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Project Report By Vikram Dhumal(523)
Topic: Mutual und Analysis & Portfolio Managemaent
Firm: Vantage Wealth Management Solutions Pvt. Ltd.
College(MMM): Sinhgad Institute of Business Administration And Computer
Application



CONTENT


CHAPTER 1:- INTRODUCTION                                      ..4


1.1   OBJECTIVE OF THE PROJECT                                ...5
1.2   SELECTION OF THE TOPIC                                  ...6
1.3   OBJECTIVE OF THE STUDY                                  ...7
1.4   METHODOLOGY OF THE PROJECT                               ...8
1.5   SCOPE OF THE STUDY                                       ...9
1.6   LIMITATIONS OF THE PROJECT                              ..10


CHAPTER 2:- PROFILE OF THE ORGANISATION                       .11


2.1 A] COMPANY PROFILE                                        .12
    B] COMPANY MISSION                                        .14
2.2 AREA OF SERVICES                                          .16


CHAPTER 3:- INVESTMENT MANAGEMENT                             .19

3.1   EQUITY PORTFOLIO MANAGEMENT                             .20
3.2   EQUITY FUNDS                                            .21
3.3   TYPES OF EQUITY INSTRUMENTS                             .23
3.4   EQUITY CLASSES                                          .24
3.5   DEBT PORTFOLIO MANAGEMENT                                .25
3.6   A REVIEW OF INDIAN DEBT MARKET                          .26
3.7   INVESTMENT POLICIES & RESTRICTIONS                       .32



                                  1
CHAPTER4:- INTRODUCTION OF MUTUAL FUNDS          ..36

4.1  CONCEPT OF MUTUAL FUND                      ..37
4.2 EMERGENCE OF MUTUAL FUNDS                   ..38
4.3 HISTORY OF MUTUAL FUNDS                     ...39
4.4 PLACE OF MUTUAL FUNDS IN FINANCIAL MARKET      44
4.5 THE ADVANTEGES OF MUTUAL FUNDS              ...47
4.6 THE DISADVANTAGES OF MUTUAL FUNDS           ...50
4.7 CLASSIFICATION OF MUTUAL FUNDS              ...53
4.8 WHO CAN INVEST?                             ...55
4.9 INVESTORS RIGHTS & OBLIGATION                  55
4.10 OFFER(DOCUMENTS) BY MUTUAL FUNDS      .     ...57
4.11 ACCOUNTING OF MUTUAL FUNDS                     59




CHAPTER 5:- MEASURING & EVALUATING OF MUTUAL
                FUND PERFORMANCE            63

5.1   NECESSARY FOR MEASURING MUTUAL FUND       ....64
      PERFORMANCE
5.2   DIFFERENT MEASURES OF FUND PERFORMANCE     ..65


CHAPTER 6:- MUTUAL FUND FEES & EXPENSES            72

CHAPTER 7:- ACCOUNTING & VALUATION OF MUTUAL
            FUND                             75

CHAPTER 8:-SECURITIES & EXCHANGE BOARD OF INDIA..79


                          2
8.1   MANAGEMENT BOARD OF INDIA          ..81
8.2   FUNCTIONS OF BOARD                 ..82
8.3   REGISTRATION CERTIFICATE           ..83



CHAPTER 9:- RULES & REGULATIONS          87


CHAPTER 10:- PENALTIES & ADJUDICATION    92


CHAPTER 11:- SUGGESTIONS                .95


GLOSSERY                                100


BIBLIOGRAPHY                            .131




                           3
CHAPTER 1:-

INTRODUCTION




      4
1. INTRODUCTION




1.1 OBJECTIVE OF THE PROJECT


Theoretical Knowledge without Practical Experience is like a Body without
Soul. So without Practical implementations, theory remains no use. Hence
we need to gain the Practical Experience. And what better would be, then a
Project work for the same.


Also as a part of our MBA curriculum, we need to undergo the training
programmed for minimum of 60 days, in a company.


I selected area of MUTUAL FUND INDUSTRY, which pools the funds &
reduces risk by investing in different diversified assets. I studied as to how
this industry proves to an option for the investors, by studying the
performance of mutual funds for few months considering their Net Asset
Values.


Hence this is a project work on a Mutual Fund Analysis & Portfolio
Management .




                                      5
1.2   SELECTION OF TOPIC


      Generally when we decide to study the investment options available in
today s complex & risky scenario, we should thoroughly evaluate the option
upon various factors. These factors should include:


             The Past Performance of the option under study
             Risk adjusted returns from the invested plan
             Share in the Portfolio Policy
             Fund House

      When observed the above parameters for the evolution of The
Financial Performance of the option under study, then immediate concept
that clicks our mind is MUTUAL FUNDS . So for this, I have selected
Mutual Funds performance to study as investment option.




Study of Mutual Fund includes

             Study of Equity, Debt, Bonds, Securities, etc.
             Investment Decision
             Risk Measurement & risk diversifications
             Portfolio Management
             Analyzing the Option (a Particular Security/ Instrument).




                                    6
1.3 OBJECTIVE OF THE STUDY


       Vision is a long term policy & to reach there you can t just leap &
jump. To there the stairs of objectives need to be climbed successfully an so
objectives of this project are

            How to find the RIGHT SCRIPT to buy & sell at RIGHT
            TIME , thereby mobilizing the saving aptly.

            How to get good return on investment

            How to achieve Capital appreciations

            How to form a right PORTFOLIO & How to invest in
             RIGHT PORTFOLIO .

            To analyze the performance of Mutual Funds.




                                     7
1.4 METHODOLOGY OF THE PROJECT


   Defining objective won t suffice unless & until a proper methodology
   is to achieve the objectives.

     1. The methodology of the project here is to analyse the investments
        Opportunities available for the investors & study the returns &
        risk involved in various investment opportunities.


     2. Study of investment management, risk management & portfolio
        Diversification.

     3. The methodology of the project here is to analyze the Mutual
        Fund performance based on:-

            NAV (NET ASSET VALUE) :- It tracked the daily NAV s
            Of the Mutual Funds to compute the performance.

            Total Return Basis: By taking into account dividends
            distributed by the funds between the two NAV s change
            To arrive at a total return.

            Portfolio turnover Ratio: This means the Amount of Buying
            & selling done by a fund.

                              Asset Purchased/ Sold
                     PTR=      Funds Net Assets


             Study Financial & Legal obligations of Mutual Funds.

                                  8
1.5    SCOPE OF THE STUDY


The study encompasses different aspects from point of view of investors as
follows.

      1.   Investment portfolio selection
      2.   types of Mutual Funds
      3.   Expected returns on investment
      4.   Investment in Tax Saving Schemes.



Despite various problems, India Could still have a lot of profitable
opportunities to offer in this sector. And given the fact it is the major
emerging market to open up. It is equally important that, even if its various
Fund Investments can harness a small part of the total funds available
internationally, Indian Foreign Exchange reserves will shoot up.


According to World Bank Study, portfolio investment in the emerging
markets will rise above a massive $100 Billion by 2002. Actual figures are
yet not published for the same.




                                      9
1.6 LIMITATIONS OF THE STUDY


      This project is not funded one, hence it gets restricted to a mere in
      depth study & few guidelines for investors.


      This study is carried out in pursuance of curriculum MBA, which
      is mandatory for period of two months; hence exhaustive data is
      not available upon which conclusion can be relied upon.


      NAV are prone to environmental factors 7 which would influence
      the value during trading.


       Investments in Securities carry risks & Mutual Fund units are no
       exception.


       Risk being erosion in the Market value of the Investment of
       decrease in the percentage dividends declared by the Mutual
       Fund. The risk factors inherent in a Mutual Fund Schemes are
       the schemes, market risk, & the investment experience of the
       Asset Management Company.

        Factors affecting the Market Price of Investment may be due to
        Market forces, performance of the companies, Govt. Policies,
        Interest rates & so on.


       Study for all the existing Mutual Fund Schemes is not feasible,
       Sample schemes of all Mutual Fund Types are considered for

                                  10
the Study.




             CHAPTER 2 :-


  PROFILE OF THE ORGANIZATION




                  11
2. PROFILE OF THE ORGANIZATION




  VANTAGE INSURANCE SERVICES PVT. LTD.
  VANTAGE WEALTH MANAGEMENT SOLUTIONS PVT. LTD.




2.1   A] COMPANY PROFILE:-




        Vantage is Financial intermediary with diversified presence across
various Financial services encompassing a range of Risk & Wealth Mgmt.
solutions with a PAN India presence spreader across- Mumbai, Pune,
Bangalore, Chennai, Hyderabad & Gurgaon, the group has created a mark in
the Financial Services market with the unique concept of being a one stop
solution for Corporates & Individuals catering to needs in the field of
Insurance- Life & General, Investments, such as Mutual Funds, Fixed
Income Instruments, Portfolio Advisory, Life stage planning among others
& also Tax Planning.


     Vantage Wealth Mgmt. is primarily focused on an end to end solutions
provider for all investment & insurance needs of an Individual. Vantage
Insurance Services, an IRDA mandated, Direct Insurance Broker, with a
License in both Life & General Insurance is focused on providing the best

                                   12
Risk Mgmt. solution to a Corporate. A synergy of both the group companies
offers a wide array of services & products to suit Individual & Corporate
needs.




           Later, it forayed into the Register & Share transfer activities &
subsequently into Financial Services. All along, Vantage Group is Strong
ethic & Professional background leveraged with Information Technology
enabled it to deliver quantity to the individual.


           A decade of Commitment, Professional Integrity & Vision
helped Vantage to achieve a leadership position in its field when it handled
the number of issues ever handled in the history of the Indian Stock Market
in a year.


            Thereafter, Vantage Group made inroads into a host of Capital
market services- Corporate & Retail which provided to be a sound Business
Synergy. Today, Vantage has assessed to millions of Indian Shareholders,
besides companies, Banks, Financial Institutes & regulatory agencies. Over
the Past one & decades, Vantage has evolved as a veritable link between
Industry, Finance & people.




                                    13
2.1 B] COMPANY MISSION



 We endeavor to move beyond a Transactional Approach in Insurance
Broking & Investment Advisory to faster growth of Consultative
relationship with our Clients aimed at delivering an Integrated Solution in
the areas of Risk & Wealth Management.


To achieve & retain leadership, Vantage Group shall aim for complete
Customer Satisfactions, by combining its Human & Technology Resources,
to provide superior quality Financial Services.




QUALITY OBJECTIVES


As per the Quality Policy, Vantage Group will:-

        Build in-house processes that will ensure transparent & harmonious
        relationships with its Clients & Investors to provide high quality
        of services.

         Establish a partner relationship with its Investors Service agents &
         Vendors that will help in keeping Commitments to the Customers.

         Provide high quality of Work Life for all its Employees & Equip
         them with adequate Knowledge & Skills so as to respond to
         Customer s needs.



                                     14
Continue to uphold values of Honesty & Integrity & Strive to
  Establish unparalleled standards in Business ethics.



 Use State-of-the art Information Technology in developing new &
   Innovative Financial Products & Services to meet changing needs
   Of Investors & Clients.



 Strives to be a reliable source of value added Financial Products &
 Services & constantly guide the Individuals& Institutions in making
 A Judicious choice of same.



 Strive to keep all Stale-holders (Share-holders, Clients, Employees,
  Suppliers & Regulatory authorities ) proud & satisfied.




                              15
2.2 AREA OF SERVICES/ PRODUCTS RANGE


ASSETS PRODUCTS


            Mutual Fund

             Tax Saving Bonds

             Capital Gain Bonds

             State & Central Govt. Bonds

             Equity Funds


SERVICES PRODUCTS


             Insurance Advisory Services

             Tax Advisory Services

             Stock Broking Services

              Investment Consultancy Services

             Project Finance & Consultancy

              Portfolio Management

              Sub- Broker for the New Issues

              BSE Trading & settlement

                             16
NSE Trading & settlement



BUSINESS GROUPS:-           Corporates Solution Groups

                            Personal Financial Consultancy Group



CORPORATES SOLUTION GROUPS

  1. I.R.D.A recognized Direct Insurance Broker with License to
     intermediate in both General Insurance & Life Insurance Business.


  2. Focus on delivering Integrated Risk Mgmt. solution across diverse
     areas such as:-

       Employee Benefit Insurance PAN India more than 2, 50.000
       Members covered through Vantage managed Health, Accident &
       Life Insurance solutions.

                     Over 45-50 Corporates including, some of the largest
        most respected corporate in the IT & ITes Industry, have entrusted
        up with their Employee benefit Insurance Programme.

       Property Insurance Including Extensive experience in Project &
       Machinery Insurance. Business Interruption / Loss of Profit insur
        -ence is another area where we have rendered our expertise to cer
        -tain key corporates.

        Liability Insurance Experienced in delivering solution for Comp
        lex Global Liability Exposures worked with many leading IT &
        ITes companies in this area.

        Specialized Risk covers including Movie & Event Insurance.
       1. Web enabled solution in Employee Benefit Insurance.
       2. Vantage draws Technical Expertise in Risk Mgmt.with Advisory

                                   17
Support from the core group consisting of experienced Experts
           From Insurance Cooperation, Valuers, Loss Assessors, Property.




PERSONAL FINANCIAL CONSULTANCY GROUP:-


  Vantage is an AMFI Registered Mutual Fund Distributors.

  Focus on delivering customized Financial Planning Solution keeping in
  a view an Individual s requirements such as:

      1)   Financial Goals & Investment Objective.
      2)   Life Insurance Coverage
      3)   Retirement Planning
      4)   Tax Planning

  Online Portfolio updates.




                                   18
CHAPTER 3 :-


INVESTMENT MANAGEMENT




          19
3. INVESTMENT MANAGEMENT



3.1 EQUITY PORTFOLIO MANAGEMENT


An equity portfolio manager s task consists of two major steps:

   a) Constructing a Portfolio of Equity shares or equity linked instrument
      That is consistent with the Investment objective of the fund &

   b) Managing or constantly re-balancing the portfolio to produce capital
      Appreciation & earning that would reward the investors with superior
      Returns.


STOCK SELECTION

The equity Portfolio manager has available to him a whole universe of
equity shares & other instruments such as preference shares, warrants or
convertible debentures issued by many companies. However, more specially,
the equity portfolio manager will choose from a universe of shares in
accordance with:

   A) The nature of the Equity instrument, or a particular stock s unique
      characteristics, &

   B) A certain investment styles or Philosophy in the process of choosing.




                                     20
3.2 EQUITY FUNDS


Form categories based on risk-return profile
    - Diversified , Index , Sectorial & Specialized

Form categories based on fund manager s style
    - Value and Growth

Evaluate Performance
     - Peer Group and Benchmark comparison



Consider Structural Characteristics
  - Size of the Fund
   - Fund History
   - Portfolio Manager Experience
   - Cost of Investing: Expense Ratio


Consider Portfolio Characteristics
  - Percentage Cash
  - Portfolio Concentration
  - Market Capitalization of Fund
  - Portfolio Turnover: Churn
  - Portfolio Risk Characteristics
               R-squared
               Beta
               Dividend Yield
  - High R Squared , Low Beta And High Dividend yield preferred




                                  21
OTHER VARITIES OF EQUITY FUNDS


Specialized Funds:-

        1) Sector Funds
        2) Offshore Funds
        3) Small Cap Equity Funds
        4) Option Income funds - writes options
        5) ELSS - Indian Variety
        6) Equity Index Funds
        7) Value Funds
        8) Equity Income Funds - invest in co. with higher dividend yields
           i.e. Power/utilities

Other Equity Oriented Funds:

    Hybrid Funds
        -Balanced Funds
        -Growth & Income Funds
        -Assets Allocation Funds

    Commodity Funds

    Real Estate Funds


Debt Funds :

    Diversified Debt Funds
    Focused Debt Funds
        Sector / Specialized / Offshore
        Municipal bonds / infrastructure cost bond funds
        Mortgaged backed

                                   22
High yield debt funds
      Assured Return Funds - Indian variety
      Liquid Funds



3.3   TYPES OF EQUITY INSTRUMENTS

Ordinary Shares:

Ordinary Shareholders are the true owners of the company, & each share
entitles the holders of ownership privileges such as dividends declared by
the company & voting right at the meetings. Losses as well as profits are
shared by the equity shareholders. Without any guaranteed income or
security, equity share are risk investment briefing with them potential for the
capital appreciation in return for the addition that the investors undertakes in
the comparison to debt instrument with guaranteed income.


PREFERENCE SHARES

Unlike equity share, preferences share entitled the holder to dividend at the
rate subject to availability of profit after tax. If preference shares are
cumulative, unpaid dividend for years of inadequate are paid in subsequently
year preference share do not entitled the holder to ownership privileges such
as voting right at the meeting. This preference shares are generally redeemed
after certain period.


EQUITY WARRANTS

These are long terms right offer holder the right to purchase equity share in a
company at a fixed price (Usually Higher than current Market Price) within
the specified period. Warrants are in the nature of option on stocks.


CONVERTIBLE DEBENTURE

As the term suggest, this are fixed rate debt instrument that are covered into
a specified number of equity share at the end of specified period for Ex.- A

                                      23
company may issue 10% CD for Rs. 100 each that would be conversed into
5 equity share after 2 years. That is a holder of 1 debenture at the time issue
would become a holder of 5 equity share in the 2 years time.



3.4   EQUITY CLASSES

Equity shares generally classified on the basic of either the market
capitalization or the anticipated movement of the accompany earning. It is a
imperative for the Fund Manager to understand these elements of the stocks
before he selects form the inclusion in the portfolio.

CLASSIFICATION IN TERMS OF MARKET CAPITALIZATION

Market is the equivalent to the current value of a company i.e. current
market price per share time per the number of outstanding shares. There are
large capitalization company, Mid-cap Company & small company.
Different scheme of a fund may define there fund objective as a preference
for large or mid or small-cap companies shares. Large cap share are more
liquid & hence easily tradable. Mid or small cap share may be thought of as
having to track this different classes of share.


CLASSIFICATION IN TERMS OF ANTICIPATED EARNING

In terms of anticipated earning of the share are generally classified on the
basis of their market price in relation to one of the following measures:-

1] PRICE / EARNING RATIO (P/E Ratio)

Price/ Earning ratio is a price of share divided by the earning per share &
indicates weather the investors are willing to pay for a company earning
prudential. Young &/or fast growing companies usually high P/E ratios.
Established companies in nature industries may have P/E Ratios. The P/E
analysis is sometimes supplemented with the rate such as Market Priceto
Book Value & Market Price to cash flow per share.

2] EARNING PER SHARE (EPS)



                                      24
Earning per Share is the amount of total earning received on each share. The
values of EPS are got by dividing total earning by number of shares. Thus
more the EPS more beneficial is for the Shareholder.



3.5   DEBT PORTFOLIO MANAGEMENT


Debt portfolio has to contend with the construction & management of
portfolio debt instrument, the primary objective of generating income. Just
as the inquiry fund manager has to go through a stock selection process, a
debt fund manager has to select from whole universe of debt securities he
wants to invest in.


Classification of Debt Securities

Many instruments give regular income. However, in the context of debt
mutual funds, manager invest only in market-trader instrument (not in
loans as done by the bank) debt instrument may be secured by the assets of
the borrowers as in case of corporate, or be unsecured as is the case with
Indian Financial Bond.


A Debt is issued by a borrower & is often known by the issuer category thus
giving us Government security & Corporate Securities or FI Bonds.
Debt instrument are also distinguished by their maturity profile. Thus,
instrument issued with short term maturities, typically under one year
maturities are classified as Money Market Securities instrument carrying
Long then one year maturities are generally called Debt Securities.


Most debt securities are interested bearing. However, there are securities that
are discounted securities or zero coupon bonds that are generally fixed that
pay interest on a Floating Rate basis. There are lots of new instruments
coming in the debt markets.




                                      25
3.6   A REVIEW OF THE INDIAN DEBT MARKET


Instruments in the Indian Debt Market


The objective of a debt is to provide investors with a stable income stream.
Hence, a debt fund invests mainly in instrument that yields a fixed rate of
return & where the principal is secured. The debt market in Indian offers the
following instruments for investment for by Mutual Funds.


Certificates of Deposits

Certificates of Deposit (CD) are issued by scheduled commercial banks
excluding regional rural banks. These are unsecured negotiable promissory
notes. Banks CDs have a maturity period of 91 days to one year, while those
issued by FI s have maturities between one & three years.


Commercial Paper

Commercial Paper (CP) is a short term, unsecured issued by corporate
bodies (Public & Private) to meet short-term working capital requirement.
Maturity varies between 3 months & 1 year. This instrument can be
incorporated in Indian. CP s can be issued to NRI s on non-repatriable &
non- transferable basis.


Corporate Debentures


The debentures are usually issued by manufacturing companies with
physical assets, as secured instruments; in the form of certificates they are

                                     26
assigned a credit rating by rating agencies. Trading in Debentures is
generally based on the current yield & market values are based on yield of
maturity. All publicly issued Debentures is listed on exchange.




Floating Rate Bonds

These are short to medium term bearing instruments issued by the financial
intermediaries & corporate. The typical maturity of these bonds is 3 to 5
years. FRB s issued by Financial Institutions are generally unsecured while
those from private corporate are secured. The FRB s are pegged to different
reference as much as T- bill or bank deposits rates. The FRB s issued by the
Government of Indians are in the form of Stock Certified of issued by credit
to SGL accounts maintained by the RBI.


Government Security

These are medium to long term interest bearing obligations issued through
the RBI by the Government of India & State Governments. The RBI decides
The cut-off on the basis of bids received during the auctions. These are
issued where the rates are pre-specified & the investor s only bids for the
quality. In most cases, the coupon is paid semi annually with bullet
redemption features.

A large part of the trading is concentrated in those government securities
that are eligible for repost (repurchase) transition, i.e. sale of a security with
a parallel agreement to repurchase the same at a future date. The RBI acts as
the depository, its public debt office maintain an SGL account for various
banks & Financial Institution, & issues or transfers the securities in the form
of book entries made in SGL accounts. If a fund does not have an SGL
account, it may open a constitution account with any RBI- registered bank.


Treasury Bills

T- Bills are shortly obligation issued through the RBI by the Government of
India at a discount the RBI Issues T-Bills for different tenures: 14 days, 91

                                       27
days & 364 days. These treasury bills are issued through an auction
procedure. The yield is determined on the basis bids tendered & accepted.




Bank/ FI Bond

Most of the institutional bonds are in the form of promissory notes
transferable by endorsement & delivery. These are negotiable, issued by the
Financial Institution such as IDB/ ICICI/ IFCI or by commercial bank.
These instruments have been issued both as regular income bonds & as
discounted long term instruments (deep discount bonds).


Public Sector Undertaking (PSU) Bonds

PSU Bonds are medium & long term obligation issued by Public sector
companies in which the government share holding is generally greater then
51% . Some PSU Bonds carry tax exemptions. The maximum maturity is 5
year for Taxable bonds & 7 years for Tax- Free Bonds. PSU bonds are
generally not guaranteed by the government & are in the form of promissory
notes transferable by endorsement & delivery. PSU bonds in Electronic form
(Demat) are eligible report transactions.


Basic Characteristics of Money Market Security

Money Market fund invest always exclusively in money market security,
which are instrument of under 1 Year Maturity many of them of discounted
or zero coupon delivery. Money market fund portfolios may include
government corporate of bank issued security. In India, certificates of
deposits, treasury bills & commercial papers from the three major types of
Instruments where MF s usually invest in.


Basic Characteristics of Bonds or Debt Security




                                    28
A debt fund or a bond fund generally invest a large part of its corpus in
longer term fixed income in debit securities issued by government,
companies or Banks/ FI s. A small part is invested in money market. In
Indian context, long dated government securities, corporate debentures & FI
Bonds from the bulk of debt fund portfolios.


Bonds have the following four keys characteristics set at the time of issue:

  Par Value : This is the principal amount that investors will be paid upon
  Maturity of the bonds, & is also known as the face value.

  Coupon : This is the annual rate of interest paid on the par value of the
  Bond to the investor.

  Maturity : This refers to the term of the bond that is , the date on which
  the Bond that is , the date on which the issuer has to repay the principle
  amount of the Bond.

   Call or Provision: These are included in some bond contracts to allow
   the issuer the option to redeem the bonds before Maturity thereby allow
   -ing refinance of debt at lower interest rates


Measuring of Bond Yields: Returns on a fixed income security is generally
computed in the form of Current Yield or a Yield to Maturity.


Current Yield: This relates interest on a Bond to its Current Market Price
by dividing the annual coupon interest by the current market price.

         1) Yield to Maturity (YTM): This is a sophisticated technique of
            bond analysis. Posen defines YTM (also known as the bonds
            IRR) as the annual rate of return & investors would realize if he
            a bond at a particular price, & received the principal at maturity.
            YTM allows investors to compare bond with different coupons,
            maturities & price & is quoted for trading purposes. The
            relationship between the price & YTM of a bond is expressed
            by the following formula:



                                      29
PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2             .+
                  (Coupon Principle) / (1+ YTM) n

           The inverse relation between price & YTM is important in bond
           portfolio management.



           Yield Curve: This is the graph showing yields for bonds
           various maturities, using a benchmark group of bond, such as
           the Government Securities. This is also known as the Term
           Structure of Interest Rates (TRIR). This yields curve usually
           upwards sloping become longer maturities generally offer
           higher yields. This is because longer term debt carries higher
           risk on account of inflation & other economic factors. The yield
           curve is important indicators of expected trends in interest rates.



RISK IN INVESTING IN BOND:


  1) Interest Rates-Risk: The price of bond will change in a direction
     opposite to movement in interest rates. When interest rates rises bond
     price will fall, thus an existing bond portfolio losing valve. A sound
     analysis of interest rates movement is therefore essential.


  2) Reinvestment Risk:         A bonds yield to maturity assumes
     reinvestment of interest received during the term at a constant rate.
     This not may be possible if interest rate changes & risk is of
     uncertain cash flow being reinvested at a lower rate.


  3) Call Risk: If a bond has been issued with a call provision the issuer
     may call them back & return the proceeds to the investors whenever
     interest rates fall, so the borrowing can be replaced with cheaper debt.
     The investor thus cannot keep a high yield bond.




                                    30
4) Default Risk: A bond is a subject to the risk that is assured may
     default on its obligation to make timely principle & interest
     payments. A fund needs to assess this risk based on the bonds rating
     & the analysis generated by its research on issuer s cash flows.




  5) Inflation Risk: When the inflation rate rises, purchasing power
     decline. Therefore, the value of interest payment is reduced.
     Investors will therefore expect higher yields in bonds. Higher interest
     rate will make the existing bond lose value again.


  6) Liquidity Risk: This refer to the ease with which investment in a
     bond can be liquidated (or sold) at a price near its value. This
     element is important for a fund because its investments are made on
     behalf of unit-holder & market conditions may require the fund to
     liquidate a part of its portfolio within a short time.


Instruments in the market

  § Equity
      1) Ordinary shares
      2) Pref. shares
      3) Equity warrants
      4) Convertible Debentures

  § P/E Ratio
  § Dividend Yield
  § Cyclical / Growth / Value Stocks

     Market Capitalization =Sum total of CMP of shares * no. of shares




                                    31
3.7   INVETMENT POLICIES AND RESTRICTION


      Investment Policy:
      Investment Policies of each scheme are dictated by its investment
      objective as stated in the offer document. In practice the board
      policy guidelines are included in the offer documents while the day-
      to-day policies are laid down by the AMC management for the fund
      manager to conform to fund manager do have some flexibility in
      alerting the strategy in the light of changing market condition & in
      specific selection.

      Investment strategy of an equity fund will lay down guideline on
      which sectors & what ki8nd of companies to invest in, what
      percentage will be held in the form of cash or money market
      securities or how much in debt securities. Usually minimum &
      maximum allocation of funds to each class- Equity & Cash is
      specified.

      Investment policies of a debt fund will also lay down guidelines on
      the portfolio & their average maturity. Minimum & Maximum
      percentage of Cash / money market instruments in the portfolio has
      to be specified too.

      Investment policy of balanced funds will specify the minimum &
      maximum asset allocations to equity & debt / cash besides the
      normal guidelines for the equity & debt components.

      Investment policies of the money market funds will largely specify
      the type of instrument preferred & their profile.


      Investment Restriction by SEBI:

                                  32
While the AMC management the AMC determines the investment
policies & its fund manager must also comply with the restriction
imposed by regulator-mostly SEBI & in case of money market fund
the RBI.



SEBI s main objective in laying down restriction on AMC s is to
ensure investor protection.

The objective is attained by:

 1. Maintaining minimum level of diversification in Mutual Fund
    Investments &

 2. Ensuring that the Investor s funds are used to favour a few or
    associated invested in approved securities only. To attain this
    Regulatory objectives, some major restrictions imposed by
    SEBI.


    Minimum Portfolio Diversification Norms


    Investment in equity shares or equity related instruments of a
    single company are restricted to 10% of the NAV as a scheme.
    However the limit of 10 % does not apply in case of sector /
    industry specified schemes subject to adequate discloser in the
    offer documents. The basic objective here is to ensure that a
    fund a fund has an adequately diversified portfolio unless the
    specified objective if the scheme is to limit the investments.

    Similarly for debt schemes, SEBI restricts the investment in
    rated investment grade debt instrument issued by a single issuer
    is not allowed to exceed 10% of the NAV subject to approval of
    board of AMC & trustee company?

    These restriction do not apply to & money & government
    securities. SEBI s restriction on the investment in unlisted share
    to a minimum of 10 % of the NAV of a scheme for closed end

                                33
scheme. In case of open ended the limits may be made more
           stringent to 5% of the NAV of the scheme as there is
           continuous purchase by investors in such a scheme.




Approved and Unapproved Investment:

  1. A Mutual Fund under all its scheme taken together will not own more
     than 10 % of any company paid up capital voting rights. The objective
     is not only to assure diversified investment but also to prevent fund
     sponsor trying to acquire control of any company through fund
     investment route.

  2. Scheme may invest in another scheme under the same AMC or any
     other Mutual Fund without charging any fees, provided that the
     aggregate inter scheme investment made by all scheme under the
     same management does not exceed 5% of the net asset value of the
     Mutual Fund. The objective here is to prevent an artificial inflection
     of fund size by inter scheme investment.

  3. Debt instrument in which scheme invests must be rated as investment
     Grade by at least one recognized rating agency. Unrated investment
     could denote favors extended to a borrower or in any case do not
     protect the investor.

  4. Mutual Funds may buy & sell securities only on the basis deliveries as
     Short selling or carry forward transaction is not in general consonance
     with Mutual Funds as investment vehicles.

  5. In case of long term investment securities should be purchased or
     transferred in the name of Mutual Scheme. Securities cannot be held
     in a general account & transferred later various scheme to main
     certain profile or loss objective. Each investment must be done with
     the objective of a scheme in mind therefore be immediately assigned
     to a given scheme.




                                    34
6. Pending investment of funds pursuant to the objective the fund may
   invest the same in short term deposit of scheduled commercial banks.
   Case is to the scheduled banks for general investor protection.




7. Mutual Funds are not allowed to advance any loans. But lead security
   in accordance with SEBI s Stock Leading Scheme. Mutual Fund must
   invest in marketable securities not in unmarketable loans.


8. A Mutual Fund is prohibited from investing in any unlisted security
   or a security issued through private placement by an associated or
   Group Company of the sponsor. In the case of listed securities of
   group companies of the sponsor or group company of the sponsor, it
   is not allowed to invest an amount in exceed of 25% of the net assets
   of any of its scheme of fund. The objective is to ensure that the fund
   sponsor do not use investor funds to bolster their other group
   companies.

9. A Mutual Fund may transfer investment from one scheme to another
   Provided the transfer is at the current market rate & in conformity
   with the investment objective of the scheme to which to losses form
   one group of investor to another.




                                 35
CHAPTER 4:-


INTRODUCTION TO MUTUAL FUNDS




           36
4.     INTRODUCTION TO MUTUAL FUND


4.1 THE CONCEPT OF A MUTUAL FUND


   A Mutual Fund is a common pool money into which investor place their
   contribution that is to be investors in accordance with a stated objective.
   The ownership of the joint or Mutual , the fund belongs to the
   contribution make a single investor s ownership of the fund to the total
   amount of the fund.


   A mutual fund is a collective investment that allows many investors, with
   a common objective, to pool individual investments and give to a
   professional manager who in turn would invest these monies in line with
   the common objective.


A Mutual Fund used the money collected from investors to buy those assets,
which are specifically permitted by its stated investment objective. Thus an
equity fund would buy equity asset- ordinary shares, preferences share,
warrants etc. a bond fund would buy debt instrument such as debentures,
bonds, or government securities. It is these assets, which are owns by the
investor in the same proportion as their contribution bears to the total
contribution of all investor put together.


Since each owner is a part owner of a Mutual Fund, it is necessary to
establish the value of his part. In other words, each share or unit that
investors hold needs to be assigned a value. Since the unit held by investors

                                     37
evidence the ownership of the funds asset, the value of total asset of the fund.
When divided by the total number of units issued by the Mutual Fund gives
us the value of one unit. This is generally called the net asset value (NAV)
of the number of unit held.




4.2 EMERGENCY OF MUTUAL FUNDS


    Mutual Funds now represent perhaps the most appropriate investment
    opportunity for most investor, as financial markets become more
    sophisticated & complex. Investors need a Financial Intermediary who
    provides the required knowledge & professional expertise on successful
    investing. It is no wonder then in the birthplace of Mutual Fund the
    U.S.A. the fund industry has already overtaken the banking industry
    more funds being under Mutual Fund Management than deposited with
    the bank.


    The Indian Mutual Fund Industry is a fast growing segment of the
    economy. The Industry consists of 36 Mutual Funds including Unit
    Trust of India. With 397 schemes spread over variety products the
    industry today manages assets close to Rs. 97,000 crores.


    The Indian Mutual Fund Industry has already started opening up, of
    many of exciting investment opportunity to Indian investors. We have
    started witnessing the phenomenon of more saving now being entrusted
    to the funds than to the banks. Mutual Funds as still a new Financial
    Intermediary in India. Hence it is important that the investors should
    make proper analysis of the available scheme in the market. The
    investment advisor & even the fund employees acquire better
    knowledge of what Mutual Funds are. What, they can do for investor &
    what they cannot & how they function differently from other
    intermediaries such as the banks. The association of Mutual Funds in
    India has commissioned a workbook, as the basic compellation of the

                                      38
minimum knowledge requires by both fund distributors & the
      employees. The workbook provided by AMFI can serve as a guide
      distributors & employees.




4.3    HISTORY OF MUTUAL FUNDS IN INDIA


The Indian Mutual Fund Industry began with the formation of the Unit Trust
of India (UTI) in 1964 by the Government. UTI was formed as a non-profit
organization governed under a special legislation, the Unit Trust of India Act,
1963. It had a monopoly up to 1987 & during this period, UTI launched a
series of equity & debt schemes & established itself as a household name
with assets under management of Rs. 4563 crore & unit holder accounts of
slightly under 3 Million by mid 1987. UTI s growth continued up to 1996
when the strong entry of private sector players saw its share of the market
reducing sharply although UTI continues to be a dominant force in the
Indian Financial Services industry with assets of over Rs. 67,000 crore as of
December 31, 1999.


In 1987, the Industry saw the entry of Public Sector Mutual Funds, i.e. funds
promoted by public sector banks & financial institutions, such as SBI,
Canara Bank, LIC & IDBI. Predictably they were given the brand of their
promoters such as SBI Mutual Fund, Canbank Mutual Fund, and LIC
Mutual Fund & IDBI Mutual Fund. Other Public Sector Mutual Funds also
entered the market but UTI continued to remain the dominant player with a
share of 84% in 1991-92.


The Government first allowed private sector participation in 1993 & the
subsequent entry of a large number of players has made the industry very
competitive. The diagram below shows the three segments & a few of the
players in each segment.




                                     39
UTI was started, at the initiative of the Reserve Bank of India & the
Government of India. The objective then was to attract the small investors &
introduce them to market investment. Since, then the History of Mutual
Funds in India can be broadly divided into three distinct phases.




           Phase I: 1964   87 (Unit Trust Of India)


This phase spans from 1964 to 1988. In 1963, UTI was established by an act
of Parliament & given a monopoly. Operationally, UTI was set up by the
Reserve Bank of India, but was later de-linked from the RBI. The first &
still one of the largest schemes, launched by the UTI was Unit Scheme 1964.
Over the years, US-64 attracted & probably still has the largest number of
investors in any single investments schemes.


First Phase (1964- 1987) :-

  Establishment of UTI in 1963.

  In 1978, UTI was delinked from the RBI & the Industrial Development
  Bank of India (IDBI) & took over the regulatory & administrative control
  in place of RBI.

  The first scheme launched by UTI was Unit Scheme in 1964.

  At the end of 1988 UTI had Rs.6, 700 crores of assets under Mgmt.


UTI had grown large as evidence by the following statistics:

1987- 88

       Amount mobilized (Cr) Asset Under Mgt (Cr)         Mobilization
                                                          as % GDP

                                     40
UTI    2175                      670                        3.1 %




    Phase II: 1987-1993 (Entry of Public Sector Funds)

1987, Marked the entry of non-UTI public sector Mutual Funds, bringing in
competition. With the opening of economy, many public sector bank &
financial institution were allowed to establish Mutual Funds. The State Bank
of India established the first non-UTI Mutual Fund- SBI Mutual Fund- in
November 1987. This was followed by Can Bank Mutual Fund ( launched in
December, 1987), LIC Mutual Funds ( launched in 1989 ) & Indian Bank
Mutual Funds ( launched in 1990 ) followed by Bank Of India Mutual Fund,
GIC Mutual Fund & PNB Mutual Fund.

The private sector players, after an indifferent start in the early years, have
made a strong impression especially in the larger cities, with a high quality
of fund management, sales & customer service. This sector has dented UTI s
dominance resulting in a falling market share towards the end of the last
millennium.

Assets under Management
                            June 30, 2000              Sep. 30, 2001
       UTI                       57.09 %                  53.60 %
 Bank Sponsored                    3.66 %                  3.78 %
   Institutions                    4.12 %                  4.46 %
  Private Sector                  35.13 %                 38.16 %
      Total                      100.00 %                100.00 %
 Total ( Rs. In Crore )             97953                  91811


                                  OPEN      CLOSE ASSURED              TOTAL
                                  END       END   RETURN
INCOME                             85         28     29                 142


                                       41
GROWTH                            96         15           -          111
BALANCED                          31          4           -           35
LIQUID/ MONEY MARKET              28         -            -           28
GILT                              24         -            -           24
ELSS                              19         52           -           71
TOTAL                             283        99           29          411



Second Phase (1987-1993) / Entry of Public Sector Funds:-

   1987 marked the entry of Non- UTI, Public Sector Mutual Fund setup by
   Public Sector Banks & LIC of India & General Insurance Corporation of
   India (GIC)

   SBI Mutual Fund was the First Non-UTI Mutual Fund established in
   June 1987 followed by Canbank Mutual Fund (Dec.1987), Punjab
   National Bank Mutual Fund (Aug.1989), Indian Bank Mutual Fund
   (Nov.1989), Bank of India (Jan.1990), Bank of Baroda Mutual Fund
   (Oct. 1992).

   LIC established its Mutual Fund in June 1989 while GIC had setup its
   Mutual Fund in Dec. 1990.

   At the end of 1993, THE Mutual Fund Industry had assets under Mgmt.
   Of Rs. 47,004 Crores.

Gilt Funds

  1.   Next only to money market fund in risk order
  2.   Gilts- government securities with medium to long term maturities
        over one year
  3.   Investment in government paper called dated securities
  4.   Negligible risk of default
  5.   Risk arising out of changes in market price of debt securities
  6.   Debt securities prices fall when interest rate rise.

Debt Funds

  1.   Invest in debt securities issued not only by government but also

                                    42
Corporate & financial institutions
  2.   Target low risk & stable income
  3.   Higher price fluctuation risk as compared to money market funds
       due to significantly higher maturity period exposures
  4.   Higher credit risk than gilt funds due to corporate profile
  5.   Do not target capital appreciation; generate high current income &
       distribution substantial part of surpluses to investors.


Third Phase (1993-2003) / Entry of Private Sector Funds:-

   1993, the entry of Private Sector a new era started in the Indian Mutual
   Fund Industry, giving the Indian Investor a wider choice of Fund Family

   Also 1993, was the year in which the First Mutual Fund Regulation came
   into being, under which all Mutual Fund expects UTI were to be register
   & Governed. The Kothari Pioneer (now merged with Franklin Temleton)
   was the First Private Sector Mutual Fund registered in July 1993.

  In 1993 SEBI (MF) Regulations were substituted by a more
  Comprehensive & revised MF Regulations in 1996.

  At the end of Jan.2003 there were 33 MF with Total Assets of Rs.1,21,80
   5 Crore. The UTI with Rs.44, 541 Crores of Asset under Mgmt. was way
  ahead of other MF Industry has witnessed several Merges & Acquisitions.



Fourth Phase (Since Feb. 2003):-

  In Feb.2003, UTI was bifurcated into two separate entities.
  1. One is the specified Undertaking of the UTI with assets under Mgmt.
      of Rs. 29,835 Crores as at end of Jan.2003, functioning under an
      administrator & under the rules framed by Govt. of India & does not
      come under preview of MF Regulation.
   2. The second is UTI MF Ltd. Sponsored by SBI, PNB, BOB & LIC. It is
       Registered with SEBI & Functions under the MF Regulations.

  Bifurcation of UTI in Mar.2000 more than Rs. 76,000 Crores of assets
  Under Mgmt. & with the setting up of a UTI MF conforming to the SEBI

                                    43
MF Regulations.

  At the end of Sept.2004, there were 29 Funds which Manages assets of
  Rs. 1, 53,108 Crores under 421 Schemes.




4.4 PLACE OF MUTUAL FUND IN FINANCIAL MARKET


   Indian household started allocating more of their saving to the capital
   market in 1980 s with the investment flowing into equity & Debt
   instrument beside the conventional mode of the bank deposits.

   Until 1992 Primary Market investors were assured good return as the
   price of the new equity issues was controlled. After Introduction of free
   pricing of shares & with greater volatility in the Stock Markets, many
   investors who bought over priced shares lost money & withdrew from
   the markets altogether. Even those investors who continued as direct
   investors in the Stock Market realized that the key to the successful
   investing on the capital markets lay in the building a diversified
   portfolio that in turn require substantial capital. Besides selecting
   securities with growth & income was not possible for all investor.
   Under similar circumstances in other countries, Mutual Fund had
   emerged as Professional Intermediaries.

   Besides providing the expertise in stock market, investing these funds
   allows investing in small amount& yet holding a diversified portfolio to
   limit risk. In India, Unit Trust of India occupied this place as the only
   capital market intermediary Institution is emerging in India, as
   elsewhere as a good alternative to direct investing in the Capital Market.

   Mutual Funds serves as a link between the saving public & the capital
   market in that they mobilized saving from investors & bring them to
   borrower in the Capital Market. By the Very nature of their activities &
   by virtue of being knowledgeable & informed investors , they influence
   the Stock Market & play an active role in promoting good corporate

                                    44
governance, investor protection & the health of capital market. Mutual
   Fund have imparted much needed liquidity into the financial system &
   challenged the hitherto dominant role of banking & financial institution
   in the Capital Markets.




Mutual Fund Operation Flow Chart:




                    INVESTORS




  RETURNS                               FUND MANAGER




                    SECURITIES




                                   45
Structure
  Foreign
                    Sponsor                  Trustee
  Partner


  Asset Management                                     Other Service
                               Trust
      Company                                          Providers


         Scheme 1             Scheme 2                  Scheme 3




Organization of a Mutual Fund :

MUTUAL FUND - FRAMEWORK- India
                                   Sponsor




            Trustee Company                        Asset Management
                                                       Company




           Fiduciary             Fund              Operations      Marketing
        responsibility to     Management
              the
                                                                  Distribution
         Investors              Brokers    Registrar
                                                        Custody
                                Markets         Bank



                                           46
4.5 THE ADVANTAGES OF MUTUAL FUNDS


 Portfolio Diversification: Each Investor in a Fund is a part of the funds
 entire asset, thus enabling him to hold a diversified investment Portfolio
 even with a small amount of investment, which would otherwise requires
 big capital.


 Professional Management: Even if an investor has a big amount of
 Capital available to him, he benefits from the professional management
 Skill brought in by the fund in the management of the investor s portfolio.
 The investment management skills, along with the needed research into
 available investment option, ensure a much better return than what an
 Investor can manage on his own. Few investors have the skill & resource
 of their own to success in today s fast moving, global & sophisticated
 markets.




                                    47
Reduction / Diversification of Risk: When an investor invest directly,
all the risk of Potential loss is his own, weather he places deposits with
a company or bank, or buys a share debenture on his own or in any other
instrument benefits of a collective investment vehicle is from the Mutual
Fund.


Reduction of Transaction Costs: What is true of risk is also the
transaction costs. The investors bear all the cost of investing such as
brokerage or custody of securities. When through a fund, he has the
benefit of economic of scale; the fund pay lesser costs because of large
volume, a benefit passed on to is investor.


Liquidity : Often, investors hold share or bonds they cannot directly,
easily & quickly sell. When they invest in the units of a fund, they can
generally case their investment any time, by selling their units to the fund
 if open-ended , or selling them in the market if the fund is closed end.
Liquidity of investment is clearly a big benefit.


Open-ended
-Assures liquidity
-As liquid as the banks.
Close-ended
-Buying and selling can be done through the stock exchange


Conventional & Flexibility: Mutual Fund Management companies offer
many investors services that a direct market investor cannot get. Investors
can easily transfer their holding form one scheme to the other,get updated
market information, easy to Invest, Reduces excessive Paperwork etc,


Safety: SEBI & RBI have a control over Mutual Fund Making investme
nt in Mutual Fund a safe investment. A very good example here quoted
can be of Government of India coming to rescue of UTI s US- 64
Schemes.




                                   48
Affordability:
-Provides an opportunity for a small investor
-Invest as less as an amount of


Wide Choice:
-Offers a Varieties of Schemes
 -Meet the investment needs of all Investors


 MF s and Tax Benefits:
 Income Tax Benefits
      -Equity funds - 10% TDS
      -Debt Funds - Dividends are taxable

Capital Gain Benefits - Section 112 (1)
      -Long term capital gain tax of 10% without indexation, or
      -Long term capital tax of 20% with indexation




                                  49
Mutual Funds:
                   A Packaged Product

      Professional
      Management                                     Diversification




      Convenience
                                                    Liquidity
                        Tax
                        Benefits




4.6   THE DISADVANTAGES OF MUTUAL FUNDS


  No Control Over Costs: An investors in a Mutual Fund has no control
  Over the overall cost of investing. He pays investment management fees

                                   50
as long as he remains with the funds, in return for the professional manag
  ment & research. Fees are payable even while the value of his investment
  may be declining. A mutual fund investors also pays fund distribution
  costs, which he would not incur in direct investing.


 No Tailor-made Portfolios: Investors who invest on their own can build
 their own portfolios of shares, bonds & other securities. Investing through
 Funds means he delegates this decision to the fund manager. The very high
 -net-worth individuals or large corporate investors may find this to be a
 constraint in achieving their objectives.


  Managing a Portfolio of Funds: Availability of a large number of funds
  can actually mean too much choice for the investor. He may again need
  advice on how to select a fund achieve his objectives, quite similar to the
  situation when he has to select individual shares or bonds to invest in.

Developing a Model Portfolio

         Work with Investor to develop long-term goals

         Determine Asset Allocation of the investment

         Determine the sector distribution

         Select specific Fund Manager & their schemes

         Model Portfolio

         Creativity & forecasting




Shortcomings in Operation of Mutual Fund

   1. The Mutual Funds are externally managed. They do not have emplo
      yees of their own. Also there is no specific law to supervise the

                                     51
Mutual Fund in India. There are multiple regulations. While UTI is
     governed by its own regulations, the banks are supervised by Reser
     ved Bank of India, the Central Government & Insurance Company
     mutual regulations funds regulated by Central Government.

2. At present, the investors in India prefers to invest in Mutual Fund as
    a substitute of fixed deposits in Banks. About 75% of the investors
   are not willing to invest in Mutual Funds unless there was a promise
   of a minimum return.

3. Sponsorship of Mutual Funds has a bearing on the integrity &
   efficiency of fund management, which are key to establishing
    investor s confidence. So far, only public sector sponsorship or
    ownership of Mutual Fund organizations had taken care of this need.

4. Unrestrained fund rising by schemes without adequate supply of
   scrip can create severe imbalance in the market & exacerbate the
   distortions.

5. Many small companies did very well last year, by schemes with
   out adequate imbalance in the market but Mutual Funds cannot
   reap their benefits because they are not allowed to invest in smaller
   companies.

6. The Mutual Funds in India are formed as trusts. As there is no
   Distinction made between sponsors, trustees & fund managers, the
   trustees play the roll of fund managers.

7.   The increase in the number of Mutual Funds & various schemes
     has increased competition. Hence it has been remarked by Senior
     Broker Mutual Funds are too busy trying to race against each
     other. As a result they lose their stabilizing factor in the market.




8.      While UTI publishes details of accounts their investments but
        Mutual Funds have not published any profit & loss Account &
        Balance Sheet even after its operation.



                                  52
9.    The Mutual Fund have eroded the Financial clout of institution
        in the Stock market for which cross transaction between Mutual
        Funds & Financial institutions are not only allowing speculators
        to manipulate price but also providing cash leading to distortion
        of balanced growth of market.


  10.   As the Mutual Fund is very poor in standard of efficiency in
        Investors service; such as dispatch of certificates, repurchase
        & attending to inquiries lead to the detoriation of interest of
        the investors towards Mutual Fund.


  11.    Transparency is another area in Mutual Fund, which was neglect
         till recently. Investors have right to know & asset management
         companies have an obligation to inform where how his money
         has been deployed. But investors are deprived of getting
         information.




4.7 CLASSIFICATION OF MUTUAL FUNDS


   Types of Mutual Fund



                                  53
By Constitution

   By Investment Objective

   By Nature Of Investment


 By Constitution

OPEN-END:          No fixed maturity
                   Variable Corpus
                   Not Listed
                   Buy from and sell to the Fund
                   Entry/Exit at NAV related prices

CLOSED-END:        Fixed Maturity
                   Fixed Corpus
                   Generally Listed
                   Buy and sell in the Stock Exchanges
                   Entry/Exit at the market prices

LOAD or NON-LOAD FUNDS

TAX EXEMPT or NON-TAX EXEMPT


By Nature of Investments

     Financial Assets (Equity/Debt/Money Market)
     Physical Assets (Metal/ Real Estate)

 Diversified Growth Funds : Diversified Debt Funds



 Focused Debt Funds : Sector / Specialized / Offshore
                      Municipal bonds/ infrastructure cost bond fund
                      Mortgaged backed




                                 54
High yield debt funds : Assured Return Funds - Indian variety
                              Liquid Funds



       By Investment objective / patterns


      1)   Growth - Equity
      2)   Income - Debt
      3)   Balanced - Equity and Debt
      4)   Money Market - Liquid Debt
      5)   Tax Saving - Equity
      6)   Specialized - Equity
      7)   Assured Return - Equity and Debt


       Mutual Fund can also be classified as open/ closed ended Mutual Fund


    Open Ended Mutual Fund          Close Ended Mutual Fund
Units available for the sale & Unavailable
repurchase
Investor can buy or redeem units Investors can buy units from fund
from the Mutual Fund itself      only at IPO subsequently buying &
                                 selling at the Stock Exchange
Unit Capital is variable         Unit capital is fixed
Pricing at NAV +/- depending on Prices may be quoted at premium or
load charges                     discount on the exchange depending
                                 on perception about fund s future
                                 performance




4.8         WHO CAN INVEST?


      1. Resident including : 1) Resident Indian Individual

                                       55
2)   Indian Companies
                           3)   Indian Trust/ Charitable Institution
                           4)   Banks / FIs/ Partnership Firms
                           5)   NBFC s
                           6)   Insurance companies
                           7)   Provident Funds

   2. Non- residents including : 1) NRI s
                                 2) OCBs

   3. Foreign entities : 1) FIIs registered with SEBI




4.9 INVESTORS RIGHTS AND OBLGATION


Investors Rights

  1. Proportionate right to beneficial ownership of scheme s assets
  2. Right to obtain information from trustees
  3. Entitled to receive divided warrants within 30 days of declaration of
     Dividend
  4. Inspect major documents of the funds
  5. Appointment of the AMC can be terminated by 75% of the unit
     holders of the scheme present & voting
  6. Right to approve of changes in fundamental attributes of a close
     ended schemes so that they can redeem
  7. Receive Annual Reports & A/C Statements




Legal limitations to Investors Rights

   1.   Unit holders cannot use the Trust
   2.   Can imitate legal proceeding against trustees
   3.   Buyers beware

                                     56
4.     Sponsor of Mutual Funds have no obligation to meet any shortfall in
          the assured return-unless explicitly guaranteed in the offer document
   5.     No rights to a prospective investor


Minimum portfolio diversification

   1.     Equity schemes- single company under 10% of NAV, not applicable
          to index & sector funds
   2.     Debts funds- single issuer not more than 15% of NAV, can be
          relaxed to 20% with approval of trustees % AMC
   3.     Unrated as well as rated but below investment grade, not more than
          10% of NAV per issuer
   4.     All such issuers put together not more than 25% of NAV.



Investors Obligations

  1. Carefully study the offer document before investing
  2. Monitor his investment in a scheme by referring Financial statements,
     performance updates & research report sent by the AMC
  3. Complaints readdress
  4. SEBI entertains complaints

Required sponsor to appoint compliance office who has to give due
diligence certificate can remove AMC with 75% vote to this effect. No
recourse to any company law.




   4.10      OFFER ( DOCUMENT) BY MUTUAL FUND


Contents of an offer document



                                       57
1. Summary information- at a glance
  2. Type of scheme growth / income / balanced
  3. Name of AMC
  4. Price of units
  5. If assured return-name of guarantor
  6. Opening & Closing dates of the schemes
  7. Disclaimer clause of SEBI
  8. Details of the sponsor & the AMC
  9. Description of the scheme & the investment philosophy
  10. Terms of issue
  11. Historical statistics
  12. Investors rights & services
  13. Abridged offer document/key information memorandum with
      application form

Significance

  Legal document that protects and governs the right of the investor to
  information

  Is the primary vehicle for the investment decision

  Is the operating document and describes the fundamental attributes of
  schemes.

  One of the most important sources of information for the prospective
  investor

  Is a reference document for the investor to look for relevant information
  at any time.




Mandatory Information


  § Details of the Sponsor
  § Description of the scheme and investment objective/strategy

                                    58
§ Terms of issue
  § Historical statistics
  § Investors Rights and Services

Key Information Memorandum that is distributed with the application form
is an abridged version of the offer document.



Investment Options & Features


     Options
           Growth
           Dividend and Dividend Reinvestment
     Plans
           Systematic Investment Plan - SIP
           Value Averaging Plan - VAP
           Systematic Withdrawal Plan - SWP
           Systematic Transfer Plan - STP
     Other
           Nomination facility




   4.11    ACCOUTING OF MUTUAL FUND


    Balance Sheet of a Mutual Fund is different from that of a bank. All the
    Funds belong to the investors & are held in fiduciary capacity for them.

                                    59
NAV :     Investor s subscriptions are unit capital rather than deposits
          or liability.

           Investments made on behalf on investors are reflected on
           assets side

           There are liabilities but of strictly short term nature.

          NAV= (Market value of investment + Receivables + Other
            Accrued income + Other Assets) (Accrued Expense
              + Other Payables + Other Liabilities) / No: of Units
              Outstanding as at NAV date.

        NAV of all schemes to be calculated & published daily. Close-
        Ended schemes that are not mandatory required to be listed on
        Stock Exchange may declare NAV once in a month or quarter
        as permitted by SEBI.

        Mutual Fund NAV is affected by four set of factors
              Purchase & sale of investment securities
              Valuation of all investment securities held
              Others assets & liabilities
              Units sold or redeemed

        Other assets include any income due to the fund but not actual
        received as on the valuation date. Other liabilities includes
        similar liabilities include similar liabilities. These are to be
        accounted for on an accrual basis. Major expenses like Mana
        gement fee to be accrued on a daily basis. If non-accrual does
        not affect the NAV by more than 1% then it may not be
        accrued for that valuation date.



        Non-recording of addition /sales of investments transaction or
        Sales/purchase of units can be postponed to the next valuation
        date in case such non-recording is not impacting the NAV by
        more then 2%.



                                60
NAV

        NAV = Net assets of scheme / No of units Outstanding

        i.e. Market value of investments+ Receivables+
            Other accrued income+ Other assets- accrued
            expenses- Other Payables- Other liabilities
            No. of units outstanding as at the NAV date


        HOW NAV IS COMPUTED


§   Market value of Equities            - Rs.100 crore    - Asset
§   Market value of Debentures           - Rs.50 crore    - Asset
§   Dividends Accrued                    - Rs.1 crore     - Income
§   Interest Accrued                    - Rs.2 crore       - Income
§   Ongoing Fee payable                  - Rs.0.5 crore     - Liability
§   Amt..payable on shares purchased -Rs.4.5 crore         - Liability
§   No. of units held in the Fund : 10 crore units


§ NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10
                      = [153-5]/10
                      = Rs. 14.80




        NAV - Other information

    Open end funds to declare NAV daily



                                   61
NAV to be published at least weekly

   Close end Schemes (which are not listed) may publish NAV
   monthly/qt with prior approval from SEBI (MIP)

   NAV has to consider up to date transactions

   Non - recorded transactions not to affect NAV calculation
        by more than 2%


§ NAV is influenced by-
    1) Purchase and sale of Investment
    2) Valuation of Investment
    3) Other assets and Liabilities
    4) Units sold or redeemed.




       CHANGE IN NAV

       FORMULA :

       For NAV change in absolute terms =
       (NAV at end of period - NAV at beginning of period) * 100
        NAV at beginning of period

       For NAV change in annualised terms =
       ( NAV change in % in absolute terms) * (365 / No. of days)




       Loads

§ Entry Load or front ended load
              Paid at the time of purchase
              Sale Price = NAV / (1- Sales Load, if any)

                                 62
§ Exit Load or back ended load
             Paid at the time of exit
             Redemption Price = NAV/ (1+ Exit Load)

§ Contingent Deferred Sales Load (CDSL)
             Deferred exit load depending on the period
             Also known as deferred load


        Sale Price

§ Sale Price is the price at which units are sold to investors.
§ Sale Price = NAV + Entry load
§ Formula for computation of Sale Price =
         NAV/ (1-Load)
       Assuming an entry load of 2% in the earlier
       NAV computation example
       Sale Price = 14.80/ (1- 0.02)
                  = 15.10




                                   63
CHAPTER 5 :-

MEASURING & EVALUATING FUND PERFORMANCE




  5. MEASURING & EVALUATING OF MUTUAL FUND



                     64
5.1     NECESSARY FOR MEASURING MUTUAL FUND
        PERFORMANCE


When an investing entrusts his saving to Mutual Fund naturally he hopes to
increase wealth by seeing the value of his investment grow. Having
understood the conceptual & operation aspects of Mutual Funds it is
important to analyze the issues involved in the evaluation of Fund
performance.



      The Investor Perspective: - The investor would naturally be interested
      In tracking through the value of as investment whether invests directly
      in the markets or indirectly through Mutual Funds. He would have to
      make intelligent decisions on whether he gets an acceptable return on
      his investment in the funds selected by him. Or if he needs to switch to
      another fund, he therefore needs to understand the basis of appropriate
      performance measurement for the fund & acquire the basic knowledge
      of the different measures of evaluating the performance well or not, &
      make the right decisions.


      The Adviser s Perspective: - If you were an intermediary recommend
      A Mutual Fund to a potential investor he would accept you to give him
      proper advice on which funds have a performance track record. If you
      want to be an effective investment adviser, then you too have to known
      how to measure & evaluate the performance of the different funds that
      are available to the investor. The need to compare different fund s per
      formance required the advisor to have the knowledge of the correct &
      appropriate measure of evolution the fund performance.




5.2 DIFFERENT MEASURES OF FUND PERFORMANCE



                                       65
§   Different valuation methods
   §   Change in NAV
   §   Total Return
   §   Total Return with dividend reinvested at NAV
   §   Change in NAV - The most common


NAV on day 1 = Rs.10
NAV on day x = Rs.12
% Change in NAV = dayx-day1/day1 * 100
                    = 2/10 *100 = 20 %
Limitations:
Does not account for dividend
Suitable only for growth plans

   Total Return

NAV on day 1 = Rs.20
NAV on day x = Rs.22
Dividend = Rs.4 per unit
Total Return = ((Distribution + Change in NAV)/day1 NAV)* 100
= ((4+ (22-20)/20)*100
= 30%

Limitation:
Does not account for reinvestment

   §   Return on Investments - most suitable
   §   NAV on day 1 = Rs.20
   §   Dividend = Rs.4 per unit NAV at Rs. 21
   §   Div reinvested = Rs (4 /21) = 0.19 units allotted
   §   Total units = 1.19 (original +new allotted)
   §   NAV at year end = Rs.22
   §   Total Return = (NAV on year end*total units )-day1
       NAV)/ day 1 NAV* 100
                          = ((22*1.19) - 20))/20*100
                          = 30.9%

Performance Measure



                                    66
Section one:

Equity Funds:    NAV Growth

                 Total Return

                 Total Return with reinvestment at NAV annulized Return
                 & Distributed

                 Computing Total Return (per share Income & Expenses,
                 Per Share Capital Change , Ratio, Share Outstanding )

                  The expenses Ratio Portfolio Turnover Rate Fund Size

                  Transaction Cost

                  Cash Flow Leverage


Debt Funds:     Peer Group Companies

                The Income Ratio Industry Exposure & Concentration
                NPA s

                Besides NAV Growth

                Expenses Ratio


Section Two:    Concepts of benchmarking for performance evolution

                Performance benchmarking in the Indian Contest


                Active Fund Performance against market indices as bench
                Mark


                Debt Fund-interest rate on alternative investment as bench

                                     67
Mark.

                 Total Return Index

                 Money Market Funds Short Term Govt. Instrument
                 Interest rates as benchmarks.


Section Three: Tracking a funds performance Newspaper, Periodicals,
                Research, Annual Report, Prospectus, Reports from
                Tracking agencies, Internet & Interpretation of Data.


   Other Parameters

   § Expense ratios - indicates fund efficiency and cost effectiveness
   § Portfolio Turnover ratio - measures amount of buying and selling
     done by the fund
   § Transaction cost
   § Fund size
   § Cash holdings




Working of Mutual Fund & Their Performance :- It needs to be certified
that MF invest their funds in Capital market instruments such as Shares,

                                   68
Debentures, Bonds, & Money Market Instruments & therefore the NAV of
such investments will reflect the market values of underlying assets. These
Market values fluctuate & therefore the NAV of the MF Schemes also
fluctuate. All the capital market instruments have varying degrees of risk,
the Degree of risk being the highest in equities & the risk factor is
highlighted in the respective offer documents as well as in the abridged offer
documents.

           The investors therefore are in the full knowledge &
understanding of the risks involved in various schemes. As per SEBI
Regulation all MF disclose their portfolio periodically & all open-ended
Funds offer exit option to investors at NAV based price.

                      RISK RETURN GRID


Risk / Tolerance /      Focus       Suitable Products      Benefits offered
Return Excepted                                            by MF


Low                   Debt          Bank / Company Liquidity, Better
                                    FD, Debt Funds post- Tax Returns

                      Partially     Balanced     Funds,    Liquidity, Better
                      Debt,         some     Diversified   Post- Tax Returns
Medium                Partially     Equity Funds &         Better      Mgmt,
                      Equity        some Debt Funds,       Diversification
                                    Mix of Shares & FD




                                       Capital Market,     Diversification,
High               Equity              Equity      Funds   Expertise        in
                                       ( Diversified as    Stock     Picking,
                                       well as Sector )    Liquidity,    Tax


                                     69
Free Dividends.

The Risk Return Trade-off

The Risk Return Trade-off
                                                       Hedge Funds


                     Growth Funds                       Sectoral Funds
  Potential
                     Aggressive, Value,
  for                    Growth
  return
      Debt
      Funds                 Balanced Funds
  Gilt Funds, Bond            Ratio of Debt : Equity
  Funds, High
  Yield Funds


         Liquid Funds
                       Risk




                                                70
Equities are the best long term bet
   percentage of studied period in which

Other                                                      14%
investment
outperformed                               37%
                          44%
Stocks
outperformed
                          56%                              86%
                                           63%
                  1 year            3 year            5 year
  Source : RBI Report on Currency and Finance (1997-98)
  BSE Sensitive Index of Equity Prices - BSE




                               71
Equities are the best long term bet
Cumulative annualised returns (1980 - 98)
   25.0%
                                                         20.16%

   20.0%
                                              14.47%
   15.0%
               9.2%                 9.74%
                          7.62%
   10.0%


    5.0%


    0.0%
           Inflation     Gold     Bank FD   Co. FD     Equities

             Inflation   Gold     Bank FD    Co. FD    Equities




 Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices -
 BSE




                                            72
CHAPTER 6:-


MUTUAL FUND FEES & EXPENSES




            73
6. MUTUAL FUND FEES & EXPENSES



     Initial Issue Expenses

     Transaction Cost: Entry / Exit Load

      CDSE for No-Load Fees

      Annual Recurring Expenses: AMC Fee
                                 Custodian Fee
                                 Registry Exp.
                                 Trustee Fee
                                 Audit Fee
                                 Marketing & Selling Exp.
                                 Brokerage Exp.
                                 Others


§ Initial Issue expenses
      For launching of the scheme
      Can charge up to 6%

§ Recurring Expenses
    Marketing exp including brokerage
    Transaction cost
    R&T cost
    Custodian Fees
    Audit fees etc
    Investor Communication s cost

§ AMC a charge Investment management fee to the fund on weekly avg.
  net assets.




                                74
§ The limits are: (Subject to overall limit of 6%)
       1.25% for up to Rs.100 cr of weekly avg net assets
       1% in excess of Rs.100 cr.
       No Load schemes can charge an additional fee of 1%



   § Total Expenses that can be charged to the Fund ( excluding entry and
     exit loads):
                                 Equity         Debt
        On the first Rs.100 cr 2.50%            2.25%
        On the next Rs.300 cr 2.25%             2.00%
        On the next Rs.300 cr 2.00 %            1.75%
        On the balance assets   1.75%           1.50%

Based on average weekly net assets

   § Initial issue expenses
     Charge to the scheme capped at 6% of the initial resources
      raised under that scheme

   § Entry/Exit Loads - Transaction costs
     Sale price not greater than 107% / Re-purchase price not lower
     than 93% (95% for close-ended schemes) of the NAV

   § Contingent Deferred Sales Charge ( For No-Load Schemes)
     Ceiling    For redemption within 1year        4%
                For redemption within 2years       3%
                For redemption within 3years       2%
                For redemption within 4years       1%




                                     75
CHAPTER 7:-


ACCOUTING & VALUATION OF MUTUAL FUND




                 76
7. ACCOUNTING & VALUATION OF MUTUAL FUND



Accounting Policies

  § Investments to be marked to market on market prices.
  § Unrealised appreciation cannot be distributed.
  § Purchase & sale of investments to be recognised on the trade date and
    not on settlement date.
  § Investments to be taken as NPA if it gives no return through interest
    for more than 6 months
  § Dividend / Bonus/ rights to be recognised on ex-dividend / ex-bonus
    dates and not on declared dates.
  § Income receivable on Invest NOT accrued for more than 3 months
    should be provided for.
  § For determining gain/ loss on investments - avg cost is to be taken


Mutual Fund Valuation

  § Marking to Market
  § Equity Valuation Norms - Listed, Unlisted, NPA, Untreated
  § Debt valuation norms - Listed, Unlisted, Illiquid
  § Money Market Instruments - valuation norms
  § Effect of Buybacks, Mergers
  § Valuation Models - CRISIL


Valuation

  § TRADED SECURITIES
      Last quoted closing price on the SE where principally traded
      If Not traded on any SE on a particular day, then earliest previous
      day price is taken (not more than 30 days)
      Valuation = MP * current holding




                                  77
§ NON - TRADED SECURITIES
Stocks which are not traded for more than 30 days on any SE are valued on
good faith basis by AMC within following parameters

   § Debt - YTM basis
   § Equity capitalization of earning or NAV or combination of both


Disclosures and Reporting

   § Audit by independent auditor
   § Audited Annual report every year
   § Un-audited accounts to be published within 1 month after March 31 &
     September 30
   § Within 6 months of closure, publish abridged summary of report
     scheme-wise in newspapers
   § Summary to be forwarded to SEBI & unit holders
   § Full portfolio disclosure to be made within a month from the half-year
     ended March 31 & September 30

   § Reporting to SEBI
       Annual audited accounts
       Six monthly unaudited a/cs
       Half yearly statement of movements in net assets of each scheme
       Qtr portfolio statement
       Monthly amount mobilized

   § Communication to investor
       Qtr portfolio
       Annual report

Taxation

   § Capital Gain Benefits

           Long term capital gain tax of 10% without indexation

           Long term capital gain tax of 20% with indexation.



                                      78
Investment Restrictions as a % of Net assets - AMC

  § Max. Investment under all schemes of the AMC in paid up capital
    carrying voting rights in single Co. - 10 %
  § Max. Inter scheme investments of the same AMC - 5 % (no AMC fee
    payable)
  § Inter scheme transfers at CMP and within the objectives of scheme
  § Max. Investment in listed shares of Group Co s - 25 % for each
    scheme.
  § No investments allowed in unlisted/private placement of
    group/associate cos.
  § Can borrow only to meet liquidity requirements. Max for 6 months &
    not more than 20% of NAV of scheme.

Investment Restrictions as a % of Net Assets -Debt

  § Max. Investment in Rated paper in single Co - 15% (can be increased
    to 20% with approval by Board of AMC/Trustee)
  § Max.Investment in Unrated/ Rated but below investment grade in
    single issuer- 10% of NAV
  § Max. Investment in Unrated/Rated but below investment grade in all
    cost - 25% (subject to approval of Board of AMC /Trustee).
  § Restrictions not applicable to Govt. Securities/Money Market
  § Can only invest in marketable securities - no loans


Investment Restrictions as a % of Net Assets -Equity

  § Max. Investment in Equity/Equity related instruments of single - 10%
  § No restrictions in case of Index Fund
  § Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open
    ended funds
  § Buy & Sell securities on Delivery position , No short selling/ carry
    forward allowed.




                                  79
CHAPTER 8:-


                SEBI
[SECURITIES EXCHANGE BOARD OF INDIA]




                 80
SEBI

[THE SECURITIES & EXCHANGE BOARD OF INDIA ACT]

In 1992, an Act to provide for the establishment of a Board to Protect the
interests of Investors in Securities & to promote the development of & to
regulate the Securities market & for matters connected therewith or
incidental thereto on the 30 Jan. 1992 under Section 3.


8.1 MANAGEMENT OF BOARD

  A Chairman

  2 Members from the Officials of the (Ministry) of the Central Govt.
  dealing with Finance (& Administration of the Companies Act, 1956
  2 of 1934)

  1 Member from the Officials of RBI.

  5 Other Members of whom at least 3 shall be the whole time members.

  The General Superintendence, Director, Mgmt. of the Affairs of the
  Board as exercise all powers & do all acts & things which may be
  exercised or done by the Board.

  The Chairman & Members referred in clauses (1) & (4) are appointed by
  the Central Govt. of India & the Members referred in clauses (2) &(3) are
  nominated by the Central Govt. & RBI.

   The Central Govt. has a right to terminate the Service of the Chairman or
   Other appointed Members by giving him a Notice of not less than 3
   Months in writing or 3 Months salary & allowance in lieu.




                                    81
Removal of Members from Office: - The Central Govt. shall remove a
Member from Office if He/ She

   1. Adjudicated as insolvent

   2. Unsound mind & Stands so declared by a Competent Court


   3. Convicted of an Offence, involves a Moral Turpitude

   4. Abused his / her Position as to render his / her Continuation in Office
      detrimental to the Public Interest.



Members not to Participate in Meetings in Certain Cases: - Any Member,
who is a Director of a Company & who as such Director has any Direct or
indirect pecuniary interest in any Matter coming up for consideration at a
meeting of a Board.




                                     82
8.2 FUNCTIONS OF BOARD

 Subjects to the provisions of this Act; it shall be Duty of Board to Protect
 the Investors in Securities to Promote & Development & to Regulate the
 Securities Market by such measures as it thinks fit.

  Registering & Regulating the Working of Stock Brokers, Sub-Brokers,
  transfer agents, bankers to an Issue, trustees of Trusts deeds, Registrars
  to an Issue, Merchant bankers, underwriters, portfolio managers, invest
  ment adverse & such other intermediaries who may be associated with
  securities markets in any manner.

  Registering & Regulating the Working of the Depositories, (Participants)
  Custodians of Securities, Foreign Institution Investors credit rating
  agencies & such other intermediaries.

  Promoting & Regulating the Self- Regulatory Organization.

  Prohibiting fraudulent & unfair trade practices relating to securities
  market insider trading in Securities.

  Calling for Information from, undertaking Inspection, conducting
   inquiries & audits of the Stock Exchanges, (Mutual Fund) & other
   persons associated with the Securities market & intermediaries & self-
   regulatory organization in the Securities Market.

  Conducting Research

  Summoning & enforcing the attendance of Persons & examining them on
  oath.

  Board to Regulate or Prohibit issue of Prospectus, offer document or
  advertisement soliciting money for issue of Securities.

  The investigating Authority shall keep in its custody the Books, Registers,
   other documents & record seized under this section for such period later
   than the conclusion of the investigation.

                                     83
8.3 REGISTRATION CERTIFICATE

   No Stock- Broker, sub- Broker, Share Transfer Agent, Banker an Issue,
   Trustee of Trust deed, Register to an Issue, Merchant Banker, under
    writer, portfolio manager, investment adviser& such other intermediary
    who may be associated with securities market shall buy, sell or deal in
    securities except under & in accordance with the regulation made under
    this Act.

   No Depository, (Participant), custodian of Security, foreign institutional
   Investor, Credit rating agency or any other intermediary associated with
   the Securities markets as the Board may be notification in this behalf
   Specify.

    No person shall Sponsor or cause to be Sponsored or carry on or cause
    to be carried on any venture Capital Funds or collective investment
    Schemes including Mutual Fund, unless he obtains a certificate of
    Registration from the Board in accordance with the Regulations.

    The Board may by order, suspend, cancel or Certificate of Registration
    in such manner as may be determined by Regulations.



Prohibition of Manipulative & Deceptive Devices, insider trading &
Substantial acquisition of Securities & Control :-


   Use or Employ, in connection with the issue, purchase or sale of any
   Security listed or proposed to be listed on a recognized Stock Exchange
   & any manipulative or deceptive device or contrivance in contravention
   of the provisions of this Act or the rules or the regulations made under.

   Employ any device, scheme or artificial to defraud in connection with
   Issues or dealing in Securities which are listed or proposed to be listed
   on a recognized Stock Exchange.



                                    84
Grants by the Central Govt. for all Grants, fees & charges received by
the Board under SEBI Act made by Parliament:-


    All sums received by the Board from such other sources as may be
    decided upon by the Central Govt.

    The salaries allowances & other remuneration of members officers &
    other employees of the Board & other expenses of the Board on objects
    & for other purposes are funded by Central Govt.

    The Board shall maintain proper accounts & other relevant records &
    prepare an annual statement of A/C in such form as may be prescribed
    by the Central Govt. in consultation with the comptroller & Auditor-
    General of India.




Only then can the Mutual Funds hope to stage a recovery & regains some of
the recent heavy losses with a reshuffling of portfolios & net appreciation in
equity values.


   All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI

   Responsible for protecting investors interest and promote orderly growth
   of Mutual Fund Industry

   Formulates regulations, monitors performance and conduct of Mutual
   funds and enforces compliance to regulations through reviewing reports
   and regular inspections




                                     85
Reserve Bank of India & SE

   RBI
         Dual supervision for bank sponsored AMC s
         Issue concerning ownership bank promoted AMC falls with RBI


   Stock Exchange (SE)
         Close ended MF listed of SE. Needs to comply with listing
         guidelines.


Office of public Trustee

   MF being public trustee - governed by Indian Trust Act , 1882

   Trustee Co or Board of Trustee accountable to office of Public Trustee

   Public trustees reports to Charity Comm.




                                    86
Trustee and AMC to comply with Cos Act 1956


         Registrars of Companies (ROC)


          Department of Company Affairs


           Company Law Board (CLB)


             Ministry of Law & Justice




                         87
CHAPTER 9:


RULES & REGULATIONS




       88
9. RULES & REGULATIONS

Legal Frame Work: -    20 Sept.1995 The Depositories Act, 1996
                       Companies Act, 1956
                       30 Jan.1992 SEBI Act
                       16 Feb. 1957 The Securities Contracts
                       (Regulations) Act 1956



I] 1. Short Title, Extent & Commencement:
         a) This Act may be called as Depositories Act, 1956
         b) It extends to the whole of India
         c) Come into force on 20 day of Sept. 1995

  2. Definitions :- 1) Beneficial Owner means a person whose name is
                       Recorded as such with a depository.
                    2) Board means SEBI est. Under section 3 of SEBI
                       Act , 1992.
                    3) Bye- Laws means made by a Depository under
                       section 26.
                    4) Company Law Board means the Board of
                        Company Law Administration constituted under
                        Section 10 E of the Companies Act, 1956.
                    5) Depository means a Company formed & register
                        under the Companies Act, 1956 & which has been
                        garneted a Certificate of Registration under Sub-
                        section (1A) of section 12 of the SEBI Act, 1992.
                    6) Issuer means any person making an Issue of
                         Securities.
                    7) Participant means a Person Registered as such
                        Under, sub-section (1A) of section of SEBI Act.
                    8) Prescribed means a Prescribed by Rules made
                        under this Act.




                                   89
9) Record includes the records maintained in the
                      Form of Books or stored in a Computer or in such
                      form as may be determined by Regulations.
                  10) Registered Owner means a Depository whose name
                      entered as such in the Register of the Issuer.
                  11) Regulation means Regulation made by the Board.
                  12) Security means Security as may be specified by the
                       Board.
                  13) Service means any Service connected with the
                       Recording of Allotment of Securities or Transfer of
                      Ownership of Securities in the Record of Depository.



II ] Certificate of Commencement of Business by Depositories:-

   1. No Depository shall act as a Depository unless it obtains a Certificate
      of Commencement of Business from the Board.
   2. The Board shall not grant a Certificate under sub- section; unless it is
      satisfied that the Depository has adequate Systems & Safeguards to
      prevent Manipulation of Records & Transactions.


III] Rights & Obligations of Depositories, Participants, Issuers &
     Beneficial Owners:-

  Agreement between Depository & Participant: With one or more
  participants as its Agents, Specified by the Bye- Laws.
  1. Services of Depository- Any Person, through a Participant may enter
     into an Agreement, in such form as may be specified by the Bye-
     Laws, with any Depository for availing its services.

  Surrendered of Certificate of Security :
  1. Any Person who has entered into an Agreement under section 5 shall
     surrendered the Certificate of Security, for which he seeks to avail
     the Services of a Depository.




                                     90
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
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Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent
Mutual und analysis & portfolio managemaent

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Mutual und analysis & portfolio managemaent

  • 1. Project Report By Vikram Dhumal(523) Topic: Mutual und Analysis & Portfolio Managemaent Firm: Vantage Wealth Management Solutions Pvt. Ltd. College(MMM): Sinhgad Institute of Business Administration And Computer Application CONTENT CHAPTER 1:- INTRODUCTION ..4 1.1 OBJECTIVE OF THE PROJECT ...5 1.2 SELECTION OF THE TOPIC ...6 1.3 OBJECTIVE OF THE STUDY ...7 1.4 METHODOLOGY OF THE PROJECT ...8 1.5 SCOPE OF THE STUDY ...9 1.6 LIMITATIONS OF THE PROJECT ..10 CHAPTER 2:- PROFILE OF THE ORGANISATION .11 2.1 A] COMPANY PROFILE .12 B] COMPANY MISSION .14 2.2 AREA OF SERVICES .16 CHAPTER 3:- INVESTMENT MANAGEMENT .19 3.1 EQUITY PORTFOLIO MANAGEMENT .20 3.2 EQUITY FUNDS .21 3.3 TYPES OF EQUITY INSTRUMENTS .23 3.4 EQUITY CLASSES .24 3.5 DEBT PORTFOLIO MANAGEMENT .25 3.6 A REVIEW OF INDIAN DEBT MARKET .26 3.7 INVESTMENT POLICIES & RESTRICTIONS .32 1
  • 2. CHAPTER4:- INTRODUCTION OF MUTUAL FUNDS ..36 4.1 CONCEPT OF MUTUAL FUND ..37 4.2 EMERGENCE OF MUTUAL FUNDS ..38 4.3 HISTORY OF MUTUAL FUNDS ...39 4.4 PLACE OF MUTUAL FUNDS IN FINANCIAL MARKET 44 4.5 THE ADVANTEGES OF MUTUAL FUNDS ...47 4.6 THE DISADVANTAGES OF MUTUAL FUNDS ...50 4.7 CLASSIFICATION OF MUTUAL FUNDS ...53 4.8 WHO CAN INVEST? ...55 4.9 INVESTORS RIGHTS & OBLIGATION 55 4.10 OFFER(DOCUMENTS) BY MUTUAL FUNDS . ...57 4.11 ACCOUNTING OF MUTUAL FUNDS 59 CHAPTER 5:- MEASURING & EVALUATING OF MUTUAL FUND PERFORMANCE 63 5.1 NECESSARY FOR MEASURING MUTUAL FUND ....64 PERFORMANCE 5.2 DIFFERENT MEASURES OF FUND PERFORMANCE ..65 CHAPTER 6:- MUTUAL FUND FEES & EXPENSES 72 CHAPTER 7:- ACCOUNTING & VALUATION OF MUTUAL FUND 75 CHAPTER 8:-SECURITIES & EXCHANGE BOARD OF INDIA..79 2
  • 3. 8.1 MANAGEMENT BOARD OF INDIA ..81 8.2 FUNCTIONS OF BOARD ..82 8.3 REGISTRATION CERTIFICATE ..83 CHAPTER 9:- RULES & REGULATIONS 87 CHAPTER 10:- PENALTIES & ADJUDICATION 92 CHAPTER 11:- SUGGESTIONS .95 GLOSSERY 100 BIBLIOGRAPHY .131 3
  • 5. 1. INTRODUCTION 1.1 OBJECTIVE OF THE PROJECT Theoretical Knowledge without Practical Experience is like a Body without Soul. So without Practical implementations, theory remains no use. Hence we need to gain the Practical Experience. And what better would be, then a Project work for the same. Also as a part of our MBA curriculum, we need to undergo the training programmed for minimum of 60 days, in a company. I selected area of MUTUAL FUND INDUSTRY, which pools the funds & reduces risk by investing in different diversified assets. I studied as to how this industry proves to an option for the investors, by studying the performance of mutual funds for few months considering their Net Asset Values. Hence this is a project work on a Mutual Fund Analysis & Portfolio Management . 5
  • 6. 1.2 SELECTION OF TOPIC Generally when we decide to study the investment options available in today s complex & risky scenario, we should thoroughly evaluate the option upon various factors. These factors should include: The Past Performance of the option under study Risk adjusted returns from the invested plan Share in the Portfolio Policy Fund House When observed the above parameters for the evolution of The Financial Performance of the option under study, then immediate concept that clicks our mind is MUTUAL FUNDS . So for this, I have selected Mutual Funds performance to study as investment option. Study of Mutual Fund includes Study of Equity, Debt, Bonds, Securities, etc. Investment Decision Risk Measurement & risk diversifications Portfolio Management Analyzing the Option (a Particular Security/ Instrument). 6
  • 7. 1.3 OBJECTIVE OF THE STUDY Vision is a long term policy & to reach there you can t just leap & jump. To there the stairs of objectives need to be climbed successfully an so objectives of this project are How to find the RIGHT SCRIPT to buy & sell at RIGHT TIME , thereby mobilizing the saving aptly. How to get good return on investment How to achieve Capital appreciations How to form a right PORTFOLIO & How to invest in RIGHT PORTFOLIO . To analyze the performance of Mutual Funds. 7
  • 8. 1.4 METHODOLOGY OF THE PROJECT Defining objective won t suffice unless & until a proper methodology is to achieve the objectives. 1. The methodology of the project here is to analyse the investments Opportunities available for the investors & study the returns & risk involved in various investment opportunities. 2. Study of investment management, risk management & portfolio Diversification. 3. The methodology of the project here is to analyze the Mutual Fund performance based on:- NAV (NET ASSET VALUE) :- It tracked the daily NAV s Of the Mutual Funds to compute the performance. Total Return Basis: By taking into account dividends distributed by the funds between the two NAV s change To arrive at a total return. Portfolio turnover Ratio: This means the Amount of Buying & selling done by a fund. Asset Purchased/ Sold PTR= Funds Net Assets Study Financial & Legal obligations of Mutual Funds. 8
  • 9. 1.5 SCOPE OF THE STUDY The study encompasses different aspects from point of view of investors as follows. 1. Investment portfolio selection 2. types of Mutual Funds 3. Expected returns on investment 4. Investment in Tax Saving Schemes. Despite various problems, India Could still have a lot of profitable opportunities to offer in this sector. And given the fact it is the major emerging market to open up. It is equally important that, even if its various Fund Investments can harness a small part of the total funds available internationally, Indian Foreign Exchange reserves will shoot up. According to World Bank Study, portfolio investment in the emerging markets will rise above a massive $100 Billion by 2002. Actual figures are yet not published for the same. 9
  • 10. 1.6 LIMITATIONS OF THE STUDY This project is not funded one, hence it gets restricted to a mere in depth study & few guidelines for investors. This study is carried out in pursuance of curriculum MBA, which is mandatory for period of two months; hence exhaustive data is not available upon which conclusion can be relied upon. NAV are prone to environmental factors 7 which would influence the value during trading. Investments in Securities carry risks & Mutual Fund units are no exception. Risk being erosion in the Market value of the Investment of decrease in the percentage dividends declared by the Mutual Fund. The risk factors inherent in a Mutual Fund Schemes are the schemes, market risk, & the investment experience of the Asset Management Company. Factors affecting the Market Price of Investment may be due to Market forces, performance of the companies, Govt. Policies, Interest rates & so on. Study for all the existing Mutual Fund Schemes is not feasible, Sample schemes of all Mutual Fund Types are considered for 10
  • 11. the Study. CHAPTER 2 :- PROFILE OF THE ORGANIZATION 11
  • 12. 2. PROFILE OF THE ORGANIZATION VANTAGE INSURANCE SERVICES PVT. LTD. VANTAGE WEALTH MANAGEMENT SOLUTIONS PVT. LTD. 2.1 A] COMPANY PROFILE:- Vantage is Financial intermediary with diversified presence across various Financial services encompassing a range of Risk & Wealth Mgmt. solutions with a PAN India presence spreader across- Mumbai, Pune, Bangalore, Chennai, Hyderabad & Gurgaon, the group has created a mark in the Financial Services market with the unique concept of being a one stop solution for Corporates & Individuals catering to needs in the field of Insurance- Life & General, Investments, such as Mutual Funds, Fixed Income Instruments, Portfolio Advisory, Life stage planning among others & also Tax Planning. Vantage Wealth Mgmt. is primarily focused on an end to end solutions provider for all investment & insurance needs of an Individual. Vantage Insurance Services, an IRDA mandated, Direct Insurance Broker, with a License in both Life & General Insurance is focused on providing the best 12
  • 13. Risk Mgmt. solution to a Corporate. A synergy of both the group companies offers a wide array of services & products to suit Individual & Corporate needs. Later, it forayed into the Register & Share transfer activities & subsequently into Financial Services. All along, Vantage Group is Strong ethic & Professional background leveraged with Information Technology enabled it to deliver quantity to the individual. A decade of Commitment, Professional Integrity & Vision helped Vantage to achieve a leadership position in its field when it handled the number of issues ever handled in the history of the Indian Stock Market in a year. Thereafter, Vantage Group made inroads into a host of Capital market services- Corporate & Retail which provided to be a sound Business Synergy. Today, Vantage has assessed to millions of Indian Shareholders, besides companies, Banks, Financial Institutes & regulatory agencies. Over the Past one & decades, Vantage has evolved as a veritable link between Industry, Finance & people. 13
  • 14. 2.1 B] COMPANY MISSION We endeavor to move beyond a Transactional Approach in Insurance Broking & Investment Advisory to faster growth of Consultative relationship with our Clients aimed at delivering an Integrated Solution in the areas of Risk & Wealth Management. To achieve & retain leadership, Vantage Group shall aim for complete Customer Satisfactions, by combining its Human & Technology Resources, to provide superior quality Financial Services. QUALITY OBJECTIVES As per the Quality Policy, Vantage Group will:- Build in-house processes that will ensure transparent & harmonious relationships with its Clients & Investors to provide high quality of services. Establish a partner relationship with its Investors Service agents & Vendors that will help in keeping Commitments to the Customers. Provide high quality of Work Life for all its Employees & Equip them with adequate Knowledge & Skills so as to respond to Customer s needs. 14
  • 15. Continue to uphold values of Honesty & Integrity & Strive to Establish unparalleled standards in Business ethics. Use State-of-the art Information Technology in developing new & Innovative Financial Products & Services to meet changing needs Of Investors & Clients. Strives to be a reliable source of value added Financial Products & Services & constantly guide the Individuals& Institutions in making A Judicious choice of same. Strive to keep all Stale-holders (Share-holders, Clients, Employees, Suppliers & Regulatory authorities ) proud & satisfied. 15
  • 16. 2.2 AREA OF SERVICES/ PRODUCTS RANGE ASSETS PRODUCTS Mutual Fund Tax Saving Bonds Capital Gain Bonds State & Central Govt. Bonds Equity Funds SERVICES PRODUCTS Insurance Advisory Services Tax Advisory Services Stock Broking Services Investment Consultancy Services Project Finance & Consultancy Portfolio Management Sub- Broker for the New Issues BSE Trading & settlement 16
  • 17. NSE Trading & settlement BUSINESS GROUPS:- Corporates Solution Groups Personal Financial Consultancy Group CORPORATES SOLUTION GROUPS 1. I.R.D.A recognized Direct Insurance Broker with License to intermediate in both General Insurance & Life Insurance Business. 2. Focus on delivering Integrated Risk Mgmt. solution across diverse areas such as:- Employee Benefit Insurance PAN India more than 2, 50.000 Members covered through Vantage managed Health, Accident & Life Insurance solutions. Over 45-50 Corporates including, some of the largest most respected corporate in the IT & ITes Industry, have entrusted up with their Employee benefit Insurance Programme. Property Insurance Including Extensive experience in Project & Machinery Insurance. Business Interruption / Loss of Profit insur -ence is another area where we have rendered our expertise to cer -tain key corporates. Liability Insurance Experienced in delivering solution for Comp lex Global Liability Exposures worked with many leading IT & ITes companies in this area. Specialized Risk covers including Movie & Event Insurance. 1. Web enabled solution in Employee Benefit Insurance. 2. Vantage draws Technical Expertise in Risk Mgmt.with Advisory 17
  • 18. Support from the core group consisting of experienced Experts From Insurance Cooperation, Valuers, Loss Assessors, Property. PERSONAL FINANCIAL CONSULTANCY GROUP:- Vantage is an AMFI Registered Mutual Fund Distributors. Focus on delivering customized Financial Planning Solution keeping in a view an Individual s requirements such as: 1) Financial Goals & Investment Objective. 2) Life Insurance Coverage 3) Retirement Planning 4) Tax Planning Online Portfolio updates. 18
  • 19. CHAPTER 3 :- INVESTMENT MANAGEMENT 19
  • 20. 3. INVESTMENT MANAGEMENT 3.1 EQUITY PORTFOLIO MANAGEMENT An equity portfolio manager s task consists of two major steps: a) Constructing a Portfolio of Equity shares or equity linked instrument That is consistent with the Investment objective of the fund & b) Managing or constantly re-balancing the portfolio to produce capital Appreciation & earning that would reward the investors with superior Returns. STOCK SELECTION The equity Portfolio manager has available to him a whole universe of equity shares & other instruments such as preference shares, warrants or convertible debentures issued by many companies. However, more specially, the equity portfolio manager will choose from a universe of shares in accordance with: A) The nature of the Equity instrument, or a particular stock s unique characteristics, & B) A certain investment styles or Philosophy in the process of choosing. 20
  • 21. 3.2 EQUITY FUNDS Form categories based on risk-return profile - Diversified , Index , Sectorial & Specialized Form categories based on fund manager s style - Value and Growth Evaluate Performance - Peer Group and Benchmark comparison Consider Structural Characteristics - Size of the Fund - Fund History - Portfolio Manager Experience - Cost of Investing: Expense Ratio Consider Portfolio Characteristics - Percentage Cash - Portfolio Concentration - Market Capitalization of Fund - Portfolio Turnover: Churn - Portfolio Risk Characteristics R-squared Beta Dividend Yield - High R Squared , Low Beta And High Dividend yield preferred 21
  • 22. OTHER VARITIES OF EQUITY FUNDS Specialized Funds:- 1) Sector Funds 2) Offshore Funds 3) Small Cap Equity Funds 4) Option Income funds - writes options 5) ELSS - Indian Variety 6) Equity Index Funds 7) Value Funds 8) Equity Income Funds - invest in co. with higher dividend yields i.e. Power/utilities Other Equity Oriented Funds: Hybrid Funds -Balanced Funds -Growth & Income Funds -Assets Allocation Funds Commodity Funds Real Estate Funds Debt Funds : Diversified Debt Funds Focused Debt Funds Sector / Specialized / Offshore Municipal bonds / infrastructure cost bond funds Mortgaged backed 22
  • 23. High yield debt funds Assured Return Funds - Indian variety Liquid Funds 3.3 TYPES OF EQUITY INSTRUMENTS Ordinary Shares: Ordinary Shareholders are the true owners of the company, & each share entitles the holders of ownership privileges such as dividends declared by the company & voting right at the meetings. Losses as well as profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are risk investment briefing with them potential for the capital appreciation in return for the addition that the investors undertakes in the comparison to debt instrument with guaranteed income. PREFERENCE SHARES Unlike equity share, preferences share entitled the holder to dividend at the rate subject to availability of profit after tax. If preference shares are cumulative, unpaid dividend for years of inadequate are paid in subsequently year preference share do not entitled the holder to ownership privileges such as voting right at the meeting. This preference shares are generally redeemed after certain period. EQUITY WARRANTS These are long terms right offer holder the right to purchase equity share in a company at a fixed price (Usually Higher than current Market Price) within the specified period. Warrants are in the nature of option on stocks. CONVERTIBLE DEBENTURE As the term suggest, this are fixed rate debt instrument that are covered into a specified number of equity share at the end of specified period for Ex.- A 23
  • 24. company may issue 10% CD for Rs. 100 each that would be conversed into 5 equity share after 2 years. That is a holder of 1 debenture at the time issue would become a holder of 5 equity share in the 2 years time. 3.4 EQUITY CLASSES Equity shares generally classified on the basic of either the market capitalization or the anticipated movement of the accompany earning. It is a imperative for the Fund Manager to understand these elements of the stocks before he selects form the inclusion in the portfolio. CLASSIFICATION IN TERMS OF MARKET CAPITALIZATION Market is the equivalent to the current value of a company i.e. current market price per share time per the number of outstanding shares. There are large capitalization company, Mid-cap Company & small company. Different scheme of a fund may define there fund objective as a preference for large or mid or small-cap companies shares. Large cap share are more liquid & hence easily tradable. Mid or small cap share may be thought of as having to track this different classes of share. CLASSIFICATION IN TERMS OF ANTICIPATED EARNING In terms of anticipated earning of the share are generally classified on the basis of their market price in relation to one of the following measures:- 1] PRICE / EARNING RATIO (P/E Ratio) Price/ Earning ratio is a price of share divided by the earning per share & indicates weather the investors are willing to pay for a company earning prudential. Young &/or fast growing companies usually high P/E ratios. Established companies in nature industries may have P/E Ratios. The P/E analysis is sometimes supplemented with the rate such as Market Priceto Book Value & Market Price to cash flow per share. 2] EARNING PER SHARE (EPS) 24
  • 25. Earning per Share is the amount of total earning received on each share. The values of EPS are got by dividing total earning by number of shares. Thus more the EPS more beneficial is for the Shareholder. 3.5 DEBT PORTFOLIO MANAGEMENT Debt portfolio has to contend with the construction & management of portfolio debt instrument, the primary objective of generating income. Just as the inquiry fund manager has to go through a stock selection process, a debt fund manager has to select from whole universe of debt securities he wants to invest in. Classification of Debt Securities Many instruments give regular income. However, in the context of debt mutual funds, manager invest only in market-trader instrument (not in loans as done by the bank) debt instrument may be secured by the assets of the borrowers as in case of corporate, or be unsecured as is the case with Indian Financial Bond. A Debt is issued by a borrower & is often known by the issuer category thus giving us Government security & Corporate Securities or FI Bonds. Debt instrument are also distinguished by their maturity profile. Thus, instrument issued with short term maturities, typically under one year maturities are classified as Money Market Securities instrument carrying Long then one year maturities are generally called Debt Securities. Most debt securities are interested bearing. However, there are securities that are discounted securities or zero coupon bonds that are generally fixed that pay interest on a Floating Rate basis. There are lots of new instruments coming in the debt markets. 25
  • 26. 3.6 A REVIEW OF THE INDIAN DEBT MARKET Instruments in the Indian Debt Market The objective of a debt is to provide investors with a stable income stream. Hence, a debt fund invests mainly in instrument that yields a fixed rate of return & where the principal is secured. The debt market in Indian offers the following instruments for investment for by Mutual Funds. Certificates of Deposits Certificates of Deposit (CD) are issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Banks CDs have a maturity period of 91 days to one year, while those issued by FI s have maturities between one & three years. Commercial Paper Commercial Paper (CP) is a short term, unsecured issued by corporate bodies (Public & Private) to meet short-term working capital requirement. Maturity varies between 3 months & 1 year. This instrument can be incorporated in Indian. CP s can be issued to NRI s on non-repatriable & non- transferable basis. Corporate Debentures The debentures are usually issued by manufacturing companies with physical assets, as secured instruments; in the form of certificates they are 26
  • 27. assigned a credit rating by rating agencies. Trading in Debentures is generally based on the current yield & market values are based on yield of maturity. All publicly issued Debentures is listed on exchange. Floating Rate Bonds These are short to medium term bearing instruments issued by the financial intermediaries & corporate. The typical maturity of these bonds is 3 to 5 years. FRB s issued by Financial Institutions are generally unsecured while those from private corporate are secured. The FRB s are pegged to different reference as much as T- bill or bank deposits rates. The FRB s issued by the Government of Indians are in the form of Stock Certified of issued by credit to SGL accounts maintained by the RBI. Government Security These are medium to long term interest bearing obligations issued through the RBI by the Government of India & State Governments. The RBI decides The cut-off on the basis of bids received during the auctions. These are issued where the rates are pre-specified & the investor s only bids for the quality. In most cases, the coupon is paid semi annually with bullet redemption features. A large part of the trading is concentrated in those government securities that are eligible for repost (repurchase) transition, i.e. sale of a security with a parallel agreement to repurchase the same at a future date. The RBI acts as the depository, its public debt office maintain an SGL account for various banks & Financial Institution, & issues or transfers the securities in the form of book entries made in SGL accounts. If a fund does not have an SGL account, it may open a constitution account with any RBI- registered bank. Treasury Bills T- Bills are shortly obligation issued through the RBI by the Government of India at a discount the RBI Issues T-Bills for different tenures: 14 days, 91 27
  • 28. days & 364 days. These treasury bills are issued through an auction procedure. The yield is determined on the basis bids tendered & accepted. Bank/ FI Bond Most of the institutional bonds are in the form of promissory notes transferable by endorsement & delivery. These are negotiable, issued by the Financial Institution such as IDB/ ICICI/ IFCI or by commercial bank. These instruments have been issued both as regular income bonds & as discounted long term instruments (deep discount bonds). Public Sector Undertaking (PSU) Bonds PSU Bonds are medium & long term obligation issued by Public sector companies in which the government share holding is generally greater then 51% . Some PSU Bonds carry tax exemptions. The maximum maturity is 5 year for Taxable bonds & 7 years for Tax- Free Bonds. PSU bonds are generally not guaranteed by the government & are in the form of promissory notes transferable by endorsement & delivery. PSU bonds in Electronic form (Demat) are eligible report transactions. Basic Characteristics of Money Market Security Money Market fund invest always exclusively in money market security, which are instrument of under 1 Year Maturity many of them of discounted or zero coupon delivery. Money market fund portfolios may include government corporate of bank issued security. In India, certificates of deposits, treasury bills & commercial papers from the three major types of Instruments where MF s usually invest in. Basic Characteristics of Bonds or Debt Security 28
  • 29. A debt fund or a bond fund generally invest a large part of its corpus in longer term fixed income in debit securities issued by government, companies or Banks/ FI s. A small part is invested in money market. In Indian context, long dated government securities, corporate debentures & FI Bonds from the bulk of debt fund portfolios. Bonds have the following four keys characteristics set at the time of issue: Par Value : This is the principal amount that investors will be paid upon Maturity of the bonds, & is also known as the face value. Coupon : This is the annual rate of interest paid on the par value of the Bond to the investor. Maturity : This refers to the term of the bond that is , the date on which the Bond that is , the date on which the issuer has to repay the principle amount of the Bond. Call or Provision: These are included in some bond contracts to allow the issuer the option to redeem the bonds before Maturity thereby allow -ing refinance of debt at lower interest rates Measuring of Bond Yields: Returns on a fixed income security is generally computed in the form of Current Yield or a Yield to Maturity. Current Yield: This relates interest on a Bond to its Current Market Price by dividing the annual coupon interest by the current market price. 1) Yield to Maturity (YTM): This is a sophisticated technique of bond analysis. Posen defines YTM (also known as the bonds IRR) as the annual rate of return & investors would realize if he a bond at a particular price, & received the principal at maturity. YTM allows investors to compare bond with different coupons, maturities & price & is quoted for trading purposes. The relationship between the price & YTM of a bond is expressed by the following formula: 29
  • 30. PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2 .+ (Coupon Principle) / (1+ YTM) n The inverse relation between price & YTM is important in bond portfolio management. Yield Curve: This is the graph showing yields for bonds various maturities, using a benchmark group of bond, such as the Government Securities. This is also known as the Term Structure of Interest Rates (TRIR). This yields curve usually upwards sloping become longer maturities generally offer higher yields. This is because longer term debt carries higher risk on account of inflation & other economic factors. The yield curve is important indicators of expected trends in interest rates. RISK IN INVESTING IN BOND: 1) Interest Rates-Risk: The price of bond will change in a direction opposite to movement in interest rates. When interest rates rises bond price will fall, thus an existing bond portfolio losing valve. A sound analysis of interest rates movement is therefore essential. 2) Reinvestment Risk: A bonds yield to maturity assumes reinvestment of interest received during the term at a constant rate. This not may be possible if interest rate changes & risk is of uncertain cash flow being reinvested at a lower rate. 3) Call Risk: If a bond has been issued with a call provision the issuer may call them back & return the proceeds to the investors whenever interest rates fall, so the borrowing can be replaced with cheaper debt. The investor thus cannot keep a high yield bond. 30
  • 31. 4) Default Risk: A bond is a subject to the risk that is assured may default on its obligation to make timely principle & interest payments. A fund needs to assess this risk based on the bonds rating & the analysis generated by its research on issuer s cash flows. 5) Inflation Risk: When the inflation rate rises, purchasing power decline. Therefore, the value of interest payment is reduced. Investors will therefore expect higher yields in bonds. Higher interest rate will make the existing bond lose value again. 6) Liquidity Risk: This refer to the ease with which investment in a bond can be liquidated (or sold) at a price near its value. This element is important for a fund because its investments are made on behalf of unit-holder & market conditions may require the fund to liquidate a part of its portfolio within a short time. Instruments in the market § Equity 1) Ordinary shares 2) Pref. shares 3) Equity warrants 4) Convertible Debentures § P/E Ratio § Dividend Yield § Cyclical / Growth / Value Stocks Market Capitalization =Sum total of CMP of shares * no. of shares 31
  • 32. 3.7 INVETMENT POLICIES AND RESTRICTION Investment Policy: Investment Policies of each scheme are dictated by its investment objective as stated in the offer document. In practice the board policy guidelines are included in the offer documents while the day- to-day policies are laid down by the AMC management for the fund manager to conform to fund manager do have some flexibility in alerting the strategy in the light of changing market condition & in specific selection. Investment strategy of an equity fund will lay down guideline on which sectors & what ki8nd of companies to invest in, what percentage will be held in the form of cash or money market securities or how much in debt securities. Usually minimum & maximum allocation of funds to each class- Equity & Cash is specified. Investment policies of a debt fund will also lay down guidelines on the portfolio & their average maturity. Minimum & Maximum percentage of Cash / money market instruments in the portfolio has to be specified too. Investment policy of balanced funds will specify the minimum & maximum asset allocations to equity & debt / cash besides the normal guidelines for the equity & debt components. Investment policies of the money market funds will largely specify the type of instrument preferred & their profile. Investment Restriction by SEBI: 32
  • 33. While the AMC management the AMC determines the investment policies & its fund manager must also comply with the restriction imposed by regulator-mostly SEBI & in case of money market fund the RBI. SEBI s main objective in laying down restriction on AMC s is to ensure investor protection. The objective is attained by: 1. Maintaining minimum level of diversification in Mutual Fund Investments & 2. Ensuring that the Investor s funds are used to favour a few or associated invested in approved securities only. To attain this Regulatory objectives, some major restrictions imposed by SEBI. Minimum Portfolio Diversification Norms Investment in equity shares or equity related instruments of a single company are restricted to 10% of the NAV as a scheme. However the limit of 10 % does not apply in case of sector / industry specified schemes subject to adequate discloser in the offer documents. The basic objective here is to ensure that a fund a fund has an adequately diversified portfolio unless the specified objective if the scheme is to limit the investments. Similarly for debt schemes, SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer is not allowed to exceed 10% of the NAV subject to approval of board of AMC & trustee company? These restriction do not apply to & money & government securities. SEBI s restriction on the investment in unlisted share to a minimum of 10 % of the NAV of a scheme for closed end 33
  • 34. scheme. In case of open ended the limits may be made more stringent to 5% of the NAV of the scheme as there is continuous purchase by investors in such a scheme. Approved and Unapproved Investment: 1. A Mutual Fund under all its scheme taken together will not own more than 10 % of any company paid up capital voting rights. The objective is not only to assure diversified investment but also to prevent fund sponsor trying to acquire control of any company through fund investment route. 2. Scheme may invest in another scheme under the same AMC or any other Mutual Fund without charging any fees, provided that the aggregate inter scheme investment made by all scheme under the same management does not exceed 5% of the net asset value of the Mutual Fund. The objective here is to prevent an artificial inflection of fund size by inter scheme investment. 3. Debt instrument in which scheme invests must be rated as investment Grade by at least one recognized rating agency. Unrated investment could denote favors extended to a borrower or in any case do not protect the investor. 4. Mutual Funds may buy & sell securities only on the basis deliveries as Short selling or carry forward transaction is not in general consonance with Mutual Funds as investment vehicles. 5. In case of long term investment securities should be purchased or transferred in the name of Mutual Scheme. Securities cannot be held in a general account & transferred later various scheme to main certain profile or loss objective. Each investment must be done with the objective of a scheme in mind therefore be immediately assigned to a given scheme. 34
  • 35. 6. Pending investment of funds pursuant to the objective the fund may invest the same in short term deposit of scheduled commercial banks. Case is to the scheduled banks for general investor protection. 7. Mutual Funds are not allowed to advance any loans. But lead security in accordance with SEBI s Stock Leading Scheme. Mutual Fund must invest in marketable securities not in unmarketable loans. 8. A Mutual Fund is prohibited from investing in any unlisted security or a security issued through private placement by an associated or Group Company of the sponsor. In the case of listed securities of group companies of the sponsor or group company of the sponsor, it is not allowed to invest an amount in exceed of 25% of the net assets of any of its scheme of fund. The objective is to ensure that the fund sponsor do not use investor funds to bolster their other group companies. 9. A Mutual Fund may transfer investment from one scheme to another Provided the transfer is at the current market rate & in conformity with the investment objective of the scheme to which to losses form one group of investor to another. 35
  • 36. CHAPTER 4:- INTRODUCTION TO MUTUAL FUNDS 36
  • 37. 4. INTRODUCTION TO MUTUAL FUND 4.1 THE CONCEPT OF A MUTUAL FUND A Mutual Fund is a common pool money into which investor place their contribution that is to be investors in accordance with a stated objective. The ownership of the joint or Mutual , the fund belongs to the contribution make a single investor s ownership of the fund to the total amount of the fund. A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective. A Mutual Fund used the money collected from investors to buy those assets, which are specifically permitted by its stated investment objective. Thus an equity fund would buy equity asset- ordinary shares, preferences share, warrants etc. a bond fund would buy debt instrument such as debentures, bonds, or government securities. It is these assets, which are owns by the investor in the same proportion as their contribution bears to the total contribution of all investor put together. Since each owner is a part owner of a Mutual Fund, it is necessary to establish the value of his part. In other words, each share or unit that investors hold needs to be assigned a value. Since the unit held by investors 37
  • 38. evidence the ownership of the funds asset, the value of total asset of the fund. When divided by the total number of units issued by the Mutual Fund gives us the value of one unit. This is generally called the net asset value (NAV) of the number of unit held. 4.2 EMERGENCY OF MUTUAL FUNDS Mutual Funds now represent perhaps the most appropriate investment opportunity for most investor, as financial markets become more sophisticated & complex. Investors need a Financial Intermediary who provides the required knowledge & professional expertise on successful investing. It is no wonder then in the birthplace of Mutual Fund the U.S.A. the fund industry has already overtaken the banking industry more funds being under Mutual Fund Management than deposited with the bank. The Indian Mutual Fund Industry is a fast growing segment of the economy. The Industry consists of 36 Mutual Funds including Unit Trust of India. With 397 schemes spread over variety products the industry today manages assets close to Rs. 97,000 crores. The Indian Mutual Fund Industry has already started opening up, of many of exciting investment opportunity to Indian investors. We have started witnessing the phenomenon of more saving now being entrusted to the funds than to the banks. Mutual Funds as still a new Financial Intermediary in India. Hence it is important that the investors should make proper analysis of the available scheme in the market. The investment advisor & even the fund employees acquire better knowledge of what Mutual Funds are. What, they can do for investor & what they cannot & how they function differently from other intermediaries such as the banks. The association of Mutual Funds in India has commissioned a workbook, as the basic compellation of the 38
  • 39. minimum knowledge requires by both fund distributors & the employees. The workbook provided by AMFI can serve as a guide distributors & employees. 4.3 HISTORY OF MUTUAL FUNDS IN INDIA The Indian Mutual Fund Industry began with the formation of the Unit Trust of India (UTI) in 1964 by the Government. UTI was formed as a non-profit organization governed under a special legislation, the Unit Trust of India Act, 1963. It had a monopoly up to 1987 & during this period, UTI launched a series of equity & debt schemes & established itself as a household name with assets under management of Rs. 4563 crore & unit holder accounts of slightly under 3 Million by mid 1987. UTI s growth continued up to 1996 when the strong entry of private sector players saw its share of the market reducing sharply although UTI continues to be a dominant force in the Indian Financial Services industry with assets of over Rs. 67,000 crore as of December 31, 1999. In 1987, the Industry saw the entry of Public Sector Mutual Funds, i.e. funds promoted by public sector banks & financial institutions, such as SBI, Canara Bank, LIC & IDBI. Predictably they were given the brand of their promoters such as SBI Mutual Fund, Canbank Mutual Fund, and LIC Mutual Fund & IDBI Mutual Fund. Other Public Sector Mutual Funds also entered the market but UTI continued to remain the dominant player with a share of 84% in 1991-92. The Government first allowed private sector participation in 1993 & the subsequent entry of a large number of players has made the industry very competitive. The diagram below shows the three segments & a few of the players in each segment. 39
  • 40. UTI was started, at the initiative of the Reserve Bank of India & the Government of India. The objective then was to attract the small investors & introduce them to market investment. Since, then the History of Mutual Funds in India can be broadly divided into three distinct phases. Phase I: 1964 87 (Unit Trust Of India) This phase spans from 1964 to 1988. In 1963, UTI was established by an act of Parliament & given a monopoly. Operationally, UTI was set up by the Reserve Bank of India, but was later de-linked from the RBI. The first & still one of the largest schemes, launched by the UTI was Unit Scheme 1964. Over the years, US-64 attracted & probably still has the largest number of investors in any single investments schemes. First Phase (1964- 1987) :- Establishment of UTI in 1963. In 1978, UTI was delinked from the RBI & the Industrial Development Bank of India (IDBI) & took over the regulatory & administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme in 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under Mgmt. UTI had grown large as evidence by the following statistics: 1987- 88 Amount mobilized (Cr) Asset Under Mgt (Cr) Mobilization as % GDP 40
  • 41. UTI 2175 670 3.1 % Phase II: 1987-1993 (Entry of Public Sector Funds) 1987, Marked the entry of non-UTI public sector Mutual Funds, bringing in competition. With the opening of economy, many public sector bank & financial institution were allowed to establish Mutual Funds. The State Bank of India established the first non-UTI Mutual Fund- SBI Mutual Fund- in November 1987. This was followed by Can Bank Mutual Fund ( launched in December, 1987), LIC Mutual Funds ( launched in 1989 ) & Indian Bank Mutual Funds ( launched in 1990 ) followed by Bank Of India Mutual Fund, GIC Mutual Fund & PNB Mutual Fund. The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales & customer service. This sector has dented UTI s dominance resulting in a falling market share towards the end of the last millennium. Assets under Management June 30, 2000 Sep. 30, 2001 UTI 57.09 % 53.60 % Bank Sponsored 3.66 % 3.78 % Institutions 4.12 % 4.46 % Private Sector 35.13 % 38.16 % Total 100.00 % 100.00 % Total ( Rs. In Crore ) 97953 91811 OPEN CLOSE ASSURED TOTAL END END RETURN INCOME 85 28 29 142 41
  • 42. GROWTH 96 15 - 111 BALANCED 31 4 - 35 LIQUID/ MONEY MARKET 28 - - 28 GILT 24 - - 24 ELSS 19 52 - 71 TOTAL 283 99 29 411 Second Phase (1987-1993) / Entry of Public Sector Funds:- 1987 marked the entry of Non- UTI, Public Sector Mutual Fund setup by Public Sector Banks & LIC of India & General Insurance Corporation of India (GIC) SBI Mutual Fund was the First Non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec.1987), Punjab National Bank Mutual Fund (Aug.1989), Indian Bank Mutual Fund (Nov.1989), Bank of India (Jan.1990), Bank of Baroda Mutual Fund (Oct. 1992). LIC established its Mutual Fund in June 1989 while GIC had setup its Mutual Fund in Dec. 1990. At the end of 1993, THE Mutual Fund Industry had assets under Mgmt. Of Rs. 47,004 Crores. Gilt Funds 1. Next only to money market fund in risk order 2. Gilts- government securities with medium to long term maturities over one year 3. Investment in government paper called dated securities 4. Negligible risk of default 5. Risk arising out of changes in market price of debt securities 6. Debt securities prices fall when interest rate rise. Debt Funds 1. Invest in debt securities issued not only by government but also 42
  • 43. Corporate & financial institutions 2. Target low risk & stable income 3. Higher price fluctuation risk as compared to money market funds due to significantly higher maturity period exposures 4. Higher credit risk than gilt funds due to corporate profile 5. Do not target capital appreciation; generate high current income & distribution substantial part of surpluses to investors. Third Phase (1993-2003) / Entry of Private Sector Funds:- 1993, the entry of Private Sector a new era started in the Indian Mutual Fund Industry, giving the Indian Investor a wider choice of Fund Family Also 1993, was the year in which the First Mutual Fund Regulation came into being, under which all Mutual Fund expects UTI were to be register & Governed. The Kothari Pioneer (now merged with Franklin Temleton) was the First Private Sector Mutual Fund registered in July 1993. In 1993 SEBI (MF) Regulations were substituted by a more Comprehensive & revised MF Regulations in 1996. At the end of Jan.2003 there were 33 MF with Total Assets of Rs.1,21,80 5 Crore. The UTI with Rs.44, 541 Crores of Asset under Mgmt. was way ahead of other MF Industry has witnessed several Merges & Acquisitions. Fourth Phase (Since Feb. 2003):- In Feb.2003, UTI was bifurcated into two separate entities. 1. One is the specified Undertaking of the UTI with assets under Mgmt. of Rs. 29,835 Crores as at end of Jan.2003, functioning under an administrator & under the rules framed by Govt. of India & does not come under preview of MF Regulation. 2. The second is UTI MF Ltd. Sponsored by SBI, PNB, BOB & LIC. It is Registered with SEBI & Functions under the MF Regulations. Bifurcation of UTI in Mar.2000 more than Rs. 76,000 Crores of assets Under Mgmt. & with the setting up of a UTI MF conforming to the SEBI 43
  • 44. MF Regulations. At the end of Sept.2004, there were 29 Funds which Manages assets of Rs. 1, 53,108 Crores under 421 Schemes. 4.4 PLACE OF MUTUAL FUND IN FINANCIAL MARKET Indian household started allocating more of their saving to the capital market in 1980 s with the investment flowing into equity & Debt instrument beside the conventional mode of the bank deposits. Until 1992 Primary Market investors were assured good return as the price of the new equity issues was controlled. After Introduction of free pricing of shares & with greater volatility in the Stock Markets, many investors who bought over priced shares lost money & withdrew from the markets altogether. Even those investors who continued as direct investors in the Stock Market realized that the key to the successful investing on the capital markets lay in the building a diversified portfolio that in turn require substantial capital. Besides selecting securities with growth & income was not possible for all investor. Under similar circumstances in other countries, Mutual Fund had emerged as Professional Intermediaries. Besides providing the expertise in stock market, investing these funds allows investing in small amount& yet holding a diversified portfolio to limit risk. In India, Unit Trust of India occupied this place as the only capital market intermediary Institution is emerging in India, as elsewhere as a good alternative to direct investing in the Capital Market. Mutual Funds serves as a link between the saving public & the capital market in that they mobilized saving from investors & bring them to borrower in the Capital Market. By the Very nature of their activities & by virtue of being knowledgeable & informed investors , they influence the Stock Market & play an active role in promoting good corporate 44
  • 45. governance, investor protection & the health of capital market. Mutual Fund have imparted much needed liquidity into the financial system & challenged the hitherto dominant role of banking & financial institution in the Capital Markets. Mutual Fund Operation Flow Chart: INVESTORS RETURNS FUND MANAGER SECURITIES 45
  • 46. Structure Foreign Sponsor Trustee Partner Asset Management Other Service Trust Company Providers Scheme 1 Scheme 2 Scheme 3 Organization of a Mutual Fund : MUTUAL FUND - FRAMEWORK- India Sponsor Trustee Company Asset Management Company Fiduciary Fund Operations Marketing responsibility to Management the Distribution Investors Brokers Registrar Custody Markets Bank 46
  • 47. 4.5 THE ADVANTAGES OF MUTUAL FUNDS Portfolio Diversification: Each Investor in a Fund is a part of the funds entire asset, thus enabling him to hold a diversified investment Portfolio even with a small amount of investment, which would otherwise requires big capital. Professional Management: Even if an investor has a big amount of Capital available to him, he benefits from the professional management Skill brought in by the fund in the management of the investor s portfolio. The investment management skills, along with the needed research into available investment option, ensure a much better return than what an Investor can manage on his own. Few investors have the skill & resource of their own to success in today s fast moving, global & sophisticated markets. 47
  • 48. Reduction / Diversification of Risk: When an investor invest directly, all the risk of Potential loss is his own, weather he places deposits with a company or bank, or buys a share debenture on his own or in any other instrument benefits of a collective investment vehicle is from the Mutual Fund. Reduction of Transaction Costs: What is true of risk is also the transaction costs. The investors bear all the cost of investing such as brokerage or custody of securities. When through a fund, he has the benefit of economic of scale; the fund pay lesser costs because of large volume, a benefit passed on to is investor. Liquidity : Often, investors hold share or bonds they cannot directly, easily & quickly sell. When they invest in the units of a fund, they can generally case their investment any time, by selling their units to the fund if open-ended , or selling them in the market if the fund is closed end. Liquidity of investment is clearly a big benefit. Open-ended -Assures liquidity -As liquid as the banks. Close-ended -Buying and selling can be done through the stock exchange Conventional & Flexibility: Mutual Fund Management companies offer many investors services that a direct market investor cannot get. Investors can easily transfer their holding form one scheme to the other,get updated market information, easy to Invest, Reduces excessive Paperwork etc, Safety: SEBI & RBI have a control over Mutual Fund Making investme nt in Mutual Fund a safe investment. A very good example here quoted can be of Government of India coming to rescue of UTI s US- 64 Schemes. 48
  • 49. Affordability: -Provides an opportunity for a small investor -Invest as less as an amount of Wide Choice: -Offers a Varieties of Schemes -Meet the investment needs of all Investors MF s and Tax Benefits: Income Tax Benefits -Equity funds - 10% TDS -Debt Funds - Dividends are taxable Capital Gain Benefits - Section 112 (1) -Long term capital gain tax of 10% without indexation, or -Long term capital tax of 20% with indexation 49
  • 50. Mutual Funds: A Packaged Product Professional Management Diversification Convenience Liquidity Tax Benefits 4.6 THE DISADVANTAGES OF MUTUAL FUNDS No Control Over Costs: An investors in a Mutual Fund has no control Over the overall cost of investing. He pays investment management fees 50
  • 51. as long as he remains with the funds, in return for the professional manag ment & research. Fees are payable even while the value of his investment may be declining. A mutual fund investors also pays fund distribution costs, which he would not incur in direct investing. No Tailor-made Portfolios: Investors who invest on their own can build their own portfolios of shares, bonds & other securities. Investing through Funds means he delegates this decision to the fund manager. The very high -net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in. Developing a Model Portfolio Work with Investor to develop long-term goals Determine Asset Allocation of the investment Determine the sector distribution Select specific Fund Manager & their schemes Model Portfolio Creativity & forecasting Shortcomings in Operation of Mutual Fund 1. The Mutual Funds are externally managed. They do not have emplo yees of their own. Also there is no specific law to supervise the 51
  • 52. Mutual Fund in India. There are multiple regulations. While UTI is governed by its own regulations, the banks are supervised by Reser ved Bank of India, the Central Government & Insurance Company mutual regulations funds regulated by Central Government. 2. At present, the investors in India prefers to invest in Mutual Fund as a substitute of fixed deposits in Banks. About 75% of the investors are not willing to invest in Mutual Funds unless there was a promise of a minimum return. 3. Sponsorship of Mutual Funds has a bearing on the integrity & efficiency of fund management, which are key to establishing investor s confidence. So far, only public sector sponsorship or ownership of Mutual Fund organizations had taken care of this need. 4. Unrestrained fund rising by schemes without adequate supply of scrip can create severe imbalance in the market & exacerbate the distortions. 5. Many small companies did very well last year, by schemes with out adequate imbalance in the market but Mutual Funds cannot reap their benefits because they are not allowed to invest in smaller companies. 6. The Mutual Funds in India are formed as trusts. As there is no Distinction made between sponsors, trustees & fund managers, the trustees play the roll of fund managers. 7. The increase in the number of Mutual Funds & various schemes has increased competition. Hence it has been remarked by Senior Broker Mutual Funds are too busy trying to race against each other. As a result they lose their stabilizing factor in the market. 8. While UTI publishes details of accounts their investments but Mutual Funds have not published any profit & loss Account & Balance Sheet even after its operation. 52
  • 53. 9. The Mutual Fund have eroded the Financial clout of institution in the Stock market for which cross transaction between Mutual Funds & Financial institutions are not only allowing speculators to manipulate price but also providing cash leading to distortion of balanced growth of market. 10. As the Mutual Fund is very poor in standard of efficiency in Investors service; such as dispatch of certificates, repurchase & attending to inquiries lead to the detoriation of interest of the investors towards Mutual Fund. 11. Transparency is another area in Mutual Fund, which was neglect till recently. Investors have right to know & asset management companies have an obligation to inform where how his money has been deployed. But investors are deprived of getting information. 4.7 CLASSIFICATION OF MUTUAL FUNDS Types of Mutual Fund 53
  • 54. By Constitution By Investment Objective By Nature Of Investment By Constitution OPEN-END: No fixed maturity Variable Corpus Not Listed Buy from and sell to the Fund Entry/Exit at NAV related prices CLOSED-END: Fixed Maturity Fixed Corpus Generally Listed Buy and sell in the Stock Exchanges Entry/Exit at the market prices LOAD or NON-LOAD FUNDS TAX EXEMPT or NON-TAX EXEMPT By Nature of Investments Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate) Diversified Growth Funds : Diversified Debt Funds Focused Debt Funds : Sector / Specialized / Offshore Municipal bonds/ infrastructure cost bond fund Mortgaged backed 54
  • 55. High yield debt funds : Assured Return Funds - Indian variety Liquid Funds By Investment objective / patterns 1) Growth - Equity 2) Income - Debt 3) Balanced - Equity and Debt 4) Money Market - Liquid Debt 5) Tax Saving - Equity 6) Specialized - Equity 7) Assured Return - Equity and Debt Mutual Fund can also be classified as open/ closed ended Mutual Fund Open Ended Mutual Fund Close Ended Mutual Fund Units available for the sale & Unavailable repurchase Investor can buy or redeem units Investors can buy units from fund from the Mutual Fund itself only at IPO subsequently buying & selling at the Stock Exchange Unit Capital is variable Unit capital is fixed Pricing at NAV +/- depending on Prices may be quoted at premium or load charges discount on the exchange depending on perception about fund s future performance 4.8 WHO CAN INVEST? 1. Resident including : 1) Resident Indian Individual 55
  • 56. 2) Indian Companies 3) Indian Trust/ Charitable Institution 4) Banks / FIs/ Partnership Firms 5) NBFC s 6) Insurance companies 7) Provident Funds 2. Non- residents including : 1) NRI s 2) OCBs 3. Foreign entities : 1) FIIs registered with SEBI 4.9 INVESTORS RIGHTS AND OBLGATION Investors Rights 1. Proportionate right to beneficial ownership of scheme s assets 2. Right to obtain information from trustees 3. Entitled to receive divided warrants within 30 days of declaration of Dividend 4. Inspect major documents of the funds 5. Appointment of the AMC can be terminated by 75% of the unit holders of the scheme present & voting 6. Right to approve of changes in fundamental attributes of a close ended schemes so that they can redeem 7. Receive Annual Reports & A/C Statements Legal limitations to Investors Rights 1. Unit holders cannot use the Trust 2. Can imitate legal proceeding against trustees 3. Buyers beware 56
  • 57. 4. Sponsor of Mutual Funds have no obligation to meet any shortfall in the assured return-unless explicitly guaranteed in the offer document 5. No rights to a prospective investor Minimum portfolio diversification 1. Equity schemes- single company under 10% of NAV, not applicable to index & sector funds 2. Debts funds- single issuer not more than 15% of NAV, can be relaxed to 20% with approval of trustees % AMC 3. Unrated as well as rated but below investment grade, not more than 10% of NAV per issuer 4. All such issuers put together not more than 25% of NAV. Investors Obligations 1. Carefully study the offer document before investing 2. Monitor his investment in a scheme by referring Financial statements, performance updates & research report sent by the AMC 3. Complaints readdress 4. SEBI entertains complaints Required sponsor to appoint compliance office who has to give due diligence certificate can remove AMC with 75% vote to this effect. No recourse to any company law. 4.10 OFFER ( DOCUMENT) BY MUTUAL FUND Contents of an offer document 57
  • 58. 1. Summary information- at a glance 2. Type of scheme growth / income / balanced 3. Name of AMC 4. Price of units 5. If assured return-name of guarantor 6. Opening & Closing dates of the schemes 7. Disclaimer clause of SEBI 8. Details of the sponsor & the AMC 9. Description of the scheme & the investment philosophy 10. Terms of issue 11. Historical statistics 12. Investors rights & services 13. Abridged offer document/key information memorandum with application form Significance Legal document that protects and governs the right of the investor to information Is the primary vehicle for the investment decision Is the operating document and describes the fundamental attributes of schemes. One of the most important sources of information for the prospective investor Is a reference document for the investor to look for relevant information at any time. Mandatory Information § Details of the Sponsor § Description of the scheme and investment objective/strategy 58
  • 59. § Terms of issue § Historical statistics § Investors Rights and Services Key Information Memorandum that is distributed with the application form is an abridged version of the offer document. Investment Options & Features Options Growth Dividend and Dividend Reinvestment Plans Systematic Investment Plan - SIP Value Averaging Plan - VAP Systematic Withdrawal Plan - SWP Systematic Transfer Plan - STP Other Nomination facility 4.11 ACCOUTING OF MUTUAL FUND Balance Sheet of a Mutual Fund is different from that of a bank. All the Funds belong to the investors & are held in fiduciary capacity for them. 59
  • 60. NAV : Investor s subscriptions are unit capital rather than deposits or liability. Investments made on behalf on investors are reflected on assets side There are liabilities but of strictly short term nature. NAV= (Market value of investment + Receivables + Other Accrued income + Other Assets) (Accrued Expense + Other Payables + Other Liabilities) / No: of Units Outstanding as at NAV date. NAV of all schemes to be calculated & published daily. Close- Ended schemes that are not mandatory required to be listed on Stock Exchange may declare NAV once in a month or quarter as permitted by SEBI. Mutual Fund NAV is affected by four set of factors Purchase & sale of investment securities Valuation of all investment securities held Others assets & liabilities Units sold or redeemed Other assets include any income due to the fund but not actual received as on the valuation date. Other liabilities includes similar liabilities include similar liabilities. These are to be accounted for on an accrual basis. Major expenses like Mana gement fee to be accrued on a daily basis. If non-accrual does not affect the NAV by more than 1% then it may not be accrued for that valuation date. Non-recording of addition /sales of investments transaction or Sales/purchase of units can be postponed to the next valuation date in case such non-recording is not impacting the NAV by more then 2%. 60
  • 61. NAV NAV = Net assets of scheme / No of units Outstanding i.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities No. of units outstanding as at the NAV date HOW NAV IS COMPUTED § Market value of Equities - Rs.100 crore - Asset § Market value of Debentures - Rs.50 crore - Asset § Dividends Accrued - Rs.1 crore - Income § Interest Accrued - Rs.2 crore - Income § Ongoing Fee payable - Rs.0.5 crore - Liability § Amt..payable on shares purchased -Rs.4.5 crore - Liability § No. of units held in the Fund : 10 crore units § NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80 NAV - Other information Open end funds to declare NAV daily 61
  • 62. NAV to be published at least weekly Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP) NAV has to consider up to date transactions Non - recorded transactions not to affect NAV calculation by more than 2% § NAV is influenced by- 1) Purchase and sale of Investment 2) Valuation of Investment 3) Other assets and Liabilities 4) Units sold or redeemed. CHANGE IN NAV FORMULA : For NAV change in absolute terms = (NAV at end of period - NAV at beginning of period) * 100 NAV at beginning of period For NAV change in annualised terms = ( NAV change in % in absolute terms) * (365 / No. of days) Loads § Entry Load or front ended load Paid at the time of purchase Sale Price = NAV / (1- Sales Load, if any) 62
  • 63. § Exit Load or back ended load Paid at the time of exit Redemption Price = NAV/ (1+ Exit Load) § Contingent Deferred Sales Load (CDSL) Deferred exit load depending on the period Also known as deferred load Sale Price § Sale Price is the price at which units are sold to investors. § Sale Price = NAV + Entry load § Formula for computation of Sale Price = NAV/ (1-Load) Assuming an entry load of 2% in the earlier NAV computation example Sale Price = 14.80/ (1- 0.02) = 15.10 63
  • 64. CHAPTER 5 :- MEASURING & EVALUATING FUND PERFORMANCE 5. MEASURING & EVALUATING OF MUTUAL FUND 64
  • 65. 5.1 NECESSARY FOR MEASURING MUTUAL FUND PERFORMANCE When an investing entrusts his saving to Mutual Fund naturally he hopes to increase wealth by seeing the value of his investment grow. Having understood the conceptual & operation aspects of Mutual Funds it is important to analyze the issues involved in the evaluation of Fund performance. The Investor Perspective: - The investor would naturally be interested In tracking through the value of as investment whether invests directly in the markets or indirectly through Mutual Funds. He would have to make intelligent decisions on whether he gets an acceptable return on his investment in the funds selected by him. Or if he needs to switch to another fund, he therefore needs to understand the basis of appropriate performance measurement for the fund & acquire the basic knowledge of the different measures of evaluating the performance well or not, & make the right decisions. The Adviser s Perspective: - If you were an intermediary recommend A Mutual Fund to a potential investor he would accept you to give him proper advice on which funds have a performance track record. If you want to be an effective investment adviser, then you too have to known how to measure & evaluate the performance of the different funds that are available to the investor. The need to compare different fund s per formance required the advisor to have the knowledge of the correct & appropriate measure of evolution the fund performance. 5.2 DIFFERENT MEASURES OF FUND PERFORMANCE 65
  • 66. § Different valuation methods § Change in NAV § Total Return § Total Return with dividend reinvested at NAV § Change in NAV - The most common NAV on day 1 = Rs.10 NAV on day x = Rs.12 % Change in NAV = dayx-day1/day1 * 100 = 2/10 *100 = 20 % Limitations: Does not account for dividend Suitable only for growth plans Total Return NAV on day 1 = Rs.20 NAV on day x = Rs.22 Dividend = Rs.4 per unit Total Return = ((Distribution + Change in NAV)/day1 NAV)* 100 = ((4+ (22-20)/20)*100 = 30% Limitation: Does not account for reinvestment § Return on Investments - most suitable § NAV on day 1 = Rs.20 § Dividend = Rs.4 per unit NAV at Rs. 21 § Div reinvested = Rs (4 /21) = 0.19 units allotted § Total units = 1.19 (original +new allotted) § NAV at year end = Rs.22 § Total Return = (NAV on year end*total units )-day1 NAV)/ day 1 NAV* 100 = ((22*1.19) - 20))/20*100 = 30.9% Performance Measure 66
  • 67. Section one: Equity Funds: NAV Growth Total Return Total Return with reinvestment at NAV annulized Return & Distributed Computing Total Return (per share Income & Expenses, Per Share Capital Change , Ratio, Share Outstanding ) The expenses Ratio Portfolio Turnover Rate Fund Size Transaction Cost Cash Flow Leverage Debt Funds: Peer Group Companies The Income Ratio Industry Exposure & Concentration NPA s Besides NAV Growth Expenses Ratio Section Two: Concepts of benchmarking for performance evolution Performance benchmarking in the Indian Contest Active Fund Performance against market indices as bench Mark Debt Fund-interest rate on alternative investment as bench 67
  • 68. Mark. Total Return Index Money Market Funds Short Term Govt. Instrument Interest rates as benchmarks. Section Three: Tracking a funds performance Newspaper, Periodicals, Research, Annual Report, Prospectus, Reports from Tracking agencies, Internet & Interpretation of Data. Other Parameters § Expense ratios - indicates fund efficiency and cost effectiveness § Portfolio Turnover ratio - measures amount of buying and selling done by the fund § Transaction cost § Fund size § Cash holdings Working of Mutual Fund & Their Performance :- It needs to be certified that MF invest their funds in Capital market instruments such as Shares, 68
  • 69. Debentures, Bonds, & Money Market Instruments & therefore the NAV of such investments will reflect the market values of underlying assets. These Market values fluctuate & therefore the NAV of the MF Schemes also fluctuate. All the capital market instruments have varying degrees of risk, the Degree of risk being the highest in equities & the risk factor is highlighted in the respective offer documents as well as in the abridged offer documents. The investors therefore are in the full knowledge & understanding of the risks involved in various schemes. As per SEBI Regulation all MF disclose their portfolio periodically & all open-ended Funds offer exit option to investors at NAV based price. RISK RETURN GRID Risk / Tolerance / Focus Suitable Products Benefits offered Return Excepted by MF Low Debt Bank / Company Liquidity, Better FD, Debt Funds post- Tax Returns Partially Balanced Funds, Liquidity, Better Debt, some Diversified Post- Tax Returns Medium Partially Equity Funds & Better Mgmt, Equity some Debt Funds, Diversification Mix of Shares & FD Capital Market, Diversification, High Equity Equity Funds Expertise in ( Diversified as Stock Picking, well as Sector ) Liquidity, Tax 69
  • 70. Free Dividends. The Risk Return Trade-off The Risk Return Trade-off Hedge Funds Growth Funds Sectoral Funds Potential Aggressive, Value, for Growth return Debt Funds Balanced Funds Gilt Funds, Bond Ratio of Debt : Equity Funds, High Yield Funds Liquid Funds Risk 70
  • 71. Equities are the best long term bet percentage of studied period in which Other 14% investment outperformed 37% 44% Stocks outperformed 56% 86% 63% 1 year 3 year 5 year Source : RBI Report on Currency and Finance (1997-98) BSE Sensitive Index of Equity Prices - BSE 71
  • 72. Equities are the best long term bet Cumulative annualised returns (1980 - 98) 25.0% 20.16% 20.0% 14.47% 15.0% 9.2% 9.74% 7.62% 10.0% 5.0% 0.0% Inflation Gold Bank FD Co. FD Equities Inflation Gold Bank FD Co. FD Equities Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices - BSE 72
  • 73. CHAPTER 6:- MUTUAL FUND FEES & EXPENSES 73
  • 74. 6. MUTUAL FUND FEES & EXPENSES Initial Issue Expenses Transaction Cost: Entry / Exit Load CDSE for No-Load Fees Annual Recurring Expenses: AMC Fee Custodian Fee Registry Exp. Trustee Fee Audit Fee Marketing & Selling Exp. Brokerage Exp. Others § Initial Issue expenses For launching of the scheme Can charge up to 6% § Recurring Expenses Marketing exp including brokerage Transaction cost R&T cost Custodian Fees Audit fees etc Investor Communication s cost § AMC a charge Investment management fee to the fund on weekly avg. net assets. 74
  • 75. § The limits are: (Subject to overall limit of 6%) 1.25% for up to Rs.100 cr of weekly avg net assets 1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1% § Total Expenses that can be charged to the Fund ( excluding entry and exit loads): Equity Debt On the first Rs.100 cr 2.50% 2.25% On the next Rs.300 cr 2.25% 2.00% On the next Rs.300 cr 2.00 % 1.75% On the balance assets 1.75% 1.50% Based on average weekly net assets § Initial issue expenses Charge to the scheme capped at 6% of the initial resources raised under that scheme § Entry/Exit Loads - Transaction costs Sale price not greater than 107% / Re-purchase price not lower than 93% (95% for close-ended schemes) of the NAV § Contingent Deferred Sales Charge ( For No-Load Schemes) Ceiling For redemption within 1year 4% For redemption within 2years 3% For redemption within 3years 2% For redemption within 4years 1% 75
  • 76. CHAPTER 7:- ACCOUTING & VALUATION OF MUTUAL FUND 76
  • 77. 7. ACCOUNTING & VALUATION OF MUTUAL FUND Accounting Policies § Investments to be marked to market on market prices. § Unrealised appreciation cannot be distributed. § Purchase & sale of investments to be recognised on the trade date and not on settlement date. § Investments to be taken as NPA if it gives no return through interest for more than 6 months § Dividend / Bonus/ rights to be recognised on ex-dividend / ex-bonus dates and not on declared dates. § Income receivable on Invest NOT accrued for more than 3 months should be provided for. § For determining gain/ loss on investments - avg cost is to be taken Mutual Fund Valuation § Marking to Market § Equity Valuation Norms - Listed, Unlisted, NPA, Untreated § Debt valuation norms - Listed, Unlisted, Illiquid § Money Market Instruments - valuation norms § Effect of Buybacks, Mergers § Valuation Models - CRISIL Valuation § TRADED SECURITIES Last quoted closing price on the SE where principally traded If Not traded on any SE on a particular day, then earliest previous day price is taken (not more than 30 days) Valuation = MP * current holding 77
  • 78. § NON - TRADED SECURITIES Stocks which are not traded for more than 30 days on any SE are valued on good faith basis by AMC within following parameters § Debt - YTM basis § Equity capitalization of earning or NAV or combination of both Disclosures and Reporting § Audit by independent auditor § Audited Annual report every year § Un-audited accounts to be published within 1 month after March 31 & September 30 § Within 6 months of closure, publish abridged summary of report scheme-wise in newspapers § Summary to be forwarded to SEBI & unit holders § Full portfolio disclosure to be made within a month from the half-year ended March 31 & September 30 § Reporting to SEBI Annual audited accounts Six monthly unaudited a/cs Half yearly statement of movements in net assets of each scheme Qtr portfolio statement Monthly amount mobilized § Communication to investor Qtr portfolio Annual report Taxation § Capital Gain Benefits Long term capital gain tax of 10% without indexation Long term capital gain tax of 20% with indexation. 78
  • 79. Investment Restrictions as a % of Net assets - AMC § Max. Investment under all schemes of the AMC in paid up capital carrying voting rights in single Co. - 10 % § Max. Inter scheme investments of the same AMC - 5 % (no AMC fee payable) § Inter scheme transfers at CMP and within the objectives of scheme § Max. Investment in listed shares of Group Co s - 25 % for each scheme. § No investments allowed in unlisted/private placement of group/associate cos. § Can borrow only to meet liquidity requirements. Max for 6 months & not more than 20% of NAV of scheme. Investment Restrictions as a % of Net Assets -Debt § Max. Investment in Rated paper in single Co - 15% (can be increased to 20% with approval by Board of AMC/Trustee) § Max.Investment in Unrated/ Rated but below investment grade in single issuer- 10% of NAV § Max. Investment in Unrated/Rated but below investment grade in all cost - 25% (subject to approval of Board of AMC /Trustee). § Restrictions not applicable to Govt. Securities/Money Market § Can only invest in marketable securities - no loans Investment Restrictions as a % of Net Assets -Equity § Max. Investment in Equity/Equity related instruments of single - 10% § No restrictions in case of Index Fund § Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open ended funds § Buy & Sell securities on Delivery position , No short selling/ carry forward allowed. 79
  • 80. CHAPTER 8:- SEBI [SECURITIES EXCHANGE BOARD OF INDIA] 80
  • 81. SEBI [THE SECURITIES & EXCHANGE BOARD OF INDIA ACT] In 1992, an Act to provide for the establishment of a Board to Protect the interests of Investors in Securities & to promote the development of & to regulate the Securities market & for matters connected therewith or incidental thereto on the 30 Jan. 1992 under Section 3. 8.1 MANAGEMENT OF BOARD A Chairman 2 Members from the Officials of the (Ministry) of the Central Govt. dealing with Finance (& Administration of the Companies Act, 1956 2 of 1934) 1 Member from the Officials of RBI. 5 Other Members of whom at least 3 shall be the whole time members. The General Superintendence, Director, Mgmt. of the Affairs of the Board as exercise all powers & do all acts & things which may be exercised or done by the Board. The Chairman & Members referred in clauses (1) & (4) are appointed by the Central Govt. of India & the Members referred in clauses (2) &(3) are nominated by the Central Govt. & RBI. The Central Govt. has a right to terminate the Service of the Chairman or Other appointed Members by giving him a Notice of not less than 3 Months in writing or 3 Months salary & allowance in lieu. 81
  • 82. Removal of Members from Office: - The Central Govt. shall remove a Member from Office if He/ She 1. Adjudicated as insolvent 2. Unsound mind & Stands so declared by a Competent Court 3. Convicted of an Offence, involves a Moral Turpitude 4. Abused his / her Position as to render his / her Continuation in Office detrimental to the Public Interest. Members not to Participate in Meetings in Certain Cases: - Any Member, who is a Director of a Company & who as such Director has any Direct or indirect pecuniary interest in any Matter coming up for consideration at a meeting of a Board. 82
  • 83. 8.2 FUNCTIONS OF BOARD Subjects to the provisions of this Act; it shall be Duty of Board to Protect the Investors in Securities to Promote & Development & to Regulate the Securities Market by such measures as it thinks fit. Registering & Regulating the Working of Stock Brokers, Sub-Brokers, transfer agents, bankers to an Issue, trustees of Trusts deeds, Registrars to an Issue, Merchant bankers, underwriters, portfolio managers, invest ment adverse & such other intermediaries who may be associated with securities markets in any manner. Registering & Regulating the Working of the Depositories, (Participants) Custodians of Securities, Foreign Institution Investors credit rating agencies & such other intermediaries. Promoting & Regulating the Self- Regulatory Organization. Prohibiting fraudulent & unfair trade practices relating to securities market insider trading in Securities. Calling for Information from, undertaking Inspection, conducting inquiries & audits of the Stock Exchanges, (Mutual Fund) & other persons associated with the Securities market & intermediaries & self- regulatory organization in the Securities Market. Conducting Research Summoning & enforcing the attendance of Persons & examining them on oath. Board to Regulate or Prohibit issue of Prospectus, offer document or advertisement soliciting money for issue of Securities. The investigating Authority shall keep in its custody the Books, Registers, other documents & record seized under this section for such period later than the conclusion of the investigation. 83
  • 84. 8.3 REGISTRATION CERTIFICATE No Stock- Broker, sub- Broker, Share Transfer Agent, Banker an Issue, Trustee of Trust deed, Register to an Issue, Merchant Banker, under writer, portfolio manager, investment adviser& such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under & in accordance with the regulation made under this Act. No Depository, (Participant), custodian of Security, foreign institutional Investor, Credit rating agency or any other intermediary associated with the Securities markets as the Board may be notification in this behalf Specify. No person shall Sponsor or cause to be Sponsored or carry on or cause to be carried on any venture Capital Funds or collective investment Schemes including Mutual Fund, unless he obtains a certificate of Registration from the Board in accordance with the Regulations. The Board may by order, suspend, cancel or Certificate of Registration in such manner as may be determined by Regulations. Prohibition of Manipulative & Deceptive Devices, insider trading & Substantial acquisition of Securities & Control :- Use or Employ, in connection with the issue, purchase or sale of any Security listed or proposed to be listed on a recognized Stock Exchange & any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made under. Employ any device, scheme or artificial to defraud in connection with Issues or dealing in Securities which are listed or proposed to be listed on a recognized Stock Exchange. 84
  • 85. Grants by the Central Govt. for all Grants, fees & charges received by the Board under SEBI Act made by Parliament:- All sums received by the Board from such other sources as may be decided upon by the Central Govt. The salaries allowances & other remuneration of members officers & other employees of the Board & other expenses of the Board on objects & for other purposes are funded by Central Govt. The Board shall maintain proper accounts & other relevant records & prepare an annual statement of A/C in such form as may be prescribed by the Central Govt. in consultation with the comptroller & Auditor- General of India. Only then can the Mutual Funds hope to stage a recovery & regains some of the recent heavy losses with a reshuffling of portfolios & net appreciation in equity values. All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI Responsible for protecting investors interest and promote orderly growth of Mutual Fund Industry Formulates regulations, monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections 85
  • 86. Reserve Bank of India & SE RBI Dual supervision for bank sponsored AMC s Issue concerning ownership bank promoted AMC falls with RBI Stock Exchange (SE) Close ended MF listed of SE. Needs to comply with listing guidelines. Office of public Trustee MF being public trustee - governed by Indian Trust Act , 1882 Trustee Co or Board of Trustee accountable to office of Public Trustee Public trustees reports to Charity Comm. 86
  • 87. Trustee and AMC to comply with Cos Act 1956 Registrars of Companies (ROC) Department of Company Affairs Company Law Board (CLB) Ministry of Law & Justice 87
  • 88. CHAPTER 9: RULES & REGULATIONS 88
  • 89. 9. RULES & REGULATIONS Legal Frame Work: - 20 Sept.1995 The Depositories Act, 1996 Companies Act, 1956 30 Jan.1992 SEBI Act 16 Feb. 1957 The Securities Contracts (Regulations) Act 1956 I] 1. Short Title, Extent & Commencement: a) This Act may be called as Depositories Act, 1956 b) It extends to the whole of India c) Come into force on 20 day of Sept. 1995 2. Definitions :- 1) Beneficial Owner means a person whose name is Recorded as such with a depository. 2) Board means SEBI est. Under section 3 of SEBI Act , 1992. 3) Bye- Laws means made by a Depository under section 26. 4) Company Law Board means the Board of Company Law Administration constituted under Section 10 E of the Companies Act, 1956. 5) Depository means a Company formed & register under the Companies Act, 1956 & which has been garneted a Certificate of Registration under Sub- section (1A) of section 12 of the SEBI Act, 1992. 6) Issuer means any person making an Issue of Securities. 7) Participant means a Person Registered as such Under, sub-section (1A) of section of SEBI Act. 8) Prescribed means a Prescribed by Rules made under this Act. 89
  • 90. 9) Record includes the records maintained in the Form of Books or stored in a Computer or in such form as may be determined by Regulations. 10) Registered Owner means a Depository whose name entered as such in the Register of the Issuer. 11) Regulation means Regulation made by the Board. 12) Security means Security as may be specified by the Board. 13) Service means any Service connected with the Recording of Allotment of Securities or Transfer of Ownership of Securities in the Record of Depository. II ] Certificate of Commencement of Business by Depositories:- 1. No Depository shall act as a Depository unless it obtains a Certificate of Commencement of Business from the Board. 2. The Board shall not grant a Certificate under sub- section; unless it is satisfied that the Depository has adequate Systems & Safeguards to prevent Manipulation of Records & Transactions. III] Rights & Obligations of Depositories, Participants, Issuers & Beneficial Owners:- Agreement between Depository & Participant: With one or more participants as its Agents, Specified by the Bye- Laws. 1. Services of Depository- Any Person, through a Participant may enter into an Agreement, in such form as may be specified by the Bye- Laws, with any Depository for availing its services. Surrendered of Certificate of Security : 1. Any Person who has entered into an Agreement under section 5 shall surrendered the Certificate of Security, for which he seeks to avail the Services of a Depository. 90