Project report of mf

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Project report of mf

  1. 1. About J&K Bank………J&K Bank one of the leading banks in the country is a brand with heritage,widespread presence and a strong track record of solid performance and stabilityunder very difficult conditions. It is also unique in that it is a private sector Bank,despite the government holding a major stake; it is the sole banker and lender oflast resort to the Government of J&K. It is the only private sector bank designatedas RBI’s agent for banking business, and it carries out the banking business ofthe central government in the state.J&K Bank is today one of the fast growing banks in India with a network of morethan 500 branches/offices spread across the country offering world-class bankingproducts/services to its customers. Today the bank has a status of value drivenorganization and is always working towards building trust with its stakeholders,for which it has adopted a strategy directing to developing a sound foundation ofrelationship and trust aimed at achieving excellence, which of course, comesfrom the womb of good corporate governance.The J&K Bank one of the most vibrant banking institutions was founded onOctober 1, 1938 and it commenced business from July 4, 1939. It has been thefirst of its nature and composition as a State owned bank in the country. TheBank was established as a semi State Bank with participation in capital by Stateand the public under the control of State Government. Following the extension ofCentral laws to the state of Jammu & Kashmir, the bank was defined as agovernment company as per the provisions of Indian companies act 1956.In its formative years the bank had to encounter several serious problems at thetime of independence when out of its total of ten branches two branches ofMuzaffarabad and Mirpur fell to the other side of the line of control (now PakOccupied Kashmir) along with cash and other assets in 1947, however the stateGovernment came to its rescue with the assistance of Rs. 6 Lakhs to meet itsclaims.The excellence achieved by bank in its operations stemming from the roots ofvoluntary governance has not gone unrecognized and bank has recently baggedthree very prestigious awards for fair business practices and commitment tosocial obligations.
  2. 2. Board of Directors of J&K Bank……..J&K Bank’s diverse and rich culture is abundantly evident inits Board Members, who provide direction to the Bank in orderto achieve its vision. A brief profile of our eminent BoardMembers is as under:MUSHTAQ AHMAD MUSHTAQ AHMED (Chairman & CEO) Having joined the Bank in 1972 as Probationary Officer (PO), Mr. Mushtaq Ahmad has a distinguishing career of 36 years as a prudent banker. His personal progression has been a vital and contributing element of the unfolding success story of J&K Bank since morethan three decades.Before his retirement as Executive Director of the Bank inFebruary 2008, he held some of the most significant positionsin the bank and discharged all his duties with honesty anddistinctive vision.His person makes an ideal blend of specialized knowledge andpractical experience in almost all the critical fields ofcontemporary banking, which include Credit/RiskManagement, Strategy and Business Development, Assets &Liability Management, Human Resource Development,Investments, Treasury, Forex operations, InternationalBanking, Insurance etc.As a leading banker, he commands huge respect for hisprudence, esteem for his discipline and affection for hisleadership skills in the Bank as well as the industry.
  3. 3. As a top executive, Mushtaq Ahmad lays great emphasis ontalent search, human resources development, skillenhancement, besides team building. SUDHANSHU PANDEY, IAS Mr. Sudhanshu Pandey, IAS, is Commissioner Secretary to Government, Finance Department, J&K, Govt. A post graduate in Life Science (Botany) with specialization in Environmental Management and Ecology (Gold Medal), University of Allahabad, MBA in Financial Management; Business Management and FinancialManagement, Institute of Management, Ahmadabad, Reformsin Government, Indian Institute of Management, Bangaloreand Decentralized Industrial Development, Japan.Mr. Sudhansh Pandey began his career with Indian ForestServices in 1985 and thereafter, joined the IndianAdministrative Services in 1987. Mr. Sudhanshu Pandey hasserved the IAS in various distinguished capacities, whichinclude Sub-Divisional Magistrate, Bhaderwah (J&K),Additional Secretary Education(GOJK), Addl. Chief Executive,Shri Mata Vaishno Devi Shrine Board, Katra (Udhampur),District Development Commissioner and District Magistrate,Doda, J&K, Special Secretary to Governor, J&K, ManagingDirector, SIDCO, Director Information, Director Employmentand Special Secretary, Labor and Employment, J&K, Director& PS to MoS , Ministry of Commerce and Industry, GOI,Director & PS to Mos , Ministry of External Affairs, GoI,Counselor and Director, Tagore Centre for Information,Education, Commerce and Culture, Embassy of India, Berlinand Divisional Commissioner, Jammu.Mr. Sudhanshu Pandey has additionally also held the positionof Chairman of the Confederation of Indian Industries (J&KChapter) for two years, besides serving on the Board of
  4. 4. Directors of several reputed Public and Private SectorCompanies including RPG group and Modi group, asManaging Director of SIDCO.Mr. Sudhanshu Pandey is the recipient of Governor’s Medal(1997), a highest recognition awarded in the state and also theState Government Medal (2008), in honor of his exemplaryservices for the state of J&K.M. I. SHAHDAD Mr. M. I. Shahdad is a holder of Master’s Degree in Economics and LLB from Aligarh Muslim University. He has made significant contribution to Commerce Industry by being associated with Kashmir Chamber of Commerce & Industry in the capacity of President and other prominent positions. Mr. M. I. Shahdad has had a longassociation with the Bank as Director, during which he hasmade valuable contribution and provided tremendous valueaddition to the organization.VIKRANT KUTHIALA Mr. Vikrant Kuthiala is B.com (Hons) from Hindu College, Delhi University. He is a prominent Businessman from Jammu with interests in steel manufacturing and hydel projects. He is also representing on the committees of various academic and professional organizations, prominent being the Regional Advisory Committee of Central Excise &Customs, J&K, Chamber of Commerce & Industry, Jammuand J&K State Committee of Federation of Industries of India,New Delhi. He is also a Member of India Islamic CulturalCentre, New Delhi and INTACH, J&K Chapter, Jammu.
  5. 5. PROF. NISAR ALI Prof. Nisar Ali is a Ph.D in Economics from Osmania University, Hyderabad. He is a Professor from Post-Graduate Department of Economics, University of Kashmir.Prof. Nisar Ali is also Dean, Faculty of Social Sciences University of Kashmir and Member, J&K State Finance Commission. He has served in various prominent positions with theUniversity and has many research papers and publications tohis credit.RAKESH KUMAR GUPTA Mr. R.K. Gupta, aged 47 years, is a professional Chartered Accountant with 25 years standing possessing skill in Finance, Taxation, Auditing and Corporate Legal Affairs. He started his professional career with M/s Gupta Gupta & Associates in January 1986 and heads this renowned firm of Chartered Accountants since then. Mr. Gupta remained in Executive Committeeof the Jammu & Kashmir Branch of the Institute of CharteredAccountants of India for three terms from 1991-1994; 1994-1998 and 2006-2009. During these three terms herepresented the Branch as its Treasurer, Secretary, Vice-Chairman and Chairman. Mr. Gupta has been member of TaxPayers Committee of this Region. He has also been member ofResearch Committee & Direct Tax Committee of The Instituteof Chartered Accountants of India. He is also empanelled asPeer Reviewer with Peer Review Board of the ICAI. Havingauthored various articles, Mr. Gupta has to his creditpublished Articles in The Chartered Accountant Journal andalso in Current Tax.com on the issues of Taxation andAccounting Standards. Mr. Gupta has been Guest Speaker onmany occasions for various Seminars and Study Circle meetsof Chartered Accountants & others. Mr. Gupta is Member of
  6. 6. Taxation Advisory Committee and other Committees ofChamber of Commerce & Industry, Jammu. He is also aTrustee in Charitable Institutions providing education to theunder privileged children and relief to the needy. In view of hisinterest in social activities and sports, Mr. Gupta is also amember of Sports and Health Committee of Prestigious SocialClub.A. M. MATTO Mr. A. M. Matto is a Graduate in Commerce and World Explorer. He is a high silhouette Businessman having his interests in the manufacture and export of Kashmir Handicrafts. He has made significant contribution to commerce industry by being associated with it in the capacity of President and otherprominent positions. Mr. A. M. Matto has had a longassociation with the Bank as Director, during which he hasmade valuable contribution to the Institution with his rich andvaried experiences.NIHAL GARWARE Mr. Nihal Chandrakant Garware is a holder of Bachelor of Arts Degree (U.S.A.) and the scion of well known Industrialist family of India –
  7. 7. the Garwares.Mr. Nihal Chandrakant Garware, is at present Head of theLegal Department and Liaison Department in some of theGarware Companies. He has been a Director in variouscompanies in the Garware Group, where his responsibilitieshave ranged from Production, Sales, Legal, Liaison to Finance.He is Advisor to outside Companies like Ama Pvt. Ltd., D. Y.Patil Group and Sharad Pawar International School. He is alsothe founder member of The Youth Wing of Indian MerchantsChamber Of Commerce.Origin of the word “BANK”…….The name bank derives from the Italian word banco "desk/bench", used duringthe Renaissance by Florentines bankers, who used to make their transactionsabove a desk covered by a green tablecloth. However, there are traces ofbanking activity even in ancient times. In fact, the word traces its origins back tothe Ancient Roman Empire, where moneylenders would set up their stalls in themiddle of enclosed courtyards called macella on a long bench called a bancu,from which the words banco and bank are derived. As a moneychanger, themerchant at the bancu did not so much invest money as merely convert theforeign currency into the only legal tender in Rome- that of the Imperial Mint.Concept of a Bank………A banker or bank is a financial institution that acts as a payment agent forcustomers, and borrows and lends money. The first modern bank was founded inItaly at Genoa in 1406, its name was "Banco di San Giorgio" (Bank of St.George).Banks act as payment agents by conducting checking or currentaccounts for customers, paying cheques drawn by customers on the bank, andcollecting cheques deposited to customers current accounts. Banks also enablecustomer payments via other payment methods such as telegraphic transfer,EFTPOS, and ATM.Banks borrow money by accepting funds deposited on current account,accepting term deposits and by issuing debt securities such as banknotes andbonds. Banks lend money by making advances to customers on current account,
  8. 8. by making installment loans, and by investing in marketable debt securities andother forms of lending.Banks provide almost all payment services, and a bank account is consideredindispensable by most businesses, individuals and governments. Non-banks thatprovide payment services such as remittance companies are not normallyconsidered an adequate substitute for having a bank account.Banks borrow most funds borrowed from households and non-financialbusinesses, and lend most funds lent to households and non-financialbusinesses, but non-bank lenders provide a significant and in many casesadequate substitute for bank loans, and money market funds, cash managementtrusts and other non-bank financial institutions in many cases provide anadequate substitute to banks for lending savings to.Economic Functions of a Bank…….. 1. Issue of money: in the form of banknotes and current accounts subject to cheques or payment at the customers order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par and effectively transferable by mere delivery in the case of banknotes, or by drawing cheques, delivering it to the payee to bank or cash. 2. Netting and settlement of payments: banks act both as collection agent and paying agents for customers, and participate in inter-bank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables payment flows between geographical areas to offset, reducing the cost of settling payments between geographical areas. 3. Credit intermediation: banks borrow and lend back-to-back on their own account as middle men
  9. 9. 4. Credit quality improvement: banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the banks assets and the banks own capital which provides a buffer to absorb losses without defaulting on its own obligations. However, since banknotes and deposits are generally unsecured, if the bank gets into difficulty and pledges assets as security to try to get the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Maturity transformation: banks borrow more on demand debt and short term debt, but provide more long term loans. Bank can do this because they can aggregate issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain reserves of cash, invest in marketable securities that can be readily converted to cash if needed, and raise replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets) because they have a high and more well known credit quality than most other borrowers.Banks in India…….Banks in India can be categorized into non-scheduled banks and scheduledbanks. Scheduled banks constitute of commercial banks and co-operative banks.There are about 67,000 branches of Scheduled banks spread across India.During the first phase of financial reforms, there was a nationalization of 14 majorbanks in 1969. This crucial step led to a shift from Class banking to Massbanking. Since then the growth of the banking industry in India has been acontinuous process.As far as the present scenario is concerned the banking industry is in a transitionphase. The Public Sector Banks (PSBs), which are the foundation of the IndianBanking system account for more than 78 per cent of total banking industryassets. Unfortunately they are burdened with excessive Non Performing assets(NPAs), massive manpower and lack of modern technology. On the other handthe Private Sector Banks in India is witnessing immense progress. They areleaders in Internet banking, mobile banking, phone banking, ATMs.
  10. 10. On the other hand the Public Sector Banks are still facing the problem ofunhappy employees. There has been a decrease of 20% in the employeestrength of the private sector in the wake of the Voluntary Retirement Schemes(VRS). As far as foreign banks are concerned they are likely to succeed in India.Indusland Bank was the first private bank to be set up in India. IDBI, ING VyasaBank, SBI Commercial and International Bank Ltd, Dhanalakshmi Bank Ltd,Karur Vysya Bank Ltd, Bank of Rajasthan Ltd etc are some Private SectorBanks.Banks from the Public Sector include Punjab National bank, Vijaya Bank, UCOBank, Oriental Bank, Allahabad Bank, Andhra Bank etc. ANZ Grind lays Bank,ABN-AMRO Bank, American Express Bank Ltd; Citibank etc are some foreignbanks operating in India. Currently (2007), banking in India is generally fairlymature in terms of supply, product range and reach-even though reach in ruralIndia still remains a challenge for the private sector and foreign banks. In termsof quality of assets and capital adequacy, Indian banks are considered to haveclean, strong and transparent balance sheets relative to other banks incomparable economies in its region.The Reserve Bank of India is an autonomous body, with minimal pressure fromthe government. The stated policy of the Bank on the Indian Rupee is to managevolatility but without any fixed exchange rate-and this has mostly been true.With the growth in the Indian economy expected to be strong for quite sometime-especially in its services sector-the demand for banking services, especiallyretail banking, mortgages and investment services are expected to be strong.One may also expect M&As, takeovers, and asset sales.In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase itsstake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the firsttime an investor has been allowed to hold more than 5% in a private sector banksince the RBI announced norms in 2005 that any stake exceeding 5% in theprivate sector banks would need to be vetted by them.Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sectorbanks (that is with the Government of India holding a stake), 29 private banks(these do not have government stake; they may be publicly listed and traded on
  11. 11. stock exchanges) and 31 foreign banks. They have a combined network of over53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, arating agency, the public sector banks hold over 75 percent of total assets of thebanking industry, with the private and foreign banks holding 18.2% and 6.5%respectively. Banking in IndiaCentral Bank Reserve Bank of India State Bank of India · Allahabad Bank · Andhra Bank · Bank of Baroda · Bank of India · Bank of Maharashtra · Canara Bank · Central Bank of India · Corporation Bank · Dena Bank · Indian Bank · Indian Overseas Bank ·Nationalized Banks Oriental Bank of Commerce · Punjab & Sind Bank · Punjab National Bank · Syndicate Bank · Union Bank of India · United Bank of India · UCO Bank · Vijaya Bank · IDBI Bank Axis Bank · Bank of Rajasthan · Bharat Overseas Bank · Catholic Syrian Bank · Centurion Bank of Punjab · City Union Bank · Development Credit Bank · Dhanalakshmi Bank · Federal Bank · Ganesh Bank of Kurundwad · HDFC Bank · ICICI Bank · IndusInd Bank · ING Vysya Bank · Jammu &Private Banks Kashmir Bank · Karnataka Bank Limited · Karur Vysya Bank · Kotak Mahindra Bank · Lakshmi Vilas Bank · Nainital Bank · Ratnakar Bank · SBI Commercial and International Bank · South Indian Bank · Tamilnad Mercantile Bank Ltd. · YES BankForeign Banks Citibank · HSBC · Standard CharteredRegional Rural Banks South Malabar Gramin BankCorporate Governance of J&K Bank……..J&K Bank has been committed to all the basic tenets of good CorporateGovernance well before the Securities and Exchange Board of India and theStock Exchanges pursuant to Clause 49 of the Listing Agreement mandatedthese. Now, it is our Endeavour to go beyond the letter of the CorporateGovernance codes and apply it innovatively in a more meaningful mannerthereby making it relevant to the organization that is operating in a specificenvironment, which is different from the generic Anglo-Saxon one. In line with thevision, J&K Bank wants to use Corporate Governance innovatively in atransitional economy like Jammu and Kashmir.
  12. 12. The Bank wants to use Corporate Governance as an instrument of economic andsocial transformation. In due course, we would set our self-targets of social andeconomic reporting as a part of annual disclosures. This will help usconceptualize and contextualize the form and content of Corporate Governancein a developing state. Given the fact that J&K Bank is and is seen as a greatsuccess of” public-private partnership”, our Bank as a business is expected toplay a role in social transformation of the economy. This lends urgency toimplementation of good governance practices which go beyond the CorporateGovernance code. Operating in an environment that is emerging from a situationof civil strife, the issue of Corporate Governance assumes a different and greaterrelevance. We, as the prime corporation of Jammu and Kashmir, have a vestedinterest in making the state a safe place for business. J&K Bank has a key role toplay in providing public and private services, financial infrastructure andemployment.As such, the efficiency and accountability of the corporation is a matter of bothprivate and public interest, and governance, therefore, comes at the top of theagenda. The fact that the bank is state owned but professionally managed,having a large size of international investors, governance is critical. For usCorporate Governance is concerned with the systems of laws, regulations, andpractices, which will promote enterprise, ensure accountability and triggerperformance. The J&K Bank, for one, stands for being more accountable,practice self-policing and make financial transactions transparent andconstitutional, of our directors to make J&K Bank an engine of socialtransformation. As an eminent corporate jurist (Chancellor William T. Allen) fromUS says, “A corporate director has civic responsibility. The people, who acceptthis responsibility, do it conscientiously and well deserve our respect as they areserving a nation.Vision of J&K Bank……….
  13. 13. The vision of J&K Bank is not to be like any other commercial bank operating inJammu and Kashmir but to be the developmental bank of the state intrinsicallyinvolved in its overall socio-economic development.In synchronization with this vision, J&K Bank adopted a new strategy ofsubstantially increasing the investment in the state, particularly in productivesectors like horticulture, handicrafts etc and developmental sectors like primaryeducation.Mission of J&K Bank……….Our mission is two-fold: To provide the people of J&K international qualityfinancial service and solutions and to be a super-specialist bank in the rest of thecountry. The two together will make us the most profitable bank in the country.Quick Facts about J&K Bank……… First meeting of BOD’s-7th Jan 1938. First manager: Mr. Sohan lal khotari. First Chairman: Major general Roy Bahadur Bishan Dass (CM). First safe deposit vault at Residency Road: 1940 Appointment of staff on professional basis: 1945 First outside branch: Amritsar. Loss of two braches –Mirpur and Muzafarabad on partition 1947. Sponsored first Regional rural bank: Jammu rural bank 1976. Responsibility of payment of pension to civil pensioners of state 1976. Bank declared as A class bank 1976 Permission granted by RBI to deal in the foreign exchange business 1981 Sponsored another regional rural bank Kamraz rural bank 1981. Customer service cell 1984. Introduction of MICR technology 1987. Historic period Golden Jubilee, creation of J&K bank golden jubilee 1989.
  14. 14. Brand Identity………. The new identity for J&K Bank is a visual representation of the Bank’s philosophy and business strategy. The three colored squares represent the regions of Jammu, Kashmir and Ladakh. The counter-form created by the interaction of the squares is a falcon with outstretched wings – a symbol of power andempowerment.The synergy between the three regions propels the bank towards new horizons.Green signifies growth and renewal, blue conveys stability and unity, and redrepresents energy and power. All these attributes are integrated and assimilatedin the white counter-form.View of the Organization……….
  15. 15. Corporate Eleven Divisions Headquarters Zonal Offices Ten Zonal Offices Branch Network 555+Business units ATM and other 200+centers ChannelsCorporate Social Responsibility……… The Corporate Social Responsibility (CSR) of the J&K Bank seeks to recognize obligations towards society and aims to integrate the CSR ideals into its mission for optimizing both business and social performance. It stresses on promoting work life balance, give attention to social and environmental concerns and host of factors that facilitate business pursuits and accomplishment of economic goals. The CSR is not just recognized as promulgating the Banks own values and principles of philanthropy but also the values and principles of all those who have a stake in it or are affected by its operations. By supporting social cause aligned to the mission the CSR strategy differentiates the Banks brand and enhances its reputation. The Bank manages social issues in the same manner as any other strategic business issues.
  16. 16.  The Bank besides playing its role in economic development of the State and country contributes significantly towards the social cause. The Bank has established its credentials for the poor and needy by donating generously for various philanthropic activities aimed at ameliorating their sufferings. Be it victims of natural calamity, like fire, flood, snowstorm or tsunami and disabled or patients with serious ailment who lack reliable means of survival, the bank has been all through supporting them. The one and a half decades long turmoil in the State of J&K has added to the agonies of people with hundreds of children losing their parents to fend for themselves in this harsh world. The Bank realizing its responsibility of saving the life/ future of these blooming children, adopt several of them by providing financial support either through various orphanages where they are sheltered or directly to the orphans by bearing their educational or other expenditure. The Bank would continue to provide study scholarships to the poor and needy students including students from far-flung areas, who without such support would have been school dropouts. The Bank shall continue donations for the development of infrastructure (computers, books, TVs, prosthetic support etc) to various NGOs, societies, trusts, institutions, etc. involved in socio- economic development of the society. The physically challenged persons belonging to socially and economically deprived classes especially children shall be helped by acquiring prosthetic support by meeting partly or fully cost of surgery with pre and post medication. In order to enable socially and economically weaker classes to live a healthy life the bank shall endeavor to give financial support to the needy and poor patients, afflicted with dreaded diseases like Cancer, cardiac failure, Kidney failure etc. for their treatment / surgery. Heritage preservation is an important responsibility of every conscious individual, institution or agency. The thrust areas to assist in this respect for the Bank will be preservation of historical/religious monuments, development of tourist sites, national properties, museums, libraries, protection of environment/ecology etc. and sponsoring seminars and awareness camps, art and literary works, 3rd cultural activities, social service camps, college or university students clubs etc. The Bank has been playing a vital role in the promotion of tourism and it is in this backdrop that the Bank has been shouldering the responsibility of registering yatris for the Shri. Amarnathji Yatra through its extensive network of branches spread across the country. The Yatra is an annual religious function of Hindu community, wherein devotees travel by foot to pay
  17. 17. obeisance to Holy Shiv Lingam at Shri Amarnathji cave. The Bank puts in place special registration counters at all branches of the Bank outside the state and some selected branches in Jammu and Kashmir State. In addition to this, accidental insurance cover facility of Bajaj Allianz General Insurance Co. Ltd. to the pilgrims at a nominal premium is made available to the yatris. During the Yatra, the bank establishes mobile branches even at the holy cave. People in general and pilgrims in particular all over the country have appreciated this effort and won lot of applause for the Bank. Apart from above activities the Bank has been constructing/developing the public utility service like public parks, bus stands, drinking water posts, lavatories, conveniences, rain shelters. In addition to this, the bank organizes relief camps, service camps, night shelters, health resorts, health clinics, disaster & calamity management centers, rehabilitation centers etc. With the objective of promoting the philanthropic activities, other social and environmental issues, the bank has a CSR policy in place embodying the broader principles for providing donations. The donations are made within the prescribed limit of 1% of the published profit for the previous year. It focuses on economic, social, cultural and geographical backwardness of the area. The bank provides financial assistance for the benefit of Handicapped persons/ orphans/ poor patients suffering from serious ailments. Provides direct assistance or through Prime Ministers Relief Fund or Chief Ministers Relief Fund or any other national level or state level calamity relief fund to needy who have suffered due to natural disaster and calamities. Helps in rehabilitation of handicapped children/ persons belonging to depressed classes of society. Provides for procurement of devices / apertures for kidney transplantation; cardiac interventions; cancer patients; AIDS HIV and other dreaded diseases, philanthropic support for people belonging to economically deprived sections of the society. Provides financial support to orphanages. Provides scholarships to meritorious students of depressed sections of the society at various levels with focus on the needy. Provides technical and financial support for the Heritage Preservation through sponsorship of awareness seminars, organizing social service camps, sponsoring Art & Literary works and preservation and development of important Historical, religious, tourist sites, museums, libraries, archives, scientific organizations and National properties. Provides financial assistance for protection of Environment/ecology.
  18. 18.  Constructs and develops the public utility services like bus stands, development of parks, construction of drinking water posts, lavatories, conveniences etc. The donations are directly made to depressed class of society including physically challenged person or through a Non Governmental Organization engaged in the ameliorating of the suffering of this class of society. The Banks CSR is rooted in its Corporate Governance philosophy, which in turn is woven around Banks commitment to ethical practices in the conduct of its business, while striving in the constant quest to grow with profits and enhance shareholders value and align interests of the stakeholders and society through adoption of best international practices and standards. Managing CSR is not viewed as an extra cost or burden but is viewed not only as making good business sense but also contributing to the long-term prosperity of our Bank and ultimately its survival. Being a good neighbor and showing that you care on the one hand and being a successful business on the other, are flip sides of the same coin. The Bank donated Rs.1 lakh to Maharaja Ranjit Singh Trust, New Delhi, for the upliftment of downtrodden sections of the society. The Bank gave donation to the Foundation for inter-community Relations Delhi for upliftment of society. A financial assistance to the tune of Rs.1.00 lakh for the welfare of Gujjars was given to Gurjar Desh Charitable Trust, Jammu. The Bank donated sewing machines to destitute widows through Bhartiya Dalit Sahitya Academy, Jammu. Showing its eagerness for the upliftment of women, the Bank donated embroidery machines to Womens Welfare Society, Kachhama, Kupwara. The Bank also gave donation to NGO Friends Association for Ladies and Orphans Welfare (FAOW), Srinagar. Devastating fire in village Batpora (Wathora), Kashmir rendered hundreds of people homeless and two persons lost their lives. The Bank organized a relief camp and distributed 50 Kgs of rice and Rs. 5000 to each of the affected family. Similarly, another relief camp was organized for the fire victims at Seer, Anantnag (South Kashmir), where blankets, eatables and domestic utensils were distributed among the sufferers. A camp was also organized by the Bank at Lasipora, Pahalgam, where cash was distributed among the fire victims. With a view to help Kargil war sufferers of Drass area in Ladakh region in their rehabilitation, the Bank organized a relief camp. Blankets and eatables were distributed among the people covering about 1500 families settled in 17 villages in and around Drass, who had migrated to Sankoo, Saliskote and
  19. 19. other far flung areas of Kargil. Stationery items were distributed among the school going children.Insurance Service through J&K Bank…….. In life insurance segment, the bank joined hands with MetLife International (USA) and it culminated into the launch of MetLife India Insurance Company Private Limited, which was incorporated in India on April 11, 2001. MetLife India is a joint venture between MetLife International Holdings Inc., the J&K Bank, M. Pallonji and Co. Private Limited and other small private investors. MetLife India is headquartered in Bangalore. It is remarkable that MetLife International, headquartered in New York, is number one insurer in the United States based on over US$ 2 trillion of life insurance in force and serves approximately 9 million individual households in the U.S. as well as 87 of the Fortune 100 companies. It has its affiliates, subsidiaries and representative offices in 15 countries. The bank is also Corporate Agent of MetLife and is marketing its products through its strong branch network. The Bank has entered into an alliance with Bajaj Allianz to distribute their non-life products. These products are available at all branches of the bank across India.Remittance Services through J&K Bank…….. The bank has a tie –up with Western Union Financial Services Inc., an international leader in money transfer services through its primary agent SITA, a division of Kuoni Travels India Pvt. (“Kuoni”) to provide inbound money transfer services to customers across the country. As a result of this association, people in general and J&K Bank customers in particular are availing the facility of receiving money from their relatives and friends abroad using the Western Union Money Transfer service. Our bank has also an arrangement with Reliance Capital –Travel mate to provide inbound money transfer services to customers across the country. A number of branches in J & K and all the branches outside state have been
  20. 20. added to the existing list to bring more customers to the bank’s fold for availing this facility.J&K Bank’s Tie up with foreign AMC’s for MutualFunds…….J&K bank Ltd. has joined its hands with various foreign Asset ManagementCompanies for entering into a joint-venture for its proposed mutual fund venture.The bank has been approached by many foreign AMC’s, who have shown akeen interest in joining hands with it. The joint-venture becomes important forJ&K bank as it would provide the expertise required for running the AssetManagement Business. The bank already has a network of more than 500branches, which could be leveraged to market the schemes. It is a greatopportunity to exploit the virgin market for mutual funds in Jammu & Kashmirwhere J&K Bank is having around 280 branches,"Role of J&K Bank in Mutual Funds…….. J&K Bank has entered into tie-ups with reputed Asset Management Companies for distribution of Mutual Fund products. Mutual Fund industry is one of the fastest growing segments in financial services in India. Over the years, banks in India have emerged as the biggest distributors of financial products. This has helped the banks to capture and retain their huge client base and simultaneously adding a steady stream of fee based income. Mutual Funds have become an attractive proposition for investors in the current context and for J&K Bank it will be a good investment option to have in our product portfolio. This shall be an important step towards converting the bank branch into a financial supermarket addressing all the financial needs of the customers thus helping the bank retain the customers within its fold.
  21. 21.  Moreover the branch can augment its fee based income the Bank aims to match to industry standards. The AMC’s with which the Bank has entered into an arrangement are: UTI, Kotak and Reliance Capital Asset Management. The Bank shall undertake distribution of their current schemes as well as NFO (New Fund Offer) as and when the AMC comes up with the same.Moving forward challenges ahead……… Barrier less entry of foreign banks from 2009 (GATS). Capital account convertibility Global market integration Sub prime crises Possible mergers and acquisitions Application of BASIL-II normsMutual Fund…….A mutual fund is a common pool or fund of capital mobilized from a largenumber of investors and invested on their behalf in several securities in themarket. All the returns from such investments, both in terms of dividends andcapital appreciation, net of various incidental expenses, accrue to the investors.A mutual fund provides many financial and non-financial benefits to the investors.Like shares, all mutual funds provide returns in the form of dividends and capitalappreciation and even bonus issues. But by far the most significant benefit is oneof risk reduction or risk diversification.
  22. 22. When one invests in the stock of anyone company, one is exposed to severalrandom risks. For instance, the company may go bankrupt, it may suffer hugeunexpected losses or the management may not be honest or efficient. Investingin a mutual fund protects investors from such random or non- Systematic risks.How does this protection work? It is well known from ones grandma that oneshould not put all one’s in a single basket. Thus, any investment portfolio must bewell diversified. It is difficult for a small investor to diversify the investment over30 or 50 different securities or more. Also, being laypersons, it maybe wiser toleave the selection of securities to an expert agency. This is where the mutualfund steps in by pooling together investments from a large number of smallinvestors and then investing the accumulated proceeds in a well diversifiedbasket of securities. Thus, investors get the benefit of diversification withoutactually doing so themselves.It is therefore usually better for small investors to invest in a mutual fund directlyrather than invest in 30 to 50 securities on their own. The capital required forinvesting in several securities on ones own is considerably higher than thatneeded for investing in a mutual fund. For example, if one wants to invest Rs.10,000, it is not sufficient to build a diversified portfolio. However, this amountcan be easily invested in a, mutual fund, which typically invests in a large numberof companies. Thus, a mutual fund offers the benefit of diversification even at alow level of investment. As a consequence of wide diversification, its expectedreturns tend to be lower and less volatile than the returns from anyone security.Furthermore, transaction costs for the investors tend to be lower while dealingwith a single mutual fund as against transacting in a large number of securities.There is also no need to research or track a large number of different companiesor regularly keep a check on the dividend returns from dozens of differentcompanies.Thus, much of the value of mutual funds to small investor comes from riskdiversification or risk mitigation, professional management, switching amongschemes, affordability, liquidity, lower transaction costs, research, internationalinvestment facilities, etc.Mutual funds render a large range of services that are not available to an investorwho invests in securities directly.A mutual fund is thus, as much a financial product as a financial service. Ofcourse, the services rendered by a mutual fund are not free. Nothing worthwhileever is. Unit holders have to pay for the recurring transactions, annual fees, entryand exit loads and so forth, irrespective of whether the fund generate returns ornot.
  23. 23. All this should not create the impression that mutual fund investments are onlyfor small investors. Large entities, including banks, insurance companies andfinancial institutions routinely invest in mutual funds.Investors subscribe to units of a mutual fund just as shareholders subscribe toshares of a company. Also, a mutual fund, like a company, does not guaranteeany dividend.Mutual fund managers use their discretion to decide whether or not to declaredividends, based on the profitability of the fund, market conditions, etc.Even when they do so, the dividend per unit may vary from period to period andthese variations may be considerably higher than in the case of shares. This isbecause companies normally like to smoothen out the equity dividends over aperiod of time. This means that they strive hard to maintain dividends even in abad year to convey the impression to the market that all is well with the company.But such considerations do not constrain mutual funds since their majorpreoccupation is to provide well-diversified portfolio returns, whatever they maybe.Mutual fund dividends can be paid only from the revenue income and realizedcapital gains of the underlying portfolio and not from previous profits as in thecase of shares.Each unit of a mutual fund represents a unit holder’s proportionate ownership ofthe funds portfolio holdings. The investors of mutual funds are known as unitholders. The companies that operate the mutual funds are known as AssetManagement Companies (AMC’s) or Investment Managers. (Appendix 1 lists theAMC’s operating in India). An AMC may float more than one fund (also calledschemes), each with an objective and investment mandate of its own. The termsmutual fund, fund or scheme are often used interchangeably.Benefits from investing in a Mutual Fund…….
  24. 24. Small investments: Mutual funds help you to reap the benefit of returns by aportfolio spread across a wide spectrum of companies with small investments.Such a spread would not have been possible without their assistance.Professional Fund Management: Professionals having considerableexpertise, experience and resources manage the pool of money collected by amutual fund. They thoroughly analyze the markets and economy to pick goodinvestment opportunities.Spreading Risk / Diversification: An investor with a limited amount of fundmight be able to invest in only one or two stocks / bonds, thus increasing his orher risk. However, a mutual fund will spread its risk by investing a number ofsound stocks or bonds. A fund normally invests in companies across a widerange of industries, so the risk is diversified at the same time taking advantage ofthe position it holds. Also in cases of liquidity crisis where stocks are sold at adistress, mutual funds have the advantage of the redemption option at the NAV’s.Transparency and interactivity: Mutual Funds regularly provide investorswith information on the value of their investments. Mutual Funds also providecomplete portfolio disclosure of the investments made by various schemes andalso the proportion invested in each asset type. Mutual Funds clearly layout theirinvestment strategy to the investor.Liquidity: Closed ended funds have their units listed at the stock exchange,thus they can be bought and sold at their market value. Over and above this theunits can be directly redeemed to the Mutual Fund as and when they announcethe repurchase.Choice: The large amount of Mutual Funds offer the investor a wide variety tochoose from. An investor can pick up a scheme depending upon his risk / returnprofile.Regulations: All the mutual funds are registered with SEBI and they functionwithin the provisions of strict regulation designed to protect the interests of theinvestor.Mutual Funds give returns in two ways - Capital Appreciation or DividendDistribution.Capital Appreciation: An increase in the value of the units of the fund isknown as capital appreciation. As the value of individual securities in the fund
  25. 25. increases, the funds unit price increases. An investor can book a profit by sellingthe units at prices higher than the price at which he bought the units.Dividend Distribution: The profit earned by the fund is distributed among unitholders in the form of dividends. Dividend distribution again is of two types. It caneither be re-invested in the fund or can be on paid to the investor.A Mutual Fund is not an alternative investment option to stocks and bond; ratherit pools the money of several investors and invests this in stocks, bonds, moneymarket instruments and other types of securities. A Mutual Fund is a trust thatpools the savings of a number of investors who share a common financial goal.The money thus collected is then invested in capital market instruments such asshares, debentures and other securities.The income earned through these investments and the capital appreciationrealized is shared by its unit holders in proportion to the number of units ownedby them. Thus a Mutual Fund is the most suitable investment for the commonman as it offers an opportunity to invest in a diversified, professionally managedbasket of securities at a relatively low cost. The flow chart below describesbroadly the working of a mutual fund: Mutual Fund Operation Flow Chart
  26. 26. Types of Mutual Fund……… Mutual funds may be categorized in many ways. At the most fundamentallevel, mutual funds may be close-ended or open-ended, which are the typesof mutual funds categorized by their structure. Close-ended funds are redeemable funds having a pre-specified life, atthe end of which the capital is returned to the investors. These are listed in thestock exchanges. After one has subscribed for the units at the time of the initialpublic offer, these cannot be sold back to the AMC until the end of the funds life.Nor can one buy new units from the mutual fund. However, if one wishes toredeem (sell) the holdings or buy into such a fund before the date of maturity ofthe fund, one may do so in the stock exchange where the units are listed.Morgan Stanley Growth Fund is an example of a well-known close-ended mutualfund. Open ended funds on the other hand have no finite life or maturity period,having no finite life. They are also far more prevalent than close-ended funds.They are open for investment and redemption throughout the year. But they arenot listed in a stock exchange. It is the AMC of the fund that offers to sell and buythe units from the investors at what is called the Net Asset Value (NAV).New investors can also buy units of a mutual fund directly from the AMC and notfrom the secondary market. So in an open-ended scheme the number ofoutstanding units varies on a daily basis, while in a close-ended scheme theoutstanding units at any point in time remain constant. Thus, in an open-endedscheme, the fund size constantly increases or decreases on a daily basisdepending on whether redemption by existing unit holders is less thansubscriptions from new investors or vice versa. The next level classification of mutual funds is based on their characteristicswith respect to the risk level of the asset invested nature of asset invested, thefunds objective, industry to which the invested assets belong, trading and
  27. 27. investment strategies adopted, structure, frequency of dividend payments, andso forth. Mutual funds based on an asset class of investment may be equity funds,debt funds, money market funds, Gilt fund, real estate funds and so forth. As thenames suggest, equity funds primarily invest in a portfolio of equity shares; debtfunds in fixed return instruments; money market funds in short-term moneymarket instruments like certificate of deposit, commercial paper. Inter bank callmoney market etc; gilt funds in gilt or bullion or related securities; and real estatefunds invest in real estate. Growth funds, balanced funds and Income funds describe the extent of thecombination of different asset classes in the investments. For instance, a growthfund invests predominantly in equities and very little in debt (e.g. a ratio of 80:20).Also, a growth fund concentrates more on growing the value of the fund by re-investing rather than on paying out dividends. An income fund on the other hand invests in the reverse ratio, e.g. around20:80 in equities and debt securities respectively. The accent here is more onpaying out a steady dividend or income stream. A balanced fund strikes the golden mean investing in a more or less equalmix of equity and debt securities. In general however, all funds keep a smallfraction, perhaps around 5 to 10 per cent of the corpus, invested in moneymarket instruments for easy liquidity. This ensures that the mutual fund is able topay for the units as and when they come for redemption from unit holders. Industry specific or sectoral funds focus upon specific industries orsectors. For example, the sector of focus could be information technology,biotechnology, pharmaceuticals, banking, emerging stocks, small and mediumenterprises, or even geographic sectors, such as emerging markets, Asia Pacific,India, China and so forth., For example, a FMCG fund limits its investments tosecurities issued by companies engaged in the business of fast movingconsumer goods and other similar businesses. An MNC fund invests inmultinational or transnational companies. Often the name of a sectoral fund fairlydescribes the investment objective of the fund. For example, HSBC Floating RateFund Short Term Plan invests mostly in floating rate short-term debt instruments.
  28. 28. A real estate fund basically invests in real estate properties. Like regularmutual funds, real estate funds pool money from investors, but unlike otherfunds, they predominantly invest in securities issued by real estate companiesand in the absence of these securities they invest in real estate properties. Again,unlike other funds, calculation of the daily NAV’s for these funds is not asstraightforward as the valuation of the underlying investment units. This isbecause real estate is typically much more illiquid than securities and real estateprices are not available with as much frequency as securities on. a day-to-daybasis. Real estate funds are only just making an entry in the Indian capitalmarket. Recently SEBI spelt out the guidelines for these funds and some AMC’sare in the process of launching these funds. Then there are index funds that invest in companies belonging to specificindices such as Sensex or Nifty. Schemes or funds may also be characterized by their investment objective.For example, a fund may be called a Childrens Fund or Young Citizens Fund,etc. A childrens fund may enable parents or relatives to invest with the specificpurpose of generating savings to meet the anticipated expenses of their childrenin the future. Young Citizens Fund may be directed at young professionals. Adividend re-investment plan may not payout periodic dividends but may re-investthe dividends into new units. Typically, these schemes are open-ended in natureand often carry a lock-in provision, so that the unit holders have to wait till thisperiod is over before redeeming the units. Often AMCs suffix their funds with G/Q/ MD/ WD/ DD along with the name to indicate a growth plan or quarterly/monthly/weekly/daily payment of dividends (See Box 77.1). Box 77.1Name OptionFloating Rate Short Term Plan (G) GrowthFloating Rate Short Term Plan (MD) Monthly DividendFloating Rate Short Term Plan (WD) Weekly DividendFloating Rate Short Term Plan (DD) Daily Dividend For example, HSBC Mutual Fund offers the above options for its HSBCFloating Rate Fund Short Term Plan. Mostly the fund invests in floating rate debtinstruments.Incidentally, even when a mutual fund offers a daily dividend option in realitythey may not actually distribute cash on a daily basis. They may simply re-invest
  29. 29. the daily dividend back into the scheme so that additional units are allotted to unitholders.As stated earlier, a single AMC may offer many different mutual funds orschemes. Appendix 2 provides a list of various mutual categories of mutual fundsbeing offered by the HDFC Mutual Fund. Lewis Carroll on Types of Mutual Funds (with apologies in Alices Adventures in Wonderland) Never imagine mutual funds not to be otherwise than what they might appear to others that what they are or might have been was not otherwise than what they had been would have appeared to them to be otherwise.Different kinds of mutual funds available in India…….. With the growth of the mutual fund industry in India, the AMCs offerschemes with many innovative features to cater to different clients. Figure 78.1lists a few of the schemes along with their objectives that are offered by variousAMC’s in India. Even though these schemes have many common features, theAMC’s of each of these try to incorporate some unique features into each fund inorder to create a special appeal for some select group of investors. The offerdocument of each scheme of the AMC’s, provide this information in greater detailin their websites.Structural arrangement of an average mutual fund…….
  30. 30. Mutual funds in India function under a 3-tier structure as indicated in Figure79.1. The promoters or sponsors intending to float a mutual fund appoint trusteesand set up an AMC, which in turn appoints a custodian/depository, registrars,transfer agents and auditors. The mutual fund industry in India and all the participants involved in thisbusiness are governed by SEBI. A sponsor or promoter first applies to SEBI toget a registration in order to start mutual fund activities. SEBI grants a certificateof registration if the sponsors fulfill the necessary criteria of experience,profitability, positive net worth, etc.Next, the sponsor forms a trust under the provisions of the Indian Trusts Act,1882, appoints trustees and forms a board of trustees. The composition of theboard of trustees is governed by SEBI. For example, a certain number of trusteeshave to be independent persons, not associated with the sponsors in anymanner whatsoever. Entities in a Mutual Fund Business The trustees play a critical role as they hold in trust the investments of theinvestors/ unit holders of the mutual fund. The trust deed contains clauses that
  31. 31. are necessary for protecting the interests of the unit holders. In general, thetrustees act as a self- regulating body and protectors of the unit holders money. The board of trustees does not manage the day-to-day activities of themutual fund directly. Instead, it appoints an Asset Management Company (AMC)to perform that task. Normally an AMC is registered under the Companies Act,1956.It may be a private limited company or a wholly owned subsidiary of a publiclimited company or even a joint venture. Table 79.1 lists three AMC’s underdifferent forms of ownership. SEBI also requires that AMC’s have a certain minimum net worthcontributed by the sponsors. Thus, de facto an AMC manages a mutual fundscheme while, de jure the trustees manage them. The trustees also monitor theperformance of the AMC and ensure that it complies with various regulations ofSEBI.
  32. 32. A custodian holds the securities of various schemes of the fund in theircustody. Before dematerialization of shares was introduced, share transfers weredone in physical form. As mutual funds regularly buy and sell huge volumes ofsecurities, the custodians used to receive, transfer and hold the physicalcertificates on behalf of an AMC. However, following demat of securities; theterm custodian has given way to the depository. A depository maintains an on-line record of ownership of securities bought and sold by a mutual fund indematerialized form, just as a bank records the balance in ones account. The registrar is appointed in order to accept and process the unit holdersapplications, and inform the AMC regarding the amount received for subscription,redemption and so forth. Transfer agents are responsible for issuing and redeeming units of thescheme and provide other related services such as preparation of transferdocuments and updating investor records. They are the conduit through whichfresh units are issued to new buyers or units sent back to the AMC forredemption. The trustees appoint the top management of the AMC, such as ChiefInvestment Officer or Chief Executive Officer as well as fund manager(s) for thevarious schemes. The trust company also appoints an auditor to audit the booksof accounts of all the schemes. Auditing the financial details for a specificscheme, is an important aspect as in the past there have been several instanceswhere AMC’s have resorted to inter-scheme transfer of securities to make aspecific scheme more attractive. Such manipulations acquire ominousproportions particularly when the transfer of securities from one scheme toanother is done at a price different from the market price. In such cases, unitholders of one scheme benefit at the cost of another. Having organized its structure comprehensively, an AMC is ready to floatvarious schemes, each one tailored to the requirements of different sections ofthe public. An AMC may appoint separate fund managers for each scheme underits umbrella or may assign two or three schemes to a specific fund manager. One of the important aspects of this multi-tiered organization structure in themutual fund business is to clearly segregate the involvement of sponsors. Thetrust company and the board of trustees form the proverbial Chinese wallbetween the promoters of the mutual fund business and the money invested bymillions of unit holders. Apart from their other supervisory roles, the trustees alsoensure that aggregate investment by the sponsor promoted AMC into the listedsecurities of group companies of the sponsors, does not exceed a certain limit. In
  33. 33. short, the trustees ensure that sponsors do not use the AMC as a vehicle tochannel the unit holders money to their own group companies.Example of the above structural arrangement……..Let us consider the mutual funds floated by Kotak Mahindra. Kotak MahindraBank Limited (KMBL), as the sponsor, established Kotak Mahindra TrusteeCompany Limited (KMTCL) as the trustee company. KMBL also floated KotakMahindra Asset Management Company Limited (KMAMC) as theAMC/Investment Manager. KMAMC offers many different kinds of schemes suchas, Kotak Global India, Kotak Savings Plan, Kotak MNC, Kotak Tech, etc.Computer Age Management Services Private Limited is the registrars, DeutscheBank and ABN AMRO are the custodians and Price Waterhouse is the auditorsfor the fund.Difference between IPO of a mutual fund and IPO of acompany Depending upon the type of mutual fund an AMC expects its potentialinvestors to be interested in; it makes an initial public offer (IPO) for a suitablydesigned scheme. Until the middle of 2005, AMC’s announced an IPO every timethey launched a new scheme. But this confused the investors somewhat, asnormally only the first public issue of a company is called an IPO (all subsequentissues to public merely being public issues). Hence the AMFI (Association ofMutual Funds in India) and SEBI instructed the AMC’s to use the term NFO (NewFund Offer) rather than IPO for launching their new schemes. AMFI is theassociation of all AMC’s registered with SEBI, which promotes professional andethical standards in the mutual fund industry in India. But this is not the only pointof difference between the IPO of a company and the NFO of a mutual fund. One other difference pertains to the issue of pricing. In an IPO, a companymay issue shares at a premium over the par value. For example, an IPO may be
  34. 34. priced at Rs. 60 per share, representing Rs. 50 premium over the face value ofRs. 10 per share. But the concept of a premium is not applicable in case ofmutual fund units, which carry only their face value. Another difference pertains to the matter of oversubscription. In an IPO, acompany is normally required to return the over-subscribed amount to theinvestors (though companies can exercise greenshoe option). However, in anNFO, the AMC retains the entire -amount that it mobilizes. Incidentally, it may benoted that this also impacts the pricing of shares vis-à-vis units following thepublic offer. This is because, when an IPO of a company is over-subscribed by alarge margin, there is a huge unfulfilled demand and that pushes up the price ofshares following the public offer. However nothing like that happens in case ofNFO’s of mutual funds. The fund starts trading at the Net Asset Value (NAV),(Question 85 has more on calculation of NAV) which in turn depends upon thevalue of the underlying portfolio of the relevant scheme. Lastly, the price of a share may be influenced by speculation, rumors,corporate performance, forces of demand and supply, etc. so that there could besignificant swings in share prices. However the NAV of a mutual fund scheme islargely governed by the value of the underlying securities (which could add up to30, 50 or even more securities) into which the fund stays invested and is hencefar less volatile. For example, it is not unknown for the market price of a share todouble over a relatively short period of time. But for the NAV of a particularscheme to double in the same time, each and every one of the underlyingsecurities will have to double in their market price, which is highly unlikely.Offer Document of Mutual Fund…….When launching any new scheme, the AMC prepares an offer document. Thisprovides the name of the scheme, its specific investment objectives, entry/exitload structure and other attributes such as, minimum investment requirement,face value, periodicity of dividend payments and so forth. The document oftencontains so much information that it runs into 60-70 pages, although innewspapers there is usually only a quarter-page highlights in the form of anadvertisement. Almost all mutual funds put their offer document on theirwebsites.
  35. 35. Once the offer closes, the AMC issues the units of the scheme to theinvestors and the funds mobilized are invested according to the broad investmentobjectives indicated in the offer document. For example, the investment objectiveor investments mandate of a certain scheme may be to invest at least 70 percent in equity and equity-related securities issued by service sector companiesand the balance in debt and money market instruments. Thus, such a schemetargets itself at those investors who feel that investing a sizeable amount in theservices sector affords a good opportunity of investment. This mandate indicatesthat if one is an investor looking for a regular income from the investment and/ orif one has a very short-term investment horizon, then this scheme may not besuitable. The offer document also indicates whether a unit holder will receive a -return through regular dividend or only the capital appreciation on the investment,or a combination of both. It may also require the unit holder to specify whetherdividends should be paid daily, weekly, monthly or quarterly and so forth. Thedocument also specifies the face value of a unit (which may vary depending onthe scheme) and the minimum application amount for a single unit holder, etc.Costs associated with investing in mutual funds…… The offer document provides details of the various costs associated withinvesting in the funds. Needless to say, an AMC incurs several expenses inmanaging the fund on behalf of the investors. Some of these are recurringexpenses while others are one-time. The annual recurring expenses recovered as fund management fees fromthe investors include trustee fees, custodian fees, registrar fees, investmentmanagement and advisory fees and other recurring operating expenses. Thisincludes ongoing marketing and selling expenses, brokerage and transactioncosts, audit fees, costs related to providing accounting statement, dividendredemption cheques and warrants, insurance premium paid by the fund, salariesto staff, etc. In general, mutual funds cannot exceed the fund management feesindicated in the offer document. The AMC passes on these annual recurring expenses or fund managementfees to the investors as entry or exit loads.The annual recurring expense is normally expressed as a percentage of the netassets and is referred to as expense ratio. SEBI has given directives on the
  36. 36. expense ratio to be charged by AMC’s. This ratio is a graded ratio. For example,equity funds may charge up to 2.5 per cent of the average weekly net asset ofthe fund for the first Rs. 1,000 million, 2.25 per cent on the next Rs. 3,000 million,2 per cent on the following Rs. 3,000 million and 1.75 per cent on any amountabove this. Debt funds, balanced funds, and liquid funds may charge differentamounts as prescribed by SEBI. These expense ratios form an upper limit. Giventhe structure of expenses, the bigger funds will obviously have lower expenseratios. Entry load or the front-end charge is applied when investors buy units of ascheme. Thus, if the entry load is 2 per cent, then the AMC deducts 2 per cent ofthe total fund mobilized straight away and invests the balance 98 per cent of thecorpus to create the investors portfolio. Hence, if the face value of a scheme isRs. 10, the opening NAV will be only Rs. 9.80 and not Rs. 10, since 2 per cent isdeducted towards expenses. Exit Load, or the back-end load, is levied when an investor exits the scheme(i.e. sells his units). For example, if a fund charges an exit load of 2 per cent andthe NAV of the scheme is Rs. 20 only Rs. 19.60 will be received when the unitsare redeemed or sold.Normally AMC’s do not charge both entry and exit loads for a given scheme. Ascheme may also be a no-load scheme, if the AMC chooses not to levy any loadwhatsoever on a scheme. There are some variations to these loads. One of them goes by a ratherpompous terminology as contingent deferred sales charges (or CDSC). CDSC isa back-end load with a difference. It varies depending upon the duration forwhich an investor remains invested in .the scheme. Typically, it rewards aninvestor for loyalty that is, for remaining with the scheme longer. For example, afund may levy a CDSC of 2 per cent if the investment is for less than one yearfrom the time of investing; 1.5 per cent if it is between one and two years; 1 percent for between two and three years; 0.5 per cent if it is between three and fouryears; and there is no charge if the investment is for more than four years. CDSCis normally computed on the face value of the unit or the NAV whichever is lower.More often than not, CDSC is levied by debt funds more than equity funds. Exit loads are generally structured so as to discourage large redemptionsand in a certain period they carry higher exit loads while smaller redemptionsduring the same period may carry smaller exit loads. Similarly, large investorsare rewarded with lower or no entry load in order to attract a bigger corpus whilesmall investors are levied a higher load. Surprisingly, there have been occasions
  37. 37. when some AMC’s have inexplicably done the opposite, i.e. levied lower exit load(in percentage terms) to be compared etc. NAV’s and performance of otherschemes of the fund, both past and present and other relevant information,including financial information about the sponsors and information about theboard members of the mutual fund trust company etc. are also mentioned in this. The offer document also lists out details of the growth or dividend options.For example, under dividend option it may mention the periodicity of dividendsand reinvestment plans, etc. It also clearly mentions the day of the week onwhich the AMC will declare the dividend. For example, in the case of HSBCFloating Rate Short Term Plan-Monthly Dividend Option, the dividend is declaredon the last Friday of each month. Similarly, the exact date for quarterly andweekly dividend is also mentioned. While the offer document with its 60-70 pages of information might appearintimidating to the newly initiated, in reality these documents are fairlystandardized and one soon learns which information is more relevant. It ishowever, very important to read the fine prints more than anything else. A simpleand trivial sounding term like automatic renewal could create a great problem asit may give the AMC the right to shift the investment from a close-ended fundupon its maturity to some other fund, unless redemption instructions arecommunicated to them on time. To sum up then, one should not only look for important factors that couldaffect the risk and return of the investment in a scheme, but also develop the skillto read the fine prints. The devil, as they say, often lurks in the details.Net asset value (NAV) and its calculation……. It is important here to first distinguish between the NA V of fund and theNAV of a unit. The NAV of a fund at any point in time is the sum total of themarket value of the assets (securities) that comprise its portfolio, net of anyliabilities at that time. In other words, the NAV of a fund is the amount that all theunit holders will receive after paying all its liabilities. The NAV of a unit or NAVper unit on any given day simply the NAV of the fund divided by the number ofoutstanding units of the scheme on that day. For example, if the market value ofsecurities of a mutual fund scheme is Rs. 20 million, net of all its liabilities on agiven day and the mutual fund has 1 million units outstanding on that day, theNAV per unit will be Rs. 20.
  38. 38. The most common use of the term NAV represents the NAV per unit. This isthe price at which all the buying and selling of units with the AMC takes place.Simply put, NAV is the market value of the securities held by the scheme. As themarket price of the underlying securities change daily, so also does the NAV of ascheme, although the change is much less than that of a single security. AMC’s are required to calculate the NAV of all open-ended schemes on adaily basis and at the least on a weekly basis for close-ended ones, and publishthese in a minimum of two national newspapers. The NAV’s are also available onthe websites of the respective AMC’s as well as on the website of AMFI.The specific formula for computing the NAV is as follows:A. (Market Value of Investments + Receivables + Other Accrued Income + OtherAssets)LessB. (Accrued Expenses + Other Payables + Other Liabilities)Divided byC. Number of units outstanding on the NAV computation date Clearly all the items against A above are the various assets of the mutualfund, while all the items against B are the liabilities. The market value ofinvestments of the fund is impacted by the individual market prices of theinvested securities. Receivables come about in the process of transacting theunits where certain sale proceeds of the scheme are yet to be received. Otheraccrued income and assets may typically be the various dividends or interestaccrued from the funds investments, but not yet received. Similarly, accrued expenses may represent various loads, issuing expensesor other accrued expenses payable to the AMC from the scheme. The payablesand other liabilities may be occasioned in the course of units being transacted,where the scheme has yet to pay the unit holders for their redemptions. Theycould also be the dividends of the units themselves that are payable to the unitholders. The net amount of the two sets of items (A and B) represents the net assetvalue (or net market value or net realizable value) of the fund for the unit holdersas a whole. When divided by item C, namely the number of units outstanding onthe NAV computation date, it yields the NAV per unit.
  39. 39. It can thus be seen that the NAV is impacted every time an investor buysinto or exits from the scheme. Clearly, large-scale redemptions have an effect oflowering the NAV. Even though all funds maintain some liquidity for meeting theneeds of normal redemptions, large-scale redemptions may force a fundmanager to sell large volumes of securities in a hurry. This may put a downwardpressure on the market value of the securities being redeemed, which in turnmay result in a lower NAV. Also, if such a large-scale redemption has to beundertaken when the market conditions are unfavorable, the NAV again takes adip. If the fund holds stocks whose values were expected to go up in the future,the interest of the non-redeeming unit holders is compromised as their NAV’sbecome much lower, as they are deprived of future appreciation of market valueof those stocks. Incidentally, the NAV of a close-ended fund is different, and is generally lessthan its market price. There are several reasons for this phenomenon. Perhapsthe most significant of them is the fact that while the NAV is computed at the endof the day, it is effectively reported only the next day, by which time the marketvalue of the underlying securities may have risen (though of course this need notalways be the case). When the market price of a fund is greater than the NAV, itis said to trade at a premium; and when it is lower than the NAV, it is said totrade at a discount. It is noteworthy that this does not apply to open-ended funds,as they are not quoted in the stock exchanges and hence have no market value;they have only NAV’s.Does NAV reflect the best estimate of the net market value of a schemesinvestments?This depends on what one means by the term best estimate. It is a fact thatcomputation of NAV is not without some problems. For example NAV depends alot on the market prices of all the underlying securities of the scheme.However, market prices are not always available for every invested security. Forexample, shares of many companies in India are traded very infrequently. Again,trading in most corporate debt securities is negligible. Often, securities likeconvertible debentures or warrants do not trade at all or the trading may be toothin for the prices to be representative.Thus, the calculation of the NAV is hindered by the problem of non-availability ofdaily market prices for all the underlying securities. It is for these reasons that themarket price and the NAV of a fund are rarely the same. What is worse is thatsuch situations often present an attractive incentive for the mutual funds tomanipulate the computation of the NAV’s. The intensity of the problem is mild or
  40. 40. strong depending on the proportion of the scheme invested in illiquid stocks. Tohelp minimize this problem, SEBI has prescribed detailed guidelines on how notraded or thinly traded securities and other types of illiquid securities such asconvertible debentures, call money papers, short term-deposits with banks andsecurities with put and call options, etc. are to be valued for the purposes ofcomputing NAV.Difference between index funds and mutual funds………An index fund is also a mutual fund, except that it only invests in securities ofcompanies underlying a major market index. For example, a mutual fund thatinvests only in the 50 securities underlying the Nifty will track only the Nifty. Indexfunds characteristically mimic popular indices like Sensex, Nifty, BSE-I00 or othermajor market indices such as Crisil Composite Bond Index, etc. Index funds mayalso mimic specific industry indices. An index fund that tracks a specific index not only invests in the securitiesthat comprise the index, but does this in the same proportion as they arerepresented in the index. For example, a mutual fund tracking the Sensex willinvest in the stocks of 30 companies that make up the Sensex index, in the sameproportion as the weights assigned to these companies in the index. Fund basedon the Sense x would thus invest 8.28 per cent of the total portfolio in Infosys,12.33 per cent in Reliance Industries, 6.65 per cent in ICICI Bank and so forth,on that day. Depending upon the changes in underlying share prices on the nextday, the weights of the shares in SENSEX would change again, and the fundmanager would alter the portfolio accordingly so that the weight age of sharesboth in the portfolio and the Sensex are the same. At times, fund managers may depart from this norm by changing theweights of some or, all of the securities in the index depending upon theirperception of the specific stocks securities comprising the index. However, suchfunds cannot strictly be called pure index funds. For example, ING Vysya NiftyPlus Fund invests 70 per cent of the total corpus in the same proportion to that ofthe Nifty, while the balance 25 per cent of the fund is invested in a few otherstocks from the Nifty itself, in order to create an overweight position in thesestocks.Typically, a funds offer document details the actual portfolio composition withinthe larger investment objective of tracking a specific index.Index funds provide certain features that other mutual funds do not and viceversa. To begin with index funds are more diversified than other types of mutual
  41. 41. funds. In other types of funds, a fund manager selects the securities forinvestment while in an index fund, security selection is not an issue. Of course,that can swing returns either way, but risk is precisely about volatility or swing ofreturns. An index fund on the other hand, takes away the selection of securitiesfrom the fund manager and reduces his job to simply mimicking an index. Thus, an index fund keeps the volatility of returns close to the marketvolatility, because by definition an index is merely a representation of the marketas a whole. For these reasons, the indexed management strategy is called apassive management strategy. This is also why entry/ exit loads on index fundstend to be lower compared to other kinds of equity funds that require activemanagement strategies for stock selection. However in times of market upswings, AMC’s have been known to chargeor increase the entry load on index funds in order to capitalize on the goodperformance of the market. One must therefore closely examine the entry/ exitload structure in any index fund particularly when they try to buy or sell unitsduring a market upswing. Index funds are not suitable for investors wanting to beat the- market, asbeating the market with index funds is an oxymoron, simply because the returnon an index fund moves in line with the market. Nor are they suitable for aninvestor with a very short-term investment horizon, as swinging with the market isa fairly long affair. (Appendix-3 lists some of the index funds.) On the whole, however, index funds provide a safer (less risky) investmentopportunity, unlike actively managed funds, which entail higher risk. Normallythere is very little variation in the returns of index funds, as all stock indices areusually highly correlated.Shareholder’s Rights……..Owners of shares in mutual funds receive investment income dividends derivedfrom dividends and interest earned on securities in the portfolio. Capital gainsdistributions are made when and if long-term gains are realized on the sale ofsecurities in the portfolio. Income dividends are paid quarterly or semiannually;capital gains distributions are usually made annually, toward the end of the fiscalyear of the fund. A variety of services are offered to shareholders by mutualfunds. Most funds provide accumulation plans, in which investors may buyshares at regular intervals, have dividends reinvested automatically, and acceptcapital gains distributions in additional shares. A few mutual funds offercontractual plans wherein the shareholder agrees to invest a certain amounteach month. Many financial institutions offer a so-called family of open-endmutual funds, allowing investors to divide their savings among funds with varying
  42. 42. objectives but managed by the same sponsor and to switch from one fund toanother at little or no cost. A number of funds also offer withdrawal plans, underwhich shareholders may receive payments from their investment at regularintervals while income dividends and capital gains are routinely reinvested.Mutual Funds in Indian Capital Market…….Retail investors usually want to participate in the Capital market but due topaucity of funds, lack of expertise knowledge and limited risk - bearing capacitythey have limited access to capital market. Mutual funds provide a mechanismthat helps the retail investors enter the capital market. The mutual funds managetheir funds for maximum gain at minimum risk and in the most professional wayand work as agent for growth and stability of capital market. Till 1964, there wasno mutual fund in India. In 1963, UTI Act, 1963 was enacted for theestablishment of first mutual fund. The UTI launched its first scheme, US-64, in1964 which later became the most popular unit scheme in India. In 1987, the RBIissued bank-sponsored mutual funds. Government of India also issuedGuidelines in 1991 for setting up of mutual funds. In the first phase, i.e., from1964 to 1987, there was single mutual fund (UTI) structure. After 1987, some ofthe commercialbanks started mutual fund schemes, and this second phase continued till 1992.The third phase started after the set up of SEBI in 1992 when the private sectormutual funds were also encouraged. Since then, there h as been a growth innumber of mutual funds as well as the numbers and types of schemes. Duringlast 10 years, mutual funds have become very popular among retail investors.The increase in number of mutual funds and their schemes speak of theunderlying strength of the investors confidence in them. Some of the mutualfunds operating in India are as follows (in alphabetical order): ABN Amro DSP Merril Lynch JM SBIAlliance Capital Escorts Kotak Mahindra StandardBank of Baroda Fidelity LIC Chartered Benchmark Franklin Tempelton Morgan Sun F&C Birla Sunlife GIC Principal Sundarum Canbank HDFC Reliance TataCholamandola ING Vysya Sahara Tauras m UTI Deutsche
  43. 43. The multiplicity of mutual funds has intensified competition and led to productinnovation. Each of these mutual funds has a number of scheme operating withdifferent features and characteristics. There are more than 400 schemes inoperation at present.Immediately after its constitution, SEBI issued the Mutual Fund Regulations in1993. However, with the growth of mutual funds, it was imperative that theyshould follow uniform policies in respect of NA~ valuation of investment,accounting practices, etc. SEBI prepared a Mutual Fund 2000 Report and on thebasis of this report, it prepared more stringent and comprehensive regulations in1996 known as SEBI (Mutual Fund) Regulations, 1996. Since then, there havebeen number of amendments in Regulations, 1996. Besides, SEBI has alsoissued several Guidelines in respect of working of mutual funds.Some of the provisions of the Regulations, 2000 and Guidelines are asfollows: 1. The sponsor, who wants to establish a mutual fund, should have a sound track record and a general reputation of fairness and integrity i.e., must be in business of financial services for 5 years, etc. 2. A mutual fund is constituted in form of trust. The trust shall incorporate an Asset Management Company (AMC). The trustees shall ensure that the AMC has been managing the schemes independently of other activities. 3. The trust shall periodically review the investor complaints received and shall be redressed by the AMC.
  44. 44. 4. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes. The sponsor or its associates shall not have 50% or more of the share capital of the custodians.5. No scheme shall be launched by the AMC unless the offer document contains disclosures which are adequate in order to enable the investors to make informed investment decisions.6. Advertisement in respect of every scheme shall be in conformity with the Advertisement Code.7. Every close-ended scheme shall be listed at a recognized stock exchange, or there will be a repurchase facility.8. The close-ended schemes may be converted into open-ended schemes under certain conditions. A close-ended scheme may be allowed to be rolled over if necessary disclosures about NAV, etc., are made to the unit holders.9. In case of over-subscription for a new scheme, the applicants applying for upto 5,000 units shall be allotted full. The refund to applicants, if any, shall be made within 6 weeks from the date of closure of the list.10. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed by the sponsor or the AMC.11. An open-ended scheme shall be wound up after the expiration of the fixed period, or 75% of the unit holders decide so, after repaying the amount due to the unit-holders.12. The money collected under any scheme shall be invested only in transferable securities in money market or capital market or private placed debts or securitized debts.13. The mutual fund shall not borrow any money except to meet temporary liquidity needs and borrowing, if any, need not be more than 20% of NAV of the scheme, and for period of less than 6 months.14. The funds of a scheme shall not be used in option trading or a carry forward transaction. However, derivatives can be traded by a mutual fund at a recognized stock exchange.15. A mutual fund can enter into underwriting agreement.16. NAV for each scheme shall be calculated by dividing the total assets of the scheme by the number of outstanding units. The NAV of the scheme shall be published in two daily newspapers at interval of not exceeding one week.17. In case of open-ended schemes, the repurchase and sale price shall be published at least once a week.18. The mutual fund shall ensure that the repurchase price of a unit is not less than 93% of NAV and the sale price is not more than 107% of NAV. In
  45. 45. case of close-ended schemes, the repurchase price shall not be less than 95% of the NAV.19. The AMC may charge the mutual fund with investment and advisory fees as per rates prescribed in the Regulations. The issue expenses and redemption expenses of a scheme shall not exceed the limits given in the Regulations.20. The mutual funds are required to raise at least Rs. 20 crores or Rs. 50 crores (for close-ended and open-ended schemes respectively) or 60% of the target amount, otherwise the entire subscription be refunded.21. The unquoted debt instruments shall not exceed 10% in case of growth funds and 40% in case of income funds.22. Investment in one company under any scheme should be restricted to 5% of the corpus of the scheme. Under all schemes, the investment in one company should be restricted to 5% of the paid-up capital of the company. Total investment in all securities (Debts and shares) in one company shall be restricted to 10% of the corpus of the mutual fund.23. Funds under the same AMC should not be lent or invested from one scheme to another, unless the funds are transferred at the prevailing market price.24. All mutual funds must distribute a minimum of 90% of their profits in any given year. The earnings must be segregated as current income, short- term capital gain and long-term capital gain.25. Trading by mutual funds shall be restricted to hedging and portfolio balancing purposes only. The securities held shall be marked to market by the AMC to ensure full coverage of the investments made in derivative products.26. Mutual funds are permitted to participate in the Securities Lending Scheme of SEBI under certain guidelines.27. Mutual funds are allowed to invest in ADRs/GDRs issued by Indian companies. They can also invest in foreign securities under certain conditions and within limits.28. Mutual funds can also invest up to 10% their funds in equity or listed overseas companies which have a shareholding of at least 10% in an Indian company listed on a recognized stock exchange.29. The AMC and the trustees are required to review and disclose the performance of their schemes. They are also required to disclose the performance of the benchmark indices. Any of the following indices may be selected for this purpose: BSE Sensex, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX Nifty 500.
  46. 46. 30. Several Guidelines have been prescribed in respect of advertisement to be issued by mutual funds. Any advertisement, communication, sales literature, or presentation, etc., should not be misleading.31. Detailed guidelines are prescribed for valuation of investments. For this purpose, the investments are classified into traded, thinly traded and non- traded investments.32. Guidelines for identification and provisioning for NPA are also provided. For this purpose, an asset is NPA if the principal/interest is not received for one quarter. On NPA, no interest shall be accrued. If any interest is already accrued, it shall be provided. A provision @ 10%, 20% or 25% of the book value of NPA is required depending upon the period for which it is NPA.33. A mutual fund and the AMC, before the expiry of 1 month from the close of half year, shall publish its financial results in respect of that half year.
  47. 47. Mutual Fund Companies in India……….OverviewABN AMRO Mutual Fund ABN AMRO Mutual Funds are promoted by ABN AMRO Bank, one of the leading banks of the world. In India, the investment management business of the bank is handledby ABN AMRO Asset Management (India) Limited, which is a part of the globalnetwork of ABN AMRO Asset Management.ABN AMRO Asset Management is one of the worlds leading asset managementcompanies with more than 70 years of experience in managing funds forindividual customers and institutional clients including central banks, pensionfunds, insurance companies and other institutions.Benchmark Mutual Fund Benchmark Mutual Fund is one of the leading asset management companies of India. Benchmark Mutual Fund specializes inmanaging Exchange Traded Funds (ETFs). The objective of Benchmark MutualFund is to provide low cost innovative products that enhance returns atacceptable levels of risk.Benchmark Mutual Fund employs quantitative techniques of investing. Thesetechniques involve gathering massive amounts of financial information, analyzingand transforming it to develop disciplined and rigorous models of investing.Birla Sun Life Mutual Fund
  48. 48. Birla Sun Life Mutual Fund is a joint venture between Aditya Birla Group and Sun Life Financial. The Aditya Birla Group is Indias first truly multinational corporation. It is a dominant player in viscosestaple fiber, non-ferrous metals, cement, viscose filament yarn, branded apparel,carbon black, chemicals, fertilizers, sponge iron, insulators, financial services,telecom, BPO and IT services. Sun Life Financial is a leading internationalfinancial services organization providing a diverse range of protection and wealthaccumulation products. The company has operations in key markets worldwide,including Canada, the United States, the United Kingdom, Ireland, Hong Kong,the Philippines, Japan, Indonesia, India, China and Bermuda.BOB Mutual Fund BOB Mutual Fund is sponsored by Bank of Baroda. Bank of Baroda was established in July 1908 by Maharaja of Baroda Sir Sayajirao Gaikwad III. The bank has a 2,704 strong branch network all over thecountry. Bank of Baroda is one of the few Indian Banks with a formidablepresence overseas with 39 branches.BOB Mutual Fund has been established and set up as a Trust under the IndianTrusts Act, 1882 by Bank of Baroda and registered with SEBI. BOB AssetManagement Company Ltd. is a wholly owned subsidiary of Bank of Barodaincorporated on November 05, 1992 acts as an Investment Manager to the BOBMutual Fund.Canbank Mutual Fund Canbank Mutual Funds are sponsored by Canara Bank. The bank was established in 1906 and is a leading nationalized Bank operating in India and abroad, through its network of branches in India and offices in London, Moscow, UAE (Exchange Companies)and Hong Kong.

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