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An analysis of performance of mutual funds



An analysis of performance of mutual funds

An analysis of performance of mutual funds



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An analysis of performance of mutual funds An analysis of performance of mutual funds Document Transcript

  • Projectsformba.blospot.com Acknowledgement to the companyThe opportunity to get practical training in a reputed organizationfulfills the felt gap between the theory and practical. In the case of astudent of FINANCE this aspect assumes an additional dimension I hereby acknowledge SAHARA INDIA for providing theconstant guidance for encouragement which helped me a lot to besuccessful in my efforts. This formal acknowledgement will hardly besufficient to express my deep sense of gratitude to all of them. It was amemorable experience while doing my project at SAHARAORGANISATION, Lucknow. I am highly indebted and thankful to DEVENDRA SIR for hisguidance and encouragement, without which the satisfactorycompletion of this project would not had been possible. He is a constantsource of inspiration to me, showing all the patience and abundantencouragement throughout the project duration. Acknowledgement couldn’t end without expressing my gratitudetowards Mr. PANKAJ VARSHNEYA who was instrumental in timelycompletion of the project. Words fall short in expressing my sincere regards towards themembers of CMSD Ms Priyanka and Mr Santosh kumar for their expertadvice and invaluable suggestions.I would also like to thank my brother PRAKARSH SRIVASTAVA whowas working with me in the same department and was there to help meall the time. Lastly thanks to teacher and colleagues who directly or indirectlyhelped me in procurement of my goal. In all SAHARA INDIA provided a wonderful simulatingenvironment for this very educative and instructive training. (UTKARSH SRIVASTAVA) Projectsformba.blospot.com 2
  • Projectsformba.blospot.com Acknowledgement to the Faculty Of PGDM , Jaipuria Institute of ManagementIt is high privilege for me to express my deep sense of gratitude to allthose faculty members who helped me in the completion of the project,especially my PGDM Director Mr. AMAN SRIVASTAVA who was alwaysthere at hour of need.My special thanks to Prof. PRASHANT GUPTA (FACULTY OF FINANCE)for helping me in the completion of project work and its reportsubmission.Last but not the least my special thanks to the faculty of JaipuriaInstitute of Management for their kind co–operation and providing mewith all the necessary documents needed and guidance during the timeperiod of project completion. (UTKARSH SRIVASTAVA) Projectsformba.blospot.com 3
  • Projectsformba.blospot.com DECLARATIONThis is the report of the project work entitled “AN ANALYSIS OFPERFORMANCE OF MUTUAL FUNDS” undertaken by me during thetwo month training at SAHARA INDIA, Lucknow.I hereby declare that project report is being submitted by me to theDepartment of Commerce for the partial fulfillment of the degree ofMaster of Finance & Control. A copy of this project has been submittedto the organization where the project was developed. This project is notsubmitted to any other organization or university or college and is theoutcome of my work. (UTKARSH SRIVASTAVA) Projectsformba.blospot.com 4
  • Projectsformba.blospot.com INDEXSr No. Contents Pg. No.1 Introduction 62 Company Profile 113 Capital Market Services Division 164 Initial Methods Of Investment 195 History Of Mutual Funds 266 Mutual Funds & its classifications 337 Advantages of Mutual Funds 408 Disadvantages Of Mutual Funds 429 Tax Aspect of Mutual Funds 4710 Terms Related To Mutual Funds 5111 Steps Involved In Investments Of Mutual Funds 5412 Growth in Mutual Fund Industry 5613 Comparision Of Mutual Fund With Other Deposits 6214 Market Trends Mutual Funds 7015 Research Objective & Research Design 7816 Data Analysis 8017 Recommendations & Conclusion 9718 Future Scenario 9919 Global Scenario 10020 Questionaire 10121 FAQ’s 10322 Glosary 105 Projectsformba.blospot.com 5
  • Projectsformba.blospot.com23 Bibligraphy 110 IntroductionA Mutual Fund is an ideal investment vehicle where a number ofinvestors come together to pool their money with common investmentgoal. Respective Asset Management Company (AMC) manages eachMutual Fund with different type of schemes. An investor can invest hismoney in one or more schemes of Mutual Fund according to his choiceand becomes the unit holder of the scheme. Fund manager in differenttypes of suitable stock and securities, bonds and money marketinstruments then invests the invested money in a particular scheme of aMutual Fund. Each Mutual Fund is managed by qualified professionalmen, who use this money to create a portfolio, which includes stock andshares, bonds, gilt, money-market instruments or combination of all.Thus Mutual Fund will diversify your portfolio over a variety ofinvestment vehicles. Mutual Fund offers an investor to invest even asmall amount of money. A security that gives small investors access to awell-diversified portfolio of equities, bonds, and other securities. Eachshareholder participates in the gain or loss of the fund. Shares areissued and can be redeemed as needed. The funds net asset value(NAV) is determined each day. Each mutual fund portfolio is investedto match the objective stated in the prospectus.Respective Asset Management Companies sponsored by financialinstitutions, banks, private companies or international firms managesMutual Funds schemes. The biggest Indian AMC is UTI while Alliance,Franklin Templeton etc are international AMCs. Projectsformba.blospot.com 6
  • Projectsformba.blospot.comMutual Fund offers several benefits to an investor such as potentialreturn, liquidity, transparency, income growth, good post tax returnand reasonable safety. There are number of options available for aninvestor offered by a mutual fund. A draft offer document is to be prepared at the time of launching thefund. Typically, it pre specifies the investment objectives of the fund,the risk associated, the costs involved in the process and the boardrules for entry into and exit from the fund and other areas of operation.In India, as in most countries, these sponsors need approvals from aregulator, SEBI (securities Exchange Board of India) in our case. SEBIlooks at track records of the sponsor and its financial strength ingranting approval to the fund for commencing operations.A sponsor then hires an Asset Management Company to invest thefunds according to the investment objectives. It also hires anotherentity to be the custodian of the asset of the fund and perhaps a thirdone to handle registry work for the unit holder (subscriber) of the fund,in the Indian context, the sponsor promote the Asset ManagementCompany also, in which it holds a majority stake. In many cases asponsor can hold a 100% stake in the Asset Management Company(AMC).A mutual fund is like a big pizza cut into slices. Each slice is called ashare. The share price is called the Net Asset Value (NAV). Unlike astock price that will fluctuate all day long, the mutual fund pricechanges only once a day, at the close of the stock marketEach Mutual Fund has a specific stated objectiveThe fund’s objective is laid out in the fund’s prospectus, which is thelegal document that contains information about the fund, its history, itsofficers and its performance. Projectsformba.blospot.com 7
  • Projectsformba.blospot.com Some popular objectives of a mutual fund are-FUND OBJECTIVE WHAT THE FUND WILL INVEST INEquity (growth) Only in stocksDebt (income) Only in fixed-income securitiesMoney Market (including Gilt) In short-term money market instrument (including government securities)Balanced Partly in stocks and partly in fixed-income securities, in order to maintain a balance in return and risk FLOW CHART OF HOW MUTUAL FUND WORKS Projectsformba.blospot.com 8
  • Projectsformba.blospot.comProjectsformba.blospot.com 9
  • Projectsformba.blospot.comThe company that puts together a mutual fund is called an AMC. AnAMC may have several mutual fund schemes with similar or variedinvestment objectives.The AMC hires a professional money manager, who buys and sellssecurities in line with the fund’s stated objective.All AMCs regulated by SEBI, funds governed by board of directors. ORGANISATION OF MUTUAL WORKThe securities and exchange Board of India (SEBI) mutual fundregulations require that the fund’s objectives are clearly spelt out in theprospectus. Projectsformba.blospot.com 10
  • Projectsformba.blospot.comIn addition, every mutual fund has a board of directors that is supposedto represent the shareholder’s interest, rather than the AMC’sA mutual fund is a company that combines, or pools, investors moneyand, generally, purchases stocks or bonds. Ideally, a funds size andresultant efficiency, combined with experienced management, provideadvantages for investors that include diversification, expert stock andbond selection, low cost, and convenience.In terms of legal structure, a mutual fund is a corporation that receivespreferential tax treatment under the U.S. Internal Revenue Code. Theassets of a mutual fund consist almost entirely of the securities it holdsin its portfolio. The most common type of mutual fund, called an open-end fund, allows investors to buy and sell stock in it on an ongoingbasis. COMPANY PROFILEThe Mutual Fund Industry is one of the fastest growing sectors in Indiawith an average CAGR of 20% over the past five years. In this scenario,Sahara Mutual Funds is all set to revolutionize the India AMC industry,with a mission to give every class of investors a profitable and prudentinvestment option with a perfect balance ofreturns, safety and liquidity.Investment options are:Debt: Sahara Income Fund, Sahara Gilt Fund, Sahara Liquid Fund, AndSahara Short Term Plan.Equity: Sahara Growth Fund, Sahara Tax Gain Fund. Projectsformba.blospot.com 11
  • Projectsformba.blospot.comSahara India Pariwar’s success story began in 1978. Starting on amodest scale with a capital of only Rs. 2000 (USD 43), the company hastraversed a long way to become a frontrunner in Indianentrepreneurship.Today, Sahara India Pariwar is a major entity on the corporate scenehaving an asset base of over Rs. 50,000 crores (USD 10.87 billion) anddiversified business interests that include: Public Deposit Mobilization,Infrastructure & Housing, Media & Entertainment, Aviation, ConsumerProducts, Information Technology, Sundarbans Project, SaharaHospital, Araria Jute Project, Life Insurance, Mutual Funds, HousingFinance, Power Project, Computer Manufacturing, Hotel and CaringScheme. SAHARA’S CORE COMMITMENTS - OUR STRENGTH EmotionEmotion is in Performance of genuine duties towards the loved onesprimarily in their benefit, from their point of view. EMOTION is THEKEY that generates the required energy and enthusiasm for desiredquality performance.DisciplineThe enthusiastic obedience of laws and orders, which are given by therightful authority.DutyThe enthusiastic obedience of laws and orders, which are given by ourCONSCIENCE.No DiscriminationNever should we discriminate in any of our actions, reactions,attitudes, decisions, conclusions, in any of our expressions while caringfor the six health’s of other human beings, namely physical, material,mental, emotional, social and professional health. Projectsformba.blospot.com 12
  • Projectsformba.blospot.comQualityResults from honoring Rules, Regulations, Commitments, Values,Fairness, Performance of Duties by honestly balancing ones own andothers reasonable point of view in the matters of Material & Emotionalaspects.Quality is our essence and we, at Sahara India Pariwar, have alwaysstressed on the Qualitative aspect. Consequently in this run for quality,quantity has always pursued us. We look forward to reaching the zenithand reaffirm our commitment to the process of sound nation-building. “Wechase Quality, Quantity chases us”Give RespectTo definitely make others feel important and respected by givingsincere regard to others feelings, reasonable wishes & thoughts with anopen and receptive mind and warmth.Self-respectTo develop a sense of respect for oneself in others mind, i.e. togenerate genuine & warm feelings for oneself among others on acontinuous basis.TruthMeans total transparency in action, reaction, attitude and all otherexpressions and the conviction to follow the right course.Collective MaterialismMeans to progress and prosper together for collective sharing and Projectsformba.blospot.com 13
  • Projectsformba.blospot.comcaring and not individually or for a select group.ReligionThere is a religion higher than religion itself - it is NATIONALITY. Wemay practice our religions in the confines of our homes, but outside, weshould be Indians and only Indians. Bharatiyata or Nationalism thusbecomes our supreme religion.Absolute HonestyWe firmly believe that our mind inside knows the truth and we shouldbe absolutely honest to our mind inside and accordingly our actions,reactions, directions, decisions and all our expressions should bepresent in all human dealings. PHILOSOPHYSAHARA INDIA PARIWARS PHILOSOPHY - "CollectiveMaterialism"In any human relationship, it becomes imperative to take intoconsideration the materialistic aspect of life - we do so but by giving itsecond priority.The first priority is given to emotional aspect and with perfect blendingof materialism with emotionalism, results in continuous collectivegrowth for collective sharing and caring, that gives an impetus to ourphilosophy - "COLLECTIVE MATERIALISM". FEELINGS THAT DWELS IN AN ORGANISATIONMaan-Samman,AtmasammanEmotions are of two kinds - love and respect. Love is an inferioremotion which has been given by God to fulfill your reasonable,unreasonable needs. But in human society since we have the thinkingpower, respect for others and sense of self-respect are the mostsuperior emotions. Projectsformba.blospot.com 14
  • Projectsformba.blospot.com"Saharasri"SubrataRoySahara The Man and His VisionHe has talked about problems and proposed the solutions on 5 socialissues namely Population, Education, Political (Election) system, Media& Religion, besides interacting on various aspects of life andprofessional life. According to him if these five issues are taken care ofproperly, our beloved country shall be the best in the worldSAHARA INDIA FINANCIAL CORPORATION LIMITEDSahara India Financial Corporation Limited, (SIFCL) is the flagshipcompany of Sahara India Group. Incorporated in 1987, SIFCL is theFirst Residuary Non-Banking Company (RNBC) in India that has beengranted certificate of registration by RBI and is considered to be aleading public deposit mobilization company in the Private sector. TheSahara India Group, has over the years emerged as a multi-service andmulti-product business conglomerate with diverse interests in fieldssuch as Aviation, Life Insurance, Para banking, Housing, Infrastructure& Tourism, Consumer Products, Media & EntertainmentSahara India Financial Corporation Limited is the largest depositmobilization company in the private sector with the highest yearlydeposit level in India. It is the first Residuary Non-Banking Company(RNBC) to be granted a certification of registration by the Reserve Bank Projectsformba.blospot.com 15
  • Projectsformba.blospot.comof India. It has over 61 million esteemed depositors (1 out of every 17Indians) served by 9.1 lakh staff through over 1500 branches “Capital Market Services Division”Capital Market Services Division (CMSD) is a Division of Sahara IndiaFinancial Corporation Ltd. (SIFCL) with an objective to provide variousfee based services to the Investors in the Capital Market.This Division operates through a cluster of Service Centers & collectioncentres. It deals in Depository Services with National SecuritiesDepository Ltd (NSDL) & Central Depository Services (I) Ltd as aDepository Participant (DP) and has also ventured into other relatedactivities like Mutual Fund distribution, Financing against Initial PublicOfferings, Distribution of other Financial Products etc.Our Strong And Strict Fundamentals • Stringent expense control. Cost of fund (including interest cost) within 8% p.a. • No speculative investment. Total investment in listed equity shares (less than 1% of the total assets.) Projectsformba.blospot.com 16
  • Projectsformba.blospot.com • High class quality investment. Restricting the non-performing assets ratio within 0.75% only. • No unsecured loans. Hence no bad debts at all. • Capital adequacy ratio. 24.64% as on 30.09.2004(statutory requirement 12%)Present Activities of CMSDDepository Services. • Mutual Fund Distribution. • Distribution of RBI Bonds, Infrastructure Bonds, Capital Gain Tax Bonds. • IPO Financing (Financing for Subscribing New Initial Public Offerings) etc.Our Services • Extended Business Hours. • Highly Competitive Rates. • Round the Clock Helpdesk service through IVRS facility and availability on 24/7/365 basis. • Convenience of anywhere accounts management through SPEED- e (NSDL) / easiest (CDSL). • Personalized and Efficient Service by NCFM qualified staff Projectsformba.blospot.com 17
  • Projectsformba.blospot.comOur Offering • Multiple financial products at a very reasonable cost and in a very convenient manner. • Depository services • Internet Trading of securities • Distribution of Mutual Fund UnitsDistribution of Other Products • CMSD is also a Distributor for other financial products like • RBI Relief Bonds (Tax Free) • Infrastructure Bonds • Capital Gain Tax Bonds • Initial Public Offerings etc.Future Plans: • Proposed Activities: • Loan against Shares and Mutual Fund Units. • Funding for Margin Trading • Distribution of Insurance Products. • Facilitating Internet Trading of Securities • Retailing of Debt Instruments. • Geographical Expansion based on potentials of respective markets.Initial Product Offering by Capital Market Service Division Projectsformba.blospot.com 18
  • Projectsformba.blospot.comSAHARA INCOME FUNDDepositing your money in a savings account bank or fixed deposit willonly provide you safety, but the opportunity for your money toappreciate is limited. Sahara Income Fund provides safety, highestcredit quality, plus an opportunity to earn steady and regular income.SAHARA LIQUID FUNDSahara Liquid Fund is a good parking place for your idle funds. Itprovides an opportunity to generate returns on your idle funds withminimal risk and high liquidity.SAHARA GILT FUNDWhen you invest in Gilt Fund, your investment carries no Credit risk.You can enjoy steady returns at a relatively low risk over a medium tolong-term horizon.SAHARA SHORT TERM FUNDEvery Corporate and High Net worth investors who have treasurysurpluses for a few days can benefit from Sahara Short Term Plans.SAHARA GROWTH FUND Projectsformba.blospot.com 19
  • Projectsformba.blospot.comMake your Investments grow with the benefit of Equities.SAHARA TAX GAIN FUNDSahara Tax Gain Fund is an Equity Linked Saving Scheme (ELSS) thatnot only helps you save tax under section 88 of the Income Tax Act, 1961but also has the potential of long-term growth through investments inequities. INITIAL METHODS OF INVESTMENTWhat is `deposit’The term `deposit’ has been defined as receipt of any money borrowedby the company but not including any of the following :- • Government Borrowings • Borrowings from any financial institutions; • Borrowings from any Banks; • Borrowings from any company • Security deposit; • Advance from purchasing/selling agent • money received in Trust ; • Subscription against application for shares; • Subscription against bonds, debentures, etc. secured by a mortgage with or without option to convert into shares; • Money brought in by issue of any secured bonds/debenture • Money brought in by promoters; • Money received from the shareholders of a private limited company or a deemed public company.What are the limits for accepting deposits ?A company can borrow deposits upto the extent given below :- • up to 25% of the paid-up capital and free reserves of the company from the public and Projectsformba.blospot.com 20
  • Projectsformba.blospot.com • upto 10% of its paid-up capital and free reserves from its shareholders. • Therefore, maximum deposit a company can accept from public/shareholders is 35% of its paid up capital and free reserves as mentioned above. • If the company is a `Government Company’, then it can accept or renew deposits from public upto 35% of its paid up capital and free reserves. • "Free Reserves" mean the balance in the share premium account, capital and debenture redemption reserves and any other reserves shown in the balance-sheet of the company and created by appropriation out of the profits of the company, but does not include the balance in any reserve created for repayment of any future liability or for depreciation in assets or for bad debts; • revaluation of any assets of the companyPeriod of accepting deposits:-A company can invite/accept deposits for a period not less than 6months and not more than 36 months from the date of acceptance ofsuch deposits or from the date of its renewal.Therefore, a company canaccept/invite deposits for a period between 6-36 months.However, a company may accept deposits upto 10% of its paid up capitaland free reserves which are repayable after three months, from thedate of such deposits or renewal thereof to meet any of its short termrequirements.Rate of interestMaximum rate of interest that a company can offer on fixed deposits is15%.FIXED DEPOSITSFixed deposits remain the most popular instrument for financialsavings in India. They are the middle path investments with adequate Projectsformba.blospot.com 21
  • Projectsformba.blospot.comreturns and sufficient liquidity. There are basically three avenues forparking savings in the form of fixed deposits. The most common arebank deposits. For nationalized banks, the yield is generally low with amaximum interest of 10 to 10.5% per annum for a period of three yearsor more. As opposed to that, NBFCs and company deposits are moreattractive.The idea is to select the right company to minimize the risk. Companydeposits as a saving instrument have declined in popularity over thelast three years. The major reasons being the slowdown in economyresulting in default by some companies. Also, some NBFCs simplyvanished with the depositors money. All that is likely to change for thebetter. Corporate performance is likely to improve and stricter controlby RBI should improve NBFCs record. But one still needs to beselective. Let us help you in making the right decision.Post office is a very safe and secure investment avenue. The money isused in the development of the society as a whole, while it providessteady returns. The biggest advantage of investing in post officeschemes is the tax benefit that they provide. Thus a lot of savings gothrough this channel to dual advantage - tax benefits and steady returnsDeposit accountA deposit account is an account at a banking institution that alowsmoney to be held on behalf of the account holder. Some banks charge afee for this service, while others may pay the client interest on the fundsdeposited.The account holder retains rights to their deposit, although restrictonsplaced on access depend upon the terms and conditions of the accountand the provider.A deposit is a type of asset.Saving depositSavings deposits are accounts maintained by commercial banks,savings and loan associations, credit unions, and mutual savings banksthat pay interest but can not be used directly as money (by, for example,writing a check). These accounts let customers set aside a portion oftheir liquid assets that could be used to make purchases. But to makethose purchases, savings account balances must be transferred to Projectsformba.blospot.com 22
  • Projectsformba.blospot.com"transaction deposits" (or "checkable deposits") or currency. However,this transference is easy enough that savings accounts are often termednear money. Savings accounts, as such constitute a sizeable portion ofthe M2 monetary aggregate.With savings accounts you can make withdrawals, but you do not havethe flexibility of using checks to do so. As with an MMDAs (moneymarket deposit account), the number of withdrawals or transfers youcan make on the account each month is limitedTime depositA time deposit (also known as a term deposit, particularly in Australiaand New Zealand) is a money deposit at a bank that cannot bewithdrawn for a certain "term" or period of time. When the term is overit can be withdrawn or it can be held for another term. Generallyspeaking, the longer the term the better the yield on the money. Acertificate of deposit is a time-deposit product.Note that the M2 money supply includes funds that can be used directlyin payment, such as money market mutual funds and money marketdeposit accounts (MMDAs). MMDAs are considered by the UnitedStates Federal Reserve (the Fed) to be savings accounts and are thusexempt from reserve requirements. These large transaction accountsnot being included in the M1 money supply suggests that the Fed doesnot pay much attention to ordinary transaction deposits, and in July2000, it announced that it was no longer setting target ranges forgrowth rates of the monetary aggregatesTransaction depositTransaction accounts include all deposits against which the accountholder is permitted make withdrawals by negotiable or transferableinstruments, payment orders of withdrawal, or telephone orpreauthorized transfers for the purpose of making payments to thirdpersons or others. However, accounts subject to the rules that permitno more than six preauthorized, automatic, or other transfers permonth (of which no more than three may be by check, draft, debit card,or similar order payable directly to third parties) are savings deposits,not transaction accounts Projectsformba.blospot.com 23
  • Projectsformba.blospot.comCurrent accountA current account is a deposit account in the UK and countries with aUK banking heritage offering various flexible payment methods toallow customers to distribute money directly to others. Most currentaccounts have a cheque book, offer the facility to arrange standingorders, direct debits and payment via a debit card. Current accountsmay also allow borrowing via an overdraft facility.Current accounts providers include banks, building societies and creditunions.Since the internet revolution most retail banking institutions offeraccess to current accounts via online banking.Demand depositA demand account (or demand deposit, demand deposit account) is adeposit account held at a bank or other financial institution, the fundsdeposited in which are payable on demand. The primary purpose ofdemand accounts is to facilitate cashless payments by means of check,bank draft, direct debit, electronic funds transfer, etc.A demand account is commonly known as: • a checking account • a share draft account • a current account • a current account • a cheque account REASON WHY PEOPLE INVEST IN DEPOSITSThere has been an age old concept of people investing in fixed depositsand other methods of deposits .They follow this concept because againand again investing in different fields might fetch them loss at differentstages of life and in order to have a secure future people prefer to investin one deposit for a particular period of time and withdraw themwhenever they need.In today’s era where people are more concerned about their securefuture and due to their busy life they lack knowledge about othermethods if investment. Projectsformba.blospot.com 24
  • Projectsformba.blospot.comREASONS OF INVESTMENTS BASIC INVESTMENT OBJECTIVEThe investment approach will be based on a set of well established butflexible principles that emphasize the concept of sustainable economicearnings and cash return on investment as the means of valuation ofcompanies.Five basic principles serve as the foundation for this investmentapproach. They are as follows: Projectsformba.blospot.com 25
  • Projectsformba.blospot.comFocus on the long termThere is substantive empirical evidence to suggest that equities providethe maximum risk adjusted returns over the long term. In an attempt totake full advantage of this phenomenon, investments would be madewith a long term perspective.Investments confer proportionate ownershipThe approach to valuing a company is similar to making an investmentin a business. Therefore, there is a need to have a comprehensiveunderstanding of how the business operates. The key issues to focus onare growth opportunities, sustainable competitive advantage, industrystructure and margins and quality of the management.Maintain a margin of safetyThe benchmark for determining relative attractiveness ofstocks would be the intrinsic value of the business. The InvestmentManager would endeavor to purchase stocks that represent a discountto this value, in an effort to preserve capital and generate superiorgrowth.Maintain a balanced outlook on the marketThe investment portfolio would be regularly monitored tounderstand the impact of changes in business and economic trend aswell as investor sentiment. While short-term market volatility wouldaffect valuations of the portfolio, this is not expected to influence thedecision to own fundamentally strong companies. HISTORY OF MUTUAL FUNDWhen three Boston securities executives pooled their money togetherin 1924 to create the first mutual fund, they had no idea how popularmutual funds would become.The idea of pooling money together for investing purposes started inEurope in the mid-1800s. The first pooled fund in the U.S. was createdin 1893 for the faculty and staff of Harvard University. On March 21st,1924 the first official mutual fund was born. It was called theMassachusetts Investors Trust. Projectsformba.blospot.com 26
  • Projectsformba.blospot.comAfter one year, the Massachusetts Investors Trust grew from $50,000in assets in 1924 to $392,000 in assets (with around 200 shareholders).In contrast, there are over 10,000 mutual funds in the U.S. todaytotaling around $7 trillion (with approximately 83 million individualinvestors) according to the Investment Company Institute.The stock market crash of 1929 slowed the growth of mutual funds. Inresponse to the stock market crash, Congress passed the Securities Actof 1933 and the Securities Exchange Act of 1934. These laws require thata fund be registered with the SEC and provide prospective investorswith a prospectus. The SEC (U.S. Securities and Exchange Commission)helped create the Investment Company Act of 1940 which provides theguidelines that all funds must comply with today.With renewed confidence in the stock market, mutual funds began toblossom. By the end of the 1960s there were around 270 funds with $48billion in assets.In 1976, John C. Bogle opened the first retail index fund called the FirstIndex Investment Trust. It is now called the Vanguard 500 Index fundand in November of 2000 it became the largest mutual fund ever with$100 billion in assets.One of the largest contributors of mutual fund growth was IndividualRetirement Account (IRA) provisions made in 1981, allowingindividuals (including those already in corporate pension plans) tocontribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401k), IRAs andRoth IRAs.Mutual funds are very popular today, known for ease-of-use, liquidity,and unique diversification capabilities Mutual funds are not an American invention.The first was started in the Netherlands in 1822, and the second inScotland in the 1880s.Originally called investment trusts, the first American one was the NewYork Stock Trust, established in 1889. Most that followed were begun inBoston in the early 1920s, including the State Street Fund,Massachusetts Investors Trust (now called MFS), Fidelity, Scudder,Pioneer, and the Putnum Fund. The Wellington Fund, the first balanced Projectsformba.blospot.com 27
  • Projectsformba.blospot.comfund that included both stocks and bonds, was founded in 1928, andtoday is part of the giant Vanguard Funds Group.In the 1960s there was a phenomenal rise in aggressive growth funds(with very high risk). Sometimes called "go-go" or "hot-shot" funds,they received the majority of the billions of dollars flowing into mutualfunds at that time. In 1968 and 1969, over 100 of these new aggressivegrowth funds were established.A severe bear market began in the autumn of 1969. People becamedisillusioned with stocks and mutual funds. "The markets toast willnever get back to where it was!" was echoed by panicked investors.Unemployment grew; inflation went crazy, and investors pulled billionsback out of the funds. They should have hung in there! Many funds haverisen 9,000% since then.The 1970s saw a new kind of fund innovation: funds with no salescommission called "no load" funds. The largest and most successful noload family of funds is the Vanguard Funds, created by John Bogle in1977.At the end of the 1920s there were only 10 mutual funds. At the end ofthe 1960s there were 244. Today there are more than 6,500 uniquefunds and even thousands more that differ only by their share class(how they are sold, and how their expenses are charged).Before we continue with all you need to know about mutual funds, hereis something that merits your attention.Since 1940, no mutual fundhas gone bankrupt. Yousure cant say that about Projectsformba.blospot.com 28
  • Projectsformba.blospot.combanks and savings andloans! GROWTH OF MUTUAL FUNDS SINCE IT’S INCEPTIONJust 76 years ago the mutual fund industry was born in the UnitedStates. The first open-end mutual fund, Massachusetts Investors Trustwas founded on March 21, 1924 and after one year had 200shareholders and $392,000 in assets. The entire industry, whichincluded a few closed-end funds, represented less than $10 million in1924. At the end of December 1999, the industrys explosive growthincludes more than 8,000 mutual funds with over $6.8 trillion inassets.First 27 Years Experienced Slow GrowthGrowth for the industry during the first 27 years was slow. In 1951, thenumber of funds surpassed 100 and the number of shareholdersexceeded 1 million. It wasnt until 1954 that the stock market finallyrose above its 1929 peak and by the end of the fifties there were 155mutual funds with $15.8 billion in assets. In 1967 funds hit their bestyear, one quarter earning at least 50% with an average return of 67%,but it was done by cheating using borrowed money, risky options, andpumping up returns with privately traded "letter stock." By the end ofthe 60s there were 269 funds with a total of $48.3 billion. Index Funds are Born in 1970sIn 1976, John C. Bogle opened the first retail index fund - First IndexInvestment Trust (now the largest index fund - Vanguard 500 Index)and the next year Peter Lynch took over at Fidelity Magellan, now thelargest stock mutual fund. The two funds are battling for top spot andsome think the Vanguard 500 Index will surpass Fidelity Magellen by Projectsformba.blospot.com 29
  • Projectsformba.blospot.comthe year 2000. By the end of the 70s there were 524 funds with $94.5billion in assets.Major Growth after IRA IntroducedIn 1981, Congress created the Individual Retirement Account and by theend of the 80s there were 2,917 funds and $982 billion in assets. Thenext big change for the industry was in 1991 when Morningstarintroduced its "star ratings." By 1994, 75% of all new investments werein funds with a rating of four or five stars. In 1992, Charles Schwabstarted One Source, the first "fund supermarket."As of December 1998, stock mutual funds account for $2.981 trillion or53.9% of total mutual fund industry assets. Money market fundsaccount for 24.5% ($1.353 trillion), bond funds comprise 15.0% ($830.5billion), and hybrid funds hold 6.6% ($365.1 billion). Mutual funds heldabout 20% of all publicly traded U.S. stocks in 1998. The remaining 80%was held by households, private pension funds, state and localgovernment retirement funds, insurance companies, private trusts,residents of foreign countries, and other investors. These numbers aregathered by the Investment Company Institute. HISTORY OF THE INDIAN MUTUAL FUND INDUSTRYThe mutual fund industry in India started in 1963 with the formation ofthe Unit Trust Of India, at the initiative of the government of India andReserve Bank. The history of mutual funds in India can be broadlydivided into four distinct phases, which are as follows: Projectsformba.blospot.com 30
  • Projectsformba.blospot.comPhase I (Monopoly of UTI) 1964-87:This period was marked by the operational of a single institution, UTI,which prepared ground for the future mutual fund industry.The first and still most popular, product launched by UTI was unit64.Due to the immense popularity of unit64, UTI launched was unit64.Another popular scheme, Unit Linked Insurance Plan (ULIP), waslaunched in 1971. By the end of June 1974 there were 6-lakh unit holderwith UTI.An act of parliament established Unit Trust of India (UTI) in 1963. Itwas set up by the Reserve Bank of India and functioned under theregulatory and administrative control of the Reserve Bank of India. In1978 UTI was delinked from the RBI and the Industrial DevelopmentBank of India (IDBI) took over the regulatory and administrativecontrol in place of RBI. The first scheme launched by UTI was UnitScheme 1964. At the end of 1988 UTI had Rs 6700 crores of assetsmanagement.Phase II (Public Sector Competition) 1987-199This period was marked by the entry of non-UTI public Sector mutualfunds in the market, bringing in competition. With the opening up ofthe economy many public sector financial institutions establishedmutual funds in India. However, the mutual funds industry remainedthe exclusive domain of public sector in this period.1987 marked the entry of non-UTI, public sector mutual funds set up bypublic sector banks and Life Insurance Corporation of India (LIC) andGeneral Insurance corporation of India (GIC). SBI mutual fund was thefirst non-UTI mutual fund established in June 1987 followed by Canbank Mutual fund (Dec 87), Punjab National Bank Mutual Fund (Aug89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jan 90), Bankof Baroda Mutual Fund (Oct 92). LIC established its mutual fund inJune 1989 while GIC had set up its mutual fund in December 1990. At Projectsformba.blospot.com 31
  • Projectsformba.blospot.comthe end of 1993, the mutual fund industry had assets undermanagement of Rs 4700 crores.Phase III (Entry of Private Sector Fund) 1993-2003:A new era in the mutual fund industry began with entry of privatesector funds in 1993, posing a serious competition to the existing publicsector funds. The first private sector mutual fund to launch a schemewas the Madras based Kothari pioneer Mutual fund. It launched theopen-ended prima fund in November 1993.With the entry of private funds in 1993, a new era started in the Indianmutual fund industry, giving the Indian investors a wider choice offund families. Also,1993 was the year in which the first mutual fundRegulations came into being, under which all mutual funds, except UTIwere to be registered and governed. The erstwhile Kothari pioneer(now merged with Franklin templton) was the private sector mutualfund registered in July 1993. The 1993 SEBI (mutual Fund) Regulationswere substituted by a more comprehensive and revised mutual fundregulations in 1996. The industry now functions under the SEBI(Mutual Fund) regulations 1996. The number of mutual fund houseswent on increasing, with many foreign mutual funds setting up funds inIndia and also the industry was witnessed several mergers andacquisitions. As at the end of January 2003, there were 33 mutual fundswith total asset of Rs 1, 21,805 crores.Phase IV (Since February 2003):In February 2003, following the repeal of the Unit Trust of India Act1963 UTI was bifurcated into two separate entities. One is the specifiedundertaking of the Unit Trust of India with assets under managementof Rs 29,835 crores as at the end of January 2003. Projectsformba.blospot.com 32
  • Projectsformba.blospot.comThe second is the UTI mutual fund LTD, sponsored by SBI, PNB, BOBand LIC. It is registered with SEBI and functions under the mutual fundregulations. At the end of October 31,2003, there were 31 funds, whichmanage asset of Rs 126726 crores under 386 scheme.MUTUAL FUND AND ITS CLASSIFICATION:Income FundsThese are also known as debt funds since they invest in debtinstruments issued by the government, private companies’ banks andfinancial institutions. By investing in debt, these funds target low riskand stable income to the investors. While returns in these funds may be Projectsformba.blospot.com 33
  • Projectsformba.blospot.comregular, their scale may fluctuate depending on the prevailing interestrates and the credit quality of the debt securities.Liquid FundsAlso know as Money market funds as they invest in securities of shortterm nature, typically securities of less than one-year maturity likeTreasury Bills issued by the government, Certificate of Deposits issuedby banks and Commercial Paper issued by companies as well as in theinter- bank call money market. These funds are considered to be at thelowest rung in the hierarchy of risks.Equity FundsAs the name suggests these funds invest in stock market securities.They are exposed to the equity price fluctuation risk at the market level,industry level and also the specific company level. These pricemovements are caused by external factors, political and social as well aseconomic factors. Thus the Net Asset values of these funds fluctuatewith all price movements. Equity investments are for a longer timehorizon and a well managed equity fund can get you higher returns butalso carries higher risks.Gilt FundsThese funds invest in government paper called dated securities. As theinvestments are in government paper these funds have little risk ofdefault and hence offer better protection of principal. However, onemust recognize the potential changes in values of debt securities heldby the funds that are caused by changes in the market price of thesesecurities as a result of change in the market price of these debtsecurities.Balanced FundsThese funds, as the name suggests, are a mix of both equity and debtfunds. They invest in both equities and fixed income securities in linewith pre-defined investment objectives. The aim at providing abalanced mix of capital appreciation through investments in equitiescoupled with investments in stable instruments like bonds etc. Projectsformba.blospot.com 34
  • Projectsformba.blospot.com TYPES OF MUTUAL FUNDSA Mutual Fund may float several schemes, which may be classified onthe basis of its structure, its investment objectives and other objectives. Types of SchemesMUTUAL FUND SCHEME BY STRUCTURE:Open- Ended Funds: Projectsformba.blospot.com 35
  • Projectsformba.blospot.comOpen-Ended fund scheme is open for subscription all through year. Aninvestor can buy or sell the units at "NAV" (Net Asset Value) relatedprice at any time.The investments of these schemes will predominantly be in the stockmarkets and endeavor will be to provide investors the opportunity tobenefit from the higher returns which stock markets can provide.However they are also exposed to the volatility and attendant risks ofstock markets and hence should be chosen only by such investors whohave high risk taking capacities and are willing to think long term.Equity Funds include diversified Equity Funds, Sectoral Funds andIndex Funds. Diversified Equity Funds invest in various stocks acrossdifferent sectors while sectoral funds which are specialized EquityFunds restrict their investments only to shares of a particular sectorand hence, are riskier than Diversified Equity Funds. Index Fundsinvest passively only in the stocks of a particular index and theperformance of such funds move with the movements of the indexClose-Ended Funds: Projectsformba.blospot.com 36
  • Projectsformba.blospot.comA Close-Ended fund is open for subscription only during a specifiedperiod, generally at the time of initial public issue that generally rangesfrom 3 to 15 years.. The Close-Ended fund scheme is listed on the somestock exchanges where an investor can buy or sell the units of this typeof scheme.SEBI Regulations stipulate that at least one of the two exit routes isprovided to the investor.Interval Funds:Interval Funds combines both the features of Open-Ended funds andClose-Ended funds. MUTUAL FUND SCHEME BY INVESTMENT OBJECTIVES: Projectsformba.blospot.com 37
  • Projectsformba.blospot.com • Growth Funds:The objective of Growth Fund scheme is to provide capital appreciationover the medium to long term. This type of scheme is an ideal schemefor the investors seeking capital appreciation for a long period. • Income Funds:The Income Fund schemes objective is to provide regular and steadyincome to investors. • Balanced Funds:The objective of Balanced Fund schemes is to provide both growth andregular income to investors. • Money Market Funds Projectsformba.blospot.com 38
  • Projectsformba.blospot.comThe objective of Money market funds is to provide easy liquidity,regular income and preservation of income.Money market funds also come in two varieties, taxable and tax-free.Taxable funds buy the best-yielding short-term corporate, agency, orgovernment issues available, while tax-free funds are limited to buyingprimarily municipal debt. Taxable funds pay slightly higher incomethan tax-free funds, but you must pay tax on any distributions theymake. In either case, the rate a fund pays is roughly the same as bankmoney market accounts or CDs. • Load Funds:A load fund is one that charges a commission for entry or exit. That is,each time you buy or sell units in the fund, a commission is payable.Typically entry and exit loads range from 1% to 2%. It could be worthpaying the load, if the fund has a good performance history. • No Load Funds: A No Load Fund is one that does not charge a commission for the entryor exit. That is, no commission is payable on purchase or sale of units inthe fund. The advantage of a no load fund is that the entire corpus is putto work. Projectsformba.blospot.com 39
  • Projectsformba.blospot.com • OTHER FUNDS: • Tax Saving Schemes:The objective of Tax Saving schemes is to offer tax rebates to theinvestors under specific provisions of the Indian Income Tax Laws.Investment made under some schemes are allowed as deduction u/s 88of the Income Tax Act. • Industry specific Schemes:Industry specific schemes invest only in the industries specified in theoffer document of the schemes. • Sectorial Schemes:The schemes invest particularly in a specified industries or initialpublic offering. • Index schemes:Such schemes link with the performance of BSE sensex or NSE. Projectsformba.blospot.com 40
  • Projectsformba.blospot.comAdvantages of Investment in Mutual FundMutual Funds offer several benefits to an investor that unmatched bythe other investment options. The major benefits are good post-taxreturns and reasonable safety, the other benefits in investing in MutualFunds are • Professional Management:Mutual Funds employ the services of experienced and skilledprofessionals and dedicated investment research team. The whole teamanalyses the performance and balance sheet of companies and selectsthem to achieve the objectives of the scheme. • Potential Return:Mutual Funds have the potential to provide a higher return to aninvestor than any other option over a reasonable period of time. • Diversification:Mutual Funds invest in a number of companies across a wide crosssection of industries and sectors. • Liquidity:The investor can get the money promptly at the net asset value relatedprices from the Mutual Funds open-ended schemes. In close-endedschemes, the units can be sold on a stock exchange at the prevailingmarket price. • Low Cost:Investment in Mutual Funds is a less expensive way in comparison to adirect investment in capital market. • Transparency:Mutual Funds have to disclose their holdings, investment pattern andthe necessary information before all investors under a regulationframework. Projectsformba.blospot.com 41
  • Projectsformba.blospot.com • Flexibility:Investment in Mutual Funds offers a lot of flexibility with features ofschemes such as regular investment plan, regular withdrawal plans anddividend reinvestment plans enabling systematic investment orwithdrawal of funds. • Affordability:Small investors with low investment fund are unable to high-grade orblue chip stocks. An investor through Mutual Funds can be benefitedfrom a portfolio including of high priced stock. • Well regulated:All Mutual Funds are registered with SEBI, and SEBI acts a watchdog,so the Mutual Funds are well regulated Projectsformba.blospot.com 42
  • Projectsformba.blospot.com Disadvantages of Mutual Funds • Fluctuating Returns:Mutual funds are like many other investments without a guaranteedreturn. There is always the possibility that the value of your mutualfund will depreciate. Unlike fixed-income products, such as bonds andTreasury bills, mutual funds experience price fluctuations along withthe stocks that make up the fund. • Diversification:Although diversification is one of the keys to successful investing, manymutual fund investors tend to over diversify. The idea of diversificationis to reduce the risks associated with holding a single security; overdiversification (also known as diworsification) occurs when investorsacquire many funds that are highly related and so dont get the riskreducing benefits of diversification. • Cash, Cash and More Cash:Mutual funds pool money from thousands of investors, so everydayinvestors are putting money into the fund as well as withdrawinginvestments. To maintain liquidity and the capacity to accommodatewithdrawals, funds typically have to keep a large portion of theirportfolio as cash. Having ample cash is great for liquidity, but moneysitting around as cash is not working for you and thus is not veryadvantageous. • Costs: In mutual funds the fees are classified into two categories: shareholderfees and annual fund-operating fees.The shareholder fees, in the forms of loads and redemption fees arepaid directly by shareholders purchasing or selling the funds. Theannual fund operating fees are charged as an annual percentage -usually ranging from 1-3%. These fees are assessed to mutual fundinvestors regardless of the performance of the fund. When the funddoesnt make money these fees only magnify losses. Projectsformba.blospot.com 43
  • Projectsformba.blospot.com • Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income. • Evaluating Funds:Another disadvantage of mutual funds is the difficulty they pose forinvestors interested in researching and evaluating the different funds.Unlike stocks, mutual funds do not offer investors the opportunity tocompare the P/E ratio, sales growth, earnings per share, etc. Projectsformba.blospot.com 44
  • Projectsformba.blospot.comSTRUCTURE OF INDIAN MUTUAL FUND INDUSTRY Projectsformba.blospot.com 45
  • Projectsformba.blospot.comMutual Funds in IndiaProjectsformba.blospot.com 46
  • Projectsformba.blospot.comMutual funds have been a significant source of investment in bothgovernment and corporate securities. It has been for decades themonopoly of the state with UTI being the key player, with investedfunds exceeding Rs.300bn. (US$ 10bn.). The state-owned insurancecompanies also hold a portfolio of stocks. Presently, numerous mutualfunds exist, including private and foreign companies. Banks--- mainlystate-owned too have established Mutual Funds (MFs). Foreignparticipation in mutual funds and asset management companies ispermitted on a case by case basis.UTI, the largest mutual fund in the country was set up by thegovernment in 1964, to encourage small investors in the equity market.UTI has an extensive marketing network of over 35, 000 agents spreadover the country. The UTI scrip’s have performed relatively well in themarket, as compared to the Sensex trend. However, the same cannot besaid of all mutual funds.All MFs are allowed to apply for firm allotment in public issues. SEBIregulates the functioning of mutual funds, and it requires that all MFsshould be established as trusts under the Indian Trusts Act. The actualfund management activity shall be conducted from a separate assetmanagement company (AMC). The minimum net worth of an AMC orits affiliate must be Rs. 50 million to act as a manager in any other fund.MFs can be penalized for defaults including non-registration andfailure to observe rules set by their AMCs. MFs dealing exclusively withmoney market instruments have to be registered with RBI. All otherschemes floated by MFs are required to be registered with SEBI.In 1995, the RBI permitted private sector institutions to set up MoneyMarket Mutual Funds (MMMFs). They can invest in treasury bills, calland notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated governmentsecurities having unexpired maturity upto one year.Before investing in a Mutual Fund an investor must identify his needsand preferences. While selecting a Mutual Funds schemes he shouldconsider the effect of inflation rate, diversification of investment, thetime period of investment and the risk factors. There are various typeof risk factors as: • Market Risk • Credit Risk • Interest Rate Risk Projectsformba.blospot.com 47
  • Projectsformba.blospot.com • Inflation Risk • Political EnvironmentCRISILs composite performance ranking (CPR) measures theperformance for each of the open-ended scheme of Mutual Fund. Thereare four parameters considered to measure the performance of amutual fund such as Risk-adjusted returns of the schemes NAV,Diversification of Portfolio, Liquidity and Asset Size.By December 2004, Indian mutual fund industry reached Rs 1, 50,537crore. It is estimated that by 2010 March-end, the total assets of allscheduled commercial banks should be Rs 40, 90,000 crore.The annual composite rate of growth is expected 13.4% during the restof the decade. In the last 5 years we have seen annual growth rate of 9%.According to the current growth rate, by year 2010, mutual fund assetswill be double. Some facts for the growth of mutual funds in India: • 100% growth in the last 6 years. • Number of foreign AMCs are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. • Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. • We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion. • B and C class cities are growing rapidly. Today most of the mutual funds are concentrating on the A class cities. Soon they will find scope in the growing cities. • Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products. Projectsformba.blospot.com 48
  • Projectsformba.blospot.com • SEBI allowing the Mutual Funds to launch commodity mutual funds. • Emphasis on better corporate governance. • Trying to curb the late trading practices. • Introduction of Financial Planners who can provide need based advice.Tax aspect of Mutual fund • Dividend Made Tax-freeDividend received from a domestic company and income distributed byUTI-I or any MF, to its unit holders has been made tax-free from 1.4.03onwards. However, dividend declared, distributed or paid by suchsources shall be charged a distribution tax of @12.8125% flat. Thisdistribution tax is in addition to the normal income tax payable bythem. • Capital Gain Tax:Capital gains are generated through the sale of stocks, bonds and otherinvestments, which have appreciated in value, from the fund’sportfolio. Net capital gains are taxed at the 15% cap. • LTCG on Equities ExemptLong-term capital gains arising from transfer of shares purchasedthrough a recognized stock exchange, on or after 1.3.03 but before1.3.04 are exempt from income tax. This exemption is restricted to onlythose shares figuring in the BSE-500 index as on 1.3.03. If during thecourse of the year, any of these shares are replaced with another stockin the index, investors who had purchased the share prior to itsreplacement will continue to enjoy the benefit.The benefit is also extended to shares of companies making InitialPublic Offers during the year. • Income received from Mutual Fund: Projectsformba.blospot.com 49
  • Projectsformba.blospot.comThe Internal Revenue Service might depend upon the nature of yourmutual fund investment. Generally, most income generated from amutual fund account, with the exception of tax-exempt money marketor municipal bond funds, is subject to federal taxes as ordinary incomeor capital gains • Wealth Tax:Under sec 21(e), Wealth tax is not treated as an asset. Therefore this isexempted from tax liability. • Gift Tax:Mutual Fund may be given as a gift and no tax is applicable by donor ordonee. • TDS on Redemption:No TDS is required to be deducted from capital gain at the time ofredemption in case of mutual fund. Tax benefits on investment in Mutual Fund:100% Income Tax Exemption on all Mutual Fund dividends. • Capital Gains tax to be lower of –10% on the capital gains without factoring indexation benefits and20% on the capital gains after factoring indexation benefits.Open-end funds with equity exposure of more than 50% are exempt ofdividend tax for a period of 3 years from 1999-2000. Projectsformba.blospot.com 50
  • Projectsformba.blospot.comAnother Investment Avenue featuring in the list of “eligible”instruments is the Equity Linked Saving Scheme or tax saving funds.Simply put, these are mutual fund schemes wherein investment upto Rs10,000 qualify for Section 88 benefits. Investors are given the uniqueopportunity to invest in an equity-linked product and still claim taxbenefits on the same; which is quite a departure from conventional taxsaving instruments. Tax saving funds has a mandatory 3-Yr lock inperiod, which distinguishes them from conventional equity-orientedfunds, which have no constraints on liquidity. Tax saving funds: Smart long-term performers! Tax Saving Funds NAV (Rs) 1-Yr 3-Yr 5-Yr SD SR HDFC LONG TERM 41.52 68.36 46.63 - 6.17% 0.76% ADV. % % 19.55 55.01 12.10 BIRLA EQUITY PLAN 35.50 7.23% 0.62% % % % 47.12 51.95 MAGNUM TAXGAIN 32.45 0.13% 7.96% 0.64% % % 30.89 51.93 15.76 PRU ICICI TAX 41.91 7.93% 0.59% % % % 42.46 51.40 HDFC TAX SAVER 61.15 - 5.72% 0.78% % %(Source: Credence Analytics. NAV data as on Jan 7, 2005. Growth over1-Yr is compounded annualized)(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviationhighlights the element of risk associated with the fund.)TERMS RELATED TO MUTUAL FUND Projectsformba.blospot.com 51
  • Projectsformba.blospot.com • Net Asset Value"Net asset value," or "NAV," of an investment company is thecompany’s total assets minus its total liabilities. For example, if aninvestment company has securities and other assets worth $100 millionand has liabilities of $10 million, the investment company’s NAV will be$90 million. Because an investment company’s assets and liabilitieschange daily, NAV will also change daily. NAV might be $90 million oneday, $100 million the next, and $80 million the day after.Mutual funds and Unit Investment Trusts (UITs) generally mustcalculate their NAV at least once every business day, typically after themajor U.S. exchanges close .A closed-end fund, whose shares generallyare not "redeemable"—that is, not required to be repurchased by thefund—is not subject to this requirement.An investment company calculates the NAV of a single share (or the"per share NAV") by dividing its NAV by the number of shares that areoutstanding. For example, if a mutual fund has an NAV of $100 million,and investors own 10,000,000 of the fund’s shares, the funds per shareNAV will be $10. Because per share NAV is based on NAV, whichchanges daily, and on the number of shares held by investors, whichalso changes daily, per share NAV also will change daily. Most mutualfunds publish their per share NAVs in the daily newspapers.The share price of mutual funds and traditional UITs is based on theirNAV. That is, the price that investors pay to purchase mutual fund andmost UIT shares is the approximate per share NAV, plus any fees thatthe fund imposes at purchase (such as sales loads or purchase fees).The price that investors receive on redemptions is the approximate pershare NAV at redemption, minus any fees that the fund deducts at thattime (such as deferred sales loads or redemption fees).Example: Projectsformba.blospot.com 52
  • Projectsformba.blospot.comYou invest $1,000 in a mutual fund with an NAV of $10.00. You willtherefore own 100 shares of the fund. If the NAV drops to $9.00(because the value of the funds portfolio has dropped), you will stillown 100 shares, but your investment is now worth $900. If the NAVgoes up to $11.00, your investment is worth $1,100. (This exampleassumes no sales charge.) • Sale PriceIs the price you pay when you invest in a scheme.Also called Offer Price.It may include a sales load. • Repurchase PriceIs the price at which a close-ended scheme repurchases its units and itmay include a back-end load. This is also called Bid Price. • Redemption PriceIs the price at which open-ended schemes repurchase their units andclose-ended schemes redeem their units on maturity. Such prices areNAV related. • Sales LoadIs 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. • Repurchase or ‘Back-end’ LoadIs a charge collected by a scheme when it buys back the units from theunit holders. Projectsformba.blospot.com 53
  • Projectsformba.blospot.comASSET MANAGEMENT COMPANYIn an endeavor to enlarge the range of services available to ourcustomers, PNB has been distributing the products of Principal PNBAsset Management Company Pvt. Ltd. from its designated branches.In recent times Mutual funds have gained rapid popularity as a goodinvestment vehicle. The variety of schemes and income options offeredby Mutual Funds can suit the financial preferences of all classes ofinvestors, be it Retail, Corporate or Institutional.The following benefits, intrinsic to investments in Mutual Funds haveinspired greater confidence amongst the investors: • Transparency • Efficient Performance • Liquidity • Convenience • Tax benefitsRange of schemes:Mutual Funds offer schemes keeping in view the risk profile and risk-return preferences of investors. For an aggressive investor withappetite for risk, Equity oriented schemes are available which have ahigher potential for capital appreciation. For a conservative investorwith expectations of stable returns and low risk, Income Schemes areavailable. To suit various type of requirements of the investors,following is the range of schemes offered by PRINCIPAL PNB AMC:Principal Growth Scheme: Open-ended equity fund with an investmentportfolio of stocks diversified across different sectors of the economy. • Principal balanced Fund:Open ended fund with an equity (diversified) component of 51% to 70%and Debt component (including Money Market) 30% to 49%.Principal Income Fund: Open-ended fund with up to 100% investmentin Debt instruments (including Money Market instruments andsecuritized debt) • Principal Income Fund – Projectsformba.blospot.com 54
  • Projectsformba.blospot.comShort Term Debt: Open-ended short term maturity debt fund aimed atproviding stable returns with lower to negligible risks. Fund invests indebt securities, predominantly 100% money market instruments andsecuritized debt. • Principal Cash management Fund: Open-ended fund that invests 100% of its corpus in Money Marketinstruments and seeks to provide an excellent avenue to park very shortterm cash surpluses and earn returns linked to the call money marketrates. • Principal Index Fund:Open-ended fund that tracks S&P CNX Nifty (NSE) closely. The aim ofthe fund is to provide its investors returns commensurate with theNifty. • Principal Government Securities Fund:Open-ended dedicated Gilt scheme investing in Government Securities.Innovative options to facilitate greater control over investments:Mutual Funds have options such as Systematic Investment Plans,Systematic withdrawal plan, Trigger Option, Automatic Rebalancing,Dividend Re-investment, etc that enable you to get the most out of yourinvestment in Mutual Funds. • Distribution ReachThe distribution services of Mutual Fund products are available atselected branches of all the zones except Bihar, Chhatisgarh andJharkhand. • Risk ProfileMutual Fund investments are subject to market risks. Please read theoffer document of the scheme carefully for details on risk factors beforeinvestment. Punjab National Bank does not guarantee any assuredreturns for your investments through Mutual Fund. Projectsformba.blospot.com 55
  • Projectsformba.blospot.com How to invest in Mutual Fund• Step One - Identify your Investment needs Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements. • Step Two - Choose the right Mutual FundThe important thing is to choose the right mutual fund scheme whichsuits your requirements. The offer document of the scheme tells you itsobjectives and provides supplementary details like the track record ofother schemes managed by the same Fund Manager. Some factors toevaluate before choosing a particular Mutual Fund are the track recordof the performance of the fund over the last few years in relation to theappropriate yardstick and similar funds in the same category. Otherfactors could be the portfolio allocation, the dividend yield and thedegree of transparency as reflected in the frequency and quality of theircommunications. • Step Three - Select the ideal mix of SchemesInvesting in just one Mutual Fund scheme may not meet all yourinvestment needs. You may consider investing in a combination ofschemes to achieve your specific goals. • Step Four - Invest regularlyThe best approach is to invest a fixed amount at specific intervals, sayevery month. By investing a fixed sum each month, you buy fewer unitswhen the price is higher and more units when the price is low, thusbringing down your average cost per unit. This is called rupee costaveraging and is a disciplined investment strategy followed by investorsall over the world. You can also avail the systematic investment planfacility offered by many open end funds. Projectsformba.blospot.com 56
  • Projectsformba.blospot.com • Step Five- Start earlyIt is desirable to start investing early and stick to a regular investmentplan. If you start now, you will make more than if you wait and investlater. The power of compounding lets you earn income on income andyour money multiplies at a compounded rate of return. • Step Six - The final stepAll you need to do now is to Click here for online application forms ofvarious mutual fund schemes and start investing. You may reap therewards in the years to come. Mutual Funds are suitable for every kindof investor - whether starting a career or retiring, conservative or risktaking, growth oriented or income seeking Projectsformba.blospot.com 57
  • Projectsformba.blospot.comTHINGS KEPT IN MIND BEFORE INVESTINGProspectusBy law, you should receive a prospectus from the fund company beforeyou invest in it. Many investors ignore the prospectus, but this is a mustread. The mutual funds objectives are displayed in the prospectus. Ittells you the goals of the fund and how it intends to achieve them. Youwill also find information about the funds past performance and fees. Mutual Fund Families Mutual Fund Glossary Mutual Fund FeesThe fees are displayed in the prospectus as well as on many mutualfund research sites. Try to buy funds with low expense ratios andcertainly avoid 12b-fees. I have yet to hear a valid argument on why youshould ever buy a loaded fund. A loaded fund is a fund that carriesfront-end loads, back-end loads or deferred loads. These loads arebasically sales charges. There are plenty of no-load funds to meet yourobjectives. GROWTH IN MUTUAL FUNDS SECTOR“Mutual funds are shuddering at the prospect of an economic recovery.But they have enough time to consolidate their client base.”The Smart Investor TeamNormally a recovery means good news for all, consumers,manufacturers and service providers. But hold on. Mutual funds arentvery enthusiastic, though. Why? Because, the biggest investors in thedomestic mutual fund industry today are large corporates and banks.These investors have put in more than 50 per cent of total assets of theindustry. And, a recovery means that corporates may pull out theirmoney to invest in their core activities. Similarly, a revival in creditdemand on the back of a recovery means that banks may need to pullout their investments from mutual funds to meet the demand. Projectsformba.blospot.com 58
  • Projectsformba.blospot.comThats perhaps why mutual funds are pulling such long faces at theprospect of a recovery. What if the economy recovers and corporates goon a spending spree? Capacity expansions, merger and acquisitionactivity and better credit demand would require corporates and banksto encash their existing investments to plough back in their corebusiness.Obviously, there is a strong possibility of large scale redemptions.While fund companies see this issue as a matter of concern, they areoptimistic about guarding their current assets. Says Ved PrakashChaturvedi, chief executive officer,Tata TDW Mutual Fund, "Despite an economic recovery, the fundindustry should be able to retain and in fact, grow its assets."Is a economic recovery underway? The outlook on the economy ispretty much positive and economists are predicting a wide-rangingrecovery led by an increase in domestic consumer demand.According to the latest data released by the Central StatisticalOrganization (CSO), the Indian economy grew 4.3 per cent in 2002-03.With the manufacturing and services sectors growing at 6.0 per centand 7.1 per cent respectively, the poor performance of the agriculturesector dragged down the overall growth. Growth in the agriculturalsector declined 3.2 per cent last fiscal. The growth in manufacturingindustry was led by buoyant exports and a boost to constructionactivity.This year, again, the manufacturing sector is expected to grow at afaster clip. The overall manufacturing outsourcing story should meanmore business for Indian manufacturing companies too.Construction is again going to be a key driver. So sectors like steel andcement have already seen a quantum jump in demand and many loss-making companies such as Ispat, Essar, and the Jindal group haveturned profitable. Similarly, many other sectors such as consumerdurables and textiles are seeing demand-led growth. Many of thesecorporate houses are thus focusing on the longer-term targets.Some sectors like steel are already talking of capacity expansion andgreen field projects. Others like cement have been seeing consolidation.However, as Sanjeev Bafna, senior vice-president Projectsformba.blospot.com 59
  • Projectsformba.blospot.comCorporate finance, Grasim Industries says "It will take 1-2 years for theIndian industry to start committing funds into expansions."But whenever it happens, will corporates queue up for redemptions?And secondly, will banks and financial institutions, which have investedtheir surplus funds in mutual funds on the back of poor credit off takein the last couple of years, divert their money into lending?The latter, of course, is a definite possibility. Last year, lendingbehemoth IDBI was among the biggest investors in mutual funds.Others such as ICICI bank and HDFC also figured in the list of biggestinvestors.While Reliance Industries was one of the largest investors in mutualfunds, mutual fund sources say that some of the other big investors arefrom the banking industry. For instance, both IDBI and SIDBI are saidto have a considerable exposure in rolling over surplus funds in mutualfunds. Other big players in the sector include the Finolex Group, ICICIBank, Bank of India, Central bank and LIC Housing Finance.Clearly, a lot depends on the outlook for the economy. Any revival willresult in an increase in credit off take and thus, funds will have to beredirected from the market to industry. But the probability of thathappening in the near-term is bleak: there is a huge amount of liquidityin the banking sector, and further rate cuts will only add to it.But corporate money pulling out may not be that big a threat. Here iswhy. Companies typically park their surplus cash in treasuryinstruments (liquid fund schemes). And, they deploy money consideredsurplus in a slightly longer horizon into medium term funds. Industryexperts feel that the economic recovery will have no impact on the flowsinto liquid funds.As a matter of fact, improved cash flow for corporates will only increasethe popularity of liquid funds. Even more, they say that todayfinancially healthy corporates will find it less prudent to pull out moneyfrom investments like mutual funds to fund expansions becauseborrowed funds are so cheap. Projectsformba.blospot.com 60
  • Projectsformba.blospot.comAlso, capital expenditure is never lumped together but is spread over aperiod of time and prudence requires a judicious mix of debt and equitydepending on the project size, horizon of returns, gestation period etc.Hence there will not be any sudden withdrawal of funds from themarket. Such expenditure is planned in advance and as result, acompany cannot take the risk of a sudden withdrawal of its investment.Opportunity cost of moneyTo get a feel of this, look at the opportunity cost of money. Currently,companies have witnessed around a 500-600 basis points reduction ininterest costs on long-term debt from about 16 per cent-plus in 1998-99to about 10 per cent now, and even lesser for top rated corporates,which can raise money at around 5.5-6.0 per cent per annum. As aresult, it is much more attractive to fund investments by taking onadditional debt while continuing to earning a higher return fromdeploying internal cash into market instruments such as mutual funds.Arbitrage between debt vs. fundsBut the main reason that the companies prefer raising debt is two-fold.Firstly, debt is available at historically low costs and secondly, taxconsiderations favor debt. These include a tax benefit on the interestcosts, a dividend distribution tax on dividend income and capital gainstax on long-term capital gains. As a result, while effective cost of debt isless than 4 per cent, the effective tax-adjusted return on mutual fundinvestment is around 5-6 per cent.Grasims Bafna says "the biggest factor that will determine an outflowof funds is the any change in the tax status of dividends and capitalgains tax on long-term capital gains". Currently, dividends from mutualfunds are tax-free in the hands of the investors except for a dividenddistribution tax of 12.81 per cent. Long-term capital gains are taxed at10.25 per cent with indexation benefits, and at 20.5 per cent withoutindexation benefits.The banking sector, with the considerable amount of liquidity in thesystem, has also been a significant investor in mutual funds.For instance, as on March 31, 2003, HDFC had investments of aroundRs 1500 crore in liquid funds. According to MA Ravi Kumar, Regional Projectsformba.blospot.com 61
  • Projectsformba.blospot.comHead - Global Markets, Stanchart Grindlays "The corporate sectoraccounts for a reasonable chunk of the investments in mutual funds.While there may be some withdrawal of funds, an increase in economicactivity will also increase the surplus funds. Therefore, over a period oftime, the cash surpluses will find their way back into the market"NEW FUND OFFERIn the last one-year we have seen surge in the number of Equity IPOs &Mutual Fund NFOs launched. This is because there is a significant jumpin profits of small & medium sized companies & so many loss-makingcompanies have been restructured and now making profits. Thesecompanies are looking for expansion & to support their future plansthese companies are looking at IPO option. This has created goodopportunity to invest in the new companies, which are growing at fastrate. New Mutual Fund schemes launched also got the more options toinvest collected money in various old as well as new companies. Thisyear so many Mutual Fund NFOs have collected money in excess ofRs1000Cr & some of them had even crossed Rs2000Cr mark. Some ofthe existing schemes with highest AUMs are looking small if we look atthese collections by MF NFOs.Collection of Mutual Fund NFOs launched in 2005Scheme NFO Collection (Rs Cr)SBI Magnum Multi Cap Fund 2102Franklin India Flexi Cap Fund 1950Reliance Equity Opportunities Fund 1761Fidelity Equity Fund 1495Prudential ICICI Infrastructure Fund 1418HDFC Premier Multi - Cap Fund 1328Standard Chartered Classic Equity Fund 1043Floating a NFO at the right time when markets are in correction phase& investing the collected money on correction is proved as verysuccessful strategy in the last one year. This is evident as newlylaunched Mutual Fund NFOs have outperformed various indices & ableto generate good returns. The below table indicates good performance Projectsformba.blospot.com 62
  • Projectsformba.blospot.comgiven by MF NFOs. Therefore It’s a good idea to invest in NFO’s whichcould create wealth for investors like you. Current Scenario of Mutual FundIndia is at the first stage of a revolution that has already peaked in theU.S. the U.S. boasts if an asset base that are much higher than itsdeposits. In India, mutual fund assets are not even 10% of the bankdeposits, but this trend is beginning to change. Recent figures indicatethat in the first quarter of the current fiscal year mutual fund assetwent up by 115% whereas bank deposit rose up only 17%. This is forcinga large number of banks to adopt the concept of narrow bankingwherein the deposits are kept in Gilts and some other assets. Thisimproves liquidity and reduces risk. The basic fact lies that bankscannot be ignored and they will not completely. Their role closes downas intermediaries cannot be ignored. It is just mutual Funds are goingto change the way banks do business in the future. COMPARISONS OF MUTUAL FUND WITH OTHER DEPOSITS BANKS V/S MUTUAL FUNDSBanks v/s Mutual Funds BANKS MUTUAL FUNDSReturns Low BetterAdministrative High Lowexp.Risk Low ModerateInvestment Less MoreoptionsNetwork High Penetration Low put improvingLiquidity At a cost BetterQuality of Not Transparent Transparentassets Projectsformba.blospot.com 63
  • Projectsformba.blospot.comInterest Min. bal. between 10th & 30th Everydaycalculation of every monthGuarantee Max. Rs. 1Lakh on deposit NoneSHARES V/S MUTUAL FUNDSSHARES MUTUAL FUNDSKnow-how is needed Superficial know. Is sufficientHigh cost involved Low CostTime needed one can sleep over Professional Management. Insurance Vs Mutual FundsBoth these instruments are designed to serve different purposes andare not comparable. A unit-linked plan from an insurance company isan insurance policy designed to pay a lump sum on maturity or ondeath if earlier. Premium paid under these plans is eligible for taxdeduction under Section 88 of the Income Tax Act. On the other hand,mutual funds are investment avenues to participate in the growth offinancial markets and do not provide any tax deduction (except ELSSand pension funds).For a unit-linked insurance plan, providing life cover is the mostimportant function; returns are just an added benefit, which getsmagnified, given the tax rebates. Though unit-linked plans offertransparency in returns in terms of net asset value and flexibility ininvestment options in debt, equity or mixes of both, these advantagesremain secondary, whereas for a mutual fund, the main objective is toprovide returns.Moreover, unit-linked plans are not as liquid as mutual funds. There isa lock-in of three years. Even if one redeems after three years, youwould be at a loss because of higher initial administrative charges. Forexample, the upfront charges for the first two premium amounts are ashigh as 20-27 per cent. Then there is an annual management fee of0.8-1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is adeduction for risk cover. This goes towards contribution to the sum Projectsformba.blospot.com 64
  • Projectsformba.blospot.com assured or the life insurance cover, which is based on mortality rates as calculated by actuaries. Though mutual funds too have entry and exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costs are lower than unit-linked plans. COMPARISON AMONG DIFFERENT INVESTMENT AVENUESINVESTMENT FD Real Busine Asse MF Share RBI PPF NSC PostAVENUES Estate ss t s Bonds Offi ceRETURNS * 5.25% V V DEP V V 8%9.50 8% 8% %POST TAX 3.63% V V - V V 5.60% 6-6.5 5.60% 5.60YIELD % %INFLATION 6% - - - - - - - - -RRR -2.50 V V - V V -0.40 0.65 -0.40 -0.4 % % % % 0%Pos RRR - Pos Pos - Pos Pos - - - -LIQUIDIT - LOW LOW - HIG HIGH LOW LOW LOW LOY H W Projectsformba.blospot.com 65
  • Projectsformba.blospot.com PUBLIC PROVIDENT FUND Scheme: Public Provident Fund 15 years and then optional extension in blocks ofTenure: 5 yearsIssue date: Perpetually OpenClosure date: At the end of the 15th yearInterest: 9.5%Interest Payment: Yearly (Computed on monthly balance)Effective interest rate: 9.9%Minimum investment: Rs.100Maximum Investment: Rs.60000 per financial yearTax benefits: Sec.88 and Sec.10 Available. Loans can be obtained upto 25% of the balance at the end of the 2nd preceding financial year in the 3rd year of opening at an interest rate 1% above the prevalent PPF rate. Thus theLoan Facility: repayment rate is now 12%. After the repayment of the first loan is affected, a second loan can be taken. This loan facility ceases after the end of the 6th financial year as after that the withdrawal facility starts. Available. From the 7th year and every year thereafter, the account holder is allowed to withdraw aWithdrawal: maximum of 50% of the balance that is to his/her credit at the end of the 4th or the 1st previous financial year, whichever is lower. Projectsformba.blospot.com 66
  • Projectsformba.blospot.com 1. Benefits are two fold, 20% of the amount paid each year in the account is available as a taxRemarks: rebate and interest earned is tax free. 2. The account can be opened even at any of the select few nationalized banks also. Projectsformba.blospot.com 67
  • Projectsformba.blospot.com NATIONAL SAVING CERTIFICATE Scheme: National Savings CertificateTenure: 6 yearsIssue date: Perpetually OpenClosure date: End of tenureInterest: 9.5%Interest Payment: Half-YearlyEffective interest rate: 9.7%Minimum investment: Rs.100Maximum Investment: No LimitTax benefits: Sec. 88 and Sec.80L Not available. However can be pledgedLoan Facility: in a bankWithdrawal: Not availableRemarks: None Projectsformba.blospot.com 68
  • Projectsformba.blospot.com KISAN VIKAS PATRA Scheme: Kisan Vikas PatraTenure: 6.5 years (en cashable after 2.5 years)Issue date: Perpetually OpenClosure date: End of tenureInterest: 9.5%Interest Payment: Cumulative compoundingEffective interest rate: 9.5%Minimum investment: Rs.100Maximum Investment: No LimitTax benefits: Nil Not Available. However can beLoan Facility: pledged in a bank.Withdrawal: Not Available Projectsformba.blospot.com 69
  • Projectsformba.blospot.com POST OFFICE SCHEME Scheme: Monthly Income SchemeTenure: 6 yearsIssue date: Perpetually OpenClosure date: Anytime after 3rd yearInterest: 11%Interest Payment: MonthlyEffective interest rate: 11.57%Minimum investment: Rs.6000 Rs.300000 - Individual nameMaximum Investment: Rs.600000 - Joint NameTax benefits: Sec.80L After completion of 1st year, but 5% ofLoan Facility: the amount deposited is deducted. After 3rd year full deposit amount canWithdrawal: be withdrawn without any penalties. At the end of the 6th year, the amountRemarks: his repaid with 10% bonus. Projectsformba.blospot.com 70
  • Projectsformba.blospot.com Current Mutual Fund Schemes:One can select specific Investment Avenue from among the productsoffered by the following fund houses: Alliance Capital Mutual Fund Benchmark Mutual Fund Birla Sun Life Mutual Fund BOB Mutual Fund Canbank Mutual Fund Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund GIC Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ING Vysya Mutual Fund J M Mutual Fund Kotak Mahindra Mutual Fund LIC Mutual Fund Morgan Stanley Mutual Fund PRINCIPAL Mutual Fund Prudential ICICI Mutual Fund Reliance Mutual Fund Sahara Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Templeton Mutual Fund UTI Mutual Fund Projectsformba.blospot.com 71
  • Projectsformba.blospot.com MARKET TRENDSAlone UTI with just one scheme in 1964 now competes with as many as400 odd products and 34 players in the market. Now with increasingcompetition and losing market share, UTI no longer remains aformidable force to reckon with. Last six years have been the most turbulent as well as exiting ones forthe industry. New players have come in, while others have decided toclose shop by either selling off or merging with others. Productinnovation is now passed with the game shifting to performancedelivery in fund management as well as service. Those directlyassociated with the fund management industry like distributors,registrars and transfer agents, and even the regulator have becomemore mature and responsible.The industry is also having a profound impact on financial market. UTIhas once been a dominant player on the bourses as well as the debtmarket, but now, new generations of private funds, has gainedsubstantial mass, and are flexing their muscles. Fund managers bytheir selection criteria for stocks have forced corporate governance onthe industry. By rewarding honest and transparent management withhigher valuations, a system of risk reward has been created where thecorporate sector is more transparent than before.Funds have shifted their focus to the recession free sector likepharmaceutical, FMCG and technology sector, funds performances areimproving. Funds collection, which averaged at less than Rs 100 bn perannum over five-year period spanning 1993-1998 doubled to Rs 210 bnin 1998-1999. In the financial year ending march2000 was mobilizationwas above Rs 300 bn. Total collections for the financial year march2000 was around Rs 450 bn.What is particularly noteworthy is that bulk of the mobilization hasbeen by the private sector mutual funds rather than public sectormutual funds. Indeed private MFs saw a net inflow of Rs 7819.43 croresduring the first nine months of the year as against a net inflow of Rs604.40 crores in case of public sector funds.Mutual funds are now also competing with commercial banks in racefor retail investor’s savings and corporate float money. The power shifttowards mutual funds has become obvious. The coming few years willshow that the traditional saving avenues are losing out in the currentscenario. Many investors are realizing that investments in saving Projectsformba.blospot.com 72
  • Projectsformba.blospot.comaccount are good as locking up their deposits in a closet. The fundmobilization trends by mutual funds in the current year indicate thatmoney is going to mutual funds in a big way. RESEARCH OBJECTIVEThe present study has been undertaken with the object of examining,analyzing and inferring the performance of the mutual funds, whichaddresses the following issues: • To understand what type of mutual fund is most preferred by the existing customer because performance of these funds is the criteria for customer selection. • Which mutual fund is the best in its category? • To understand the best way to attract customer investing in mutual fund by understanding the factors responsible for making a mutual fund successful. • To find out the reasons behind not investing in mutual fund and to find out the most important attributes so as to keep the existing customer & to attract new customers. • To understand which factors govern their choice of investment? RESEARCH DESIGNAs the focus is on the probable reasons responsible for the low dealersales therefore the research design used is Exploratory Research.METHODOLOGYThe data was collected through both primary & secondary sources. Primary data was collected from the market by circulatingquestionnaires to the respondents.The secondary data was collected from the Internet site of: Projectsformba.blospot.com 73
  • Projectsformba.blospot.comwww.amfiindia.com.,www.valueresearch.com,www.capitalmarket.com, BSEINDIA.COM.My sample size is 100 in number and we are dealing with theGovernment Offices and recognized private Offices. Importantsecondary data were available to us from the confidential office recordsof the department and various magazines and newspaper published bythe concerned authorities. Projectsformba.blospot.com 74
  • Projectsformba.blospot.comProjectsformba.blospot.com 75
  • Projectsformba.blospot.com ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS PERFORMANCE COMPARISON OF FOLOWING MUTUAL FUNDS HAS BEEN DONE: Reliance Growth-G HDFC Growth Fund DBS Chola Growth Escorts Growth ICICI Prudential Growth LICMF Growth Principal Growth Sahara Growth Tata Growth Templeton India Growth. INDIVIDUAL PERFORMANCE OF EACH FUND 1) RELIANCE GROWTH FUND (GROWTH) Current Stats & profile Latest NAV 296.94 (19/06/07) 52-Week High 298.36 (05/06/07) 52-Week Low 183.75 (24/07/06) Fund Category Equity: Diversified Type Open End Launch Date October 1995 Risk Grade Average Return Grade High Net Assets (Cr) 3,775.92 (31/05/07) Benchmark BSE 100 Trailing Returns As on 19 Jun 2007 Fund Category Year to Date 11.32 6.18 1-Month 2.84 1.72 3-Month 18.15 16.59 1-Year 55.94 43.68 3-Year 63.43 46.91 Projectsformba.blospot.com 76
  • Projectsformba.blospot.com 5-Year 58.38 41.95 Return Since Launch 33.60 -- Returns upto 1 year are absolute and over 1 year are annualised. RELATIVE PERFORMANCE (fund vs. category) 2) HDFC GROWTH FUND(GROWTH) Current Stats & profileLatest NAV 53.27 (19/06/07)52-Week High 53.305 (01/06/07)52-Week Low 33.65 (20/06/06)Fund Category Equity: DiversifiedType Open EndLaunch Date August 2000Risk Grade Below AverageReturn Grade AverageNet Assets (Cr) 447.79 (31/05/07)Benchmark Sensex Trailing ReturnsAs on 19 Jun 2007 Fund CategoryYear to Date 10.03 6.181-Month 5.09 1.723-Month 22.59 16.591-Year 56.62 43.683-Year 49.50 46.915-Year 44.13 41.95Return Since Launch 27.61 --Returns upto 1 year are absolute and over 1 year are annualised. Projectsformba.blospot.com 77
  • Projectsformba.blospot.com RELATIVE PERFORMANCE (fund vs. category) 3) DBS CHOLA GROWTH FUND Current Stats & profileLatest NAV 32.82 (19/06/07)52-Week High 33.48 (07/02/07)52-Week Low 22.3 (19/07/06)Fund Category Equity: DiversifiedType Open EndLaunch Date September 2001Risk Grade Below AverageReturn Grade Below AverageNet Assets (Cr) 32.19 (31/05/07)Benchmark S&P CNX Nifty Trailing ReturnsAs on 19 Jun 2007 Fund CategoryYear to Date 1.77 6.181-Month 1.11 1.723-Month 15.93 16.591-Year 41.89 43.683-Year 43.27 46.91 Projectsformba.blospot.com 78
  • Projectsformba.blospot.com5-Year 40.54 41.95Return Since Launch 38.45 --Returns upto 1 year are absolute and over 1 year are annualised. RELATIVE PERFORMANCE (fund vs. category) 4) ESCORTS GROWTH FUND Current Stats & profile Latest NAV 58.4193 (19/06/07) 52-Week High 59.4682 (05/06/07) 52-Week Low 42.5427 (19/07/06) Fund Category Equity: Diversified Type Open End Launch Date March 2001 Risk Grade High Return Grade Average Net Assets (Cr) 4.26 (31/05/07) Benchmark S&P CNX Nifty Trailing ReturnsAs on 19 Jun 2007 Fund CategoryYear to Date 7.44 6.181-Month 0.93 1.723-Month 18.87 16.591-Year 33.93 43.68 Projectsformba.blospot.com 79
  • Projectsformba.blospot.com3-Year 47.03 46.915-Year 38.34 41.95Return Since Launch 32.62 --Returns upto 1 year are absolute and over 1 year are annualised. RELATIVE PERFORMANCE (fund vs. category) 5) ICICI PRUDENTIAL GROWTH FUND Current Stats & profileLatest NAV 97.71 (19/06/07)52-Week High 99.85 (01/06/07)52-Week Low 68.89 (20/06/06)Fund Category Equity: DiversifiedType Open EndLaunch Date June 1998Risk Grade AverageReturn Grade AverageNet Assets (Cr) 470.64 (31/05/07)Benchmark S&P CNX Nifty Trailing ReturnsAs on 19 Jun 2007 Fund CategoryYear to Date 4.66 6.181-Month 0.17 1.723-Month 13.95 16.59 Projectsformba.blospot.com 80
  • Projectsformba.blospot.com1-Year 39.57 43.683-Year 48.21 46.915-Year 38.55 41.95Return Since Launch 28.80 --Returns upto 1 year are absolute and over 1 year are annualised. RELATIVE PERFORMANCE (fund vs. category) 6) LICMF GROWTH Current Stats & profileLatest NAV 10.7098 (19/06/07)52-Week High 11.3947 (07/02/07)52-Week Low 8.254 (20/06/06)Fund Category Equity: DiversifiedType Open EndLaunch Date August 1994Risk Grade Above AverageReturn Grade LowNet Assets (Cr) 99.62 (31/05/07)Benchmark Sensex Trailing ReturnsAs on 19 Jun 2007 Fund CategoryYear to Date -3.12 6.181-Month -0.15 1.723-Month 11.90 16.591-Year 27.86 43.68 Projectsformba.blospot.com 81
  • Projectsformba.blospot.com3-Year 31.66 46.915-Year 36.19 41.95Return Since Launch 0.53 --Returns upto 1 year are absolute and over 1 year are annualised.RECOMMENDATIONS & CONCLUSIONSTapping the up coming market - Semi Urban Market as there is a lot ofopportunity. Most of the Mutual Funds are operating in the metros andbig cities as per their present branch office locations. If they have toincrease their market size they have to open more distribution centersat the various urban and semi-urban markets.To create the awareness about the different products of Mutual Fundand not about the generic product. Various respondents were notaware of the mutual fund products and the type of mutual fundschemes and the risk associated with mutual fund products.To provide some kind of curriculum at the school/college level to createawareness regarding Mutual Fund.The shift of preference may change the market leadership in terms ofAUM in years to come. Therefore, the change of strategy and tactics isrequired to maintain their market position, those who are holdingtoday and those who want to hold in future. LACK OF PROPER GUIDANCE MAKE MUTUAL FUND FALLFrom the days of the Unit Trust of India till now when private sectorfunds have assumed a dominant position, what do you see as theindustrys greatest achievements? And what are the challenges? Theachievements are manifold. The performance record of both equity anddebt funds have been excellent. Plus, there is a robust risk-managementsystem in place and the atmosphere is very vibrant. We have also seenimprovements on the service side. The investor now has the liberty toswitch schemes and redemptions are credited to bank accounts in lessthan 24 hours. There are many other facilities available like monthlyfact-sheets, quarterly holding-statements, online trading, etc. We havedone many things, but much more needs to be done. Projectsformba.blospot.com 82
  • Projectsformba.blospot.com  The greatest challenge, of course, is to get more retail participation in funds. We have made tremendous efforts in this direction. About 250 mutual fund outlets, including branches, franchisees and collection centers, were opened across the country in the last two years. Today, in metros and non-metros, there are more than 1,000 outlets to provide services to investors.  Mutual Funds are still not the most preferred investment vehicle in the country. How do you think this could change? In our country, people want to buy only sacred assets. Unless this mindset changes, it will be difficult to get investors interested in mutual funds. Government securities and post-office investments offer 8 per cent assured returns, while banks offer 6 per cent. So, competition is very high. Only sustained efforts by a trained and qualified distributor class can bring success. Again this is wrong, when it is done regularly. We are discussingvarious ways to tackle the same and will take it up with Sebi. But thereis no clear solution as of now.Why dont you say there should be no additional incentives for newfunds?You must understand that this is also a business. So, we cannot micro-manage everything. There is a cap on expenses that funds can charge.Within the existing cap, there should be freedom and creativity for themanagers to work.Despite the plethora of new funds launched in the past year, there hasbeen hardly any real innovation... There is a drought in the area of realinnovations. Though funds are packaged differently, all of them investin the same companies. But it is not a problem as long as the investor isnot misled. As long as fund companies say what they are going to doand do not camouflage anything, it should be fine. The fact is that,people have a mindset to buy at Rs 10. The industry has to cater to thatsentiment. Most mutual funds are launching funds focused on theflavour of the day or season. Dont you think this is dangerous?People have a mindset to buy at Rs. 10. The industry has to cater to thatsentimentThere is risk in the market. We can contain it, but can not eliminate it.Can we have a uniform load structure to attract more retail investors? Projectsformba.blospot.com 83
  • Projectsformba.blospot.comThere is always a discount for those who buy big. That is one of thebasic laws of business. If you buy one shirt, you pay the full-price. If youbuy two shirts, you get discount. If you buy three, you get one free. But Ifeel that an exit-load helps. It will discourage people from moving outeasily.Amfi has also been an industry lobby. Do you see it developing as onethat is on the side of investors? Amfi was established for protecting andpromoting the industry and investors. We have never done anythingthat damaged the interest of investors. Bearing the sole interest ofcustomers in mind, we have inscribed certification, ensured quickerpayment facilities and set up a committee for the simplification of theoffer-document. There is a congruity of interest between the industryand the investor.Have you invested in mutual funds personally? How has been yourexperience?There have made gains and losses. However, I do not have any remorse.It is common that the preacher seldom follows what he teaches. Mutualfund investments are about 25 to 30 per cent of the total investments.And they are mostly on the equity side. I have recently shifted my debt-investments to the RBI and post-office investments.Who is your favourite fund manager?Its like asking me who is your favourite grandchild. I like all of themequallyLIMITATIONSAs every aspect of life has its own limitations the same goes withresearches. The few limitations attached to this research are: - • As time and tide waits for none so is the case with this research. A much more detailed analysis could be done had there been more time spent for data collection. Due to lack of Time data from the all the places could not be collected. • Management of all the activities from one place limited the research with in it self as appropriate data, which was required, was not available. • Giving Instruction through telecommunications has caused a communication gap due to which the cream of data has not been available. Projectsformba.blospot.com 84
  • Projectsformba.blospot.comQUESTIONAIRE TO PRESENT INVESTORS IN MUTUAL FUNDSDear Sir/Madam, I am currently engaged in a study on “Investor Perception OfMutual Funds”. In this connection I request you to read the followingitems carefully & answer them .The answers you give will be heldconfidential & used purely for academic purposes.Indicate your response by tick marking when applicable. 1.) Name:- 2.) Sex:-  Male  Female 3.) Age:-  Below 30  31 – 40 years  41 – 50 years  Above 50 years.Academic Qualification (Last Qualification):-Which of the following is your source of income?  Government employee  Private employee  Self employedAnnual Income In Rs.  Below 1 Lakh  1 - 3 Lakhs  3- 5 Lakhs  Above 5 LakhsHave you ever invested in any of the Mutual Funds? Yes  NoRank in order of preference of savings avenue (Highest being given 1strank & the lowest being given 9th rank)___ Currency ___ Real Estate___ Units of UTI ___ Life Insurance Projectsformba.blospot.com 85
  • Projectsformba.blospot.com & Mutual Bonds___ Bank Deposits ___ Shares___ Postal Savings ___ Pension & Provident Fund___ GoldAs a mutual fund investor what is your experience?  Highly satisfied  Satisfied  Somewhat satisfied  Unsatisfied  Highly unsatisfiedReasons For Preference Of Mutual Funds(Please Tick mark in the boxprovided.)  Professional Management  Liquidity  Good Return  Capital Appreciation  Tax Benefit  Diversification  Safety  FlexibilityWhat Are the Decision Affecting Factors:-  Economic Scenario  Companys Image  Fund Performance  Fund Managers Image  Tax Incentive  Minimum Initial InvestmentHow did you come to know about Mutual Fund investments schemes?  News Paper  T.V.  Financial Magazines  Reference Groups  Brokers/Agents  MailWhat effects your decision regarding of investment in Mutual Funds?  Economic Scenario  Company’s Image  Fund Performance  Fund Management Image  Tax Incentives  Minimum Initial Projectsformba.blospot.com 86
  • Projectsformba.blospot.com InvestmentWhich Mutual Fund is the best? ICICI  HDFC  UTI SBI  KOTAK  TATA STANDARD CHARTERED  RELLIANCE FRANKLIN TEMPLETION  OTHERSThanks you very much for your kind co-operation & for taking time tocomplete this questionnaire. ANNEXURE: 2 FAQs ON MUTUAL FUNDS Projectsformba.blospot.com 87
  • Projectsformba.blospot.com ?Some banks and savings institutions are now offering uninsuredproducts such as mutual funds and annuities. These products mayprovide you with higher returns, but these investments involve risk.Americas Community Bankers, a national trade associationrepresenting nearly 2,000 savings institutions across the country, hasprovided the answers to some commonly asked questions:Q. Are the mutual fund or annuity investments I buy from a bank orsavings institution insured?A. No. These investments are not like insured deposits. They are notguaranteed by the FDIC, they are not guaranteed by the bank or savingsinstitution, and they are not guaranteed by the U.S. government. Youare not protected against losses on the amount you invest.Q. Are there risks in investing in mutual funds or annuities?A. Yes. You may get more or less back than the original amount youinvested. There may also be sales charges for these investments. Thesales representative should thoroughly brief you to make sure youunderstand these risks and charges, and you should be asked to sign anacknowledgement form verifying that you have received theinformation and understand it.Q. Who can sell me these products? Projectsformba.blospot.com 88
  • Projectsformba.blospot.comA. Only properly trained sales personnel can sell these products. Tellersmay not sell or provide advice to you on these products. They can referyou to the sales desk for these services.Q. How can I be sure I am investing in the right mutual fund orannuity?A. A sales representative should ask you questions about how much riskyou are willing to accept, your investment objectives and your financialresources and background. You have no obligation to provide thisinformation, but it would be helpful to the sales representative insuggesting the most appropriate investment for you.GLOSSARY • AdvisorThe organization employed by a mutual fund to give professional adviceon the fund’s investment and to supervise the management of its assets. • Asset Allocation FundA fund that spreads its portfolio among a wide variety of investment,including domestic and foreign stocks and bonds, governmentsecurities, gold bullion and real estate stocks. This gives small investorsfar more diversification than they could get allocating money on theirown. Some of these funds keep the proportions allocated betweendifferent sectors relatively constant, while others alter the mix asmarket conditions change. • Alpha A percentage that is a measure of the returns of a fund with its riskadjusted for. Alpha is calculated from the difference between a fundsactual returns and its expected returns given its market risk level asmeasured by its beta. It is also a measure of the value added ordeducted by the funds manager. An alpha of 1 means the fundproduced a return 1% higher than what its beta would predict. An alphaof –1 means the fund produced a return 1% lower. Naturally, higher thealpha the better it is for the investor. No, not always. For a high alpha tobe better, simultaneously, another number called the R-squared should Projectsformba.blospot.com 89
  • Projectsformba.blospot.combe high enough too. Normally, with R-squared anywhere below 50,never trust the alpha however high. Alpha depends entirely on theaccuracy of beta. And beta again, is calculated by the R-squared. So ifyou believe that beta is the definite value for risk then any positivealpha would be a sufficient condition for a funds good performance. • Balanced fundA mutual fund scheme that invest half in corpus in equity and the otherhalf in debt instruments. A balanced fund is less risky than an equityfund but at the same time gives better returns than an debt fund. • BetaIt is a measure of a securities risk. Each security has a certain amountof risk attached to it. Beta tries to measure the risk involved with eachsecurity. Thus an investor should choose a security which gives thehighest return for a given risk level. • BondsA debt instrument issued for a period of more than one year with thepurpose of raising capital by borrowing Bond is a promise to pay theprincipal along with the interest after a specified period of time. • Capital GainsIt is the profit earned on selling capital assets. Capital gains arecalculated by subtracting from the selling price the following1. Indexed cost of Acquisition2. Indexed cost of Improvement3. And any other holding cost. • CustodianThe bank or trust company that maintains a mutual fund’s assets,including its portfolio of securities or some records of them. Providessafekeeping of securities but has no role in portfolio management. • CorpusThe amount of money available with a scheme for investment. • Debenture They are bonds issued by a company to raise capital There are various kinds of debentures. They could be secured or unsecured, convertible or non-convertible. Projectsformba.blospot.com 90
  • Projectsformba.blospot.com• Debt/Equity Determined by dividing long-term debt by common stockholder’s equity. It is one of the most useful financial ratios. Creditors use it to see whether it is safe to lend money to the particular company. The ratio should ideally be around 2. • DistributorThe individual or a corporation serving as principal underwriter of amutual fund’s shares, buying shares directly from the fund, andreselling them to other investor. • DividendsIncome distributed to share holders. Dividends can be received fromthe ownership of stock or from mutual funds. Mutual fundshareholders have the option to reinvest dividends automatically inorder to purchase more shares. • GiltsGilts are government-based securities. The name signifies that thesecurity is very safe and is as sound as gold itself. • Growth and income fundsGrowth funds are mutual fund schemes,which invest in the equity market while income funds invest in fixedincome securities. • Growth fundGrowth funds are Mutual funds that invest in equities market. • HedgingA strategy designed to reduce investment risk hedging techniques usescall options, put options, short selling, or futures contracts. A hedgecan help lock in existing profits. Its purpose is to reduce the volatility ofa portfolio, by reducing the risk of loss. • InstrumentAny tradable commodity whose price can be obtained from a FinancialMarket is called as an instrument. • Net assets Projectsformba.blospot.com 91
  • Projectsformba.blospot.comNet assets are the total amount of money that comprises the mutualfunds holdings. Small funds have millions of dollars while large fundsmay have over 50 billion dollars. Sometimes a manager may close afund to new investors if its size is large • P/E ratioRatio of the price of a stock to the total earnings of the company iscalled as P/E ratio. Companies with very high ratios of greater than 30are considered to be overpriced. Company stock with a low ratio isconsidered to be undervalued and potentially good investments. Mutualfunds with a value type of investment strategy seek a portfolioconsisting of stocks with low ratios with the expectation that they willincrease in price. • PortfolioThe collection of all the holdings of a mutual fund, such as bonds, andstocks is called as portfolio. In a mutual funds annual report, a list ofthe funds current portfolio will usually be contained. • Preferred stockPreferred stock is a type of shares offered by a company, which pay apre-stated dividend, before common stock dividends are issued. Thebenefits of owning preferred stock are realized if the company evergoes bankrupt. If this occurs, preferred stock share holders receivetheir money first. Common stock holders may not receive any money, ifnone is remaining after paying preferred stock holders. • ProspectusA document, usually in the form of a booklet, that provides informationabout a specific mutual fund; such as the funds investment andredemption policies. The prospectus, according to law, must always beaccompanied with the application. Prospective investors should alwaysread the mutual funds prospectus before sending money. • VolatilityThe degree to which a mutual funds share price will change in value • WithdrawalTo redeem shares of a mutual fund or stock is called as withdrawal. In amutual fund, partial or full redemptions may be made over the phone.Some funds may impose an extra redemption fee to discourage market Projectsformba.blospot.com 92
  • Projectsformba.blospot.comtimers from pulling their money immediately after investing. If this is afunds policy, it will be stated in the prospectus. • YieldIncome or dividends received from a security or mutual fund.BIBLIOGRAPHYAMFI –Mutual Fund Testing Programme for Distributors & Employeesof Mutual Funds in India.Fact Sheets of various Mutual FundsEconomic TimesWeb sites:-www.mutualfundindia.comwww.mutualfund.comwww.moneycontrol.comwww.saharaindiapariwar.net Projectsformba.blospot.com 93
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