A study on investors’ awareness level on mutual fund & promotion of sip plan

8,967 views

Published on

A study on investors’ awareness level on mutual fund & promotion of sip plan

Published in: Business

A study on investors’ awareness level on mutual fund & promotion of sip plan

  1. 1. “A STUDY ON INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN” DONE FOR Project report submitted in partial fulfillment of the requirement of Pondicherry University for the award of the degree of MASTER OF BUSINESS ADMINISTRATION Submitted By BRIJESH PULAIYA (Reg.No. 1095514) Under the Guidance ofDr. B.CHARUMATHI Mr. ALOK KUMAR SINGHReader, Relationship Manager,Department of Management Studies, Reliance Mutual Fund,Pondicherry University. Gwalior (M.P.) DEPARTMENT OF MANAGEMENT STUDIES SCHOOLS OF MANAGEMENT PONDICHERRY UNIVERSITY PUDUCHERRY 605014 MAY-JUNE 2010
  2. 2. DEPARTMENT OF MANAGEMENT STUDIES SCHOOL OF MANAGEMENT PONDICHERRY UNIVERSITY PUDUCHERRY-605014 CERTIFICATEThis is to certify that this project entitled “A STUDY ON INVESTORS’AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN”done for Reliance Mutual Fund is submitted by Brijesh Pulaiya, MBA II year (Reg. No.1095514) to the Department of Management Studies, School of Management,Pondicherry University in partial fulfillment of the degree requirement for the award ofthe degree Master of Business Administration and is certified to be an original andbonafide work.Dr. R.P.RAYA Dr. B.CHARUMATHIProfessor & Head of the Department, Reader,Department of Management Studies, Department of Management Studies,Pondicherry University. Pondicherry University.Place: PuducherryDate:
  3. 3. DECLERATIONI, Brijesh Pulaiya, hereby declare that this Project Report entitled “ A STUDY ONINVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTIONOF SIP PLAN” in Reliance Mutual Fund, Gwalior (M.P.) submitted in thepartial fulfillment of the requirement of Master of Business Administration (MBA)of Department of Management Studies-School of Management, PondicherryUniversity, Puducherry-605014 is based on primary & secondary data found byme in various departments, books, magazines and websites & Collected by me inunder guidance of Mr. Alok Kumar Singh , Customer Relationship Manager,Reliance Mutual Fund, Gwalior (M.P.).Date: BRIJESH PULAIYA MBA (Second Year) Reg. No. 1095514 DMS, PU.
  4. 4. ACKNOWLEDGEMENTI am indebted to the all powerful Almighty God for all the blessings he showered on meand for being with me throughout the study.I place on record my sincere gratitude and appreciation to my project guideDr.B.CHARUMATHI, Reader, Department of Management Studies, for her kind co-operation and guidance which enabled me to complete this project.I express my sincere thanks to Dr.R.P.RAYA, HOD, Department of ManagementStudies, School of Management, Pondicherry University, who provided me anopportunity to do this project.I am deeply obliged to Mr. ALOK KUMAR SINGH, Customer Relationship Manager,Reliance Mutual Fund, Gwalior (M.P.) for taking the role as my external guide andguiding and supporting continuously in shaping my project, correcting errors, clearingdoubts throughout the project.I would also like to extend my thanks to other members for their support especiallyMr. VAIBHAV DESHPANDEY, Branch Manager, Reliance Mutual Fund, Gwalior(M.P.) and entire Reliance Mutual Fund Sales Team and Other Private Banks’ SalesTeam for their constant guidance and support.Lastly, I would like to express my gratefulness to the parent’s for seeing me through itall. BRIJESH PULAIYA (Signature of the Candidate) Page | 1
  5. 5. EXECUTIVE SUMMARYIn few years Mutual Fund has emerged as a tool for ensuring one’s financial well-being. Mutual Funds have not only contributed to the India’s growth story but havealso helped families tap into the success of Indian Industry. As information andawareness is rising more and more people are enjoying the benefits of investing inmutual funds. The main reason the number of retail mutual fund investors remainssmall is that nine in ten people with income in India do not know the benefits ofmutual funds. But once, people are aware of mutual fund investment opportunitiesand benefits, the number of people who decide to invest in mutual funds increase toas many as one in five people. The trick for converting a person with no knowledgeof mutual funds to a new mutual fund customer is to understand which of thepotential investors are more likely to buy mutual funds and to use the rightarguments in the sales process that customers will accept as important and relevantto their decision.This Project gave me a great learning experience and at the same time it gave meenough scope to implement my analytical ability. The analysis and advicepresented in this Project Report is based on market research on the saving andinvestment practices of the investors and preferences of the investors for investmentin Mutual Funds. This Report will help to know about the investors’ Preferences inMutual Fund means Are they prefer any particular Asset Management Company(AMC), Which type of Product they prefer, Which Option (Growth or Dividend)they prefer or Which Investment Strategy they follow (Systematic Investment Planor One time Plan). This Project as a whole can be divided into two parts.The first part gives an insight about Mutual Fund and its various aspects, theCompany Profile, Objectives of the study, Research Methodology. One can have abrief knowledge about Mutual Fund and its basics through the Project.The second part of the Project consists of data and its analysis collected throughsurvey done on 100 people. For the collection of Primary data I made a Page | 2
  6. 6. questionnaire and surveyed of 100 people. I also taken interview of many Peoplethose who were coming at the Reliance Mutual Fund Gwalior (M.P.) Branch whereI done my Project. I visited other AMCs and several Private and GovernmentBanks in Gwalior (M.P.) to get some knowledge related to my topic. I studied aboutthe products and strategies of other AMCs in Gwalior (M.P.) to know why peopleprefer to invest in those AMCs. This Project covers the topic “A STUDY ONINVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTIONOF SIP PLAN”. The data collected has been well organized and presented. I hopethe research findings and conclusion will be of use. Page | 3
  7. 7. TABLE OF CONTENTSChapter DESCRIPTION Page No. ACKNOWLEDGEMENT 1 EXECUTIVE SUMMARY 2 LIST OF TABLES 5 LIST OF CHARTS 7 1 INTRODUCTION 8 1.1 Introduction to the topic 9 1.2 Need for the study 9 1.3 Statement of the problem 11 1.4 Objectives of the study 11 1.5 Research methodology 12 1.6 Limitations of the study 12 1.7 Chapterization 13 2 PROFILE OF THE MUTUAL FUND INDUSTRY AND THE 14 COMPANY 2.1 Profile of the mutual fund industry 15 2.2 Profile of the Reliance Mutual Fund 28 3 FUNCTIONING OF MUTUAL FUND 36 4 ANALYSIS & INTERPRETATION 82 5 SUMMARY OF FINDINGS, SUGGESTIONS & 108 RECOMMENDATIONS BIBLIOGRAPHY 112 QUESTIONNAIRE 114 Page | 4
  8. 8. LIST OF TABLESTable Title Page No. No. 2.1 Total net asset in U.S. Dollars 17 2.2 Phase II. Entry of Public Sector Funds 21 2.3 Phase IV. Growth and SEBI Regulation 23 2.4 Latest AUM & Ranking for mutual funds 24 2.5 Reliance Capital Ltd financials 29 2.6 Reliance Capital Asset Management Ltd. Schemes summary 30 3.1 Snapshot of mutual fund schemes 53 3.2 Tax rules for mutual fund investors 60 3.3 R-squared 68 3.4 SIP returns 76 3.5 Investor type 1 77 3.6 Investor type 2 78 3.7 Investor type 3 79 3.8 Compare percentage change in returns of Reliance Growth Fund & 80 BSE-Sensex 4.1 Profile of the respondents 83 4.2 Primary objective for investment 84 4.3 Knowledge about mutual fund 85 4.4 Relationship between mutual fund & Share market 86 4.5 Have you ever invested in mutual funds 87 4.6 Reason not to invest in mutual funds 88 4.7 Which mutual fund company 89 4.8 Reason for selecting Reliance mutual fund 91 4.9 Reason for investments in mutual fund 924.10 Rank primary sources of your knowledge about Mutual Funds 934.11 Prioritize reason for investment 944.12 Rank the various investments that you would invest 954.13 Rank factors affect your decision for investment in Mutual Fund 964.14 What kind of investment schemes you prefer in Mutual Fund 974.15 What is your Primary objective? *Age Cross-tab 98 Page | 5
  9. 9. 4.16 What is your primary objective for your investment? * Occupation 98 Cross-tab4.17 What is your primary objective for your investment? * Income level 99 Cross-tab4.18 What is your primary objective for your investment? * Marital Status 100 Cross-tab4.19 Do you know about the Mutual Funds? * Age Cross-tab 1004.20 Do you know about the Mutual Funds? * Occupation Cross-tab 1014.21 Do you know about the Mutual Funds? * Income level Cross-tab 1014.22 Have you ever invested in mutual fund? * Age Cross-tab 1024.23 Have you ever invested in mutual fund? * Occupation Cross-tab 1024.24 Have you ever invested in mutual fund? * Income level Cross-tab 1034.25 If no: What is/are the reason? * Age Cross-tab 1034.26 If no: What is/are the reason? * Occupation Cross-tab 1044.27 If no: What is/are the reason? * Income level Cross-tab 1044.28 If invested in Reliance Mutual Fund; what are the reasons? 1054.29 If Reliance Mutual Fund; what are the reasons?* Income level Cross 105 tab4.30 Why do you prefer investment in mutual fund to other investment 106 avenue? * Occupation Cross-tab4.31 What kind of investment schemes you prefer in Mutual Fund? * 107 Occupation Cross-tab Page | 6
  10. 10. LIST OF CHARTSChart Title Page No. No. 2.1 Asset under Management till 30 April, 2010 20 3.1 Mutual fund operation flow chart 38 3.2 Mutual fund structure 40 3.3 Classification of mutual fund 42 3.4 Risk V/s Returns 64 3.5 Pass through certificate 73 3.6 SIP benefits chart 81 4.1 Primary objective for investment 84 4.2 Knowledge about mutual fund 85 4.3 Relationship between mutual fund & Share market 86 4.4 Have you ever invested in mutual funds? 87 4.5 Reason not to invest in mutual funds 88 4.6 Which mutual fund company 89 4.7 Reason for selecting Reliance mutual fund 91 4.8 Reason for investments in mutual fund 92 4.9 What kind of investment schemes you prefer in Mutual Fund 97 Page | 7
  11. 11. CHAPTER 1INTRODUCTION Page | 8
  12. 12. INTRODUCTION TO THE TOPIC In the last decade we have seen enormous growth in the size of mutual fund industry in India. Especially the private sector has shown tremendous growth. With unmatched advances on the information technology, increased role of the institutional investors in the stock market and the SEBI still in its infancy, the mutual fund industry players gained unparalleled and unchecked power. To ensure the safety of investment of small investors against whims and fancies of professional fund managers have become the need of the hour. WHAT IS INVESTMENT? Trade off between risk and reward while aiming for incremental gain and preservation of the invested amount (principal). In contrast, speculation aims at high gain or heavy loss, and gambling at out of proportion gain or total loss. Two main classes of investment are  Fixed income investment such as bonds, fixed deposits, preference shares  Variable income investment such as business ownership (equities), property ownership. In economics, investment means creation of capital or goods capable of producing other goods or services. Expenditure on education and health is recognized as an investment inhuman capital, and research and development in intellectual capital. Return on investment (ROI) is a key measure of firm’s performance. 1.2 NEED FOR THE STUDY 100% growth in the last 6 years. Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 37 mutual funds which are much less than US having more than 800. There is a big scope for expansion. Page | 9
  13. 13.  B and C class cities are growing rapidly. Today most of the mutual funds are concentrating on the A class cities. Soon they will find scope in the growing cities. Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products. SEBI allowing the MFs to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice. The Indian mutual funds business is expected to grow significantly in the coming years due to a high degree of transparency and disclosure standards comparable to anywhere in the world, though there are many challenges that need to be addressed to increase net mobilization of funds in this sector, as said by Mr. A.P. Kurian, Chairman of the Association of Mutual Funds of India (AMFI). Indian Mutual fund industry exhibited 200% growth in the last 10 yrs from Rs.470 billion to Rs1400 billion in terms of assets under management (AUM). The Mutual Funds industry is expected to jump sharply from its present share of 6% of GDP to 40% in the next 10yrs provided the country’s growth rate is consistently above 6%. The growing investor preference for mutual funds has resulted in the assets under management of mutual funds growing 8-folds in last 5 yrs. Number of foreign AMCs are in the queue to enter the Indian markets like US based Fidelity Investments, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channeling these savings in mutual funds sector is required. There is a big scope for expansion as we have 37 mutual funds which are much less than US having more than 800. Page | 10
  14. 14. 1.3 STATEMENT OF THE PROBLEMOne of the lucrative investment avenues available for investors is mutual fund nowadays.The problem at hand was to study and measure the awareness level of people regardingmutual funds in the city. To find out Investors’ awareness about Mutual funds andPromotion of SIP plan. The study includes analysis of the investors on the basis of theirinvestment objectives, age etc. It also examined the position of MF among investmentavenues available for the investors and the past performances of various schemes fromthe active AMCs in Indian market on the basis of NAV & time. So that it can help theadvisors as well as investors to choose the correct portfolio.1.4 OBJECTIVES OF THE STUDYThe major objective of the study was to determine the awareness about benefits ofMutual funds and to impart information, knowledge and the functioning of mutual fundsamong financial advisors.Following are the specific objectives:  To know the awareness of mutual funds among Indian investors.  To evaluate the position of Mutual Fund among investment avenues available for the investors in Indian market.  To promote the SIP Scheme (Systematic Investment Plan).  To come up with recommendations for investors and mutual fund companies in India based on the above study. Page | 11
  15. 15. 1.5 RESEARCH METHODOLOGYThis is a descriptive study. Two types of data were taken into consideration i.e.Secondary data & primary data. My major emphasis was on gathering the primary data.The secondary data has been used to make things more clear.(i) Primary Data: Direct collection of data from the source of information,technology including personal interviewing, survey etc.(ii) Secondary Data: Indirect collection of data from sources containing past orrecent past information like Bank’s Brochures, Annual publications, Books, Fact sheetsof mutual funds, Newspaper & Magazines etc. The secondary data was collected toknow the theoretical aspect of the mutual funds and also for the performance evaluationof various mutual fund schemes.A questionnaire was constructed for survey. Questionnaire consisting of a set ofquestions made to be filled by various respondents. My area of the study was Gwalior(M.P.). The sample consisted of 100 respondents. The sample was drawn from walk incustomers of Reliance Mutual Fund, Some private & government banks and offices,College students. The selection of the respondents was done on the basis of convenientsampling. The responses were taken through personal interviews, telephonic interview.The next step is to extract the pertinent findings from the collected data. I have tabulatedthe collected data & developed frequency distributions. Thus the whole data was groupedaspect wise and was presented in tabular form. Thus, cross-tabulations, frequencies &percentages were prepared to render impact of the study.1.6 LIMITATIONS OF THE STUDYEvery research is incomplete without its own limitations. In this research too there weresome limitations. They are: Page | 12
  16. 16.  Results are just an indication of the present scenario and may not be applicable in the future. As the study was conducted only in Gwalior (M.P.) only, so it can be said that the study was regionally biased. Since sampling was done under the simple random sampling method, where easily approachable respondents were picked up. So this may not represent the whole universe. Lack of time on the part of respondents for filling up the questionnaire. Respondents may fill the partially correct information in questionnaire. 1.7 CHAPTERIZATION Chapter 1 deals with the crisp introduction of topic. Along with this it deals with the need for the study, statement of the study, objective of the study, period of the study, research methodology used and limitations of the study. Chapter 2 portrays the profiles of the mutual fund industry with history and Reliance Mutual Fund. Chapter 3 contains a detailed study of functioning of Mutual Fund and regulatory authorities, tax planning for investors, SIP promotion and benefits of its. Chapter 4 gives the analysis and interpretation of the data. Chapter 5 suggests some suggestions and recommendation based on the study done. Page | 13
  17. 17. CHAPTER 2 Profile ofMutual fund industry & company Page | 14
  18. 18. PROFILE OF THE MUTUAL FUND INDUSTRY2.1.1. BEGINNING OF THE MUTUAL FUND INDUSTRYHistorians are uncertain of the origins of investment funds; some cite the closed-endinvestment companies launched in the Netherlands in 1822 by King William I as the firstmutual funds, while others point to a Dutch merchant named Adrian van Ketwich whoseinvestment trust created in 1774 may have given the king the idea. Van Ketwich probablytheorized that diversification would increase the appeal of investments to smallerinvestors with minimal capital. The name of van Ketwichs fund, EENDRAGT MAAKTMAGT, translates to "unity creates strength". The next wave of near-mutual fundsincluded an investment trust launched in Switzerland in 1849, followed by similarvehicles which is followed by many kind of companies created in Scotland in the 1880s.The idea of pooling resources and spreading risk using closed-end investments soon tookroot in Great Britain and France, making its way to the United States in the 1890s. TheBoston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S.The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was animportant step in the evolution toward what we know as the modern mutual fund. TheAlexander Fund featured semi-annual issues and allowed investors to make withdrawalson demand.2.1.2. THE ARRIVAL OF THE MODERN FUNDThe creation of the Massachusetts Investors Trust in Boston, Massachusetts, heralded thearrival of the modern mutual fund in 1924. The fund went public in 1928, eventuallyspawning the mutual fund firm known today as MFS Investment Management. StateStreet Investors Trust was the custodian of the Massachusetts Investors Trust. Later,State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstalland Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Page | 15
  19. 19. Clark, an outfit that would launch the first no-load fund in 1928. A momentous year inthe history of the mutual fund, 1928 also saw the launch of the Wellington Fund, whichwas the first mutual fund to include stocks and bonds, as opposed to direct merchant bankstyle of investments in business and trade.2.1.3. REGULATIONS AND EXPANSIONBy 1929, there were 19 open-end mutual funds competing with nearly 700 closed-endfunds. With the stock market crash of 1929, the dynamic began to change as highly-leveraged closed-end funds were wiped out and small open-end funds managed tosurvive. Government regulators also began to take notice of the fledgling mutual fundindustry. The creation of the Securities and Exchange Commission (SEC), the passage ofthe Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 putin place safeguards to protect investors: mutual funds were required to register with theSEC and to provide disclosure in the form of a prospectus. The Investment Company Actof 1940 put in place additional regulations that required more disclosures and sought tominimize grievance of investor of different categories conflicts of interest. The mutual fund industry continued to expand. At the beginning of the 1950s, thenumber of open-end funds topped 100. In 1954, the financial markets overcame their1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 newfunds over the course of the decade. The 1960s saw the rise of aggressive growth funds,with more than 100 new funds established and billions of dollars in new asset inflows. Hundreds of new funds were launched throughout the 1960s until the bear marketof 1969 cooled the public appetite for mutual funds. Money flowed out of mutual fundsas quickly as investors could redeem their shares, but the industrys growth later resumed. Page | 16
  20. 20. Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Security Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC. 2.1.4. Introduction of Mutual Fund Industry – Global Perspective The U.S. mutual fund market, with $9.6 trillion in assets under management as of year- end 2008, remained the largest in the world, accounting for 55 percent of the $19.0 trillion in mutual fund assets worldwide. Table 2.1 TOTAL NET ASSETS IN U.S. DOLLARS (Millions, end of period)COUNTRY 2005 2006 2007 2008 2009WORLD 17,771,027 21,823,455 26,150,936 18,917,499 22,882,716AMERICA 9 ,763,921 11,485,012 1 3,442,521 1 0,579,430 1 2,515,691EUROPE 6,002,261 7,803,906 8,934,864 6,231,116 7,545,531ASIA & 1,939,251 2,456,511 3,678,330 2,037,536 2,715,233PACIFICAustralia 700,068 864,254 1,192,992 841,133 1,198,838China 434,063 276,303 381,207Hong Kong 460,517 631,055 818,421India 40,546 58,219 108,582 62,805 130,284Japan 470,044 578,883 713,998 575,327 660,666 Page | 17
  21. 21. Korea 198,994 251,930 329,979 221,992 264,573New 10,332 12,892 14,924 10,612 17,657ZealandPakistan 2,164 4,956 1,985 2,224Philippines 1,449 1,544 2,090 1,263 1,488Taiwan 57,301 55,571 58,323 46,116 58,297AFRICA 65,594 78,026 95,221 69,417 106,261(SouthAfrica) Note: Components may not sum to total because of rounding. Source: National mutual fund associations; European Fund and Asset Management Association (EFAMA) provide data for all European countries except Russia. 1 Funds of funds are not included, except for France, Germany, Italy, and Luxembourg. Home-domiciled funds, except for Hong Kong, New Zealand and Trinidad & Tobago, which include home and foreign- domiciled funds. Mutual fund assets worldwide increased 2.3 percent to $22.88 trillion at the end of 2009. Net cash flow to all funds was $77 billion in the fourth quarter, marking the fifth consecutive quarter with positive net flows. Net inflows to long-term funds slowed to $283 billion in the fourth quarter of 2009, from $351 billion in the third quarter. Net outflows from money market funds also decelerated, with $206 billion of net outflows, from $283 billion in outflows in the previous quarter. For the year as a whole, net cash flows into all mutual funds worldwide were $275 billion, on par with the $280 billion of net inflows experienced in 2008. However, the composition of flows was considerably different. Long-term funds had net inflows of $912 billion in 2009, compared to net outflows of $610 billion in 2008. Money market funds had net outflows of $638 billion in 2009, compared to net inflows of $891 billion in 2008. The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the fourth quarter of 2009 contains statistics from 44 countries. Page | 18
  22. 22. 2.1.5 INDIAN MUTUAL FUND INDUSTRY- AN INSIGHTThe concept of mutual funds in India dates back to the year 1963. The era between 1963and 1987 marked the existence of only one mutual fund company in India with Rs. 67bnassets under management (AUM), by the end of its monopoly era, the Unit Trust of India(UTI). By the end of the 80s decade, few other mutual fund companies in India took theirposition in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund,Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund,Bank of India Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. Bythe end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sectorfunds started penetrating the fund families. In the same year the first Mutual FundRegulations came into existence with re-registering all mutual funds except UTI. Theregulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India whichhas now merged with Franklin Templeton. Just after ten years with private sector players’penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 37 mutual fundcompanies in India.2.1.6 AT THE BEGINNINGThe mutual fund industry in India started in 1963 with the formation of Unit Trustof India, at the initiative of the Government of India and Reserve Bank of India.Though the growth was slow, but it accelerated from the year 1987 when Non-UTIplayers entered into the Industry. In the past decade, Indian mutual fund industry had seen a dramaticimprovement, both qualities wise as well as quantity wise. In March 1987, the Page | 19
  23. 23. Asset under Management (AUM) was Rs.4564 crores. The private sector entry to the fund family raised the AUM to Rs. 47000 crores in March 1993 and till April 30, 2010; it has reached the height of Rs. 7, 19,133 crores. Asset Under Management (In Rs. Crores) 800000 719133 700000 600000 505152 417300 500000 400000 326388 300000 200000 79464 100000 47000 25 4564 0 1965 Phase I 1987 Phase 1993 Phase 2003 Phase 2007 2008 2009 30-Apr II III IV Asset Under Management (In Rs. Crores)Source: www.amfiindia.com The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. Phase I. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of Page | 20
  24. 24. different investors. It launched ULIP in 1971, six more schemes between 1981 and 1984,Childrens Gift Growth Fund and India Fund (Indias first offshore fund) in 1986, Mastershare (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes(offering assured returns) during 1990s. By the end of 1987, UTIs assets undermanagement grew ten times to Rs. 6700 crores.Phase II. Entry of Public Sector Funds - 1987-1993The Indian mutual fund industry witnessed a number of public sector players entering themarket in the year 1987. In November 1987, SBI Mutual Fund from the State Bank ofIndia became the first non-UTI mutual fund in India. SBI Mutual Fund was laterfollowed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bankof India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assetsunder management of the industry increased seven times to Rs. 47,004 crores. However,UTI remained to be the leader with about 80% market share.Table 2.2 Mobilization Amount Assets Under as % of Mobilized 1992-93 Management Gross (In Rs. (In Rs. crores) Domestic crores) Savings UTI 11,057 38,247 5.2% Public 1,964 8,757 0.9% Sector Total 13,021 47,004 6.1%Phase III. Emergence of Private Sector Funds - 1993-96The permission given to private sector funds including foreign fund managementcompanies (most of them entering through joint ventures with Indian promoters) to enterthe mutual fund industry in 1993, provided a wide range of choice to investors and more Page | 21
  25. 25. competition in the industry. Private funds introduced innovative products, investmenttechniques and investor-servicing technology. By 1994-95, about 11 private sector fundshad launched their schemes.Phase IV. Growth and SEBI Regulation - 1996-2004The mutual fund industry witnessed robust growth and stricter regulation from the SEBIafter the year 1996. The mobilization of funds and the number of players operating in theindustry reached new heights as investors started showing more interest in mutual funds.Investors interests were safeguarded by SEBI and the Government offered tax benefits tothe investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 wasintroduced by SEBI that set uniform standards for all mutual funds in India. The UnionBudget in 1999 exempted all dividend incomes in the hands of investors from incometax. Various Investor Awareness Programs were launched during this phase, both bySEBI and AMFI, with an objective to educate investors and make them informed aboutthe mutual fund industry. In February 2003, the UTI Act was repealed and UTI wasstripped of its Special legal status as a trust formed by an Act of Parliament. The primaryobjective behind this was to bring all mutual fund players on the same level.UTI was re-organized into two parts:1. The Specified Undertaking2. The UTI Mutual FundPresently Unit Trust of India operates under the name of UTI Mutual Fund and its pastschemes (like US-64, Assured Return Schemes) are being gradually wound up.However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was asignificant growth in mobilizations of funds from investors and assets under managementwhich is supported by the following data: Page | 22
  26. 26. Table 2.3 ASSETS UNDER MANAGEMENT (Rs. CRORES) PUBLIC PRIVATE AS ON UTI TOTAL SECTOR SECTOR 31- March- 53,320 8,292 6,860 68,472 99Phase V. Growth and Consolidation - 2004 OnwardsThe industry has also witnessed several mergers and acquisitions recently, examples ofwhich are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&CMutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, moreinternational mutual fund players have entered India like Fidelity, Franklin TempletonMutual Fund etc. There were 38 funds as at the end of April 2010. This is a continuingphase of growth of the industry through consolidation and entry of new international andprivate sector players.2.1.7 INDIAN MUTUAL FUND INDUSTRY- TODAYThirteen out of 37 fund houses witnesses a growth in average AUM in January, 2010,with Reliance Mutual Fund continuing the largest fund house by asset at Rs. 1.17 trillion.HDFC was at the second spot at Rs. 948 billion, followed by ICICI Prudential MutualFund at Rs. 784 billion. UTI Mutual Fund and Birla Sun Life Mutual Fund followed withan average AUM of Rs. 745 billion and Rs. 626 billion, respectively. The share of top 5MF’s in the industry’s asset was at 56% while that of top 10 funds’ asset was close to80% in January 2010. As per AMFI data, UTI Mutual Fund had the highest number of investor folios at10 million as of December 2009. The total number of investor folios for the mutual fundindustry stood at 48 million as of December 2009. Page | 23
  27. 27. The average AUM data analyzed for equity oriented schemes showed that Reliance Growth Fund held the highest corpus of around Rs. 70 billion, followed by HDFC top 200 fund, Reliance diversified Power Sector fund, HDFC equity fund and SBI magnum Tax Gain Scheme1993 with an average AUM Rs. 61billion, Rs.58 billion, Rs. 55 billion, Rs. 54 billion, respectively. Table 2.4Latest Average Asset Under Management for all Mutual Fund houses & Rankingaccording to the AAUMMUTUAL FUND NO. OF ASSET UNDER MANAGEMENT (AMOUNT IN RS. CRORE)NAME SCHEMES* AS ON CORPUS AS ON CORPUS NET INC/DEC IN CORPUSAIG GLOBAL 44 MAY 31, 1,030.86 APR 30, 1,093.24 -62.378INVESTMENT 2010 2010GROUP MUTUALFUNDAXIS MUTUAL 58 MAY 31, 4,715.89 APR 30, 3,477.98 1237.912FUND 2010 2010BARODA PIONEER 31 MAY 31, 4,759.53 APR 30, 4,362.69 396.845MUTUAL FUND 2010 2010BENCHMARK 14 MAY 31, 2,263.15 APR 30, 1,930.53 332.628MUTUAL FUND 2010 2010BHARTI AXA 45 MAY 31, 724.17 APR 30, 595.35 128.819MUTUAL FUND 2010 2010BIRLA SUN LIFE 219 MAY 31, 73,828.03 APR 30, 69,508.69 4319.346MUTUAL FUND 2010 2010(RANK 4)CANARA ROBECO 87 MAY 31, 10,661.95 APR 30, 10,050.84 611.109MUTUAL FUND 2010 2010 Page | 24
  28. 28. DEUTSCHE 116 MAY 31, 10,102.46 APR 30, 10,111.61 -9.149MUTUAL FUND 2010 2010DSP BLACKROCK 96 MAY 31, 21,884.95 APR 30, 21,948.76 -63.814MUTUAL FUND 2010 2010EDELWEISS 40 MAY 31, 261.09 APR 30, 216.16 44.932MUTUAL FUND 2010 2010ESCORTS MUTUAL 30 MAY 31, 198.23 APR 30, 205.46 -7.237FUND 2010 2010FIDELITY MUTUAL 61 MAY 31, 7,457.84 APR 30, 7,684.70 -226.865FUND 2010 2010FORTIS MUTUAL 472 MAY 31, 7,537.44 APR 30, 6,902.15 635.297FUND 2010 2010FRANKLIN 173 MAY 31, 35,774.79 APR 30, 34,107.00 1667.789TEMPLETON 2010 2010MUTUAL FUNDHDFC MUTUAL 162 MAY 31, 101,863.31 APR 30, 94,702.79 7160.526FUND 2010 2010(RANK 2)HSBC MUTUAL 88 MAY 31, 5,851.11 APR 30, 6,005.03 -153.926FUND 2010 2010ICICI PRUDENTIAL 317 MAY 31, 87,709.81 APR 30, 83,035.51 4674.3MUTUAL FUND 2010 2010(RANK 3)IDFC MUTUAL 170 MAY 31, 26,614.77 APR 30, 25,177.28 1437.488FUND 2010 2010ING MUTUAL 92 MAY 31, 1,645.42 APR 30, 1,652.84 -7.423FUND 2010 2010JM FINANCIAL 90 MAY 31, 8,950.43 APR 30, 8,568.80 381.625MUTUAL FUND 2010 2010 Page | 25
  29. 29. JPMORGAN 31 MAY 31, 3,784.98 APR 30, 4,114.75 -329.768MUTUAL FUND 2010 2010KOTAK 119 MAY 31, 40,657.52 APR 30, 33,743.49 6914.032MAHINDRA 2010 2010MUTUAL FUNDL&T MUTUAL 61 MAY 31, 5,170.69 APR 30, 4,125.69 1045.009FUND 2010 2010LIC MUTUAL FUND 62 MAY 31, 38,962.82 APR 30, 40,507.21 -1544.388 2010 2010MIRAE ASSET 37 MAY 31, 236.50 APR 30, 245.06 -8.562MUTUAL FUND 2010 2010MORGAN 11 MAY 31, 2,253.67 APR 30, 2,305.89 -52.226STANLEY MUTUAL 2010 2010FUNDPEERLESS 22 MAY 31, 823.38 APR 30, 496.26 327.119MUTUAL FUND 2010 2010PRINCIPAL 85 MAY 31, 7,647.76 APR 30, 7,470.15 177.605MUTUAL FUND 2010 2010QUANTUM 11 MAY 31, 101.72 APR 30, 101.34 0.381MUTUAL FUND 2010 2010RELIANCE 185 MAY 31, 118,973.14 APR 30, 111,819.33 7153.812MUTUAL FUND 2010 2010(RANK 1)RELIGARE 87 MAY 31, 15,464.10 APR 30, 13,829.25 1634.85MUTUAL FUND 2010 2010SAHARA MUTUAL 44 MAY 31, 765.23 APR 30, 804.57 -39.335FUND 2010 2010SBI MUTUAL FUND 116 MAY 31, 36,235.76 APR 30, 39,826.35 -3590.585 2010 2010 Page | 26
  30. 30. SHINSEI MUTUAL 11 MAY 31, 323.71 APR 30, 222.28 101.433FUND 2010 2010SUNDARAM BNP 143 MAY 31, 13,976.11 APR 30, 14,361.18 -385.076PARIBAS MUTUAL 2010 2010FUNDTATA MUTUAL 168 MAY 31, 22,673.43 APR 30, 22,051.27 622.154FUND 2010 2010TAURUS MUTUAL 47 MAY 31, 3,056.16 APR 30, 2,347.23 708.928FUND 2010 2010UTI MUTUAL FUND 203 MAY 31, 78,617.15 APR 30, 79,456.70 -839.544 2010 2010(RANK 5) * indicates currently in operation Page | 27
  31. 31. 2.2 PROFILE OF THE RELIANCE MUTUAL FUND2.2.1 INTRODUCTION:The Reliance group - one of Indias largest business houses with revenues of Rs. 990billion ($22.6 billion) that is equal to 3.5 percent of the countrys gross domestic productwas split into two. The group - which claims to contribute nearly 10 per cent of the countrys indirecttax revenues and over six percent of Indias exports - was divided between MukeshAmbani and his younger brother Anil on June 18, 2005. Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, withAverage Assets under Management (AAUM) of Rs. 1, 18,973 Crores and aninvestor count of over 74 Lakh folios. (AAUM and investor count as of May 2010). Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, isone of the fastest growing mutual funds in the country. RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in159 cities across the country. Reliance Mutual Fund constantly endeavors to launchinnovative products and customer service initiatives to increase value to investors."Reliance Mutual Fund schemes are managed by Reliance Capital Asset ManagementLimited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-upcapital of RCAM, the balance paid up capital being held by minority shareholders."2.2.2 SponsorReliance Capital LimitedReliance Mutual Fund schemes are managed by Reliance Capital Asset ManagementLimited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-upcapital of RCAM, the balance paid up capital being held by minority shareholders.Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL). Thepromoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited is a NonBanking Finance Company. Reliance Capital Limited is one of the India’s leading and Page | 28
  32. 32. fastest growing financial services companies, and ranks among the top three privatesector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, life andnon-life insurance, private equity and proprietary investments, stock broking and otheractivities in the financial services sector. The net worth of RCL is Rs. 6086 crores as onMarch 31, 2008. Given below is a summary of RCL’s financials:Table 2.5 Particulars 2007-08 2006-07 2005-06 (Rs. in crores)Total Income 2079.79 883.86 652.02Profit Before Tax 1171.45 733.18 550.61Profit After Tax 1025.45 646.18 537.61Reserves & Surplus 5779.06 4915.07 3849.58Net Worth 5927.50 5161.23 4122.46Earnings per 41.75 28.39 29.74Share (Rs.) (Basic + (Basic + (Basic + Diluted) Diluted) Diluted)Dividend (%) 55% 35% 30%Paid up Equity 246.16 246.16 223.40CapitalReliance Capital Ltd. has contributed Rupees One Lac as the initial contribution to thecorpus for the setting up of the Mutual Fund. Reliance Capital Ltd. is responsible fordischarging its functions and responsibilities towards the Fund in accordance with theSecurities and Exchange Board of India (SEBI) Regulations.2.2.3 The Asset Management CompanyReliance Capital Asset Management Ltd.Reliance Capital Asset Management Ltd. (RCAM) is an unlisted Public LimitedCompany incorporated under the Companies Act, 1956 on February 24, 1995. Page | 29
  33. 33. Vision Statement:“To be a globally respected wealth creator, with an emphasis on customer care and aculture of good corporate governance”.Mission Statement:“To create and nurture a world-class, high performance environment aimed at delightingtheir customers”.Pursuant to this IMA, RCAM is authorized to act as Investment Manager of the MutualFund. The net worth of the Asset Management Company based on audited accounts as onMarch 31, 2009 is Rs. 841.32 Crore. Table 2.6 No. of schemes 57 No. of schemes including 185 options Equity Schemes 60 Debt Schemes 100 Short term debt Schemes 15 Equity & Debt 2 Money Market 0 Gilt Fund 6Corpus under management Rs. 109485.69 crores as on May 31, 2010 Page | 30
  34. 34. 2.2.4 MANAGEMENT TEAM 1. Sundeep Sikka (CEO), 2. Madhusudan Kela (Hd-Equity), 3. Rajesh Derhgawen (Hd-HRD), 4. Himanshu Vyapak (Sales & Dist), 5. Milind Nesarikar (IRO), 6. Suresh T Viswanathan (Compliance), 7. Muneesh Sud (Legal) 2.2.5 FUND MANAGERS 1. Amit Tripathy, 2. Hiren Chandaria , 3. Krishan Daga , 4. Omprakash Kuckien , 5. Sailesh Raj Bhan , 6. Sunil Singhania 2.2.6 INVESTMENT OBJECTIVES OF THE SCHEMES Reliance Monthly Income Plan aims to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital. Reliance Income Fund aims to generate optimal returns consistent with moderate levels of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Medium Term Fund aims to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital. Page | 31
  35. 35.  Reliance Liquid Fund aims to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Liquidity Fund aims to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments Reliance Short Term Fund aims to generate stable returns for investors with a short term investment horizon by investing in fixed income securities of a short term maturity. Reliance Gilt Securities Fund aims to generate optimal credit risk free returns by investing in a portfolio of securities issued and guaranteed by the Central Government and State Governments Reliance Floating Rate Fund aims to generate regular income through investment in a portfolio comprising substantially of Floating Rate Debt Securities (including floating rate securitized debt and Money Market Instruments and Fixed Rate Debt Instruments swapped for floating rate returns). Reliance Regular Savings Fund Debt Option: The primary investment objective of this plan is to generate optimal returns consistent with moderate level of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly investments shall predominantly be made in Debt & Money Market Instruments. Reliance Regular Savings Fund Equity Option: The primary investment objective is to seek capital appreciation and or consistent returns by actively investing in equity / equity related securities. Reliance Regular Savings Fund Hybrid Option: The primary investment objective is to generate consistent return by investing a major portion in debt & money market securities and a small portion in equity & equity related instruments. Reliance Growth Fund aims to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach. Reliance Vision Fund aims to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach. Page | 32
  36. 36.  Reliance Equity Opportunities Fund aims to generate capital appreciation & provide long term growth opportunities by investing in a portfolio constituted of equity securities & equity related securities Reliance Banking Fund aims to generate continuous returns by actively investing in equity / equity related or fixed income securities of banks. Reliance Diversified Power Sector Fund seek to generate consistent returns by investing in equity / equity related or fixed income securities of Power and other associated companies Reliance Pharma Fund aims generate consistent returns by investing in equity / equity related or fixed income securities of Pharma and other associated companies. Reliance Media & Entertainment Fund to generate consistent returns by investing in equity / equity related or fixed income securities of media & entertainment and other associated companies. Reliance Index Fund-Sensex Plan aims to replicate the composition of the Sensex, with a view to endeavor to generate returns, which could approximately be the same as that of Sensex. Reliance Index Fund-Nifty Plan aims to replicate the composition of the Nifty, with a view to endeavor to generate returns, which could approximately be the same as that of Nifty. Reliance NRI Equity Fund aims to generate optimal returns by investing in equity and equity related instruments primarily drawn from the Companies in the BSE 200 Index. Reliance Equity Fund: The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities of top 100 companies by market capitalization & of companies which are available in the derivatives segment from time to time and the secondary objective is to generate consistent returns by investing in debt and money market securities. Page | 33
  37. 37. 2.2.7 CUSTODIAN Deutsche Bank, AG Deutsche Bank AG, the Custodian shall, inter alia: Provide post-trading and custodial services to the Mutual Fund. Keep Securities and other instruments belonging to the Scheme in safe custody. Ensure smooth inflow/outflow of securities and such other instruments as and when necessary, in the best interests of the unit holders. Ensure that the benefits due to the holdings of the Mutual Fund are recovered and Be responsible for loss of or damage to the securities due to negligence on its part on the part of its approved agents. 2.2.8 REGISTRAR M/s. Karvy Computershare Pvt. Limited The Registrar is responsible for carrying out diligently the functions of a Registrar and Transfer Agent and will be paid fees as set out in the agreement entered into with it and as per any modification made thereof from time to time. 2.2.9 TRUSTEE Reliance Capital Trustee Co. Limited Reliance Capital Trustee Co. Limited (RCTC), a company incorporated under the Companies Act, 1956, has been appointed as the Trustee to the Fund vide the Trust Deed dated April 25, 1995 executed between the Sponsor and the Trustee. Page | 34
  38. 38. 2.2.10 BANKERS TO THE SCHEMES OF RELIANCE CAPITAL ASSETMANAGEMENT ABN AMRO Bank Axis Bank Citibank N. A. Deutsche Bank AG Development Bank of Singapore - only for online investors HDFC Bank Limited HSBC Bank ICICI Bank Limited IDBI Bank ING Vysya Bank Kotak Mahindra Bank State Bank of India Standard Chartered Bank Yes Bank Page | 35
  39. 39. CHAPTER 3FUNCTIONING OFMUTUAL FUND Page | 36
  40. 40. 3.1 WHAT IS MUTUAL FUND?Mutual fund is a trust that pools the savings of a number of investors who share acommon financial goal. This pool of money is invested in accordance with a statedobjective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to allinvestors. The money thus collected is then invested in capital market instruments such asshares, debentures and other securities. The income earned through these investments andthe capital appreciations realized are shared by its unit holders in proportion the numberof units owned by them. Thus a Mutual Fund is the most suitable investment for thecommon man as it offers an opportunity to invest in a diversified, professionally managedbasket of securities at a relatively low cost. A Mutual Fund is an investment tool thatallows small investors access to a well-diversified portfolio of equities, bonds and othersecurities. Each shareholder participates in the gain or loss of the fund. Units are issuedand can be redeemed as needed. The fund’s Net Asset value (NAV) is determined eachday. Investments in securities are spread across a wide cross-section of industries andsectors and thus the risk is reduced. Diversification reduces the risk because all stocksmay not move in the same direction in the same proportion at the same time. Mutual fundissues units to the investors in accordance with quantum of money invested by them.Investors of mutual funds are known as unit holders. Page | 37
  41. 41. Source: www.jmfinancial.comWhen an investor subscribes for the units of a mutual fund, he becomes part owner of theassets of the fund in the same proportion as his contribution amount put up with theCorpus (the total amount of the fund). Mutual Fund investor is also known as a mutualfund shareholder or a unit holder. Any change in the value of the investments made into capital marketinstruments (such as shares, debentures etc) is reflected in the Net Asset Value(NAV) of the scheme. NAV is defined as the market value of the Mutual Fundschemes assets net of its liabilities. NAV of a scheme is calculated by dividing themarket value of schemes assets by the total number of units issued to the investors. Page | 38
  42. 42. NAV = Market Value of the scheme / Number of unit-holdersWhere, Numerator= Market value of investment+receivables+other Accrued Income+Other Assets- Accrued Expenses-Other Payables-Other Liabilities.3.1.1. SET-UP OF MUTUAL FUNDS: A mutual fund is set up in the form of a trust, which has sponsor, trustees, AssetManagement Company (AMC) and custodian. The trust is established by a sponsor ormore than one sponsor who is like promoter of a company. The trustees of the mutualfund hold its property for the benefit of the unit holders. Asset management company (AMC) approved by SEBI managers the fund bymaking investments in various schemes of the in its custody. The trustees are vested withthe general power of superintendence and direction over AMC. They monitor theperformance and compliance of SEBI regulations by the mutual fund. SEBI regulations require that at least two thirds of the directors of trusteecompany or board of trustees must be independent i.e., they should not be associated withthe sponsors. Also, 50% of the directors of AMC must be independent. All mutual fundsare required to be registered with SEBI before they launch any scheme. The performanceof a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).3.1.2. MUTUAL FUND STRUCTUREIn India, the following are involved in mutual fund operations: the sponsor, themutual fund, the trustees, the asset management company, the custodian, and theregistrars and transfer agents. Page | 39
  43. 43. 1. Fund Sponsor:The sponsor of a mutual fund is like the promoter of a company. The sponsor may be abank, a financial institution, or a financial service company. It may be Indian or foreign.The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is thethe settler of the mutual fund trust. The sponsor delegates the trustee functions to thetrustees. 2. Mutual fund :The mutual funds constituted as a trust under the Indian trust act, 1881, and registeredwith SEBI. Page | 40
  44. 44. 3. Trustees:A trust is a notional entity that cannot contract in its own name. so, the trust enters intocontracts in the name of the trustees. Appointment by the sponsor, the trustees can beeither individuals or a corporate body. Typically it is the latter. The trustees appoint theasset management company (AMC), secure necessary approval, periodically monitorhow the AMC functions, and hold the properties of the various schemes in trust for thebenefits of investors. 4. Asset Management Company:It also referred to as the investment manager, is a separate company appointed by thetrustees to run the mutual fund. The AMC should have a certificate from SEBI to act asportfolio manager under SEBI rules and regulations, 1993. 5. Custodian:The custodian handles the investment back office operations of a mutual fund. It looksafter the receipt and delivery of securities, collection of income, distribution of dividends,and segregation of assets between schemes. The sponsor of a mutual fund cannot act asits custodian. 6. Registrars and Transfer Agents:The registrars and transfer agents handle investor related services such as issuing units,redeeming units, sending fact sheets and annual reports, and so on. Some funds handlesuch functions in house, while others outsource it to be SEBI approved registrars andtransfer agents like Karvy and CAMS. The legal structure and organization of mutualfunds as laid down by SEBI guidelines is as follows. Page | 41
  45. 45. 3.2 CLASSIFICATION OF MUTUAL FUNDS Mutual Funds InvestmentReturn based Sector based Others based Commodity Income funds Equity funds Debt funds Balanced funds IT industry funds Market cap Long & short Pharmaceutical Exchange traded Growth funds funds term Debt funds industry funds Conservative Opportunities Liquid funds Power sector Real estate funds funds funds Theme based Long & short TAX saving funds term Gilt funds schemes Index funds Dynamic funds Long & short Fund of Funds term floating rate funds Conventional Fixed maturity diversified funds funds MIPs Page | 42
  46. 46. CLASSIFICATION- I1. Return based classification:The investors of the mutual fund schemes are made to enjoy a good return in form ofregular dividends or capital appreciation or a combination of these both.a) Income FundsIncome funds are floated for the interest of investors who want to maximize currentincome. These funds distribute periodically the income earned by them, in the form ofeither a constant income at relatively low risk or in the form of maximum incomepossible with higher risk by the use of leverage.b) Growth FundsThese Schemes have the objective to achieve an increase in the value of the underlyinginvestments through capital appreciation, and they invest in growth oriented securities.c) Conservative FundsThese funds offer a blend of good average returns and reasonable capital appreciation.These funds are very popular and are ideal for the investors who want both growth andincome from their investment.2. Investment Based Classification:Mutual funds may also be classified on the basis of the kind of securities that they investin.Equity Funds:Equities are a high risk-high return asset class; the same risk profile spills over to equityfunds as well. However investors must take note of the fact that a large number ofvariations exist within the high risk equity funds segment. For example a sector fundwould be on the relatively higher scale in the risk-return paradigm when compared to anindex fund, which simply tracks the movements in a chosen benchmark index. Thesefunds invest most of their investible shares in equity shares of companies and undertake Page | 43
  47. 47. the risk associated with the investment in equity shares. In a developed market, Equity funds can be of different categories. For example, ‘Blue Chip’, FMCG, PSUs, etc. The equity funds category can be further differentiated as follows: i. Market capitalization-based funds Market capitalization is defined as the number of shares issued by a company multiplied by the price of each share. Companies are generally divided into the large cap, mid cap and small cap segments respectively on the basis of their market capitalization. Some diversified equity funds are launched with the mandate to invest in stocks from one or more of the stated segments i.e. the companys market capitalization becomes the governing force.ii. Opportunities funds Fund managers handling opportunities funds have perhaps the most flexible investment mandates. Opportunities funds can invest in stocks across market segments, sectors and some are even permitted to invest a significant portion of their corpus in debt. As the name suggests, the idea is to seek opportunities for clocking gains from any sector/market segment.iii. Theme-based funds Theme based funds are fairly similar to sector funds, however the differentiating factor is the level of diversification they offer. Instead of concentrating on stocks from a single sector/industry, their focus lies on a specific theme like globally competitive Indian companies or multinational corporations operating in India. In terms of diversification and risk profiles, these companies tread the path between a sector fund and a conventional diversified equity fund. iv. Index funds Index funds are launched with the mandate of tracking benchmark indices like the BSE Sensex or S&P CNX Nifty. These funds invest in stocks from the index in the same Page | 44
  48. 48. proportion as the benchmark, thereby offering investors the opportunity to capture thegrowth in the chosen index. Index funds are generally more popular in developed marketswhere actively managed funds find it difficult to outperform the benchmark indices asmarkets are relatively better researched; also their expenses (fees, charges) tend to belower vis-à-vis actively managed funds.v. Fund of FundsA regular mutual fund invests in equities, bonds and fixed income securities dependingon its objective. Fund of Funds (FoF) extend this concept by investing in units of othermutual fund schemes. By investing in more than one mutual fund they takediversification to a new level For example an FoF could invest in five top performingequity funds and offer a highly diversified portfolio to the investor. Similarly others couldinvest in equity and debt funds simultaneously, thereby offering a portfolio that isdiversified across asset classes. On the flipside, FoF investors must be wary of higherexpenses on account of overlapping of costs. FT India Life Stage Fund is the example ofa FoF.vi. Conventional diversified equity fundsWe have used the term "conventional" diversified equity funds at various places duringthe course of this discussion. This is not a variant; instead these are equity funds in theirpurest form and might seem rather lackluster in the present scenario. Typically, adiversified equity fund invests in a number of equity/ equity related instruments fromvarious sectors thereby enabling investors to benefit from diversification. HDFC EquityFund and Sundaram Growth Fund can be classified as conventional diversified equityfunds.Debt Funds:These Funds have their portfolio comprising of bonds and debentures (Debt Instruments).These funds are considered to be very secure with a steady income. Page | 45
  49. 49. i. Long-term debt funds Long-term debt funds are conventional debt/bond funds that have been in existence for as long as equity funds. Investors prefer to invest in debt funds for the same reasons they choose to invest in equity funds viz. they get benefits of diversification across debt instruments and the services of a professional fund manager. In fact, for retail investors, debt funds are one of the most important avenues for investing in debt securities like corporate bonds and government securities, chiefly because individual transactions in debt are of a very high value (running in millions of rupees) and beyond most retail investors. This is unlike equities for instance, where retail investors can invest on their own in smaller lots. Debt funds invest across a range of debt/fixed income securities. The corpus of long-term debt funds comprises mainly of corporate bonds and government securities (gilts/G-secs). When these securities have a residual maturity of at least 12 months, they are classified as long-term debt or longer-dated paper. Debt funds also invest in shorter-dated paper like treasury bills, certificate of deposit (CDs) and commercial paper to name a few.ii. Short-term debt funds There is a category of investors who have two critical needs that short-term debt funds help achieve. One – they want to be invested for the short-term - less than 6 months. Two - over this time frame, they are looking at preserving capital with a return that is superior to that of a fixed deposit of a comparable tenure. The reason why short-term debt funds can preserve capital better than long term debt funds is because they are invested in debt instruments of a shorter tenure. a) Liquid funds Liquid funds invest in very short-term debt instruments maturing in 30-45 days. Typically this includes Treasury bills and call money. Liquid funds serve needs quite Page | 46
  50. 50. similar to that of short-term debt funds, only difference is that liquid fund investors havean even shorter investment time frame, at times as short as one day. If investors arelooking at being invested for more than a month, they can consider short-term debt fundsfor a marginally higher return.b) Gilt FundsLong-term gilt funds:A long-term government securities and invests primarily in government paper (gilt/G-Sec) with a residual maturity of over 12 months. Gilt funds have a higher risk profile thanconventional debt funds because their investments are limited to a particular segment ofthe debt market and they cannot diversify across other segments like corporate bonds.Short-term gilt funds:A short-term gilt fund invests primarily gilts of a shorter tenure (less than 12 months).The rationale for investing in short-term gilt funds is similar o that of short-term debtfunds. The reason investors choose short-term gilt funds over short-term debt funds isbecause gilts can provide a higher capital appreciation vis-à-vis bonds.Dynamic debt fundsDynamic debt funds attempt to combine the benefits of debt funds and gilt funds. Theycan invest across corporate bonds and gilts without any restrictions. They are distinctfrom conventional debt funds that invest in gilts and corporate bonds because these fundsusually maintain a cap on their gilt investments. Dynamic debt funds tend to increasetheir gilt investments in times of economic stability as gilt prices tend to have a morelucrative spread (i.e. difference between the buy and sell prices). Investments in dynamicdebt funds should be made with a time frame of at least 12 months.c) Long-term floating rate fundsFloating rate funds invest in debt instruments that have their coupon rates adjusted atperiodic intervals. These instruments are called floating rate instruments. The floatingrate paper is benchmarked against a reference point like the MIBOR (Mumbai Inter-bank Page | 47
  51. 51. Offered Rate) for instance. Changes in the MIBOR are a cue for the coupon rate on thefloating rate paper to be reset accordingly.Short-term floating rate fundsShort-term floating rate funds work on the same lines as long-term floating rate fundsexcept that they invest in floating rate paper of shorter tenure (less than 12 months). Ifinvestors are looking to be invested across a shorter time frame of 1-6 months, short-termfloating rate funds should be preferred over their long-term counterparts. TempletonFloating Rate Fund (Short Term) is an example of a short-term floating rate fund.d) Fixed Maturity Plans (FMP)Fixed maturity plans (FMPs) are another invention that became a necessity to counterinterest rate instability, a problem that has become acute over the last two years.Typically, FMPs are close-ended funds. They invest across debt instruments to arrive at apre-determined yield, Pre-determined because the yield is announced beforehand toinvestors. So FMPs have defined investment tenure. The benefit of investing in FMP isthat the investor knows in advance the return that he will generate on his investment.FMPs have investment tenures ranging from less than a year to more than 10 years.e) Monthly Income Plan (MIP)As a mutual fund category, monthly income plans (MIPs) are a relatively recentphenomenon. MIPs are hybrid funds that invest predominantly in debt instruments with asmall portion of assets invested in equities. The equity component is expected to act as akicker that will make the MIP outperform a conventional debt fund. The rationale for ahybrid product like an MIP came to the fore because debt funds werent adding a lot ofvalue to the risk-averse investors portfolio. So we had MIPs being launched that gave thefund manager a mandate to invest 5-30% of assets in equities. Conventional MIPs investabout 5- 15% of assets in equities with their aggressive counterparts investing as high as20-30% in equities. Several fund houses have two distinct MIPs catering to differentinvestor groups Page | 48
  52. 52. Balanced Fund:These funds have their portfolio consisting of a balanced mix of equity and bonds. Thecomposition of these funds may vary depending upon the outlook of the market.Balanced funds invest their corpus in both equity and debt instruments in a pre-determined ratio, say 60:40. An aggressive balanced fund would typically hold a higherportion of its assets in equities maybe as high as 70% of the total assets. On the otherhand, a disciplined balanced fund would maintain a conservative equity allocationduring most times.a) Sector Based Funds There are funds that invest in a specified sector of economy and they specialize in the said sector. However, they run the risk of not being able to diversify. Sector based funds are aggressive growth funds which make investments on the basis of assessed bright future for a particular sector. The specialty of sector funds rather oddly lies in the fact that they go against the very grain of mutual fund investing i.e. holding a diversified portfolio. That is why you will find some Asset Management Companies that swear against sector funds. Sector funds are launched with the intention of capitalizing on opportunities in a single sector.b) Commodity FundsIt will invest directly in commodities or through shares of the commodity companies orthrough commodity futures contract .Most common example of such fund is precious-metal fund, Gold funds invest in Gold, Gold futures or shares of gold minesc) Exchange Traded FundsIt combines the best features of open end and closed structure. It tracks a market indexand trades like a stock on the stock market. ETFs are not the index funds. Page | 49
  53. 53. d) Real Estate FundsIt can invest in real estate, Fund real estate developers, Buy shares of housing financecompanies, Buy securitized assets.Classification IIA. Based on their investment objective:1. Growth Schemes – Aim to provide capital appreciation over the medium to long term. These schemesnormally invest a majority of their funds in equities and are willing to bear short termdecline in value for possible future appreciation. These schemes are not for investorsseeking regular income or needing their money back in the short term.Ideal for: Investors in their prime earning years. Investors seeking growth over the long term.2. Income Schemes - Aim to provide regular and steady income to investors. These schemes generallyinvest in fixed income securities such as bonds and corporate debentures. Capitalappreciation in such schemes may be limited.Ideal for: Retired people and others with a need for capital stability and regular income. Investors who need some income to supplement their earnings.3. Balanced Schemes - Aim to provide both growth and income by periodically distributing a part of theincome and capital gains they earn. They invest in both shares and fixed incomesecurities in theproportion indicated in their offer documents. In a rising stock market, the NAV of theseschemes may not normally keep pace or fall equally when the market falls. Page | 50
  54. 54. Ideal for: Investors looking for a combination of income and moderate growth.4. Money Market / Liquid Schemes – Aim to provide easy liquidity, preservation of capital and moderate income. Theseschemes generally invest in safer, short term instruments such as treasury bills,certificates of deposit, commercial paper and interbank call money. Returns on theseschemes may fluctuate, depending upon the interest rates prevailing in the market.Ideal for:  Corporate and individual investors as a means to park their surplus funds for short period or awaiting a more favorable investment alternative.B. Other Schemes: Capital Protection Oriented Schemes – Capital Protection Oriented Schemes are the schemes that endeavour toprotect the capital as the primary objective by investing in high quality fixedincome securities and generate capital appreciation by investing in equity/equityrelated instruments as a secondary objective. The first Capital Protection OrientedFund in India, Franklin Templeton Capital Protection Oriented Fund opened forsubscription on October 31, 2006. Gold Exchange Traded Fund (GETF) – Gold Exchange Traded Fund offers investors an innovative, cost efficientand secure way to access the gold market. Gold Exchange Traded Fund areintended to offer investors a means of participating in the gold bullion market bybuying and selling units on the Stock Exchanges, without taking physical deliveryof gold. The first Gold ETF in India, Benchmark GETF, opened for subscription onFebruary 15, 2007 and listed on the NSE on April 17, 2007. Page | 51
  55. 55.  Quantitative Funds – A quantitative fund is an investment fund that selects securities based onquantitative analysis. The managers of such funds build computer based models todetermine whether or not an investment is attractive. In a pure "quant shop" the finaldecision to buy or sell is made by the model. However, there is a middle ground wherethe fund manager will use human judgment in addition to a quantitative model. The firstQuant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription onOctober 25, 2007. Funds Investing Abroad – With the opening up of the Indian economy, Mutual Funds have been permitted toinvest in foreign securities/ American Depository Receipts (ADRs) / Global DepositoryReceipts (GDRs). Some of such schemes are dedicated funds for investment abroad whileothers invest partly in foreign securities and partly in domestic securities. While mostsuch schemes invest in securities across the world there are also schemes which arecountry-specific in their investment approach. Page | 52
  56. 56. SNAPSHOT OF MUTUAL FUND SCHEMES (Table 3.1)Mutual Fund Objective Risk Investment Who should Investment Type Portfolio invest horizon Money Liquidity + Negligible Treasury Bills, Those who 2 days - 3 Market Moderate Certificate of park their weeks Income + Deposits, funds in Reservation of Commercial current Capital Papers, Call accounts or Money short-term bank depositsShort-term Liquidity + Little Call Money, Those with 3 weeks - Funds Moderate Interest Rate Commercial surplus 3 months (Floating - Income Papers, short-termshort-term) Treasury Bills, funds CDs, Short- term Government securities.Bond Funds Regular Credit Risk Predominantly Salaried & More than 9 Income & Interest Debentures, conservative - 12 months(Floating - Rate Risk Government investorsLong-term) securities, Corporate Bonds Gilt Funds Security & Interest Rate Government Salaried & 12 months Income Risk securities conservative & more investors Equity Long-term High Risk Stocks Aggressive 3 years plus Funds Capital investors with Appreciation long term outlook.Index Funds To generate NAV varies Portfolio Aggressive 3 years plus returns that are with index indices like investors. commensurate performance BSE, NIFTY with returns of etc respective indices Balanced Growth & Capital Balanced ratio Moderate & 2 years plus Funds Regular Market Risk of equity and Aggressive Income and Interest debt funds to Rate Risk ensure higher returns at lower risk Page | 53
  57. 57. ADVANTAGES OF MUTUAL FUND Portfolio Diversification Professional management Reduction / Diversification of Risk Liquidity Flexibility & Convenience Reduction in Transaction cost Safety of regulated environment Choice of schemes TransparencyDISADVANTAGE OF MUTUAL FUND No control over Cost in the Hands of an Investor No tailor-made Portfolios Managing a Portfolio Funds Difficulty in selecting a Suitable Fund Scheme3.3 COST INVOLVED IN MUTUAL FUNDS As with any business, running a mutual fund involves costs — includingshareholder transaction costs, investment advisory fees, and marketing and distributionexpenses. Funds pass along these costs to investors by imposing fees and expenses. It isimportant that you understand these charges because they lower your returns. Some fundsimpose "shareholder fees" directly on investors whenever they buy or sell shares. Inaddition, every fund has regular, recurring, fund-wide "operating expenses." Fundstypically pay their operating expenses out of fund assets — which mean that investorsindirectly pay these costs. Page | 54
  58. 58. An investor must know that there are certain costs involved while investing in mutualfunds.1. OPERATING EXPENSES/EXPENSE RATIOThese refer to cost incurred to operate a mutual fund. Advisory fee is paid to investmentmanagers, audit fees to charted accountant, custodial fees, register and transfer agent fees,trustee fees, agent commission. Operating expenses also known as expenses ratio whichis annual expenses expressed as a percentage of these expenses is required to be reportedin the schemes offer document or prospectus. Operating expensesExpenses ratio = Average net assetsFor instant, if funds Rs. 100 crores and expenses Rs. 20 Lakh. Then expenses ratio is 2%expenses ratio is available in the offer document and fro historical per unit statisticsincluded in the financial results of the fund which are published by annually, un auditedfor the half year ending September 30th and audited for the physically year end 1st March30th .Depending upon scheme and net asset, operating expenses are determined by limitsmandated by SEBI mutual funds regulation act. Any excess over specified limits as toborne by Management Company, the trustees or sponsors.2. SALES CHARGES:These are known commonly sale loads; these are charged directly to investor. Salesloads are used by mutual fund for the payment of agent’s commission, distribution andmarketing expenses. These charges have no effect on the performance of the scheme.Sales loads are usually expression percentage and or of two types-1. Front-end load2. Back-end load Page | 55
  59. 59.  FRONT-END LOAD: It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme.It determines public offer price which intern decides how much of your initial investmentactually get invested the standard practice of arriving a public offer price is as follows. Net asset valuePublic offer price = (1-front end load)Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front endload at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.10,20. So only 980 units are allowed to the investor. Amount investedNumber of units allotted = Public offer price10,000/10.20= 980 units at a NAV of Rs. 10.This means units worth 9800 are allotted to him an initial investment Rs.10,000 front endloads tend to decrease as initial investment amount increase. BACK END LOAD: May be fixed fee redemption or a contingent differed sales charged a redemptionso load continues so long as the redeeming or selling of the units of a fund does not takeplace in the event of a back end load is applied. The redemption price is arrive or usingfollowing formula. Net asset valueRedemption price = (1+back end load) Page | 56
  60. 60. Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price10/(1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).3. CONTINGENT DEFERRED SALES CHARGES (CDSC): Contingent differed sales charges of a structured back end load. It is paid whenthe units are reading during the initial years of ownership. It is for a predeterminedperiod only and reduced over the time you invested for a fund, the longer remains in afund the lower the CDSC. The SEBI stipulate the a CDSC may be charge only for first four years afterpurchase of units and also stipulate the maximum CDSC that can we charge every year.This is the SEBI mutual funds regulations 1996 do not allow either the front end load orback end load to any combination is higher than 7%.4. TRANSACTION COST: Some funds may also impose a switch over fee which is charge on transfer ofinvestment from one scheme to another within a same mutual funds family and also toswitch from one plan to another within same scheme. The real estate mutual funds sectoris now being considered as the engine of economic growth. The AMC reports to the trustees who safeguard the interests of investors in themutual fund and also ensure compliance of the operations of the und with SEBIguidelines. They not only monitor performance of the AMC but also oversee operationsof the custodian and transfer agent. The AMC receives a fee for its services. Currently,SEBI permits a maximum fee of 1.25%p.a. of the asset value of the fund size less thanRs.1bn. As the asset size of the fund increases, this falls progressively to 0.75%p.a. of theincremental asset value. In addition, SEBI also permits AMCs to charge expense relatedto the management of the fund up to certain limits. These are of two kinds of as follows: Page | 57

×