Project Report By Vikram Dhumal(523)Topic: Mutual und Analysis & Portfolio ManagemaentFirm: Vantage Wealth Management Solu...
CHAPTER4:- INTRODUCTION OF MUTUAL FUNDS          ..364.1  CONCEPT OF MUTUAL FUND                      ..374.2 EMERGENCE OF...
8.1   MANAGEMENT BOARD OF INDIA          ..818.2   FUNCTIONS OF BOARD                 ..828.3   REGISTRATION CERTIFICATE  ...
CHAPTER 1:-INTRODUCTION      4
1. INTRODUCTION1.1 OBJECTIVE OF THE PROJECTTheoretical Knowledge without Practical Experience is like a Body withoutSoul. ...
1.2   SELECTION OF TOPIC      Generally when we decide to study the investment options available intoday s complex & risky...
1.3 OBJECTIVE OF THE STUDY       Vision is a long term policy & to reach there you can t just leap &jump. To there the sta...
1.4 METHODOLOGY OF THE PROJECT   Defining objective won t suffice unless & until a proper methodology   is to achieve the ...
1.5    SCOPE OF THE STUDYThe study encompasses different aspects from point of view of investors asfollows.      1.   Inve...
1.6 LIMITATIONS OF THE STUDY      This project is not funded one, hence it gets restricted to a mere in      depth study &...
the Study.             CHAPTER 2 :-  PROFILE OF THE ORGANIZATION                  11
2. PROFILE OF THE ORGANIZATION  VANTAGE INSURANCE SERVICES PVT. LTD.  VANTAGE WEALTH MANAGEMENT SOLUTIONS PVT. LTD.2.1   A...
Risk Mgmt. solution to a Corporate. A synergy of both the group companiesoffers a wide array of services & products to sui...
2.1 B] COMPANY MISSION We endeavor to move beyond a Transactional Approach in InsuranceBroking & Investment Advisory to fa...
Continue to uphold values of Honesty & Integrity & Strive to  Establish unparalleled standards in Business ethics. Use Sta...
2.2 AREA OF SERVICES/ PRODUCTS RANGEASSETS PRODUCTS            Mutual Fund             Tax Saving Bonds             Capita...
NSE Trading & settlementBUSINESS GROUPS:-           Corporates Solution Groups                            Personal Financi...
Support from the core group consisting of experienced Experts           From Insurance Cooperation, Valuers, Loss Assessor...
CHAPTER 3 :-INVESTMENT MANAGEMENT          19
3. INVESTMENT MANAGEMENT3.1 EQUITY PORTFOLIO MANAGEMENTAn equity portfolio manager s task consists of two major steps:   a...
3.2 EQUITY FUNDSForm categories based on risk-return profile    - Diversified , Index , Sectorial & SpecializedForm catego...
OTHER VARITIES OF EQUITY FUNDSSpecialized Funds:-        1) Sector Funds        2) Offshore Funds        3) Small Cap Equi...
High yield debt funds      Assured Return Funds - Indian variety      Liquid Funds3.3   TYPES OF EQUITY INSTRUMENTSOrdinar...
company may issue 10% CD for Rs. 100 each that would be conversed into5 equity share after 2 years. That is a holder of 1 ...
Earning per Share is the amount of total earning received on each share. Thevalues of EPS are got by dividing total earnin...
3.6   A REVIEW OF THE INDIAN DEBT MARKETInstruments in the Indian Debt MarketThe objective of a debt is to provide investo...
assigned a credit rating by rating agencies. Trading in Debentures isgenerally based on the current yield & market values ...
days & 364 days. These treasury bills are issued through an auctionprocedure. The yield is determined on the basis bids te...
A debt fund or a bond fund generally invest a large part of its corpus inlonger term fixed income in debit securities issu...
PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2             .+                  (Coupon Principle) / (1+ YTM) n           ...
4) Default Risk: A bond is a subject to the risk that is assured may     default on its obligation to make timely principl...
3.7   INVETMENT POLICIES AND RESTRICTION      Investment Policy:      Investment Policies of each scheme are dictated by i...
While the AMC management the AMC determines the investmentpolicies & its fund manager must also comply with the restrictio...
scheme. In case of open ended the limits may be made more           stringent to 5% of the NAV of the scheme as there is  ...
6. Pending investment of funds pursuant to the objective the fund may   invest the same in short term deposit of scheduled...
CHAPTER 4:-INTRODUCTION TO MUTUAL FUNDS           36
4.     INTRODUCTION TO MUTUAL FUND4.1 THE CONCEPT OF A MUTUAL FUND   A Mutual Fund is a common pool money into which inves...
evidence the ownership of the funds asset, the value of total asset of the fund.When divided by the total number of units ...
minimum knowledge requires by both fund distributors & the      employees. The workbook provided by AMFI can serve as a gu...
UTI was started, at the initiative of the Reserve Bank of India & theGovernment of India. The objective then was to attrac...
UTI    2175                      670                        3.1 %    Phase II: 1987-1993 (Entry of Public Sector Funds)198...
GROWTH                            96         15           -          111BALANCED                          31          4   ...
Corporate & financial institutions  2.   Target low risk & stable income  3.   Higher price fluctuation risk as compared t...
MF Regulations.  At the end of Sept.2004, there were 29 Funds which Manages assets of  Rs. 1, 53,108 Crores under 421 Sche...
governance, investor protection & the health of capital market. Mutual   Fund have imparted much needed liquidity into the...
Structure  Foreign                    Sponsor                  Trustee  Partner  Asset Management                         ...
4.5 THE ADVANTAGES OF MUTUAL FUNDS Portfolio Diversification: Each Investor in a Fund is a part of the funds entire asset,...
Reduction / Diversification of Risk: When an investor invest directly,all the risk of Potential loss is his own, weather h...
Affordability:-Provides an opportunity for a small investor-Invest as less as an amount ofWide Choice:-Offers a Varieties ...
Mutual Funds:                   A Packaged Product      Professional      Management                                     D...
as long as he remains with the funds, in return for the professional manag  ment & research. Fees are payable even while t...
Mutual Fund in India. There are multiple regulations. While UTI is     governed by its own regulations, the banks are supe...
9.    The Mutual Fund have eroded the Financial clout of institution        in the Stock market for which cross transactio...
By Constitution   By Investment Objective   By Nature Of Investment By ConstitutionOPEN-END:          No fixed maturity   ...
High yield debt funds : Assured Return Funds - Indian variety                              Liquid Funds       By Investmen...
2)   Indian Companies                           3)   Indian Trust/ Charitable Institution                           4)   B...
4.     Sponsor of Mutual Funds have no obligation to meet any shortfall in          the assured return-unless explicitly g...
1. Summary information- at a glance  2. Type of scheme growth / income / balanced  3. Name of AMC  4. Price of units  5. I...
§ Terms of issue  § Historical statistics  § Investors Rights and ServicesKey Information Memorandum that is distributed w...
NAV :     Investor s subscriptions are unit capital rather than deposits          or liability.           Investments made...
NAV        NAV = Net assets of scheme / No of units Outstanding        i.e. Market value of investments+ Receivables+     ...
NAV to be published at least weekly   Close end Schemes (which are not listed) may publish NAV   monthly/qt with prior app...
§ Exit Load or back ended load             Paid at the time of exit             Redemption Price = NAV/ (1+ Exit Load)§ Co...
CHAPTER 5 :-MEASURING & EVALUATING FUND PERFORMANCE  5. MEASURING & EVALUATING OF MUTUAL FUND                     64
5.1     NECESSARY FOR MEASURING MUTUAL FUND        PERFORMANCEWhen an investing entrusts his saving to Mutual Fund natural...
§   Different valuation methods   §   Change in NAV   §   Total Return   §   Total Return with dividend reinvested at NAV ...
Section one:Equity Funds:    NAV Growth                 Total Return                 Total Return with reinvestment at NAV...
Mark.                 Total Return Index                 Money Market Funds Short Term Govt. Instrument                 In...
Debentures, Bonds, & Money Market Instruments & therefore the NAV ofsuch investments will reflect the market values of und...
Free Dividends.The Risk Return Trade-offThe Risk Return Trade-off                                                       He...
Equities are the best long term bet   percentage of studied period in whichOther                                          ...
Equities are the best long term betCumulative annualised returns (1980 - 98)   25.0%                                      ...
CHAPTER 6:-MUTUAL FUND FEES & EXPENSES            73
6. MUTUAL FUND FEES & EXPENSES     Initial Issue Expenses     Transaction Cost: Entry / Exit Load      CDSE for No-Load Fe...
§ The limits are: (Subject to overall limit of 6%)       1.25% for up to Rs.100 cr of weekly avg net assets       1% in ex...
CHAPTER 7:-ACCOUTING & VALUATION OF MUTUAL FUND                 76
7. ACCOUNTING & VALUATION OF MUTUAL FUNDAccounting Policies  § Investments to be marked to market on market prices.  § Unr...
§ NON - TRADED SECURITIESStocks which are not traded for more than 30 days on any SE are valued ongood faith basis by AMC ...
Investment Restrictions as a % of Net assets - AMC  § Max. Investment under all schemes of the AMC in paid up capital    c...
CHAPTER 8:-                SEBI[SECURITIES EXCHANGE BOARD OF INDIA]                 80
SEBI[THE SECURITIES & EXCHANGE BOARD OF INDIA ACT]In 1992, an Act to provide for the establishment of a Board to Protect t...
Removal of Members from Office: - The Central Govt. shall remove aMember from Office if He/ She   1. Adjudicated as insolv...
8.2 FUNCTIONS OF BOARD Subjects to the provisions of this Act; it shall be Duty of Board to Protect the Investors in Secur...
8.3 REGISTRATION CERTIFICATE   No Stock- Broker, sub- Broker, Share Transfer Agent, Banker an Issue,   Trustee of Trust de...
Grants by the Central Govt. for all Grants, fees & charges received bythe Board under SEBI Act made by Parliament:-    All...
Reserve Bank of India & SE   RBI         Dual supervision for bank sponsored AMC s         Issue concerning ownership bank...
Trustee and AMC to comply with Cos Act 1956         Registrars of Companies (ROC)          Department of Company Affairs  ...
CHAPTER 9:RULES & REGULATIONS       88
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent

  1. 1. Project Report By Vikram Dhumal(523)Topic: Mutual und Analysis & Portfolio ManagemaentFirm: Vantage Wealth Management Solutions Pvt. Ltd.College(MMM): Sinhgad Institute of Business Administration And ComputerApplicationCONTENTCHAPTER 1:- INTRODUCTION ..41.1 OBJECTIVE OF THE PROJECT ...51.2 SELECTION OF THE TOPIC ...61.3 OBJECTIVE OF THE STUDY ...71.4 METHODOLOGY OF THE PROJECT ...81.5 SCOPE OF THE STUDY ...91.6 LIMITATIONS OF THE PROJECT ..10CHAPTER 2:- PROFILE OF THE ORGANISATION .112.1 A] COMPANY PROFILE .12 B] COMPANY MISSION .142.2 AREA OF SERVICES .16CHAPTER 3:- INVESTMENT MANAGEMENT .193.1 EQUITY PORTFOLIO MANAGEMENT .203.2 EQUITY FUNDS .213.3 TYPES OF EQUITY INSTRUMENTS .233.4 EQUITY CLASSES .243.5 DEBT PORTFOLIO MANAGEMENT .253.6 A REVIEW OF INDIAN DEBT MARKET .263.7 INVESTMENT POLICIES & RESTRICTIONS .32 1
  2. 2. CHAPTER4:- INTRODUCTION OF MUTUAL FUNDS ..364.1 CONCEPT OF MUTUAL FUND ..374.2 EMERGENCE OF MUTUAL FUNDS ..384.3 HISTORY OF MUTUAL FUNDS ...394.4 PLACE OF MUTUAL FUNDS IN FINANCIAL MARKET 444.5 THE ADVANTEGES OF MUTUAL FUNDS ...474.6 THE DISADVANTAGES OF MUTUAL FUNDS ...504.7 CLASSIFICATION OF MUTUAL FUNDS ...534.8 WHO CAN INVEST? ...554.9 INVESTORS RIGHTS & OBLIGATION 554.10 OFFER(DOCUMENTS) BY MUTUAL FUNDS . ...574.11 ACCOUNTING OF MUTUAL FUNDS 59CHAPTER 5:- MEASURING & EVALUATING OF MUTUAL FUND PERFORMANCE 635.1 NECESSARY FOR MEASURING MUTUAL FUND ....64 PERFORMANCE5.2 DIFFERENT MEASURES OF FUND PERFORMANCE ..65CHAPTER 6:- MUTUAL FUND FEES & EXPENSES 72CHAPTER 7:- ACCOUNTING & VALUATION OF MUTUAL FUND 75CHAPTER 8:-SECURITIES & EXCHANGE BOARD OF INDIA..79 2
  3. 3. 8.1 MANAGEMENT BOARD OF INDIA ..818.2 FUNCTIONS OF BOARD ..828.3 REGISTRATION CERTIFICATE ..83CHAPTER 9:- RULES & REGULATIONS 87CHAPTER 10:- PENALTIES & ADJUDICATION 92CHAPTER 11:- SUGGESTIONS .95GLOSSERY 100BIBLIOGRAPHY .131 3
  4. 4. CHAPTER 1:-INTRODUCTION 4
  5. 5. 1. INTRODUCTION1.1 OBJECTIVE OF THE PROJECTTheoretical Knowledge without Practical Experience is like a Body withoutSoul. So without Practical implementations, theory remains no use. Hencewe need to gain the Practical Experience. And what better would be, then aProject work for the same.Also as a part of our MBA curriculum, we need to undergo the trainingprogrammed for minimum of 60 days, in a company.I selected area of MUTUAL FUND INDUSTRY, which pools the funds &reduces risk by investing in different diversified assets. I studied as to howthis industry proves to an option for the investors, by studying theperformance of mutual funds for few months considering their Net AssetValues.Hence this is a project work on a Mutual Fund Analysis & PortfolioManagement . 5
  6. 6. 1.2 SELECTION OF TOPIC Generally when we decide to study the investment options available intoday s complex & risky scenario, we should thoroughly evaluate the optionupon various factors. These factors should include: The Past Performance of the option under study Risk adjusted returns from the invested plan Share in the Portfolio Policy Fund House When observed the above parameters for the evolution of TheFinancial Performance of the option under study, then immediate conceptthat clicks our mind is MUTUAL FUNDS . So for this, I have selectedMutual Funds performance to study as investment option.Study of Mutual Fund includes Study of Equity, Debt, Bonds, Securities, etc. Investment Decision Risk Measurement & risk diversifications Portfolio Management Analyzing the Option (a Particular Security/ Instrument). 6
  7. 7. 1.3 OBJECTIVE OF THE STUDY Vision is a long term policy & to reach there you can t just leap &jump. To there the stairs of objectives need to be climbed successfully an soobjectives of this project are How to find the RIGHT SCRIPT to buy & sell at RIGHT TIME , thereby mobilizing the saving aptly. How to get good return on investment How to achieve Capital appreciations How to form a right PORTFOLIO & How to invest in RIGHT PORTFOLIO . To analyze the performance of Mutual Funds. 7
  8. 8. 1.4 METHODOLOGY OF THE PROJECT Defining objective won t suffice unless & until a proper methodology is to achieve the objectives. 1. The methodology of the project here is to analyse the investments Opportunities available for the investors & study the returns & risk involved in various investment opportunities. 2. Study of investment management, risk management & portfolio Diversification. 3. The methodology of the project here is to analyze the Mutual Fund performance based on:- NAV (NET ASSET VALUE) :- It tracked the daily NAV s Of the Mutual Funds to compute the performance. Total Return Basis: By taking into account dividends distributed by the funds between the two NAV s change To arrive at a total return. Portfolio turnover Ratio: This means the Amount of Buying & selling done by a fund. Asset Purchased/ Sold PTR= Funds Net Assets Study Financial & Legal obligations of Mutual Funds. 8
  9. 9. 1.5 SCOPE OF THE STUDYThe study encompasses different aspects from point of view of investors asfollows. 1. Investment portfolio selection 2. types of Mutual Funds 3. Expected returns on investment 4. Investment in Tax Saving Schemes.Despite various problems, India Could still have a lot of profitableopportunities to offer in this sector. And given the fact it is the majoremerging market to open up. It is equally important that, even if its variousFund Investments can harness a small part of the total funds availableinternationally, Indian Foreign Exchange reserves will shoot up.According to World Bank Study, portfolio investment in the emergingmarkets will rise above a massive $100 Billion by 2002. Actual figures areyet not published for the same. 9
  10. 10. 1.6 LIMITATIONS OF THE STUDY This project is not funded one, hence it gets restricted to a mere in depth study & few guidelines for investors. This study is carried out in pursuance of curriculum MBA, which is mandatory for period of two months; hence exhaustive data is not available upon which conclusion can be relied upon. NAV are prone to environmental factors 7 which would influence the value during trading. Investments in Securities carry risks & Mutual Fund units are no exception. Risk being erosion in the Market value of the Investment of decrease in the percentage dividends declared by the Mutual Fund. The risk factors inherent in a Mutual Fund Schemes are the schemes, market risk, & the investment experience of the Asset Management Company. Factors affecting the Market Price of Investment may be due to Market forces, performance of the companies, Govt. Policies, Interest rates & so on. Study for all the existing Mutual Fund Schemes is not feasible, Sample schemes of all Mutual Fund Types are considered for 10
  11. 11. the Study. CHAPTER 2 :- PROFILE OF THE ORGANIZATION 11
  12. 12. 2. PROFILE OF THE ORGANIZATION VANTAGE INSURANCE SERVICES PVT. LTD. VANTAGE WEALTH MANAGEMENT SOLUTIONS PVT. LTD.2.1 A] COMPANY PROFILE:- Vantage is Financial intermediary with diversified presence acrossvarious Financial services encompassing a range of Risk & Wealth Mgmt.solutions with a PAN India presence spreader across- Mumbai, Pune,Bangalore, Chennai, Hyderabad & Gurgaon, the group has created a mark inthe Financial Services market with the unique concept of being a one stopsolution for Corporates & Individuals catering to needs in the field ofInsurance- Life & General, Investments, such as Mutual Funds, FixedIncome Instruments, Portfolio Advisory, Life stage planning among others& also Tax Planning. Vantage Wealth Mgmt. is primarily focused on an end to end solutionsprovider for all investment & insurance needs of an Individual. VantageInsurance Services, an IRDA mandated, Direct Insurance Broker, with aLicense in both Life & General Insurance is focused on providing the best 12
  13. 13. Risk Mgmt. solution to a Corporate. A synergy of both the group companiesoffers a wide array of services & products to suit Individual & Corporateneeds. Later, it forayed into the Register & Share transfer activities &subsequently into Financial Services. All along, Vantage Group is Strongethic & Professional background leveraged with Information Technologyenabled it to deliver quantity to the individual. A decade of Commitment, Professional Integrity & Visionhelped Vantage to achieve a leadership position in its field when it handledthe number of issues ever handled in the history of the Indian Stock Marketin a year. Thereafter, Vantage Group made inroads into a host of Capitalmarket services- Corporate & Retail which provided to be a sound BusinessSynergy. Today, Vantage has assessed to millions of Indian Shareholders,besides companies, Banks, Financial Institutes & regulatory agencies. Overthe Past one & decades, Vantage has evolved as a veritable link betweenIndustry, Finance & people. 13
  14. 14. 2.1 B] COMPANY MISSION We endeavor to move beyond a Transactional Approach in InsuranceBroking & Investment Advisory to faster growth of Consultativerelationship with our Clients aimed at delivering an Integrated Solution inthe areas of Risk & Wealth Management.To achieve & retain leadership, Vantage Group shall aim for completeCustomer Satisfactions, by combining its Human & Technology Resources,to provide superior quality Financial Services.QUALITY OBJECTIVESAs per the Quality Policy, Vantage Group will:- Build in-house processes that will ensure transparent & harmonious relationships with its Clients & Investors to provide high quality of services. Establish a partner relationship with its Investors Service agents & Vendors that will help in keeping Commitments to the Customers. Provide high quality of Work Life for all its Employees & Equip them with adequate Knowledge & Skills so as to respond to Customer s needs. 14
  15. 15. Continue to uphold values of Honesty & Integrity & Strive to Establish unparalleled standards in Business ethics. Use State-of-the art Information Technology in developing new & Innovative Financial Products & Services to meet changing needs Of Investors & Clients. Strives to be a reliable source of value added Financial Products & Services & constantly guide the Individuals& Institutions in making A Judicious choice of same. Strive to keep all Stale-holders (Share-holders, Clients, Employees, Suppliers & Regulatory authorities ) proud & satisfied. 15
  16. 16. 2.2 AREA OF SERVICES/ PRODUCTS RANGEASSETS PRODUCTS Mutual Fund Tax Saving Bonds Capital Gain Bonds State & Central Govt. Bonds Equity FundsSERVICES PRODUCTS Insurance Advisory Services Tax Advisory Services Stock Broking Services Investment Consultancy Services Project Finance & Consultancy Portfolio Management Sub- Broker for the New Issues BSE Trading & settlement 16
  17. 17. NSE Trading & settlementBUSINESS GROUPS:- Corporates Solution Groups Personal Financial Consultancy GroupCORPORATES SOLUTION GROUPS 1. I.R.D.A recognized Direct Insurance Broker with License to intermediate in both General Insurance & Life Insurance Business. 2. Focus on delivering Integrated Risk Mgmt. solution across diverse areas such as:- Employee Benefit Insurance PAN India more than 2, 50.000 Members covered through Vantage managed Health, Accident & Life Insurance solutions. Over 45-50 Corporates including, some of the largest most respected corporate in the IT & ITes Industry, have entrusted up with their Employee benefit Insurance Programme. Property Insurance Including Extensive experience in Project & Machinery Insurance. Business Interruption / Loss of Profit insur -ence is another area where we have rendered our expertise to cer -tain key corporates. Liability Insurance Experienced in delivering solution for Comp lex Global Liability Exposures worked with many leading IT & ITes companies in this area. Specialized Risk covers including Movie & Event Insurance. 1. Web enabled solution in Employee Benefit Insurance. 2. Vantage draws Technical Expertise in Risk Mgmt.with Advisory 17
  18. 18. Support from the core group consisting of experienced Experts From Insurance Cooperation, Valuers, Loss Assessors, Property.PERSONAL FINANCIAL CONSULTANCY GROUP:- Vantage is an AMFI Registered Mutual Fund Distributors. Focus on delivering customized Financial Planning Solution keeping in a view an Individual s requirements such as: 1) Financial Goals & Investment Objective. 2) Life Insurance Coverage 3) Retirement Planning 4) Tax Planning Online Portfolio updates. 18
  19. 19. CHAPTER 3 :-INVESTMENT MANAGEMENT 19
  20. 20. 3. INVESTMENT MANAGEMENT3.1 EQUITY PORTFOLIO MANAGEMENTAn equity portfolio manager s task consists of two major steps: a) Constructing a Portfolio of Equity shares or equity linked instrument That is consistent with the Investment objective of the fund & b) Managing or constantly re-balancing the portfolio to produce capital Appreciation & earning that would reward the investors with superior Returns.STOCK SELECTIONThe equity Portfolio manager has available to him a whole universe ofequity shares & other instruments such as preference shares, warrants orconvertible debentures issued by many companies. However, more specially,the equity portfolio manager will choose from a universe of shares inaccordance with: A) The nature of the Equity instrument, or a particular stock s unique characteristics, & B) A certain investment styles or Philosophy in the process of choosing. 20
  21. 21. 3.2 EQUITY FUNDSForm categories based on risk-return profile - Diversified , Index , Sectorial & SpecializedForm categories based on fund manager s style - Value and GrowthEvaluate Performance - Peer Group and Benchmark comparisonConsider Structural Characteristics - Size of the Fund - Fund History - Portfolio Manager Experience - Cost of Investing: Expense RatioConsider Portfolio Characteristics - Percentage Cash - Portfolio Concentration - Market Capitalization of Fund - Portfolio Turnover: Churn - Portfolio Risk Characteristics R-squared Beta Dividend Yield - High R Squared , Low Beta And High Dividend yield preferred 21
  22. 22. OTHER VARITIES OF EQUITY FUNDSSpecialized Funds:- 1) Sector Funds 2) Offshore Funds 3) Small Cap Equity Funds 4) Option Income funds - writes options 5) ELSS - Indian Variety 6) Equity Index Funds 7) Value Funds 8) Equity Income Funds - invest in co. with higher dividend yields i.e. Power/utilitiesOther Equity Oriented Funds: Hybrid Funds -Balanced Funds -Growth & Income Funds -Assets Allocation Funds Commodity Funds Real Estate FundsDebt Funds : Diversified Debt Funds Focused Debt Funds Sector / Specialized / Offshore Municipal bonds / infrastructure cost bond funds Mortgaged backed 22
  23. 23. High yield debt funds Assured Return Funds - Indian variety Liquid Funds3.3 TYPES OF EQUITY INSTRUMENTSOrdinary Shares:Ordinary Shareholders are the true owners of the company, & each shareentitles the holders of ownership privileges such as dividends declared bythe company & voting right at the meetings. Losses as well as profits areshared by the equity shareholders. Without any guaranteed income orsecurity, equity share are risk investment briefing with them potential for thecapital appreciation in return for the addition that the investors undertakes inthe comparison to debt instrument with guaranteed income.PREFERENCE SHARESUnlike equity share, preferences share entitled the holder to dividend at therate subject to availability of profit after tax. If preference shares arecumulative, unpaid dividend for years of inadequate are paid in subsequentlyyear preference share do not entitled the holder to ownership privileges suchas voting right at the meeting. This preference shares are generally redeemedafter certain period.EQUITY WARRANTSThese are long terms right offer holder the right to purchase equity share in acompany at a fixed price (Usually Higher than current Market Price) withinthe specified period. Warrants are in the nature of option on stocks.CONVERTIBLE DEBENTUREAs the term suggest, this are fixed rate debt instrument that are covered intoa specified number of equity share at the end of specified period for Ex.- A 23
  24. 24. company may issue 10% CD for Rs. 100 each that would be conversed into5 equity share after 2 years. That is a holder of 1 debenture at the time issuewould become a holder of 5 equity share in the 2 years time.3.4 EQUITY CLASSESEquity shares generally classified on the basic of either the marketcapitalization or the anticipated movement of the accompany earning. It is aimperative for the Fund Manager to understand these elements of the stocksbefore he selects form the inclusion in the portfolio.CLASSIFICATION IN TERMS OF MARKET CAPITALIZATIONMarket is the equivalent to the current value of a company i.e. currentmarket price per share time per the number of outstanding shares. There arelarge capitalization company, Mid-cap Company & small company.Different scheme of a fund may define there fund objective as a preferencefor large or mid or small-cap companies shares. Large cap share are moreliquid & hence easily tradable. Mid or small cap share may be thought of ashaving to track this different classes of share.CLASSIFICATION IN TERMS OF ANTICIPATED EARNINGIn terms of anticipated earning of the share are generally classified on thebasis of their market price in relation to one of the following measures:-1] PRICE / EARNING RATIO (P/E Ratio)Price/ Earning ratio is a price of share divided by the earning per share &indicates weather the investors are willing to pay for a company earningprudential. Young &/or fast growing companies usually high P/E ratios.Established companies in nature industries may have P/E Ratios. The P/Eanalysis is sometimes supplemented with the rate such as Market PricetoBook Value & Market Price to cash flow per share.2] EARNING PER SHARE (EPS) 24
  25. 25. Earning per Share is the amount of total earning received on each share. Thevalues of EPS are got by dividing total earning by number of shares. Thusmore the EPS more beneficial is for the Shareholder.3.5 DEBT PORTFOLIO MANAGEMENTDebt portfolio has to contend with the construction & management ofportfolio debt instrument, the primary objective of generating income. Justas the inquiry fund manager has to go through a stock selection process, adebt fund manager has to select from whole universe of debt securities hewants to invest in.Classification of Debt SecuritiesMany instruments give regular income. However, in the context of debtmutual funds, manager invest only in market-trader instrument (not inloans as done by the bank) debt instrument may be secured by the assets ofthe borrowers as in case of corporate, or be unsecured as is the case withIndian Financial Bond.A Debt is issued by a borrower & is often known by the issuer category thusgiving us Government security & Corporate Securities or FI Bonds.Debt instrument are also distinguished by their maturity profile. Thus,instrument issued with short term maturities, typically under one yearmaturities are classified as Money Market Securities instrument carryingLong then one year maturities are generally called Debt Securities.Most debt securities are interested bearing. However, there are securities thatare discounted securities or zero coupon bonds that are generally fixed thatpay interest on a Floating Rate basis. There are lots of new instrumentscoming in the debt markets. 25
  26. 26. 3.6 A REVIEW OF THE INDIAN DEBT MARKETInstruments in the Indian Debt MarketThe objective of a debt is to provide investors with a stable income stream.Hence, a debt fund invests mainly in instrument that yields a fixed rate ofreturn & where the principal is secured. The debt market in Indian offers thefollowing instruments for investment for by Mutual Funds.Certificates of DepositsCertificates of Deposit (CD) are issued by scheduled commercial banksexcluding regional rural banks. These are unsecured negotiable promissorynotes. Banks CDs have a maturity period of 91 days to one year, while thoseissued by FI s have maturities between one & three years.Commercial PaperCommercial Paper (CP) is a short term, unsecured issued by corporatebodies (Public & Private) to meet short-term working capital requirement.Maturity varies between 3 months & 1 year. This instrument can beincorporated in Indian. CP s can be issued to NRI s on non-repatriable &non- transferable basis.Corporate DebenturesThe debentures are usually issued by manufacturing companies withphysical assets, as secured instruments; in the form of certificates they are 26
  27. 27. assigned a credit rating by rating agencies. Trading in Debentures isgenerally based on the current yield & market values are based on yield ofmaturity. All publicly issued Debentures is listed on exchange.Floating Rate BondsThese are short to medium term bearing instruments issued by the financialintermediaries & corporate. The typical maturity of these bonds is 3 to 5years. FRB s issued by Financial Institutions are generally unsecured whilethose from private corporate are secured. The FRB s are pegged to differentreference as much as T- bill or bank deposits rates. The FRB s issued by theGovernment of Indians are in the form of Stock Certified of issued by creditto SGL accounts maintained by the RBI.Government SecurityThese are medium to long term interest bearing obligations issued throughthe RBI by the Government of India & State Governments. The RBI decidesThe cut-off on the basis of bids received during the auctions. These areissued where the rates are pre-specified & the investor s only bids for thequality. In most cases, the coupon is paid semi annually with bulletredemption features.A large part of the trading is concentrated in those government securitiesthat are eligible for repost (repurchase) transition, i.e. sale of a security witha parallel agreement to repurchase the same at a future date. The RBI acts asthe depository, its public debt office maintain an SGL account for variousbanks & Financial Institution, & issues or transfers the securities in the formof book entries made in SGL accounts. If a fund does not have an SGLaccount, it may open a constitution account with any RBI- registered bank.Treasury BillsT- Bills are shortly obligation issued through the RBI by the Government ofIndia at a discount the RBI Issues T-Bills for different tenures: 14 days, 91 27
  28. 28. days & 364 days. These treasury bills are issued through an auctionprocedure. The yield is determined on the basis bids tendered & accepted.Bank/ FI BondMost of the institutional bonds are in the form of promissory notestransferable by endorsement & delivery. These are negotiable, issued by theFinancial Institution such as IDB/ ICICI/ IFCI or by commercial bank.These instruments have been issued both as regular income bonds & asdiscounted long term instruments (deep discount bonds).Public Sector Undertaking (PSU) BondsPSU Bonds are medium & long term obligation issued by Public sectorcompanies in which the government share holding is generally greater then51% . Some PSU Bonds carry tax exemptions. The maximum maturity is 5year for Taxable bonds & 7 years for Tax- Free Bonds. PSU bonds aregenerally not guaranteed by the government & are in the form of promissorynotes transferable by endorsement & delivery. PSU bonds in Electronic form(Demat) are eligible report transactions.Basic Characteristics of Money Market SecurityMoney Market fund invest always exclusively in money market security,which are instrument of under 1 Year Maturity many of them of discountedor zero coupon delivery. Money market fund portfolios may includegovernment corporate of bank issued security. In India, certificates ofdeposits, treasury bills & commercial papers from the three major types ofInstruments where MF s usually invest in.Basic Characteristics of Bonds or Debt Security 28
  29. 29. A debt fund or a bond fund generally invest a large part of its corpus inlonger term fixed income in debit securities issued by government,companies or Banks/ FI s. A small part is invested in money market. InIndian context, long dated government securities, corporate debentures & FIBonds from the bulk of debt fund portfolios.Bonds have the following four keys characteristics set at the time of issue: Par Value : This is the principal amount that investors will be paid upon Maturity of the bonds, & is also known as the face value. Coupon : This is the annual rate of interest paid on the par value of the Bond to the investor. Maturity : This refers to the term of the bond that is , the date on which the Bond that is , the date on which the issuer has to repay the principle amount of the Bond. Call or Provision: These are included in some bond contracts to allow the issuer the option to redeem the bonds before Maturity thereby allow -ing refinance of debt at lower interest ratesMeasuring of Bond Yields: Returns on a fixed income security is generallycomputed in the form of Current Yield or a Yield to Maturity.Current Yield: This relates interest on a Bond to its Current Market Priceby dividing the annual coupon interest by the current market price. 1) Yield to Maturity (YTM): This is a sophisticated technique of bond analysis. Posen defines YTM (also known as the bonds IRR) as the annual rate of return & investors would realize if he a bond at a particular price, & received the principal at maturity. YTM allows investors to compare bond with different coupons, maturities & price & is quoted for trading purposes. The relationship between the price & YTM of a bond is expressed by the following formula: 29
  30. 30. PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2 .+ (Coupon Principle) / (1+ YTM) n The inverse relation between price & YTM is important in bond portfolio management. Yield Curve: This is the graph showing yields for bonds various maturities, using a benchmark group of bond, such as the Government Securities. This is also known as the Term Structure of Interest Rates (TRIR). This yields curve usually upwards sloping become longer maturities generally offer higher yields. This is because longer term debt carries higher risk on account of inflation & other economic factors. The yield curve is important indicators of expected trends in interest rates.RISK IN INVESTING IN BOND: 1) Interest Rates-Risk: The price of bond will change in a direction opposite to movement in interest rates. When interest rates rises bond price will fall, thus an existing bond portfolio losing valve. A sound analysis of interest rates movement is therefore essential. 2) Reinvestment Risk: A bonds yield to maturity assumes reinvestment of interest received during the term at a constant rate. This not may be possible if interest rate changes & risk is of uncertain cash flow being reinvested at a lower rate. 3) Call Risk: If a bond has been issued with a call provision the issuer may call them back & return the proceeds to the investors whenever interest rates fall, so the borrowing can be replaced with cheaper debt. The investor thus cannot keep a high yield bond. 30
  31. 31. 4) Default Risk: A bond is a subject to the risk that is assured may default on its obligation to make timely principle & interest payments. A fund needs to assess this risk based on the bonds rating & the analysis generated by its research on issuer s cash flows. 5) Inflation Risk: When the inflation rate rises, purchasing power decline. Therefore, the value of interest payment is reduced. Investors will therefore expect higher yields in bonds. Higher interest rate will make the existing bond lose value again. 6) Liquidity Risk: This refer to the ease with which investment in a bond can be liquidated (or sold) at a price near its value. This element is important for a fund because its investments are made on behalf of unit-holder & market conditions may require the fund to liquidate a part of its portfolio within a short time.Instruments in the market § Equity 1) Ordinary shares 2) Pref. shares 3) Equity warrants 4) Convertible Debentures § P/E Ratio § Dividend Yield § Cyclical / Growth / Value Stocks Market Capitalization =Sum total of CMP of shares * no. of shares 31
  32. 32. 3.7 INVETMENT POLICIES AND RESTRICTION Investment Policy: Investment Policies of each scheme are dictated by its investment objective as stated in the offer document. In practice the board policy guidelines are included in the offer documents while the day- to-day policies are laid down by the AMC management for the fund manager to conform to fund manager do have some flexibility in alerting the strategy in the light of changing market condition & in specific selection. Investment strategy of an equity fund will lay down guideline on which sectors & what ki8nd of companies to invest in, what percentage will be held in the form of cash or money market securities or how much in debt securities. Usually minimum & maximum allocation of funds to each class- Equity & Cash is specified. Investment policies of a debt fund will also lay down guidelines on the portfolio & their average maturity. Minimum & Maximum percentage of Cash / money market instruments in the portfolio has to be specified too. Investment policy of balanced funds will specify the minimum & maximum asset allocations to equity & debt / cash besides the normal guidelines for the equity & debt components. Investment policies of the money market funds will largely specify the type of instrument preferred & their profile. Investment Restriction by SEBI: 32
  33. 33. While the AMC management the AMC determines the investmentpolicies & its fund manager must also comply with the restrictionimposed by regulator-mostly SEBI & in case of money market fundthe RBI.SEBI s main objective in laying down restriction on AMC s is toensure investor protection.The objective is attained by: 1. Maintaining minimum level of diversification in Mutual Fund Investments & 2. Ensuring that the Investor s funds are used to favour a few or associated invested in approved securities only. To attain this Regulatory objectives, some major restrictions imposed by SEBI. Minimum Portfolio Diversification Norms Investment in equity shares or equity related instruments of a single company are restricted to 10% of the NAV as a scheme. However the limit of 10 % does not apply in case of sector / industry specified schemes subject to adequate discloser in the offer documents. The basic objective here is to ensure that a fund a fund has an adequately diversified portfolio unless the specified objective if the scheme is to limit the investments. Similarly for debt schemes, SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer is not allowed to exceed 10% of the NAV subject to approval of board of AMC & trustee company? These restriction do not apply to & money & government securities. SEBI s restriction on the investment in unlisted share to a minimum of 10 % of the NAV of a scheme for closed end 33
  34. 34. scheme. In case of open ended the limits may be made more stringent to 5% of the NAV of the scheme as there is continuous purchase by investors in such a scheme.Approved and Unapproved Investment: 1. A Mutual Fund under all its scheme taken together will not own more than 10 % of any company paid up capital voting rights. The objective is not only to assure diversified investment but also to prevent fund sponsor trying to acquire control of any company through fund investment route. 2. Scheme may invest in another scheme under the same AMC or any other Mutual Fund without charging any fees, provided that the aggregate inter scheme investment made by all scheme under the same management does not exceed 5% of the net asset value of the Mutual Fund. The objective here is to prevent an artificial inflection of fund size by inter scheme investment. 3. Debt instrument in which scheme invests must be rated as investment Grade by at least one recognized rating agency. Unrated investment could denote favors extended to a borrower or in any case do not protect the investor. 4. Mutual Funds may buy & sell securities only on the basis deliveries as Short selling or carry forward transaction is not in general consonance with Mutual Funds as investment vehicles. 5. In case of long term investment securities should be purchased or transferred in the name of Mutual Scheme. Securities cannot be held in a general account & transferred later various scheme to main certain profile or loss objective. Each investment must be done with the objective of a scheme in mind therefore be immediately assigned to a given scheme. 34
  35. 35. 6. Pending investment of funds pursuant to the objective the fund may invest the same in short term deposit of scheduled commercial banks. Case is to the scheduled banks for general investor protection.7. Mutual Funds are not allowed to advance any loans. But lead security in accordance with SEBI s Stock Leading Scheme. Mutual Fund must invest in marketable securities not in unmarketable loans.8. A Mutual Fund is prohibited from investing in any unlisted security or a security issued through private placement by an associated or Group Company of the sponsor. In the case of listed securities of group companies of the sponsor or group company of the sponsor, it is not allowed to invest an amount in exceed of 25% of the net assets of any of its scheme of fund. The objective is to ensure that the fund sponsor do not use investor funds to bolster their other group companies.9. A Mutual Fund may transfer investment from one scheme to another Provided the transfer is at the current market rate & in conformity with the investment objective of the scheme to which to losses form one group of investor to another. 35
  36. 36. CHAPTER 4:-INTRODUCTION TO MUTUAL FUNDS 36
  37. 37. 4. INTRODUCTION TO MUTUAL FUND4.1 THE CONCEPT OF A MUTUAL FUND A Mutual Fund is a common pool money into which investor place their contribution that is to be investors in accordance with a stated objective. The ownership of the joint or Mutual , the fund belongs to the contribution make a single investor s ownership of the fund to the total amount of the fund. A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective.A Mutual Fund used the money collected from investors to buy those assets,which are specifically permitted by its stated investment objective. Thus anequity fund would buy equity asset- ordinary shares, preferences share,warrants etc. a bond fund would buy debt instrument such as debentures,bonds, or government securities. It is these assets, which are owns by theinvestor in the same proportion as their contribution bears to the totalcontribution of all investor put together.Since each owner is a part owner of a Mutual Fund, it is necessary toestablish the value of his part. In other words, each share or unit thatinvestors hold needs to be assigned a value. Since the unit held by investors 37
  38. 38. evidence the ownership of the funds asset, the value of total asset of the fund.When divided by the total number of units issued by the Mutual Fund givesus the value of one unit. This is generally called the net asset value (NAV)of the number of unit held.4.2 EMERGENCY OF MUTUAL FUNDS Mutual Funds now represent perhaps the most appropriate investment opportunity for most investor, as financial markets become more sophisticated & complex. Investors need a Financial Intermediary who provides the required knowledge & professional expertise on successful investing. It is no wonder then in the birthplace of Mutual Fund the U.S.A. the fund industry has already overtaken the banking industry more funds being under Mutual Fund Management than deposited with the bank. The Indian Mutual Fund Industry is a fast growing segment of the economy. The Industry consists of 36 Mutual Funds including Unit Trust of India. With 397 schemes spread over variety products the industry today manages assets close to Rs. 97,000 crores. The Indian Mutual Fund Industry has already started opening up, of many of exciting investment opportunity to Indian investors. We have started witnessing the phenomenon of more saving now being entrusted to the funds than to the banks. Mutual Funds as still a new Financial Intermediary in India. Hence it is important that the investors should make proper analysis of the available scheme in the market. The investment advisor & even the fund employees acquire better knowledge of what Mutual Funds are. What, they can do for investor & what they cannot & how they function differently from other intermediaries such as the banks. The association of Mutual Funds in India has commissioned a workbook, as the basic compellation of the 38
  39. 39. minimum knowledge requires by both fund distributors & the employees. The workbook provided by AMFI can serve as a guide distributors & employees.4.3 HISTORY OF MUTUAL FUNDS IN INDIAThe Indian Mutual Fund Industry began with the formation of the Unit Trustof India (UTI) in 1964 by the Government. UTI was formed as a non-profitorganization governed under a special legislation, the Unit Trust of India Act,1963. It had a monopoly up to 1987 & during this period, UTI launched aseries of equity & debt schemes & established itself as a household namewith assets under management of Rs. 4563 crore & unit holder accounts ofslightly under 3 Million by mid 1987. UTI s growth continued up to 1996when the strong entry of private sector players saw its share of the marketreducing sharply although UTI continues to be a dominant force in theIndian Financial Services industry with assets of over Rs. 67,000 crore as ofDecember 31, 1999.In 1987, the Industry saw the entry of Public Sector Mutual Funds, i.e. fundspromoted by public sector banks & financial institutions, such as SBI,Canara Bank, LIC & IDBI. Predictably they were given the brand of theirpromoters such as SBI Mutual Fund, Canbank Mutual Fund, and LICMutual Fund & IDBI Mutual Fund. Other Public Sector Mutual Funds alsoentered the market but UTI continued to remain the dominant player with ashare of 84% in 1991-92.The Government first allowed private sector participation in 1993 & thesubsequent entry of a large number of players has made the industry verycompetitive. The diagram below shows the three segments & a few of theplayers in each segment. 39
  40. 40. UTI was started, at the initiative of the Reserve Bank of India & theGovernment of India. The objective then was to attract the small investors &introduce them to market investment. Since, then the History of MutualFunds in India can be broadly divided into three distinct phases. Phase I: 1964 87 (Unit Trust Of India)This phase spans from 1964 to 1988. In 1963, UTI was established by an actof Parliament & given a monopoly. Operationally, UTI was set up by theReserve Bank of India, but was later de-linked from the RBI. The first &still one of the largest schemes, launched by the UTI was Unit Scheme 1964.Over the years, US-64 attracted & probably still has the largest number ofinvestors in any single investments schemes.First Phase (1964- 1987) :- Establishment of UTI in 1963. In 1978, UTI was delinked from the RBI & the Industrial Development Bank of India (IDBI) & took over the regulatory & administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme in 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under Mgmt.UTI had grown large as evidence by the following statistics:1987- 88 Amount mobilized (Cr) Asset Under Mgt (Cr) Mobilization as % GDP 40
  41. 41. UTI 2175 670 3.1 % Phase II: 1987-1993 (Entry of Public Sector Funds)1987, Marked the entry of non-UTI public sector Mutual Funds, bringing incompetition. With the opening of economy, many public sector bank &financial institution were allowed to establish Mutual Funds. The State Bankof India established the first non-UTI Mutual Fund- SBI Mutual Fund- inNovember 1987. This was followed by Can Bank Mutual Fund ( launched inDecember, 1987), LIC Mutual Funds ( launched in 1989 ) & Indian BankMutual Funds ( launched in 1990 ) followed by Bank Of India Mutual Fund,GIC Mutual Fund & PNB Mutual Fund.The private sector players, after an indifferent start in the early years, havemade a strong impression especially in the larger cities, with a high qualityof fund management, sales & customer service. This sector has dented UTI sdominance resulting in a falling market share towards the end of the lastmillennium.Assets under Management June 30, 2000 Sep. 30, 2001 UTI 57.09 % 53.60 % Bank Sponsored 3.66 % 3.78 % Institutions 4.12 % 4.46 % Private Sector 35.13 % 38.16 % Total 100.00 % 100.00 % Total ( Rs. In Crore ) 97953 91811 OPEN CLOSE ASSURED TOTAL END END RETURNINCOME 85 28 29 142 41
  42. 42. GROWTH 96 15 - 111BALANCED 31 4 - 35LIQUID/ MONEY MARKET 28 - - 28GILT 24 - - 24ELSS 19 52 - 71TOTAL 283 99 29 411Second Phase (1987-1993) / Entry of Public Sector Funds:- 1987 marked the entry of Non- UTI, Public Sector Mutual Fund setup by Public Sector Banks & LIC of India & General Insurance Corporation of India (GIC) SBI Mutual Fund was the First Non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec.1987), Punjab National Bank Mutual Fund (Aug.1989), Indian Bank Mutual Fund (Nov.1989), Bank of India (Jan.1990), Bank of Baroda Mutual Fund (Oct. 1992). LIC established its Mutual Fund in June 1989 while GIC had setup its Mutual Fund in Dec. 1990. At the end of 1993, THE Mutual Fund Industry had assets under Mgmt. Of Rs. 47,004 Crores.Gilt Funds 1. Next only to money market fund in risk order 2. Gilts- government securities with medium to long term maturities over one year 3. Investment in government paper called dated securities 4. Negligible risk of default 5. Risk arising out of changes in market price of debt securities 6. Debt securities prices fall when interest rate rise.Debt Funds 1. Invest in debt securities issued not only by government but also 42
  43. 43. Corporate & financial institutions 2. Target low risk & stable income 3. Higher price fluctuation risk as compared to money market funds due to significantly higher maturity period exposures 4. Higher credit risk than gilt funds due to corporate profile 5. Do not target capital appreciation; generate high current income & distribution substantial part of surpluses to investors.Third Phase (1993-2003) / Entry of Private Sector Funds:- 1993, the entry of Private Sector a new era started in the Indian Mutual Fund Industry, giving the Indian Investor a wider choice of Fund Family Also 1993, was the year in which the First Mutual Fund Regulation came into being, under which all Mutual Fund expects UTI were to be register & Governed. The Kothari Pioneer (now merged with Franklin Temleton) was the First Private Sector Mutual Fund registered in July 1993. In 1993 SEBI (MF) Regulations were substituted by a more Comprehensive & revised MF Regulations in 1996. At the end of Jan.2003 there were 33 MF with Total Assets of Rs.1,21,80 5 Crore. The UTI with Rs.44, 541 Crores of Asset under Mgmt. was way ahead of other MF Industry has witnessed several Merges & Acquisitions.Fourth Phase (Since Feb. 2003):- In Feb.2003, UTI was bifurcated into two separate entities. 1. One is the specified Undertaking of the UTI with assets under Mgmt. of Rs. 29,835 Crores as at end of Jan.2003, functioning under an administrator & under the rules framed by Govt. of India & does not come under preview of MF Regulation. 2. The second is UTI MF Ltd. Sponsored by SBI, PNB, BOB & LIC. It is Registered with SEBI & Functions under the MF Regulations. Bifurcation of UTI in Mar.2000 more than Rs. 76,000 Crores of assets Under Mgmt. & with the setting up of a UTI MF conforming to the SEBI 43
  44. 44. MF Regulations. At the end of Sept.2004, there were 29 Funds which Manages assets of Rs. 1, 53,108 Crores under 421 Schemes.4.4 PLACE OF MUTUAL FUND IN FINANCIAL MARKET Indian household started allocating more of their saving to the capital market in 1980 s with the investment flowing into equity & Debt instrument beside the conventional mode of the bank deposits. Until 1992 Primary Market investors were assured good return as the price of the new equity issues was controlled. After Introduction of free pricing of shares & with greater volatility in the Stock Markets, many investors who bought over priced shares lost money & withdrew from the markets altogether. Even those investors who continued as direct investors in the Stock Market realized that the key to the successful investing on the capital markets lay in the building a diversified portfolio that in turn require substantial capital. Besides selecting securities with growth & income was not possible for all investor. Under similar circumstances in other countries, Mutual Fund had emerged as Professional Intermediaries. Besides providing the expertise in stock market, investing these funds allows investing in small amount& yet holding a diversified portfolio to limit risk. In India, Unit Trust of India occupied this place as the only capital market intermediary Institution is emerging in India, as elsewhere as a good alternative to direct investing in the Capital Market. Mutual Funds serves as a link between the saving public & the capital market in that they mobilized saving from investors & bring them to borrower in the Capital Market. By the Very nature of their activities & by virtue of being knowledgeable & informed investors , they influence the Stock Market & play an active role in promoting good corporate 44
  45. 45. governance, investor protection & the health of capital market. Mutual Fund have imparted much needed liquidity into the financial system & challenged the hitherto dominant role of banking & financial institution in the Capital Markets.Mutual Fund Operation Flow Chart: INVESTORS RETURNS FUND MANAGER SECURITIES 45
  46. 46. Structure Foreign Sponsor Trustee Partner Asset Management Other Service Trust Company Providers Scheme 1 Scheme 2 Scheme 3Organization of a Mutual Fund :MUTUAL FUND - FRAMEWORK- India Sponsor Trustee Company Asset Management Company Fiduciary Fund Operations Marketing responsibility to Management the Distribution Investors Brokers Registrar Custody Markets Bank 46
  47. 47. 4.5 THE ADVANTAGES OF MUTUAL FUNDS Portfolio Diversification: Each Investor in a Fund is a part of the funds entire asset, thus enabling him to hold a diversified investment Portfolio even with a small amount of investment, which would otherwise requires big capital. Professional Management: Even if an investor has a big amount of Capital available to him, he benefits from the professional management Skill brought in by the fund in the management of the investor s portfolio. The investment management skills, along with the needed research into available investment option, ensure a much better return than what an Investor can manage on his own. Few investors have the skill & resource of their own to success in today s fast moving, global & sophisticated markets. 47
  48. 48. Reduction / Diversification of Risk: When an investor invest directly,all the risk of Potential loss is his own, weather he places deposits witha company or bank, or buys a share debenture on his own or in any otherinstrument benefits of a collective investment vehicle is from the MutualFund.Reduction of Transaction Costs: What is true of risk is also thetransaction costs. The investors bear all the cost of investing such asbrokerage or custody of securities. When through a fund, he has thebenefit of economic of scale; the fund pay lesser costs because of largevolume, a benefit passed on to is investor.Liquidity : Often, investors hold share or bonds they cannot directly,easily & quickly sell. When they invest in the units of a fund, they cangenerally case their investment any time, by selling their units to the fund if open-ended , or selling them in the market if the fund is closed end.Liquidity of investment is clearly a big benefit.Open-ended-Assures liquidity-As liquid as the banks.Close-ended-Buying and selling can be done through the stock exchangeConventional & Flexibility: Mutual Fund Management companies offermany investors services that a direct market investor cannot get. Investorscan easily transfer their holding form one scheme to the other,get updatedmarket information, easy to Invest, Reduces excessive Paperwork etc,Safety: SEBI & RBI have a control over Mutual Fund Making investment in Mutual Fund a safe investment. A very good example here quotedcan be of Government of India coming to rescue of UTI s US- 64Schemes. 48
  49. 49. Affordability:-Provides an opportunity for a small investor-Invest as less as an amount ofWide Choice:-Offers a Varieties of Schemes -Meet the investment needs of all Investors MF s and Tax Benefits: Income Tax Benefits -Equity funds - 10% TDS -Debt Funds - Dividends are taxableCapital Gain Benefits - Section 112 (1) -Long term capital gain tax of 10% without indexation, or -Long term capital tax of 20% with indexation 49
  50. 50. Mutual Funds: A Packaged Product Professional Management Diversification Convenience Liquidity Tax Benefits4.6 THE DISADVANTAGES OF MUTUAL FUNDS No Control Over Costs: An investors in a Mutual Fund has no control Over the overall cost of investing. He pays investment management fees 50
  51. 51. as long as he remains with the funds, in return for the professional manag ment & research. Fees are payable even while the value of his investment may be declining. A mutual fund investors also pays fund distribution costs, which he would not incur in direct investing. No Tailor-made Portfolios: Investors who invest on their own can build their own portfolios of shares, bonds & other securities. Investing through Funds means he delegates this decision to the fund manager. The very high -net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in.Developing a Model Portfolio Work with Investor to develop long-term goals Determine Asset Allocation of the investment Determine the sector distribution Select specific Fund Manager & their schemes Model Portfolio Creativity & forecastingShortcomings in Operation of Mutual Fund 1. The Mutual Funds are externally managed. They do not have emplo yees of their own. Also there is no specific law to supervise the 51
  52. 52. Mutual Fund in India. There are multiple regulations. While UTI is governed by its own regulations, the banks are supervised by Reser ved Bank of India, the Central Government & Insurance Company mutual regulations funds regulated by Central Government.2. At present, the investors in India prefers to invest in Mutual Fund as a substitute of fixed deposits in Banks. About 75% of the investors are not willing to invest in Mutual Funds unless there was a promise of a minimum return.3. Sponsorship of Mutual Funds has a bearing on the integrity & efficiency of fund management, which are key to establishing investor s confidence. So far, only public sector sponsorship or ownership of Mutual Fund organizations had taken care of this need.4. Unrestrained fund rising by schemes without adequate supply of scrip can create severe imbalance in the market & exacerbate the distortions.5. Many small companies did very well last year, by schemes with out adequate imbalance in the market but Mutual Funds cannot reap their benefits because they are not allowed to invest in smaller companies.6. The Mutual Funds in India are formed as trusts. As there is no Distinction made between sponsors, trustees & fund managers, the trustees play the roll of fund managers.7. The increase in the number of Mutual Funds & various schemes has increased competition. Hence it has been remarked by Senior Broker Mutual Funds are too busy trying to race against each other. As a result they lose their stabilizing factor in the market.8. While UTI publishes details of accounts their investments but Mutual Funds have not published any profit & loss Account & Balance Sheet even after its operation. 52
  53. 53. 9. The Mutual Fund have eroded the Financial clout of institution in the Stock market for which cross transaction between Mutual Funds & Financial institutions are not only allowing speculators to manipulate price but also providing cash leading to distortion of balanced growth of market. 10. As the Mutual Fund is very poor in standard of efficiency in Investors service; such as dispatch of certificates, repurchase & attending to inquiries lead to the detoriation of interest of the investors towards Mutual Fund. 11. Transparency is another area in Mutual Fund, which was neglect till recently. Investors have right to know & asset management companies have an obligation to inform where how his money has been deployed. But investors are deprived of getting information.4.7 CLASSIFICATION OF MUTUAL FUNDS Types of Mutual Fund 53
  54. 54. By Constitution By Investment Objective By Nature Of Investment By ConstitutionOPEN-END: No fixed maturity Variable Corpus Not Listed Buy from and sell to the Fund Entry/Exit at NAV related pricesCLOSED-END: Fixed Maturity Fixed Corpus Generally Listed Buy and sell in the Stock Exchanges Entry/Exit at the market pricesLOAD or NON-LOAD FUNDSTAX EXEMPT or NON-TAX EXEMPTBy Nature of Investments Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate) Diversified Growth Funds : Diversified Debt Funds Focused Debt Funds : Sector / Specialized / Offshore Municipal bonds/ infrastructure cost bond fund Mortgaged backed 54
  55. 55. High yield debt funds : Assured Return Funds - Indian variety Liquid Funds By Investment objective / patterns 1) Growth - Equity 2) Income - Debt 3) Balanced - Equity and Debt 4) Money Market - Liquid Debt 5) Tax Saving - Equity 6) Specialized - Equity 7) Assured Return - Equity and Debt Mutual Fund can also be classified as open/ closed ended Mutual Fund Open Ended Mutual Fund Close Ended Mutual FundUnits available for the sale & UnavailablerepurchaseInvestor can buy or redeem units Investors can buy units from fundfrom the Mutual Fund itself only at IPO subsequently buying & selling at the Stock ExchangeUnit Capital is variable Unit capital is fixedPricing at NAV +/- depending on Prices may be quoted at premium orload charges discount on the exchange depending on perception about fund s future performance4.8 WHO CAN INVEST? 1. Resident including : 1) Resident Indian Individual 55
  56. 56. 2) Indian Companies 3) Indian Trust/ Charitable Institution 4) Banks / FIs/ Partnership Firms 5) NBFC s 6) Insurance companies 7) Provident Funds 2. Non- residents including : 1) NRI s 2) OCBs 3. Foreign entities : 1) FIIs registered with SEBI4.9 INVESTORS RIGHTS AND OBLGATIONInvestors Rights 1. Proportionate right to beneficial ownership of scheme s assets 2. Right to obtain information from trustees 3. Entitled to receive divided warrants within 30 days of declaration of Dividend 4. Inspect major documents of the funds 5. Appointment of the AMC can be terminated by 75% of the unit holders of the scheme present & voting 6. Right to approve of changes in fundamental attributes of a close ended schemes so that they can redeem 7. Receive Annual Reports & A/C StatementsLegal limitations to Investors Rights 1. Unit holders cannot use the Trust 2. Can imitate legal proceeding against trustees 3. Buyers beware 56
  57. 57. 4. Sponsor of Mutual Funds have no obligation to meet any shortfall in the assured return-unless explicitly guaranteed in the offer document 5. No rights to a prospective investorMinimum portfolio diversification 1. Equity schemes- single company under 10% of NAV, not applicable to index & sector funds 2. Debts funds- single issuer not more than 15% of NAV, can be relaxed to 20% with approval of trustees % AMC 3. Unrated as well as rated but below investment grade, not more than 10% of NAV per issuer 4. All such issuers put together not more than 25% of NAV.Investors Obligations 1. Carefully study the offer document before investing 2. Monitor his investment in a scheme by referring Financial statements, performance updates & research report sent by the AMC 3. Complaints readdress 4. SEBI entertains complaintsRequired sponsor to appoint compliance office who has to give duediligence certificate can remove AMC with 75% vote to this effect. Norecourse to any company law. 4.10 OFFER ( DOCUMENT) BY MUTUAL FUNDContents of an offer document 57
  58. 58. 1. Summary information- at a glance 2. Type of scheme growth / income / balanced 3. Name of AMC 4. Price of units 5. If assured return-name of guarantor 6. Opening & Closing dates of the schemes 7. Disclaimer clause of SEBI 8. Details of the sponsor & the AMC 9. Description of the scheme & the investment philosophy 10. Terms of issue 11. Historical statistics 12. Investors rights & services 13. Abridged offer document/key information memorandum with application formSignificance Legal document that protects and governs the right of the investor to information Is the primary vehicle for the investment decision Is the operating document and describes the fundamental attributes of schemes. One of the most important sources of information for the prospective investor Is a reference document for the investor to look for relevant information at any time.Mandatory Information § Details of the Sponsor § Description of the scheme and investment objective/strategy 58
  59. 59. § Terms of issue § Historical statistics § Investors Rights and ServicesKey Information Memorandum that is distributed with the application formis an abridged version of the offer document.Investment Options & Features Options Growth Dividend and Dividend Reinvestment Plans Systematic Investment Plan - SIP Value Averaging Plan - VAP Systematic Withdrawal Plan - SWP Systematic Transfer Plan - STP Other Nomination facility 4.11 ACCOUTING OF MUTUAL FUND Balance Sheet of a Mutual Fund is different from that of a bank. All the Funds belong to the investors & are held in fiduciary capacity for them. 59
  60. 60. NAV : Investor s subscriptions are unit capital rather than deposits or liability. Investments made on behalf on investors are reflected on assets side There are liabilities but of strictly short term nature. NAV= (Market value of investment + Receivables + Other Accrued income + Other Assets) (Accrued Expense + Other Payables + Other Liabilities) / No: of Units Outstanding as at NAV date. NAV of all schemes to be calculated & published daily. Close- Ended schemes that are not mandatory required to be listed on Stock Exchange may declare NAV once in a month or quarter as permitted by SEBI. Mutual Fund NAV is affected by four set of factors Purchase & sale of investment securities Valuation of all investment securities held Others assets & liabilities Units sold or redeemed Other assets include any income due to the fund but not actual received as on the valuation date. Other liabilities includes similar liabilities include similar liabilities. These are to be accounted for on an accrual basis. Major expenses like Mana gement fee to be accrued on a daily basis. If non-accrual does not affect the NAV by more than 1% then it may not be accrued for that valuation date. Non-recording of addition /sales of investments transaction or Sales/purchase of units can be postponed to the next valuation date in case such non-recording is not impacting the NAV by more then 2%. 60
  61. 61. NAV NAV = Net assets of scheme / No of units Outstanding i.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities No. of units outstanding as at the NAV date HOW NAV IS COMPUTED§ Market value of Equities - Rs.100 crore - Asset§ Market value of Debentures - Rs.50 crore - Asset§ Dividends Accrued - Rs.1 crore - Income§ Interest Accrued - Rs.2 crore - Income§ Ongoing Fee payable - Rs.0.5 crore - Liability§ Amt..payable on shares purchased -Rs.4.5 crore - Liability§ No. of units held in the Fund : 10 crore units§ NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80 NAV - Other information Open end funds to declare NAV daily 61
  62. 62. NAV to be published at least weekly Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP) NAV has to consider up to date transactions Non - recorded transactions not to affect NAV calculation by more than 2%§ NAV is influenced by- 1) Purchase and sale of Investment 2) Valuation of Investment 3) Other assets and Liabilities 4) Units sold or redeemed. CHANGE IN NAV FORMULA : For NAV change in absolute terms = (NAV at end of period - NAV at beginning of period) * 100 NAV at beginning of period For NAV change in annualised terms = ( NAV change in % in absolute terms) * (365 / No. of days) Loads§ Entry Load or front ended load Paid at the time of purchase Sale Price = NAV / (1- Sales Load, if any) 62
  63. 63. § Exit Load or back ended load Paid at the time of exit Redemption Price = NAV/ (1+ Exit Load)§ Contingent Deferred Sales Load (CDSL) Deferred exit load depending on the period Also known as deferred load Sale Price§ Sale Price is the price at which units are sold to investors.§ Sale Price = NAV + Entry load§ Formula for computation of Sale Price = NAV/ (1-Load) Assuming an entry load of 2% in the earlier NAV computation example Sale Price = 14.80/ (1- 0.02) = 15.10 63
  64. 64. CHAPTER 5 :-MEASURING & EVALUATING FUND PERFORMANCE 5. MEASURING & EVALUATING OF MUTUAL FUND 64
  65. 65. 5.1 NECESSARY FOR MEASURING MUTUAL FUND PERFORMANCEWhen an investing entrusts his saving to Mutual Fund naturally he hopes toincrease wealth by seeing the value of his investment grow. Havingunderstood the conceptual & operation aspects of Mutual Funds it isimportant to analyze the issues involved in the evaluation of Fundperformance. The Investor Perspective: - The investor would naturally be interested In tracking through the value of as investment whether invests directly in the markets or indirectly through Mutual Funds. He would have to make intelligent decisions on whether he gets an acceptable return on his investment in the funds selected by him. Or if he needs to switch to another fund, he therefore needs to understand the basis of appropriate performance measurement for the fund & acquire the basic knowledge of the different measures of evaluating the performance well or not, & make the right decisions. The Adviser s Perspective: - If you were an intermediary recommend A Mutual Fund to a potential investor he would accept you to give him proper advice on which funds have a performance track record. If you want to be an effective investment adviser, then you too have to known how to measure & evaluate the performance of the different funds that are available to the investor. The need to compare different fund s per formance required the advisor to have the knowledge of the correct & appropriate measure of evolution the fund performance.5.2 DIFFERENT MEASURES OF FUND PERFORMANCE 65
  66. 66. § Different valuation methods § Change in NAV § Total Return § Total Return with dividend reinvested at NAV § Change in NAV - The most commonNAV on day 1 = Rs.10NAV on day x = Rs.12% Change in NAV = dayx-day1/day1 * 100 = 2/10 *100 = 20 %Limitations:Does not account for dividendSuitable only for growth plans Total ReturnNAV on day 1 = Rs.20NAV on day x = Rs.22Dividend = Rs.4 per unitTotal Return = ((Distribution + Change in NAV)/day1 NAV)* 100= ((4+ (22-20)/20)*100= 30%Limitation:Does not account for reinvestment § Return on Investments - most suitable § NAV on day 1 = Rs.20 § Dividend = Rs.4 per unit NAV at Rs. 21 § Div reinvested = Rs (4 /21) = 0.19 units allotted § Total units = 1.19 (original +new allotted) § NAV at year end = Rs.22 § Total Return = (NAV on year end*total units )-day1 NAV)/ day 1 NAV* 100 = ((22*1.19) - 20))/20*100 = 30.9%Performance Measure 66
  67. 67. Section one:Equity Funds: NAV Growth Total Return Total Return with reinvestment at NAV annulized Return & Distributed Computing Total Return (per share Income & Expenses, Per Share Capital Change , Ratio, Share Outstanding ) The expenses Ratio Portfolio Turnover Rate Fund Size Transaction Cost Cash Flow LeverageDebt Funds: Peer Group Companies The Income Ratio Industry Exposure & Concentration NPA s Besides NAV Growth Expenses RatioSection Two: Concepts of benchmarking for performance evolution Performance benchmarking in the Indian Contest Active Fund Performance against market indices as bench Mark Debt Fund-interest rate on alternative investment as bench 67
  68. 68. Mark. Total Return Index Money Market Funds Short Term Govt. Instrument Interest rates as benchmarks.Section Three: Tracking a funds performance Newspaper, Periodicals, Research, Annual Report, Prospectus, Reports from Tracking agencies, Internet & Interpretation of Data. Other Parameters § Expense ratios - indicates fund efficiency and cost effectiveness § Portfolio Turnover ratio - measures amount of buying and selling done by the fund § Transaction cost § Fund size § Cash holdingsWorking of Mutual Fund & Their Performance :- It needs to be certifiedthat MF invest their funds in Capital market instruments such as Shares, 68
  69. 69. Debentures, Bonds, & Money Market Instruments & therefore the NAV ofsuch investments will reflect the market values of underlying assets. TheseMarket values fluctuate & therefore the NAV of the MF Schemes alsofluctuate. All the capital market instruments have varying degrees of risk,the Degree of risk being the highest in equities & the risk factor ishighlighted in the respective offer documents as well as in the abridged offerdocuments. The investors therefore are in the full knowledge &understanding of the risks involved in various schemes. As per SEBIRegulation all MF disclose their portfolio periodically & all open-endedFunds offer exit option to investors at NAV based price. RISK RETURN GRIDRisk / Tolerance / Focus Suitable Products Benefits offeredReturn Excepted by MFLow Debt Bank / Company Liquidity, Better FD, Debt Funds post- Tax Returns Partially Balanced Funds, Liquidity, Better Debt, some Diversified Post- Tax ReturnsMedium Partially Equity Funds & Better Mgmt, Equity some Debt Funds, Diversification Mix of Shares & FD Capital Market, Diversification,High Equity Equity Funds Expertise in ( Diversified as Stock Picking, well as Sector ) Liquidity, Tax 69
  70. 70. Free Dividends.The Risk Return Trade-offThe Risk Return Trade-off Hedge Funds Growth Funds Sectoral Funds Potential Aggressive, Value, for Growth return Debt Funds Balanced Funds Gilt Funds, Bond Ratio of Debt : Equity Funds, High Yield Funds Liquid Funds Risk 70
  71. 71. Equities are the best long term bet percentage of studied period in whichOther 14%investmentoutperformed 37% 44%Stocksoutperformed 56% 86% 63% 1 year 3 year 5 year Source : RBI Report on Currency and Finance (1997-98) BSE Sensitive Index of Equity Prices - BSE 71
  72. 72. Equities are the best long term betCumulative annualised returns (1980 - 98) 25.0% 20.16% 20.0% 14.47% 15.0% 9.2% 9.74% 7.62% 10.0% 5.0% 0.0% Inflation Gold Bank FD Co. FD Equities Inflation Gold Bank FD Co. FD Equities Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices - BSE 72
  73. 73. CHAPTER 6:-MUTUAL FUND FEES & EXPENSES 73
  74. 74. 6. MUTUAL FUND FEES & EXPENSES Initial Issue Expenses Transaction Cost: Entry / Exit Load CDSE for No-Load Fees Annual Recurring Expenses: AMC Fee Custodian Fee Registry Exp. Trustee Fee Audit Fee Marketing & Selling Exp. Brokerage Exp. Others§ Initial Issue expenses For launching of the scheme Can charge up to 6%§ Recurring Expenses Marketing exp including brokerage Transaction cost R&T cost Custodian Fees Audit fees etc Investor Communication s cost§ AMC a charge Investment management fee to the fund on weekly avg. net assets. 74
  75. 75. § The limits are: (Subject to overall limit of 6%) 1.25% for up to Rs.100 cr of weekly avg net assets 1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1% § Total Expenses that can be charged to the Fund ( excluding entry and exit loads): Equity Debt On the first Rs.100 cr 2.50% 2.25% On the next Rs.300 cr 2.25% 2.00% On the next Rs.300 cr 2.00 % 1.75% On the balance assets 1.75% 1.50%Based on average weekly net assets § Initial issue expenses Charge to the scheme capped at 6% of the initial resources raised under that scheme § Entry/Exit Loads - Transaction costs Sale price not greater than 107% / Re-purchase price not lower than 93% (95% for close-ended schemes) of the NAV § Contingent Deferred Sales Charge ( For No-Load Schemes) Ceiling For redemption within 1year 4% For redemption within 2years 3% For redemption within 3years 2% For redemption within 4years 1% 75
  76. 76. CHAPTER 7:-ACCOUTING & VALUATION OF MUTUAL FUND 76
  77. 77. 7. ACCOUNTING & VALUATION OF MUTUAL FUNDAccounting Policies § Investments to be marked to market on market prices. § Unrealised appreciation cannot be distributed. § Purchase & sale of investments to be recognised on the trade date and not on settlement date. § Investments to be taken as NPA if it gives no return through interest for more than 6 months § Dividend / Bonus/ rights to be recognised on ex-dividend / ex-bonus dates and not on declared dates. § Income receivable on Invest NOT accrued for more than 3 months should be provided for. § For determining gain/ loss on investments - avg cost is to be takenMutual Fund Valuation § Marking to Market § Equity Valuation Norms - Listed, Unlisted, NPA, Untreated § Debt valuation norms - Listed, Unlisted, Illiquid § Money Market Instruments - valuation norms § Effect of Buybacks, Mergers § Valuation Models - CRISILValuation § TRADED SECURITIES Last quoted closing price on the SE where principally traded If Not traded on any SE on a particular day, then earliest previous day price is taken (not more than 30 days) Valuation = MP * current holding 77
  78. 78. § NON - TRADED SECURITIESStocks which are not traded for more than 30 days on any SE are valued ongood faith basis by AMC within following parameters § Debt - YTM basis § Equity capitalization of earning or NAV or combination of bothDisclosures and Reporting § Audit by independent auditor § Audited Annual report every year § Un-audited accounts to be published within 1 month after March 31 & September 30 § Within 6 months of closure, publish abridged summary of report scheme-wise in newspapers § Summary to be forwarded to SEBI & unit holders § Full portfolio disclosure to be made within a month from the half-year ended March 31 & September 30 § Reporting to SEBI Annual audited accounts Six monthly unaudited a/cs Half yearly statement of movements in net assets of each scheme Qtr portfolio statement Monthly amount mobilized § Communication to investor Qtr portfolio Annual reportTaxation § Capital Gain Benefits Long term capital gain tax of 10% without indexation Long term capital gain tax of 20% with indexation. 78
  79. 79. Investment Restrictions as a % of Net assets - AMC § Max. Investment under all schemes of the AMC in paid up capital carrying voting rights in single Co. - 10 % § Max. Inter scheme investments of the same AMC - 5 % (no AMC fee payable) § Inter scheme transfers at CMP and within the objectives of scheme § Max. Investment in listed shares of Group Co s - 25 % for each scheme. § No investments allowed in unlisted/private placement of group/associate cos. § Can borrow only to meet liquidity requirements. Max for 6 months & not more than 20% of NAV of scheme.Investment Restrictions as a % of Net Assets -Debt § Max. Investment in Rated paper in single Co - 15% (can be increased to 20% with approval by Board of AMC/Trustee) § Max.Investment in Unrated/ Rated but below investment grade in single issuer- 10% of NAV § Max. Investment in Unrated/Rated but below investment grade in all cost - 25% (subject to approval of Board of AMC /Trustee). § Restrictions not applicable to Govt. Securities/Money Market § Can only invest in marketable securities - no loansInvestment Restrictions as a % of Net Assets -Equity § Max. Investment in Equity/Equity related instruments of single - 10% § No restrictions in case of Index Fund § Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open ended funds § Buy & Sell securities on Delivery position , No short selling/ carry forward allowed. 79
  80. 80. CHAPTER 8:- SEBI[SECURITIES EXCHANGE BOARD OF INDIA] 80
  81. 81. SEBI[THE SECURITIES & EXCHANGE BOARD OF INDIA ACT]In 1992, an Act to provide for the establishment of a Board to Protect theinterests of Investors in Securities & to promote the development of & toregulate the Securities market & for matters connected therewith orincidental thereto on the 30 Jan. 1992 under Section 3.8.1 MANAGEMENT OF BOARD A Chairman 2 Members from the Officials of the (Ministry) of the Central Govt. dealing with Finance (& Administration of the Companies Act, 1956 2 of 1934) 1 Member from the Officials of RBI. 5 Other Members of whom at least 3 shall be the whole time members. The General Superintendence, Director, Mgmt. of the Affairs of the Board as exercise all powers & do all acts & things which may be exercised or done by the Board. The Chairman & Members referred in clauses (1) & (4) are appointed by the Central Govt. of India & the Members referred in clauses (2) &(3) are nominated by the Central Govt. & RBI. The Central Govt. has a right to terminate the Service of the Chairman or Other appointed Members by giving him a Notice of not less than 3 Months in writing or 3 Months salary & allowance in lieu. 81
  82. 82. Removal of Members from Office: - The Central Govt. shall remove aMember from Office if He/ She 1. Adjudicated as insolvent 2. Unsound mind & Stands so declared by a Competent Court 3. Convicted of an Offence, involves a Moral Turpitude 4. Abused his / her Position as to render his / her Continuation in Office detrimental to the Public Interest.Members not to Participate in Meetings in Certain Cases: - Any Member,who is a Director of a Company & who as such Director has any Direct orindirect pecuniary interest in any Matter coming up for consideration at ameeting of a Board. 82
  83. 83. 8.2 FUNCTIONS OF BOARD Subjects to the provisions of this Act; it shall be Duty of Board to Protect the Investors in Securities to Promote & Development & to Regulate the Securities Market by such measures as it thinks fit. Registering & Regulating the Working of Stock Brokers, Sub-Brokers, transfer agents, bankers to an Issue, trustees of Trusts deeds, Registrars to an Issue, Merchant bankers, underwriters, portfolio managers, invest ment adverse & such other intermediaries who may be associated with securities markets in any manner. Registering & Regulating the Working of the Depositories, (Participants) Custodians of Securities, Foreign Institution Investors credit rating agencies & such other intermediaries. Promoting & Regulating the Self- Regulatory Organization. Prohibiting fraudulent & unfair trade practices relating to securities market insider trading in Securities. Calling for Information from, undertaking Inspection, conducting inquiries & audits of the Stock Exchanges, (Mutual Fund) & other persons associated with the Securities market & intermediaries & self- regulatory organization in the Securities Market. Conducting Research Summoning & enforcing the attendance of Persons & examining them on oath. Board to Regulate or Prohibit issue of Prospectus, offer document or advertisement soliciting money for issue of Securities. The investigating Authority shall keep in its custody the Books, Registers, other documents & record seized under this section for such period later than the conclusion of the investigation. 83
  84. 84. 8.3 REGISTRATION CERTIFICATE No Stock- Broker, sub- Broker, Share Transfer Agent, Banker an Issue, Trustee of Trust deed, Register to an Issue, Merchant Banker, under writer, portfolio manager, investment adviser& such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under & in accordance with the regulation made under this Act. No Depository, (Participant), custodian of Security, foreign institutional Investor, Credit rating agency or any other intermediary associated with the Securities markets as the Board may be notification in this behalf Specify. No person shall Sponsor or cause to be Sponsored or carry on or cause to be carried on any venture Capital Funds or collective investment Schemes including Mutual Fund, unless he obtains a certificate of Registration from the Board in accordance with the Regulations. The Board may by order, suspend, cancel or Certificate of Registration in such manner as may be determined by Regulations.Prohibition of Manipulative & Deceptive Devices, insider trading &Substantial acquisition of Securities & Control :- Use or Employ, in connection with the issue, purchase or sale of any Security listed or proposed to be listed on a recognized Stock Exchange & any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made under. Employ any device, scheme or artificial to defraud in connection with Issues or dealing in Securities which are listed or proposed to be listed on a recognized Stock Exchange. 84
  85. 85. Grants by the Central Govt. for all Grants, fees & charges received bythe Board under SEBI Act made by Parliament:- All sums received by the Board from such other sources as may be decided upon by the Central Govt. The salaries allowances & other remuneration of members officers & other employees of the Board & other expenses of the Board on objects & for other purposes are funded by Central Govt. The Board shall maintain proper accounts & other relevant records & prepare an annual statement of A/C in such form as may be prescribed by the Central Govt. in consultation with the comptroller & Auditor- General of India.Only then can the Mutual Funds hope to stage a recovery & regains some ofthe recent heavy losses with a reshuffling of portfolios & net appreciation inequity values. All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI Responsible for protecting investors interest and promote orderly growth of Mutual Fund Industry Formulates regulations, monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections 85
  86. 86. Reserve Bank of India & SE RBI Dual supervision for bank sponsored AMC s Issue concerning ownership bank promoted AMC falls with RBI Stock Exchange (SE) Close ended MF listed of SE. Needs to comply with listing guidelines.Office of public Trustee MF being public trustee - governed by Indian Trust Act , 1882 Trustee Co or Board of Trustee accountable to office of Public Trustee Public trustees reports to Charity Comm. 86
  87. 87. Trustee and AMC to comply with Cos Act 1956 Registrars of Companies (ROC) Department of Company Affairs Company Law Board (CLB) Ministry of Law & Justice 87
  88. 88. CHAPTER 9:RULES & REGULATIONS 88

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