the right allocation between shares of wealth-creating companies and high quality debt instruments can give you the perfect balance between growth and stability. Investment Style The fund manager seeks to strike an optimum balance between growth and stability, by maintaining diversified portfolio of equities and managing interest rate movements and credit risk on the fixed income component. Load Structure Entry Load -2.25% Exit Load – NIL 51
  52. 52. MUTUAL FUNDS S E C TOR AL L OC ATION-E QUITY HOL DING 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% INDUSTRIALCAPITALGOODS BANKS SOFTW AREFINANCE TELECOM SERVICES CEM ENT PETRO LEUM PRO DUCYS CONSUM ER NON-DURABLES AUTO INDUSTRIALPRODUCTS REST S E C TOR ALLOC ATION- E QUITY HOLDING The Funds total investment in Equity is 64%, from which more amount of Fund is invested in Banks & Industrial Capital Goods, whereas investment in Retailing & Pharmaceuticals is lesser. 52
  53. 53. MUTUAL FUNDS Templeton India Pension Plan (TIPP) Investment Style The fund manager seeks steady capital appreciation by maintaining diversified portfolio of equities and seeks to earn regular income on the fixed income component by managing interest rate movements and credit risk. Investment Objective : TIPP is an open ended tax saving scheme whose objective is to provide investors regular income under the Dividend Plan and capital appreciation under the Growth Plan. Date of Allotment - March 31, 1997. Fund Managers - Anand Radhakrishnan , NinadDeshpande & Sachin Padwal- Desai. Fund Size - Rs. 157.41 crores. Load Structure Entry Load - 2.25% Exit Load - 3%,if redeemed before the age of 58 years(subject to a 3 year lock-in period)NIL, if redeemed after the age of 58 years. Tax Benefits Investments will qualify for tax benefit under the Section 80C as per the income tax act. 53
  54. 54. MUTUAL FUNDS S E C TIOR AL L OC ATION-E QUITY HOL DING 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% INDUSTRIAL CAPITAL BANKS SOFTWARE FINANCE TELECOM SERVICES CEMENT PETROLIUM PRODUCTS CONSUMER NON- AUTO INDUSTRIAL PRODUCTS REST S E C TIOR ALLOCATION-E QUITY HOLDING The Equity holdings is 35% from which more amount of Fund is invested in Banks & Industrial Capital Goods, whereas investment in Industrial products is lesser. 54
  55. 55. MUTUAL FUNDS COMPUTING YOUR MUTUAL FUND RETURNS Ramesh opened the morning papers and straight away went to the markets page, where he checked out the NAV of XYZ Mutual Fund’s scheme, which he had invested . He was happy to see that the NAV had moved from Rs. 14 to Rs. 15. His cost per unit was Rs. 10 (since he had invested in the scheme’s NFO). That gave him profit of Rs. 5 per unit. That’s a decent 50 per cent. But Ramesh is wrong… His profit is actually much lower because he has not taken into consideration the time period of investment. Ramesh has stayed invested in this scheme for 2 years. If this time period is considered, his annualized return is 25 per cent and not 50 per cent, as he believes. Computing the return on investment on your mutual funds can be done in various ways. ABSOLUTE RETURNS One of the ways is called ‘absolute return’. In this method, one ignores the time period and simply takes the difference between market value and cost as a percentage of cost. This is the way Ramesh has computed his investment return at 50 per cen. ANNUALIZED RETURNS In this method, one considers the time period of investment. Here, one considers the difference between market value and cost, divides this difference by the cost, multiplies by 12 months/ 365 days and divides by the number of months/days one has stayed invested. In Ramesh’s case the computation is: 5/10 x 1 year / 2 years. When Ramesh applied this method, his returns worked out to 25 per cent. ASSESSING PERFORMANCE Now, whether one takes absolute returns or annualized returns, one must not judge the performance of the mutual fund on a standalone basis one must consider the performance vis-à-vis the fund’s competitors and the benchmark index of the fund. For instance, for Ramesh, the benchmarks index of the fund. For instance, for Ramesh, the 55
  56. 56. MUTUAL FUNDS benchmark index of XYZ Mutual Fund scheme was BSE Sensex, which had given an absolute return of 60 per cent and an annualized return of 30 per cent during the same time period that Ramesh had invested in the scheme. Clearly, the scheme had under- performed its benchmark index. Another way of assessing performance is by considering the average performance of all schemes in the category. Again in Ramesh’s case, XYZ Mutual Fund scheme was an equity diversified scheme. The average absolute return offered by all equity diversified schemes was 45 per cent and annualized return was 22.5 per cent during the same period as Ramesh was invested in XYZ Mutual Fund scheme. Clearly, XYZ Mutual Funds scheme had done better than the category average. Information about returns of mutual fund schemes and comparison between their benchmark indices and averages of the categories they fall under are available on the internet in websites such as,,, etc. PRESENT PERFORMANCE As on 12 July 07, average annualized returns offered by equity diversified schemes for 1 year, 3 years and 5 years are 44.41 per cent, 47.14 per cent and 40.31 per cent respectively. During the 1-year, 3-year and 5-year periods, the BSE Sensex has given returns of 38.08 per cent, 45.06 per cent and 35.46 per cent respectively. Clearly, equity diversified funds have outperformed this index throughout these periods. CONCLUSION Don’t be simplistic while assessing the performance of your mutual fund investments. Use smart computation strategies to judge the performance of your investments vis-à-vis benchmarks and competitors. RETURNS OFFERED BY EQUITY DIVERSIFIED FUNDS 1 Year 3 Year 5 Years Average 44.41 47.14 40.31 BSE Sensex 38.08 45.06 35.46 As on 12 July 07 Returns are annualized 56
  57. 57. MUTUAL FUNDS Returns considered for the ‘growth’ option. 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 27th August 2007. I interviewed Mr. Girish Kalra (Marketing Manager) he spared 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. Girish Kalra:-  Karishma (I asked) : What is a Mutual Fund? Mr.Girish 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.  I asked : What does a Mutual Fund do with investor's money? Mr.Girish 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. I asked: What is Net Asset Value (NAV)? Mr.Girish 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.  I asked : Is there a guaranteed return on the mutual funds? Mr.Girish replied: No, we do not give any guarantees on the returns on any of our funds. 57
  58. 58. MUTUAL FUNDS  I asked: What are the types of returns one can expect from a Mutual Fund? Mr.Girish 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.  I asked: Are mutual funds insured? Mr.Girish 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.  I asked: Why one should invest in mutual funds? Mr.Girish replied: Mutual funds have qualified professionals who manages the fund for investors. Mutual funds minimize risk by creating a diversified portfolio while providing the necessary liquidity.  I asked: Why should one invest in Franklin Templeton Mutual Funds? Mr.Girish 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.  I asked: TAX implications for the mutual fund Mr.Girish 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. SURVEY REPORT 58
  61. 61. MUTUAL FUNDS PEOPLE PREFER MUTUAL FUND BECAUSE OF :- 64%PREFER BECAUSE OF HIGH RETURN 36%PREFER BECAUSE OF LOW RISK PEOPLE PREFERING DIFFERENT MODE OF PAYEMENT 46%ONE TIME INVESTMENT 54%SIP(MONTHLY INCOME PLAN) 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. 61
  62. 62. MUTUAL FUNDS SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS Survey for Project on MUTUAL FUNDS. Name:- Designation:- Sign:- Contact No. :- 1) Do you know what is Mutual Funds? Yes No 2) Have you invested in Mutual Funds? Yes No 3) Do you plan to invest in Mutual Funds in future? Yes No 4) Which Mutual Fund would you like to prefer for investing – Reliance Mutual Fund. Franklin Tempelton Mutual Fund. SBI Mutual Fund. Other Mutual Funds. 5) Why would you prefer, Mutual Funds, because of – Higher Returns. Low Risk. 6) What types of schemes would you prefer? SIP( Monthly Investment Plan) One Time Investment Comment Project Guide – Survey Conducted By - Karishma Gondalwala Prof. Leena Nair T.Y.B.B.I. REVIEW OF LITERATURE 62
  64. 64. MUTUAL FUNDS 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 Lippman [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.] Conclusion 64
  65. 65. MUTUAL FUNDS Mutual fund is in existence since 1964 but as the awareness increased the demand also increased simultaneously. It is increasing by 10times in a span of 5years (1987-1993).at rapid increase the future prospects of mutual fund is tremendously huge. From Survey Report it is concluded that 98% of the people are aware about Mutual Fund. And in our busy life’s we don’t have time to manage & take care of our portfolio. Mutual Funds are seen to be in boom & demand is not expected to decrease. As our money is safe as our funds are distributed in different sectors. BIBLIOGRAPHY 65
  66. 66. MUTUAL FUNDS  BOOKS REFERRED o AMFI Mutual Fund Test – Workbook.  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.  WEB SITES: o Web site – o Web site – o Web site – o Web site – www.rbi 66
  67. 67. MUTUAL FUNDS 67