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54589226 kotak

  1. 1. A REPORT ON “MUTUAL FUND INDUSTRY-ANALYSIS & RECENT TRENDS” By: Priyanka Agrawal PICT-SITM PuneKotak Mahindra Asset Management Company Limited A 1|Page
  2. 2. REPORT ON “MUTUAL FUND INDUSTRY- ANALYSIS & RECENT TRENDS” By: Priyanka Agrawal PICT-SITM A report submitted in partial fulfillment of the requirement of MBA Program Submitted to: Mr.Balaramchandran Faculty Member PICT-SITM, Pune & Mr. Rohit Kaushal Relationship ManagerKotak Mahindra Asset Management Company Limited 2|Page
  3. 3. ACKNOWLEDGEMENTThe success behind the completion of any good job is the support and thejoint team effort of a number of people. There are many persons, whose help& cooperation, made this project successful.My deepest sense of gratitude, profound respect and sincere thanks toMr. Balaramchandran (faculty member PICT-SITM Pune ) my projectguide, for his valuable assistance, keen interest and constant motivation ateach step of the project. It would not have been possible for me to reach thisstage without his support & guidance.My special thanks to Mr. Rohit Kaushal (Relationship Manager- KotakMahindra Asset Management Co. Ltd.), my company guide who has beenthere with me throughout the entire project. He always had the answers tomy queries, be it regarding any concept related to mutual funds. His warmthsupport, practical guidance and easy explanations not only regarding theproject matters but others too add to the success of my project. Hiscontinuous interaction and support made it possible for the successfulcompletion of the project.I would also like to thank my parents and my friends for all their time-to-time assistance. Last but not the least I would like to thank God becausewithout his divine grace nothing would have been possible. 3|Page
  4. 4. TABLE OF CONTENTS Page No.Acknowledgements……………………………………………………... 3List of Illustrations……………………………………………………... 6Abstract………………………………………………………………… 7 1. Introduction a. Purpose…………………………………………………… 8 b. Objective………………………………………………...... 8 c. Proposed Methodology………………………………....... 9 d. Limitations of the Project………………………………… 9 2. About Mutual Funds a. Concept of Mutual Funds………………………………... 10 b. Advantages of Mutual Funds…………………………..... 13 c. Disadvantages of Mutual Funds…………………………. 15 3. Mutual Fund Industry a. Phases of Growth………………………………………… 16 b. Major Mutual Fund Companies………………………......18 c. Players in the Industry…………………………………… 23 d. Types of Mutual Fund…………………………………… 24 e. Advertisement of Mutual Funds……………………….... 29 4|Page
  5. 5. 4. Distribution Model a. Multi-Channel Distribution Model……………………… 31 b. Distribution Channels………………………………….... 32 c. Challenges in Distribution……………………………….. 33 d. Curbing Unethical Practices……………………………... 34 e. Spreading Mutual Fund Culture………………………… 355. Terms associated with Mutual Funds a. Offer Document………………………………………….. 36 b. Net Asset Value………………………………………….. 39 c. Pricing Of Units………………………………………….. 40 d. Investment Plans…………………………………………. 42 e. Tax Provisions…………………………………………… 44 f. Restriction on Investment……………………………….. 46 g. Asset Allocation Principles……………………………… 486. Measuring & Evaluating Mutual Fund Performance a. Measurement of Mutual Fund Performance……………... 56 b. Recent Trends in Mutual Fund Industry…………………..63 i) Impact on Mutual Funds of the Union Budget………… 67 c. Fund Analysis 5|Page
  6. 6. i) Equity Based Fund………………………………. .73 ii) Debt Based Fund………………………………… 76 iii) ELSS Tax Saver………………………………… 79 iv) Monthly Income Plans………………………….. 82 v) Cash Funds………………………………………. 857. Conclusion……………………………………………………….. 888. Recommendations……………………………………………….. 899. Appendices……………………………………………………….. 9110. Reference….……………………………………………………... 116 6|Page
  7. 7. TABLE OF ILLUSTRATIONS1. Working of Mutual Funds……………………………………… 122. Structure of Mutual Funds……………………………………... 243. Mutual Fund Classification…………………………………….. 244. Multi-Channel Distribution Model……………………………… 315. Investor Earning Opportunities…..…………………………….. 376. Expenses charged by AMC………………………………………. 417. Investor in Different Phases…………………………………….. 498. Portfolio Model (By Jacobs)…………………………………….. 509. Wealth Cycle Classification……………………………………… 5110.Comparison of Investment Products a. By Nature of Investment………………………………….. 52 b. By Performance……………………………………………. 5311.Risk-Return Grid………………………………………………… 5412. Bank v/s Mutual Fund…………………………………………… 5513. Diagrams showing a. Beta……………………………………………………….. 57 b. R Squared…………………………………………………. 58 c. Treynor Ratio…………………………………………….. 59 7|Page
  8. 8. d. Sharpe Ratio……………………………………………… 60 14. Fund Analysis (On the basis of NAV)…………………………. 70 15. Different Funds which are compared…………………………. 71 16. Calculation showing Mutual Fund Performance a. Equity Fund Scheme……………………………………… 73 b. Debt Fund Scheme……………………………………….. 76 c. ELSS Tax Saver Scheme………………………………… 79 d. Monthly Income Plans…………………………………… 82 e. Cash Funds……………………………………………….. 85s 8|Page
  9. 9. ABSTRACTIf size is the measure of dominance, then the Indian mutual fund industry cannow boast on that. With the total Asset Under Management (AUM)increasing from Rs.1,01,565 Crores in Jan 2000 to Rs.5,67,601.98 Croresby April 2008, according to the Association of Mutual Funds in India(AMFI), the industry’s growth has been nothing but exceptional. It hasindeed come a long way from being a single player, single scheme (US-64)industry to having 34 players and more than 480 schemes.What has driven the growth? Numbers of factors have contributed to thesurge in the industry’s growth. First and foremost, a buoyant domesticeconomy coupled with a booming stock market has been one of the majordrivers of the growth in recent times particularly in the last five-year.Another significant factor facilitating this growth has been a conduciveregulatory regime, thanks to increased effort by SEBI to improve marketsurveillance and protect investor’s interests. Further, incentives, such asmaking dividend tax free in the hands of investors have also provided strongimpetus to the growth.This research covers various aspect of mutual funds industry in India.Starting with basic concept of mutual fund and its advantages it would givedetail about the growth of mutual fund industry in India, its present scenario.It also throws some light on major mutual fund companies in India, thedifferent types of mutual funds on the basis of structure, investment, load andschemes and also it covers the different phases of growth of mutual fundindustry. Then it covers the calculation of NAV, the various investmentplans, factor’s that help in calculating the mutual fund performance.In the end mutual fund analysis have been done on the basis of StandardDeviation, Beta, Alpha, R Squared, Treynor Ratio & Sharpe Ratio on variousschemes like Equity based Funds, Debt based Funds, Monthly Income Plans,Cash Funds & ELSS Tax Saver Schemes. INTRODUCTION 9|Page
  10. 10. Purpose of the projectThis project provides better understanding to the reader by giving insights onIndian Mutual Fund Industry through comparative analysis of different AssetManagement Companies and their schemes in India. To do a comparativeanalysis of five major Mutual Funds of India namely  Kotak Mutual Fund  HDFC Mutual Fund  UTI Mutual Fund  Reliance Mutual Fund  Prudential ICICI Mutual FundObjective of the ProjectFor every problem there is a research. As all the researches are basedon some and my study is also based upon some objective and theseare as follows:  To give a holistic and a comprehensive view of mutual fund industry in India  Comparative study of returns given by various AMC Mutual funds on the basis of 6 parameters like Standard Deviation, Beta, Alpha, R Squared, Treynor Ratio & Sharpe Ratio.  To understand the risk profile of the customer  To know the awareness of investors about schemes provided by various AMCs 10 | P a g e
  11. 11. Proposed MethodologyIn broader perspective the whole project can be divided into three sections.Under SECTION I, on the basis of past and present the industry has beenanalyzed and based on which future outlook has been projected. This sectioncovers following things: i. Concept of Mutual Funds and its Advantages. ii. Types of Mutual Funds.iii. Size of Industryiv. Growth trendsSECTION II focuses on the distribution Channel used by different AMC inorder to sell their schemes. This section also tries to cover i. Distribution models. ii. Challenges in distribution.iii. Curbing Unethical Practices iv. Spreading Mutual Fund CultureSection III focuses on the different tools used to measure & evaluate theperformance of different Mutual Funds. This section covers the followingthings: i. The performance of the Mutual Funds is evaluated on the basis of Standard Deviation, Beta, Alpha, R Squared, Treynor Ratio & Sharpe Ratio. ii. Recent Trends in the Mutual Fund industry iii. Impact on Mutual Funds of the Union Budget.Finally on the basis of findings and observation suitable recommendationswill be given.Limitations  The analysis is completely based on the past performance and not confirms the future performance.  The research is based on secondary data collected from other sources like magazines, newspapers and websites etc.  Reliability of the sources could also be limitation for the project. 11 | P a g e
  12. 12. ABOUT MUTUAL FUNDS CONCEPTIndividuals or institutions when have surplusmoney, i.e. savings, would like to invest with thecommon and logical motive of growing money bygetting returns on the investments. There arevarious avenues to park money towards fulfillmentof your objective of return on investment.One can invest money either where you can getassured returns & hence the risk is low but returnsalso are low compared to the high riskinvestments.The other way is through investing in shares i.e.equity market. Generally the returns on equityinvestments are higher than debt investment butrisk also is higher. To get good returns one reallyneeds to understand the economy andperformance of companies where you areinvesting money. For a common man it may becumbersome while managing own profession, jobor business.Hence the concept of mutual fund has evolved tomanage the funds i.e. on behalf of the investor;fund managers will be taking decisions tomaximize the investor’s returns.The concept of mutual funds in India dates back to the year 1963. The erabetween 1963 and 1987 marked the existence of only one mutual fundcompany in India with Rs. 67bn assets under management (AUM), by theend of its monopoly era, the Unit Trust of India (UTI). By the end of the 80sdecade, few other mutual fund companies in India took their position inmutual fund market. 12 | P a g e
  13. 13. The new entries of mutual fund companies in India were SBI Mutual Fund,Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian BankMutual Fund, Bank of India Mutual Fund.The succeeding decade showed a new horizon in Indian mutual fundindustry. By the end of 1993, the total AUM of the industry was Rs. 470.04bn. The private sector funds started penetrating the fund families. In the sameyear the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given arevised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in Indiawhich has now merged with Franklin Templeton. Just after ten years withprivate sector player penetration, the total assets rose up to Rs. 1218.05 bn.Today there are 34 mutual fund companies in India.A Mutual fund is a common pool of money into which investors place theircontributions 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 allinvestors. A single investor’s ownership of the fund is in the same proportionas the amount of the contribution made by him bears to the total amount ofthe fund.A mutual fund uses the money collected from investors to buy those assets,which are specifically permitted by its stated investment objective. Thus, anequity fund would buy mainly equity assets-ordinary shares, preferenceshares, warrants, etc. a bond fund would mainly buy debt instruments, suchas debentures, bonds, or government securities. It is these assets, which areowned by the investors in the proportion of their investments.When an investor subscribes to a mutual fund, he or she buys a part of theassets or the pool of funds that are outstanding at that time. It is no differentfrom buying “shares” of a joint stock company, in which case the purchasemakes the investor a part owner of the company and its assets. In fact, in theUSA, a mutual fund is constituted as an investment company and an investor“buys in to the fund” meaning he buys the shares of the fund. In India, amutual fund id constituted as a trust an investor subscribes to the “units”issued by the fund, which is where the term Unit Trust comes from. . Mutualfunds issues units to the investors in accordance with quantum of moneyinvested by them. Investors of Mutual funds are known as Unit Holders. 13 | P a g e
  14. 14. Investments in securities are spread across a wide cross-section of industriesand sectors and thus the risk is reduced. Diversification reduces the riskbecause all stocks may not move in the same direction in the same proportionat the same time. The profits and losses are shared by the investors inproportion to their investments. Mutual funds normally come out with anumber of schemes with different investments objectives which are launchedfrom time to time. A mutual fund is required to be registered with Securitiesand Exchange Board of India which regulates securities markets before it cancollect funds from public.However, whether the investor gets funds shares or units is only a matter oflegal distinction. In any case, a mutual fund shareholder or unit holder is apart owner of the fund’s assets. The term unit-holder includes the mutualfund account-holder or closed-end fund shareholder. A unit holder in UnitTrust of India US-64 scheme is the same as a UTI Master shareholder or aninvestor in an allianceEach share or unit that an investor holds needs to be assigned a value. Sincethe units held by investor evidence the ownership of the assets, the value ofthe total assets of the fund when divided by the total number of units issuedby the mutual fund gives us the value of one unit. This is generally called theNet Asset Value (NAV) of one unit or one share. The value of an investor’spart ownership is the determined by the NAV of the number of units held.Example: If the value of a fund’s assets stands at Rs 1000 and it has 10investors who have bought 10 units each, the total numbers of units issuedare 100, and the value of one unit is Rs 10 (1000/100). If a single investor infact owns 3 units, the value of his ownership of the fund will be Rs 30(1000/100*3). Note that the value of the fund’s investments will keepfluctuating with the market price movements, causing the NAV alsofluctuate. For example, if the value of our funds assets increased from Rs1000 to Rs 1200, the value of our investors holding of 3 units (1200/100*3)Rs 36. The investment value can go up and down, depending on the marketvalue of the fund’s assets.The flow chart below describes broadly the working of a mutual fund: 14 | P a g e
  15. 15. SOURCE: AMFIAdvantages of Mutual Funds If mutual funds are emerging as the favorite investment vehicle, it is becauseof the many advantages they have over other forma and avenues of investing,particularly for the investor who has limited resources available in terms ofcapital and ability to carry out detailed research and market monitoring. Thefollowing are the major benefits offered by mutual funds to all investors:i) Portfolio DiversificationMutual Funds spread the investment across different securities (stocks,bonds, money market instruments, real estate, fixed deposits etc.) byinvesting in a number of companies across a broad cross-section of industriesand sectors (auto, textile, information technology etc.). This kind of adiversification may add to the stability of your returns and reduces the riskwith far less money than you can do on your own. For example during oneperiod of time equities might underperform but bonds and money marketinstruments might do well enough to offset the effect of a slump in the equitymarkets.ii) Convenient AdministrationInvesting in a Mutual Fund reduces paperwork and helps you avoid manyproblems such as bad deliveries, delayed payments and follow up withbrokers and companies. 15 | P a g e
  16. 16. iii) Professional ManagementQualified investment professionals who seek to maximize returns andminimize risk monitor investors money. The investment professional hasexperience in making investment decisions. It is the Fund Managers job to(a) find the best securities for the fund, given the funds stated investmentobjectives; and (b) keep track of investments and changes in marketconditions and adjust the mix of the portfolio, as and when required.iv) LiquidityIn open-end schemes, the investor gets the money back promptly at net assetvalue related prices from the Mutual Fund. In closed-end schemes, the unitscan be sold on a stock exchange at the prevailing market price or the investorcan avail of the facility of direct repurchase at NAV related prices by theMutual Fund.v) AffordabilityInvestors individually may lack sufficient funds to invest in high-gradestocks. A mutual fund because of its large corpus allows even a smallinvestor to take the benefit of its investment strategy.vi) VarietyMutual funds offer a tremendous variety of schemes. This variety isbeneficial in two ways: first, it offers different types of schemes to investorswith different needs and risk appetites; secondly, it offers an opportunity toan investor to invest sums across a variety of schemes, both debt and equity.vii) Tax BenefitsIn 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 frominvestments specified in Section 80L, including income from Units of theMutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax. 16 | P a g e
  17. 17. viii) TransparencyOpen-ended mutual funds disclose their Net Asset Value (NAV) daily andthe entire portfolio monthly. This level of transparency, where the investorhimself sees the underlying assets bought with his money, is unmatched byany other financial instrument.Disadvantages of Mutual FundsWhile the benefits of investing through mutual funds far outweigh thedisadvantages, an investor and his advisor will do well to be aware of fewshortcomings of using the mutual fund as an investment vehicle.i) No Tailor-made-PortfoliosInvesting through funds means, the investor delegates the decision ofinvesting through which securities to fund manager. The very high-net-worthindividuals or large corporates may find this as a constraint in achieving theirobjectives. However this constraint can be overcome to some extent byoffering families of schemes to investor, within the same fund.ii) No control over costsInvestor pays the investment management fees as long as he remains withinthe fund. Fees are usually payable as a percentage of the value of hisinvestments, whether the fund value is rising or declining. The investor alsopays the fund distribution cost, which he would not incur in directinvestment.iii) Managing a Portfolio of FundsAvailability of a large number of options from mutual funds can actuallymean too much choice for the investor. He may again need advice on how toselect a fund to achieve his objectives. 17 | P a g e
  18. 18. MUTUAL FUND INDUSTRYThe Phases of GrowthThe Indian mutual industry has come a long way since the inception of UTIin 1963.According to AMFI, the evolution of the industry can be classifiedbroadly into four phases, which mark its transition from a period when UTIruled the roost to a period of competition and increased awareness amonginvestors.i) First Phase (1964-87) – UTI all the wayThis phase begin with the inception of the Unit Trust of India (UTI). Itremained the only mutual fund player in the country till 1987. UTI started itsoperation in July 1964 “with a view to encouraging savings and investmentsand participation in income, profits and gains accruing to the corporationfrom acquisition, holding, management and disposal of securities.” In short,it was set up by Indian government with a view to augment small savings inthe country and to channelize these savings to the capital markets. UTIwitnessed a slow and steady growth over the 1970s and the 1980s and by theend of 1988 it had an AUM of Rs.67bn. It still continues to be the largestplayer in the domestic mutual fund industry with an AUM of Rs. 23,500 cras on March 31, 2008.ii) Second Phase (1987-1993) – Enter Public sector Mutual FundsPublic sector mutual funds set up by public sector banks, Life insuranceCorporation of India (LIC) and the General insurance Corporation of India(GIC) entered in the market in 1987. The first non mutual fund was the SBIMutual Fund established in June 1987, followed by Canbank Mutual Fund inDecember 1987, Punjab National Bank Mutual Fund in August 1989, IndiaBank Mutual Fund in Nov 1989, Bank of India Mutual Fund in June 1990and Bank of Baroda Mutual Fund in Oct 1992. LIC set up its mutual Fund inJun e 1989 while GIC established its Mutual Fund in Dec 1990. During this 18 | P a g e
  19. 19. period, the total asset of the industry grew to about Rs. 610bn with the totalnumber of schemes increasing to about 167 by the end of 1994.iii) Third Phase of (1993-2003) – Private players enter the sceneThis phase marked the entry of private sector funds. The phase also signaledthe intensification of competition. Both domestic and foreign players enteredthe market, offering a wide variety of schemes to investors. Kothari PioneerMutual Fund was the first private sector fund to establish in association withthe foreign fund. Private players like Morgan Stanley, Jardine Fleming, JPMorgan, George Soros and Capital International entering the market. Thetotal AUM by the end of Jan 31, 2003 increased to $ 34,927mn from$23,260mn in March 1995 with a CAGR of 6.92%.iv) Fourth Phase (since Feb 2003)– UTI’s restructuring and beyondIn Feb 2003 UTI ACT 1963 was replaced and UTI was bifurcated into twoseparate entities: Specified undertaking of Unit Trust of India, which is stillunder the Govt. of India and the UTI Mutual Fund Ltd. This was done in thewake of the sever payment crisis that UTI suffered on account of its assuredreturn schemes of US-64 that finally resulted in an adverse impact on theIndia capital markets. US-64 was the first scheme launched by UTI with asignificant equity exposure and the returns of which were not linked to themarket. However, the industry has overcome that shock and is hoped to havelearnt its lesson.Major Mutual Fund Companies in India:i) Kotak Mahindra Mutual FundKotak Mahindra Asset Management Company (KMAMC) is a subsidiary of 19 | P a g e
  20. 20. Kotak Mahindra Bank Limited (KMBL). It is presently having more than1,99,800 investors in its various schemes. KMAMC started its operations inDecember 1998. Kotak Mahindra Mutual Fund offers schemes catering toinvestors with varying risk - return profiles. It was the first company tolaunch dedicated gilt scheme investing only in government securities.ii) HDFC Mutual FundHDFC Asset Management Company Ltd (AMC) was incorporated under theCompanies Act, 1956, on December 10, 1999, and was approved to act as anAsset Management Company for the HDFC Mutual Fund by SEBI vide itsletter dated June 30, 2000. HDFC Mutual Fund was setup with two sponsorsnamely Housing Development Finance Corporation Limited and StandardLife Investments Limited.iii) Unit Trust of India Mutual FundUTI Asset Management Company Private Limited, established in Jan 14,2003, manages the UTI Mutual Fund with the support of UTI TrusteeCompany Private Limited. UTI Asset Management Company presentlymanages a corpus of over Rs.20000 Crores. The sponsors of UTI MutualFund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bankof India (SBI), and Life Insurance Corporation of India (LIC). The schemesof UTI Mutual Fund are Liquid Funds, Income Funds, Asset ManagementFunds, Index Funds, Equity Funds and Balance Funds.iv) Prudential ICICI Mutual FundThe mutual fund of ICICI is a joint venture with Prudential Plc. of America,one of the largest life insurance companies in the US of A. Prudential ICICIMutual Fund was setup on 13th of October, 1993 with two sponsors,Prudential Plc. and ICICI Ltd. The Trustee Company formed is PrudentialICICI Trust Ltd. and the AMC is Prudential ICICI Asset ManagementCompany Limited incorporated on 22nd of June, 1993.v) Reliance Mutual FundReliance Mutual Fund (RMF) was established as trust under Indian TrustsAct, 1882. The sponsor of RMF is Reliance Capital Limited and RelianceCapital Trustee Co. Limited is the Trustee. It was registered on June 30, 20 | P a g e
  21. 21. 1995 as Reliance Capital Mutual Fund which was changed on March 11,2004. Reliance Mutual Fund was formed for launching of various schemesunder which units are issued to the Public with a view to contribute to thecapital market and to provide investors the opportunities to makeinvestments in diversified securities.vi) ABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMROTrustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMROAsset Management (India) Ltd. was incorporated on November 4, 2003.Deutsche Bank AG is the custodian of ABN AMRO Mutual Fund.vii) Birla Sun Life Mutual FundBirla Sun Life Mutual Fund is the joint venture of Aditya Birla Group andSun Life Financial. Sun Life Financial is a global organization evolved in1871 and is being represented in Canada, the US, the Philippines, Japan,Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fundfollows a conservative long-term approach to investment. Recently it crossedAUM of Rs. 10,000 crores.viii) Bank of Baroda Mutual Fund (BOB Mutual Fund)Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30,1992 under the sponsorship of Bank of Baroda. BOB Asset ManagementCompany Limited is the AMC of BOB Mutual Fund and was incorporatedon November 5, 1992. Deutsche Bank AG is the custodian.ix) HSBC Mutual FundHSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities andCapital Markets (India) Private Limited as the sponsor.x) ING Vysya Mutual FundING Vysya Mutual Fund was setup on February 11, 1999 with the samenamed Trustee Company. It is a joint venture of Vysya & ING. The AMC,ING Investment Management Pvt. Ltd. was incorporated on April 6, 1998. 21 | P a g e
  22. 22. xi) Sahara Mutual FundSahara Mutual Fund was set up on July 18, 1996 with Sahara India FinancialCorporation Ltd. as the sponsor. Sahara Asset Management Company PrivateLimited incorporated on August 31, 1995 works as the AMC of SaharaMutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.xii) State Bank of India Mutual FundState Bank of India Mutual Fund is the first Bank sponsored Mutual Fund tolaunch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr.approximately. Today it is the largest Bank sponsored Mutual Fund in India.They have already launched 35 Schemes out of which 15 have alreadyyielded handsome returns to investors. State Bank of India Mutual Fund hasmore than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8Lakhs spread over 18 schemes.xiii) Tata Mutual FundTata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. Thesponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata InvestmentCorporation Ltd. The investment manager is Tata Asset ManagementLimited and Tata Trustee Company Pvt. Ltd. Tata Asset ManagementLimiteds is one of the fastest in the country with more than Rs. 7,703 Crores(on April 30, 2005).xiv) Standard Chartered Mutual FundStandard Chartered Mutual Fund was set up on March 13, 2000 sponsored byStandard Chartered Bank. The Trustee is Standard Chartered TrusteeCompany Pvt. Ltd. Standard Chartered Asset Management Company Pvt.Ltd. is the AMC which was incorporated with SEBI on December 20, 1999.xv) Franklin Templeton India Mutual FundThe group, Franklin Templeton Investments is a California (USA) basedcompany with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It isone of the largest financial services groups in the world. Investors can buy orsell the Mutual Fund through their financial advisor or through mail or 22 | P a g e
  23. 23. through their website. They have Open end Diversified Equity schemes,Open end Sector Equity schemes, Open end Hybrid schemes, Open end TaxSaving schemes, Open end Income and Liquid schemes, Closed end Incomeschemes and Open end Fund of Funds schemes to offer.xvi) Morgan Stanley Mutual Fund IndiaMorgan Stanley is a worldwide financial services company and its leading inthe market in securities, investment management and credit services. MorganStanley Investment Management (MISM) was established in the year 1975.It provides customized asset management services and products togovernments, corporations, pension funds and non-profit organizations. Itsservices are also extended to high net worth individuals and retail investors.In India it is known as Morgan Stanley Investment Management PrivateLimited (MSIM India) and its AMC is Morgan Stanley Mutual Fund(MSMF).xvii) Escorts Mutual FundEscorts Mutual Fund was setup on April 15, 1996 with Escorts FinanceLimited as its sponsor. The Trustee Company is Escorts Investment TrustLimited. Its AMC was incorporated on December 1, 1995 with the nameEscorts Asset Management Limited.xviii) Alliance Capital Mutual FundAlliance Capital Mutual Fund was setup on December 30, 1994 withAlliance Capital Management Corp. of Delaware (USA) as sponsor. TheTrustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance CapitalAsset Management India Private Ltd. with the corporate office in Mumbai.xix) Chola Mutual FundChola Mutual Fund under the sponsorship of Cholamandalam Investment &Finance Company Ltd. was setup on January 3, 1997. CholamandalamTrustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMCLimited. 23 | P a g e
  24. 24. xx) LIC Mutual FundLife Insurance Corporation of India set up LIC Mutual Fund on 19th June1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LICMutual Fund was constituted as a Trust in accordance with the provisions ofthe Indian Trust Act, 1882. . The Company started its business on 29th April1994. The Trustees of LIC Mutual Fund have appointed Jeevan BimaSahayog Asset Management Company Ltd as the Investment Managers forLIC Mutual Fund.xxi) GIC Mutual FundGIC Mutual Fund, sponsored by General Insurance Corporation of India(GIC), a Government of India undertaking and the four Public SectorGeneral Insurance Companies, viz. National Insurance Co. Ltd (NIC), TheNew India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC)and United India Insurance Co. Ltd. (UII) and is constituted as a Trust inaccordance with the provisions of the Indian Trusts Act, 1882.The Players in the Mutual Fund IndustryThe players in the Indian Mutual Funds Industry are similar to some extent tothe players in other financial services industry. The players are as follows:SEBIThe Securities Exchange Board of India (SEBI) is the regulatory authorityfor all the mutual funds sponsored by the public/private sector banks,financial institutions, private sector companies, non- banking finance 24 | P a g e
  25. 25. companies and foreign institutional investors. SEBI has laid down the rulesand regulations regarding the obligations of the entities involves in a mutualfund, its establishment and launch of different schemes, investments andvaluation, financial reporting, conduct and operations of mutual funds.Asset Management Company (AMC)Its role is highly significant in the mutual funds operation. They are the fundmanagers i.e. they invest the investors money in various securities afterproper research and analysis. They also look after the administrativefunctions of a mutual fund for which they charge management fee.IntermediariesThey act as a link between the mutual fund companies and the investors. Theintermediaries include brokers, sub- brokers, and investment houses. Theother intermediary- registrar and transfer agents perform activities, which areassociated with maintaining records concerning units already issued or to beissued by the company. The registrar also performs other activities such asdividend payment, investor grievance, etc.InvestorsInvestors subscribe to the units issued by the mutual funds in the hope ofgetting a return commensurate with the risk involved. SEBI protects theinterest of the investors through the guidelines laid down under SEBI(Disclosure and Investor Protection) Guidelines, 2000. The mutual fundinvestor mainly includes individual, HUF, corporate and trusts.Types of Mutual FundsThere are many types of mutual funds available to the investor. However,these different types of funds can be grouped into certain classifications forbetter understanding.Structure of a Mutual Fund 25 | P a g e
  26. 26. SOURCE: http://amfiindia.comMutual Fund ClassificationSOURCE: http://amfiindia.com  By Structurei) Open-ended FundsAn open-end fund is one that is available for subscription all through theyear. These do not have a fixed maturity. Investors can conveniently buy andsell units at Net Asset Value (NAV) related prices. Hence, the unit capital ofthe schemes keeps changing each day. Such schemes thus offer very highliquidity to investors and are becoming increasingly popular in India. Please 26 | P a g e
  27. 27. note that an open-ended fund is NOT obliged to keep selling/issuing newunits at all times, and may stop issuing further subscription to new investors.On the other hand, an open-ended fund rarely denies to its investor thefacility to redeem existing units.ii) Closed-ended FundsA closed-end fund has a stipulated maturity period which generally rangingfrom 3 to 15 years. The fund is open for subscription only during a specifiedperiod. Investors can invest in the scheme at the time of the initial publicissue and thereafter they can buy or sell the units of the scheme on the stockexchanges where they are listed. In order to provide an exit route to theinvestors, some close-ended funds give an option of selling back the units tothe Mutual Fund through periodic repurchase at NAV related prices. SEBIRegulations stipulate that at least one of the two exit routes is provided to theinvestor.Closed-ended schemes are usually more illiquid as compared to open-endedschemes and hence trade at a discount to the NAV. This discount tendstowards the NAV closer to the maturity date of the scheme.iii) Interval FundsInterval funds combine the features of open-ended and close-ended schemes.They may be traded on the stock exchange or may be open for sale orredemption during pre-determined intervals at NAV based prices.  By Investment Objectivei) Growth FundsThe aim of growth funds is to provide capital appreciation over the mediumto long- term. Such schemes normally invest a majority of their corpus inequities. It has been proven that returns from stocks, have outperformed mostother kind of investments held over the long term. Growth schemes are ideal 27 | P a g e
  28. 28. for investors having a long-term outlook seeking growth over a period oftime.ii) Income FundsThe aim of income funds is to provide regular and steady income toinvestors. Such schemes generally invest in fixed income securities such asbonds, corporate debentures and Government securities. Income Funds areideal for capital stability and regular income.iii) Balanced FundsThe aim of balanced funds is to provide both growth and regular income.Such schemes periodically distribute a part of their earning and invest both inequities and fixed income securities in the proportion indicated in their offerdocuments. In a rising stock market, the NAV of these schemes may notnormally keep pace, or fall equally when the market falls. These are ideal forinvestors looking for a combination of income and moderate growth.iv) Money Market FundsThe aim of money market funds is to provide easy liquidity, preservation ofcapital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercialpaper and inter-bank call money. Returns on these schemes may fluctuatedepending upon the interest rates prevailing in the market. These are ideal forCorporate and individual investors as a means to park their surplus funds forshort periods.v) Gilt FundThese funds invest exclusively in government securities. Governmentsecurities have no default risk. NAVs of these schemes also fluctuate due tochange in interest rates and economic factors as is the case with income ordebt oriented schemes.vi) Index FundsIndex Funds replicate the portfolio of a particular index such as the BSEsensitive index, S&P NSE 50 index(Nifty).These schemes invest in the 28 | P a g e
  29. 29. securities in the same weight age comprising of an index. NAV’s of suchschemes would rise or fall in accordance with the rise or fall in the index,though not exactly by the same percentage due to some factors known as“Tracking Error” in technical terms. Necessary disclosure in this regard ismade in the offer document of the mutual fund scheme. There are alsoexchange traded index funds launched by the mutual funds which are tradedon the stock exchanges.  On the basis of Loadi) Load FundsA Load Fund is one that charges a commission for entry or exit. That is, eachtime 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 worthpaying the load, if the fund has a good performance history.ii) No-Load FundsA 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 Schemesi) Tax Saving SchemesThese schemes offer tax rebates to the investors under specific provisions ofthe Indian Income Tax laws as the Government offers tax incentives forinvestment in specified avenues. Investments made in Equity Linked SavingsSchemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 ofthe Income Tax Act, 1961. The Act also provides opportunities to investorsto save capital gains u/s 54EA and 54EB by investing in Mutual Funds,provided the capital asset has been sold prior to April 1, 2000 and the amountis invested before September 30, 2000.ii) Industry Specific Schemes 29 | P a g e
  30. 30. Industry Specific Schemes invest only in the industries specified in the offerdocument. The investment of these funds is limited to specific industries likeInfoTech, FMCG, and Pharmaceuticals etc.iii) Sectoral SchemesSectoral Funds are those, which invest exclusively in a specified industry ora group of industries or various segments such as A Group shares or initialpublic offerings. In these funds or schemes the investor invests in thesecurities of only those sectors or industries which are specified in the offerdocuments. E.g. Pharmaceuticals, software, Fast Moving Consumers goods(FMCG), petroleum stocks, etc. the return on these funds is dependent on theperformance of the respective sector/industries. While these funds may givehigher returns, they are more risky compared to the diversified funds.Investors need to keep a watch on the performance of these sectors and mustexit at an appropriate time. They may seek an advice of an expert.Advertisements of Mutual Funds  Advertisements through Hoardings/Posters It is essential for the investors to read the Offer Documents & Risk Factors before investing in the mutual funds scheme to take well informed investment decisions. Considering that the investors get very little time to read the advertisements through hoardings/posters, etc. 30 | P a g e
  31. 31. while passing by, it is clarified that such advertisements may carry only the following statement apart from copy of advertisement: “Mutual Fund investments are subject to market risks, read the offer document carefully before investing” The above statement shall be displayed in black letters of at least 8 inches height or covering 10% of the display area on white blackboard. The compliance officers shall ensure that he statement appearing in such advertisements are in legible font. Advertisements through Audio-Visual Media Advertisements through audio-visual media like television, a statement “Mutual Fund investments are subject to market risks, read the offer document carefully before investing” shall be displayed on the screen for at least 2 seconds, in a clearly legible font-size covering at least 80% of the total screen space and accompanied by a voice-over reiteration. The remaining 20% space can be used for the name of the mutual fund or logo or name of scheme, etc. Performance Advertisements • Disclosure of Benchmarks in Advertisements: All performance advertisements disclosing return statistics shall mention the returns on the benchmark indices, during the same time periods. • Performance of Money Market Schemes: The investors in cash/liquid/money market schemes have short investment horizon therefore the mutual funds while advertising simple annualized returns of such schemes based on a period of 30 days can also advertise simple annualize returns based on 15 days period. 31 | P a g e
  32. 32. • Impact of Distribution Taxes: While advertising returns by assuming reinvestment of dividends, if distribution taxes are excluded while calculating the returns, this should also be disclosed. • Pay-out of Dividends: While advertising pay-out dividends, it shall be disclosed that after the payment of dividend, the NAV will fall to the extent of the payout and distribution taxes (if applicable), in the main body of the advertisement. Fund of Fund’s Advertisement In case of Fund of Fund’s scheme, the mutual funds shall disclose in the offer document as well as in the advertisements that the investors are bearing the recurring expenses of the scheme in addition to the expenses of other schemes in which Fund of Fund’s scheme makes investment. 32 | P a g e
  33. 33. Distribution Model AMC 33 | P a g e
  34. 34. Direct Sales Brokers Banks Tied Agency Internet Institutional Brokers IFAs Large HNW Retail Corporate Corporate Customer Customer Customer Segments Multi - Channel Distribution Distribution Channels In highly competitive environment, product innovation or development has become a necessity for mutual fund players to stay ahead. Increasing commoditization and growing needs of the customers are forcing players to shift to solution based models from production based ones. In either model, the role of distribution channel remains critical as it helps stave off 34 | P a g e
  35. 35. competition by maintaining relationships, providing advisory services andcustomizing need-based solutionRelationship plays a vital role while selling mutual fund products. An agentis essential channel between investors and mutual fund products. However itis difficult for AMCs to manage and monitor large agent force. So they takeshelter in third-party distribution AMCs like KARVY, BAJAJ Capital, andIntegrated Enterprises etc. These AMCs in turn, appoint their agents to sellthe MF to AMCs products. Agents advise the customer on the kind ofproduct that caters to the needs of the client. To unload their work, thecompanies bear a huge market expense in the form of higher commission tolure investors.To control increasing operational costs, AMCs are opting for the service s oflarge distributors to sell their products by leveraging their value chain, whichcomprises of a brokers, sub brokers and agents. However mutual fundplayers have to bear splurging marketing expenses to push their productagainst others. In addition mutual fund AMCs are also using banks and Non–Banking Financial AMCs (NBFC) as distribution channels to leverage theirreach and huge client base. UTI is distributing its offerings through selectedbranches of Indian Bank, Corporation Bank, Bank of India an AllahabadBank, besides, they are also appointing sales personnel to meet investors,educate them and sell their products.The contribution of direct marketing to the total sales is miniscule, but thecost burden is huge. The post office is also used as a channel of Distributionby mutual funds AMCs, given the fact that the post office has the largestnetwork then many other institution or bank in the country. As far as retailpenetration is concerned, the post office plays a vital role because its officesare distributed through the country. Mutual fund industry is also using theinternet to distribute their products because of the cost advantages andincreased communication. However, the fact is that internet has its limits inproviding customized advice to individuals; restrict its use on large scale.Challenges in Distribution 35 | P a g e
  36. 36.  Lack of awareness  Risk aversion  Extensive availability of the central govt. assured return  Delay (in Liquidity)  Tardy inter-city payment system  Transaction cost of establishing contact centersIt has been a big challenge for the Mutual Fund Industry. As most of theinvestors are still not aware how it functions. They sometime feel that it is acostly affair. Educating investors about the advantages of investing in mutualfunds compared to risk-free savings instrument is a big task for the industry.According to the Securities Market Infrastructure- Leveraging Expert(SMILE), the transaction cost of establishing contact centers, delay in fundtransfer and tardy inter-city payment system are the major impediments. Soenhancing the reach through the existing distribution model will requiremore investments.As of now, mutual fund investments are confined to the metros, tier 1 and 2cities (about 50 cities). A major reason for this is high cost of developingretail infrastructure. So, scaling up the operation by increasing investment inother cities doesn’t seem feasible.There is also a regulatory entanglement in fund realization. Allotment ofunits Net Asset Value (NAVs) is done before realization of funds, except inliquid and money market schemes. Such delay is quite pervasive in smallertowns, where it can be 3-5 days or more. Such hassle could prevent investorsfrom investing in mutual funds. However, these problems are being resolvedwith appointment of registrars to meet the time-lines of recording thetransactions. In addition, technological advancements of remittanceinstruments such as Electronic clearing Services (ECS), Electronic Funds 36 | P a g e
  37. 37. Transfer (FT) and Real- Time Gross settlement System (RTGS), is a makingthe process fast and reducing delay in fund transfer across cities.The extensive availability of the central govt. assured return on smallproducts are restricting the competition as well as penetration of widevariety of mutual fund products, particularly in the smaller towns whereinvestors are not willing to take risk. This poses a great challenge for theindustry to realize its potential.Curbing unethical practicesThe industry faces challenge to control certain practices. AMCs are wooingthe distributors by offering more commission to push their products. In thehope of getting more incentives, distributors may opt for unfair practices likefalse projections to sell unsuitable products, motivate the investors to shiftfrom one fund to another, namely high net worth investors and persuadethem to over invest. However, the client’s concern and his needs should be ofprime importance while selling. To curb such unethical practices, theAssociation of Mutual Funds in India (AMFI) has prescribed thatagents/distributors must have AMFI certification. And to control the hugemarket expenses the authority has prescribed that the commission rates alsoshouldn’t be more than mutual fund’s expense limit of 2.5% for equity and2.25 % for debt. Such regulations are required to be more effective to stopsuch unethical practices.Spreading the Mutual Fund CultureThough the Indian Mutual Fund industry has a huge potential, it is yet to berealized. To realize its growth potential, industry will have to focus on itsreach in the retail segment. According to Chairman of AMFI there are about180 million households in India, of which just 11.8 millions invest in mutualfunds, making it penetration of 6.7% in the urban areas 13.7% of thehouseholds invest in mutual funds; in rural areas this percentage is just 3.8%. 37 | P a g e
  38. 38. So there is a need to focus on rural penetration for future growth. To achieveits growth, educating the customer about the mutual funds as a saving vehiclewill be critical. More efforts are required from the regulators and the industryto manage the wealth of individuals to further propel the growth of theindustry by popularizing the use of mutual funds. The govt. should properlyregulate and monitor the regulation so that a favorable climate can becreated. Regulations should be tightened to curb unethical practices. Theyshould also develop a comprehensive risk management system so that it caninduce more investment. The industry should focus on product innovationand maintain transparency, flexibility, service and innovation to realize itspotential.Offer DocumentWhen an AMC or a Fund Sponsor wishes to launch a new mutual fundscheme, they are required to formulate the details of the schemes and registerit with SEBI before announcing the scheme and inviting the investors tosubscribe to the fund. Launch of a new mutual fund scheme is called a NewFund Offer (NFO). The document containing the details of the new fundoffer that the AMC or the Sponsor prepares and circulates to the prospectiveinvestors is called the Offer Document.Offer Document issued by mutual funds serve the same purpose of invitinginvestors and giving them the information about the new fund offer. Theoffer document of the closed-end fund is issued only once at the time ofissue, as the units are normally not re-purchasable for investors. But, theopen-end fund could issue and repurchase units on an ongoing basis. Thismeans that the offer document of the open-end funds is valid for all the time,until amended, though it will be first issued at the time of launch of thescheme. SEBI requires the offer document of the open-end fund to be revisedevery two years.Options Offered to Investors: 38 | P a g e
  39. 39.  Dividend Option: The investor can choose to receive a part of the profits of the mutual fund at some intervals before their redemption. This option is Dividend Option. Investors who choose dividend option can again have 2 sub options: • Dividend Payout Option: Investors who choose the dividend payout option on their investments will receive dividends as and when such dividends are declared by the scheme. Dividends are paid out to the investors in the form of warrants or are directly credited to the investor’s bank account. • Dividend Re-investment Option: Investors who opt for the dividend reinvestment option do not take the amount of dividend out of the scheme. They re-invest the dividends that are declared by the mutual funds back into the mutual funds itself, at a NAV that is prevalent immediately after the declaration of dividend or the NAV at the time of re-investment. This NAV is known as ex- div NAV.  Growth Option: The investors who do not want to receive any part of profits of the mutual fund before its redemption. Rather they want to retain the profits made in the pool and want their returns to grow by being compounded. Whenever they need to get some money or profits back, they would sell a part of their units. This is Growth Option.Investor Earning Opportunities: Dividend Payout Dividend Growth Option ReinvestmentDividend Yes Yes NoChange in NAV Yes Yes Yes 39 | P a g e
  40. 40. Lock-in Period Options:Mutual funds usually do not have lock-in periods, during which investorscannot exit the fund. Mutual funds may create products with lock-in periods.Repurchase information can be found in the offer document. There are 2normal situations when investors are restricted from exiting the fund:  An open-ended fund may announce an initial offer period, during which time it will only sell units. There may be no repurchase during that period. The fund will announce a date from which further sales and repurchases will take place.  Some specific funds scheme can be designed to have a minimum period of investment. Example: Investments in special “Equity Linked Savings Scheme” are eligible for tax rebates. In order to enjoy the tax rebate, the investor is required to stay invested for a period of 3 years. In extra-ordinary situations, mutual funds can, with notice to the investors through a national daily, impose temporary lock-in periods. Investors have to check the offer document to see if the mutual fund has sought such a right for itself.Regulations regarding Cutoff Timings:  All funds except liquid funds • Purchases: In respect of valid applications received upto 3 p.m. by the Mutual Fund, same day’s closing NAV shall be applicable. In respect of valid applications received after 3 p.m. by the Mutual Fund, the closing NAV of the next business day shall be applicable. • Redemption: 40 | P a g e
  41. 41. In respect of valid applications received upto 3 p.m. by the Mutual Fund, same day’s closing NAV shall be applicable. In respect of valid applications received after 3 p.m. by the Mutual Fund, the closing NAV of the next business day shall be applicable. Liquid funds • Purchases: In respect of valid applications, closing NAV of the day immediately before the day on which funds are available for utilization by the fund shall be applicable. However, in respect of any application received after 1 p.m. by the Mutual Fund and the funds are available for utilization by the fund on the same day, closing NAV of the same day shall be applied. • Redemption In respect of valid applications received upto 10:00 a.m. by the Mutual Fund, previous day’s closing NAV shall be applicable. In respect of valid applications received after 10:00 a.m.by the Mutual Fund, same day’s NAV shall be applicable.Net Asset ValueNet Asset Value (NAV) represents a funds per share market value. Thisis the price at which investors buy (bid price) fund shares from a fundcompany and sell them (redemption price) to a fund company. Dividingthe total value of all the cash and securities in a fund’s portfolio, less anyliabilities, by the number of shares outstanding, derives it. The 41 | P a g e
  42. 42. NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolios securities. NAV: Net Assets of the Scheme/ Number of Units Outstanding Or (Market Value of Investment + Receivables + Other Accrued Income + Other Assets – Accrued Expenses – Other Payables – Other Liabilities)/Number of Units Outstanding on the Valuation Date For the purpose of NAV calculation, the day on which NAV is calculated by a fund is known as the Valuation Date. NAV of all schemes must be calculated and published at least every Wednesday for Closed-end schemes and daily for Open-end schemes. The day’s NAV must be posted on AMFI website by 8:00 p.m. that day. This applies to both Open-end & Closed-end schemes. The fund’s NAV is affected by these 4 factors: • Purchase & Sale of investment securities • Valuation of all investment securities held • Other assets & liabilities • Units sold or redeemedPricing Of UnitsAlthough NAV per unit defines the fair value of the investor’s holding in thefund, the fund may not repurchase the investor’s units at the same price asNAV. There can be entry or exit loads. The Sale price is NAV + Entry Loadand the Repurchase price is NAV – Exit Load. SEBI requires that fund mustensure that repurchase price is not lower than 93% of NAV (95% in the caseof a closed-end fund). On the other side, the fund may sell new units at aprice that is different from the NAV, but the sale price cannot be higher than107% of NAV. Also, the difference between the repurchase price and thesale price of the unit is not permitted to exceed 7% of the sale price.Sale Price: Applicable NAV * (1 + Entry Load) 42 | P a g e
  43. 43. Repurchase Price: Applicable NAV * (1 – Exit Load)Fees & Expenses:An AMC may charge the scheme with Investment Management & AdvisoryFees that are fully disclosed in the offer document subject to the followinglimits:  1.25% of the first Rs.100 Crores of weekly average net assets outstanding in the accounting year, and @ 1% of weekly average net assets in excess of Rs.100 Crores.  For no load schemes, the AMC may charge an additional management fee up to 1% of weekly average net assets outstanding in the accounting year.Initial Issue Expenses  Initial Issue Expenses will be permitted for Closed Ended Scheme only and such scheme will not charge entry load.  Initial Issue Expenses of launching schemes (not to exceed 6% of initial resources raised under the scheme)Total Expenses: Total Expenses charged by the AMC to a scheme, excluding issue or redemption expenses but including investment management & advisory fees, are subject to the following limits:On the first Rs.100 Crores of daily or average weekly net assets 2.5%On the next Rs.300 Crores of daily or average weekly net assets 2.25%On the next Rs.300 Crores of daily or average weekly net assets 2.0%On the balance of daily or average weekly net assets 1.75% 43 | P a g e
  44. 44. For Bond Funds:On the first Rs.100 Crores of daily or average weekly net assets 2.25%On the next Rs.300 Crores of daily or average weekly net assets 2.0%On the next Rs.300 Crores of daily or average weekly net assets 1.75%On the balance of daily or average weekly net assets 1.5%Investment PlansThe term “investment plans” generally refers to the portfolio flexibility thatthe funds to investors offering different ways to invest or reinvest. Thedifferent investment plans are an important consideration in the investmentdecision, because they determine the level of flexibility available to theinvestor. Also, the investment plan offered by a fund allows the investorsfreedom with respect to investing one time or at regular intervals, makingtransfers to different schemes within the same fund family, or receivingincome at specified intervals or accumulating distributions. These are someof the investment plans offered by mutual funds in India: 44 | P a g e
  45. 45. • Automatic Reinvestment Plans (ARP): Many funds offer 2 options under the same scheme- the Dividend Option & the Growth Option. The ARP allows the investor to reinvest the amount of dividends or other distributions made by the fund in the same fund & receive additional units, instead of receiving them in cash.• Systematic Investment Plan (SIP): These require the investor to invest a fixed sum periodically, thereby letting the investor save in a disciplined and phased manner. The mode of investment could be though direct debit to the investor’s salary or bank account. A modified version of SIP is the Voluntary Accumulation Plan (VAP) that allows the investor flexibility with respect to the amount and frequency of investment.• Systematic Withdrawal Plan (SWP): Such plans allows the investor to make systematic withdrawals from his fund investment account on a periodic basis, thereby providing the same benefit as regular income. The investor must withdraw a specific minimum amount with the facility to have withdrawal amounts sent to his residence by a cheque or credited directly into the bank account. The amount withdrawn is treated as redemption of units at the applicable NAV as specified in the offer document. The investor is usually required to maintain a minimum balance in his fund account under this plan.• Systematic Transfer Plan (STP): These plans allow the investor to transfer on a periodic basis a specified amount from one scheme to another with the same fund family- meaning two schemes managed by the same AMC and belonging to the same mutual fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made, and as investment in units of the scheme into which the transfer is made. Such redemption or investment will be at the applicable NAV for the respective schemes as specified in the offer 45 | P a g e
  46. 46. document. The investor is usually required to maintain a minimumbalance in his fund account under this plan for which the transfer ismade. 46 | P a g e
  47. 47. Tax Provisions  Income earned by any mutual fund registered with SEBI (Mutual Fund) Regulation, 1996 is fully exempt from tax under section 10 (23D) of the IT act.  However, income distributed to unit-holders by a closed-end or debt fund is liable to a dividend distribution tax at a rate stipulated by the Government. This tax is not applicable to distributions made by open-end-equity-oriented funds (funds with more than 50% of their portfolio in Equity).  Dividend Distribution Tax is payable by the fund on its distributions and out of its income, the investor pays indirectly since the fund’s NAV and the value his investment will come down by the amount of tax paid by the fund. Example: If a closed-end or a debt fund declares a dividend distribution of Rs.100, Rs.10.20 (Tax Rate 10.2%) will be the tax in the hands of the fund. While the investor will get Rs.100, the fund will have Rs.10.20 less to invest. The fund’s current cash flow diminish by Rs.10.20 paid as tax, and its impact will be reflected in the lower value of the fund’s NAV and hence investor’s investment on a compound basis in future periods.  Since the tax is on distributions, it makes income schemes less attractive in comparison to growth schemes, as the objective of income schemes is to pay regular dividends.  The fund cannot avoid the tax even if the investor chooses to reinvest the distribution back into the fund. Example: The fund will still pay Rs.10.20 tax on the announced distribution, even if the investor chooses to reinvest his dividends in the concerned scheme.Tax Benefits to the Investor  Dividends Received from Mutual Funds: • Income distributed by a fund is exempted in the hands of investors • No TDS on any income distribution by mutual fund 47 | P a g e
  48. 48. What is risk?Risk can be defined as the potential for harm. But when anyone analyzingmutual funds uses this term, what is actually being talked about is volatility.Volatility is nothing but the fluctuation of the Net Asset Value (price of aunit of a fund). If there is high volatility, then there will be greaterfluctuations in NAV.Generally, past volatility is taken as an indicator of future risk and for thetask of evaluating a mutual fund, this is an adequate approximation.How risk is measured?There are 2 ways in which you can determine how risky a fund is.  Standard Deviation Standard Deviation is a measure of how much the actual performance of a fund over a period of time deviates from the average performance. Since Standard Deviation is a measure of risk, a low Standard Deviation is good.  Sharpe Ratio The Sharpe Ratio of a fund measures whether the returns that a fund delivered were commensurate with the kind of volatility it exhibited. This ratio looks at both, returns and risk, and delivers a single measure that is proportional to the risk adjusted returns. Since Sharpe Ratio is a measure of risk-adjusted returns, a high Sharpe Ratio is good. 48 | P a g e
  49. 49. Important Points:  Dont just look at the NAV, also look at the risks-returns Kotak 30 has 3 stars & Kotak Opportunities has 4 stars. That does not mean that their NAV is approximately the same. In fact, the NAV of Kotak 30 is 90.22 & NAV of Kotak Opportunities is 40.48 However, Kotak 30 took a below average risk and delivered an above average return, while Kotak Opportunities took an average risk to get the high returns. So, don’t just look at the NAV also consider the risks-returns of the fund.  Higher rating does not mean better returns A fund with more stars does not indicate a higher return when compared with the rest. All it means is that you will get a good return without putting your money at too much risk. ICICI Prudential Liquid Fund has a 4-star rating while ICICI Prudential Growth Fund has a 3-star rating. However, the fund with the 3-star rating has a higher NAV (109.08) than the one with the 4- star rating (11.73).  Higher rating does not mean more risk HDFC Top 200 has an NAV of 140.47 while UTI Infrastructure has an NAV of 36.60 This does not necessarily mean that HDFC Top 200 is offering a higher risk since the return is higher. In fact, according to the ratings, HDFC Top 200, a 5-star fund has a low risk while UTI Infrastructure, a 5-star fund has an average risk. 49 | P a g e
  50. 50. Recent Trends in the Mutual Fund Industry Funds betting on Natural Resources • Since Indian regulations do not permit mutual funds to invest directly in commodities, fund houses go for schemes that invest in stocks of mining companies. • At least five funds, keen on investing in natural resources, are set to hit the market, as per documents filed with the stock market regulator SEBI. There are two funds from ING and one each from Mirae Asset Management, Tata AMC and HSBC MF. Systematic Transfer Plans lower Volatility Risk• Systematic Transfer Plan (STP) helps in reaching the financial goals by investing a fixed sum in the chosen fund for a pre-determined number of installments. STP offers an investor the security of a liquid fund while trying to enhance returns by investing a part of the funds in equity. This helps mitigate any risk arising from volatility or improve the fund’s returns in a boom. Thus, an investor can match his risk appetite with that of the equity scheme.• Most fund houses are already offering this STP facility to investors. In the first week of May, JP Morgan AMC launched Optimiser Systematic transfer plan, wherein investors can invest a lump sum in JP Morgan India Liquid Fund or JP Morgan India Liquid Plus Fund through STP. An amount predetermined by the investor would be transferred periodically (daily, weekly, monthly or quarterly) from this fund to any of the existing equity schemes managed by JP Morgan Mutual Fund.• STP is definitely going to gain ground as aspirations, possibilities and opportunities increase among the youth. However, fund managers feel, STP is yet to be promoted in India to its full extent. Investors need to be adequately informed about it. 50 | P a g e
  51. 51.  Mutual Fund industry to tap Entertainment space• To cash the bullish growth of the entertainment & media industry in the country financial institutions are rolling out a slew of mutual funds focusing on these spaces.• Many of the funds will cover a wide range of areas within the entertainment arena such as retail, shopping malls, mobile content providers, lifestyle beyond the conventional media like television, film, print advertising and multiplex.• Global media giants like Viacom, Walt Disney, BBC, J C Decaux and Astro are already in the country or looking at it. The industry has already witnessed deals such as Walt Disney-UTV, Blackstone- Eenadu and Adlabs-ADAG (Anil Dhirubhai Ambani Group). Brand name works for Mutual Funds• A brand image is very important for mutual funds and investors base their decisions on known and dependable brands. Brand-building exercises are mostly taken up by foreign players and big industrial houses which have deep pockets, while fund houses with lower corpus can only attract investors by showing good performance.• Fund mobilisation trend in mutual funds space suggests that brand play an important role in helping fund houses attract investors initially although in the long term it boils down to the performance of the schemes. 51 | P a g e
  52. 52. • Countrys MF industry holds immense potential for the existing as well as the new players entering or those envisaging an entry into the space, but firms with a strong brand presence definitely has a competitive advantage. Mutual Fund Industry’s AUM advances by 7.33% in April• The asset base of the industry has grown by 7.33% to Rs. 567601.98 Crores.• Compared to the last month, April has been great for the mutual fund industry as 28 AMCs out of 34 posted positive growth in their AAUM. Reliance Mutual Fund has topped the chart with an AAUM of Rs 96,386.40 Crores. ICICI Prudential MF and UTI MF continue to be at the second and third position respectively. Reliance MF offers life insurance cover through SIP investment• Reliance MF has introduced a scheme to encourage investors to save and invest regularly through Systematic Investment Plan (SIP), to ensure that investors achieve their financial objective even in the unfortunate event of death before completing the SIP tenure as the balance amount towards the SIP installments remaining unpaid shall be made good from the life insurance cover.• The nominee would be able to continue investing in the scheme without having to make any further contribution. The cost of life insurance premium will be borne by the AMC. Kotak Mahindra Mutual Fund launches Sensex ETF• Kotak Mahindra Asset Management Company has announced the launch of an exchange traded fund which will focus on the stocks that comprise the BSE SENSEX. 52 | P a g e
  53. 53. • Kotak Mahindra Asset Management Company has announced the launch of an exchange traded fund which will focus on the stocks that comprise the BSE SENSEX.• The fund is open for subscription from May 07, 2008 till May 16, 2008. The units will be listed on BSE to provide liquidity through secondary market. Each unit of the Kotak Sensex ETF will be approximately equal to 1/100th of the value of BSE SENSEX. The minimum investment amount during the New Fund Offer is Rs 10,000 and in multiples of Rs 1,000. Reliance Mutual Fund achieves a milestone• Reliance Mutual Fund, owned by Anil Ambani controlled Reliance Capital, has achieved the coveted milestone by notching up Rs 1 trillion of assets under its management this April.• Reliance Mutual Fund is the first mutual fund in India to cross this mark. On April 30, the total Assets Under Management (AUM) of the fund was Rs 100812 Crores, including Rs 34000 Crores in equity schemes and Rs 66800 Crores in debt funds. ICICI Prudential AMC Step towards Transparency • ICICI Prudential AMC has taken a pioneering step towards transparency and investors right to information. The company has disclosed the complete details on the securitizations and pass through certificates across all its fixed income funds on a consolidated basis in its April’ 08 Fact sheet. • The fact sheet will provide details of obligators, underlying asset class, rating etc on a consolidated basis across the entire fixed income portfolio which will play a key role in aiding investors gain complete insight of their investment and evaluate the credit quality of their portfolio. 53 | P a g e
  54. 54. Impact on Mutual Fund Industry of the Union Budget Easing in Income Tax slabs• Threshold limit of Income Tax exemption for individuals rose as follows - Up to Rs.150,000 - NIL Rs.150,001 to Rs.300,000 - 10% Rs.300,001 to Rs.500,000 - 20% Rs.500,001 and above - 30% Impact• This is expected to increase the disposable income in the hands of the individuals to some extent which could translate into increased retail investments in mutual funds. 54 | P a g e
  55. 55.  Increase in Short Term Capital Gain Tax • Short Term Capital Gains Tax rose from 10% to 15% Impact • Since long term capital gains tax has been left unchanged, this hike in short term capital gains tax could encourage long-term investments which augur well to the development of the concept of “long term” in the Indian Mutual Fund industry, which is conspicuous by its absence but which is coveted by the fund industry given the greater flexibility that this provides in fund’s management. • At the same time since the short term capital gains tax is still lower than the income tax slabs of typical capital market investors, it is not expected to cause too many investors to turn away from mutual funds. Incentives for equities should be continued and the status quo on long- term capital gain tax and STT should be maintained. Section 80 C deduction for tax saving should be raised from the current limit of Rs 1 lakh and Equity Linked Saving Schemes from mutual funds should be given the benefit of the same. Know your Customer (KYC) Compliance for Mutual Funds• KYC is an acronym for “Know your Client”, a term commonly used for Client Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to ‘know’ their clients. This would be in the form of verification of identity and 55 | P a g e
  56. 56. address, financial status, occupation and such other personal information. Applicant must be KYC compliant while investing with any SEBI registered Mutual Fund.• The provisions of The Prevention of Money Laundering Act, 2002 (PMLA), has made it mandatory for all Mutual Funds to comply with the ‘Know Your Client’ (KYC) norms of the applicants desirous of subscribing to their ‘units’. In this regard, it has been mandated to create the necessary infrastructure in order to handle the KYC on behalf of the Mutual Fund Industry.• As a result, all applicants will now have to submit their PAN card copy (which serves as Proof of Identity (PoI)) and Proof of Address (PoA) only once to the designated Point of Service (PoS) centers spread across the country. After confirming the credentials of the investor, the PoS issues KYC acknowledgement letter that needs to be submitted along with the mutual fund investments. Norms for dedicated infrastructure funds should be finalized regarding which announcement was made in last Union Budget. Existing open-ended equity schemes of mutual fund industry should be included for the purpose of tax savings wherein a lock-in period of three years can be introduced in separate plan of same schemes. Dividend distribution taxes on Money Market Mutual Funds which was increased last year should be brought back to earlier levels. Service Taxes realigned for ULIP’s• Asset management services provided under Unit Linked Insurance Plans (ULIPs) would be brought on par with asset management 56 | P a g e
  57. 57. services provided under mutual funds as regards chargeability to service tax. • Services provided by stock/commodity exchanges and clearing houses would also be brought under the service tax net. Impact • The competitiveness of mutual funds vis-à-vis ULIPs in the investment basket of investors is expected to increase somewhat. • Transactional expense levels of mutual funds are expected to go up marginally on account of their exposure to stock and commodity exchange which are expected to pass on the service tax. But clarity on what would define services here and on what amount the service tax would be levied is awaited. FUND ANALYSIS (On the basis of NAV)Fund Category Rating 3 Year ReturnDSPML T.I.G.E.R. Reg Equity: Diversified 45.64Tata Infrastructure Equity: Diversified 45.31 57 | P a g e
  58. 58. Magnum Contra Equity: Diversified 44.80Kotak Opportunities Equity: Diversified 43.72UTI Infrastructure Equity: Diversified 43.18Magnum Multiplier Plus Equity: Diversified 43.05Reliance Growth Equity: Diversified 42.00Sundaram BNP Paribas Select Equity: Diversified 41.06Midcap RegHDFC Top 200 Equity: Diversified 39.65BoB Growth Equity: Diversified 38.55Principal Child Benefit Hybrid: Equity-oriented 36.93Magnum Balanced Hybrid: Equity-oriented 31.37HDFC Prudence Hybrid: Equity-oriented 29.27Birla Sun Life Income Debt: Medium-term 8.37ICICI Prudential Long-... Debt: Medium-term 7.54Kotak Flexi Debt Debt: Medium-term 7.47Sundaram BNP Paribas S... Equity: Diversified 44.86DWS Investment Opportunity Equity: Diversified 44.10DSPML Equity Fund Equity: Diversified 43.39ICICI Prudential Dynamic Equity: Diversified 42.69Kotak 30 Equity: Diversified 42.68DSPML Top 100 Equity Reg Equity: Diversified 42.55Magnum Equity Equity: Diversified 42.23Source: http://amfiindia.com (on 8th May, 2008)Funds which have been compared are:  KotakCategory FundEquity Fund Scheme Kotak 30 – GrowthDebt Fund Scheme Kotak Bond Short TermELSS Tax Saver Kotak Tax Saver Scheme – Growth 58 | P a g e
  59. 59. Monthly Income Plan Kotak Income PlusCash Fund Kotak Liquid Instrument  HDFCCategory FundEquity Fund Scheme HDFC Equity Fund- GrowthDebt Fund Scheme HDFC HI Short TermELSS Tax Saver HDFC Tax Saver Scheme- GrowthMonthly Income Plan HDFC MIP- Short TermCash Fund HDFC Liquid  UTICategory FundEquity Fund Scheme UTI Equity Fund- GrowthDebt Fund Scheme UTI Short Term Income RegularELSS Tax Saver UTI ETSP- GrowthMonthly Income Plan UTI- MISCash Fund UTI Liquid Cash Instrument  ICICICategory FundEquity Fund Scheme ICICI Prudential Dynamic Plan- GrowthDebt Fund Scheme ICICI Prudential Short TermELSS Tax Saver ICICI Prudential Tax Plan 59 | P a g e
  60. 60. Monthly Income Plan ICICI Prudential MIPCash Fund ICICI Prudential Liquid  RelianceCategory FundEquity Fund Scheme Reliance GrowthDebt Fund Scheme Reliance Short TermELSS Tax Saver Reliance Tax SaverMonthly Income Plan Reliance MIPCash Fund Reliance Liquid Cash 60 | P a g e
  61. 61. Equity Fund Scheme 1. Kotak 30- Growth 2. HDFC Equity Fund- Growth 3. UTI Equity Fund- Growth 4. ICICI Prudential Dynamic Plan- Growth 5. Reliance Growth Standard Sharpe Treynor Beta R Square Alpha Deviation Ratio RatioKotak 25.48 1.39 3.09 .96 .88 4.98HDFC 23.61 1.34 2.65 .91 .92 2.75UTI 23.06 1.06 2.13 .88 .89 -3.28ICICI 25.10 1.43 1.95 .87 .77 7.78Reliance 27.93 1.29 2.97 .98 .76 4.74Note: The data is collected on 8th May, 2008Findings Standard Sharpe Treynor Beta R Alpha Total Deviation Ratio Ratio SquareKotak 4 2 1 4 3 2 16HDFC 2 3 3 3 1 4 16UTI 1 5 4 2 2 5 19ICICI 3 1 5 1 4 1 15Reliance 5 4 2 5 5 3 24Analysis 61 | P a g e
  62. 62. The analysis suggests that in case of standard deviation which is desired tobe low so that the fund can perform better, UTI stands out with rank 1(23.06) & following UTI is HDFC (23.61) which suggest that these funds arestable in their returns .As the desired level of Beta is low so that the fund return is stable but this iscontradiction statement because beta shows the volatility of the stock or fundlower beta means that funds returns are stable but in today’s competitiveworld there is a quote “Higher the risk higher the return” if we go by this weneed to have a high value of beta. this also depends upon the risk appetitiveof the investor if he is aggressive investor he would want his fund beta to behigh but the case is entirely different in case of risk averse investor but asthese funds are managed by professionals so we would be giving 1st rank tothat fund which has lowest beta value . In this case also ICICI PrudentialDynamic Plan has lowest beta (.87) among these funds which is followed byUTI Equity Fund- Growth (.88). But beta of 1 is preferable because of thereturns it is considered safe for the value of 1 in this analysis almost most ofthe funds have beta of less than 1 which means that these funds are managedin keeping the people risk at a manageable level, which help investors to earnsafe returns. As we have to do the analysis we have to take one stand so inthis case, according to me 1st rank should be given to that beta value which islowest.If two funds have same beta value then R-square value is used with thebeta which show how reliable the beta number is higher R-square valueis preferred.Also, one of the important advantages of the mutual fund is that the investorcan enjoy the benefits of diversification of portfolio. Further, well diversifiedportfolio diversifies the risk of the portfolio. Diversification can be measuredwith the help of coefficient of diversification (R Square).So, higher R Square means a well diversified portfolio. So, HDFC EquityGrowth fund has the maximum R Square (.92) followed by UTI EquityGrowth fund (.89). 62 | P a g e
  63. 63. But the analysis can’t be done on these three parameters. Standard deviationmeasures total risk and this is the case with a single portfolio so we have alsoconsidered ratios which are quite important for mutual funds analysis likeSharpe ratio & Treynor ratio.Sharpe ratio represents this trade-off between risk and returns. A higherSharpe ratio is therefore better as it represents a higher return generated perunit of risk. Sharpe ratio provides an unbiased look into funds performance.This is because they are based solely on quantitative measures. Both theTreynor Ratio and the Sharpe Ratio provide measures for ranking the relativeperformance of various portfolios, on a risk-adjusted basis. So, in these tworatios higher value is preferred for the fund selection.In the case of Sharpe ratio ICICI Prudential Growth fund (1.43) stands outclear with 1st rank, followed by Kotak 30 Growth fund (1.39).In case of Treynor ratio, Kotak 30 Growth fund (3.09) value is higher so ithas been given the 1st rank among the others which is followed by RelianceEquity fund (2.97).Alpha indicates the superior performance of the fund. If the alpha is positivethe fund has performed better and if the alpha is negative the fund has notperformed upto the benchmark.When Alpha is considered, ICICI Prudential Dynamic Growth Plan (7.78) isthe best followed by Kotak-30 Growth fund (4.98).Thus, ICICI Prudential Dynamic Growth Plan is the best Equity fund for theinvestor for investment purpose. It is the best fund as far as Alpha, Beta &Sharpe ratio is concerned. Though R Square is not so convincing whichmeans that the fund is not so diversified. It stands at 3 rd position in StandardDeviation after UTI Equity Growth fund & HDFC Equity Growth fund andlast when Treynor ratio is considered. But when we combine all the 6parameters which are considered to measure the performance of a MutualFund, ICICI Prudential Dynamic Growth Plan is the best Equity Fund whencompared with rest of the Equity funds. 63 | P a g e
  64. 64. Debt Fund Scheme 1. Kotak Bond Short Term 2. HDFC HI Short Term 3. UTI Short Term Income Regular 4. ICICI Prudential Short Term 5. Reliance Short Term Standard Sharpe Treynor Beta R Alpha Deviation Ratio Ratio SquareKotak .59 5.30 3.42 .48 .55 2.27HDFC .52 7.10 3.11 .42 .54 2.95UTI .66 2.53 2.87 .51 .49 .77ICICI .85 3.01 2.56 .62 .44 1.45Reliance .54 6.55 2.98 .46 .59 2.72 thNote: The data is collected on 8 May, 2008Findings Standard Sharpe Treynor Beta R Alpha Total Deviation Ratio Ratio SquareKotak 3 3 1 3 2 3 15HDFC 1 1 2 1 3 1 9UTI 4 5 4 4 4 5 26ICICI 5 4 5 5 5 4 28Reliance 2 2 3 2 1 2 12AnalysisThe analysis suggests that in case of standard deviation which is desired tobe low so that the fund can perform better, HDFC HI Short Term stands out 64 | P a g e