No. Topic Page . No.
1. Introduction 1
2. How Mutual Funds Work 4
3. History of Mutual Funds 7
4. Structure of Indian Mutual Fund Industry 10
5. Fund Structure and Constituents 13
6. How does a mutual fund collect money 17
7. NAV 18
8. Regulatory Aspect 20
9. Types of Mutual Funds 24
10. Benefits of Mutual Funds 27
11. Limitation of Mutual Funds 29
12. Different Plans that Mutual Fund Offers 31
13. Risk v/s Reward 32
14. Types of Risk 34
15. Market Trend 36
16. Recent Trend 38
17. Global Scenario 39
18. Future Scenario 42
19. Impact of Budget 2003-04 on Mutual Fund 43
20. Impact of Budget 2002-03 on Mutual Fund 46
21. Impact of Budget 2000-01 on Mutual Fund 47
22. Performance measures for Mutual Funds 51
23. Analysis of Gilt Funds till Feb 2003 53
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24. Bibliography 56
Project Report on
NAMITA WALVEKAR - - -40
Date of Submission
SEPTEMBER 25, 2003
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N.E.S RATNAM COLLEGE OF SCIENCE , ARTS AND COMMERCE
BHANDUP (WEST ).
I _______________ hereby certify that Namita Walvekar ;40 of NES
Ratnam college ,Bhandup of Third Year Student Bachelor of Management
Studies(T.Y.BMS),(Semester V) has completed a project on “Mutual Funds”
in the year 2003-2004
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I Mr/Miss NAMITA .WALVEKAR of N.E.S RATNAM COLLEGE of
T.Y.BMS(Semester V)hereby declare that I have completed this project on
“MUTUAL FUNDS” in the Academic year 2003-2004. The information collected
and submitted is true and original to the best of my knowledge.
( SIGNATURE STUDENT )
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The data collected for compiling the project are secondary data.
The sources are:
Data from various Internet sites.
Data from newspapers.
Data from current affairs magazines.
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Objective of the project.Objective of the project.
The objective of the project is to understand mutual funds, its different
schemes, benefits offered to its investors and its overall functioning in India .
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Foremost, I would like to express my heartfelt thanks and
acknowledge the guidance and support given by my project guide Prof.
I would also like to convey my thanks to Prof.Miss .Julie Joseph .
A vote of appreciation also goes to Mr. Pankaj Sinha ,Mr.Rishu
Miglani for helping me compile my project
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Mutual Funds: An overview
A Mutual Fund is a trust that collects the savings of a number of
investors who share a common financial goal. Mutual fund offers a simple and
effective way to put money in a number of financial investments that no one investor
could afford. The money thus collected is invested by the fund manager in different
types of securities depending upon the objective of the scheme. These could range
from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciation realized by the scheme are
shared by its unit holders in proportion to the number of units owned by them (pro
There are some things in LIFE that GROW faster than your savings. Your
EXPENSES, for instance. In today’s world of inflation and spiraling costs, you need
to invest your savings wisely so that you get good returns consistently .your end
objective is to maximize returns while minimizing risk . a judicious mix of mutual
funds give you a short at growth in any market condition while reducing portfolio risk
through diversification .
Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed portfolio
at a relatively low cost. Anybody with an investible surplus of as little as a few
thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a
defined investment objective and strategy.
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TYPES / CLASSIFICATION OF FUNDS:
On the basis of on the basis
execution and operation and investment pattern
Income Growth Balance Specialized Money Taxation
Fund Fund Fund Fund Market Fund
For example, a mutual fund could invest in investors
favorite stocks , which if you went to buy on your own would cost lakhs. But since
several other like-minded investors invest with other investors in the mutual fund ,
you get to own many of investors favourite stocks without having to invest huge
A mutual fund provides diversification,professional management and
liquidity.Diversification reduces the risk that negative performance of one type of
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investment will result in a significant loss to the mutual fund and erosion of investor
own money in the fund . Say an investor buy 100shares of ITC Rs.1,00,000 . ITC
reports negative news and the share price 20%. You loose Rs.20,000
Had you invested in a mutual fund which had ITC among other stocks , ITC’s fall
could have been managed by another share’s risk or atleast the loss would not have
been as large .The flip side of course is that had the shares done well ,the investor
would have gained handsomely whereas the gain would have been smaller for the
mutual fund . Mutual funds are managed by professional portfolio managers , who
have the education and experience(atleast that’s what the investor expects )to
research and put investments with the best potential and those that meet the mutual
funds investment objectives. And for a busy person like many investors are , that
means less time researching individual shares and bonds or spending big bucks on
an investment advisor .
Unlike fixed deposits with banks or company deposits , mutual funds shares
/units can be sold back to the mutual fund and the investor can withdraw funds in
some cases by just making a phone-call. A note of caution though-a funds unit price
and return will vary and the investor may have a gain or loss on selling his mutual
fund units. The biggest advantage of mutual funds is that the investor doesn’t need
huge amounts to be invested in all his favourite stocks and bonds . most mutual
funds have a minimum investment of rupees 5000. A mutual fund is the ideal
investment vehicle for today’s complex and modern financial scenario. Markets for
equity shares, bonds and other fixed income instruments, real estate, derivatives
and other assets have become mature and information driven. Price changes in
these assets are driven by global events occurring in faraway places. A typical
individual is unlikely to have the knowledge, skills, inclination and time to keep track
of events, understand their implications and act speedily. An individual also finds it
difficult to keep track of ownership of his assets, investments, brokerage dues and
bank transactions etc.
A mutual fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these functions
on a full time basis. The large pool of money collected in the fund allows it to hire
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such staff at a very low cost to each investor. In effect, the mutual fund vehicle
exploits economies of scale in all three areas - research, investments and
transaction processing. While the concept of individuals coming together to invest
money collectively is not new, the mutual fund in its present form is a 20th
phenomenon. In fact, mutual funds gained popularity only after the Second World
War. Globally, there are thousands of firms offering tens of thousands of mutual
funds with different investment objectives. Today, mutual funds collectively manage
almost as much as or more money as compared to banks.
The flow chart below describes broadly the working of a mutual fund:
passed back to money with returns
investors fund manager
capital market securities
for a specified or in
A draft offer document is to be prepared at the time of launching the
fund. Typically, it pre specifies the investment objectives of the fund, the risk
associated, the costs involved in the process and the broad rules for entry into and
exit from the fund and other areas of operation. In India, as in most countries, these
sponsors need approval from a regulator, SEBI (Securities exchange Board of India)
in our case. SEBI looks at track records of the sponsor and its financial strength in
granting approval to the fund for commencing operations.
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A sponsor then hires an asset management company to invest the funds
according to the investment objective. It also hires another entity to be the custodian
of the assets of the fund and perhaps a third one to handle registry work for the unit
holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management
Company also, in which it holds a majority stake. In many cases a sponsor can hold
a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance
is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has
floated different mutual funds schemes and also acts as an asset manager for the
funds collected under the schemes.
FIVE STEPS TO SELECTING THE RIGHT FUND.
Take into consideration the present needs and future financial goals and what
are the money requirements .
the fund category for investors will depend on two prime factors: :
1) investment objective and time horizon
2) personal risk taking ability
Most of the time the investor gets swayed with market trends and
invest their money in investments , which don’t match with either of the above
parameters . what may be suitable to one investor may not be suitable for
another. Investments must reflect investors risk personality and collectively
perform to help them achieve their financial objective . today there are varied
choices of schemes available to choose from. they offer investors different risk
levels , investment styles and objectives. Based on the investors needs investor
must select what suits him the best . for example ,if investors goal is near term ,
like his sons college fees to be paid in the next semester , then the investor
should look at debt based mutual fund (in this case avoid equity based funds
which have higher risks associated to them ). However if investor plans to buy a
house 5 years later , then investor can have a decent in equity based mutual
funds depending on the investors risk personality . thus based on different goals
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and time horizon you can create a personalized portfolio of different mutual fund
once the investor knows the category of funds that suits him , the next step
is to start deciding specific schemes . this is a very crucial step because there
are so many schemes on offer . the points to be considered before deciding the
scheme : -
a. Period of existence - - it is advisable to invest in schemes which has been
in existence long enough to have built a track record.
b. Past track record - - past is no guarantee for future but analyzing the past
thus gives an investor enough information to make a wise decision .
based on this an investor can take a call on how the fund has performed
over various periods of market fluctuation , and compare that with similar
funds in the category . it will also give you an idea of the volatility of the
returns . select funds , which are steady performers and don’t show too
much fluctuations in returns .
c. Fund house - - to look at the credit worthiness of the fund house . the
quality of the service offered is also important . incase of a foreign fund
house , assess how its schemes have performed overseas.
d. Portfolio Quality - - the most important thing to analyze in any fund is its
underlying investments . these investments and their quality will
determine the returns of the scheme . this information is fairly available on
the internet and funds also come out with regular news letters , which
disclose their portfolios.
Incase of debt funds investor needs to look at the credit quality
of the portfolio .A scheme with large proportion of low graded paper
indicates higher risks and is avoidable.incase of equity – based funds you
should look at how well the portfolio is diversified across sectors and
companies . at times the portfolios are very skewed to certain well performing
sectors that may perform for a small proportion of time only. These schemes
are avoidable .
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e. Corpus size - - select a scheme with a decent corpus size . small corpus
sizes are a problem when faced with redemption pressure in times of
panic as this results in distress sales where existing investors lose out .
incase of debt funds ,subscription to good corporate issues start at very
high lot sizes ,which again may be missed by small funds due to liquidity
f. Adherence to its objectives - - while analyzing the scheme past
performance look into how often it has moved away from its objective .it is
very important for a scheme to stick to its objectives . like a debt fund
can’t invest in equities when equities start performing well .this is
important to do because based on this objectives the investor has to
choose the goals.
g. Incentives - - some intermediaries offer incentive on investments.the
investor for that may upfront money get stucked with a bad performing
fund or a fund which does not match an investors objective.
h. Fund managers objectives - - look into the past track record of the fund
managers with whom an investor is trusting his hard earned money.
Once the investor has selected the scheme the next step is to decide whether
to invest in dividend option or growth .If an investor needs regular inflow of income
then he can opt for dividend option and if he is seeking wealth build up for the future
then select growth option .
When the investor invests it does mean his goals are achieved . it is very
important to continuously monitor them and see if they are performing as per his
expectation . in case of under performance an investor can look at a shift to another
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HOW MUTUAL FUNDS WORK
A large number of people
with money to invest buy
shares/units in a Mutual Fund
Their pooled money has
more buying power
The Fund Manager invests the money in
a collection of stocks, bonds or other securities
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Successful investment adds
value to the fund
Investors receive distributions
Most investment professionals agree that it's smarter to own a
variety of stocks and bonds than to gamble on the success of a few. But diversifying
can be tough because buying a portfolio of individual stocks and bonds can be
expensive. And knowing what to buy — and when — takes time and concentration.
Mutual funds offer one solution: When you put money into a fund, it's pooled with
money from other investors to create much greater buying power than you would
have investing on your own. Since a fund can own hundreds of different securities,
its success isn't dependent on how one or two holdings do. And the fund's
professional managers keep constant tabs on the markets, working to adjust the
portfolio for the strongest possible performance.
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PAYING OUT THE PROFITS :
A mutual fund makes money in two ways: by earning dividends or interest
on its investments and by selling investments that have increased in price. The fund
distributes, or pays out, its profits (minus fees and expenses) to its investors.
Income distributions are from the money the fund earns on its investments.
Capital gain distributions are the profits from selling investments. Different funds
pay their distributions on different schedules — from once a day to once a year.
Many funds offer investors the option of reinvesting all or part of their distributions to
buy more shares in the fund. You pay taxes on the distributions you receive
from the fund, whether the money is reinvested or paid out in cash. But if a fund
loses more than it makes in any year, it can use the loss to offset future gains. Until
profits equal the accumulated losses, distributions aren't taxable, although the share
price may increase to reflect the profits.
CREATING A FUND
Mutual funds are created by investment companies (called mutual fund
companies), brokerage houses and banks. Each new fund has a professional
manager, an investment objective, and a plan, or investment program, it follows in
building its portfolio. The funds are marketed to potential investors with ads in the
financial press, through direct mailings and press announcements, and in some
cases with the support of registered representatives who make commissions selling
History Of Mutual Funds
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Mutual Funds in India (1964-2000)
The end of millennium marks 36 years of existence of mutual funds
in this country. The ride through these 36 years is not been smooth. Investor opinion
is still divided. While some are for mutual funds others are against it.
UTI commenced its operations from July 1964 .The impetus for establishing a formal
institution came from the desire to increase the propensity of the middle and lower
groups to save and to invest. UTI came into existence during a period marked by
great political and economic uncertainty in India. With war on the borders and
economic turmoil that depressed the financial market, entrepreneurs were hesitant
to enter capital market.The already existing companies found it difficult to raise fresh
capital, as investors did not respond adequately to new issues. Earnest efforts were
required to canalize savings of the community into productive uses in order to speed
up the process of industrial growth.The then Finance Minister, T.T. Krishnamachari
set up the idea of a unit trust that would be “open to any person or institution to
purchase the units offered by the trust. However, this institution as we see it, is
intended to cater to the needs of individual investors, and even among them as far
as possible, to those whose means are small.”
His ideas took the form of the Unit Trust of India, an intermediary that
would help fulfill the twin objectives of mobilizing retail savings and investing those
savings in the capital market and passing on the benefits so accrued to the small
UTI commenced its operations from July 1964 “with a view to
encouraging savings and investment and participation in the income, profits and
gains accruing to the Corporation from the acquisition, holding, management and
disposal of securities.” Different provisions of the UTI Act laid down the structure of
management, scope of business, powers and functions of the Trust as well as
accounting, disclosures and regulatory requirements for the Trust.
One thing is certain – the fund industry is here to stay. The industry was one-entity
show till 1986 when the UTI monopoly was broken when SBI and Canbank mutual
fund entered the arena. This was followed by the entry of others like BOI, LIC, GIC,
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etc. sponsored by public sector banks. Starting with an asset base of Rs0.25bn in
1964 the industry has grown at a compounded average growth rate of 26.34% to its
current size of Rs1130bn.
The period 1986-1993 can be termed as the period of public
sector mutual funds (PMFs). From one player in 1985 the number increased to 8 in
1993. The party did not last long. When the private sector made its debut in 1993-
94, the stock market was booming.
The opening up of the asset management business to private
sector in 1993 saw international players like Morgan Stanley, Jardine Fleming, JP
Morgan, George Soros and Capital International along with the host of domestic
players join the party. But for the equity funds, the period of 1994-96 was one of the
worst in the history of Indian Mutual Funds.
1999-2000 Year of the funds
Mutual funds have been around for a long period of time to be
precise for 36 yrs but the year 1999 saw immense future potential and developments
in this sector. This year signaled the year of resurgence of mutual funds and the
regaining of investor confidence in these MF’s. This time around all the participants
are involved in the revival of the funds ----- the AMC’s, the unit holders, the other
related parties. However the sole factor that gave life to the revival of the funds was
the Union Budget. The budget brought about a large number of changes in one
It provided center stage to the mutual funds, made them more
attractive and provides acceptability among the investors. The Union Budget
exempted mutual fund dividend given out by equity-oriented schemes from tax, both
at the hands of the investor as well as the mutual fund. No longer were the mutual
funds interested in selling the concept of mutual funds they wanted to talk business
which would mean to increase asset base, and to get asset base and investor base
they had to be fully armed with a whole lot of schemes for every investor .So new
schemes for new IPO’s were inevitable. The quest to attract investors extended
beyond just new schemes. The funds started to regulate themselves and were all
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out on winning the trust and confidence of the investors under the aegis of the
Association of Mutual Funds of India (AMFI)
One can say that the industry is moving from infancy to adolescence,
the industry is maturing and the investors and funds are frankly and openly
discussing difficulties opportunities and compulsions.
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Structure of the Indian mutual fund industry
The mutual fund industry in India was started by the Unit Trust of India (UTI)in 1963
with the intriduction of the unit scheme US-64.this scheme was a big success ,
which encourage UTI to introduce special schemes like the unit linked insurance
plan(ULIP)in 1971 , Childern’s Gilt Growth Funds(CGGF)in 1986 , master share in
1987 saw the entry of public sector mutual funds into the market .m these were
mainly public sector banks and financial institution,which established their own
mutual funds. SBI mutual fund , Can Bank,LIC mutual fund and Indian bank mutual
fund were among the first to be launched .1993 saw the entry of private sector
mutual funds . These were mainly foreign fund management companies entering
India through joint venture with Indian companies .Mutual funds have been
successful in garnering funds from individual investors under various schemes .With
the introduction of the SEBI in 1996 , the regulatory authority for mutual funds
,investor protection measures have been put in place giving individual investors
added confidence while putting there money with mutual funds . by October 1999 ,
mutual funds had garnered rupees 86.949 crores of which rupees 64,276 crores was
under the management of UTI .
The Indian mutual fund industry was dominated by the Unit Trust of
India, which has a total corpus of Rs700bn collected from more than 20 million
investors. The UTI has many funds/schemes in all categories i.e. equity, balanced,
income etc with some being open-ended and some being closed-ended. The Unit
Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the
biggest scheme with a corpus of about Rs200bn. UTI was floated by financial
institutions and is governed by a special act of Parliament. Most of its investors
believe that the UTI is government owned and controlled, which, while legally
incorrect, is true for all practical purposes.
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The second largest category of mutual funds are the ones floated by
nationalized banks. Canbank Asset Management floated by Canara Bank and SBI
Funds Management floated by the State Bank of India are the largest of these. GIC
AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC
floated by the LIC are some of the other prominent ones. The aggregate corpus of
funds managed by this category of AMCs is about Rs150bn.
The third largest category of mutual funds are the ones floated
by the private sector and by foreign asset management companies. Several private
sectors Mutual Funds were launched in 1993 and 1994. Kothari Pioneer Mutual fund
was the first fund to be established by the private sector in association with a foreign
fund. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. This
signaled a growth phase in the industry and at the end of financial year 2000, 32
funds were functioning with Rs. 1,13,005 crores as total assets under management.
As on August end 2000, there were 33 funds with 391 schemes and assets under
management with Rs. 1,02,849 crores. The Securities and Exchange Board of India
(SEBI) came out with comprehensive regulation in 1993 which defined the structure
of Mutual Fund and Asset Management Companies for the first time.
The diagram below shows the three segments and a few of the players in each
SBI M F LIC M F GIC M F
SUN F&C BIRLA SUN LIFE ALLIANCE CAPITAL PRUDENTIAL ICICI
Indian M UTUAL FUNDS INDUSTRY
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Some of the AMCs operating currently are:
Name of the AMC Nature of ownership
Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Bank
Bank of India Asset Management Company Limited Bank
Canbank Investment Management Services Limited Bank
Cholamandalam Cazenove Asset Management Company
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institution
IDBI Investment Management Company Limited Institution
Indfund Management Limited Bank
ING Investment Asset Management Company Private Limited Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company Limited Private Indian
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Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Limited Institution
Morgan Stanley Asset Management Company Private Limited Private foreign
Punjab National Bank Asset Management Company Limited Bank
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Bank
Shriram Asset Management Company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institution
Zurich Asset Management Company (I) Limited Private foreign
Fund Structure and Constituents
Special legal structure of mutual funds
Mutual funds have a unique structure not shared with other entities
such as companies or firms. It is important for employees and agents to b aware of
the special nature of this structure, because it determines the rights and
responsibilities of the fund’s constituents viz sponsors trustees, custodians, transfer
agent, the fund and the asset management company.
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Structure of mutual funds in India
Like other countries, India has a legal framework within which mutual
funds must be constituted. Unlike in the UK, where two distinct ‘ trust’ and ‘corporate’
structures are followed with separate regulations, in India, open and close end funds
operate under the same regulatory structure, and are constituted along one unique
structure as unit trusts. A mutual fund in India is allowed to issue open end and
closed end schemes under a common legal structure. The structure which is
required to be followed by mutual funds in India is laid down under SEBI ( Mutual
fund) regulations, 199A mutual fund is normally formed as a Trust and is governed
by a Board of Trustees - see diagram below. The Trustees in turn appoint an
investment advisor to manage the various schemes launched by the mutual fund.
This investment advisor is called an Asset Management Company (AMC). The AMC
is responsible for marketing and selling the schemes, investing the funds collected
by it and servicing the investors. The AMC is responsible to the Trustees and has to
take their approval for all major actions taken in connection with the mutual fund. To
help the AMC in its daily activities, it appoints specialists in different areas - a
Registrar & Transfer (R&T) Agent , a Custodian and one or more Banks
The Fund Sponsor
“Sponsor “ is defined under SEBI regulations as any person who,
acting alone or in combination with another body corporate, establishes a mutual
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fund. The sponsor of a fund is akin to the promoter of a company as he gets the
funds registered with SEBI. The sponsor will form a trust and appoint board of
trustees. The sponsor will also generally appoint an asset management company as
fund managers. The sponsor either directly or acting through the trustees, will also
appoint a custodian to hold the fund assets. All these appointments are made in
accordance with SEBI regulations.
As per the existing SEBI regulations, for a person to qualify as a
sponsor, he must contribute at least 40% of the net worth of the AMC and posses a
sound financial track record over five years prior to registration.
Mutual Fund as Trusts
It should be understood that a mutual fund is just “ a pass
through” vehicle. Under the Indian Trust Act, the Trust or the Fund has no
independent legal capacity itself, rather it is the trustee or the trustees who have the
legal capacity and therefore all acts in relation to the trust are taken on its behalf by
the trustees. The trustees hold the unitholders money in fiduciary capacity i.e. the
money belongs to the unit holders and is entrusted to the fund for the purpose of
investment. In legal parlance, the investors or the unit holders are the “ beneficial
owners “ of the investment held by the trust, even as these investments are held in
the name of the trustees on a day – to –day basis. Being a public trusts, mutual
funds can invite any number of investors as beneficial owners in their investment
The trust – the mutual fund- may be managed by a board of
trustees- a body of individuals, or a Trust company- a corporate body. Most of the
funds in India are managed by Board of Trustees. While the Board of Trustees is
governed by the provisions of the Indian Trusts Act, where the Trustee is a corporate
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body, it would also be required to comply with the provisions of the Companies Act,
The trust is created through a document called the Trust Deed
that is executed by the Fund Sponsor in favour of the trustees. Clauses in the trust
deed, inter alia, deal with the establishment of the trust, the appointment of the
trustees, their powers and duties, and the obligations of the trustees towards unit
holders and the AMC.
The trustees must ensure that the investor’s interest is
safeguarded and that the AMC’s operations are along professional lines. They must
also ensure that the management of the fund is in accordance with SEBI
The Asset Management Company
The role of an AMC is to act as the Investment Manager of the
Trust. The sponsors or the trustees, if so authorized by the trust deed appoint the
AMC. The AMC so appointed is required to be approved by SEBI. The AMC would,
in the name of the trust, float and then manage the different investment “schemes”
as per the SEBI regulations and as per the Investment Management Agreement it
signs with the trustees. The AMC of the mutual fund must have a net worth of at
least Rs. 10 crores at all times. The AMC cannot act as trustee of any other mutual
fund. The AMC must always act in the interest of the unit holders and report to the
trustees with respect to its activities.
Other fund constituents
Custodian and depositories
Mutual funds are in the business of buying and selling of
securities in large volumes. Handling these securities in terms of physical delivery
and eventual safekeeping is therefore a specialized activity. The custodian is
appointed by the board of trustees for safeguarding of physical securities or
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participating in any vlaering system through approved depository companies on
behalf of the mutual fund in case of dematerialized securities. The custodian should
be an entity independent of the sponsors and is required to be registered with the
Transfer agents are responsible for issuing and redeeming
units of the mutual fund and provide other related services such as preparation of
transfer documents and updating investor records.
Funds activities involve dealing with money on a
continuous basis primarily with respect to buying and selling units, paying for
investment made, receiving the proceeds on the sale of investments and discharging
its obligations towards operating expenses. A funds banker therefore plays a crucial
role with respect to its financial dealings by holdings its bank accounts and providing
it with remittance services.
How does a mutual fund collect funds?
Mutual funds offer units or shares to the public by issuing an offer
document or prospectus. When an Asset management company or a Fund Sponsor
wishes to launch a new scheme of a mutual fund, they are required to formulate the
details of the scheme and register it with SEBI before announcing the scheme and
inviting the investors to subscribe to the fund. The document containing the details of
the new scheme that the AMC or the sponsor prepares for and circulates to the
prospective investor is called the Prospectus or the Offer Document. This document
1. The face value of each unit in terms of rupees
2. Objective of the scheme
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3. How the funds collected will be invested and what securities or in what money
4. Minimum amount of subscription per application
5. Duration of the scheme
6. Who can apply for units
7. Date of launching the scheme and the date upto which applications will be
8. Repurchase facility (if available) or arrangements proposed to be made for
listing the units on Stock Exchanges.
Each scheme of the mutual funds should be registered with the
Securities and Exchange Board of India (SEBI). The funds give wide publicity
through newspapers about their schemes and make arrangements for collecting the
application money in important centers in one or more banks. After the last date for
receiving the application is over, mutual funds collect all the applications, scrutinize
them and allot units to the applicants and issue them unit certificates, which are
evidence for owning the units.
Mutual funds invest the funds collected from the public according to
the investment objectives stated in the offer documents/ prospectus. Mutual funds
are allowed to invest in a wide range of securities in different industries with a view
to spreading the investment risk.
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Net Asset Value (NAV)
The net asset value of the fund is the cumulative market value of
the assets fund net of its liabilities. In other words, if the fund is dissolved or
liquidated, by selling off all the assets in the fund, this is the amount that the
shareholders would collectively own. This gives rise to the concept of net asset
value per unit, which is the value, represented by the ownership of one unit in the
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fund. It is calculated simply by dividing the net asset value of the fund by the number
of units. However, most people refer loosely to the NAV per unit as NAV, ignoring
the “per unit”. We also abide by the same convention.
The following are the regulatory requirements and accounting
definitions laid down by SEBI
▪ NAV = Net Assets of the Scheme / Number of units outstanding
Market value of investments + Receivables + Other Accrued Income + Other Assets
– Accured expenses – Other Payables – Other Liabilities
Number of units outstanding as at the NAV date
THE SIMPLE FORMULA THAT A NEW INVESTOR CAN USE TO FIND OUT HIS
EARNINGS IS :
NAV = Principle + Profit – Cost(companies expenses)
Calculation of NAV
The most important part of the calculation is the valuation of the assets
owned by the fund. Once it is calculated, the NAV is simply the net value of assets
divided by the number of units outstanding. The detailed methodology for the
calculation of the asset value is given below.
Asset value is equal to
Sum of market value of shares/debentures
• Liquid assets/cash held, if any
• Dividends/interest accrued Amount due on unpaid assets Expenses accrued
but not paid
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Details on the above items
For liquid shares/debentures, valuation is done on the basis of the last or
closing market price on the principal exchange where the security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the value
has to be estimated. For shares, this could be the book value per share or an
estimated market price if suitable benchmarks are available. For debentures and
bonds, value is estimated on the basis of yields of comparable liquid securities after
adjusting for illiquidity. The value of fixed interest bearing securities moves in a
direction opposite to interest rate changes Valuation of debentures and bonds is a
big problem since most of them are unlisted and thinly traded. This gives
considerable leeway to the AMCs on valuation and some of the AMCs are believed
to take advantage of this and adopt flexible valuation policies depending on the
Interest is payable on debentures/bonds on a periodic basis say every 6
months. But, with every passing day, interest is said to be accrued, at the daily
interest rate, which is calculated by dividing the periodic interest payment with the
number of days in each period. Thus, accrued interest on a particular day is equal to
the daily interest rate multiplied by the number of days since the last interest
Usually, dividends are proposed at the time of the Annual General
meeting and become due on the record date. There is a gap between the dates on
which it becomes due and the actual payment date. In the intermediate period, it is
deemed to be “accrued”.
Expenses including management fees, custody charges etc. are
calculated on a daily basis.
A funds NAV is affected by four factors:
▪ Purchase and sale of investment securities
▪ Valuation of all securities held
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▪ Other assets and liabilities
▪ Units sold or redeemed
Schemes of a Mutual Fund
The asset management company shall launch no scheme unless the trustees
approve such scheme and a copy of the offer document has been filed with the
Every mutual fund shall along with the offer document of each scheme pay
The offer document shall contain disclosures which are adequate in order to
enable the investors to make informed investment decision including the
disclosure on maximum investments proposed to be made by the scheme in
the listed securities of the group companies of the sponsor A close-ended
scheme shall be fully redeemed at the end of the maturity period. “Unless a
majority of the unit holders otherwise decide for its rollover by passing a
The mutual fund and asset management company shall be liable to refund the
application money to the applicants,-
(i) If the mutual fund fails to receive the minimum
subscription amount referred to in clause (a) of sub-
(ii) If the moneys received from the applicants for units
are in excess of subscription as referred to in clause (b)
of sub-regulation (1).
The asset management company shall issue to the applicant
whose application has been accepted, unit certificates or a
statement of accounts specifying the number of units allotted to
the applicant as soon as possible but not later than six weeks
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from the date of closure of the initial subscription list and or from
the date of receipt of the request from the unit holders in any
open ended scheme.
Rules Regarding Advertisement:
The offer document and advertisement materials shall not be misleading or
contain any statement or opinion, which are incorrect or false.
Investment Objectives And Valuation Policies:
The price at which the units may be subscribed or sold and the price at which
such units may at any time be repurchased by the mutual fund shall be made
available to the investors.
Every asset management company for each scheme shall keep and maintain
proper books of accounts, records and documents, for each scheme so as to
explain its transactions and to disclose at any point of time the financial position
of each scheme and in particular give a true and fair view of the state of affairs
of the fund and intimate to the Board the place where such books of accounts,
records and documents are maintained.
The financial year for all the schemes shall end as of March 31 of each year.
Every mutual fund or the asset management company shall prepare in respect
of each financial year an annual report and annual statement of accounts of the
schemes and the fund as specified in Eleventh Schedule.
Every mutual fund shall have the annual statement of accounts audited by an
auditor who is not in any way associated with the auditor of the asset
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Procedure For Action In Case Of Default:
On and from the date of the suspension of the certificate or the approval, as the
case may be, the mutual fund, trustees or asset management company, shall
cease to carry on any activity as a mutual fund, trustee or asset management
company, during the period of suspension, and shall be subject to the
directions of the Board with regard to any records, documents, or securities
that may be in its custody or control, relating to its activities as mutual fund,
trustees or asset management company.
Restrictions On Investments:
A mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer, which are rated not below investment
grade by a credit rating agency authorized to carry out such activity under the
Act. Such investment limit may be extended to 20% of the NAV of the scheme
with the prior approval of the Board of Trustees and the Board of asset
A mutual fund scheme shall not invest more than 10% of its NAV in unrated
debt instruments issued by a single issuer and the total investment in such
instruments shall not exceed 25% of the NAV of the scheme. All such
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investments shall be made with the prior approval of the Board of Trustees and
the Board of asset management company.
No mutual fund under all its schemes should own more than ten per cent of
any company’s paid up capital carrying voting rights.
Such transfers are done at the prevailing market price for quoted instruments
on spot basis.
The securities so transferred shall be in conformity with the investment
objective of the scheme to which such transfer has been made.
A scheme may invest in another scheme under the same asset management
company or any other mutual fund without charging any fees, provided that
aggregate interscheme investment made by all schemes under the same
management or in schemes under the management of any other asset
management company shall not exceed 5% of the net asset value of the
The initial issue expenses in respect of any scheme may not exceed six per
cent of the funds raised under that scheme.
Every mutual fund shall buy and sell securities on the basis of deliveries and
shall in all cases of purchases, take delivery of relative securities and in all
cases of sale, deliver the securities and shall in no case put itself in a position
has to make short sale or carry forward transaction or engage in badla finance.
Every mutual fund shall, get the securities purchased or transferred in the
name of the mutual fund on account of the concerned scheme, wherever
investments are intended to be of long-term nature.
Pending deployment of funds of a scheme in securities in terms of investment
objectives of the scheme a mutual fund can invest the funds of the scheme in
short term deposits of scheduled commercial banks.
No mutual fund scheme shall make any investment in;
i. Any unlisted security of an associate or group company of the sponsor; or
ii. Any security issued by way of private placement by an
associate or group company of the sponsor; or
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iii. The listed securities of group companies of the sponsor which is
in excess of 30% of the net assets [of all the schemes of a
No mutual fund scheme shall invest more than 10 per cent of its NAV in the
equity shares or equity related instruments of any company. Provided that, the
limit of 10 per cent shall not be applicable for investments in index fund or
sector or industry specific scheme.
A mutual fund scheme shall not invest more than 5% of its NAV in the equity
shares or equity related investments in case of open-ended scheme and 10%
of its NAV in case of close-ended scheme.
Types of Mutual Funds
Mutual fund schemes may be classified on the basis of its structure and its
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An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value (“NAV”) related prices. The key feature of open-end schemes is
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where they are listed. In
order to provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the Mutual Fund through periodic repurchase at
NAV related prices. SEBI Regulations stipulate that at least one of the two exit
routes is provided to the investor.
Interval funds combine the features of open-ended and close-ended schemes. They
are open for sale or redemption during pre-determined intervals at NAV related
By Investment Objective:
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a majority of their corpus in equities. It has
been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors having
a long-term outlook seeking growth over a period of time.
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
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debentures and Government securities. Income Funds are ideal for capital stability
and regular income.
The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in equities and
fixed income securities in the proportion indicated in their offer documents. In a
rising stock market, the NAV of these schemes may not normally keep pace, or fall
equally when the market falls. These are ideal for investors looking for a combination
of income and moderate growth.
Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of capital
and moderate income. These schemes generally invest in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and
inter-bank call money. Returns on these schemes may fluctuate depending upon the
interest rates prevailing in the market. These are ideal for Corporate and individual
investors as a means to park their surplus funds for short periods.
A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and
exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a
good performance history.
A No-Load Fund is one that does not charge a commission for entry or exit. That is,
no commission is payable on purchase or sale of units in the fund. The advantage of
a no load fund is that the entire corpus is put to work.
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Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment in
specified avenues. Investments made in Equity Linked Savings Schemes (ELSS)
and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961.
The Act also provides opportunities to investors to save capital gains u/s 54EA and
54EB by investing in Mutual Funds, provided the capital asset has been sold prior to
April 1, 2000 and the amount is invested before September 30, 2000.
Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.
Index Funds attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50
Sectoral Funds are those, which invest exclusively in a specified industry or a group
of industries or various segments such as ‘A’ Group shares or initial public offerings.
Benefits of Mutual Fund investment
Mutual Funds provide the services of experienced and skilled professionals, backed
by a dedicated investment research team that analyses the performance and
- 40 -
prospects of companies and selects suitable investments to achieve the objectives
of the scheme.
Mutual Funds invest in a number of companies across a broad cross-section of
industries and sectors. This diversification reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on your
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems
such as bad deliveries, delayed payments and follow up with brokers and
companies. Mutual Funds save your time and make investing easy and convenient.
Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold
- 41 -
on a stock exchange at the prevailing market price or the investor can avail of the
facility of direct repurchase at NAV related prices by the Mutual Fund.
You get regular information on the value of your investment in addition to disclosure
on the specific investments made by your scheme, the proportion invested in each
class of assets and the fund manager’s investment strategy and outlook.
Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds
according to your needs and convenience.
Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy.
Choice of Scheme
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
All Mutual Funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI
Limitations of mutual funds
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It is 100% true that globally, most mutual fund managers underperform the asset
class that they are investing in .This under performance is largely the result of
limitations inherent in the concept of mutual funds. These limitations are as follows:
Entry and exit costs:
Mutual funds are a victim of their own success. When a large body like a fund
invests in shares, the concentrated buying or selling often results in adverse price
movements i.e. at the time of buying, the fund ends up paying a higher price and
while selling it realizes a lower price. This problem is especially severe in emerging
markets like India, where, excluding a few stocks, even the stocks in the Sensex are
not liquid, let alone stocks in the NSE 50 or the CRISIL 500.
Wait time before investment:
It takes time for a mutual fund to invest money. Unfortunately, most mutual funds
receive money when markets are in a boom phase and investors are willing to try
out mutual funds. Since it is difficult to invest all funds in one day, there is some
money waiting to be invested. Further, there may be a time lag before investment
opportunities are identified. This ensures that the fund underperforms the index.
Fund management costs:
The costs of the fund management process are deducted from the fund. This
includes marketing and initial costs deducted at the time of entry itself, called “load”.
Then there is the annual asset management fee and expenses, together called the
expense ratio. Usually, the former is not counted while measuring performance,
while the latter is. A standard 2% expense ratio means that, everything else being
equal, the fund manager underperforms the benchmark index by an equal amount.
Cost of churn:
The portfolio of a fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a
- 43 -
buy and hold type of manager or one who aggressively churns the fund. It is also
dependent on the volatility of the fund size i.e. whether the fund constantly receives
fresh subscriptions and redemptions. Such portfolio changes have associated costs
of brokerage, custody fees, registration fees etc. which lowers the portfolio return
Change of index composition:
World over, the indices keep changing to reflect changing market conditions. There
is an inherent survivorship bias in this process, with the bad stocks weeded out and
replaced by emerging blue chips. This is a severe problem in India with the Sensex
having been changed twice in the last 5 years, with each change being quite
substantial. Another reason for change index composition is Mergers & Acquisitions.
Tendency to take conformist decisions:
From the above points, it is quite clear that the only way a fund can beat the index is
through investment of some part of its portfolio in some shares where it gets
excellent returns, much more than the index. This will pull up the overall average
return. In order to obtain such exceptional returns, the fund manager has to take a
strong view and invest in some uncommon or unfancied investment options. They
follow the principle “No fund manager ever got fired for investing in Hindustan Lever”
ie if something goes wrong with an unusual investment, the fund manager will be
questioned but if anything goes wrong with the blue chip, then you can always blame
it on the “environment” or “uncontrollable factors” knowing fully well that there are
many other fund managers who have made the same decision. Unfortunately, if the
fund manager does the same thing as several others of his class, chances are that
he will produce average results. This does not mean that if a fund manager takes
“active” views and invests in heavily researched “uncommon” ideas, the fund will
necessarily outperform the index.
Different plans that Mutual Funds offer
Growth Plan and Dividend Plan
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A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few income distributions, if any, are made. The investor thus
only realises capital appreciation on the investment. This plan appeals to investors in
the high income bracket. Under the dividend plan, income is distributed from time to
time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income
distribution. This is referred to as the dividend reinvestment plan. Under this plan,
dividends declared by a fund are reinvested on behalf of the investor, thus
increasing the number of units held by the investors.
Automatic Investment Plan
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan
(SIP), the investor is given the option for investing in a specified frequency of months
in a specified scheme of the Mutual Fund for a constant sum of investment. AIP
allows the investors to plan their savings through a structured regular monthly
Automatic Withdrawal Plan
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal
Plan (SWP), a facility is provided to the investor to withdraw a pre-determined
amount from his fund at a pre-determined interval
Risk vs Reward
The first thing that has to be kept in mind before investing is that
when you invest in mutual funds, there is no guarantee that the investor will end up
with more money when you withdraw your investment than what you started out
with. That is the potential of loss is always there. The loss of value in your
investment is what is considered risk in investing.
Even so, the opportunity for investment growth that is possible through
investments in mutual funds far exceeds that concern for most investors.
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At the cornerstone of investing is the basic principal that the greater
the risk you take, the greater the potential reward. Or stated in another way, you get
what you pay for and you get paid a higher return only when you’re willing to accept
Risk then, refers to the volatility—the up and down activity in the
markets and individual issues that occurs constantly over time. This volatility can be
caused by a number of factors—interest rate changes, inflation or general economic
conditions. It is this variability, uncertainty and potential for loss, that causes
investors to worry. We all fear the possibility that a stock we invest in will fall
substantially. But it is this very volatility that is the exact reason that you can expect
to earn a higher long-term return from these investments than from a savings
Different types of mutual funds have different levels of volatility or potential price
change, and those with the greater chance of losing value are also the funds that
can produce the greater returns for you over time. So risk has two sides: it causes
the value of your investments to fluctuate, but it is precisely the reason you can
expect to earn higher returns.
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Focus Suitable Products
Benefits offered by
Bank/ Company FD,
Debt based Funds
Liquidity, Better Post-
Balanced Funds, Some
Diversified Equity Funds
and some debt Funds,
Mix of shares and Fixed
Liquidity, Better Post-
Tax returns, Better
Capital Market, Equity
Funds (Diversified as
well as Sector)
Expertise in stock
picking, Liquidity, Tax
Types of risks
All investments involve some form of risk. These common types of risk
need to be considered and evaluated against potential rewards when an investor
selects an investment.
- 47 -
At times the prices or yields of all the securities in a particular market rise
or fall due to broad outside influences. When this happens, the stock prices of both
an outstanding, highly profitable company and a fledgling corporation may be
affected. This change in price is due to “market risk”. Also known as systematic risk.
Sometimes referred to as “loss of purchasing power.” Whenever
inflation rises forward faster than the earnings on investment, there is the risk that
investor actually be able to buy less, not more. Inflation risk also occurs when prices
rise faster than your returns.
In short, how stable is the company or entity to which an investor
lends his money when he invests? How certain are investors that they will be able to
pay the interest they promised, or repay their principal when the investment
Interest Rate Risk
Changing interest rates affect both equities and bonds in many ways.
Investors are reminded that “predicting” which way rates will go is rarely successful.
A diversified portfolio can help in offsetting these changes.
A number of companies generate revenues in foreign currencies and
may have investments or expenses also denominated in foreign currencies.
Changes in exchange rates may, therefore, have a positive or negative impact on
companies which in turn would have an effect on the investment of the fund.
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The sectoral fund schemes, investments will be predominantly in
equities of select companies in the particular sectors. Accordingly, the NAV of the
schemes are linked to the equity performance of such companies and may be more
volatile than a more diversified portfolio of equities.
Changes in the Government Policy
Changes in Government policy especially in regard to the tax benefits
may impact the business prospects of the companies leading to an impact on the
investments made by the fund.Effect of loss of key professionals and inability to
adapt business to the rapid technological change.
An industries’ key asset is often the personnel who run the business
i.e. intellectual properties of the key employees of the respective companies. Given
the ever-changing complexion of few industries and the high obsolescence levels,
availability of qualified, trained and motivated personnel is very critical for the
success of industries in few sectors. It is, therefore, necessary to attract key
personnel and also to retain them to meet the changing environment and challenges
the sector offers. Failure or inability to attract/retain such qualified key personnel
may impact the prospects of the companies in the particular sector in which the fund
Alone UTI with just one scheme in 1964, now competes with as many
as 400 odd products and 34 players in the market. In spite of the stiff competition
and losing market share, UTI still remains a formidable force to reckon with.Last six
years have been the most turbulent as well as exiting ones for the industry. New
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players have come in, while others have decided to close shop by either selling off
or merging with others. Product innovation is now passé with the game shifting to
performance delivery in fund management as well as service. Those directly
associated with the fund management industry like distributors, registrars and
transfer agents, and even the regulators have become more mature and
The industry is also having a profound impact on financial
markets. While UTI has always been a dominant player on the bourses as well as
the debt markets, the new generation of private funds which have gained substantial
mass are now seen flexing their muscles. Fund managers, by their selection criteria
for stocks have forced corporate governance on the industry. By rewarding honest
and transparent management with higher valuations, a system of risk-reward has
been created where the corporate sector is more transparent then before.
Funds have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds performances are improving.
Funds collection, which averaged at less than Rs100bn per annum over five-year
period spanning 1993-98 doubled to Rs210bn in 1998-99. In the current year
mobilization till now have exceeded Rs300bn. Total collection for the current
financial year ending March 2000 is expected to reach Rs450bn.
What is particularly noteworthy is that bulk of the mobilization has
been by the private sector mutual funds rather than public sector mutual funds.
Indeed private MFs saw a net inflow of Rs. 7819.34 crore during the first nine
months of the year as against a net inflow of Rs.604.40 crore in the case of public
Mutual funds are now also competing with commercial banks in
the race for retail investor’s savings and corporate float money. The power shift
towards mutual funds has become obvious. The coming few years will show that the
traditional saving avenues are losing out in the current scenario. Many investors are
realizing that investments in savings accounts are as good as locking up their
deposits in a closet. The fund mobilization trend by mutual funds in the current year
- 50 -
indicates that money is going to mutual funds in a big way. The collection in the first
half of the financial year 1999-2000 matches the whole of 1998-99.
India is at the first stage of a revolution that has already peaked
in the U.S. The U.S. boasts of an Asset base that is much higher than its bank
deposits. In India, mutual fund assets are not even 10% of the bank deposits, but
this trend is beginning to change. Recent figures indicate that in the first quarter of
the current fiscal year mutual fund assets went up by 115% whereas bank deposits
rose by only 17%. This is forcing a large number of banks to adopt the concept of
narrow banking wherein the deposits are kept in Gilts and some other assets, which
improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored
and they will not close down completely. Their role as intermediaries cannot be
ignored. It is just that Mutual Funds are going to change the way banks do business
in the future.
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Banks v/s Mutual Funds
BANKS MUTUAL FUNDS
Returns Low Better
Risk Low Moderate
Investment optionsLess More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculationMinimum balance between 10th
. Of every month
Guarantee Maximum Rs.1 lakh on deposits None
Recent trends in mutual fund industry
The most important trend in the mutual fund industry is the
aggressive expansion of the foreign owned mutual fund companies and the decline
of the companies floated by nationalized banks and smaller private sector players.
Many nationalized banks got into the mutual fund business in the
early nineties and got off to a good start due to the stock market boom prevailing
then. These banks did not really understand the mutual fund business and they just
viewed it as another kind of banking activity. Few hired specialized staff and
generally chose to transfer staff from the parent organizations. The performance of
most of the schemes floated by these funds was not good. Some schemes had
offered guaranteed returns and their parent organizations had to bail out these
AMCs by paying large amounts of money as the difference between the guaranteed
- 52 -
and actual returns. The service levels were also very bad. Most of these AMCs have
not been able to retain staff, float new schemes etc. and it is doubtful whether,
barring a few exceptions, they have serious plans of continuing the activity in a
The experience of some of the AMCs floated by private sector
Indian companies was also very similar. They quickly realized that the AMC
business is a business, which makes money in the long term and requires deep-
pocketed support in the intermediate years. Some have sold out to foreign owned
companies, some have merged with others and there is general restructuring going
The foreign owned companies have deep pockets and have come in
here with the expectation of a long haul. They can be credited with introducing many
new practices such as new product innovation, sharp improvement in service
standards and disclosure, usage of technology, broker education and support etc. In
fact, they have forced the industry to upgrade itself and service levels of
organizations like UTI have improved dramatically in the last few years in response
to the competition provided by these.
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Some basic facts-
The money market mutual fund segment has a total corpus of $ 1.48
trillion in the U.S. against a corpus of $ 100 million in India.
Out of the top 10 mutual funds worldwide, eight are bank- sponsored.
Only Fidelity and Capital are non-bank mutual funds in this group.
In the U.S. the total number of schemes is higher than that of the
listed companies while in India we have just 277 schemes
Internationally, mutual funds are allowed to go short. In India fund
managers do not have such leeway.
In the U.S. about 9.7 million households will manage their assets on-
line by the year 2003, such a facility is not yet of avail in India.
On- line trading is a great idea to reduce management expenses
from the current 2 % of total assets to about 0.75 % of the total
72% of the core customer base of mutual funds in the top 50-broking
firms in the U.S. are expected to trade on-line by 2003.
Internationally, on- line investing continues its meteoric rise. Many have debated
about the success of e- commerce and its breakthroughs, but it is true that this
- 54 -
aspect of technology could and will change the way financial sectors function.
However, mutual funds cannot be left far behind. They have realized the potential of
the Internet and are equipping themselves to perform better.
In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have
already begun on the Net, while in India the Net is used as a source of Information.
Such changes could facilitate easy access, lower intermediation costs and better
services for all. A research agency that specializes in internet technology estimates
that over the next four years Mutual Fund Assets traded on- line will grow ten folds
from $ 128 billion to $ 1,227 billion; whereas equity assets traded on-line will
increase during the period from $ 246 billion to $ 1,561 billion. This will increase the
share of mutual funds from 34% to 40% during the period.
Such increases in volumes are expected to bring about large changes in the way
Mutual Funds conduct their business.
Here are some of the basic changes that have taken place since the advent of the
Lower Costs: Distribution of funds will fall in the online trading regime by
2003 . Mutual funds could bring down their administrative costs to 0.75% if
trading is done on- line. As per SEBI regulations , bond funds can charge a
maximum of 2.25% and equity funds can charge 2.5% as administrative fees.
Therefore if the administrative costs are low , the benefits are passed down
and hence Mutual Funds are able to attract mire investors and increase their
Better advice: Mutual funds could provide better advice to their investors
through the Net rather than through the traditional investment routes where
there is an additional channel to deal with the Brokers. Direct dealing with the
fund could help the investor with their financial planning.
In India , brokers could get more Net savvy than investors and could help the
investors with the knowledge through get from the Net.
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New investors would prefer online : Mutual funds can target investors who
are young individuals and who are Net savvy, since servicing them would be
easier on the Net.
• India has around 1.6 million net users who are prime target for these funds
and this could just be the beginning. The Internet users are going to increase
dramatically and mutual funds are going to be the best beneficiary. With
smaller administrative costs more funds would be mobilized .A fund manager
must be ready to tackle the volatility and will have to maintain sufficient
amount of investments which are high liquidity and low yielding investments
to honor redemption.
Net based advertisements: There will be more sites involved in ads and
promotion of mutual funds. In the U.S. sites like AOL offer detailed research
and financial details about the functioning of different funds and their
performance statistics. It is witnessing a genesis in this area. There are many
sites such as indiainfoline.com and indiafn.com that are doing something
similar and providing advice to investors regarding their investments.
In the U.S. most mutual funds concentrate only on financial funds
like equity and debt. Some like real estate funds and commodity funds also take an
exposure to physical assets. The latter type of funds are preferred by corporate’s
who want to hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of
January could buy an equivalent amount of copper by investing in a copper fund. For
Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed
percentage of it’s corpus in Gold, Silver, Swiss francs, specific stocks on various
bourses around the world, short –term and long-term U.S. treasuries etc.
In U.S.A. apart from bullion funds there are copper funds, precious metal funds and
real estate funds (investing in real estate and other related assets as well.).In India,
the Canada based Dundee mutual fund is planning to launch a gold and a real
estate fund before the year-end.
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In developed countries like the U.S.A there are funds to satisfy everybody’s
requirement, but in India only the tip of the iceberg has been explored. In the near
future India too will concentrate on financial as well as physical functions.
The asset base will continue to grow at an annual rate of about 30 to 35 % over the
next few years as investor’s shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close shop
or be taken over.
Out of ten public sector players five will sell out, close down or merge with stronger
players in three to four years. In the private sector this trend has already started with
two mergers and one takeover. Here too some of them will down their shutters in the
near future to come.
But this does not mean there is no room for other players. The market will witness a
flurry of new players entering the arena. There will be a large number of offers from
various asset management companies in the time to come. Some big names like
Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One
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important reason for it is that most major players already have presence here and
hence these big names would hardly like to get left behind.
A perceptible change is sweeping across the mutual fund landscape in India.
Factors such as changing investors' needs and their appetite for risk, emergence of
Internet as a powerful service platform, and above all the growing commoditization
of mutual fund products are acting as major catalysts putting pressure on industry
players to formulate strategies to stay the course.
Increased deregulation of the financial markets in the country coupled with the
introduction of derivative products offers tremendous scope for the industry to design
and sell innovative schemes to suit individual customer needs. As it is being
increasingly felt, with the commoditization of products looking imminent, service to
investor and performance would be major differentiators.
Union Budget 2003 - 04 - Impact on MF Industry
The Budget 2003-04 has brought some cheers to the mutual fund industry. The
budget has following proposals for the MF investors:
Investors, once again, will get the tax-free dividends from MF units.
Dividends from Equity Funds will be tax free While Debt Mutual
Funds have to pay distribution tax amounting to 12.5 percent of the
Long-term capital gains tax on equity funds remains at 20 per cent
with indexation, or 10 per cent, whichever is lower. Investments
made in listed equity shares, for one year from April 2003, will be
exempted from long-term capital gains tax.
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Administered interest rates on PPF and small-savings have been
reduced by 1 per cent. Interest on Relief and Savings bonds will also
be reset accordingly. This is likely to give a boost to the debt market.
On the taxation front Budget 2003-04 has the following proposals –
Standard deduction for income tax raised to 40 % or Rs 30,000
whichever is lower, on income up to Rs 5 Lakh p.a.
Standard deduction for income exceeding Rs 5 Lakhs will be Rs
Exemption under Section 80L of the Income Tax Act increased to Rs
15,000, which includes Rs 3000 exclusively for interest from
Surcharge on corporate tax halved to 2.5 % from 5 %.
10 % surcharge for income above Rs 8.5 Lakh p.a.
Tax rebate u/s 88 to include expenditure on children’s education up
to Rs 12000 per child for a maximum of 2 children.
Tax rebate for senior citizens u/s 88 hiked from Rs 15,000 to Rs
Tax exemption on the interest payments on housing loans remains
unaltered to Rs 1.5 Lakh.
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Dividend tax abolished in the hand of the taxpayer.
Long Term Capital Gains on shares removed.
VRS payments up to Rs 5 Lakh exempt from tax.
Budget meets MF industry expectation
In his maiden Budget today, the finance minister Jaswant Singh did not
disappoint the mutual fund (MF) industry as the announcements were in-line with the
industry`s expectations. Jaswant Singh said in his Budget speech, `We need to
promote investment in the industrial sector and improve the debt and equity markets.
We are also committed to bringing small investors back to the equity markets by
restoring their confidence.`
To ensure this, the Budget has proposed that dividends will be tax-free
in the hands of shareholders from April 1, 2003. Domestic companies will pay a
12.50 per cent dividend distribution tax. While mutual funds, including UTI-II,
renamed UTI Mutual Fund, will also pay dividend distribution tax, equity-oriented
schemes are proposed to be exempted from the purview of tax for one year. UTI-I,
however, will be exempt from dividend distribution tax.
To give a further fillip to capital markets, the Budget also proposes
to exempt all listed equities acquired on or after March 1, 2003, and sold after the
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lapse of a year, or more, from the incidence of capital gains tax. Hence the long-term
capital gains tax will not hereafter apply to such transactions. Singh believes that this
proposal should facilitate investment in equities. However, the effects of this
exemption will be reexamined in the next Budget, and the scheme will be enforced
The two initiatives were widely expected by the mutual fund industry.
But, one major thing which mutual funds were hoping for, was allowing asset
management companies to develop new pension products and participate in the
pensions activity because they believe funds have the expertise to manage people`s
money. They also wanted pension funds to be allowed to invest in mutual fund
income schemes or gilt schemes or invest through government approved pension
funds. The finance minister has made no announcements on this front.
Impact of budget 2002-2003 on Mutual Funds
Investment in rated securities of countries in which complete Capital
Account Convertibility prevails.
Abolition in the distribution tax of 10% on companies and mutual funds
on the dividends or income distributed by them. Such income will
henceforth be taxed in the hands of the recipients at the rates
applicable to them, and will be subject to tax deduction at source at the
rate of 10%.
Continued support to the equity oriented funds of the UTI and other
mutual funds. The income received during the financial year 2002-
2003 by unit holders of such funds will be taxed only at 10% as at
Till year 2001-02 (u/s 88) a rebate of 20% was applicable for equity
linked schemes of MF. From year 2002-03, the rebate has been
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slashed down to 10% (subject to maximum of Rs.10000) for investors
whose income ranges between Rs. 150000 to Rs. 500000.
Taxing the recipient of dividend was the last thing the MF industry
wanted. This would adversely impact the retail investor, since the
relative attractiveness of MF scheme will reduce.
Till year 2001-02 a rebate of 20% was applicable for equity linked
schemes of MF. From year 2002-03, the rebate has been slashed
down to 10%. As a result of this decision the equity-linked scheme has
lost out its charm and might loose a class of investors (having income
between Rs. 150000 to Rs. 500000) who largely invested for the tax
The move to allow participation in rated securities of foreign countries
is a positive step taken towards the liberalization in the MF industry.
Mutual funds and the Budget 2000-2001
Deletion of sections 54 EA and 54 EB of the Income Tax Act, 1961.
The above two sections provided relief from capital gains tax if investments were
made in specified securities and locked in for a period of 3 years in the case of 54EA
and 7 years in the case of 54EB. Mutual fund units were one of the specified
securities and this resulted in a lot of money realised as profit from sale of securities
being reinvested in the market through mutual funds.
With the withdrawal of the exemption to mutual funds, investors have lost out on a
very viable alternative for tax saving and funds also would be faced with the problem
of ‘hot money’ as there would no longer be any lock in period for investments. It is
estimated that 54EA investments formed approximately 15% of the corpus.
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Increase in dividend tax from 10% to 20% for debt funds.
The existing dividend tax payable by debt schemes has been doubled to 20%. This
would lead to a reduction in returns available to investors by approximately 1.5%
from the average of approximately 14%. This is expected to hurt retail investment in
debt schemes and could lead to a pull out and reduced mobilisation. Two
implications of this move could be:
• Reinvestment of dividends by investors; since capital gains would be taxed at
a lower rate as compared to dividend, investors would prefer to reinvest
dividend and earn long-term capital appreciation.
• Switch over from debt to equity schemes; since open ended equity schemes
are free from paying dividend tax, these schemes could attract some of the
investment that is pulled out from debt schemes.
Instead of taxing debt schemes so as to bring parity between the banks and mutual
funds, it is widely felt that the finance minister could have simply extended some of
the benefits enjoyed by mutual funds to banks and FIs. The experience with mutual
funds has in any case shown that turning dividends tax free in the hands of investors
has simply improved collections, widened the tax base and reduced procedural
Budget Impact on mutual funds
Important tax provisions of the Union Budget 2001 for the mutual fund
industry are as follows:
New provision introduced to prevent dividend stripping
A new provision has been introduced to bring into tax ambit the notional short term
capital loss booked by investors on mutual funds. As per this provision, any investor
who acquires mutual fund units before 3 months prior to the dividend record
/distribution date and sells or transfers these units within a period of three months
after the record date and obtains dividend income that is exempt from tax, then the
capital loss arising from the such purchase and sale will be ignored to the extent of
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the amount received as tax free dividend.
This will help the interests of the long term investors in mutual fund units as it is
expected to considerably reduce the sharp short term movement of funds into open
ended equity oriented mutual funds. However as the provisions are applicable with
effect from 1st
April 2001, this will lead to large cases of dividend declaration by
mutual funds in equity schemes in March 2001. Investors have a last chance to
undertake dividend stripping by 31st
March 2001 to claim short term capital loss tax
benefits before the new provisions become applicable.
Decrease in dividend distribution tax to 10.2% from 22.4% for Debt/Income
schemes with effect from 1st
Dividend tax payable by Debt/Income mutual fund schemes has been reduced to an
effective rate of 10.2% from 22.4% inclusive of surcharge with effect from 1st
This move is expected to lead to greater flows into dividend option of the income
schemes. This is because earlier long term capital gains tax rate was 11.2% (without
indexation). This lead to investors preferring growth option as effective tax was
lower. However as the difference in the net returns (adjusted for taxation) is now
marginal, investors will now move to dividend option.
Reduction in capital gains tax
The budget has removed the surcharge chargeable to income tax. Thus, Short
tem capital gains tax rate will now be 30.6% against 35.1% earlier.
Long term capital gains tax rate (with indexation benefits) will now be 20.4%
compared to 22.4% earlier.
Long term capital gains tax rate (without indexation benefits) will now be 10.2%
compared to 11.2% earlier.
Exemption from long term capital gains tax for investment in primary market
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The long term capital gains made on sale of mutual funds will be exempt from capital
gains provided the capital gains are invested in primary market issues that are open
for public subscription and are not sold within one year from the date of acquisition.
Income arising on transfer of mutual fund or units of UTI in secondary market
to be taxable retrospectively
The Budget has amended Section 10(33) of the IT Act whereby any income arising
from transfer of units of UTI or mutual fund by unit holders to persons other than UTI
or mutual fund will be taxed. This provisions are applicable with retrospective effect
This clarificatory amendment has been introduced to avoid misuse of the Income tax
provisions whereby capital gains on transfer of mutual fund and UTI units in
secondary market was claimed as exemption by investors.
Other provisions affecting the mutual fund industry
Cut in the small savings interest rate by 1.50%.
Deductions available for interest income under Section 80L maintained at
Rs12000 of which Rs3000 will be exclusively available for interest received
from government securities.
TDS limit for interest income exceeding Rs5000 will now be applicable for all
categories of deposits (including deposits made with financial institutions)
Measures for strengthening the debt market as under:
▪ Setting up of a clearing corporation for orderly development of
money market (including repo), government securities market
▪ Setting up of an electronic Negotiated Dealing System to
facilitate transparent electronic bidding in auctions and
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dealings in Government securities on a real time basis.
▪ Introduction of Electronic Fund Transfer and Real Time Gross
Settlement Systems by RBI.
These measures are expected to lead to shift in investor preference to debt/income-
based mutual funds due to higher returns (net of taxes) available to the investors.
Government Securities based mutual funds will be major beneficiary by the reforms
undertaken in the debt market.
Performance measures for mutual funds
Risk and investing go hand in hand. To know your funds performance, apart from
comparing the performance vi-a-vis the benchmarks, an investor should also make
use of certain statistical measures that make evaluation of a mutual fund even
more precise. Among the most commonly used ratios, there are six ratios, which
we come across very often but fail to understand their utility. They are Standard
Deviation, Beta, Sharpe, Alpha, Treynor and R-Squared.
Standard deviation: Standard deviation is a statistical measure of the
range of a fund's performance, and is reported as an annual number.
When a fund has a high standard deviation, its range of performance
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has been very wide, indicating that there is a greater potential for
Beta: Another way to assess the Fund’s up and down movement is its
Beta measure. Beta measures the volatility of a fund relative to a
particular market benchmark i.e. how sensitive the fund is to market
movements. A Beta greater than 1 means that the fund is more
volatile than the benchmark. A Beta less than 1 means that the fund is
less volatile than the benchmark. For example, a Beta of 1.1 would
indicate that if the market goes up 10%, the fund might rise 11% and
vice versa in a down market.
Sharpe: The most common measure that combines both risk and
reward into a single indicator is the Sharpe Ratio. A Sharpe Ratio is
computed by dividing a fund’s return in excess of a risk-free return
(usually a 90-day Treasury Bill or SBI fixed deposit rate) by its
standard deviation. This measures the amount of return over and
above a risk-free rate against the amount of risk taken to achieve the
return. So if a fund produced a 20% return while the SBI fixed deposit
rate returned 6.5% and its standard deviation is 10%, its Sharpe Ratio
(20 – 6.5) / 10 = 1.35.
Generally, there is no right or wrong Sharpe Ratio. The measure is best used to
compare one fund’s ratio with another, or to its peer group average. For similar
funds, the higher the Sharpe Ratio, the better a fund’s historical risk-adjusted
Sharpe ratio = (Fund Average Return - Risk Free Return) / Standard
Deviation Of The Fund
) : The R-Squared measure reveals what percentage
of a fund’s movements can be related to movements in its
benchmark index. An R-Squared of 100 would mean that all of the
fund’s movements are perfectly explained by its benchmark; Index
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funds normally achieve this ideal. A high R-squared means the beta
on a fund is actually a useful measurement. A low R-squared means
ignore the beta.
Alpha: The Alpha measure is less about risk than it is about "value
added." Alpha represents the difference between the performance
you would expect from a fund, given its Beta, and the actual returns it
generates. A high alpha (more than 1) means that the fund has
performed well. A negative alpha means the fund under performed.
Mathematically, Alpha= fund return - [Risk free rate + Beta of fund (Benchmark
return - Risk free return)]
Treynor: the Treynor ratio is similar to the Sharpe ratio. Instead of
comparing the fund’s risk adjusted performance to the risk free return,
it compares the fund’s risk adjusted performance of the relative index.
Analysis Of Mutual Funds Performance
Performance of some private Mutual Funds are measured based on the following
Change in NAV
Performances of a fund are measured by calculating the change in the value of the
NAV between the two dates in absolute and percentage terms.
Formula:- for NAV changed in absolute terms:
(NAV at the end of the period) – ( NAV at the beginning of the period)
- for change in percentage terms:
(Absolute change in NAV / NAV at the beginning) * 100
Risk Free rate
The Risk free rate is the risk free annualized return which is the average of 91 – day
T-bill of each month. The return on NAV is compared to Periodic Interest Rate. The
monthly return is compared with the Periodic interest rate. The difference between
them is the excess return . Geometric mean of the excess return is calculated.
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1. Allows direct comparison of fund's risk-adjusted return regardless of their
volatilities and correlation with a benchmark.
2. A high Sharpe ratio means that the fund is able to deliver a lot of return for its
level of volatility.
There are three types of benchmarks that can be used to evaluate a funds
performance, relative to the market as a whole, relative to other mutual funds and
relative to other comparable financial products or investment options open to the
investors. The monthly return , is compared with the Benchmark return and excess
return is calculated. The geometric mean of the excess return is calculated.
HDFC MUTUL FUND “continuing a tradition of trust.”
HDFC has acquired some schemes of Zurich and have renamed as
Zurich India equity fund HDFC equity fund .
Zurich India prudence fund HDFC prudence fund.
Zurich India builder fund HDFC capital builder fund
Zurich India tax saver HDFC tax saver
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Zurich India top 200 HDFC top 200 fund
Zurich India high interest fund HDFC high interest fund
Zurich India liquidity fund HDFC cash management fund
Zurich India sovereign guilt fund HDFC sovereign gilt fund
There was tremendous synergy between the two fund houses
and to believe that this acquisition will enable HDFC to offer customers a broader
range of debt and equity products . it will be their endeavor to maintain the
investment styles of the acquired schemes and continue providing you with the
highest level of customer service in line with the HDFC mutual fund tradition .
HDFC offers many other schemes to it potential customers :
Anytime mutual fund (ATMF) :-you can transact in the designated schemes
of HDFC mutual fund any time , any where through HDFC bank and ICICI bank
ATM’s across the country.
Debit credit facility : unit holder can avail of direct credit of redemption
proceeds/dividend payments (if any declare by the trustee )with select banks.
Electronic clearing service (ECS): dividend , if any declared by the trustee ,
can be credited to the unit holder’s bank account in select cities .
Consolidation of folios: in case you have more than one folio with the same
unit holding pattern and the same distributor , you can choose to consolidate all
the folios into one single folio for convenience in transacting .
HDFC has around 19 schemes for its customers.
HDFC children ‘s guilt fund a unique scheme has been started where
the entry load for this scheme is 1%of applicable NAV having no exit load. This is
both debt and equity oriented. The NAV changes every business day.
Children the unit holder attains the age 18 years or until the
completion of 3 years from date of allotment whichever is later. The redemption
proceed is normally dispatched within 3 business days
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HDFC Top 200 Fund: Consistent outperformed - To generate long
term capital appreciation from a portfolio of equity and equity linked instruments.
Multiply Your Money - Mutual Funds
Over 300 schemes from 15 renowned Fund houses!
Prudential ICICI mutual fund ‘taking care of your investments.’
This organization is well known in the country with the operating activities
like banks , home loans, insurance ,mutual funds ,online direct trading ,etc.
The mutual funds organization is named as prudential ICICI.
There are around 10-12 schemes offered by this organization .This is both
debt and equity oriented. The NAV changes every business day. Prudential ICICI
schemes have designed its portfolio turnover stating that it shall generally not
exceed 10 times once the entire corpus is invested and excluding the portfolio
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turnover caused on account of fresh inflows into the scheme and money placed in
call deposits. The scheme to the customers are
1) liquid plan
2) short term plan
3) income plan
4) flexible income plan
5) gilt fund
6) balanced fund
7) monthly income plan
8) growth plan
9) dynamic plan
and plans relating to the specific categories of funds .
Application forms are available at the stock exchange brokers , customer
service center and at the corporate office of the AMC .
Purchase price = applicable NAV (1+entry load , if any )
Applicable NAV differs on every business day.
Depending on the lock-in period value is redeemed.
Redemption price =applicable NAV (1- exit load , if any )
Applicable NAV differs on every business day.
Other mutual fund providers:-
Standard Chartered Mutual Fund is the country's only fund house
focused exclusively on debt schemes. A strong rally in debt markets in the past two
years has also helped this AMC to grow at a rapid clip.
In theory a mutual fund is made up of a number of small investors.
Financial results of mutual funds, however, reveal the presence of investors who
hold more than 25 per cent of NAV in a scheme.
For measuring performance of fund arithmetic mean and the
geometric mean are calculated for the monthly return, excess return over risk free
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return and excess return over the benchmark return for different periods i.e. since
inception, 1 year, 6 months, 3 months and for last 1 month. These were the
parameters for measuring the return of the fund. For the measuring the risk
associated with different funds, Standard Deviation of returns and excess returns are
THE LATEST REPORT:
net purchases/(sales) of equity schemes between April 2003 to 4th
September 2003 is Rest.33.68crores while for debt schemes, for the
same period ,it is Rest.13,02,330 crores (sources:SEBI)
There are 31 mutual fund houses in our country offering 459 open-
The total number of debt schemes (261 schemes)are more than the
sum of equity and balanced schemes.
The total corpus of wealth under management with mutual funds (as
August 2003)is Rs.1,19,548.50crores.
UTI mutual fund has the largest corpus under its management –at
Rs.16,708.33crores(as on 31st
Pru ICICI Mutual fund has the second largest corpus under its
management –at Rest.13,590.53 crores (as on 31st
good Rs.3,117.80 crores lesser than UTI mutual fund.
UTI mutual fund has the largest number of equity schemes
(17schemes),HDFC mutual fund has the largest number of debt
schemes (22 schemes)and templeton India has the largest number of
balanced schemes(11 schemes).
Different funds are compared and given points based on AM and GM of
return, AM and GM of excess return over risk free return and AM and GM of excess
return over Benchmark return. Fund having higher AM and GM are given higher
points. They are also given points based on the standard deviation of return,
standard return of excess return . Lower the SD more points the fund gets.
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Funds are then ranked based on the number of points each funds get .
The Analysis is done for Gilt funds till Feb 2003.
The Analysis is done on the following funds
3. PRUDENTIAL (I)
11. TEMP. Gsec fund TP (G)
Analysis of Gilt funds till Feb 2003
Top three mutual equity diversified funds based on return and risk
Top Mutual balanced based on Risk
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Rank Mutual equity diversified.
1 Frinklin India Prima Fund
2 HDFC Top 200
3 DSPML Opportunity Fund
Rank Balanced Funds
1 HDFC Prudence
Top three medium Term Debt Funds based on Return
Rank Medium Term Debt Funds
1 HDFC Income Fund
2 Templeton India Income
3 Sundaram Bond Saver
Top three long Term Gilt Funds
1 FT India Gilt Fund
2 Tata GSF
3 Templeton India GSF
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The penguin guide to personnel finance Ashu Dutt
AMFI mutual Fund Testing Programme
Investment for beginners----- V.A.Avadhan
Magazines and newspaper
The Times of India
The project has been undertaken with the objective of
understanding the various aspects of Mutual funds and the method of evaluating the
Performance of the fund. The concept of Mutual fund is explained which is followed
by History of Mutual funds, the Structure of the industry and Structure of the Mutual
The various types of Mutual funds have been discussed in
brief followed by merits and Demerits of investing in Mutual Funds and the various
investment options available to the investors. The various risk associated with
investing in Mutual Funds to investors are discussed in brief.
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The Market Trends in the Mutual Fund Industry has been described
followed by the recent trend in Mutual Fund. The Global Scenario and future
Scenario has been discussed.The impact of the Budget 2003-04 on Mutual Fund
has been explained followed by Impact of Budget 2002-03 and 2000-01.
The different measures used to evaluate the performance of
Mutual Fund has been explained and Gilt funds of various Mutual Funds have been
analyzed and ranked based on their risk and return.
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