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Project.doc... mutual funds

  1. 1. MUTUAL FUNDS MEANING DEFINITION WHO ARE THE PARTIES INVOLVED? 1
  2. 2. MUTUAL FUNDS ORIGIN WHAT ARE MUTUAL FUNDS? Mutual Fund is an investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end mutual funds continuously offer new shares to investors. Also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets divided by shares outstanding. In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. 2
  3. 3. MUTUAL FUNDS Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. In India, A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. In Short, a mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 3
  4. 4. MUTUAL FUNDS DEFINITION The securities & Exchange Board of India (mutual funds) regulations, 1993 defines a mutual fund as “a fund established in the form of a trust by a sponsor, to raise money by trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations”. These mutual funds are referred to as Unit Trusts in the U.K. and as open end investment companies in the U.S.A. therefore, Kamm, J.O. defines an open end investment company as “an organization formed for the investment of funds obtained from individuals & institutional investors who in exchange for the funds receive shares which can be redeemed at any time at their underlying asset values”. According to Weston J. Fred & Brigham, Eugene, F., Unit Trusts are “corporations which accepts dollars from savers and then use these dollars to buy stocks, long term bonds, short term debt instruments issued by business or government units; these corporations pool funds & thus reduce risk by diversifications”. Thus, mutual funds are corporations which pool funds by selling their own shares & reduce risk by diversification. 4
  5. 5. MUTUAL FUNDS WHO ARE THE PARTIES INVOVED? INVESTORS Every investor, given her financial position & personal disposition, has a certain inclination to take risk (risk profile or risk appetite). The hypothesis is that by taking an incremental risk (of losing capital, wholly or partly), it would be possible for the investor to earn an incremental return. But assuming risk without regularly monitoring it is foolhardy. Therefore, it would be prudent for investors who take a risk to be able to manage this risk. A mutual fund is the solution for investors who lack the time, the inclinations or the skills to actively manage their investment risk in individual securities. 5
  6. 6. MUTUAL FUNDS The following categories of investors are eligible to invest in Indian mutual funds: • Resident Indian adult individuals, either singly or jointly (not exceeding three); • Parents & lawful guardians on behalf of minors; • Companies, corporate bodies registered in India; • Registered societies & co-operative societies authorized to invest in such units; • Partners of partnership firms; • Hindu undivided families (HUFs), in the sole name of the karta; • Banks (including co-operative banks & regional rural banks) & financial institutions & investment institutions; • Other mutual funds registered with SEBI; TRUSTEES Trustees are the people within a mutual fund organization who are responsible for ensuring that investors’ interests in a scheme are properly taken care of. In return for their services, they are paid trustee fees, which are normally charged to the scheme. 6
  7. 7. MUTUAL FUNDS ASSET MANAGEMENT COMPANY (AMC) AMCs manage the investment portfolios of schemes. An AMCs incomes comes the management fees it charges the schemes it manages. The management fee is calculated as a percentage of net assets managed. Some countries provide for performance based management fees as well. In order to earn management fee, an AMC has naturally to employ people & bear all the establishment cost that are related to its activity, such as for premises, furniture, computers & other assets, software development, communication costs, etc. The break-even level of AUM is a function of cost structure of AMC & distribution of assets between its different types of schemes since debt schemes & index schemes generally yield a lower management fee. DISTRIBUTORS Distributors earn a commission for bringing investors into the schemes of a mutual fund. This commission is an expense for the scheme, although there are occasions when an AMC may choose to bear the cost, wholly or partly. 7
  8. 8. MUTUAL FUNDS Depending on the financial & physical resources at their disposal, the distributors could be: Tier 1 distributors who have their own or franchised network reaching out to investors all across the country; or Tier 2 distributors who are generally regional players with some reach within their region; or Tier 3 distributors who are small & marginal players with limited reach. REGISTRARS An investors holding in mutual fund schemes in typically tracked by the scheme’s registrar & transfer agent (R&T). Some AMCs prefer to handle this role in-house, i.e. on their own instead of appointing an R&T. The registrar or the AMC as the case may be maintains an account of the investor’s investments in and disinvestments from the scheme. Requests to invest more money into a scheme or to redeem money against existing investment in a scheme are processed by the R&T. 8
  9. 9. MUTUAL FUNDS CUSTODIAN / DEPOSITORY The custodian maintains custody of the securities in which the schemes invests as distinct from the registrars who tracks the investment by investors in the schemes. This ensures an ongoing independent record of the investments of the scheme. The custodian also follows up on various corporate actions, such as rights, bonus & dividends declared by investee companies. In a situation where a securities are increasingly being dematerialized, the role of the depository for such independent record of investments is growing. 9
  10. 10. MUTUAL FUNDS STRENGTHS WEAKNESS OPPORTUNITIES THREATS 10
  11. 11. MUTUAL FUNDS SWOT ANALYSIS OF MUTUAL FUNDS STRENGTHS WEAKNESS  Option available  Diversification  Professional management  Potential returns  Well regulated  Technical analysis  Convenient administration  Return potential  Low cost  Transparency  Affordability  Flexibility.  No control over cost  No tailor made portfolio  Managing a portfolio of funds  Cost of churn. 11
  12. 12. MUTUAL FUNDS OPPORTUNITIES THREATS  Bid scope for expansion  Saving rate in India  Growing cities  Online trading of mutual funds  Like equity & commodity  Clubbing up with other investments.  Uncertainity  Change of market trends  Increasing number of assets management companies. 12
  13. 13. MUTUAL FUNDS EVALUATION & HISTORY OF MUTUAL FUND IN INDIA MUTUAL FUNDS INDUSTRY IN INDIA TYPES OF MUTUAL FUND SCHEMES IN INDIA FUTURE OF MUTUAL FUNDS IN INDIA 13
  14. 14. MUTUAL FUNDS MUTUAL FUND CONCEPT A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund: 14
  15. 15. MUTUAL FUNDS Mutual Fund Operation Flow Chart EVALUATION & HISTORY OF MUTUAL FUND IN INDIA Unit Trust of India (UTI) was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. UTI has an extensive marketing network of over 40,000 agents all over the country. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in 15
  16. 16. MUTUAL FUNDS securities and to promote the development of and to regulate the securities market. In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity upto one year. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. 16
  17. 17. MUTUAL FUNDS MUTUAL FUNDS INDUSTRY IN INDIA The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well as quantitywise. Before, the 1963 Establishment of Unit Trust of India 1964 Unit Scheme 1964 launched 1987 Entry of non-UTI, Public Sector mutual funds 1993 Entry of private sector funds First Mutual Fund regulations came into being 1996 Substitution of prevalent rules by SEBI (Mutual Funds) Regulations 1996 2003 UTI bifurcated into two separate entities - Specified Undertaking of Unit Trust of India - UTI Mutual Fund 2004 Existence of 421 schemes, managing assets worth Rs. 153108 17
  18. 18. MUTUAL FUNDS monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. FIRST PHASE - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of 18
  19. 19. MUTUAL FUNDS India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. SECOND PHASE - 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. THIRD PHASE - 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI 19
  20. 20. MUTUAL FUNDS were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. FOURTH PHASE - SINCE FEBRUARY 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the 20
  21. 21. MUTUAL FUNDS rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The major players in the Indian Mutual Fund Industry are: GROWTH IN ASSETS UNDER MANAGEMENT 21
  22. 22. MUTUAL FUNDS Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards. 22
  23. 23. MUTUAL FUNDS TYPES OF MUTUAL FUND SCHEMES IN INDIA A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry. BY STRUCTURE: a) open-ended schemes b) close-ended schemes c) interval schemes BY INVESTMENT OBJECTIVE: a) growth schemes b) income schemes c) Balanced schemes d) money market schemes OTHER SCHEMES: a) Tax saving schemes b) special schemes c) index schemes 23
  24. 24. MUTUAL FUNDS d) sector specific schemes BY STRUCTURE a) Open-ended schemes Open-ended or open mutual funds are much more common than closed- ended funds and meet the true definition of a mutual fund – a financial intermediary that allows a group of investors to pool their money together to meet an investment objective– to make money! An individual or team of professional money managers manage the pooled assets and choose investments, which create the fund’s portfolio. They are established by a fund sponsor, usually a mutual fund company, and valued by the fund company or an outside agent. This means that the fund’s portfolio is valued at "fair market" value, which is the closing market value for listed public securities. An open-ended fund can be freely sold and repurchased by investors. 24
  25. 25. MUTUAL FUNDS • Buying and Selling: Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the fund’s net asset value as determined by the mutual fund company. Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested. 25
  26. 26. MUTUAL FUNDS • Advantages: Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption (sell) request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. Open funds range in risk depending on their investment strategies and objectives, but still provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, you’re likely to feel a more considerable loss. • Risks: Risk depends on the quality and the kind of portfolio you invest in. One unique risk to open funds is that they may be subject to inflows at one time or sudden redemptions, which leads to a spurt or a fall in the portfolio value, thus affecting your returns. Also, some funds invest in certain sectors or industries in which the value of the in the portfolio can 26
  27. 27. MUTUAL FUNDS fluctuate due to various market forces, thus affecting the returns of the fund. b) Close-ended schemes Close-ended or closed mutual funds are really financial securities that are traded on the stock market. Similar to a company, a closed-ended fund issues a fixed number of shares in an initial public offering, which trade on an exchange. Share prices are determined not by the total net asset value (NAV), but by investor demand. A sponsor, either a mutual fund company or investment dealer, will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified. • Buying and Selling: Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges; however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as $5000 may apply, and unlike the more common open funds discussed below, there is typically a five-year commitment. 27
  28. 28. MUTUAL FUNDS • Advantages: The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount. • Risks: Investing in closed-end funds is more appropriate for seasoned investors. Depending on their investment objective and underlying portfolio, closed-ended funds can be fairly volatile, and their value can fluctuate drastically. Shares can trade at a hefty discount and deprive you from realizing the true value of your shares. Since there is no liquidity, 28
  29. 29. MUTUAL FUNDS investors must buy a fund with a strong portfolio, when units are trading at a good discount and the stock market is in position to rise. BY INVESTMENT OBJECTIVE: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: a) Growth / Equity Oriented Schemes The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. 29
  30. 30. MUTUAL FUNDS Equity funds As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are: Index funds These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Investing through index funds is a passive investment strategy, as a fund’s performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, there’s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its 30
  31. 31. MUTUAL FUNDS unitholders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, the lower the tracking error, the better the index fund. Diversified funds Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies); the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund manager’s picks languish, the returns will be far lower. The crux of the matter is that your returns from a diversified fund depend a lot on the fund manager’s capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practiced by your fund manager. Understand that a portfolio 31
  32. 32. MUTUAL FUNDS concentrated in a few sectors or companies is a high risk, high return proposition. If you don’t want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance. Tax-saving funds Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you won’t get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax- saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions. Sector funds The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector fund’s NAV will zoom if the 32
  33. 33. MUTUAL FUNDS sector performs well; however, if the sector languishes, the scheme’s NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharmacy, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch this cycles–get in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds. b) Income / Debt Oriented Scheme 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 debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. 33
  34. 34. MUTUAL FUNDS Such funds attempt to generate a steady income while preserving investors’ capital. Therefore, they invest exclusively in fixed-income instruments securities like bonds, debentures, Government of India securities, and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. There are basically three types of debt funds. Income funds By definition, such funds can invest in the entire gamut of debt instruments. Most income funds park a major part of their corpus in corporate bonds and debentures, as the returns there are the higher than those available on government-backed paper. But there is also the risk of default–a company could fail to service its debt obligations. Gilt funds They invest only in government securities and T-bills–instruments on which repayment of principal and periodic payment of interest is assured by the government. So, unlike income funds, they don’t face the spectre of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds. Liquid funds 34
  35. 35. MUTUAL FUNDS They invest in money market instruments (duration of up to one year) such as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile. They are ideal for investors seeking low-risk investment avenues to park their short-term surpluses. The ‘risk’ in debt funds Although debt funds invest in fixed-income instruments, it doesn’t follow that they are risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so don’t show the same degree of volatility in their performance as equity funds. Still, they face some inherent risk, namely credit risk, interest rate risk and liquidity risk. • Interest rate risk: This is common to all three types of debt funds, and is the prime reason why the NAVs of debt funds don’t show a steady, consistent rise. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevelant demand and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign themselves with the new market yield. This, in turn, brings down the NAV of a debt fund. On the other hand, if interest rates fall, existing debt securities become more precious, and rise in value, in 35
  36. 36. MUTUAL FUNDS line with the new market yield. This pushes up the NAVs of debt funds. • Credit risk: This throws light on the quality of debt instruments a fund holds. In the case of debt instruments, safety of principal and timely payment of interest is paramount. There is no credit risk attached with government paper, but that is not the case with debt securities issued by companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more liquid than lower-rated paper. Credit risk is not an issue with gilt funds and liquid funds. Gilt funds invest only in government paper, which are safe. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. For income funds, however, credit risk is real, as they invest primarily in corporate paper. • Liquidity risk: This refers to the ease with which a security can be sold in the market. While there is brisk trading in government securities and money market instruments, corporate securities aren’t actively traded. More so, when you go down the rating scale–there is 36
  37. 37. MUTUAL FUNDS little demand for low-rated debt paper. As with credit risk, gilt funds and liquid risk don’t face any liquidity risk. That’s not the case with income funds, though. An income fund that has a big exposure to low- rated debt instruments could find it difficult to raise money when faced with large redemptions. c) Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. As the name suggests, balanced funds have an exposure to both equity and debt instruments. They invest in a pre-determined proportion in equity and debt–normally 60:40 in favour of equity. On the risk ladder, they fall somewhere between equity and debt funds, depending on the fund’s debt- equity spilt–the higher the equity holding, the higher the risk. Therefore, they are a good option for investors who would like greater returns than from pure debt, and are willing to take on a little more risk in the process. d) Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest 37
  38. 38. MUTUAL FUNDS exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Other types of funds a) Pooled Funds A "pooled fund" is a unit trust in which investors contribute funds that are then invested, or managed, by a third party. A pooled fund operates like a mutual fund, but is not required to have a prospectus under securities law. Pooled funds are offered by trust companies, investment management firms, insurance companies, and other organizations. Pooled funds and mutual funds are substantially the same, but differ in their legal form. Like a mutual fund, a pooled fund is a trust that is set up under a "trust indenture". This specifies how the pooled fund will operate and what the duties of the various parties to the trust indenture will be. The trust indenture specifies an investment policy for the pooled fund and how management fees will be charged. Pooled funds, like mutual funds, are "unit trusts". This means that investors deposit funds into the trust in exchange for "units" of the fund, which reflect a pro-rata share of the fund's investments. The fund trust indenture will specify how units are issued and redeemed, as well as, the frequency and procedures for valuations. Pooled funds can be 38
  39. 39. MUTUAL FUNDS either "closed" or "open". An "open" pooled fund is the most common type of pooled fund, and allows units to be redeemed at scheduled valuations. A "closed" pooled fund does not allow redemptions, except in specific circumstances or at termination of the trust. Closed pooled funds are usually established to hold illiquid investments such as real estate or very specialized investment programs, such as hedge funds. The major difference between pooled funds and mutual funds is their legal status under securities law. Pooled funds are not "public" investments, which means investment and trading in pooled funds is restricted. Securities legislation defines the rules for a "public" security. Publicly issued securities must meet certain requirements before issue, particularly in information disclosure through their prospectus, or reporting by issuers. Pooled funds are exempt from prospectus requirements under securities law, usually under the "private placement", or "sophisticated investor", clauses in the Securities Act. This means that investments in pooled funds must be over $150,000. Financial institutions such as banks, trust companies or investment counselling firms are allowed to invest their clients in their own pooled funds, by specific exemptions granted under the Securities Act. Each pooled fund investment must be reported to the relevant Securities Commission. Once a client is invested in a pool fund, the result is identical to being in a mutual fund with the same investment mandate. Fees for pooled funds can either be charged inside or outside the fund. Valuation of pooled funds can be less frequent, as there tends to be less activity with fewer and more sophisticated pooled fund investors. Pooled fund fees are usually lower than mutual funds, as these funds are created to deal with larger investors. Pooled funds are allowed to charge their expenses from operations against the fund assets, and the trust 39
  40. 40. MUTUAL FUNDS indenture provides for the sponsor, or trustee, to hire outside agents to perform certain tasks, such as custody and unit record-keeping. b) Insurance Segregated Funds An insurance segregated fund is an insurance contract issued under insurance legislation by an insurance company. Its value is based on the performance of a portfolio of marketable securities, such as stocks and bonds. As an insurance contract, a segregated fund is an obligation of an insurance company and forms part of its assets. Insurance companies "segregate" the portfolios which these contracts are based on, dividing these assets from their general assets. The contracts have a minimum value, the price at which they were issued. It is important to realize that insurance segregated fund might look and act like a mutual fund, but that it is actually something quite different. A mutual fund is a trust, or sometimes a company, which owns title to the actual securities in the funds. The unitholders own the trust which in turn owns the assets. An insurance segregated fund is an insurance contract or a "variable rate annuity". Legally, the insurance company issues the contract the same way it would an annuity or life insurance policy under the relevant insurance legislation. The buyer or "policy holder" has contracted for a payment that is based on the underlying prices of the portfolio that supports the contract but does not have a direct claim or ownership on the securities that form the 40
  41. 41. MUTUAL FUNDS portfolio. Although insurance companies "segregate" the assets to support these contracts, the holder of the contract does not own these assets. The insurance contract nature of a segregated fund makes for an interesting feature that insurance companies often use in their marketing. The contract can be issued with an initial "book value" that the company can agree to pay no matter what the actual value of the portfolio supporting the contract. If the market value of the portfolio falls below the book value, the company agrees to pay no less than the book value which is known as the "minimum value guarantee" or the "higher of book or market". Initially, this guarantee feature has some value. Since marketable securities increase over longer periods of time it becomes less important over time. Another wrinkle of segregated funds is their tax status. Since they are insurance contracts, they are taxed as such. Sometimes segregated funds are used as investment options for "universal" or "whole life" life insurance which provides a savings option as well as insurance. Life companies market the tax shelter aspects of these contracts, which allow compounding of investment income untaxed while inside the insurance contract. Another sales aspect of segregated funds is their characteristics under bankruptcy legislation in some jurisdictions. In Canada, for example, an insurance contract is not available to creditors in a bankruptcy. This means an RRSP that uses segregated funds would be protected from creditors in a 41
  42. 42. MUTUAL FUNDS bankruptcy while an RRSP which invested in mutual funds would be exposed. In summary, although insurance segregated funds look and function like mutual funds, they are actually insurance contracts based on the valuation of a portfolio of marketable securities. As always, investors are wise to consider all the aspects of insurance contracts in their legal jurisdiction prior to investment. c) Specific Sectoral & Thematic funds /schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. Thematic funds are those fund which invest in a stocks which will benefit from a particular theme like Outsourcing, Infrastructure etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Restrain the urge to invest in sector/thematic funds no matter how compelling an argument your agent or the fund house makes. Over the long-term, there is little value that a restrictive and narrow theme can bring to the table. It is best to opt for a broad investment mandate that is best championed by well- diversified equity funds. 42
  43. 43. MUTUAL FUNDS UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and Exchange Board of India for an omnibus fund that will have six options. The UTI Thematic Fund is the umbrella fund. It will have sub-funds that will focus on large-cap stocks, mid-cap stocks, auto, banking, PSU stocks and basic industries. UTI now has a UTI Growth Sectors Umbrella with five options that focus on investing in stocks in the services, petro, healthcare pharmaceuticals, information technology, and consumer products. The new fund also proposes to provide investors four automatic triggers that could be used for exit: value, appreciation, date and stop loss. 43
  44. 44. MUTUAL FUNDS FUTURE OF MUTUAL FUNDS IN INDIA By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double. Let us discuss with the following table: Aggregate deposits of Scheduled Com Banks in India (Rs.Crore) Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03 Mar- 04 Sep-04 4-Dec Deposits 60541 0 85159 3 98914 1 113118 8 128085 3 - 156725 1 1622579 Change in % over last yr 15 14 13 12 - 18 3 Source - RBI Mutual Fund AUM’s Growth Month/Year Mar- 98 Mar- 00 Mar- 01 Mar- 02 Mar- 03 Mar-04 Sep-04 4-Dec MF AUM's 68984 93717 83131 94017 75306 13762 6 15114 1 149300 Change in % over last yr 26 13 12 25 45 9 1 Source – AMFI 44
  45. 45. MUTUAL FUNDS SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN INDIA • 100% growth in the last 6 years. • Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. • Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. • We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion. • 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities. • Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. • SEBI allowing the MF's to launch commodity mutual funds. • Emphasis on better corporate governance. • Trying to curb the late trading practices. • Introduction of Financial Planners who can provide need based advice NEWS PAPER: ECONOMIC TIMES DATE: 21- 8- 08 45
  46. 46. MUTUAL FUNDS 46
  47. 47. MUTUAL FUNDS WHAT IS NET ASSET VALUE? 47
  48. 48. MUTUAL FUNDS The repurchase price is always linked to the net asset value (NAV). The NAV in nothing but the market price of each unit of particular scheme in relation to all the assets of the scheme. It can other wise be called “the intrinsic value” of each unit. This value is a true indicator of the performance of the fund. If the NAV is more than the face value of the unit, it clearly indicates that the money invested on that unit has appreciated & the fund has performed well. Illustration For instance, fortune mutual fund has introduced a scheme called millionaire scheme. The scheme size is 100 crores. The value of each unit is Rs. 10/-. It has invested all the funds in shares & debentures & the market value of the investment comes to Rs. 200 crores. Now NAV = 200 crores x value of each unit 100 crores Thus, the value of each unit of Rs. 10/- is worth Rs. 20. Hence the NAV = Rs. 20. This NAV forms the basis for fixing the repurchase price & reissue price. The investor can call up the fund any time to find out the NAV. Some MFs publish the NAV weekly in two or three leading daily news papers. 48
  49. 49. MUTUAL FUNDS 49
  50. 50. MUTUAL FUNDS BENEFITS OF INVESTING IN MUTUAL FUNDS & RISK RETURN GRID BENEFITS OF INVESTING IN MUTUAL FUNDS 1. PROFESSIONAL MANAGEMENT Mutual funds provide the services of experienced & skilled professionals, backed by a dedicated investment research team that analyses the performance & prospects of companies & selects suitable investments to achieve the objective of the scheme. 2. DIVERSIFICATION Mutual funds invest in a number of companies across a broad cross-selection of industries & sectors. This diversification reduces the risk because seldom do all stocks decline at the same time & in the same proportion. You achieve this diversification through a mutual fund with far less money than you can do on your own. 3. CONVENIENT ADMINISTRATION Investing in a mutual fund reduces paperwork & helps you avoid many problems such as bad deliveries, delayed payments & follow up with brokers & companies. Mutual funds save your time & investing easy & convenient. 50
  51. 51. MUTUAL FUNDS 4. RETURN POTENTIAL Over a medium to long-term, mutual funds have a potential to provide a higher return as they invest in a diversified basket of selected securities. 5. LOW COSTS Mutual funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial & other fees translate into lower costs for investor. 6. LIQUIDITY In open-end schemes, the investor gets the money back promptly at net asset value related prices from the mutual fund. In closed-end scheme, the units can be sold 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. 7. TRANSPARENCY You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion Invested in each class of assets and the fund manager’s investment strategy & outlook. 51
  52. 52. MUTUAL FUNDS 8. FLEXIBILITY Though features such as regular investment plans, regular withdrawals plans & dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs & convenience. 9. AFFORDABILITY 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. 10. CHOICE OF SCHEMES Mutual funds offer a family of schemes to suit your varying needs over a lifetime. 11. WELL REGULATED RISK RETURN GRID 52
  53. 53. MUTUAL FUNDS RISK TOLERANCE/ RETURN EXPECTED FOCUS SUITABLE PRODUCTS BENEFITS OFFERED BY MFs LOW Debt Bank/ company FD, debt based funds Liquidity, better post-tax returns MEDIAM Partially debt / Partially equity Balanced funds, some diversified equity funds & some debt funds, mix of shares & FDs Liquidity, better post-tax returns, better management, diversification HIGH Equity Capital market, equity funds (diversified as well as sector) Diversification, expertise in stock picking, liquidity, tax free dividends 53
  54. 54. MUTUAL FUNDS Their appeal is not just limited to these categories of investors. Specific goals like career planning for children & retirement plans are also catered to buy mutual funds. Essentially debt oriented, children funds invite investments, where the funds are locked till the child attains majority & requires money for higher education. One can invest today & assure financial support to your child when he/she requires them. The schemes have given very good returns of around 14 percent in the last one-year period. These schemes are also designed to provide tax efficiency. The returns generated by these funds come under capital gains and attract tax at concessional rates. Besides this, if the objective was to save taxes, the industry offers equity linked savings schemes as well. Equity-based funds, they can take long-term call on stock & market conditions without having to worry about redemption pressure as the money is locked in for three years & provide good returns. Some of the ELSS have been exceptional performers in past & cater to equity investor with good performances. The industry offered tax benefits under various sections of the IT Act. For e.g. dividend income is free in the hands of the investor while capital gains are taxed after providing for cost inflation indexation. Hitherto, the benefits under section 54 EA/EB were available to take benefits of the tax provisions for capital gains but have now been removed. The benefits listed so far have essentially been for the small retail investor but the industry can attract investment from institutional & big investor as well. Liquid funds offer liquidity as well as better returns than banks & so 54
  55. 55. MUTUAL FUNDS attract investors. Many funds provide anytime withdrawal enabling a big investor to take benefits. Indeed, the appeal of mutual funds cuts across investor classes. In other developed countries, mutual funds attract much more investments as compared to the banking sector but in India the case is reverse. We lack awareness about the benefits that are offered by these schemes. It is time that investors irrespective of their risk capacities, made intelligent decisions to generate better returns & mutual funds are definitely one of the ways to go about it. 55
  56. 56. MUTUAL FUNDS MARKETING OF MUTUAL FUNDS Marketing of services has been considered the most vital area of operation of mutual fund industry keeping in view the ever increasing competition of 56
  57. 57. MUTUAL FUNDS similar or alternative products. Marketing is the management process which identifies, anticipates & satisfies customers’ requirements profitably. Since the purpose of any organization is to create, win & retain a customer, the focal point of any marketing strategy of mutual funds should be the customer or investor. Virtually all providers of goods & services want to deliver good quality. Mutual fund managers are also no exception to this. But a financial investment is not a consumer product with identifiable, measurable consistency of performance. For instance, a shampoo always looks, smells & performs the same from bottle to bottle of the same brand. In contrast, mutual fund managers cannot make any promises about the future performance of the investment. They can talk only about how funds have performed in the past & assure investors of the professional expertise of the managers & their general expectations. Thus, the marketing of the fund differs in some very important ways with the marketing of goods. As a result, fund marketers must adapt their skills to fit the demands of a dynamic investment environment. In the case of mutual funds, managerial efficiency & investment skills would determine returns. Successful mutual fund marketing, therefore, must create confidence among potential investors & strengthen their desire to put their money with particular fund. It is not only publicity, talking skills & public relations which will strengthen confidence, but also evidence of good performance. Additionally organizational image, visibility of operational policies & quality of management form an indirect part of mutual fund marketing. 57
  58. 58. MUTUAL FUNDS MARKETING PLAN In a wide market like India where investors’ awareness is yet to take shape, mutual funds have important role to educate investors (particularly those who are located in rural & semi-urban areas) about the main fold advantages of investment in mutual funds. Therefore, a well planed marketing strategy has to be designed to mobilize savings by educating investors & creating confidence about safety & returns. In a changing environment of financial services & increasing competition from a wide spectrum of financial products & institutions offering them, mutual funds marketing has to maximize customer’s satisfaction by optimizing internal & external efficiency in resource use, competitive product development, cost efficient distribution system, etc. this calls for a well designed marketing plan & marketing strategy. It is essential that the marketing plan for mutual fund services be based on a co-relation matrix of firm-product-customer relation because of the very nature of products which are intangible & have the elements of inseparability & perishability. Any marketing plan for mutual funds should include the following tools of marketing mix to form the marketing strategy to achieve the marketing objectives, in the target market. 58
  59. 59. MUTUAL FUNDS PRODUCT PLANNING Mutual funds provide financial services which are intangible like any other financial services & the quality of services depends not only on product but SERVICINGSERVICING PROMOTIONPROMOTION DISTRIBUTIONDISTRIBUTION PRICINGPRICING BRANDINGBRANDING PRODUCT PLANNING PRODUCT PLANNING TARGET MARKET TARGET MARKET 59
  60. 60. MUTUAL FUNDS also on performance. Mutual funds operate under a very volatile situation of the stock market & their performance is closely scrutinized by taking stock market performance as an index. Since the basic objective of setting up mutual fund is to mobilize funds from the public it becomes a difficult task of winning over the confidence of the investing public by directly appealing to them. As the mutual fund deal with the savings of the public, they have to shoulder more responsibility & be very cautious in introducing mutual fund products (schemes) with innovations & new instruments to attract the investors. The mutual fund products i.e., schemes are basically investment object oriented & the savings mobilized by them are invested in the instruments like shares, bonds, etc., that is protected in the schemes. There is little scope of flexibility, therefore a lot of care need to be taken while designing particular products. Expected changes in the financial market must be kept in view for future investment returns & the changing profile of customers or investors must be taken into account to identify the segments of savings market likely to be tapped .thus it became an important function for product designer to integrate the market segments & investment instruments while designing new products or schemes. Various segments of potential savings market have varied expectations. Individual investor preferences also change under the influence of various economic factors. Some are interested in long-term growth some in regular income, tax benefits, etc. new products should be aimed at satisfying one or more objectives & seasonality also has an important bearing on launching a new product. Designing & developing a new product would need the help of 60
  61. 61. MUTUAL FUNDS market research to assess the market potential, availability of existing product & future growth in demand. Formulation of a scheme, therefore, will be a research based task & new ideas will require the support of facts & exposure to feasibility tests before being acceptable. BRANDING This is an important part of product development. Like the manufactures of consumer goods, sponsors of mutual fund also strive to differentiate their products & instill recognition of their brand name in the consumers. They seek to build the customers loyalty & generate repeat business. Brand name signifies the market segments, inherent benefits & investment objectives & ensures customer loyalty. Brand identity is an important marketing factor because it facilitates product identification at the market place. In India, most of the products or schemes are linked to the names of the mutual funds. For example, alliance ’95 fund, alliance equity fund, alliance new millennium fund, alliance buy India fund, alliance basic industry fund, etc., were launched by alliance capital mutual fund. Kothari internet opportunity fund, kothari pioneer FMCG fund, kothari pioneer pharma fund, kothari pioneer balances fund, kothai pioneer infotech fund, etc. Were introduced kothari mutual funds. However, there are products not linked to names of organizations. Example, ‘dhan series’ is identified with LIC mutual funs, ‘master series’ with UTI & ‘magnum’ with SBI mutual funds. It is observed that Indian mutual funds have been quite successful in brand policy & brand identification. 61
  62. 62. MUTUAL FUNDS PRICING We have learnt that low-cost strategy leads to success. Michael porter, a Harvard business school professor who specializes in analyzing competition in different industries, suggests that achieving low cost relative to the competition is a way to cope successfully with competitive forces. Yet, we observe that high cost load funds distributed through sales people have dominated the industry. This happens because in the fund industry, it is the distribution cost, not the manufacturing cost that separates one competitor from another. Thus, we can say that the method of distribution is the primary factor in setting prices in the fund industry. The prices of mutual fund is inextricably linked with returns. In comparing funds to typical consumer goods, there is a significant difference. Mutual funds must disclose to the buyer any distribution fees being paid. But it is not so in the case of consumer goods. Until sometime ago up-front commissions as high as 8.5% of amt invested (paid on purchase) were taken for granted. The commission rewarded the sales person for their marketing efforts. Now, many funds have started experimenting with a variety of pricing techniques that are often confusing, if not misleading, for the investor. Sometimes the load or sales charge is split into two, with a part deducted from the purchase price & a part from redemption process (a back end-load). Another pricing strategy eliminates all front-end loads but applies a stiff back-end load, which declines the longer the shareholder remains in the fund 62
  63. 63. MUTUAL FUNDS & reaches zero in some cases. Some charge for services that were formally free, such as switching from one fund to another within a group. Because these pricing experiments are quite new, there is no evidence concerning their effect on sales. But there is substantial documentation that the presence or absence of sales charges does not prevent or guarantee good investment performance. DISTRIBUTION Mutual funds are marketed through a variety of distribution channels. The fund sponsor may directly market to the customer or funds may be distributed through intermediaries or middlemen who in tern sell them to the customers. Mutual fund may be having the desired qualities but that does not ensure spontaneous acceptance of the product by the customers. Success depends on the use of an appropriate distribution & promotion strategy. It can be divided into the following. a. Direct marketing b. Selling through intermediaries c. Joint calls. 63
  64. 64. MUTUAL FUNDS a. Direct Marketing: This involves purchasing of fund shares directly from a mutual fund. It constitutes 20% of the total sales of mutual funds. 1. Personal selling: In this case an officer at a particular branch of a mutual fund takes appointment from the potential prospect. Once the appointment is fixed, the branch officer then meets the prospect & gives him all the details about the various schemes being offered by his fund 2. Telemarketing: Here, the emphasis is to inform people about the fund. The names & phone numbers of people are linked at random from telephone directory. 3. Direct mail: This is one of the most common methods followed by all mutual funds. Addresses of people are picked at random from the telephone directory. The 64
  65. 65. MUTUAL FUNDS literature of the schemes offered by the fund are then mailed to the prospective customers. The follow-up starts after 3-4 days mailing the literature. The customer officers than calls on the people to whom the literature was mailed & answers their queries. Unlike selling through intermediaries, direct marketers have little personal contact with their customers. In some cases they can not meet the customers or make recommendations & arguments favoring one investment over another. Direct sellers tend to be the industry’s low cost providers because they do not have to pay any fees or commissions (loads) to any intermediaries, thus they are usually referred to as “no load” funds. Direct marketed funds are used by those investors who prefer to make investment decisions themselves. Direct marketers, therefore, try to reach such investors through print advertising, radio & TV, informative communications, word of mouth, etc. b. Selling through Intermediaries This distribution channels is also referred to as sales force distribution. Most sales force distributed funds charge a sales commission & are commonly 65
  66. 66. MUTUAL FUNDS referred to as load funds. Selling through intermediaries is the oldest approach to mutual funds & accounts of more than two thirds of mutual fund sales today. Intermediaries contribute towards 80% of the total sales of mutual funds. They comprise people/ distributors/ dealers who are in direct touch with the investors. They perform an important role in attracting new customers. Most of these intermediaries are also involved in selling shares & other investment instruments. They help a lot in convincing investors to invest in mutual funds but a lot depends on the after sales services offered by the intermediaries to the customer. Customers prefer to work with those intermediaries who give them right information about the fund & keep them abreast with the latest changes taking place in the market. The major market intermediaries are: agents appointed by respective mutual funds, stock brokers who are members of stock exchange & are registered with the mutual fund, institutional & corporate agents. The basic objective of any incentive schemes is to increase sales. In the strategy formulation of any incentive scheme it is very important to decide the period for which it can run in line with the profitability & selling behavior of the people involved in the distribution channel structure. c. Joint Calls This is generally done when the prospective customer is a high net worth investor. The mutual fund branch officer & an agent or intermediary like a broker or a financial planner, together visit the prospect & brief him about 66
  67. 67. MUTUAL FUNDS the fund. Both the officer & the agent provide even after sales service in this particular case. PROMOTION As the Indian markets move from a tough to a tougher position, the role of marketing strategies has become the matter of core significance to fight the fast growing competition. Almost a decade ago, the Indian market was more of a sellers’ market as buyers did not have any options to choose from. With the entry of the multinational corporations, the market slowly started changing into a buyers’ market & the domestic mutual fund industry was shaken up by the sudden competition growth. Mutual funds offer investors hope – the hope of achieving acceptable investment returns on the shareholders money. They also offer service & trustworthiness to investors. Thus, these funds can survive & thrive only if they can live up to the hopes & trusts of their individual members. Existing & potential investors must be convinced of the expertise & skill with which the mutual funds operate. Therefore, marketing manager must identify strategies & target promotion efforts that will reach the different kinds of investors. With the existence of the many players in mutual fund industry, it becomes very difficult for the investor group to choose one mutual fund over another. This has led the mutual funds to take to brand building by aggressive promotion techniques. By their very nature, mutual funds require high advertisement & sales promotion exercises to serve the needs of different 67
  68. 68. MUTUAL FUNDS classes of investors. As a part of their marketing campaign, mutual funds compete by advertising heavily to reinforce brand loyalty & product differentiation. Communication through advertisement is the most important promotional aid for any mutual fund. Funds regularly advertise in business newspapers & magazines besides leading national dailies. Hoardings & banners of the funds are put at important locations of the city where people’s movement is very high. The loading & banner generally contains information either about one particular scheme or brief information about all schemes of the fund. According to the mutual fund marketers, advertising helps bring recall when customer looks for investment opportunities. Attractive point of purchase (PoP) materials like newsletters, intermediary magazines, etc., can also be used for advertising. Advertising content by most of the funds has undergone a marked change form concept-selling ads dispelling myths, to selling specific schemes that meet defined objectives/goals. One of the limiting factors is, however, the regulatory framework governing advertisements of mutual fund products. For instance, in the offer documents, mutual funds are required to mention the fund objectives in clear terms & the risk factor also has to be mentioned. Another hurdle is the statutory disclaimer required to be carried along with every advertisement. Mutual funds advertisements are regulated by SEBI which prohibit any contents that may mislead the investors. The SEBI also lays down certain advertisement code to be followed by the mutual funds. 68
  69. 69. MUTUAL FUNDS SERVICING Servicing has great significance in mutual funds like any other financial service industry. The mutual fund industry has a large number of players & each of them are differentiated by their orientation of servicing in the competitive world of financial services. Services can be provided through external agencies or internally through service department. Services like timely & prompt issuing of certificates/ cheques & attending other requests, continuous reporting of investment performance & other after sales services like honoring the commitments made for redemptions & repurchase, paying dividends & other entitlements, etc., aims at enduring customer relations. In India most of the mutual fund provide after sales services through a mix of external agencies. In order to ensure quality service to the customers, mutual fund should conduct a service audit for controlling, monitoring & improving the quality of service. A service standard can be fixed on the basis of expectation level of customers. Mutual fund managers can than evaluate their performance on each front. Market Analysis & Research Investment in mutual funds is not a one-time activity but is a continuous one. An investor, if satisfied with the performance of a mutual fund, will continue to be its customer; if not, he would switch over to other firms. Therefore, to retain customers, it should be seen that the customers are 69
  70. 70. MUTUAL FUNDS satisfied & made happy. Since for a market driven product like mutual fund the important determinant of success is customer satisfaction, it becomes necessary for mutual funds to maximize customer satisfaction along with cost minimization. Decisions regarding mutual fund schemes are to be made after giving due thought to matters like opportunities in the market, the size & future expansion of the market, consumer expectation, availability of alternatives & so on. Thus, market analysis & market research becomes important in providing insight into investor needs, preferences & behavior & enables us to target customers, to achieve penetration, to identify new opportunities in a highly competitive market, to monitor the effect of economy on the savings & investment patterns of the public, etc. HORDINGS 70
  71. 71. MUTUAL FUNDS BANNERS OUT SIDE THE OFFICE SEMINAR ON MUTUAL FUND 71
  72. 72. MUTUAL FUNDS BROCHURES & FACT SHEET NEWS PAPER 72
  73. 73. MUTUAL FUNDS PAMPHLETS 73
  74. 74. MUTUAL FUNDS 74
  75. 75. MUTUAL FUNDS ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI) With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors. Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders. 75
  76. 76. MUTUAL FUNDS THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN INDIA The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows: • This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry. • It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association. • AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry. 76
  77. 77. MUTUAL FUNDS • Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. • It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. • AMFI undertakes all India awarness programme for investors in order to promote proper understanding of the concept and working of mutual funds. • At last but not the least association of mutual fund of India also disseminate information’s on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies. 77
  78. 78. MUTUAL FUNDS THE SPONSORERS OF ASSOCIATION OF MUTUAL FUNDS IN INDIA Bank Sponsored • SBI Fund Management Ltd. • BOB Asset Management Co. Ltd. • Canbank Investment Management Services Ltd. • UTI Asset Management Company Pvt. Ltd. Institutions • GIC Asset Management Co. Ltd. • Jeevan Bima Sahayog Asset Management Co. Ltd. Private Sector Indian:- • BenchMark Asset Management Co. Pvt. Ltd. • Cholamandalam Asset Management Co. Ltd. • Credit Capital Asset Management Co. Ltd. • Escorts Asset Management Ltd. • JM Financial Mutual Fund • Kotak Mahindra Asset Management Co. Ltd. • Reliance Capital Asset Management Ltd. • Sahara Asset Management Co. Pvt. Ltd • Sundaram Asset Management Company Ltd. • Tata Asset Management Private Ltd. Predominantly India Joint Ventures:- 78
  79. 79. MUTUAL FUNDS • Birla Sun Life Asset Management Co. Ltd. • DSP Merrill Lynch Fund Managers Limited • HDFC Asset Management Company Ltd. Predominantly Foreign Joint Ventures:- • ABN AMRO Asset Management (I) Ltd. • Alliance Capital Asset Management (India) Pvt. Ltd. • Deutsche Asset Management (India) Pvt. Ltd. • Fidelity Fund Management Private Limited • Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. • HSBC Asset Management (India) Private Ltd. • ING Investment Management (India) Pvt. Ltd. • Morgan Stanley Investment Management Pvt. Ltd. • Principal Asset Management Co. Pvt. Ltd. • Prudential ICICI Asset Management Co. Ltd. • Standard Chartered Asset Mgmt Co. Pvt. Ltd. ASSOCIATION OF MUTUAL FUNDS IN INDIA PUBLICATIONS AMFI publices mainly two types of bulletin. One is on the monthly basis and the other is quarterly. These publications are of great support for the investors to get intimation of the know-how of their parked money. 79
  80. 80. MUTUAL FUNDS ADVANTAGES OF MUTUAL FUNDS 80
  81. 81. MUTUAL FUNDS 1. PROFESSIONAL MANAGEMENT Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies’ financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. 2. DIVERSIFICATION Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. 3. CONVENIENT ADMINISTRATION 81
  82. 82. MUTUAL FUNDS 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. 4. RETURN POTENTIAL Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis. 5. LOW COSTS 82
  83. 83. MUTUAL FUNDS Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. 6. LIQUIDITY In open-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 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. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. 7. TRANSPARENCY Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. 8. FLEXIBILITY 83
  84. 84. MUTUAL FUNDS Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans; you can systematically invest or withdraw funds according to your needs and convenience. 9. AFFORDABILITY A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. 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. 10.CHOICE OF SCHEMES Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. 11.WELL REGULATED 84
  85. 85. MUTUAL FUNDS 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. 12.TAX BENEFITS Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase costs and selling price. This reduces your tax liability. What’s more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year DISADVANTAGES OF MUTUAL FUNDS 85
  86. 86. MUTUAL FUNDS Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund. 1. NO ASSURED RETURNS AND NO PROTECTION OF CAPITAL If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors. A scheme cannot make any guarantee of return, without stating the name of the guarantor, and disclosing the net worth of the guarantor. The past performance of the assured return schemes should also be given. 2. RESTRICTIVE GAINS 86
  87. 87. MUTUAL FUNDS Diversification helps, if risk minimisation is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. 3. TAXES During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. 4. MANAGEMENT RISK When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers. 87
  88. 88. MUTUAL FUNDS FRANKLIN INDIA BLUECHIP FUND (FIBCF) FRANKLIN INDIA PRIMA FUND (FIPF) FRANKLIN INDIA FLEXI CAP FUND (FIFCF) TEMPLETON INDIA EQUITY INCOME FUND (TIEIF) FRANKLIN INDIA PRIMA PLUS (FIPP) 88
  89. 89. MUTUAL FUNDS CASE STUDY: INDIA -- FRANKLIN TEMPLETON April 08, 2008 Franklin Templeton had an early presence in India's investment market and was one of the first international firms to set up a local asset management business in 1995. Its initial focus was on fixed income, as Indian equity markets were then undeveloped. Many of the early difficulties of setting up a fund were smoothed by its local partner, Hathway Investments, an asset manager whose stake it bought last year. Franklin Templeton also bolstered its presence in India in 2002 through the acquisition of Pioneer ITI, formerly part of Pioneer Group. As well as providing local expertise, Pioneer ITI brought a strong equity team to Franklin Templeton and helped boost the asset manager's retail distribution activity and rapidly develop the mutual funds business. Being among the first has also given it an edge, says Stephen Dover, international chief investment officer at Franklin Templeton Investments. Many of the senior managers on the ground have been together for 12 years and know the companies and the economy, he says. He sees Franklin Templeton as a long-term player in India. 89
  90. 90. MUTUAL FUNDS It manages $7.4bn (�3.7bn, Euro4.7bn) of assets, has offices in 33 locations in India and a range of open-ended equity funds, such as the Franklin India Bluechip Fund, the Templeton India Growth Fund, launched in 1996, and the Franklin India High Growth Companies Fund, as well as debt funds. It was also the first to set up a private pension fund in India, the Templeton India Pension Plan, in 1997, and launched a fund of funds, the FT India Life Stage Fund of Funds, in 2003. Sukumar Rajah, chief investment officer of equity at Franklin Templeton Investments, India, has seen a shift from traditional investments such as bank deposits, property and gold, to mutual funds. "With post-tax returns from traditional savings avenues becoming less attractive and growing investor comfort with market-linked investment products, investors are looking to professional fund managers to help them achieve their financial goals." Early on, the asset manager set up a distributor training programme, with workshops to help financial advisers. Mr Rajah also sees changes in the distribution landscape. "Government- owned banks with theirwide branch network are also now beginning to distribute mutual fund products," he says. 90
  91. 91. MUTUAL FUNDS FRANKLIN INDIA BLUECHIP FUND (FIBCF) Key Facts Fund Type Steady Growth, Open end, Entry Load 2.25% Inception Date December 1, 1993 Fund Manager Anand Radhakrishnan Options Growth and Dividend Investment Focus FIBCF is a steady growth scheme that invests mainly in large cap bluechip shares. Launched in October 1993 as a 3-year closed end fund, FIBCF was converted into an open end fund from January 1997. Ever since its inception, FIBCF has been ranked consistently among India’s top performing funds. Performance Snapshot Last 6 Months Last 1 Year Last 3 Years* Last 5 Years* Last 7 Years* Last 10 Years* Since Inception* FIBCF (G) -20.11% -11.88% 22.06% 34.31% 32.12% 30.89% 26.62% FIBCF (D) -20.11% -11.88% 22.06% 34.30% 32.11% 30.90% 26.63% BSE Sensex -18.66% -7.69% 23.35% 30.53% 23.20% 16.14% 10.56% Past performance may or may not be sustained in the future. * Compounded and annualised. As on July 31, 2008. Highlights Daily NAV 91
  92. 92. MUTUAL FUNDS Choice: Growth Plan and Dividend Plan (Reinvestment & Payout options) Low entry amount of Rs.5000 Easy liquidity: transactions are processed within 4 working days normally Convenience of Systematic Investment Plan: the ideal way to accumulate wealth over the long term NRIs can invest on a fully repatriable basis Fund Information Net Asset Value: Calculated and disclosed on all business days Minimum Investments: New Investments Rs. 5,000 Additional Investments Rs. 1,000 Load Amount (Rs.) Entry Load Exit Load 92
  93. 93. MUTUAL FUNDS < Rs. 5 Crs 2.25% - 1% if the Units are redeemed/switched-out within 6 months of allotment - 0.5% if the Units are redeemed/ switched-out after 6 months, but within 1 year of allotment => Rs. 5 Crs< Rs. 25 Crs Nil 1% if the Units are redeemed/ switched-out within 6 months of allotment => Rs. 25 Crs Nil Nil Systematic Investment Plan Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for 6 months Systematic Withdrawal Plan Minimum withdrawal of Rs.1000 or fixed number of units (Minimum investment/account balance for availing this facility is Rs.25, 000) Tax Benefits Indexation benefits Units are not liable to Wealth Tax and Gift Tax. No TDS on redemptions for resident investors FRANKLIN INDIA PRIMA FUND (FIPF) 93
  94. 94. MUTUAL FUNDS Key Facts Fund Type Aggressive Growth, Open end fund. Inception Date December 1, 1993 Fund Manager K N Siva Subramaniam / Janakiraman Options Growth and Dividend Investment Focus Providing you exclusive access to the finest of India's smaller companies is FIPF, India's only fund with a clear focus on this dynamic segment of the stock market. Research has shown that dynamic and well-managed, small and medium sized enterprises experience higher growth rates than their well established, larger counterparts. If identified early, investments in such companies could give substantial capital appreciation over time. While there are thousands of listed smaller companies, not all of them can experience the same level of growth and success. Identifying the winners amongst them requires time, effort and research, which is something that the professional fund managers at Franklin Templeton are experts at. Performance Snapshot Last 6 Months Last 1 Year Last 3 Years* Last 5 Years* Last 7 Years* Last 10 Years* Since Inception* FIPF (G) -30.53% -23.57% 9.03% 31.41% 41.01% 32.74% 21.63% 94
  95. 95. MUTUAL FUNDS FIPF (D) -30.53% -23.57% 9.04% 31.41% 41.01% 32.74% 21.62% S&P CNX 500 -20.52% -8.65% 19.41% 29.75% 25.68% 18.70% 10.08% CNX Midcap -24.23% -10.37% 17.50% 31.63% N.A N.A N.A Past performance may or may not be sustained in the future. * Compounded and annualised. As on July 31, 2008. Highlights Daily NAV Choice: Growth Plan and Dividend Plan (Reinvestment & Payout options) Low entry amount of Rs.5000 Easy liquidity: transactions are processed within 4 working days normally Convenience of Systematic Investment Plan : the ideal way to accumulate wealth over the long term NRIs can invest on a fully repatriable basis Fund Information Net Asset Value: Calculated and disclosed on all business days Minimum Investments: 95
  96. 96. MUTUAL FUNDS New Investment Rs. 5,000 Additional Investments Rs. 1,000 Load Amount (Rs.) Entry Load Exit Load < Rs. 5 Crs 2.25% 1% if redeemed/switched-out within 6 months of allotment; 0.5% if redeemed/switched out after 6 months, but within 1 year of allotment => Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6 months of allotment) Systematic Investment Plan Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for 6 months Systematic Withdrawal Plan Minimum withdrawal of Rs.500 or fixed number of units (Minimum investment/account balance for availing this facility is Rs.25,000) Tax Benefits Indexation Benefits Units are not liable to wealth tax and gift tax. No TDS on Redemptions for resident investors 96
  97. 97. MUTUAL FUNDS # Applicable only for fresh investment accounts of Rs. 25 crores and above made on or after April 1, 2005. In such accounts, every additional purchase of Rs. 2 crores and above will also attract the same load structure provided that a minimum balance of Rs. 25 crores is maintained throughout, other than fluctuations in such value as a result of change in the Net Asset due to market conditions. In case the balance falls below Rs. 25 crores (due to redemption), an additional purchase (subject to a minimum of Rs. 2 crores) will also attract the same load structure if such purchase makes up the short fall to maintain the minimum balance at Rs. 25 crores. FRANKLIN INDIA FLEXI CAP FUND (FIFCF) Key Facts Fund Type Open end diversified equity fund Inception Date March 2, 2005 Fund Manager K N Siva Subramaniam & R Sukumar Rajah Options Growth and Dividend 97
  98. 98. MUTUAL FUNDS Investment Focus Stocks of companies are usually categorised as large-cap, midcap, and small-cap depending on their market capitalisation. History has demonstrated that these categories tend to perform differently through economic and market cycles. For example, mid or small cap stocks could move up sharply during a certain time period while large cap stocks remain range bound and vice versa. On the other hand, large-cap stocks tend to be less volatile than mid & small-cap stocks on account of factors such as size, market leadership..etc. Moreover, such periods of outperformance are typically followed by a consolidation phase and a possible reversal of the situation. In order to derive optimal returns from the stock markets, investments need to be diversified and have flexibility to shift allocations across market caps. Designed to help you achieve this with a single investment is Franklin India Flexi Cap Fund (FIFCF). An open-end diversified equity fund, FIFCF seeks to provide medium to long-term capital appreciation by investing in stocks across the entire market capitalization range. Performance Snapshot Last 3 Months Last 6 Months Last 1 Year Last 3 Years* Since Inception* FIFCF (G) -18.09% -25.13% -17.00% 20.13% 22.46% FIFCF (D) -18.09% -25.13% -17.00% 20.13% 22.46% S&P CNX 500 -18.13% -20.52% -8.65% 19.41% 20.55% Past performance may or may not be sustained in the future. * Compounded and annualised. As on July 31, 2008. 98
  99. 99. MUTUAL FUNDS Highlights Daily NAV Choice: Growth Plan and Dividend Plan (Reinvestment & Payout options) Low entry amount of Rs.5000 Easy liquidity: transactions are processed within 4 working days normally Convenience of Systematic Investment Plan: the ideal way to accumulate wealth over the long term NRIs can invest on a fully repatriable basis Fund Information Net Asset Value: Calculated and disclosed on all business days Minimum Investments: New Investments Rs. 5,000 Additional Investments Rs. 1,000 Load Amount (Rs.) Entry Load Exit Load 99
  100. 100. MUTUAL FUNDS < Rs. 5 Crs 2.25% 1% if redeemed/switched-out within 6 months of allotment; 0.5% if redeemed/switched out after 6 months, but within 1 year of allotment => Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6 months of allotment) Systematic Investment Plan Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for 6 months Tax Benefits Indexation benefits Units are not liable to Wealth Tax and Gift Tax. No TDS on redemptions for resident investors TEMPLETON INDIA EQUITY INCOME FUND (TIEIF) Key Facts Fund Type Open end diversified equity fund Inception Date May 18, 2006 Fund Manager Dr. J. Mark Mobius (Assisted by Chetan Sehgal, Vikas Chiranwal) Options Growth and Dividend Investment Focus 100
  101. 101. MUTUAL FUNDS The 'India Growth' story has attracted both global and domestic investors to the Indian stock markets, which have been scaling fresh highs. At the same time, volatility has also been on the rise. In such a situation, many investors are looking for an investment avenue that can help them participate in the long term equity story and also provide a smoother ride through the ups & downs of the markets. Designed to help you achieve this is the new equity fund from Franklin Templeton - Templeton India Equity Income Fund (TIEIF). It is an open end equity fund that seeks to provide a combination of long-term capital appreciation and regular income by investing in stocks that have a current or potentially attractive dividend yield, both in India and overseas. Performance Snapshot Last 1 Month Last 3 Months Last 6 Months Last 1 Year Since Inception* TIEIF (G) 2.27% -9.97% -5.90% 0.41% 17.86% TIEIF (D) 2.27% -9.89% -5.82% 0.49% 17.90% BSE 200 6.38% -18.93% -21.58% -7.66% 10.35% Past performance may or may not be sustained in the future. * Compounded and annualised. As on July 31, 2008. Highlights Daily NAV Choice: Growth Plan and Dividend Plan (Reinvestment & Payout options) 101
  102. 102. MUTUAL FUNDS Low entry amount of Rs.5000 Easy liquidity: transactions are processed within 4 working days normally Convenience of Systematic Investment Plan: the ideal way to accumulate wealth over the long term NRIs can invest on a fully repatriable basis Fund Information Net Asset Value: Calculated and disclosed on all business days Minimum Investments New Investments Rs. 5,000 Additional Investments Rs. 1,000 Load Amount (Rs.) Entry Load Exit Load < Rs. 5 Crs 2.25% 1% if redeemed/switched-out within 6 months of allotment; 0.5% if redeemed/switched out after 6 months, but within 1 year of allotment => Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6 months of allotment) Systematic Investment Plan 102
  103. 103. MUTUAL FUNDS Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for 6 months Tax Benefits Indexation benefits Units are not liable to Wealth Tax and Gift Tax. No TDS on redemptions for resident investors FRANKLIN INDIA PRIMA PLUS (FIPP) Key Facts Fund Type Growth, Open end fund, Inception Date September 29, 1994 Fund Manager R.Sukumar / Anand Radhakrishnan Options Growth and Dividend Investment Focus The lifeblood of any successful business is wealth creation - simply speaking, to generate returns in excess of its cost of capital. Time and again, wealth creating companies have rewarded investors as the stock market sooner or later acknowledges their unique contribution. 103
  104. 104. MUTUAL FUNDS Giving you an easy and convenient access to such companies is FIPP. The scheme looks to identify such companies by thorough research by giving due focus to the qualitative aspects such as management capabilities, business strengths and unique business models which given them a sustainable competitive advantage. Performance Snapshot Last 6 Months Last 1 Year Last 3 Years* Last 5 Years* Last 7 Years* Last 10 Years* Since Inception* FIPP (G) -22.08% -11.50% 24.87% 35.53% 33.34% 31.58% 21.23% FIPP (D) -22.08% -11.50% 24.82% 35.50% 33.31% 31.57% 21.22% S&P CNX 500 -20.52% -8.65% 19.41% 29.75% 25.68% 18.70% 8.71% Past performance may or may not be sustained in the future. * Compounded and annualised. As on July 31, 2008. Highlights Daily NAV Choice: Growth Plan and Dividend Plan (Reinvestment & Payout options) Low entry amount of Rs.5000 Easy liquidity: transactions are processed within 4 working days normally Convenience of Systematic Investment Plan : the ideal way to accumulate wealth over the long term NRIs can invest on a fully repatriable basis 104

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