Research work on kothari k30 scheme for kothari industry by akhil trivedi
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    Research work on kothari k30 scheme for kothari industry by akhil trivedi Research work on kothari k30 scheme for kothari industry by akhil trivedi Document Transcript

    • __________________________________Mutual fund market and kotak scheme analysis 1 A PROJECT REPORT ON MUTUAL FUND MARKET AND RESEARCH WORK ON KOTAK K30 SCHEME FOR R.H.KOTHARI INDUSTRY LTD. SUBMITTED TO UNIVERSITY OF PUNE IN PARTIAL FULFILLMENT OF 2 YEAR FULL TIMECOURSE MASTER IN BUSINESS ADMINISTRATION (M.B.A. UNIV.) SUBMITTED BY AKHIL TRIVEDI M.B.A. II (BATCH 2005-2007) VISHWAKARMA INSTITUTE OF MANAGEMENT (PUNE)
    • __________________________________Mutual fund market and kotak scheme analysis 2 1. EXECUTIVE SUMMARY 2. INTRODUCTION 3. WHAT IS MUTUAL FUND AND EXPLANATION IN DETAILS 4. TYPES OF MUTUAL FUNDS SCHEMES 5. BASIC FUNDAMENTAL OF MUTUAL FUNDS 6. A PERSONAL INVESTMENT PLAN 7. SURVEY ANALYSIS 8. MARKETING PLAN 9. MARKETING STRATEGIES 10. MARKET TRENDS 11. FUTURE SCENARIO 12. RESEARCH METHODOLOGY 13. CONCLUSION 14. RECOMMENDATION 15. BIBLOGRAPHY EXECUTIVE SUMMARY Mutual Funds have gained popularity as an investment vehicle over the past two years. Though
    • __________________________________Mutual fund market and kotak scheme analysis 3 technically, must have been in India since 1964 through Unit Trust of India , the industry has only recently after new private sector funds and funds backed by global investment houses set up shop in India. Mutual Funds have often been associated with equitystock markets. While that is industry, the debt or fixed income side has also gained prominence in the recent past. In fact, now mutual funds offer instruments! schemes for all types of investors from -the risk averse to high risk takers. The project lays a great stress on investor education. The primary objective is to explain in clear and simple language, the benefits and pitfalls of investing in mutual funds. There is a gap in the market about quality information on Mutual Funds. Most of the information is either inadequate or biased towards a particular scheme/fund or a particular category. This project attempts to look at the subject from the point of view of an ordinary investor who has little time or inclination to get into the technical details of Mutual Funds. The first portion of the project explains the basics of a Mutual Fund including the history and evolution of the history. Then it highlights the types of Mutual Funds and the recent trends in the industry. A section follows this on how to choose the right fund for you which covers all things one should look at before investing in a fund. The chapter on ranking of mutual funds is aimed at selecting the star performers amongst the 590 or more schemes available in the market. The second portion deals with doubts and questions that arise in investors' mind about Mutual Funds. The FAQs cover questions with explanatory answers to all possible queries. INTRODUCTION A GLOBALLY PROVEN INVESTMENT AVENUE Worldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the world, has a long and successful history. The popularity of Mutual Funds has increased manifold in developed financial
    • __________________________________Mutual fund market and kotak scheme analysis 4 markets, like the United States. As at the end of March 2006, in the US alone there were 8,002 mutual funds with total assets of over US$ 9.36 trillion (Rs.427Iakh crores). In India, the mutual fund industry started with the setting up of the Unit Trust of India in 1964. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, private sector and foreign institutions were permitted to set up mutual funds. In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities viz. The Specified Undertaking of the Unit Trust of India, representing broadly, the assets of US 64 scheme, assured returns and certain other schemes and UTI Mutual Fund conforming to SEBI Mutual Fund Regulations. As at the end of March 2006, there were 29 mutual funds, which managed assets of Rs. 2,31,862 crores ( US $ 52 Billion) under 592schemes. This fast growing industry is regulated by the Securities and Exchange Board of India (SEBI). THEORETICAL BACKGROUND Financial markets are the backbone of any economic system. Indian economic growth is inevitable, but stability and dynamism of the financial system is imperative to aid allocation of scarce capital across crucial sectors of the economy. The Indian financial system had for long been dominated by government sponsored financial institutions and . nationalized commercial banks. However, in recent years the private sector has been showing steady progress in the areas of banking, asset management and other financial services. Mutual Funds is one such financial institution, which has now become a favorable investment option for the Indian investor.
    • __________________________________Mutual fund market and kotak scheme analysis 5 Equity Market The current slide in the market is mostly due to profit booking at higher levels. Nothing has changed fundamentally for the Indian economy. The Indian economy appears to be entering into a higher trajectory of growth. Due to some concerns over interest rates in domestic market and increased interest rates in US, stock market has seen correction in the last few days of October-2005. FIIs were sellers in Indian stock market. We expect this is a temporary phenomenon. The bull run is expected to continue in coming days. Most of bluechip stocks have corrected very well and now available at better rates from which we can see decent upside. Investors should use this correction phase for building investment portfolio. While growth has averaged 5-6% in the past, the reforms initiated in the last few years have improved the business environment and the Indian economy is expected to be amongst the top 5 economies over the next 20 years. The latest economic data has reinforced our view that capital formation is on the rise and the manufacturing sector could start witnessing capacity additions in the future as demand picks up. Overall, the economic fundamentals are strong with various drivers such as infrastructure spending, retail lending, positive demographics, outsourcing opportunities and a potential capex recovery, in place. One of India's key advantages is that it does not rely excessively on external demand as a source of growth. As a result, India has much better balance in its growth model than the rest of the region - giving it a built-in macro resilience that other Asian economies lack. With Sensex at 8500, many would wonder, are there any worthwhile investment opportunities. It is easy to give reasons in retrospection suggesting the index growth from 6100 in May 2005 to 8500 in September 2005. Although majority of the market is abuzz on the huge foreign institutional inflows (FIIs have pumped in US$9bn up to September 2005 as against US$8.5bn in 2004), these have been attracted by the strong historical performance and expectation of good corporate earnings growth over the next few years. The long-term structural story remains intact. We expect India to post a consistent GDP growth of 6.5-7% over the next few years, which would continue to attract foreign investor attention.
    • __________________________________Mutual fund market and kotak scheme analysis 6 The direction of the equity markets over the medium to long term looking very positive. Economic growth is expected to improve demand for goods and services across sectors and this should lead to better profit growth for the corporate sector. Global investors are positive on emerging markets in general and India in particular given the superior growth of these economies vis-à-vis the developed economies over the next few decades. And given the low equity ownership amongst Indian households continues to be very low, this trend seems to be changing on the back of the buoyancy in the stock markets and declining returns from traditional savings avenues, combined with various tax reforms undertaken by the government. If the proposed pension reforms are implemented, it should give a further fillip to the domestic markets over the long term. So the moot question remains, where do we invest our money? The major Indian index namely Sensex is currently trading at around 17.8x its historical earnings and an expected one year forward earnings multiple of around 15.5x. This compares India at par with most of the emerging market indices. At the current levels we feel four major factors would affect the market movement. Firstly corporate earnings, secondly FII inflows, thirdly rising interest rates and finally rising crude oil price impact on the economy. While crude prices have not impacted the market sentiment, which could be because of the balance sheet strength gained by companies over the last few years through good financial performance, the same could dent going forward. However, we expect the companies with relatively stronger balance sheets to help sustain the high crude price impact. WHAT IS A MUTUALFUND? A Mutual Fund is a trust that pools the savings of a Number of investors who share a common financial Goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund Scheme that has a defined investment objective and Strategy. The money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme's stated
    • __________________________________Mutual fund market and kotak scheme analysis 7 objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Mutual funds are open-ended investment funds, meaning that new investors can contribute money to the fund at any time, and existing investors can return their units or shares to the fund for redemption at any time. When you redeem your units or shares of a mutual fund you will receive a cheque based on the current market value of the fund s portfolio. Growth of Assets(Rs.In Crores) 0 50000 100000 150000 200000 250000 1 2 3 4 5 6 Assets
    • __________________________________Mutual fund market and kotak scheme analysis 8 Number of Schemes 1980 1990 2000 2010 1 2 3 4 5 6 Schemes Several parties are involved in the organization and Operation of a mutual fund, including: Mutual Fund Manager: Establishes one or more mutual funds, markets them and oversees their general administration. Portfolio Adviser: The professional money manager appointed by the Mutual Fund Manager to direct the fund s investments. The Mutual Fund Manager also often acts as the Portfolio Adviser. Principal Distributor: Coordinates the sale of the fund to investors, either directly or through a network of registered dealers.
    • __________________________________Mutual fund market and kotak scheme analysis 9 Custodian: The bank or trust company appointed by the Mutual Fund Manager to hold all of the securities owned by the fund. Transfer Agent and Registrar: The group responsible for maintaining a list of all investors in the fund. Auditor: The independent accountants retained by the Mutual Fund Manager to audit each year, and report on the financial statements of the fund. Trustee: The entity that has title to the securities owned by the fund (when the fund is organized as a trust, instead of as a corporation) on behalf of the unitholder.
    • __________________________________Mutual fund market and kotak scheme analysis 10 TYPES OF MUTUAL FUND SCHEMES There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals. (AI) By Structure Open-Ended Schemes These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value ("NAV") related prices. Close-Ended Schemes Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, Unit holders' expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor. Interval Schemes
    • __________________________________Mutual fund market and kotak scheme analysis 11 These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices. (B) By Investment Objective Growth Schemes Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short term. Income Schemes Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for Retired people and others with a need for capital Stability and regular income Investor who need some income to supplement their earnings. Balanced Schemes Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market the NAV of these schemes may not normally keep pace, or fall equally when the market falls. Ideal for: Investors looking for a combination of income and moderate growth.
    • __________________________________Mutual fund market and kotak scheme analysis 12 Money Market/Liquid Schemes Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for: corporate and individual investors as a means to park their surplus funds for short periods or awaiting a more favorable investment alternative. Other Schemes Tax Saving Schemes These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. The details of such tax saving schemes are provided in the relevant offer documents. Ideal for: Investors seeking tax rebates. Special Schemes This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as A Group shares or initial public offerings).
    • __________________________________Mutual fund market and kotak scheme analysis 13 Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that anyone scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. Remember, as always, higher the return you seek higher the risk you should be prepared to take. A few frequently used terms are explained here below: Net Asset Value ("NAV") Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called , 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.
    • __________________________________Mutual fund market and kotak scheme analysis 14 Repurchase or 'Back-end' Load Is a charge collected by a scheme when it buys back the units from the unit holders. BASIC FUNDAMENTALS OF MUTUAL FUND WHY SHOULD YOU INVEST IN MUTUAL FUNDS? The advantages of investing in a Mutual Fund are: 1. Professional Management: You avail of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 2. Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. 3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. 4. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
    • __________________________________Mutual fund market and kotak scheme analysis 15 5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. 6. Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically. ' 7. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. 8. Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. 9. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. 10. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of 'investors. The operations of Mutual Funds are regularly monitored by SEBI. UNDERSTANDINGAND MANAGING RISK All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short
    • __________________________________Mutual fund market and kotak scheme analysis 16 of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimizes risk and maximizes returns. HOW TO INVEST IN MUTUAL FUNDS. Step One - Identify your investment needs. Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions: l. What are my investment objectives and needs? Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs. 2.How much risk am I willing to take? Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short-term loss in order to achieve a long-term potential gain. 3. What are my cash flow requirements? Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don't require a current cash flow but I want to build my assets for the future. By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund investment strategy. Step Two - Choose the right Mutual Fund.
    • __________________________________Mutual fund market and kotak scheme analysis 17 Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are: the track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category. how well the Mutual Fund is organised to provide efficient, prompt and personalized service. degree of transparency as reflected in frequency and quality of their communications. Step Three - Select the ideal mix of Schemes. Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. The following charts could prove useful in selecting a combination of schemes that satisfy your needs. This plan may suit Investor seeking Income & moderate growth. Investor looking for growth & stability with moderate risk Aggressive Plan 70% 15% 5% 10% Growth Scheme IncomeScheme Money market Scheme Balanced Scheme Conservative Plan 10% 50% 30% 10% Growth Scheme IncomeScheme Money market Scheme Balanced Scheme
    • __________________________________Mutual fund market and kotak scheme analysis 18 This plan may suit Retired & other investor who needs to preserve capital & earn regular income Step Four - Invest regularly For most of ,the approach that works best is to invest a fixed amount at specific intervals, say every month . By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you. Step Five - Keep your taxes in mind As per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt from Income Tax in the hands of investor. Further, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant for specific advice to achieve maximum tax efficiency by investing in Mutual Funds Step Six- Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return. Step Seven -The final step all you need to do now is to get in touch with a Mutual Fund or your agent/broker and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor-whether starting a career or retiring, conservative or risk taking , growth oriented or income seeking.
    • __________________________________Mutual fund market and kotak scheme analysis 19 YOUR RIGHTS AS A MUTUAL FUND UNITHOLDER As a unitholder in a Mutual Fund scheme coming Under the SEBI (Mutual Funds) Regulations, you are entitled to: 1. Receive unit certificates or statements of accounts Confirming your title within 30 days from the date of closure of the subscription under open-end schemes or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. 2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. 3. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. 4. Vote in accordance with the Regulations to a change the Asset Management Company; b. wind up the schemes. 5. To receive communication from the Trustee about change in the fundamental attributes of any scheme or any other changes which would modify the scheme and affect the interest of the unit holders and to have option to exit at prevailing Net Asset Value without any exit load in such cases. 6. Inspect the documents of the Mutual Funds specified in the scheme's offer document. In addition to your rights, you can expect the Following from mutual fund. To publish their NAV , in accordance with the regulations daily in case of open-ended schemes and once a week, in case of close- ended schemes. To disclose your schemes' entire portfolio twice a year, unaudited financial results half yearly and audited annual accounts once a year. In addition many mutual funds send out newsletters periodically. To adhere to a Code of Ethics which require that investment decisions are taken in the best interests of the unit holders.
    • __________________________________Mutual fund market and kotak scheme analysis 20 What are the potential advantages of investing in mutual funds? There are many reasons why people invest in mutual funds: Diversification: Investing in a number of different securities helps reduce the risk of investing. When you buy a mutual fund, you are buying an interest in a portfolio of dozens of different securities, giving you instant diversification, at least within the type of securities held in the fund. Affordability: With many mutual funds, you can begin buying units with a relatively small amount of money(e.g., Rs 5000 for the initial purchase). Some mutual funds also let you buy more units on a regular basis with even smaller installments (e.g., Rs 500 per month). Professional Management: Mutual funds are managed by professionals who are experienced in investing money and who have the skills and resources tore search many different investment opportunities. Liquidity: Units or shares of mutual funds can be redeemed at any time. Flexibility: Many mutual fund companies administer several different mutual funds (e.g., money market ,fixed-income, growth, balanced and international funds) and allow you to switch between funds within their fund family at little or no charge. This can enable you to change the balance of your portfolio as your personal needs or market conditions change. Performance Monitoring: The value of most mutual funds is reported daily in the financial press and on many internet sites, allowing you to continually monitor the performance of your investment. What are some of the potential disadvantages? When you invest in a mutual fund you place your money in the hands of a professional manager. The return on your investment will depend heavily on that manager s skill and judgement. Even the best
    • __________________________________Mutual fund market and kotak scheme analysis 21 portfolio advisers are wrongs one times, and studies have shown that few portfolio advisers are able to consistently out-perform the market. Check the fund manager s track record over a period of time when choosing a fund. As a mutual fund investor, you will also be paying, through management expenses and commissions, for management services and for various administrative and sales costs. Those fees and commissions reduce the return on your investment and are charged, in almost all cases, whether the fund performs well or not. Sales commissions and redemption fees can have a very significant impact on your return if you decide to redeem your mutual fund investment in the short-term. How will I know if mutual funds are right for me? For most investors, choosing a qualified financial adviser is an important first step in any investment program With the help of your financial adviser(s), you ll want to establish your investment goals, assess your risk tolerance, and develop a personal investment strategy. Ask your financial adviser if mutual funds are an appropriate investment for you. Discuss what type of fund best matches your personal investment strategy, then ask for some specific suggestions. Once you have identified some funds that seem to meet your investment needs, read the prospectus and financial statements for each one. Consider: Investment Objectives: Are the fund s investment objectives consistent with your own? Can the fund provide the level of regular income you need? Does it provide the type of diversification you re looking for? If you have other investments, how will this fund affect the overall balance of your portfolio? Risk: Are you comfortable with the level of risk associated with the fund? If you have other investments, would this fund tend to increase or decrease your overall risk exposure? Unlike GICs or savings accounts, mutual funds are not covered by deposit insurance. Values of most mutual funds will fluctuate and you can lose money depending on changes in the marketplace.
    • __________________________________Mutual fund market and kotak scheme analysis 22 Time Horizons: Does the investment fit with your expected investment time horizon? For example, if you re investing for a relatively short time, will sales charges and redemption fees offset any possible gains? Might the value of the fund be down just when you need to redeem your investment? Expected Return: Does the fund have the potential to provide the returns you need to meet your goals? Remember, predicting the return of any mutual fund requires that you predict the future something that can never be done with certainty. Past performance will tell you about the fund s historical volatility and its performance relative to competing funds, but it is not are liable indicator of future performance. The return you can expect from a mutual fund is closely related to its risk. The lower the risk of the fund, the lower the return you should expect. Be realistic in your expectations. Costs: Fees and commissions associated with mutual funds will affect your overall return and can vary widely from one fund to the next. Higher fees and commissions do not necessarily mean better performance. Check and compare fees and commissions before you invest. Service Provider: Do you know something about the mutual fund firm offering the mutual funds for sale? Consider who operates the mutual fund and who provides the services necessary for its operations. You ll also want to look at the performance history of the fund manager who selects the securities to be held in the fund. Flexibility: Will you be entitled to switch your investment to other funds in the same fund family ? Can you afford the minimum initial investment? Does the fund offer other features such as regular monthly purchase plans or redemption plans that are attractive to you? Tax Considerations: Is the mutual fund a qualifying investment for your RRSP, Registered Retirement Income Fund (RRIF) or other registered plan? If you are investing in the fund outside a registered plan, do you understand the tax implications of the distributions of income or capital gains that the fund may make to you? Who can sell mutual funds?
    • __________________________________Mutual fund market and kotak scheme analysis 23 Like other securities, mutual funds must be sold through dealers who are registered with the securities regulator in your province or territory. The names of registered dealers in your area can be found in the telephone book. Most financial institutions such as banks, credit unions and trust companies also have subsidiaries that are registered to sell mutual funds. You will also be able to find information about dealers and salespersons from your provincial securities regulator or its web site. What should I expect from the salesperson when I buy a mutual fund? You should expect your salesperson: to deal with you fairly, honestly and in good faith; to discuss with you your general investment objectives and tolerance for risk; to make recommendations that are consistent with your objectives and risk tolerance; to disclose to you any significant conflicts of interest (the form of disclosure may vary depending on the nature of the conflict); to promptly deliver a disclosure document (simplified prospectus) and current financial information for any mutual fund you buy; to relay your purchase order to the fund on the day you place it, or on the next business day if the order was given after normal business hours; Research Methodology Research Methodology is a systematic method of discovering new facts or verifying old facts, their sequence, inter-relationship, casual explanation and the natural laws which governs them. Research Methodology explained by Redman and Mory are as follows systematized effort to gain new knowledge Research Methodology is original contribution to the existing stock of knowledge making for its advancement. It is the purist of truth with the help of study. Observation, comparison and experiment. In short also covers the systematic method of finding solution to a problem is research. It also covers the systematic approach concerning generalization and the formulation of the theory.
    • __________________________________Mutual fund market and kotak scheme analysis 24 Different stages involved in research consists of enacting the problem, formulating a hypothesis, collecting the facts or data, analyzing the facts and reaching certain conclusion either in the form of solution towards the concerned problem or in generalization for some theoretical formulation. In Research Methodology mainly Data plays an important role. The Data is divided in two parts: a) Primary Data. b) Secondary Data. Primary Data is the data, which is collected directly by direct personal interview, interview, indirect oral investigation, Information received through local agents, drafting a schedule, drafting a questionnaire. Secondary Data is the data, which is collected from the various books, magazine and material, reports. The data which is stored in the organization and provide by the FINANCE people are also secondary data. The various information is taken out regarding that subject as well other subject from various sources and stored. The last years data stored can also be secondary data. This data is kept for the internal use of the organizatio The FINANCE manual is for the internal use of the organization they are secondary data which help people to gain information. In this report the data plays a very crucial role. For this report the data was provided to me by FINANCE department and other departmental head in the organization. The Primary and Secondary data which is specified above was provided by: a) Dy- Manager - finance. b) Other department head. Due to discussion with these people lot data as well latest information was known by these people who was very beneficial and was primary data to me. This is the Research Methodology used in the project. The primary and secondary data method has been used in this project. Unless the data is collected no project can be complete. So both these data is very important in the project.
    • __________________________________Mutual fund market and kotak scheme analysis 25 SURVEY ANALYSIS OBJECTIVES I conducted a survey to assess the popularity and awareness among people about the, mutual funds. For the purpose we chose a random sample of 50 end consumers in the city of Mumbai. The methodology adopted was that of questionnaire. The question addressed the basic questions relating to investment in mutual Funds like the rationale of investment Sampling Method The sampling method so as to obtain a representative sample is the Non- Probability Sampling methods. Under non-probability sampling, we selected the respondents to the survey on the basis of Judgment sampling with Convenience taken into account. Research instrument
    • __________________________________Mutual fund market and kotak scheme analysis 26 The research instrument used for this survey is a structured questionnaire. The questionnaire contains both open-ended and close ended questions. The questionnaire provides a provision with respect to rating scales. Assumptions The sample selected represents the population fully. The data has been collected by administering an open and close ended questionnaire to sample of end investors with the assumption that the primary data collected is true and reflects the actual preferences of the investors. The sample selected has thorough knowledge of the subject. Limitations of Study The respondents who have not given any information are not included in the sample but do come under the population. Factors like change in tax and regulatory framework has not been considered. Analysis Interpretation Of Data Chart 1: Penetration of mutual funds among respondents. Penetration of mutual funds among respondents. 84% 16% mutual funds others Out of the 60 respondents only 50 (84%) had invested in any kind of mutual fund scheme. This shows
    • __________________________________Mutual fund market and kotak scheme analysis 27 that the penetration of mutual funds among the populace is still low in spite of the industry's presence in India for more than 36 years. This reach is in a city like Mumbai which is considered the commercial hub for the country; one can easily imagine the penetration level in other smaller cities/towns. Chart 2: Age wise distribution of investment pattern Age wise distribution of investment patterm 0 10 20 30 40 50 60 20-40 40-55 Above 55 Distribution Age Series1 As can be seen from the above charts that for the age group 20-40 the percentage is 50% percent which shows that the popularity of mutual funds is at its peak among the people in the age group and is the lowest for age group above 55. This pattern may be due to the fact that 40-55 the time frame when a person has maximum responsibilities and may be unwilling to put money into schemes do not offer assured returns or safety. 25-40 one has few responsibilities and can afford take higher risks. People above 55 are either retired or nearing retirement so they might have some excess cash and hence they too are willing to take some amount of risks. Chart 3: Gender wise distribution of investment
    • __________________________________Mutual fund market and kotak scheme analysis 28 Gender wise distribution of investment. 72% 28% male female In our sample of 60 respondents only 72% of the male respondents invested in mutual funds which is more or less in line with over all proportion of people (73.33%).In India it is found that women are weak in making decision where to invest the money. Women in India are found to keep there funds ideal rather than invest some where. Due to lack of knowledge & awareness women participants in investing is less compared to that of male. In a survey only 28% women were found who are aware of mutual funds. Here in the survey, percentage gap between male and female is too much more. Chart 4: Distribution of income income wise distribution upto 1lakhs 52% 1-3 lakhs 28% 3-5lakhs 14% above 5 lakhs 6% upto 1lakhs 1-3 lakhs 3-5lakhs above 5 lakhs
    • __________________________________Mutual fund market and kotak scheme analysis 29 Mutual seem to have reached their peak in their reach among people in the income group 5 lakhs and above as all 3 of the respondents in our sample falling in that income bracket have invested in mutual funds. For incomes groups upto1 lakh & 1-3 lakhs the reach is penetration is more than 80% which is acceptable. The only surprising trend is that for income group 3-5 lakhs the penetration seems to be only 14% wl improved immediately. OBSERVATIONS: Fixed deposits still have high values in the Indian economy as vehicles are concerned. Number of people having mutual funds or Shares as first choice are( requires the mutual funds to do a rethinking as shares are fraught wit than mutual funds still a large number of people prefer to enter the rather than through mutual funds, this could mean that there is a mutual funds in these individuals. It is these individuals that could for mutual funds and the need to pull themselves up and gear up to attract these investors through better designed schemes, simplified procedures. One disturbing trend that has come out of this analysis is that 26 out of 60 respondents have ranked government securities as the last choice even though these have sovereign guarantee and are absolutely safe. This means Gilt funds have to be careful while designing their schemes as the preference for government securities is quite low. This low preference could be either due to filling interest rates or due to the cumbersome procedures involved in acquisition, redemption of these securities or due to lack of well developed secondary market for Gilts. On second number is Public provident fund which has been ranked as number one by 12 and number two by 24 which makes it a close second to fixed deposits, Chart 5: Information source
    • __________________________________Mutual fund market and kotak scheme analysis 30 print 46% T.V 28% newsletter 14% friends 6% others 6% print T.V newsletter friends others 46% of the respondents came to know about mutual funds through the print media like newspapers and magazines, hence it may be concluded that the print media is the most effective way of getting the investors' attention towards the mutual funds. Second most popular medium turned out to be the television .The potential of newsletters & friends as a medium of promotion doesn't seem to be have utilized fully as the people who were influenced by television & print media even though it is one of the major mass communication media. Chart 6: Influencing factor
    • __________________________________Mutual fund market and kotak scheme analysis 31 influencing factor own choice 44% friends 20% proffesionals 30% others 6% own choice friends proffesionals others As expected a person's own judgment and perception is the most prominent factor in the investment decision. 30% of the respondents took a professionals device while another 26% were influenced by friends experience or advice. Both these present an avenue for the mutual fund companies to influence more and more investors and increase their depth in the market. Chart 7: Investment rationale Investment rationale safety 40% higher returns 26% 0% liquidity 14% appreciations 6% tax benefits 14% safety higher returns liquidity appreciations tax benefits Safety seems to be the uppermost concern in people while taking investment decisions. Next important factor that people look for while making an investment decision is the tax benefit. Safety and tax benefits taken together influence more than 50% of the peoples investment decision.
    • __________________________________Mutual fund market and kotak scheme analysis 32 There are only 26% who are interested in higher returns. Others are ready to invest but with secure future. There investment carry less risk and more return. Chart 8: Satisfaction with investment choices. Satisfaction with investment choices yes 60% no 30% cant say 10% yes no cant say Most of the people are satisfied with their investment choices while Asset Management companies can 'take advantage of and win them over 30% of the people are not happy with their investment decisions which could be a potential avenue for mutual funds waiting to be tapped. Here there 10% people who cant say anything about their satisfaction with their investment choice and in the survey 60% people are found who have greater satisfaction in their investment choice this in because of their awareness of mutual fund and other investment options.
    • __________________________________Mutual fund market and kotak scheme analysis 33 Chart 9: Regulatory framework Regulatory framework 0 10 20 30 40 50 60 yes no cant say Series1 Around 48% of the people are not satisfied with the regulatory framework available for mutual funds. The regulatory authorities need to take a serious view of this feeling among the investors and take some concrete Steps for the direction of developing faith in the regulatory system for Asset Management Companies (AMCs). Some of the suggestions given by the respondents are: RBI and SEBI guideline should be tightened. Manipulations in the equity prices should be closely monitored. . The framework should be more investor friendly. Clear-cut guidelines. Accountability of the auditors /inspectors. . Disclosure norms should be more stringent Regulatory bodies should be more proactive rather than post active and reacting after something goes wrong. Each scheme should be treated as profit center and closely watched by experts
    • __________________________________Mutual fund market and kotak scheme analysis 34 Chart 10: Popularity of various funds After the analysis of what factors affect people's investment decision let us have a look at how the various Mutual funds have fared for our sample group of small investors. Popularity of various funds 17 22 15 16 18 12 0 5 10 15 20 25 Kotak mahindra UTI Sundram finance SBI Reliance DSP merill lynch Series1 It can be observe from the above chart that the popularity of the mutual funds Kotak is much popular among others mutual fund. Even UTI also have popularity from various fund. The main reason why UTI is much popular is duration from which plays in the market. UTI was the first among mutual fund who has started its function in 1964.
    • __________________________________Mutual fund market and kotak scheme analysis 35 MARKETING PIAN A marketing plan for mutual fund services needs to stress the firm-product-customer relationship. The following are the points for consideration Product Design and Range 1. Mutual fund products (schemes) are basically investment-oriented and the savings mobilized by them are invariably invested in. the instruments (shares, debentures) projected in the schemes. There is little scope for flexibility. 2. Due care needs to be taken while designing particular products taking into account expected changes in capital stock market in view of future investment return. 3. The changing profile of customers (investors) must be taken into account in identifying savings market. Different segments of the potential savings market have afferent expectations long-term growth, regular income tax benefits, and so on. New products must be aimed at satisfying one or more objectives. Fax laws and other related regulations also play an important role in designing a new product because benefits can be offered to investors within the existing framework of tax regulations. India lags behind countries like the USA, the UK and Japan in terms of innovative products. Most of the products launched in India are either income or income-cum growth schemes; few are pure growth schemes. Investor options have been restricted due to limited product range. This has probably happened on account of lack of experience and the risk-averse, conservative attitude of mutual fund management. Like product planning, product launching is a crucial clement in marketing. Many Indian mutual funds have performed poorly due to wrong, timing of launch. Market research can help to assess the needs of potential customers, availability of existing products and future growth in demand. Before formally launching a new product, test marketing can be conducted.
    • __________________________________Mutual fund market and kotak scheme analysis 36 Brand Policy Brand name highlights the market segments, inherent benefits and investment objectives, and ensures customers loyalty. Brand identity is an important marketing factor because it facilitates product identification at the market place. In India, most of the products are linked to the names of the mutual funds. However, there are products not linked to the names of organizations: the 'Dhan Series' is identified with LIC Mutual Fund, 'Master Series' with UTI and "Magnum with SBI Mutual Funds. It can be said that Indian funds have been quite successful in brand policy and brand identification. Pricing Policy The price of a service should he related to the achieving of marketing and organizational goals. The price of mutual fund products in inextricably linked with returns. Indian mutual funds follow the historic pricing structure. The schemes may (also) provide for the price at which the units may be subscribed or sold to the independent participants in the scheme and the prices at which such units may at any time be repurchase prices at least once in a week. Mutual funds are also to ensure that the difference between the sale and repurchase prices does not exceed 7 per cent of the sale price. Cost The costs of investing in mutual funds in India are not as high as in the US, the UK and Japan. This is because SERI has strictly laid down the limits of various expenses. According to SEBI regulations, the AMC can charge the mutual funds with investment, management and advisory fees, which are fully disclosed in the prospectus. Accordingly, the initial expenses under one scheme cannot be more that 6 per cent of the funds raised. These expenses include: Issue cost of sponsoring the fund and its scheme. Recurring expenses, including -marketing, selling, agents' and brokers' commissions, transaction costs, registrars' and transfer agents'(R&T) fees so on. Incentives are often offered to investors for early payment. Agents 'commission is paid out of the funds collected.
    • __________________________________Mutual fund market and kotak scheme analysis 37 Distribution And Promotion Of Products A new mutual fund product may have all the desired qualities but that does not ensure its spontaneous acceptance by customers. Success would greatly depend on appropriate market segments for the product, selection of appropriate distribution channels and promotional aids are essential. The identification of market segments is crucial for the promotion and distribution of products. Market segments are identified on the basis of nature of the product, direct and indirect benefits of the product requirements of the customers, product usage rule, Indian mutual funds still depend mostly on retailing, a distinct change has been noted m marketing strategy .i.e. major market intermediaries are agents appointed by respective mutual funds, brokers who are members of stock exchange and arc registered with the mutual fund, institutional and corporate agents. Public sector mutual funds like LIC MF and UTI have an edge over other due to their well-established agency network. In order to tap the savings potential in rural India, mutual funds are paying greater attention to rural marketing. UTI has taken specific steps to promote units in rural areas Customer Service The marketing of services is significantly influenced by the quality of service and the interpersonal relationship between customers and the service organization. Servicing has great significance in the mutual fund industry. Prompt and timely service in using certificate cheques and attending to any customer problems would make a distinct difference. Expected rates of return being more or less the same for all the schemes; it is the quality of service, which becomes the deciding factor. In order to ensure quality service to customers, service audit would be of great help to monitor the range of services usually rendered by mutual funds. These are sales related complaint-related and suggestion-related services. Service standards can be fixed on the basis of expectation levels of customers which can be found through market surveys. It must be remembered that marketing is a dynamic process and aims not only at 'sale' but also at 'resale' and an enduring relationship with customers.
    • __________________________________Mutual fund market and kotak scheme analysis 38 MARKETING STRATEGIES ADOPTED BY THE MUTUAL FUNDS The present marketing strategies of mutual funds can be divided into two main headings: Direct marketing Selling through intermediaries Joint calls DIRECT MARKETING This constitutes 20 percent of the total sales of mutual funds. Some of the important tools used in this type of selling are: Personal Selling: In this case the customer support officer of the fund at a particular branch takes appointment from the potential prospect. Once the appointment is fixed, the branch officer also called Business Development Associate (BDA) in some funds then meets the prospect and gives him all details about the various schemes being offered by his fund. The conversion rate in this mode of selling is in between 30% -40%. Telemarketing: In this ease the emphasis is to inform the people about the fund. The names and phone numbers of the people are picked at random from telephone directory. Sometimes people belonging to a particular profession are also contacted through 'phone and are then informed about the fund. Generally the conversion rate in this form of marketing is 15% - 20%. Direct mail: This one of the most common method followed by all mutual funds. Addresses of people are picked at random from telephone directory. The customer support officer (CSO) then mails the literature of the schemes offered by the fund. The follow up starts after 3-4 days of mailing the literature. The CSO calls on the people to whom the literature was mailed. Answers their queries and is generally successful in taking appointments with those people. It is then the job of BOA to try his best to convert that prospect into a customer.
    • __________________________________Mutual fund market and kotak scheme analysis 39 Advertisements in newspapers and macaws: The funds regularly advertise in business newspapers and magazines besides in leading national dailies. The purpose is to keep investors aware about the schemes offered by the fund and their performance. Hoardings and Banners: In this case the hoardings and banners of the fund are put A Important locations of the city where the movement of the people is very high. Generally hoardings arc put near UTI offices in order to tap people who are at present Investing in UTI schemes. The hoarding and banner generally contains information either about one particular scheme or brief information about all schemes of fund. Selling Through Intermediaries: Intermediaries contribute towards 80% of the total sales of mutual funds. These are the people/distributors who are in direct touch with the Investor They perform an important role in attracting new customers. Most of these Intermediaries are also involved in selling shares and other investment instruments. They do a commendable job in convincing investors to invest in mutual funds. A lot depends on the after sale services offered by the intermediary to the customer. Customers prefer to work with those intermediaries who give them right information about the fund and keep them abreast with the latest changes taking place in the market especially if they have any bearing on the fund in which they have invested. Regular Meetings with distributors: Most of the, funds conduct monthly/bi-monthly meetings with their distributors. The objective is to hear their complaints regarding service aspects from funds side and other queries related to the market situation. Sometimes, special training programmers are also conducted for the new agents/ distributors. Training involves giving details about the products of the fond, their present performance in the market, what the competitors are doing and what they do to increase the sales of the fund. Joint Calls: This is generally done when the prospect seems to be a high net worth investor. The BDA and the agent (who is located close to the HNI's residence or area of operation) together visit the prospect and brief him about the fund. The conversion rate is very high in this situation, generally, around 60%. Both the fund and the agent provide even after sale services in this particular case.
    • __________________________________Mutual fund market and kotak scheme analysis 40 MARKETING OF FUNDS: CHALLENGES AND OPPORTUNITIES When we consider marketing, we have to see the issues in totality, because we cannot judge an elephant by its trunk or by its tail but we have to see it in its totality. When we say marketing of mutual funds, it means, includes and encompasses the following aspects: Assessing of investors needs and market research Responding to investors needs; Product designing; Studying the macro environment; Timing of the launch of the product Choosing the distribution network; Preparing offer documents and other literature Getting feedback about sales; Studying performance indicators about fund performance like N A V Sending certificates in time and other after fia1es services Honoring the commitments made for redemptions and repurchase Paying dividends and other entitlements Creating positive image about the fund and changing the nature of the market itself. The above are the aspects of marketing of mutual funds, in totality. Even if there is a single weak-link among the factors, which are mentioned above, no mutual fund can successfully market its funds.
    • __________________________________Mutual fund market and kotak scheme analysis 41 Some of the older public and private sector players will either close shop or be taken over. Out often public sector players five will sell out, close down or merge with stronger players in three to four years. In the private sector this trend has already started with two mergers and one takeover. Here too some of them will down their shutters in the near future to come. The market will witness a flurry of new players entering the arena. There will be a large number of offers from various asset management companies in the time to come. Some big names like fidelity, Principal, Old Mutual etc. arc looking at Indian market seriously. One important reason for it is that most major players already have presence here and hence these big names would hardly like to get left behind. BANKS MUTUAL FUNDS Returns low better Administration expenses high low Risks low moderate Investment option less more Network high penetration low but improving Liquidity at cost better Quality of assets not transparent transparent Interest calculation minimum balance everyday Guarantee none none
    • __________________________________Mutual fund market and kotak scheme analysis 42 Inspired Marketing will help Mutual Funds walk away with the blank Deposits Bankers better watch out The Indian mutual fund industry will soon start relieving the banking system of its priced deposits. Innovative distribution, marketing and aggressive concept selling will drive savings into the lap of the Indian Mutual Fund industry in the next millennium, fond managers predicted at the Second Economic Times Roundtable on mutual funds held last week. Fund chiefs predicted that ease of transactions, thanks to technology and increased awareness, would lead to more investors putting their money into mutual funds. The day was not far, they said, when small savings account too began moving into mutual funds. Significantly, fund chiefs were unanimous that the credibility gap, which the industry suffered for the past few years, did not exist any more. All the fund chiefs were unanimous that performance, service and support were all imperative for growth. "Performance, transparency and after sales service and genuine retail investor interest as opposed to hot corporate money, an important contributor to many mutual fund schemes, will drive the industry growth. " Performance, transparency, after sales customer service and genuine retail investor interest are opposed to hot corporate money, an important contributor to many mutual fund schemes, will drive the industry growth "Tata Mutual Fund chief K.N. Atmaramani said. On the state of market in general, fund chiefs attempted to allay fears that an overvalued market may pose hurdles to stock picking. According to them, while investors may feel that information technology pharmaceuticals and consumer' goods stocks - or the BSE Sensex for that matter - might have peaked, new opportunities are opening up in areas like retail, healthcare and even in internet business. Fund chiefs also made a case for the code to prevent mutual funds from projecting short- term gains in an attempt to attract investors into their schemes. They were of the view that, "Mutual Funds have to agree to present performances in an annualized fashion, over a longer period. The industry as a whole should standardize its performance." India is at the first stage of a revolution that has already peaked in the US. The US boasts of a mutual fund asset base that is much higher than its bank deposits. In India, mutual
    • __________________________________Mutual fund market and kotak scheme analysis 43 fund assets are not even 12% of the bank deposits, but this trend is beginning to, change. This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilt and me other assets which improves liquidity and reduces risk. The basic fact is that hanks cannot be ignored and they will not close down completely. Their role as intermediaries cannot be ignored. It is just that mutual funds would change the way banks do business in future.
    • __________________________________Mutual fund market and kotak scheme analysis 44 RECIPE FOR MUTUAL FUND PERFORMANCEMORE BANGS FOR THE BUCK On a closer scrutiny an income fund seems to have done well followed by balanced funds unitarily, it can be attributed to bad equity market conditions and good debt market conditions. There is obviously more to it than that. The number of investors who invested in the growth schemes far out number the other categories. Hence there is a large-scale resentment among mutual fund investors today. The question now is whether the poor performance is attributable totally to bad market condition or if there are other ignored fundamental problems which the industry is yet to address it self to? While to an extent the poor market condition is responsible for the poor market condition is responsible for the poor show , there are others serious issues which the industry has overlooked so fur. The three areas require in-depth rethinking: Product conceptualization Investment strategy Outsourcing Product conceptualization The first and foremost ill that is plaguing the industry is lack of innovation. Abroad, ld is a very innovative industry. In India, the industry has squarely failed in conceptualization and innovation. While is a huge potential to tap the individual savings of the investors, the industry has overlooked their needs so far. To tailor products to a particular need is not easy. It is a professional job and a lot of thought should be given to it. There are basically two f conceptualizing a mutual fund product. They are Investment target based and Need based
    • __________________________________Mutual fund market and kotak scheme analysis 45 The investment target based mutual fund products are the one which we are used to so far. They design their theme based on the target where the money is going to be invested. pure growth scheme will invest 90 per cent in equity shares, 5 per cent in fixed-income yielding securities and the balance in the money market. Here the theme is growth and the growth is based on investments in equity shares. Another variety is need based. Here the theme is based on investor's specific needs. For e.g. the Children Gift Growth scheme [CGGF] UTI is a classic case where the theme is based on the need for the children as they grow. Here there is no explicit mention as to where the fund is going to derive the growth from. The fund has the freedom to invest either in equity market or in debt market depending on the attractiveness. Packaged portfolio concept The major reason for the poor performance of 50% schemes out of 592 should be attributed mainly to poor stock picking skills. Otherwise there is no reason why 17 schemes should generate double-digit returns in the same time-frame. Almost all the investors who have invested in the mutual funds do realize the fact that in the long run it is the stock market that will provide extraordinary returns. Time and again this is tested by statistical analysis. Today a well informed investor will not have doubts in his mind about future performance of blue chips like HLL, Infosys, Castrol, Bajaj Auto, lTC, and Colgate etc. But unfortunately, he is not in a position to invest in these scripts due to their high price though they are relatively cheap].Certainly beyond the reach of an intelligent, ordinary, middle-class executive. The classification is done separately for man and woman as their needs and desires differ quite considerably. The classification is also done based on the stages of life. The product to be tailored should carefully link the effect of periodic savings on achievements of the above needs/desires. Then, there is a great deal of innovative mutual fund products that can emerge out of every segment of the above needs and desires of individuals. As we zero-in on a specific need, like the one described above, the target investors become a focused group. With innovative marketing ideas, it becomes that much easier to sell the idea than to have a very broad theme like growth and attack the universe as the target! Today, we have barely catered to the specific needs of the individual Almost all the 592 schemes analyzed are plain vanilla variety of growth, income or balanced. To an extent, we can give credit to UTI & LIC which have succeeded in tailoring schemes based on children needs, medical needs, etc
    • __________________________________Mutual fund market and kotak scheme analysis 46 Investment strategies The second ill that is troubling the industry is poor fund management track record for most of the fund managers. Smart funds which have topped their performance are the ones who have quickly reallocated their assets on time. While funds which are prohibited from doing this like a pure equity fund or pure income fund did face a tough task. Even here clever fund managers shifted their portfolio well to include highly liquid blue chip stocks even at the cost of booking loss in mid-cap illiquid non-performing stocks. A good investment strategy would then aim to achieve the following: Protection of capital from erosion or alternatively guaranteeing capital safety. Possess excellent research capabilities to ensure market timing and investment strategy formulation. Outsourcing The most important aspect for the success of a mutual fund is the ability to outsource certain critical activity. This is quite a new thinking, given the Indian obsession to do everything in-house. Abroad, there are certain mutual funds which outsource to the extent of 100 per cent! from product design to investor servicing. Though the concept of outsourcing has been prevalent in manufacturing, it has yet to come of age in fund management It will ensure rapid penetration at the quickest possible time at the most economical cost. It also gives flexibility for the mutual fund to change them if their performance is sloppy. Aspects like investor servicing, information needs, research, fund management, etc. can be effectively outsourced in the context of a mutual fund. Product conceptualization Outsourcing Investment Strategies 1.Innovation 1.Cost control 1.Capital protection 2.Superior design 2.Flexibility 2.Market timing 3.Adaptability 3.Choice 3.Assest quality
    • __________________________________Mutual fund market and kotak scheme analysis 47 INVESTMENT OBJECTIVE To generate capital appreciation from a portfolio of predominantly equity and equity related securities with investment in, generally, not more than 30 stocks. SCHEME PHILOSOPHY Kotak 30 is a diversified equity growth scheme, with a portfolio of generally not more than 30 choicest stocks, handpicked by our fund management team. The portfolio comprises of stocks with an emphasis on financial strength of the company, quality of management, brands and franchises, its track record and the market liquidity of the stock regardless of the sector to which they belong.The scheme is suitable for investors with a time horizon of 2 to 3 years. KOTAK 30 PERFORMANCE As On July 31, 2006 Kotak 30 BSE Sensitive Index S&P CNX Nifty 1 YEAR 41.8 40.2 35.7 3 YEARS 52.6 41.2 38.0 5 YEARS 39.0 26.8 24.2 SINCE ALLOTMENT (DEC 29, 1998) 29.8 18.1 18.4
    • __________________________________Mutual fund market and kotak scheme analysis 48 DIVIDEND HISTORY Date Cum Dividend NAV Rate (Rs./unit) DEC-27-05 Rs. 27.711 1.00 JUN-03-05 Rs. 20.345 1.00 NOV-05-04 Rs. 18.060 1.50 JAN-31-04 Rs. 21.093 5.00 OCT-20-03 Rs. 18.983 2.00 DEC-28-01 Rs. 11.036 1.00 OCT-09-00 Rs. 17.556 2.00 DEC-11-99 Rs. 22.954 2.00 FACE VALUE : RS. 10/UNIT. DIVIDEND DISTRIBUTION IS SUBJECT TO AVAILABILITY AND ADEQUACY OF DISTRIBUTABLE SURPLUS. AFTER DIVIDEND IS DISTRIBUTED, THE NAV FALLS TO THE EXTENT OF THE DIVIDEND AND DISTRIBUTION TAXES, IF ANY.
    • __________________________________Mutual fund market and kotak scheme analysis 49 PORTFOLIO OF KOTAK 30 AS ON 31-July-2006 Issuer / Instrument Industry/Rating Quantity Marke t Value (Rs.in Lakhs) % to Net Assets Equity & Equity related Listed/Awaiting listing on Stock Exchange Infosys Technologies Ltd. Software 136600 2,261.4 8 8.66% Bharat Heavy Electrical Ltd. Industrial Capital Goods 89000 1,820.2 3 6.97% Larsen And Toubro Ltd. Industrial Capital Goods 69000 1,524.5 9 5.83% Reliance Industries Ltd. Petroleum Products 145000 1,419.2 6 5.43%
    • __________________________________Mutual fund market and kotak scheme analysis 50 Mahindra & Mahindra Ltd. Auto 238000 1,404.4 4 5.38% Wipro Ltd. Software 250000 1,227.0 0 4.70% Grasim Industries Ltd. Cement 53000 1,102.5 6 4.22% ITC Ltd. Consumer Non Durables 600000 1,004.4 0 3.84% Bajaj Auto Ltd. Auto 40000 984.88 3.77% I-Flex Solutions Ltd. Software 63850 847.19 3.24% Steel Authority of India Ltd. Ferrous Metals 1204000 845.81 3.24% Sun Pharmaceuticals Industries Ltd. Pharmaceuticals 101550 829.10 3.17% EID Parry (India) Ltd. Consumer Non Durables 413095 775.38 2.97% Nestle India Ltd. Consumer Non Durables 73800 737.74 2.82% HDFC Ltd. Finance 60000 706.44 2.70% Sterlite Industries (India) Ltd Non Ferrous Metals 175000 656.51 2.51% Siemens Ltd. Industrial Capital Goods 73000 646.85 2.48% Deccan Chronicle Holdings Ltd. Media and Entertainment 167316 644.75 2.47% Punjab National Bank Banks 160000 608.40 2.33% Aditya Birla Nuvo Limited Textile Products 83666 606.29 2.32% The Associated Cement Companies Ltd Cement 65000 548.47 2.10% ICICI Bank Ltd. Banks 95000 526.16 2.01% Lupin Ltd. Pharmaceuticals 52600 472.19 1.81%
    • __________________________________Mutual fund market and kotak scheme analysis 51 Hindustan Lever Ltd. Consumer Non Durables 200000 465.40 1.78% Mahindra Gesco Developers Ltd. Construction 58000 309.05 1.18% TajGVK Hotels & Resorts Ltd. Hotels 147250 264.46 1.01% Oil & Natural Gas Corporation Ltd. Oil 200 2.35 0.01% Listed/Awaiting listing on Stock Exchange - Total 23,241. 38 88.95 % Futures Oil & Natural Gas Corporation Ltd.- AUG2006 30000 343.83 1.32% Sun Pharmaceuticals Industries Ltd.- AUG2006 19350 155.78 0.60% Futures (Market value represents Notional Value) - Total 499.61 1.92% Collateral Borrowing & Lending Obligation 1,250.0 0 4.78% Term Deposits 800.00 3.06% Net Current Assets/(Liabilities) 337.86 1.29% Grand Total 26,128. 85 100.00 %
    • __________________________________Mutual fund market and kotak scheme analysis 52 KOTAK MAHINDRA K-30 - SIZE DOES MATTER After a long bull the BSE Sense x finally started its upward journey during April in 1999. Surely, the question doing the rounds is whether this rise is based on strong fundamentals of the-economy or fueled by speculative activities. And for how long this momentum can be sustained. These are also some of the highly contested topics among the analysts and the investors. But harping on these things is not a game of the mutual funds which claim to play it clean and safe. They are the least bothered entities about the market movements and the timing, as they claim. This case study, in its quest to find answers to these questions and many more, strives to delve deeper into the performance of a fund, K-30. The entire study revolves around the fund's investment strategy, its style of portfolio management, an in-depth analysis of the portfolio composition and last but not the least quantitative evaluation of the performance, applying relevant evaluation models. K-30 is an equity oriented open-ended fund From the house of Kotak Mahindra AMC. Launched on December 22,1998, it was the time when the stock market was down. The fund was able to pick up some of the best stocks at fairly cheaper valuations (see .'Stock Speak). After a wait of nearly four months i.e. From the April-end onwards the stock prices started flaring up. Some of the factors like revival of economies of East-Asian nations has increased FDI and a good monsoon helped sentiments look up. Increase in trade with USA and Europe added to the rise in industrial activities. This, apart From the booming IT sector provided the much needed support to fuel the stock market. The boom culminated in Sense x roaring past the 5000 level in October, 1999. A break-up of the performance of the K-30's NAV over a period of one year since inception beautifully depicts its movement during this period. The NAV of the fund was Rs. 14.64 , as on March 31, 1999. The return since inception till then worked out to around 46 percent. The NAV fell marginally to Rs. 13.22 on April 9,1999. The return since inception till that date was over 32 percent. The NAV outperformed the BSE Sensex by a huge margin of over 16 percent. There was a reshuffling of the portfolio between April and July 1999. That helped the NA V to appreciate handsomely. The NA V rose to Rs. 15.90, as on August 6, 1999 thereby giving a return of around 60 percent since inception. Between August and October
    • __________________________________Mutual fund market and kotak scheme analysis 53 1999, the portfolio was in for another rebalancing. As a result of this reshuffling, the portfolio's exposure to market heavyweights like Infosys, Satyam, Zee and Hughes Software increased significantly. This resulted in N A V vaulting to Rs.21.3 8 level, as on December 22, 1999. Thus, exactly within a year since its inception the fund's NA V got more than doubled. The return since inception works out to 113.80 percent, over this period. And, after considering the entry load of 1.50 percent the return since inception works out to 85.91 percent One interesting thing that emerges From this study is that there has been a continuous see saw kind of shift in the sectoral exposure of the portfolio, especially with regard to the IT sector. The exposure to the IT sector was 34.86 percent of the net investible corpus of the fund on March 31. 1999. During April 1999 it was pulled down to 28.7 percent which surprisingly was below that of the FMCG sector (31.1 percent). During August 1999 the fund trimmed the exposure to the IT sector further to 24.81 percent. But in a sudden reversal of the earlier strategy, the exposure to the sector was pushed up substantially to 37.61 percent, its highest ever level, in the beginning of the current year 2000. This shows that the fund manager has, From the very beginning, actively churned the portfolio. And, he has been pursuing a dynamic asset allocation strategy. Ironically, it is the troika of i.e. IT, Pharma and FMCG, which has been at the core of this see-saw. Focus on Growth The investment objective of K 30 mutual fund is to generate capital appreciation From a portfolio of predominantly equity and equity related securities. The portfolio composition is designed in such a way as to comprise equity of not more than 30 companies at any point of time which mayor may not be the same companies which constitute the BSE Sensex or NSE Nifty index. The fund lays great emphasis on a small universe of equities as well as their constant monitoring rather than indulging in an aimless stock chase. The fund strongly believes that having a portfolio constituting a greater number of investments does not necessarily result either in superior returns or significant. Reduction in risk through diversification. On the other hand, it does reduce the attention which can be given to each stock and to the portfolio
    • __________________________________Mutual fund market and kotak scheme analysis 54 as a whole The fund further argues that one of the ground rules of investing in stocks is never to spread yourself thin over too many scrip's. It believes that less is indeed more. The K-30 scheme restricts itself generally to only 30 scrip's because of this belief. It's a good thinking on the part of the fund because monitoring as well as managing a large number of shares not only require a lot of time and effort but also entail greater risks, comparatively Simply put, with increase in number of companies, in a given portfolio, the interplay among them, or the correlation factor, becomes more pronounced, which, if not managed carefully, can increase the portfolio risk thereby constraining the growth. The trick here lies in having a basket of securities where the correlation among them is minimal so that an optimum trade- off of risk and return can be achieved. Keeping in tune with the changing times, the fund aims to use derivatives to hedge exposures as and in a manner approved by SEBI. On the anvil is, also, the plan to seek permission to invest in GDR/ ADR ofIndian companies for the K 30 portfolio. Low turnover is the key The fund aims to follow a specified target for portfolio turnover. It states that the portfolio turnover will normally not exceed 150 percent once the corpus is invested. The turnover, here, means the simple average of the aggregate of purchases and sales net of the following The turnover caused on account of investing the initial, corpus; The turnover caused on account of investing in debt and money market securities; The turnover caused on account of fresh purchases And redemptions by Unit holders. As the purchases and sales invite transaction costs viz. brokerage, stamp duty and custodial charges, a predetermined turnover limit becomes essential to enable portfolio restructuring when warranted.
    • __________________________________Mutual fund market and kotak scheme analysis 55 Focus on Intrinsic Value The fund seeks to invest 90 percent of its investible corpus in equity and equity related securities and rest in debt and money market instruments. As far as the equity component is concerned the fund aims to invest in diverse sectors such as information technology, pharmaceuticals, FMCG, automotives, services, utilities, petroleum and engineering. The fund aims to invest in stocks which it believes are priced at a material discount to their intrinsic value. Such intrinsic value will be a function of both past performance and future growth prospects. For selecting particular stocks as well as determining the potential value of such stocks, the fund has a set of parameters to guide it in choosing the stocks which satisfy the selection criteria. The foremost among these criteria is the financial strength of the companies as indicated by well recognized financial parameters. Some of the important parameters which the fund looks at are total cash flow, return on capital employed (ROCE), return on net worth (RONW), dividend per share and earnings per share. The second criteria is the quality of the management and track record. The fund looks for those companies which have highly competent management and those companies which practice the code of corporate governance. And, it also looks at the companies which are regular tax payer and have a sound tax planning in place. Consistency in performance by the companies over a period of time is also one of the factors which the fund takes into consideration. Third significant consideration is that the companies should be less prone to recessions or business cycles either because of the nature of their businesses or because of superior strategies followed by their management. Fourth criteria are that the companies should pursue a strategy to build strong brands for their products or services and they should be capable of building strong franchises. And lastly, the market liquidity of the stocks. If a company does not have sufficient number of floating stocks, the fund does not consider it fit for making investments
    • __________________________________Mutual fund market and kotak scheme analysis 56 Guiding force of dynamism It is the triumvirate of IT, Pharma and FMCG which has constituted more than fifty percent of the investible corpus of the fund, since inception. The portfolio of K 30 fund comprises of around 30 stocks, spread across 12 industries. This provides a fair degree of protection from risk arising out of being concentrated in a few industries. But what is worrying about the portfolio is its unusually high concentration in the IT sector. Though the fund claims that one of the ground rules of investing is not to spread one's portfolio too thin over too many stocks, it is also equally not very wise to get highly exposed to a few stocks. Diversification strategy needs to be oriented more towards trimming the concentration in order to further lower the risk. If we look at the portfolio composition of K 30 fund it becomes pretty clear that the portfolio has seen a lot of structural changes in terms of sectoral exposure. Rebalancing on a regular basis, during the first year, has been one of the main features of the portfolio, since inception. And, it won't be an exaggeration to say that throughout the fund has adopted a dynamic asset allocation strategy. The dynamic asset allocation strategy, in simple words, involves a process of shifting the exposure of the portfolio among various asset classes such as equities, debts etc. at regular intervals. The method focuses on combining assets whose expected returns are not highly correlated so as to obtain the best possible expected return, given the level of risk assumed. Apart from a regular shift in sectoral exposure, the investments in money market instruments have also been increased to a high of 12.70 percent in January, this year, from a low of2.87 percent in March, 1999.Though the assets of the fund too have increased to around 90 crore in between, the strategy seems to be to spread the risk. In quest of a right blend The portfolio of K-30 fund has been on a continuous reshuffling spree, ever since it was launched in December 1998. A brief study of the portfolio composition strategy which has been in search of a right blend of stocks and sectors guides us through some of the
    • __________________________________Mutual fund market and kotak scheme analysis 57 interesting trends it went through over a period of time, since its inception. A glance at the portfolio composition suggests that Information Technology sector has been the most dominant sector in K-30 fund's portfolio in terms of exposure. The dominance of Information Technology stocks in the portfolio of the K 30 fund is quite understandable, given the fact that the fund aspires to produce superior returns through a balanced exposure to specific sectors. It is another thing that the exposure to IT sector has been more than the desired exposure. Anticipation of a higher growth might be the reason. The apprehension about the high concentration in the sector is not unfounded as the kind of valuation these technology stocks are getting have not been fully justified by their respective performances. The valuations in case of these stocks seem to be over stretched. Because the kind of prices investors are willing to pay is based on expectations of future performance of the companies concerned. And there is no guarantee that performances will match investors' perception. What will happen once a company fails to meet the investors' expectations? To seek an answer one does not have to go far. The price performance of Infosys on the bourses during the current month (January 2000) itself gives enough indication of what future has in store for the soaring technology scrip's prices. In the first few trading sessions, in January 2000, the price of Infosys jumped up to Rs. 15,000 a share. But during the next few sessions the price started declining and touched the level ofRs. 12,000. Thus in a few strokes it shed Rs. 3000 per share. The sheer loss in M-Cap of the stock had a telling effect on the bourses as well. The exposure to the IT sector reached an time high of37.61 percent in January 2000, From 34.56 percent in March, 1999. Among the IT stocks, Infosys has the lion's share. The exposure to the stock is at 12.45 percent. Satyam, Pentafour Communications (now, Pentasoft Technologies), Polaris, Citicorp Securities, BFL Software, Hughes Software, Software Solutions are the other technology scrip's in the portfolio of the K-30 fund.
    • __________________________________Mutual fund market and kotak scheme analysis 58 One of the heavyweights in K-30's portfolio, Infosys has been among the front runners in the ongoing Bull Run. Financial for the third quarter ended December 31,1999 look quite impressive. Contrary to the general expectations, the drop in revenues From Y2K related projects, to 5.8 percent in the said quarter From 9.4 percent in the second quarter of the same fiscal, did not have any adverse impact on the bottom lines. The company has been able to successfully make the transition to E-Commerce business From Y2K related projects. Revenues From E-Commerce increased From Rs. 6.4 crore to Rs. 15.6 crore during the said period The higher proportion of E-Commerce revenues has helped Infosys improve its operating profit margins in the third quarter of 1999-2000 by 1.67 percentage points to 40.35 percent. It has also successfully added 23 new clients in the quarter, of which seven are in the area of e-business and voice and communication technologies. During the quarter, the company undertook two very exciting new projects. The first one is related to the execution of projects in the area of optical networking fur a leading developer of next generation optical transport products. The second one is the development of an internet based pricing tool for a large drug store chain in the US. The successful execution of these two products will certainly establish Infosys' credentials as a top class global software player. The stock holds promise for strong growth in medium to long-term, given its top quality management and proven track record, even at this level (Rs. 12,000, as on January 6, 2000). But an exposure of 12.45 percent is certainly unwarranted, From diversification point of view. Satyam Computer, one of the leading domestic techno logy scrip's, though does not boast of a strong management like Infosys but has a very fascinating business story. Its business model is quite unique, in the sense that unlike other ISPs (Internet Service Providers) it not only offers the internet access but almost the entire gamut of software solutions. Today, Satyam is an access provider, a portal company, a corporate network service provider and an E-Commerce provider all rolled into one. This not only provides a greater synergy to the company, but also offers tremendous opportunity to grow. Its
    • __________________________________Mutual fund market and kotak scheme analysis 59 business model's most exciting aspect is the fact that the high investments required are spread across £Our different business streams; which means that payback is much faster. This also translates into evenly distributed cost, full utilization of the assets and generation of high returns. . From the fund's point of view the Satyam scrip is a good medium to long-term bet. The fund also participated in the initial public offerings of Hughes software and Polaris Lab, both From the IT sector. Hughes software is a leading communications software company. The promoter of the company, Hughes Electronics Corporation, a subsidiary of General Motors, is engaged in telecom, information and entertainment services. Hughes Software is engaged primarily in developing package software, providing software consultancy services and other ancillary product and services for the telecommunications industry. The company's major client has so far been its parent which accounts for 74 percent of its revenue. This shows the overdependence on one client for revenue but on the other hand also provides a stable revenue base. The parent's worldwide marketing and distribution network has come handy for the company, as major part of its balance 26 percent comes from exports. The FMCG sector accounts for 11.22 percent of the net investible corpus of the K-30 fund, as per the latest portfolio composition figure. The scrip's which form a part of the fund's portfolio are HLL, Cad bury India, Indian Shaving Products and International Best Foods (IBL). IBL's inclusion in the fund's portfolio is very interesting as it is not on the buy list of many funds. Unlike other FMCG companies, IBL has been keeping a low profile for a long time, despite being in possession of some of the top brands like Captain Cook, Knorr, Brown & Poison, Taria Dalal etc. The company has zeroed in on four areas of competency in which it would expand its product base. These are - sweet, savory, staples and drinks. The rationale behind the move to enter areas besides custards and jellies was to grow the turnover, and to be part of the housewife's daily repertoire. In order to gain greater market penetration, IBL has rapidly increased its distribution reach from 600 to 1,600 and the number of outlets from one lakh to 2.5 lakh. And, given the increased demand for packaged atta and salt among the urbanites, the company stands
    • __________________________________Mutual fund market and kotak scheme analysis 60 a good chance to grow in future given the strong brand equity of its products. But a lot will depend on the company's ability to counter the competition from biggies like HLL, Nestle and Tata: The company also hopes to cater to the export markets of South Africa and South-East Asia. If it fructifies, this can bring substantial revenue to the company. The vision of the company is to be the BEST run foods company through strong brand leadership in specialized ethnic and international food categories. A food for thought! Though, the company has been reporting losses for the two consecutive years, the long term potential appears bright. The fund has cut exposure to the stock :from 1.67 percent, in August, 1999, to 0.83 percent, as on January 6, 2000. Quite similarly, the exposure to HLL has also been pared to 5.07 percent :from a high of 10.20 percent during the same period. The move seems to be in line with the market mood which has kept shifting the focus among the IT, Pharma, FMCG and Cyclicals, all through 1999 and is still going on. The Pharmaceutical sector accounts for 10.39 percent of the net corpus of the fund. In fact, the exposure to the sector is slightly lower than the FMCG sector. The exposure to Ranbaxy at 3.21 percent-is the highest among the other pharmacy stocks in the fund's portfolio. Cipla, Knoll, Pfizer, SB Pharma and Novartis are the other scrip's from the sector. One of the top counters in the portfolio From this sector, Ranbaxy is front runner among the domestic Pharma companies in R&D arena. Concentration on dosage form sales, globalizing the operations with on-guard presence in key advanced and emerging markets and enhancing the intellectual wealth through a strong R&D and a regulatory base have given the company a significant competitive advantage. The company's global marketing strategy of building large brands is well on track. It crossed a major milestone in its internationalization drive with the launch of Cefaclor and Ranitidine formulations in the US market. It has become the first Indian company to market its products in this large generics market under its own label.
    • __________________________________Mutual fund market and kotak scheme analysis 61 In the last five-six years, Ranbaxy has steadily increased its intellectual wealth and experiential knowledge, especially in the advanced and emerging international markets. One of the company's key success factors has been its ability in regulatory filings with respective drug authorities in the US, UK, South Africa, Australia and New Zealand. These drives are expected to push the company in the forefront of global market arena. The company is a good long-term bet for the fund. Companies like Cipla, Knoll, Novartis, SmithKline Beecham Pharma and Pfizer have also been showing considerable advancement on the R&D front. Although Pfizer has been marred with controversies over its parent's plan to set up a hundred percent subsidiary. These are the good long-term bets where the fund needs to stay invested in. After IT, FMCG and Pharma sector, one sector that has gained importance in the portfolio ofK-30 is Media. Zee Telefilms is the only scrip from the sector in which the exposure of the portfolio is at 7.52 percent. In fact, the exposure to Zee Telefilms is well above the technology stocks except Infosys. This shows the strong faith the fund has in Zee. After the famous deal with the Star group last year. Zee has been seeing phenomenal growth. A lot of initiatives are being taken to propel the group's foray in internet related ventures which will further push the growth of the company. Launch of some of the regional language channels and with few more in the pipeline (this includes proposal for launching of English channels), and' on top of it all the restructuring drive which is under way, the stock will see unlocking of its underlying value in the medium-long term. Nonetheless, the substantially high exposure to the stock is required to be diluted in favor of other scrip's From the same sector in order to achieve adequate diversification. From the engineering sector, Asia Brown Boveri (ABB), LG Brothers and Blue Star are the three scrip's in the portfolio. Together, they account for 2.61 percent of the net assets of the fund; of which the exposure to ABB is 1.36 percent. A look at the ABB throws some light on strategy of the fund to hold on to the stock. ABB is a global technology and engineering conglomerate. The company is in the process of reinventing itself and is in the process of creating a lighter and faster organizational model for growth. The company has embarked on an ambitious project
    • __________________________________Mutual fund market and kotak scheme analysis 62 which involves separating the power business from its core business and concentrating on industrial IT solutions. Its industrial IT concept bridges the gap between traditional IT and process technology solutions by integrating plant-centric operations like planning and scheduling of production, maintenance with business systems like ERP, MIS, inventory and supply chain management. The restructuring process was started by the company in the end of 1998 and is aimed at metamorphosing it into a knowledge-based company from an asset-based company. The company's focus on industrial IT is expected to fetch it 30-40 percent annual growth. Industrial IT solutions open a new horizon to core sector domestic industries to become globally competitive. And, ABB is set to tap the changing automation needs of these industries in a big way with an integration From process automation to-business systems and the internet. The acquisition of Elsag Bailey by ABB has added strength to the company's industrial IT concept by widening the product portfolio as well as process expertise. In 1999, ABB'S Automation business executed orders worth Rs. 450 crore for companies like Reliance, GAIL, Grasim Cement, IOC, Neelanchal Ispat, Tata Steel, lTC, ONGC a Its Automation business is targeted to cross Rs. 1,000 crore in three years and continues to be a key revenue earner. The restructuring will provide the much needed impetus to I the future growth of the company. The fund's exposure to the ABB counter will payoff in the medium to longterm once the restructuring is over. In the Cement sector, the fund has got exposure in India Cement and L&T, though the latter is not actually a purely cement company but in the portfolio it has been classified so. The exposure to the sector is at 4.73 percent. The L&T scrip is also a good restructuring story. It is formulating new strategy to become much more competitive. The company is planning a major restructuring drive to catapult it into the top bracket in its major lines of businesses. At present, the EPC division contributes to around 57 percent of the company's total sales. And, while the company plans to give additional thrust to
    • __________________________________Mutual fund market and kotak scheme analysis 63 some of the new businesses, engineering and construction will continue to be the core businesses of the company. The company is taking new initiatives in respect of cost-- reduction, on-time delivery, global sourcing etc. besides the plan to increase its presence in the international market. The company is embarking on a massive restructuring of its operations. While the restructuring of businesses was long overdue because of the company's complex business portfolio, the process will take its own time; as issues like hiving of cement business may delay the process. In wake of this, it can be said that any delay in restructuring process could have a negative impact on the NAV of the fund in the short-medium term. The fund's exposure to automobile sector is restricted to two stocks namely Mahindra and Mahindra (M&M) and Punjab Tractors. Together, these scrip's accounted for 3.58 percent of the net assets of the fund, as on January 6, 2000. M&M has interesting growth plans. It has drawn up an impressive blue print for future growth. The company has been engaged in a major restructuring of its businesses. M&M aspires to be a knowledge-based company where the technological innovation will be the key driver of growth. For giving concrete shape to its future plans the company has entered into two new Joint ventures to foray into information technology (11) and R&D areas. On the anvil is an ambitious plan for consolidation of its entire businesses and global reach in automotive and tractor segment. The scrip offers a good other sectors which have a minor representation in the portfolio are Banks/FIs (2.61%), Chemicals (1.71%), Agrochemicals (0.92%) and Consumer durables (0.47%). On the whole, the composition of the portfolio of the fund looks reasonably balanced. With the portfolio's exposure spread well over a sufficiently large number of industries the risk stands reduced, though not fully, but to a certain extent. On the selection parameters viz. financial strength, quality of management, business cycle independence and brand equity, which the fund has been talking about, the study, suggests that barring few stocks such as Polaris, Pentafuur, LG Brothers etc. most of the companies in the fund's portfolio boast of a strong management team with a proven track record. Financially and technologically they are very sound as the performance and success of HLL, Infosys, M&M, Ranbaxy, AgrEvo, HDFC Bank suggest. And some of these
    • __________________________________Mutual fund market and kotak scheme analysis 64 companies have painstakingly built global brands like Infosys, Zee, Satyam and Pfizer. But the world is changing at such an amazing speed that nothing except the change itself is constant. It takes no time in altering the fate of a brand or the fortune of a company. That is why monitoring and managing a portfolio require an eagle's eye. Performance Evaluation: K-30 The performance evaluation, here, involves a study of the performance of K-30 fund and its comparison vis-à-vis eleven other equity oriented funds. The performances of the funds have been benchmarked against the broad market index S&P CNX 500 Nonetheless; it's been a virtual race between the risk and the diversification. Market risk or the systematic risk of majority of the funds in the sample is close to the market risk of the benchmark index i.e. one. In case of unsystematic risk majority of the sample funds have higher risks inherent in their portfolio than the index. This is not a very unique situation for the simple reason that all the risks inherent in the portfolio of a fund is function of the portfolio's concentration in a particular stock and the industry as well as the interplay among the securities, represented by the correlation coefficient, which are part of the portfolio. The lower the correlation among the securities and lower the sector! stock concentration the lower is the portfolio's risk. If we look at the Sharpe Ratio of the sample funds, we find that some of the funds, like Alliance Equity Fund and Birla Advantage Fund, with relatively higher unsystematic risk, have generated superior risk-adjusted returns while at the same time some of the funds, like Prima Plus and Tata Equity Growth, despite having fairly lower risks, also turned in better risk-adjusted returns. But on the other hand, K-30 fund which has comparatively higher unsystematic risk, as depicted by its low net selectivity, than the Prima Plus Fund and Tata Equity Fund has in contrast actually yielded a relatively lower return. Does it have anything to do with other factors? This will become clear after having a look at what other performance measures like Treynor, Jensen and Eugene Fama suggest. While comparing the risk-adjusted returns, as per the Sharpe ratio, we observe that with the exception of a few most of the funds have outperformed the broad market index with hefty margins.
    • __________________________________Mutual fund market and kotak scheme analysis 65 To put it simply, the benchmark index, for every unit of unsystematic risk, produced a return of 10.27 percent, whereas during the same period Alliance Equity Fund, with a beta of 1.07, generated a risk-adjusted return of26.31 percent which is more than double of what the benchmark index produced. What does it mean for an investor? It shows that if an investor had invested in the market portfolio he would have ended up with a poor risk-adjusted return of just 10.27 percent, where as the investor who had . invested in the Alliance Equity Fund would have been better off with a return of 26.31 percent. The same investment in K-30 fund would have fetched him a risk-adjusted return of 12.62 percent, still better than the market's risk-adjusted return. This is what the Sharpe Measure explains. A comparison of the performances of the sampled funds on the basis of Sharpe Ratio shows that K-30 fund ranks a poor seventh. While the Sharpe ratio gives an idea of a fund's performance on a risk-adjusted return basis, it has certain drawbacks. This is because of the fact that this measure implicitly assumes that the portfolio, which is under evaluation, is a fairly diversified one. It fails to give a true picture of a fund's performance in case the portfolio has some unsystematic risk. And for this diversifiable risk investor is not always compensated for. To overcome this difficulty Turnover ratio is used, which evaluates the portfolio performances on the return to volatility basis. Here, the volatility refers to difference in returns due to market forces- It is represented by beta. If both the Sharpe and Turnover ratio accord similar rankings to a fund, ii indicates that the fund is adequately diversified. But in case, if the rankings are different it goes on to show that portfolio is not fully diversified. The rankings of K-30 fund differ on the basis of these two measures. It ranks seven on the basis of Sharpe ratio and eight as per the Turnover ratio. On the other hand. Reliance Vision ranks eight as per the Sharpe ratio but ranks seven on the basis of Turnover ratio. Reliance Vision fund with relatively lower diversification ranks below the K'30 fund on the basis of Sharpe ratio. But it ranks above the K-30 fund as per the Turnover ratio. The
    • __________________________________Mutual fund market and kotak scheme analysis 66 outcome here is that if a fund is relatively well diversified it will rank above on the basis of the Sharpe ratio but will have a poor ranking on the basis of the Turnover ratio. But despite having an above-average diversification, 0.55 vs. 0.48, K-30 fund failed to perform better than Prudential ICICI Growth Plan Fund and Tata Equity Growth Fund. Both these funds have relatively lower diversification than the K-30 fund. Reason behind those fund's superior returns could be the higher concentration of their portfolio in select industries to generate higher differentiated returns The K-30 fund has generated a differential return or alpha of 19.06 percent which is almost half the average differential return of 31.40 percent for the sampled funds. In. comparison. Alliance Equity Fund, ranking first, has turned to 81.67 percent, as differential return. For K-30 fund, a lower than average differential return means that it has not been able to generate sufficient returns despite having a higher beta and lower diversification. Before discussing the performances of the funds on the basis of Eugene Fama measure a brief mention of added return for diversification is imperative here. It is one of the important components of the Fama measure. The added return for diversification stands for the net of the return required for taking extra risk, in addition to the market risk, and the return required for taking only the market risk. In simple words, a fund manager in order to achieve above-average returns takes extra risks thereby forsakes some diversification that will have its cost in terms of additional portfolio risk. To mitigate this additional risk the extra return that he needs to generate is the added return for incurring the diversification related risk. The added return for diversification for K-30 fund works out to 10.14 percent. Which means that the fund has produced an extra return of 10.14 percent for taking the additional portfolio risk. This when compared to the average added return of 18.16 percent for the sampled funds is quite low. As per the Eugene Fama measure, K-30 fund ranks seventh. It has yielded a net selectivity of 8.92 percent. When compared to the average net selectivity of 13.21 percent for the sampled funds, the K-30 fund comes far
    • __________________________________Mutual fund market and kotak scheme analysis 67 behind. It seems a poor cousin of funds like Alliance Equity, Prima Plus and Birla Advantage. The overall picture that emerges from the above study is that the performance of K-30 fund has been quite satisfactory on the risk-adjusted return basis. Though this performance doesn't look very impressive when compared to the top three funds in the sample, what one really needs to appreciate is the fact that the fund has been able to turn in a return of more than 100 percent within a year since its inception. While it has fetched more than 50 percent return in the six-month period ending December 22/1999. But one should not forget the fact that this growth has been achieved due to increased concentration in information technology sector, at the cost of other sectors. Though there is no denying the fact that the IT sector is growing at a much faster rate than the other sectors but then growth is not the only objective of the fund. And, given the stated objective of diversification as a major focus area by the K-30 fund, the investment strategy seems to be moving a bit away From this. A judicious blend of equities in various sectors is what is required most to achieve a balance between growth and risk
    • __________________________________Mutual fund market and kotak scheme analysis 68 CONCLUSION The market for mutual funds is determined by the growth rates in GDP, savings and household assets. In a globalized economic environment, external savings and investments will also influence the size of the domestic market. If mutual funds can mobilize 10% of household savings, the size of the market would be around Rs.l,62,000 crore. Globalization has enabled Indian mutual funds to mobilize savings from abroad and "any overseas Indian funds have been successfully launched. The Indian market is lire to emerge as an attractive and profitable place to invest. One can expect that a huge mutual fund market is likely to emerge by the year 2006 and beyond. This would open up tremendous opportunities for Indian mutual funds. An important element in the success of marketing strategy is the ability to fulfill investor expectations. So far as factors influencing decision-making are concerned, importance has been given to: past performance; investment objectives; reputation of the fund manager; remised response-time in correspondence: localized investor service; agents' feedback. With a return of about 55 per cent over the past year, Kotak-30 has catapulted to the top position among large-cap funds in this period. With a relatively small asset base, the fund continues to invest in a small basket of about 30 stocks, predominantly those with a market capitalisation of more than Rs 5,000 crore. With the strong performance it has delivered in the recent rally, its performance over a three-year and five-year period has also improved significantly. We strongly recommend, however, that investments be routed through a one-year systematic investment plan. Investing in phases will help cope with the kind of extreme volatility witnessed in the market in recent weeks. With a large-cap focus, Kotak-30 may be a safer investment option than a mid-cap fund. It, nevertheless, carries a risk profile similar to that of a typical diversified equity fund.
    • __________________________________Mutual fund market and kotak scheme analysis 69 Its current exposure to metal stocks, in particular, subjects its performance to wild swings. The fund has, however, displayed a higher degree of consistency in performance in recent years, which demonstrates its capacity to cope with volatility.
    • __________________________________Mutual fund market and kotak scheme analysis 70 RECOMMENDATIONS Kotak-30: Invest exposures may be considered in Kotak-30, as there is a greater consistency in performance now; the portfolio also appears well-positioned to capitalise on growth opportunities, and to weather any downward trend in the market. Investors could, however, phase out their exposures using a systematic investment plan over a twelve-month period. This will ensure that a lump-sum is not locked up at one go and investors could also benefit from any weakness in the broad market. Over the past three years, Kotak-30 has performed well in comparison to benchmark indices; it has turned in superior returns as compared to several peer funds over the past year. This is a significant change for a fund whose performance tended to be inconsistent a few years ago. The fund has invested about 80 per cent of its assets in large-cap stocks. With exposures in stocks such as Bharti Tele-Ventures, SBI, Reliance, Infosys and Larsen & Toubro, to name a few, the fund has chosen its core holdings in a manner that has delivered value. Its compact portfolio just 25-30 stocks should also be a positive, as equities are likely to deliver moderate returns over the next few years. Suitability: The risk associated with the fund is in line with what one would expect of a diversified fund with a large-cap focus. Exposure to mid-cap stocks is also at modest levels and does not add to the risk element. While the fund has delivered returns that are more than commensurate to the risks, it would not be among our top picks. If you have exposures in funds such as MagnumContra, HDFC Equity, HDFC TaxSaver, Franklin Prima and Magnum Global, you could allocate a part of the portfolio to gain a large-cap exposure. Investors could opt for the dividend re-investment option, as it offers superior tax efficiency and also ensures that you remain invested. Portfolio overview: The fund has a diversified portfolio. Banking, IT and engineering are the preferred sectors. The fund has exposures to mid-cap plays such as Deccan Chronicle, Television Eighteen, Andhra Sugars, Federal Bank and Navin Fluorine
    • __________________________________Mutual fund market and kotak scheme analysis 71 International. Mid-cap stocks account for about 15 per cent of the portfolio. The small asset base of Rs 170 crore is a positive, as it provides for a high degree of flexibility in management. Fund facts: Kotak-30 was launched in December 1998. The minimum investment is Rs 5,000. There is an entry load of 2.25 per cent on the NAV. There is no exit load. The fund has delivered annual returns of about 60 per cent and 50 per cent over the past year and three years respectively.
    • __________________________________Mutual fund market and kotak scheme analysis 72 QUESTIONNAIRE: NAME:-_______________________________________________________ AGE:-_________ GENDER:-_______ EDUCATION:-_________________________________________________ OCCUPATION:-________________________________________________ INCOME:-__________ IF YOU HAVE TO MAKE AN INVESTMENT WHERE WOULD YOU MAKE IT? ________________________________________________________________________ ________________________________________________________________________ ______ HOW DID YOU COME TO KNOW ABOUT MUTUAL FUND? ________________________________________________________________________ ________________________________________________________________________ _________________________________________________________________ WHICH MUTUAL FUND HAVE YOU INVESTED IN? ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________ WHY DID YOU CHOOSE THIS PARTICULAR MUTUAL FUND TO INVEST IN? ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________
    • __________________________________Mutual fund market and kotak scheme analysis 73 WHY DID YOU CHOOSE THIS PARTICULAR SCHEME? ________________________________________________________________________ ________________________________________________________________________ ______________________________________________________________________ ARE YOU SATISFIED WITH YOUR CHOICE? ________________________________________________________________________ ________________________________________________________________________ ______________________________________________________________________ GIVEN AN OPPORTUNITY WOULD YOU LIKE TO MAKE ANY CHANGES? ________________________________________________________________________ ________________________________________________________________________ ______________________________________________________________________ ACCORDING TO YOU WHICH MUTUAL FUND IS GIVING ITS BEST PERFORMANCE & WHY? ________________________________________________________________________ ________________________________________________________________________ ARE YOU SATISFIED WITH THE REGULATORY FRAMEWORK IN RESPECT OF MUTUAL FUND? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ WHAT CHANGES WOULD YOU LIKE TO RECOMMEND IN THE FRAMEWORK? ________________________________________________________________________ ________________________________________________________________________ _____________________________ THANK YOU
    • __________________________________Mutual fund market and kotak scheme analysis 74 BIBLOGRAPHY
    • __________________________________Mutual fund market and kotak scheme analysis 75 INTERNET 1. www.amfiindia.com 2. www.moneycontrol.com 3. www.kotakmutualfund.com 4. www.5paise.com 5. www.indiainfoline.com 6. www.nseindia.com BOOKS 1. Amfi India mutual fund 2. Book on capital market by ncfm NEWSPAPER 1. Economic Times 2. Business Standard VIM COLLEGE LIBRARY
    • __________________________________Mutual fund market and kotak scheme analysis 76
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