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Final report


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Final report

  1. 1. Introduction to theMutual Fund Industry 1
  2. 2. MUTUAL FUNDS: AN INTRODUCTIONA Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participatesin the gain or loss of the fund. Units are issued and can be redeemed as needed. Thefunds Net Asset Value (NAV) is determined each day. The income earned through theseinvestments and the capital appreciations realized are shared by its unit holders inproportion to the number of units owned by them. Thus a Mutual Fund is the mostsuitable investment for the common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities at a relatively low cost.Mutual funds are financial intermediaries, which collect the savings of investors andinvest them in a large and well-diversified portfolio of securities such as money marketinstruments, corporate and government bonds and equity shares of joint stock companies. 2
  3. 3. Mutual funds are conceived as institutions for providing small investors with avenues ofinvestments in the capital market.Since small investors generally do not have adequate time, knowledge, experience andresources for directly accessing the capital market, they have to rely on an intermediary,which undertakes informed investment decisions and provides consequential benefits ofprofessional expertise. The raison d’être of mutual funds is their ability to bring down thetransaction costs. The advantages for the investors are reduction in risk, expertprofessional management, diversified portfolios, and liquidity of investment and taxbenefits.By pooling their assets through mutual funds, investors achieve economies of scale. Theadvantage that such a investing logic offers to an individual investor is the advantage ofscale. A collected corpus can be used to procure a diversified portfolio, indicating greaterreturns as also create economies of scale through cost reduction. This principle has beeneffective world-wide as more and more investors are going the mutual fund way. Thisportfolio diversification ensures risk minimization. The criticality of such a measurecomes in when you factor in the fluctuations that characterize stock markets. Theinterests of the investors are protected by the SEBI, which acts as a watchdog. Mutualfunds are governed by the SEBI (Mutual Funds) Regulations, 1993.INTRODUCTION TO MUTUAL FUND INDUSTRYThe mutual fund industry in India began with the setting up of the Unit Trust In India(UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to bea dominant player in the industry with assets of over Rs.24,464 Crores as of March 31,2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In1987 public sector banks and insurance companies were permitted to set up mutual fundsand accordingly since 1987, 6 public sector banks have set up mutual funds. Also the twoInsurance companies LIC and GIC established mutual funds. Securities Exchange Board 3
  4. 4. of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first timeestablished a comprehensive regulatory framework for the mutual fund industry. Sincethen several mutual funds have been set up by the private and joint sectors.Mutual funds have been a significant source of investment in both government andcorporate securities. It has been for decades the monopoly of the state with UTI being thekey player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-ownedinsurance companies also hold a portfolio of stocks. Presently, numerous mutual fundsexist, including private and foreign companies. Banks--- mainly state-owned too haveestablished Mutual Funds (MFs). Foreign participation in mutual funds and assetmanagement companies is permitted on a case by case basis.UTI, the largest mutual fund in the country was set up by the government in 1964, toencourage small investors in the equity market. UTI has an extensive marketing networkof over 35, 000 agents spread over the country. The UTI scrips have performed relativelywell in the market, as compared to the Sensex trend. However, the same cannot be said ofall mutual funds.All MFs are allowed to apply for firm allotment in public issues. SEBI regulates thefunctioning of mutual funds, and it requires that all MFs should be established as trustsunder the Indian Trusts Act. The actual fund management activity shall be conductedfrom a separate asset management company (AMC). The minimum net worth of an AMCor its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can bepenalized for defaults including non-registration and failure to observe rules set by theirAMCs. MFs dealing exclusively with money market instruments have to be registeredwith RBI. All other schemes floated by MFs are required to be registered with SEBI.In 1995, the RBI permitted private sector institutions to set up Money Market MutualFunds (MMMFs). They can invest in treasury bills, call and notice money, commercialpaper, commercial bills accepted/co-accepted by banks, certificates of deposit and datedgovernment securities having unexpired maturity up to one year.MUTUAL FUND INDUSTRY IN INDIA 4
  5. 5. The end of millennium marks 36 years of existence of mutual funds in this country. Theride through these 36 years is not been smooth. Investors opinion is still divided. Whilesome are for mutual funds others are against it. UTI commenced its operation fom july 1964. The impetusfor establishing a formal institution came from the desire to increase the propensity of themiddle and lower groups to save and to invest. UTI came into existence during a periodmarked by great political and economic uncertainity in India. With was on the bordersand economic turmoil that depressed the financial market, entrepreneurs were hesitant toenter capital market. Though the growth was slow, But it accelerated from the year 1987,when non- UTI players entered the industry. In the past decade, Indian mutual fund industry had seen adramatic improvement, both qualities wise as well as quantity wise. Before, themonopoly of the market had seen an ending phase: the Assent under Management(AUM)was Rs.67bn. The private sector entry to the fund family raised the AUM to Rs.470bn inMarch 1993 and till April 2004; it reached the height of 1,540bn. Putting the AUM of the Indian Mutual Funds Industry intocomparison, the total of it is less than the deposits of SBI alone, constitute less than 11%of the total depostits held by the Indian banking industry.The main reason of its poor growth is theat the mutual fund industry in India is new in thecountry. Large sections of Indian investrors are yet to be intellect wih the concept. Hence,it is the prime responsibility of all mutual fund companies, to market the productcorrectly abreast of selling.The mutual fund industry can be broadly put into four phases according to thedevelopment of the sector, Each phase is briefly described as under.First Phase-1964-87 5
  6. 6. Unit Trust of India(UTI) was established on 1963 by Act of Parliament. It was set up bythe Reserve Bank of India and functioned uned the Regulatory and admisnistrativecontrol of the Reserve Bank f India. In 1978 UTI was de-linked from RBI and theIndustrial Development Bank of India(IDBI) took ove the regulatory and admistrativecontrol in place of RBI. The first scheme launched bye UTI was Unit Scheme 1964. At teend of 1988 UTI had Rs.6,700 crores of assets under management.Second phase 1987-1993(entry of public sector funds)The period 1986-1993 can be termed as the period of public sector mutual funds (PMSs).From one player in 1985 the number increased to 8 in 1993. Entry of non-UTI mutualfunds. SBI mutual fund was the first followed Canbank Mutual Fund (Dec 87), PunjabNational Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Oct 90), Bank ofBaroda Mutual fund (oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,000 as assets under management. The industry was one-entity show till 1986 when theUTI monopoly was broken when SBI and BOI, LIC, GIC etc. sponsored by public sectorbanks. Starting with an asset base of Rs. 0.25bn in 1964 the industry has grown at acompounded average growth rate of 26.34% to its current size of Rs. 1130bn.Third phase 1990-2003 (entry of private sector funds)When the private sector made its debut in 1993-94, the stock market was booming. Also,1993 was the year in which the first Mutual fund Regulations came into being, underwhich all mutual funds, except UTI were to be registered and governed. The erstwhileKothari Pioneer (now merged with Franklin Templeton) was the first private sectormutual fund registered in july 1993. Other Private sector mutual funds are MorganSanley, Jardine Fleming, JP Morgan, George Soros and Capital International along withthe host of domestic players join the party. The 1993 SEBI (Mutual Fund)Regulations substituted by a more comprehensive and revised Mutual Find regulations1996. But for the equity funds, the period of 1994-96 was one of the worst in the historyof Indian Mutual Funds, But the year 1999 saw immense future potential anddevelopments in this sector. This year signaled the year of resurgence of mutual funds 6
  7. 7. and the regaining of investor confidence in these MF’s. As at the end of January 2003,There were 33 mutual fund with total assets of Rs.1,21,805 crores. The Unit Trust ofIndia with Rs. 44,541 crores of assets under management was way ahead of other mutualfunds.Fourth Phase – Since February 2003This phase had bitter experience for UTI. It was bifurcated into two separate entities. Oneis the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (ason January 2003). The specified undertaking of Unit Trust of India, functioning under anadminisratior and unde the rules framed by Government of India and Does not comeunder the purview of the Mutual Fund Regulations.The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC, It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000 crores ofAUM and with the setting up of a UTI mutual fund, conforming to the SEBI MutualFund Regulations, and with recent mergers taking place among different private sectorfunds, the mutual fund industry has entered its current phase of consolidation and growth.As at the end of September 2004, There were 29 fund, Which manage assets of Rs.153108 crores under 421 Structure of Mutual Funds in India. At the end of year 2006 theAUM crossed 2,50,000 crores.GROWTH IN ASSETS UNDER MANAGEMENT 7
  8. 8. 8
  9. 9. Growth of the Mutual Fund Industry in IndiaThe mutual fund industry in India came into being in 1963 with the setting up of the UnitTrust of India (UTI). In 1987, Public Sector Banks and Insurance Companies openedtheir own mutual funds, thus starting the second phase in the growth of the mutual fundsindustry. By the end of 1988, the industrys total assets under management (AUM)reached Rs.6billion.The industry registered a major milestone in 1993 when the first private sector player, theerstwhile Kothari Pioneer Mutual Fund (now merged with Franklin Templeton), was setup. Since then, several international players have also entered the fray.The industry has also witnessed a spate of mergers and acquisitions, the most recent onesbeing the acquisition of Alliance Mutual by Birla Sun Life, GIC Mutual by CanbankMutual, and Sun F&C by Principal Mutual.While the Indian mutual fund industry has grown in size by about 320% from March,1993 (Rs 470 billion) to December, 2004 (Rs 1505 billion) in terms of AUM, the AUMof the sector excluding UTI has grown over 8 times from Rs.152 billion in March 1999 toRs.1295 billion as at December 2004 (See Chart 1).The latest phase in the industrys evolution began with the bifurcation of UTI. The Indianmutual fund industry has grown by about 4.2 times from 1993 (Rs. 470 billion) to 2005(Rs. 1992 billion) in terms of AUM. The private sector was allowed entry to set up assetmanagement companies in 1993. There was a brief period of five years during which theasset growth was slow. The AUM for the mutual fund industry started to grow rapidlyafter 1998. Between 1998 and 2005 the AUM of the sector excluding UTI grew by over15 times from Rs.114 billion in 1998 to Rs.1738 billion as at 2005. Though India is aminor player in the global mutual funds industry, its AUM as a proportion of the globalAUM has steadily increased, doubling from 1999 levels 9
  10. 10. MUTUAL FUND A GLOBALLY PROVEN INVESTMENT AVENUEWorldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the world, hasa long and.successful history. The popularity of Mutual Funds has increased manifold indeveloped financial markets, like the United states. As at the end of March 2006, in theUS alone there were 8,002 mutual funds with total assets of over US$ 9.36 trillion(Rs.427Iakh crores).In India, the mutual fund industry started with the setting up of theUnit Trust of India In 1964. Public sector banks and financial institutions were allowed toestablish mutual funds in 1987. Since 1993, private sector and foreign institutions werepermitted to set up mutual funds. In February 2003, following the repeal of the Unit Trustof India Act 1963 the erstwhile UTI was bifurcated into two separate entities viz. TheSpecified Undertaking of the Unit Trust of India, representing broadly, the assets of US64 scheme, assured returns and certain other schemes and UTI Mutual Fund conformingto SEBI Mutual Fund Regulations. As at the end of March 2006, there were 29 mutualfunds, which managed assets of Rs. 2,31,862 crores (US$52 Billion) under 592 schemes.This fast growing industry is regulated by the Securities and Exchange Board ofIndia(SEBI). 10
  11. 11. STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRYThe Indian Mutual Fund industry is dominated by the Unit Trust of India which has atotal corpus of 700 Billion collected from over 20 million investors. The UTI has manyfunds/ schemes in all categories i.e. Equity, balanced, income etc. With some being openended and some being closed ended. The Unit scheme 1964 commonly referred to as US64, which is a balanced fund, is the biggest scheme with a corpus of about 200 billion.UTI was floated by financial institutions and is governed by a special act of Parliament.Most of its investors believe that the UTI is government owned and controlled, which,while legally incorrect, is true for all practical purposes.The second largest category of mutual funds are the ones floated by nationalized banks.Canbank asset management floated by Canara Bank and SBI Funds Management floatedby State Bank of India are the largest of these. GIC AMC floated by General InsuranceCorporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the otherprominent ones. The aggregate corpus of the funds managed by this category of AMC’sis around Rs.150The third largest category of mutual funds are the ones floated by the private sector andby foreign asset management companies. The largest of these are Birla Capital AMC and 11
  12. 12. Kotak AMC . The aggregate corpus of the assets managed by this category of AMC’s isabout Rs. 60 billion.Organization of A Mutual FundThere are many entities involved in organization of Mutual Fund. Diagram given belowillustrates the organization set-up of a mutual fund.The structure of mutual fund in India is governed by SEBI (Mutual fund) Regulation,1996.The Sponsor These regulation make it mandatory to a mutual fund to have three-tierstructure of Sponsor-Trustees-Asset Management promoter of the mutual fund appoints trustees, custodians and the AMC with priorapproval of SEBI. The sponsor establishes the mutual fund and registers the same withSEBI. Sponsors must contribute at least 40% of the capital of the AMC. 12
  13. 13. Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards unitholders by protecting their interests. Trustees float andmarket schemes, and secure necessary approvals. They check if the AMC’s investmentsare within well-defined limits, whether the fund’s assets are protected, and also ensurethat unitholders get their due returns. They also review any due diligence by the AMC.For major decisions concerning the fund, they have to take the unitholders’consent. Theysubmit reports every six months to SEBI; investors get an annual report. Trustees are paidannually out of the fund’s assets – 0.5 percent of the weekly net asset valueFund Managers/ AMC: They are the ones who manage money of the investors. AnAMC takes decisions, compensates investors through dividends, maintains properaccounting and information for pricing of units, calculates the NAV, and providesinformation on listed schemes. It also exercises due diligence on investments, andsubmits quarterly reports to the trustees. A fund’s AMC can neither act for any other fundnor undertake any business other than asset management. Its net worth should not fallbelow Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are belowRs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up anAMC if it deviates from its prescribed role.Custodian: Often an independent organization, it takes custody of securities and otherassets of mutual fund. Its responsibilities include receipt and delivery of securities,collecting income-distributing dividends, safekeeping of the units and segregating assetsand settlements between schemes. Their charges range between 0.15-0.2 percent of thenet value of the holding. Custodians can service more than one fund.Mutual Fund is managed either trust company or board of trustees. Provisions of IndianTrust Act govern board of trustees and trust. If trustee is a company , it is also subject toIndian Company Act. Trustees appoint AMC in consultation with the sponsors andaccording to SEBI regulation. All mutual fund scheme floated by AMC have to beapproved by trustees. Trustees review and ensure that net worth of the company isaccording to stipulated norms, every quarter. 13
  14. 14. Though the trust is the mutual fund, the AMC is its operational face. The AMC is the firstfunctionary to be appointed , and is involved in appointment of all other functionaries.The AMC structures the mutual fund products, markets them and mobilizes fund,manages the funds and services the investors. It seeks the service other functionaries incarrying out these functions.A draft offer document is to be prepared at the time of launching the fund. Typically, itpre specifies the investment objectives of the fund, the risk associated, the costs involvedin the process and the broad rules for entry into and exit from the fund and other areas ofoperation. In India, as in most countries, these sponsors need approval from a regulator,SEBI (Securities exchange Board of India) in our case.A sponsor then hires an asset management company to invest the funds according to theinvestment objective. It also hires another entity to be the custodian of the assets of thefund and perhaps a third one to handle registry work for the unit holders (subscribers) ofthe fund.In the Indian context, the sponsors promote the Asset Management Company also, inwhich it holds a majority stake. In many cases a sponsor can hold a 100% stake in theAsset Management Company (AMC). E.g. Birla Global Finance is the sponsor of theBirla Sun Life Asset Management Company Ltd., which has floated different mutualfunds schemes and also acts as an asset manager for the funds collected under theschemes.Types of AMCs in Indian ContextThe following are the types of AMCs we have in IndiaAMCs owned by banksAMCs owned by financial institutions 14
  15. 15. AMCs owned by the Indian private sector companiesAMCs owned jointly by Indian and foreign investors.Different AMCs Working in India are Name of the AMC Nature of Ownership Alliance Capital Private Foreign Anagram Wellington Private Indian Apple Private Indian Birla Capital International Private Indian Bank of Baroda Banks Bank of India Banks Canbank Investment Banks Cholamandalam Cazenove Private Foreign Dundee Private Foreign DSP Merrill Lynch Private Foreign Escorts Private Indian First India Private Indian GIC Institutions IDBI Investment Institutions Indfund Management Ltd. Banks ING Investment Private Foreign ITC Threadneedle Private Foreign RELIANCE Capital ManagementPrivate Indian Ltd. Jardine Fleming Private Foreign Kotak Mahindra Private Indian Morgan Stanley Private Foreign Punjab National Bank Banks Reliance Capital Private Indian State Bank of India Banks Shriram Private Indian Sun F&C Private Foreign Sundaram Newton Private Foreign Tata Private Indian Credit Capital Private Indian Templeton Private Foreign UTI InstitutionsCOMPARISON OF MUTUAL FUNDS WITH THE BANKS 15
  16. 16. Banks v/s Mutual Funds BANKS MUTUAL FUNDSReturns Low BetterAdministrative exp. High LowRisk Low ModerateInvestment options Less MoreNetwork High penetration Low but improvingLiquidity At a cost BetterQuality of assets Not transparent TransparentInterest calculation Minimum balance betweenEveryday 10th.&30th.Of every monthGuarantee Max Rs.1 lakh on deposits None Capital flow in the economy MFs make it possible for investors to assume risks in the expectation of the higher returns even if the investor cannot actively manage these investments and the associated risks. This increases the level of risk capital that is available in the economy for funding enterprise. The MFs also add depth to the security markets where they invest, thus contributing to liquidity and price discovery. This again is a significant factor in channelling more money into the markets, instead of this being locked up in unproductive physical capital like gold, real estate etc. Schemes and UnitsInvestment in a company is normally represented by a certain number of shares. Peopleinvest in a company by acquiring its shares; they disinvest by selling its shares. The totaloutstanding shares of a company multiplied by the face value of each share, constitutesthe share capital of the company.What shares are for a company, units are for a mutual fund scheme. Thus investorsinvest in a scheme by buying its units. They disinvest by selling its units. The totaloutstanding units of a scheme multiplied by the face value of its units, constitutes the unitcapital of the scheme.Every scheme has an investment objective or philosophy i.e. a promise by the AMC onhow the funds would be managed. Investors in a scheme are essentially buying into thisinvestment objective or philosophy.In reality, the distinction among some of the stock fund objectives discussed is not clear-cut. The actual stocks that constitute a specific mutual fund portfolio depend on the 16
  17. 17. analysis and perspective of the fund’s manager. Hence, a generic investment objective(e.g. growth, income) can be interpreted and executed differently by different managers.One company’s aggressive growth fund may look like another company’s specialty fund,which may look like another company’s world fund. It is important to read the fund’sprospectus and review the list of its top holdings before making your final investmentdecision.Company Profile 17
  18. 18. STATE BANK OF INDIASBI Mutual Fund is India’s largest bank sponsored mutual fund and has an enviabletrack record in judicious investments and consistent wealth creation.The fund traces its lineage to SBI - India’s largest banking enterprise. Theinstitution has grown immensely since its inception and today it is Indias largestbank, patronised by over 80% of the top corporate houses of the country.SBI Mutual Fund is a joint venture between the State Bank of India and SocietyGeneral Asset Management, one of the world’s leading fund management companies that manages overUS$ 330 Billion worldwide.In eighteen years of operation, the fund has launched thirty-two schemes andsuccessfully redeemed fifteen of them. In the process it has rewarded it’s investorshandsomely with consistently high returns.A total of over 3.5 million investors have reposed their faith in the wealthgeneration expertise of the Mutual Fund.Schemes of the Mutual fund have consistently outperformed benchmark indices andhave emerged as the preferred investment for millions of investors and HNI’s.Today, the fund manages over Rs. 20000 crores of assets and has a diverse profileof investors actively parking their investments across 40 active schemes. 18
  19. 19. The fund serves this vast family of investors by reaching out to them throughnetwork of over 100 points of acceptance, 26 investor service centers, 33 investorservice desks and 52 district organizers.SBI Mutual is the first bank-sponsored fund to launch an offshore fund – ResurgentIndia Opportunities Fund. Growth through innovation and stable investmentpolicies is the SBI MF credo. KEY PERSONNELMr. Syed ShahabuddinManaging DirectorMr. G.S. SubramanianSR. Vice President Cross SellingMr. Didier TurpinDy. Chief Executive OfficerMr. G. KandasubramanianAsst. Vice President - Customer ServiceMr. Achal K. GuptaChief Operating OfficerMr. Ganti N. MurthyFund Manager - Debt 19
  20. 20. Mr. Sanjay SinhaChief Investment OfficerMs. Aparna NirgudeChief Risk OfficerMr. R. S. Srinivas JainChief Marketing Officer Mr. Ashutosh P Vaidya Company Secretary & Compliance Office IMPORTANCE OF SBI MUTUAL FUND 1) SBI Mutual Fund helps in introducing a high degree of professional management and marketing concept in to banking 2) SBI Mutual Fund creates Healthy competition on general efficiency levels in the industry 3) SBI Mutual Fund is always trying to innovate the new products avenues, new schemes, services etc. More about SBI Mutual FundSBI Mutual Fund is India’s largest bank sponsored mutual fund and has anenviable track record in judicious investments and consistent wealth creation.The fund traces its lineage to SBI - India’s largest banking enterprise. Theinstitution has grown immensely since its inception and today it is Indias largestbank, patronized by over 80% of the top corporate houses of the country. 20
  21. 21. SBI Mutual Fund is a joint venture between the State Bank of India and SocietyGeneral Asset Management, one of the world’s leading fund managementcompanies that manages over US$ 330 Billion worldwide.AWARDS AND ACHIEVEMENTS1) LIPPER AWARD- lipper India fund award –20072) ICRA MUTUAL FUND AWARD -20073) CNBC TV 18 - CRISIL MUTUAL FUND OF YEAR AWARD -20074) CNBC AWAAZ CONSUMER AWARD – 2006 21
  22. 22. 5) LIPPER AWARD- lipper India fund award -20066) CNBC TV 18 - CRISIL MUTUAL FUND OF YEAR AWARD -20067) ICRA MUTUAL FUND AWARD -2006 22
  23. 23. Business Objectives.The Primary Objective of SBI Mutual Fund is to Enhance the Investments in thecountry through the Provision of Different Mutual Fund Schemes in a systematic andProfessional Manner, and to Promote the Investments In the Mutual Fund Organizational goal SBI Mutual Fund Main goals are to a) Develop a Close Relationship with Customer b) Transform Ideas in to Viable and Creative Solutions c) Provide Consistently high Returns to Shareholders, d) To Grow through diversification by leveraging off the existing client base.Business FocusSBI Mutual Fund mission is to be world class Mutual Fund its Main aim is to buildCustomer Franchises across distinct business So as to be the Preferred Provider ofservices in the Segments That Fund Operates in and to achieve healthy growth in profitability, and consistency The SBI Mutual Fund is Committed to maintain the highest level of ethical standards,professional integrity and regulatory complianceSubsidiaries and Associates 23
  24. 24. SBI BankSBI Mutual FundSBI Life insurance CompanySBI SecuritiesSBI NRI ServicesOther Companies co- promoted by SBISBI Mutual Fund is Professionally managed organization with a board of directorsconsisting of eminent persons who represent various fields including finance, taxation,construction and Urban policy and development. The board primarily focuses on strategyFormulation, policy and control, designed to deliver increasing value to the share holdersS B I MUTUAL FUND SCHEMES1 EQUITY SCHEMES 24
  25. 25. The investments of these schemes will predominantly be in the stock markets andendeavor will be to provide investors the opportunity to benefit from the higherreturns which stock markets can provide. However they are also exposed to thevolatility and attendant risks of stock markets and hence should be chosen only bysuch investors who have high risk taking capacities and are willing to think longterm. Equity Funds include diversified Equity Funds, Sectoral Funds and IndexFunds. Diversified Equity Funds invest in various stocks across different sectorswhile sectoral funds which are specialized Equity Funds restrict their investmentsonly to shares of a particular sector and hence, are riskier than Diversified EquityFunds. Index Funds invest passively only in the stocks of a particular index andthe performance of such funds move with the movements of the index. Magnum COMMA Fund Magnum Equity Fund Magnum Global Fund Magnum Index Fund Magnum MidCap Fund Magnum Multicap Fund Magnum Multiplier Plus 1993 Magnum Sector Funds Umbrella MSFU - FMCG Fund MSFU - Emerging Businesses Fund MSFU - IT Fund MSFU - Pharma Fund MSFU - Contra Fund SBI Arbitrage Opportunities Fund SBI Blue chip Fund SBI Infrastructure Fund - Series I SBI Magnum Taxgain Scheme 1993 SBI ONE India Fund 25
  26. 26. 2 DEBT SCHEMESDebt Funds invest only in debt instruments such as Corporate Bonds, GovernmentSecurities and Money Market instruments either completely avoiding anyinvestments in the stock markets as in Income Funds or Gilt Funds or having asmall exposure to equities as in Monthly Income Plans or Childrens Plan. Hencethey are safer than equity funds. At the same time the expected returns from debtfunds would be lower. Such investments are advisable for the risk-averse investorand as a part of the investment portfolio for other investors.Magnum Children`s Benefit PlanMagnum Gilt Fund • Magnum Gilt Fund (Long Term) • Magnum Gilt Fund (Short Term)Magnum Income Fund • Magnum Income Plus Fund • Magnum Income Plus Fund (Saving Plan) • Magnum Income Plus Fund (Investment Plan)Magnum Insta Cash FundMagnum InstaCash Fund -Liquid Floater PlanMagnum Institutional Income FundMagnum Monthly Income PlanMagnum Monthly Income Plan FloaterMagnum NRI Investment FundSBI Debt Fund Series • SDFS 15 Months Fund 26
  27. 27. • SDFS 90 Days Fund • SDFS 13 Months Fund • SDFS 18 Months Fund • SDFS 24 Months Fund • SDFS 60 Days Fund • SDFS 180 Days FundSBI Premier Liquid Fund3 BALANCED SCHEMESMagnum Balanced Fund invest in a mix of equity and debt investments. Hence they areless risky than equity funds, but at the same time provide commensurately lower returns.They provide a good investment opportunity to investors who do not wish to becompletely exposed to equity markets, but is looking for higher returns than thoseprovided by debt funds.Magnum Balanced FundMagnum NRI Investment Fund - FlexiAsset PlanSBI EQUITY SCHEMES DETAILSMAGNUM GLOBAL FUNDInvestment ObjectiveTo provide the investors maximum growth opportunity through well researchedinvestments in Indian equities, PCDs and FCDs from selected industries with highgrowth potential and Bonds. 27
  28. 28. Asset AllocationInstrument %of portfolio Risk ProfileEquity, Partly Convertible Debentures, Fully 80-100% HIGHConvertible Debentures and BondsMoney Market instruments 0-20% LOWScheme Highlights1.An open-ended equity scheme investing in stocks from selected industries withhigh growth potential.2. Minimum Investment Rs. 2000 and in multiples of Rs. 1000 with Dividend andGrowth options available. ^ Money Market Instruments will include CommercialPaper, Commercial Bills, Certificate of Deposit, Treasury Bills, BillsRediscounting, Repos, Government securities having an unexpired maturity of lessthan 1 year, call or notice money, usance bills and any other such short-terminstruments as may be allowed under the regulations prevailing from time to time.Launch Date: September 30, 1994Entry LoadInvestments below Rs. 5 crores - 2.25% Investments of Rs.5 crores and above –NILExit LoadInvestments below Rs 5 crores <= 6 months - 1.00% and NIL thereafter.Investments of Rs 5 crores and above - NIL 28
  29. 29. SBI GILT FUND DETAILSSBI MAGNUM GILT FUNDInvestment ObjectiveTo provide the investors with returns generated through investments in governmentsecurities issued by the Central Government and / or a State GovernmentAsset AllocationInstrument %of portfolio Risk ProfileGovernment of India Dated Securities 100% SovereignState Governments Dated Securities 100% LowGovernment of India Treasury Bills 100% SovereignScheme Highlights1. Open ended Gilt Scheme.2. The scheme will invest in government securities only with the exception ofinvestments made in the call money markets. Investment in Government Securitiessignifies no risk of default (zero credit risk) either in payment of principal or eveninterest on the investments made by the scheme. Long-Term Plan - for investorswith a long-term investment horizon. This Plan will have two options (a) QuarterlyDividend option and (b) Growth option The Long Term Plan Dividend Plan and theGrowth Plan will each have three options for investment 1. Regular Dividend /Growth Option : This option will be the existing option in this Plan whereininvestments in this option would be subject to a Contingent Deferred Sales Charge(CDSC) of 0.25% for exit within 90 days from the date of investment. 2. PF(Regular) Option : This option under both the Dividend and Growth Plans would bea no-load option. 3. PF (Fixed Period) Option : This option under both theDividend and Growth Plan provides prospective investors with an option to lock-intheir investments for a period of 1 year, 2 years or 3 years from the date of theirinvestment Facility to reinvest dividend is available under both the Plans. Both the 29
  30. 30. Plans will have separate investment portfolios and separate NAVs. Under the Long-Term Plan, the funds will normally be managed to an average portfolio-maturitylonger than three years.Launch Date: January 1, 2003Entry Load: NilExit Load: Regular Plan (Long Term) - CDSC of 0.25% for exit within 90 daysfrom date of investmentSBI BALANCED FUNDInvestment ObjectiveTo provide investors long term capital appreciation along with the liquidity of anopen-ended scheme by investing in a mix of debt and equity. The scheme willinvest in a diversified portfolio of equities of high growth companies and balancethe risk through investing the rest in a relatively safe portfolio of debt.Asset AllocationInstrument %of portfolio Risk ProfileEquities At least 50% MED-HIGHDebt Instruments like debentures, bonds,khokhas. UP TO 40%Securitized Debt 10% MED-HIGH 30
  31. 31. Money Market Instruments Balance LowScheme Highlights1. An open-ended scheme investing in a mix of debt and equity instruments.Investors get the benefit of high expected-returns of equity investments with thesafety of debt investments in one scheme.2. On an ongoing basis, magnums will be allotted at an entry load of 2.25% to theNAV.3. Scheme open for Resident Indians, Trusts, Indian Corporates, on a fullyrepatriable basis for NRIs and, Overseas Corporate Bodies.4. Facility to reinvest dividend proceeds into the scheme at NAV available.5. Switchover facility to any other open-ended schemes of SBI Mutual Fund atNAV related prices.6. The scheme will declare NAV, Sale and repurchase price on a daily basis.7. Nomination facility available for individuals applying on their behalf eithersingly or jointly upto three.Launch Date: May 1, 1996Entry Load: Investments below Rs. 5 crores - 2.25% Investments of Rs.5 croresand above - NILExit Load: Investments below Rs.5 crores < = 6 months - 1.00%, > 6 months but< 12 months - 0.50% Investments of Rs.5 crores and above - NIL 31
  32. 32. ICICI Prudential Mutual FundICICI Prudential Asset Management Company enjoys the strong parentage ofPrudential plc, one of UKs largest players in the insurance & fund management sectorsand ICICI Bank, a well-known and trusted name in financial services in India. ICICIPrudential Asset Management Company, in a span of just over eight years, has forged aposition of pre-eminence in the Indian Mutual Fund industry as one of the largest assetmanagement companies in the country with assets under management of Rs. 37,906.24crores (as of March 31, 2007). The Company manages a comprehensive range ofschemes to meet the varying investment needs of its investors spread across 68 cities inthe country.PRUDENTIALEstablished in London in 1848, Prudential plc, through its businesses in the UK, US and Asia,provides retail financial services products and services to more than 21 million customers,policyholders and unit holders worldwide with over US$400 (as of 31st December, 2005) billion 32
  33. 33. in funds under management. Prudential employs some 23,000 staff worldwide.In Asia, Prudential has life insurance and funds management operations across twelve countries -China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore,Taiwan, Thailand and Vietnam. Prudential has championed customer-centric products andservices for over 80 years, supported by an extensive network of over 145,000 staff and agentsacross the regionICICI BANKICICI Bank is Indias second-largest bank with total assets of about Rs. 2,513.89 bn (US$ 56.3bn) at March 31, 2006 and profit after tax of Rs. 25.40 bn (US$ 569 mn) for the year endedMarch 31, 2006 (Rs. 20.05 bn (US$ 449 mn) for the year ended March 31, 2005). ICICI Bankhas a network of about 614 branches and extension counters and over 2,200 ATMs. ICICI Bankoffers a wide range of banking products and financial services to corporate and retail customersthrough a variety of delivery channels and through its specialised subsidiaries and affiliates in theareas of investment banking, life and non-life insurance, venture capital and asset management.ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needsof clients and leverage on its domestic banking strengths to offer products internationally. ICICIBank currently has subsidiaries in the United Kingdom, Russia and Canada, branches inSingapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre andrepresentative offices in the United States, United Arab Emirates, China, South Africa andBangladesh. Our UK subsidiary has established a branch in Belgium. ICICI Bank is the mostvaluable bank in India in terms of market capitalisation. 33
  34. 34. ICICI PRUDENTIAL MUTUAL FUND SCHEMESICICI Prudential Infrastructure FundICICI Prudential Services Industries FundICICI Prudential FMCG FundICICI Prudential Technology FundICICI Prudential Discovery FundICICI Prudential PowerICICI Prudential Dynamic PlanICICI Prudential Emerging S.T.A.R FundICICI Prudential Tax PlanICICI Prudential Growth PlanICICI Prudential Index FundICICI Prudential Spice FundICICI Prudential Child Care PlanICICI Prudential Banlanced FundICICI Prudential Income Multiplier FundICICI Prudential Monthly Income PlanICICI Prudential Gilt Fund-Investment Option 34
  35. 35. ICICI Prudential Income PlanICICI Prudential Flexible Income PlanICICI Prudential Long Term Floating Rate PlanICICI Prudential Blended PlanICICI Prudential Short Term PlanICICI Prudential Gilt Fund-Treasury OptionICICI Prudential Short Term FloaterICICI Prudential Liquid PlanICICI PRUDENTIAL PRODUCT DETAILSEQUITY SCHEMEICICI PRUDENTIAL DYNAMIC PLAN is a diversified equity fund thatcould be your ideal choice to make the most of dynamic changes in the market. It has theagility to capture upside opportunities across value and growth , large and midcap , indexand non-index stocks. On the flip side it also has ability to move into cash as markets getovervaluedInvestment ObjectiveTo generate capital appreciation by actively investing in equity / equity related securities.For defensive considerations, the Scheme may invest in debt, money market instruments,to the extent permitted under the Regulations. The AMC will have the discretion tocompletely or partially invest in any of the type of securities stated above so as tomaximize the returns.INVESTMENT PHILOSOPHY 35
  36. 36. ICICI PRUDENTIAL DYNAMIC PLAN is a diversified equity plan that follows thegrowth investment philosophy to invest in a portfolio of large, mid and small-cap stocks.It has the ability to move gradually into cash as the market gets over-valued. It offers aportfolio of stocks selected through rigorous bottom-up fundamental analysis acrossmarket capitalisations on a diversified basis for long-term capital appreciation.BENEFITS1.Has the agility, aimed at capturing upside opportunities in the market across marketcapitalizations.2.On the flip side, in case stock markets get into an over valued position, the plan has theability to switch to cash thus seeking to limit the downsidePERFORMANCEEntry Load: (i) For investments of less than Rs. 5 Crores : Entry load at 2.25% ofapplicable NAV. (ii)For investments of Rs. 5 crores and Above : NilExit Load: Nil 36
  37. 37. ICICI PRUDENTIAL GUILT FUNDInvestment ObjectiveTo generate income through investment in Gilts of various maturities.INVESTMENT PHILOSOPHYICICI PRUDENTIAL GILT FUND is a pure debt fund that invests in short tenureGovernment securities (G-Secs). These securities are essentially liquid and carry nocredit risk. Having said that, the portfolios exposed to some interest rate risk as thesecurities are marked to market, and therefore, respond to changes in market interestrates. The portfolio seeks to limit volatility by deploying funds in short-term G-Secs, withan average maturity not exceeding 3 years. The objective is to closely manage thedownside risks of the portfolio arising out of changes in the market rates, by activelymanaging the duration of the portfolio.BENEFITS1.Enables exposure to a pure Government security portfolio.2.Facilitates participation in the wholesale market for Government debt, even for smallerticket-size exposures. 37
  38. 38. 3.Provides the benefits of professional management of investment portfolios.PERFORMANCE OF THE FUNDEntry Load:NilExit Load: Nil 38
  39. 39. ICICI PRUDENTIAL BALANCED FUND: Asset allocation is the key to investingsuccess. It helps to reduce the volatility of returns. A Balanced Fund takes care of thisasset allocation by investing in equity for capital appreciation and debt for stable returns.It focuses on reducing volatility of returns by increasing / decreasing equity exposurebased on the market outlook and using a core debt portfolio to do the rebalancing.Investment ObjectiveTo seek to generate long-term capital appreciation and current income from a portfoliothat is invested in equity and equity related securities as well as in fixed incomesecurities.INVESTMENT PHILOSOPHYan open-ended fund that allocates to both equity and debt markets, reflects this wisdom.In a bullish market equity allocation can go upto 80%. In a bearish market equityallocation can go down to 65%. This dynamic allocation along with core debt portfolioreduces the volatility of return.BENEFITSBalanced fund brings you the twin benefits of growth from equity markets and steadyincome from debt markets 39
  40. 40. PERFORMANCEEntry Load: (i) For investments of less than Rs. 5 Crores : 2.25% of applicable NAV.(ii) For investments of Rs. 5 crores and Above : NilExit Load: Nil 40
  41. 41. Key Information 41
  42. 42. CATEGORIES OF MUTUAL FUND SCHEMES1.SCHEMES ACCORDING TO MATURITY PERIOD: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.1.1OPEN-ENDED FUND/ SCHEME An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. The key feature of open-end schemes is liquidity.1.2CLOSE-ENDED FUND/ SCHEME A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. 42
  43. 43. 2.SCHEMES ACCORDING TO INVESTMENT OBJECTIVE: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:2.1GROWTH / EQUITY ORIENTED SCHEME The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.2.2INCOME / DEBT ORIENTED SCHEMEThe aim of income funds is to provide regular and steady income to investors. Suchschemes generally invest in fixed income securities such as bonds, corporate debentures,Government securities and money market instruments. Such funds are less riskycompared to equity schemes. These funds are not affected because of fluctuations inequity markets. However, opportunities of capital appreciation are also limited in suchfunds. The NAVs of such funds are affected because of change in interest rates in thecountry. If the interest rates fall, NAVs of such funds are likely to increase in the shortrun and vice versa. However, long-term investors may not bother about thesefluctuations.2.3BALANCED FUND 43
  44. 44. The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.2.4MONEY MARKET OR LIQUID FUND These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.2.5GILT FUND These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factor as is the case with income or debt oriented schemes.2.6INDEX FUNDS Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the 44
  45. 45. same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges.Other SchemesTax Saving SchemesThese schemes offer tax rebates to the investors under tax laws as prescribed from time totime. This is made possible because the Government offerstax incentives for investment in specified avenues. For example, Equity Linked SavingsSchemes (ELSS) and Pension Schemes. The details of such tax saving schemes areprovided in the relevant offer documents.Ideal for: . Investors seeking tax rebates.Special SchemesThis category includes index schemes that attempt to replicate the erformance of aparticular index such as the SSE Sensex or the NSE 50, or industry specific schemes(which invest in specific industries) or sectoral schemes (which invest exclusively insegments such as IXGroup shares or initial public offerings).Index fund schemes are ideal for investors who are satisfied with a returnapproximately equal to that of an index.Sectoral fund schemes are ideal for investors who have already decided to invest in aparticular sector or segment. Keep in mind that anyone scheme may not meet all yourrequirements for all time. You need to place your money judiciously in different schemesto be able to get the combination of growth, income and stability that is right for you. 45
  46. 46. Remember, as always, higher the return you seek higher the risk you should be preparedto take.A few frequently used terms are explained here FREQUENTLY USED TERMSNET ASSET VALUE(NAV) Net Asset Value is the market value of the assets of the schememinus its liabilities. The per unit NAV is he net asset value of the scheme divided by thenumber of units outstanding on the Valuation date. Net Asset Value is the market valueof securities of scheme divided by the total number of units of the scheme on anyparticular date. For example, if the market value of the securities of a mutual fundscheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units at Rs. 10 each tothe investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosedby the mutual funds on a regular basis- daisy or weekly- depending on the type of schemeSale Price Is the price you pay when you invest in a scheme or NAV a unitholder is charged while investing in an open-ended scheme is sale price. Also calledOffer Price. It may include a Sale load, if applicable.Repurchase Price Is the price at which a close-ended scheme repurchases its unitsand it may include a back-end load. This is also called Bid Price.Redemption Price 46
  47. 47. Is the price at which open-ended schemes repurchase their unitsand close-ended schemes redeem their units on maturity. Such prices are NAV related.Sales load Is a charge collected by a scheme when it sells when it sells theunits also called, ‘Front-end’ load. A Load is one that charges a percentage of NAV forentry or exit. That is, each time one buys or sells units in the fund, a charge will bepayable. This charge is used by the mutual fund for marketing and distribution expenses.Suppose the NAV per unit is Rs. 10. If the entry as well as exit load charged were 1%,then the investors who buy would be required to pay Rs. 10.10 and those who offer theirunit for repurchase to the mutual fund will get only Rs.9.90 per unit. The investorsshould take the loads into consideration while making investment as these affect theiryields/returns “Whether a mutual fund impose fresh load or increase the load beyond thelevel mentioned in the offer documents” Mutual funds cannot increase the load beyond the leel mentionedin the offer document. Any change in the load will be applicable only to prospectiveinvestments and not to the original investments. In case of imposition of fresh loads orincrease in existing loads, the mutual funds are required to amend their offer documentsso that the new investors are aware of loads at the time of investments.No load Schemes that do not charge a load are called ‘No Load’ schemes.A no load fund is one that does not charge for entry or exit. It means the investors canenter the fund/scheme at NAV and not additional charges are payable on purchase or saleof units. 47
  48. 48. BENEFITS OF MUTUAL FUNDSPROFESSIONAL MANAGEMENT:Mutual Funds are backed by experienced and skilled professionals, a dedicatedinvestment research team that analyses the performance and prospects of companies andselects investments.CONVENIENT ADMINISTRATION:Investing in a Mutual Fund reduces paperwork and helps you avoid many problems suchas bad deliveries, delayed payments and follow up with brokers and companies. This isimportant when you want to have a diversified portfolio through direct equityinvestments.DIVERSIFICATION :Mutual Funds always have an investment mix. The diversity in this mix spreads out theprobability of profits and losses, reducing the risk of a substantial fall in the money youhave invested.RETURN POTENTIAL : Over a medium to long-term, Mutual Funds have the potential to provide a higher netreturn as they invest in a diversified basket of selected securities.ECONOMIES: Mutual Funds are a relatively less expensive way to invest compared to directlyinvesting in the capital markets because the benefits of scale in brokerage, custodial andother fees translate into lower costs for investors.LIQUIDITY: 48
  49. 49. In open-end schemes, the investor gets the money back promptly at net NAV peggedprices. In closed-end schemes, the units can be sold on a stock exchange at the prevailingmarket price. The fund also repurchases from the investors at NAV pegged prices. Thereis scope to speedily disinvest assets and obtain disinvestments proceeds.FLEXIBILITY: Through features such as regular investment plans, regular withdrawal plans anddividend reinvestment plans, you can systematically invest or withdraw funds accordingto your needs and convenience.TRANSPARENCY:You get regular information on the value of your investment in addition to disclosure onthe specific investments made by your scheme, the proportion invested in each class ofassets and the fund managers investment strategy and outlook.AFFORDABILITY:Investors individually may lack sufficient funds to invest in high-grade stocks. A mutualfund because of its large corpus allows even a small investor to take the benefit of itsinvestment strategy.OPTIONS:Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.INVESTOR SAFETY:All Mutual Funds are registered with SEBI and they function within the provisions ofstrict regulations designed to protect the interests of investors. The operations of MutualFunds are regularly monitored by SEBI. 49
  50. 50. LIMITATIONS OF MUTUAL FUNDNo Guarantee:No investment is risk free. If the entire stock market declines in value, the value ofmutual fund shares will go down as well, no matter how balanced the portfolio. Investorsencounter fewer risks when they invest in mutual funds than when they buy and sellstocks on their own. However, anyone who invests through a mutual fund runs the riskof losing money.Fees and commissions:All funds charge administrative fees to cover their day-to-day expenses. Some funds alsocharge sales commissions or “loads” to compensate brokers, financial consultants, orfinancial planners. Even if you don’t use a broker or other financial adviser, you will paya sales commission if you buy shares in a load fund.Taxes:During a typical year, most actively managed mutual funds sell anywhere from 20 to 70percent of the securities in their portfolios. If your fund makes a profit on its sales, youwill pay taxes on the income you receive, even if you reinvest the money you made.Management Risk:When you invest in a mutual fund, you depend on the fund manager to make the rightdecisions regarding the fund’s portfolio. If the manager does not perform as well as youhad hoped, you might not make as much money on your investments as you expected. Ofcourse, if you invest in Index Funds, you forego management risk, because these fundsdo not employ managers.1. ROLE OF INTERMEDIARIES IN THE INDIAN MUTUAL FUND INDUSTRY 50
  51. 51. 1.1 The mutual fund industry in India started in 1964 with the formation of theUnit Trust of India (UTI). In 1987, other public sector institutions entered thisbusiness, and it was in 1993 that the first of the private sector participants commencedits operations.1.2 From the beginning, UTI and other mutual funds have relied extensively onintermediaries to market their schemes to investors. It would be accurate to say thatwithout intermediaries, the mutual fund industry would not have achieved the depthand breadth of coverage amongst investors that it enjoys today. Intermediaries haveplayed a pivotal and valuable role in popularizing the concept of mutual funds across India. They make the forms available to clients, explain the schemes andprovide administrative and paperwork support to investors, making it easy andconvenient for the clients to invest.1.3 Intermediation itself has undergone a change over the past few decades.While individual agents provided the foundation for growth in the early years,institutional agents, distribution companies and national brokers soon started to playan active role in promoting mutual funds. Recently, banks, finance companies,secondary market brokers and even post offices have also begun to market mutualfunds to their existing and potential client bases.1.4 It is, thus clear that all types of intermediaries are required for the growth of theindustry, and their wellbeing, quality orientation and ways of doing business will have a significant impact on how the mutual fund industry in Indiaevolves in the future.HOW SAFE ARE MUTUAL FUNDSBy investing in mutual funds, the risk is not totally removed but one will have thebenefits of diversification.Any mutual fund is as safe or unsafe as the assets that it invests in.NAV of growth funds mirrors the fluctuations of the share prices of its constituents.Sometimes there is permanent erosion in value too. 51
  52. 52. Bond funds, in which the constituents are debt instruments, dont waver so much. Incomefunds seldom face permanent value erosion.Despite professional setups for both investment decisions and research, funds cannot beimmune to fluctuating market health. However, funds diversify the investment portfoliosubstantially so that default in any single investment (in the case of an income fund) willnot affect the overall performance of a fund in a significant manner. In the event ofdefault of a part of the portfolio, an income fund is extremely unlikely to face erosion inface value.Generally, mutual funds are not guaranteed by anybody. However, in the Indian context,some of the mutual funds have floated "guaranteed" or "assured" return schemes thatguarantee a certain annual return or guarantee a buyback at a specified price after sometime. Examples of these include funds floated by the TI, Cannabis Mutual Fund, BSIMutual Fund, etc. Many of these funds have not earned returns that they promised andthe asset management companies of the respective mutual funds or their sponsors havemade good their promisesGround Rules of Mutual Fund InvestingAssess yourself: Self-assessment of one’s needs; expectations and risk profile is of primeimportance failing which, one will make more mistakes in putting money in right placesthan otherwise. One should identify the degree of risk bearing capacity one has and alsoclearly state the expectations from the investments. Irrational expectations will only bringpain.Try to understand where the money is going: It is important to identify the nature ofinvestment and to know if one is compatible with the investment. One can losesubstantially if one picks the wrong kind of mutual fund. In order to avoid any confusionit is better to go through the literature such as offer document and fact sheets that mutualfund companies provide on their funds.Dont rush in picking funds, think first: one first has to decide what he wants themoney for and it is this investment goal that should be the guiding light for all 52
  53. 53. investments done. It is thus important to know the risks associated with the fund andalign it with the quantum of risk one is willing to take. One should take a look at theportfolio of the funds for the purpose. Excessive exposure to any specific sector shouldbe avoided, as it will only add to the risk of the entire portfolio. Mutual funds invest witha certain ideology such as the "Value Principle" or "Growth Philosophy". Both have theirshare of critics but both philosophies work for investors of different kinds. Identifying theproposed investment philosophy of the fund will give an insight into the kind of risks thatit shall be taking in future.Invest. Don’t speculate: A common investor is limited in the degree of risk that he iswilling to take. It is thus of key importance that there is thought given to the process ofinvestment and to the time horizon of the intended investment. One should abstain fromspeculating which in other words would mean getting out of one fund and investing inanother with the intention of making quick money. One would do well to remember thatnobody can perfectly time the market so staying invested is the best option unless thereare compelling reasons to exit.Don’t put all the eggs in one basket: This old age adage is of utmost importance. Nomatter what the risk profile of a person is, it is always advisable to diversify the risksassociated. So putting one’s money in different asset classes is generally the best optionas it averages the risks in each category. Thus, even investors of equity should bejudicious and invest some portion of the investment in debt. Diversification even in anyparticular asset class (such as equity, debt) is good. Not all fund managers have the sameacumen of fund management and with identification of the best man being a tough task, itis good to place money in the hands of several fund managers. This might reduce themaximum return possible, but will also reduce the risks.Be regular: Investing should be a habit and not an exercise undertaken at one’s wishes, ifone has to really benefit from them. As we said earlier, since it is extremely difficult toknow when to enter or exit the market, it is important to beat the market by beingsystematic.The basic philosophy of Rupee cost averaging would suggest that if one invests regularlythrough the ups and downs of the market, he would stand a better chance of generating 53
  54. 54. more returns than the market for the entire duration. The SIPs (Systematic InvestmentPlans) offered by all funds helps in being systematic. All that one needs to do is to givepost-dated cheques to the fund and thereafter one will not be harried later. The Automaticinvestment Plans offered by some funds goes a step further, as the amount can bedirectly/electronically transferred from the account of the investor.Do your homework:It is important for all investors to research the avenues available to them irrespective ofthe investor category they belong to. This is important because an informed investor is ina better decision to make right decisions. Having identified the risks associated with theinvestment is important and so one should try to know all aspects associated with it.Asking the intermediaries is one of the ways to take care of the problem.Find the right fundsFinding funds that do not charge much fees is of importance, as the fee chargedultimately goes from the pocket of the investor. This is even more important for debtfunds as the returns from these funds are not much. Funds that charge more will reducethe yield to the investorRisks involved in investing in Mutual Funds Mutual Funds do not provide assured returns. Their returns are linked to theirperformance. They invest in shares, debentures, bonds etc. All these investments involvean element of risk. The unit value may vary depending upon the performance of thecompany and if a company defaults in payment of interest/principal on theirdebentures/bonds the performance of the fund may get affected. Besides incase there is asudden downturn in an industry or the government comes up with new a regulation whichaffects a particular industry or company the fund can again be adversely affected. Allthese factors influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is given below:Market risk 54
  55. 55. If the overall stock or bond markets fall on account of overall economic factors,the value of stock or bond holdings in the funds portfolio can drop, thereby impacting thefund performance.Non-market riskBad news about an individual company can pull down its stock price, which cannegatively affect fund holdings. This risk can be reduced by having a diversified portfoliothat consists of a wide variety of stocks drawn from different industries.Interest rate riskBond prices and interest rates move in opposite directions. When interest rates rise, bondprices fall and this decline in underlying securities affects the fund negatively.Credit riskBonds are debt obligations. So when the funds invest in corporate bonds, they run the riskof the corporate defaulting on their interest and principal payment obligations and whenthat risk crystallizes, it leads to a fall in the value of the bond causing the NAV of thefund to take a beating.Performance Measures or Risk Measurement Of Mutual FundsMutual Fund industry today, with about 34 players and more than five hundred schemes,is one of the most preferred investment avenues in India. However, with a plethora ofschemes to choose from, the retail investor faces problems in selecting funds. Factorssuch as investment strategy and management style are qualitative, but the funds record isan important indicator too. Though past performance alone can not be indicative of futureperformance, it is, frankly, the only quantitative way to judge how good a fund is atpresent. Therefore, there is a need to correctly assess the past performance of differentmutual funds.Worldwide, good mutual fund companies over are known by their AMCs and this fame isdirectly linked to their superior stock selection skills. For mutual funds to grow, AMCs 55
  56. 56. must be held accountable for their selection of stocks. In other words, there must be someperformance indicator that will reveal the quality of stock selection of various AMCs.Return alone should not be considered as the basis of measurement of the performance ofa mutual fund scheme, it should also include the risk taken by the fund manager becausedifferent funds will have different levels of risk attached to them. Risk associated with afund, in a general, can be defined as variability or fluctuations in the returns generated byit. The higher the fluctuations in the returns of a fund during a given period, higher willbe the risk associated with it. These fluctuations in the returns generated by a fund areresultant of two guiding forces. First, general market fluctuations, which affect all thesecurities present in the market, called market risk or systematic risk and second,fluctuations due to specific securities present in the portfolio of the fund, calledunsystematic risk. The Total Risk of a given fund is sum of these two and is measured interms of standard deviation of returns of the fund. Systematic risk, on the other hand, ismeasured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in themarket; higher will be its beta. Beta is calculated by relating the returns on a mutual fundwith the returns in the market. While unsystematic risk can be diversified throughinvestments in a number of instruments, systematic risk can not. By using the risk returnrelationship, we try to assess the competitive strength of the mutual funds vis-à-vis oneanother in a better way.In order to determine the risk-adjusted returns of investment portfolios, several eminentauthors have worked since 1960s to develop composite performance indices to evaluate aportfolio by comparing alternative portfolios within a particular risk class.The most important and widely used measures of performance are:Ø The Treynor MeasureØ The Sharpe MeasureØ Jenson ModelØ Fama ModelThe Treynor Measure 56
  57. 57. Developed by Jack Treynor, this performance measure evaluates funds on the basis ofTreynors Index. This Index is a ratio of return generated by the fund over and above riskfree rate of return (generally taken to be the return on securities backed by thegovernment, as there isno credit risk associated), during a given period and systematic risk associated with it(beta). Symbolically, it can be represented as:Treynors Index (Ti) = (Ri - Rf)/Bi.Where, Ri represents return on fund, Rf is risk free rate of return and Bi isbeta of the fund.All risk-averse investors would like to maximize this value. While a high and positiveTreynors Index shows a superior risk-adjusted performance of a fund, a low and negativeTreynors Index is an indication of unfavorable performance.The Sharpe MeasureIn this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is aratio of returns generated by the fund over and above risk free rate of return and the totalrisk associated with it. According to Sharpe, it is the total risk of the fund that theinvestors are concerned about. So, the model evaluates funds on the basis of reward perunit of total risk. Symbolically, it can be written as:Sharpe Index (Si) = (Ri - Rf)/SiWhere, Si is standard deviation of the fund.While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of afund, a low and negative Sharpe Ratio is an indication of unfavorable performance.Comparison of Sharpe and TreynorSharpe and Treynor measures are similar in a way, since they both divide the riskpremium by a numerical risk measure. The total risk is appropriate when we areevaluating the risk return relationship for well-diversified portfolios. On the other hand, 57
  58. 58. the systematic risk is the relevant measure of risk when we are evaluating less than fullydiversified portfolios or individual stocks. For a well-diversified portfolio the total risk isequal to systematic risk. Rankings based on total risk (Sharpe measure) and systematicrisk (Treynor measure) should be identical for a well-diversified portfolio, as the totalrisk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higheron Treynor measure, compared with another fund that is highly diversified, will ranklower on Sharpe Measure.Jenson ModelJensons model proposes another risk adjusted performance measure. This measure wasdeveloped by Michael Jenson and is sometimes referred to as the Differential ReturnMethod. This measure involves evaluation of the returns that the fund has generated vs.the returns actually expected out of the fund given the level of its systematic risk. Thesurplus between the two returns is called Alpha, which measures the performance of afund compared with the actual returns over the period. Required return of a fund atagiven level of risk (Bi) can be calculated as:Ri = Rf + Bi (Rm - Rf)Where, Rm is average market return during the given period. After calculating it, alphacan be obtained by subtracting required return fromthe actual return of the fund.Higher alpha represents superior performance of the fund and vice versa. Limitation ofthis model is that it considers only systematic risk not the entire risk associated with thefund and an ordinary investor can not mitigate unsystematic risk, as his knowledge ofmarket is primitive.Fama ModelThe Eugene Fama model is an extension of Jenson model. This model compares theperformance, measured in terms of returns, of a fund with the required return 58
  59. 59. commensurate with the total risk associated with it. The difference between these two istaken as a measure of the performance of the fund and is called net selectivity.The net selectivity represents the stock selection skill of the fund manager, as it is theexcess return over and above the return required to compensate for the total risk taken bythe fund manager. Higher value of which indicates that fund manager has earned returnswell above the return commensurate with the level of risk taken by him.Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)Where, Sm is standard deviation of market returns. The net selectivity is then calculatedby subtracting this required return from the actual return of the fund.Among the above performance measures, two models namely, Treynor measure andJenson model use systematic risk based on the premise that the unsystematic risk isdiversifiable. These models are suitable for large investors like institutional investorswith high risk taking capacities as they do not face paucity of funds and can invest in anumber of options to dilute some risks. For them, a portfolio can be spread across anumber ofstocks and sectors. However, Sharpe measure and Fama model that consider the entirerisk associated with fund are suitable for small investors, as the ordinary investor lacksthe necessary skill and resources to diversified. Moreover, the selection of the fund on thebasis of superior stock selection ability of the fund manager will also help in safeguardingthe money invested to a great extent. The investment in funds that have generated bigreturns at higher levels of risks leaves the money all the more prone to risks of all kindsthat may exceed the individual investors risk appetite 59
  60. 60. ProjectDetails 60
  61. 61. Main ObjectiveTo make Comparative performance analysis of SBI Mutual Fund with ICICI PrudentialMutual Fund.Sub-objectives 1. To study the different kinds of schemes provided by each of Mutual funds. 2. Comparative performance analysis of SBI Equity - Diversified with ICICI Prudential Equity – Diversified Fund. 3. Comparative performance analysis of SBI Gilt Fund with ICICI Prudential Gilt Fund 4. Comparative performance analysis of SBI Balance Fund with ICICI Prudential Balance Fund.The study Comprises of 1. Comparative analysis of Returns from SBI Mutual Fund and ICICI Prudential Mutual fund. 2. Comparative analysis of Risk associated with SBI and ICICI Prudential fund, with the use of Sharpe ratio, Expense ratio, Beta, Treynor Ratio and Standard deviation.. 3. To compare Mutual Fund Average Return with NIFTY Average Return 4. Comparative analysis of corpus of the funds. 61
  62. 62. METHODOLOGY o Information is collected from the managers of Selected firms who deal in mutual funds. o Information is collected from the officials of SBI Mutual Fund officials. o Information is also collected from the secondary sources like the offer documents, fact sheets, key information memorandum, web sites, magazines, newspapers etc. o In case of corpus size, lock in period, entry and exit load the information is collected from SBI & ICICI Prudential the offer documents. o In case of returns, minimum investment and performance (Track Record’s) is collected from the offer documents & fact sheets. o Extensive use of Mutual Fund Related magazines like “ Mutual Fund Review”, “Mutual Fund Insight by value researchers” is being made. 62
  63. 63. Analysis of the Data 63
  64. 64. SOURCES OF INFORMATIONPRIMERY SOURCES OF INFORMATIONOfficials and sales executives of SBI Mutual fund.Official and executives of SBIDiscussion about mutual funds with existing and new investorsSECONDARY SOURCES OF INFORMATIONOffer documents of SBI and ICICI Prudential Mutual Funds.Mutual Fund related magazines like Mutual Fund Review, Mutual Fund Insight by valueresearchers, Outlook Money.Fact Sheets of SBI Mutual Fund and ICICI Prudential Mutual FundWeb sites, mainly,, icicipruamc.comLIMITATIONS OF THE STUDYThe analysis is done on the basis of past performance of the funds. But the pastperformance may not be an indicator of future performance.Performance of mutual funds is largely affected by environmental factors, which arebeyond the control of investors. 64
  65. 65. GILT FUND ANALYSIS ABSOLUTE RETURNS 2ND 1ST YEAR YEAR 3RD YEAR NIFTY 9.715344 85.20646 125.8813 SBI 5.36 8.88 13.07 ICICI PRU 8.09 11.34 16.65ABSOLUTE RETURNS 140 120 100 80 NIFTY SBI 60 ICICI PRU 40 20 0 1ST YEAR 2ND 3RD YEAR YEARThe above diagram exhibits he absolute return from Gilts funds. These are the funds,which are known for their high consistency. The consistent appraisal is assured in thistype of funds. This type of fund is suitable for retired people, dependants on income fromfund invested.It is clear from the diagram that the performance of ICICI Prudential is marginally higherthan SBI Mutual fund at different point of time Gilt Fund. 65
  66. 66. ICICI SBI PRU BETA 0.0004 0.00035 1ST YEAR -0.0001 0.00003 2ND RISK PREMIUM YEAR -0.0002 -0.002 3RD YEAR -0.0002 -0.001 SHARPE INDEX RANKING ICICI SBI PRU 1ST YEAR -0.86 0.03 2ND YEAR -1.51 -1.4 3RD YEAR -1.35 -0.91 AVERAGE -0.45 -0.76 0.2 0-0.2-0.4 1ST YEAR-0.6 2ND YEAR-0.8 3RD YEAR -1 Average Sharp Ratio-1.2-1.4-1.6 SBI ICICI PRU Sharpe Ratio, which measures risk free return from the fund, is favorable in case of ICICI Prudential Fund when compared to SBI.Higher the Sharpe Ratio indicates higher safety. So depending on Sharpe Ratio SBI is safer than SBI. Standard Deviation of SBI is lower than ICICI Prudential. It indicates lower risk profile of SBI when compared to ICICI Prudential. 66
  67. 67. Beta, which measures impact of market condition on funds, is lower in case of ICICI Prudential when compared to SBI. It indicates lower risk profile of ICICI Prudential than SBI. TREYNOR INDEX RANKING ICICI SBI PRU 1ST YEAR -2.64 0.09 2ND YEAR -4.66 -4.99 3RD YEAR -4.15 -3.23 AVERAGE -3.82 -2.7110-1 1ST YEAR-2 2ND YEAR 3RD YEAR-3 Average Treynor Ratio-4-5 SBI ICICI PRU A measure of a portfolios excess return per unit of risk, equal to the portfolios rate of return minus the risk-free rate of return, divided by the portfolios beta. ICICI Prudential Mutual Fund is having a higher Treynor ratio of -2.71% as compared to SBI Mutual Fund which is having a Treynor Ratio of -3.82%. A high Treynor Index indicates that were getting a good deal in terms of the return-to-risk ratio. BALANCED FUND ANALYSIS 67
  68. 68. 1ST 2ND 3RDABSOLUTE RETURNS YEAR YEAR YEAR200 NIFTY 9.715344 85.20646 125.8813180 SBI BALANCED FUND 25.96 91.85 172.5160 PRU BALANCED ICICI FUND 23.16 77.69 148.41140120 NIFTY100 SBI 80 ICICI PRU 60 40 20 0 1ST YEAR 2ND YEAR 3RD YEAR The above Diagram exhibits the absolute return of SBI and ICICI Prudential BalanceFunds. Both the funds are fluctuating. But in many a point of time returns from SBIBalance Fund are higher than ICICI Prudential Balance FundBalance funds are known for their consistent return and are suitable for the investors whocan bear moderate risk and investors seeking consistent return. ICICI SBI PRU BETA 0.003 -0.0003 1ST YEAR 0.05 -0.004 RISK PREMIUM 2ND YEAR 0.23 -0.009 68
  69. 69. 3RD YEAR 0.09 -0.008 ICICI SHARPE RATIO SBI PRU 1ST YEAR 0.91 1.01 2ND YEAR 4.23 2.42 3RD YEAR 1.72 2.13 AVG 2.29 1.854.5 43.5 3 1ST YEAR2.5 2ND YEAR 2 3RD YEAR1.5 1 Average Sharp Ratio0.5 0 SBI ICICI PRU Sharpe Ratio, which measures risk free return from the fund, is favorable in case of SBI Mutual Fund when compared to ICICI Prudential Fund. Higher the Sharpe Ratio indicates higher safety. So depending on Sharpe Ratio SBI Magnum Balanced Fund is safer than ICICI Prudential Balanced Fund. Standard Deviation of SBI Mutual Fund is higher than ICICI Prudential . It indicates lower risk profile of ICICI Prudential Fund when compared to SBI Mutual Fund Beta, which measures impact of market condition on funds on funds, is higher in case of SBI Mutual Fund when compared to ICICI Prudential. It indicates lower risk profile of ICICI Prudential Balanced Fund than SBI Magnum Balanced Fund. 69
  70. 70. TREYNOR INDEX RANKING ICICI SBI PRU 1ST YEAR 17.96 15.16 2ND YEAR 83.85 36.27 3RD YEAR 34.04 31.8 AVERAGE 34.95 27.7490807060 1ST YEAR50 2ND YEAR40 3RD YEAR3020 Average Treynor Ratio10 0 SBI ICICI PRU A measure of a portfolios excess return per unit of risk, equal to the portfolios rate of return minus the risk-free rate of return, divided by the portfolios beta. SBI Balanced Fund is having a higher Treynor ratio of 34.95%. As Compared to ICICI Prudential Balanced Fund having a Treynor Ratio of 27.74%. A high Treynor Index indicates that were getting a good deal in terms of the return-to-risk ratio. EQUITY FUND ANALYSIS 1.ABSOLUTE RETURNS 1ST 2ND 3RD AVERAGE RETURN YEAR YEAR YEAR NIFTY 9.72 85.21 125.88 SBI MAGNUM GLOBAL FUND 17.93 130.42 320.76 ICICI PRUDENTIAL DYNAMIC 43.56 148.63 319.79 70
  71. 71. ABSOLUTE RETURNS 400.00 RETURNS 300.00 NIFTY 200.00 SBI MAGNUM GLOBAL 100.00 ICICI PRU DYNAMIC 0.00 1 2 3 YEARThe above diagram exhibits the absolute return from Equity Funds for different point oftime. It is clear from the diagram that the returns from Equity Funds are very fluctuating.Only moderate risk takers invest in this fund. ICICI Prudential Magnum Global Fundcomparatively has given more return compared to SBI Magnum Global Equity Fund. ICICI SBI PRU BETA 0.08 0.01 1ST YEAR 0.81 0.37 2ND RISK PREMIUM YEAR 7.16 0.68 3RD YEAR 6.33 0.63 71