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Internship Report

  1. 1. 1|PageDSP BLACKROCK MUTUAL FUNDS 1 1 Mutual funds [Type the document subtitle] Surabhi Agarwal 2011 [TYPE THE COMPANY ADDRESS]
  2. 2. Mutual funds August 10, 2011 ACKNOWLEDGEMENT Before we get into thick of things, I would like to add a few words of appreciation forthe people who have been a part of this project right from its inception. The writing of thisproject has been one of the significant academic challenges I have faced and without thesupport, patience, and guidance of the people involved, this task would not have beencompleted. It is to them I owe my deepest gratitude. It gives me Immense pleasure in presenting this project report on “Mutual Funds asan Investment Avenue”. It has been my privilege to have a team of project guide who haveassisted me from the commencement of this project. The success of this project is a result ofsheer hard work, and determination put in by me with the help of my project guide. I herebytake this opportunity to add a special note of thanks for Mr Rizwan Aziz, who undertook toact as my mentor despite his many other professional commitments. His wisdom,knowledge, and commitment to the highest standards inspired and motivated me. Without hisinsight, support, and energy, this project wouldnt have kick-started and neither would havereached fruitfulness.I convey my heart full thanks to the staff members of DSP Blackrock Mutual funds,with their help and corporation.I am very thankful to my guide Prof. Yash Sridhar (IIPM , Lko) for his full support incompleting this project work.Last but not least, I would like to thank My family and Friends for their full cooperation &continuous support during the course of this assignment. The project is dedicated to all those people, who helped me while doing this project. TABLE OF CONTENTS Page 2
  3. 3. Mutual funds August 10, 2011Contents page no.Certificate 2Acknowledgement 3Table of content 4,5Executive summary 6Objectives of Study 7Recommendation & Suggetions 8Introduction to the Project 9  Introduction to Investment  Investment strategy.  Types of investments.  Introduction of mutual fund 10  Advantages and disadvantages 11-14  Types of mutual fund schemes 16-18  Pointers to measure mutual fund performance 19  Tax rules for mutual fund investors 20,21  History of mutual funds 22,23  Procedure of registered mutual funds 24  Evaluating portfolio performance 25  Investors financial planning and its results 25  7 investment tips to improve your returns 28,29  How to reduce risk while investing 30 Page 3
  4. 4. Mutual funds August 10, 2011Introduction to the company 32  Snapshot of DSP BlackRock Mutual Funds 33  Unique approaches 34  Milestone keys 35  History of DSP BlackRock Mutual Funds 36Objectives of the study and research methodology 37Objectives of Study 38Data Presentation, Analysis and Interpretation 41  Comparison of 4 major mutual funds 42Suggestions 63Conclusion 65Annexure 66  Questionnaire 67  Glossary 72Bibliography Page 4
  5. 5. Mutual funds August 10, 2011 EXECUTIVE SUMMARYRole of financial system is to enthusiast economic development. As investors are gettingmore educated, aware and prudent they look for innovative investment instruments so thatthey are able to reduce investment risk, minimize transaction costs, and maximize returnsalong with certain level of convenience as a result there has been as advent of numerousinnovative financial instrument such as bonds, company deposits, insurance, and mutualfinds. All of which could be matched with individual‘s investment needs. In few yearsMutual Fund has emerged as a tool for ensuring one‘s financial wellbeing. Mutual Fundshave not only contributed to the India growth story but have also helped families tap intothe success of Indian Industry. As information and awareness is rising more and morepeople are enjoying the benefits of investing in mutual funds. The main reason the numberof retail mutual fund investors remains small is that nine in ten people with incomes in Indiado not know that mutual funds exist. But once people are aware of mutual fund investmentopportunities, the number who decide to invest in mutual funds increases to as many as onein five people.Mutual funds score over all other investment options in terms of safety, liquidity, returns,and are as transparent, convenient as it can get. Goal of a mutual fund is to provide anefficient way to make money. In India there are 36 mutual funds with different Investmentstrategies and goals to choose from .different mutual funds have different risks, which differbecause of fund‘s goals, funds manager, and investment styles. The trick for converting aperson with no knowledge of mutual funds to a new Mutual Fund customer is to understandwhich of the potential investors are more likely to buy mutual funds and to use the rightarguments in the sales process that customers will accept as important and relevant to theirdecision.This Project gave me a great learning experience and at the same time it gave me enoughscope to implement my ability. The recommendation presented in this Project Report is Page 5
  6. 6. Mutual funds August 10, 2011based on market research on the investors for investment in Mutual Funds. This Report willhelp to know about the investors‘ Preferences in Mutual Fund means Do they prefer anyparticular Asset Management Company (AMC), Which type of Product they prefer, WhichOption (Growth or Dividend) they prefer or Which Investment Strategy they follow(Systematic Investment Plan or One time Plan). The first part gives an insight about MutualFund and its various aspects, the Company Profile, Objectives of the study, ResearchMethodology. One can have a brief knowledge about Mutual Fund and its basics throughthe Project.This Project covers the topic ―THE MUTUAL FUND AS INVESTMETN AVENUE‖. Thedata collected has been well presented. I hope the conclusion will be of use. Page 6
  7. 7. Mutual funds August 10, 2011 OBJECTIVES OF THE STUDY1. The objective of the research is to study and analyze the awareness level of investors of mutual funds.2. To measure the satisfaction level of investors regarding mutual funds.3. An attempt has been made to measure various variable‘s playing in the minds of investors in terms of safety, liquidity, service, returns, and tax saving.4. To get insight knowledge about mutual funds5. Understanding the different ratios & portfolios so as to tell the distributors about these terms, by this, managing the relationship with the distributors6. To know the mutual funds performance levels in the present market7. To analyze the comparative study between other leading mutual funds in the present market.8. To know the awareness of mutual funds among different groups of investors.9. Finding out ways and means to improve on the services by DSP BlackRock Mutual Funds Ltd.10. To find out what should be done to boost Mutual Fund Industry. INVESTMENT Page 7
  8. 8. Mutual funds August 10, 2011Investment refers to the concept of deferred consumption, which involves purchasing anasset, giving a loan or keeping funds in a bank account with the aim of generating futurereturns. In finance, investment is the commitment of funds through collateralized lending, ormaking a deposit into a secured institution.In contrast to investment; dollar cost averaging, market timing, and diversification arephrases associated with speculation.Investments are often made indirectly through intermediaries, such as banks, CreditUnions, Brokers, Lenders, and insurance companies. Though their legal and proceduraldetails differ, an intermediary generally makes an investment using money from manyindividuals, each of whom receives a claim on the intermediary.Variousinvestment options are available, offering differing risk-reward tradeoffs. An understandingof the core concepts and a thorough analysis of the options can help an investor create aportfolio that maximizes returns while minimizing risk exposure. INVESTMENT STRATEGYAn investment strategy is a set of rules, behaviors or procedures, designed to guide aninvestors selection of an investment portfolio. Usually the strategy will be designed aroundthe investors risk-return tradeoff: some investors will prefer to maximize expected returns byinvesting in risky assets, others will prefer to minimize risk, but most will select a strategysomewhere in between. One of the better known investment strategies is buy and hold. Buy and hold is a longterm investment strategy, based on the concept that in the long run equity markets give agood rate of return despite periods of volatility or decline. A purely passive variant of thisstrategy is indexing where an investor buys a small proportion of all the shares in a marketindex or more likely, in a mutual fund called an index fund or an exchange-tradedfund (ETF).TYPES OF INVESTMENTThere are many different types of investment.  Short term Deposits Page 8
  9. 9. Mutual funds August 10, 2011  Bonds  Property  Shares Short term depositsBank savings accountsThe simplest kind of short term (or cash) investment is a savings account. Returns are lowcompared to other investments, but returns are guaranteed by the bank - so your investmentwont drop in value in the short term like others might.Bank fixed term investmentsYou give the bank a lump sum for a set period (a fixed term) usually three, six or 12 months.Your money is locked away for the fixed term. In return, you get a higher interest rate thanyou could get in a straight savings account. You may be able to withdraw your money, butyou will get a lower rate. BondsA bond is like an IOU issued by a government or a company. You give them money for acertain period, and they promise to pay a certain interest rate and re-pay you on maturity.Bonds lock your money away for a set period of time, but they can sometimes be traded.Generally, they arent a good short term investment. Small investors dont usually investdirectly in bonds, its more usual to go through a managed fund. PropertyReal EstateReal Estate is a tangible kind of investment. It includes your land and anything permanentlyattached to your piece of property. This may include your home, rental properties, your Page 9
  10. 10. Mutual funds August 10, 2011company or empty pieces of land. Real estate is typically a smart and can make you a lot ofmoney over time SharesBy investing in shares in a public company listed on a stock exchange you get the right toshare in the future income and value of that company. Your return can come in two ways:Dividends paid out of the profits made by the company.Capital gains made because youre able at some time to sell your shares for more than youpaid. Gains may reflect the fact that the company has grown or improved its performance orthat the investment community see that it has improved future prospects.Others kinds are :-Mutual fundsIn a managed fund your money is pooled with other investors, and a professional fundmanager invests it in a variety of investments. Managed funds come in many forms - differentfunds invest in different types of assets for different objectives. Some funds target all-outgrowth and invest more in high risk shares than others - they could rise dramatically or just aseasily drop dramatically. These are funds for money that isnt absolutely vital to your futureplans. Other funds look for solid long term growth from a range of deposits, bonds, andshares - a better place for a lump sum intended for your retirement. Financial advisers, banksand insurance companies can all advise you on managed funds that match your investmentneeds.Life InsuranceLife Insurance policies are another kind of investment that is fairly popular. It is a way toensure income for your family when you die. It allows you a sense of security andprovides a valuable tax deduction.Money Market FundsA good short-term investment is a Money Market Fund. With this kind of investmentyou can earn interest as an independent shareholder. INTRODUCTION TO MUTUAL FUNDGENERAL INTRODUCTIONIn today‘s market people invest money to gain more. So when they take into account,they mostly look out for Investment Company where they can get more income. Page 10
  11. 11. Mutual funds August 10, 2011Mutual funds now represent the most appropriate investment opportunity for all theinvestors whether small or big. As financial markets become more sophisticated andcomplex, investors need a financial intermediary who provides the required knowledgeand professional expertise on successful investing. Investment companies can be classifiedinto Close-end is when it is readily transferable in the market. Open-end funds sell their ownshares to investors and ready to buy back their old shares. These days‘ people mainly look foravoiding tax so normally they look out for someinvestments, which will help them to do so. When it comes to this point of view, peoplemainly look for mutual fund.What is a Mutual fund?Mutual fund is an investment company that pools money from shareholders and invests in avariety of securities, such as stocks, bonds and money market instruments. Most open-endMutual funds stand ready to buy back (redeem) its shares at their current net asset value,which depends on the total market value of the funds investment portfolio at the time ofredemption. Most open-end Mutual funds continuously offer new shares to investors. Alsoknown as an open-end investment company, to differentiate it from a closed-end investmentcompany. Mutual funds invest pooled cash of many investors to meet the funds statedinvestment objective. Mutual funds stand ready to sell and redeem their shares at any time atthe funds current net asset value: total fund assets divided by shares outstanding.In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units tothe investors and investing funds in securities in accordance with objectives as disclosed inoffer document. Investments in securities are spread across a wide cross-section of industriesand sectors and thus the risk is reduced. Diversification reduces the risk because all stocksmay not move in the same direction in the same proportion at the same time. Mutual fundissues units to the investors in accordance with quantum of money invested by them. Page 11
  12. 12. Mutual funds August 10, 2011Investors of Mutual funds are known as unit holders. The profits or losses are shared by theinvestors in proportion to their investments. The Mutual funds normally come out with anumber of schemes with different investment objectives which are launched from time totime. In India, A Mutual fund is required to be registered with Securities and Exchange Boardof India (SEBI) which regulates securities markets before it can collect funds from the public.In Short, a Mutual fund is a common pool of money in to which investors with commoninvestment objective place their contributions that are to be invested in accordance with thestated investment objective of the scheme. The investment manager would invest the moneycollected from the investor in to assets that are defined/ permitted by the stated objective ofthe scheme. For example, an equity fund would invest equity and equity related instrumentsand a debt fund would invest in bonds, debentures, gilts etc. Mutual fund is a suitableinvestment for the common man as it offers an opportunity to invest in a diversified,professionally managed basket of securities at a relatively low cost. ADVANTAGES OF MUTUAL FUNDS Page 12
  13. 13. Mutual funds August 10, 2011Professional Management.The major advantage of investing in a mutual fund is that you get a professionalmoney manager to manage your investments for a small fee. You can leave theinvestment decisions to him and only have to monitor the performance of the fund atregular intervals.Diversification.Considered the essential tool in risk management, mutual funds make it possible foreven small investors to diversify their portfolio. A mutual fund can effectivelydiversify its portfolio because of the large corpus. However, a small investor cannothave a well-diversified portfolio because it calls for large investment. For example, amodest portfolio of 10 bluechip stocks calls for a few a few thousands.Convenient Administration.Mutual funds offer tailor-made solutions like systematic investment plans andsystematic withdrawal plans to investors, which is very convenient to investors.Investors also do not have to worry about investment decisions, they do not have todeal with brokerage or depository, etc. for buying or selling of securities. Mutualfunds also offer specialized schemes like retirement plans, children‘s plans, industryspecific schemes, etc. to suit personal preference of investors. These schemes alsohelp small investors with asset allocation of their corpus. It also saves a lot of paperwork.Costs EffectivenessA small investor will find that the mutual fund route is a cost-effective method (theAMC fee is normally 2.5%) and it also saves a lot of transaction cost as mutual fundsget concession from brokerages. Also, the investor gets the service of a financialprofessional for a very small fee. If he were to seek a financial advisors help directly,he will end up paying significantly more for investment advice. Also, he will need tohave a sizeable corpus to offer for investment management to be eligible for aninvestment adviser‘s services. Page 13
  14. 14. Mutual funds August 10, 2011 Liquidity. You can liquidate your investments within 3 to 5 working days (mutual funds dispatch redemption cheques speedily and also offer direct credit facility into your bank account i.e. Electronic Clearing Services). Transparency. Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and Sebi monitors their actions closely. Tax benefits. You do not have to pay any taxes on dividends issued by mutual funds. You also have the advantage of capital gains taxation. Tax-saving schemes and pension schemes give you the added advantage of benefits under section 88. AffordabilityMutual funds allow you to invest small sums. For instance, if you want to buy a portfolio ofblue chips of modest size, you should at least have a few lakhs of rupees. A mutual fundgives you the same portfolio for meager investment of Rs.1,000-5,000. A mutual fund can dothat because it collects money from many people and it has a large corpus. DISADVANTAGES OF MUTUAL FUNDS: Professional Management- Did you notice how we qualified the advantage of professional management with the word "theoretically"? Many investors debate over whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut. Well talk about this in detail in a later section. Costs - Mutual funds dont exist solely to make your life easier--all funds are in it for a profit. The Mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject. Dilution - Its possible to have too much diversification (this is explained in our article entitled "Are You Over-Diversified?"). Because funds have small holdings in Page 14
  15. 15. Mutual funds August 10, 2011 so many different companies, high returns from a few investments often dont make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. Taxes - When making decisions about your money, fund managers dont consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability. Equity funds, if selected in the right manner and in the right proportion, have the ability toplay an important role in achieving most long-term objectives of investors in differentsegments. While the selection process becomes much easier if you get advice fromprofessionals, it is equally important to know certain aspects of equity investing yourself todo justice to your hard earned money. Page 15
  16. 16. Mutual fundsAugust 10, 2011 Page 16
  17. 17. Mutual funds August 10, 2011 TYPES OF MUTUAL FUNDThere are many types of mutual funds available to the investor. These different types of fundscan be grouped into certain classifications:A. ON THE BASIS OF STUCTURE:i. Open ended funds:An open-ended mutual fund is one that has units available for purchase and sale at all time atNAV related prices. There is free entry and exit of investors. An open-ended fund rarelydenies to its investors the facility to redeem existing units subject to certain obviousconditionsii. Close ended funds:Close-ended funds do not provide the facility of subscription throughout the year. It is openfor a subscription for a fixed duration as specified in the prospective of the fund. Investor canapply for shares only during initial offer period, following which units can be bought & soldonly atthe stock exchange where they are listed at market price.iii. Interval FundsThis is a mix of both open ended and close-ended schemes.For a certain stipulated period, aninvestor can buy and sell NAV relatedprices, while at some times it is traded at stock exchange where it is listed.B) ON THE BASIS OF OBJECTIVES1. Growth fundsGrowth funds aim to achieve capital appreciation in the medium to long term. These funds donot pay dividends, instead they reinvest the returns. Their assets usually comprises of equity,as it has been proved that equity markets provide the maximum growth in returns amongall other assets classes2. Income fundsIncome funds aim at generating and distributingregular income to the members on a periodical basis. Fund invests in fixed income assetssuch as corporate debentures, government securities, bonds etc. it concentrate on short-termgains.3 Balanced fund:Balanced fund provided both growth as well asregular income to the investor. It aims at distributing regular income as well as capitalappreciation. This can be achieved by balancing the investments between the high growthequity shares and fixed income securities. Page 17
  18. 18. Mutual funds August 10, 20114 Tax saving funds:These schemes offer tax rebates to investors under specific provision of income tax act1961.It is suitable to salaried people who want to enjoy tax rebates. Government offers taxincentives for investment in specified avenues.C) ON THE BASIS OF COMPOSITION OF FUNDS:1 Equity funds:Equity funds invest a major portion of their corpus in equity shares issued by companies.They are riskiest, as they do not offer any guaranteed repayment NAV of equity fundsfluctuates with price moments caused by external factors like political, economical and socialfactors. Investors who want capital appreciation should invest in these funds.2 Debt funds:Debt funds invest in debt investment issued by government, private companies, banks,financial instruments etc. These funds provide low risks and stable income to the investors.3 Money market mutual funds:They invest in highly liquid and safe securities like commercial papers, certificates ofdeposits, treasury bills etc. Money market funds offer liquidity and safety of principal that aninvestor can expect from short-term funds.4 Gilt funds:Gilt funds invest in government securities and treasury bill. These funds have less risk ofdefault and hence offer better protection of principal. These fund provide timely payment ofprincipal and interest.5 Index fund:Index funds are those funds where the portfolio are designed in such a way that they reflectthe composition of some broad market index. It holds securities in the same proportion asindex. The value of these indexes goes up whenever market index goes up and vice verse.The performance of index fund exactly follows the performance stock index.6 Sector funds:Sector funds invest only in the stocks of particular industry or sector. These funds are riskieras they are not diversified. Those investors who understand the industry or sector very wellmay invest in these funds.D) OTHER SCHEMES:1) Loan funds:Loan fund charge entry or exit load every time the investor buys or sells the units of funds.These charges cover distribution, sales and marketing expenses. The load charges to theinvestor at the time his entry into a scheme is called entry load. The load charged to theinvestor at the time of exit from the scheme is called exit load.2) No load funds:The fund that do not charge entry or exit load on sale or purchase of their units. Page 18
  19. 19. Mutual funds August 10, 2011NET ASSET VALUENet asset value is the market value of the asset of the scheme minus its liabilities. The perunit NAV is the net asset value of the scheme divided by thenumber of units outstanding on the valuation date.Net Asset Value (NAV) denotes th performance of a particular scheme of a mutual fund.Mutual funds invest the money collected from the investors in securities markets. In simplewords, Net Asset Value is the market value of the securities held by the scheme. Sincemarket value of the securities changes everyday, NAV of a scheme also varies on day-to-daybasis. The NAV per unit is the market value of securities of a scheme divided by the totalnumber of units of the scheme on any particular date. For example, if the market value ofsecurities of a mutual fund scheme is Rs200 lakhs and the mutual fund has issued 10 lakhsunits of Rs 10 each to the investors, then the NAV per unit of the fund is Rs 20.Sale priceIt is the price you pay when you invest in a scheme. Also called as offer price. It may includea sales loadRepurchase priceIs the price at which a close-ended scheme repurchases its units and it may include a back-end load? This is also called Bid price.Redemption priceIs the price at which open- ended scheme repurchase their units and closeendedschemes redeem their units on maturity. Such prices are NAV related.Sales loadIs a charge collected by a scheme when it sells the units. Also called ,‗Front-end‘ load.Schemes that do not charge a load are called ‗No Load‘schemes.Repurchases or „Back-end‟ loadIs a charge collected by a scheme when it buys back the units from the unit holders . Page 19
  20. 20. Mutual funds August 10, 2011COMPETITION IN MUTUAL FUND INDUSTRY:Mutual fund is the industry, which is facing severe competition from the other financialproducts. The four types of competition in the mutual fund industry is as follows, Inter-industry competition Intra- industry competition Competition between the different mutual fund schemes Competition between the different asset management companies. Page 20
  21. 21. Mutual funds August 10, 2011Some major players on the Indian mutual ABN AMRO Mutual Fund Benchmark Mutual Fund Birla Mutual Fund BOB Mutual Fund Canbank Mutual Fund Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Investments HDFC Mutual Fund HSBC Mutual Fund ING Vysya Mutual Fund JM Financial Mutual Fund Kotak Mahindra Mutual Fund LIC Mutual Fund Morgan Stanley Mutual Fund PRINCIPAL Mutual Fund Prudential ICICI Mutual Fund Reliance Mutual Fund Sahara Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Page 21
  22. 22. Mutual fundsAugust 10, 2011Taurus Mutual FundUnit Trust of India UTI Mutual Fund Page 22
  23. 23. Mutual funds August 10, 2011Strategies of mutual fund investingRisksCapital Gains Distributions are one of the most confusing stumbling blocks for Mutual FundInvestors. Mutual Fund Investors try to limit capital gain distribution expenses by avoidingbuying a fund right before its distribution date and by holding funds for a long period of time sothat they also receive the return and profit rather than just the additional tax liability.Successful Mutual Fund Investors always put every fund through their mutual fund checklistand review the funds historical performance. If something seems too good to be true, itprobably is.BenefitsMutual Funds have two advantages over stocks when it comes to size. A stock that performswell for several years in a row will inevitably get to a point where it is nearly impossible to toplast years performance or meet analyst projections. Conversely, the longer a fund manager runsa fund, the more savvy and experienced he becomes so in most cases performance constantlyimproves. In addition, as a fund grows your returns actually improve because the managementfees become a smaller percentage of total assets (economies of scale). Admittedly, it can betough to manage the mega funds that get up into the billions but every fund manager has theoption to close the fund to new investment if they feel that performance is deteriorating.Mutual Funds are becoming the investment of choice for online investors because you can tradethem for free through the major online brokerages, there are no fees or loads. Transaction feesadd up quickly for most strategies, free trading is a significant perk for Mutual Fund Investors,especially those investors that trade a lot. Mutual Fund Investors also try to avoid funds withhigh expense ratios or they will have squandered this advantage. A good rule of thumb is toavoid fees with expense ratios > 1.5% unless you expect extraordinary returns.Diversification is one of the greatest strengths of mutual funds. Each fund represents an entireportfolio, not just one stock.Long-Term OutlookMutual Fund Investing is a very popular strategy that is already huge and will continue to grow.It is the only strategy that will allow you to test drive any of the other strategies without actuallyhaving to master them yourself. Today, there are over 10,000 funds to choose from and theycover every industry and investing strategy imaginable.Investor ProfileThere are several types of investors that naturally gravitate towards Mutual Fund Investing.This is a great strategy for anyone that likes to change strategies frequently or wants to test anew strategy out before they spend an enormous amount of time and energy trying to master it.Another investor type that is a good fit is anyone that doesnt want to spend a lot of time Page 23
  24. 24. Mutual funds August 10, 2011managing their portfolio. These investors would rather spend a little time identifying strongfunds with talented fund managers and then let a professional manage their money. Page 24
  25. 25. Mutual funds August 10, 2011MUTUAL FUND COMBINES SAFETY AND HIGH RISK RETURN A mutual fund is a professionally managed pool of money formed by collecting money from many investors. It combines safety with good return on investment. The pooled money is invested in various securities-either debt securities such as bonds and debentures or equities (stocks). As the money is managed by experienced people the risk is greatly minimized. However this does not mean that any particular level of return on investment is guaranteed. The fund manager diversifies the pool so that loss in one security is compensated by profit in others. Because of this an investor has the advantage of investing in different securities with a relatively smaller amount of money which cannot be done with stock market investing . Investors purchase units of mutual funds. This does not reflect the value of any particular security but gives an idea of the Net Asset Value (NAV) of that particular fund. The NAV of the fund is the total market value of the assets of that particular scheme minus its liabilities. If the NAV of the scheme is divided by the total number of the units we get the NAV per unit. Conversely if we multiply the NAV per unit of the scheme by the number of units held by an investor we get the market value of the units of that particular investor. For example if you have 100 units of a scheme and its NAV is 100 the market value of your investment is 10,000. The NAV is subjected to variation and is regularly announced by the fund manager. If you can sell it at a higher price than you purchased you make a profit. Some fancy terms are used by mutual fund companies and it is better you know what they mean so that you do not get confused or carried away. Some name is given to the scheme. Often the name is such that you get a feeling that investing in that scheme will solve all your financial problems. Page 25
  26. 26. Mutual funds August 10, 2011HISTORY OF MUTUAL FUNDThe mutual fund industry in India started in 1963 with the formation of Unit Trust of India, atthe initiative of the Government of India and Reserve Bank. The history of mutual funds inIndia can be broadly divided into four distinct phases: -First Phase – 1964-87An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by theReserve Bank of India and functioned under the Regulatory and administrative control of theReserve Bank of India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over the regulatory and administrative control inplace of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988UTI had Rs.6,700 crores of assets under management.Second Phase – 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banksand Life Insurance Corporation of India (LIC) and General Insurance Corporation of India(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fundin December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47,004crores.Third Phase – 1993-2003 (Entry of Private Sector Funds)With the entry of private sector funds in 1993, a new era started in the Indian mutual fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was the yearin which the first Mutual Fund Regulations came into being, under which all mutual funds, Page 26
  27. 27. Mutual funds August 10, 2011except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now mergedwith Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive andrevised Mutual Fund Regulations in 1996. The industry now functions under the SEBI(Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual fundssetting up funds in India and also the industry has witnessed several mergers and acquisitions.As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805crores. The Unit Trust of India with Rs.44,541 crores of assets under management was wayahead of other mutual funds.Fourth Phase – since February 2003In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI wasbifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust ofIndia with assets under management of Rs.29,835 crores as at the end of January 2003,representing broadly, the assets of US 64 scheme, assured return and certain other schemes.The Specified Undertaking of Unit Trust of India, functioning under an administrator andunder the rules framed by Government of India and does not come under the purview of theMutual Fund Regulations.The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With the bifurcationof the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets undermanagement and with the setting up of a UTI Mutual Fund, conforming to the SEBI MutualFund Regulations, and with recent mergers taking place among different private sector funds,the mutual fund industry has entered its current phase of consolidation and growth. As at theend of September, 2004, there were 29 funds, which manage assets of Rs.153108 croresunder 421 schemes. Page 27
  28. 28. Mutual funds August 10, 2011Growth in Assets Under ManagementSource: Association of Mutual in India Page 28
  29. 29. Mutual funds August 10, 2011Why Select Mutual Fund?The risk return trade-off indicates that if investor is willing to take higher risk thencorrespondingly he can expect higher returns and vise versa if he pertains to lower riskinstruments, which would be satisfied by lower returns. For example, if an investors opt forbank FD, which provide moderate return with minimal risk. But as he moves ahead to investin capital protected funds and the profit-bonds that give out more return which is slightlyhigher as compared to the bank deposits but the risk involved also increases in the sameproportion. Thus investors choose mutual funds as their primary means of investing, asMutual funds provide professional management, diversification, convenience and liquidity.That doesn‘t mean mutual fund investments risk free. This is because the money that ispooled in are not invested only in debts funds which are less riskier but are also invested inthe stock markets which involves a higher risk but can expect higher returns. Hedge fundinvolves a very high risk since it is mostly traded in the derivatives market which isconsidered very volatile. Page 29
  30. 30. Mutual funds August 10, 2011SELECTION PARAMETERS FOR MUTUAL FUNDYour objective:The first point to note before investing in a fund is to find out whether your objective matcheswith the scheme. It is necessary, as any conflict would directly affect your prospectivereturns. Similarly, you should pick schemes that meet your specific needs. Examples: pensionplans, children‘s plans, sector-specific schemes, etc. Your risk capacity and capability: Thisdictates the choice of schemes. Those with no risk tolerance should go for debt schemes, asthey are relatively safer. Aggressive investors can go for equity investments. Investors thatare even more aggressive can try schemes that invest in specific industry or sectors. FundManager‘s and scheme track record: Since you are giving your hard earned money tosomeone to manage it, it is imperative that he manages it well. It is also essential that the fundhouse you choose has excellent track record. It also should be professional and maintain hightransparency in operations. Look at the performance of the scheme against relevant marketbenchmarks and its competitors. Look at the performance of a longer period, as it will giveyou how the scheme fared in different market conditions.Cost factor:Though the AMC fee is regulated, you should look at the expense ratio of the fund beforeinvesting. This is because the money is deducted from your investments. A higher entry loador exit load also will eat into your returns. A higher expense ratio can be justified only bysuperlative returns. It is very crucial in a debt fund, as it will devour a few percentages fromyour modest returns. Also, Morningstar rates mutual funds. Each year end, many financialpublications list the year‘s best performing mutual funds. Naturally, very eager investors willrush out to purchase shares of last years top performers. That‘s a big mistake. Remember,changing market conditions make it rare that last years top performer repeats that ranking forthe current year. Mutual fund investors would be well advised to consider the fundprospectus, the fund manager, and the current market conditions. Never rely on last years topperformers. Types of Returns on Mutual Fund: There are three ways, where the total returnsprovided by mutual funds can be enjoyed by investors:• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly allincome it receives over the year to fund owners in the form of a distribution.• If the fund sells securities that have increased in price, the fund has a capital gain. Mostfunds also pass on these gains to investors in a distribution. If fund holdings increase in pricebut are not sold by the fund manager, the funds shares increase in price. You can then sellyour mutual fund shares for a profit.Funds will also usually give you a choice either to receive a check for distributions or toreinvest the earnings and get more shares. Page 30
  31. 31. Mutual funds August 10, 2011RISK FACTORS OF MUTUAL FUNDS: 1. The Risk-Return Trade-Off: The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns / loss and lower the risk lesser the returns/loss. Hence it is up to you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision. 2. Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (―SIP‖) that works on the concept of Rupee Cost Averaging (―RCA‖) might help mitigate this risk. 3. Credit Risk: The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A‗AAA‘ rating is considered the safest whereas a ‗D‘ rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk. 4. Inflation Risk: Things you hear people talk about:"Rs. 100 today is worth more than Rs. 100 tomorrow.""Remember the time when a bus ride coasted 50 paisa?""Mehangai Ka Jamana Hai."The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happen when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate this risk. 5. Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk. 6.Political / Government Policy Risk: Page 31
  32. 32. Mutual funds August 10, 2011Changes in government policy and political decision can change the investmentEnvironment. They can create a favorable environment for investment or vice versa.6. Liquidity Risk:Liquidity risk arises when it becomes difficult to sell the securities that one haspurchased. Liquidity Risk can be partly mitigated by diversification, staggering ofmaturities as well as internal risk controls that lean towards purchase of liquid securities Page 32
  33. 33. Mutual funds August 10, 2011WORKING OF MUTUAL FUNDSThe mutual fund collects money directly or through brokers from investors. The money isinvested in various instruments depending on the objective of the scheme. The incomegenerated by selling securities or capital appreciation of these securities is passed on tothe investors in proportion to their investment in the scheme. The investments are dividedinto units and the value of the units will be reflected in Net Asset Value or NAV of theunit. NAV is the market value of the assets of the scheme minus its liabilities. The perunit NAV is the net asset value of the scheme divided by the number of units outstandingon the valuation date. Mutual fund companies provide daily net asset value of theirschemes to their investors.NAV is important, as it will determine the price at which youbuy or redeem the units of a scheme. Depending on the load structure of the scheme, youhave to pay entry or exit load. Page 33
  34. 34. Mutual funds August 10, 2011STRUCTURE OF A MUTUAL FUND:India has a legal framework within which Mutual Fund have to be constituted. In Indiaopen and close-end funds operate under the same regulatory structure i.e. as unit Trusts.A Mutual Fund in India is allowed to issue open-end and close-end schemes under acommon legal structure. The structure that is required to be followed by any Mutual Fundin India is laid down under SEBI (Mutual Fund) Regulations, 1996.The Fund Sponsor:Sponsor is defined under SEBI regulations as any person who, acting alone or incombination of another corporate body establishes a Mutual Fund. The sponsor of thefund is akin to the promoter of a company as he gets the fund registered with SEBI. Thesponsor forms a trust and appoints a Board of Trustees. The sponsor also appoints theAsset Management Company as fund managers. The sponsor either directly or actingthrough the trustees will also appoint a custodian to hold funds assets. All these are madein accordance with the regulation and guidelines of SEBI.As per the SEBI regulations, forthe person to qualify as a sponsor, he must contribute at least40% of the net worth of theAsset Management Company and possesses a sound financial track record over 5 yearsprior to registration.Mutual Funds as Trusts: A Mutual Fund in India is constituted in the form of Public trustAct, 1882. The Fund sponsor acts as a settler of the Trust, contributing to its initial capitaland appoints a trustee to hold the assets of the trust for the benefit of the unit-holders,who are the beneficiaries of the trust. The fund then invites investors to contribute theirmoney in common pool, by scribing to ―units‖ issued by various schemes established bythe Trusts as evidence of their beneficial interest in the fund. It should be understood thatthe fund should be just a ―pass through‖ vehicle. Under the Indian Trusts Act, the trust ofthe fund has no independent legal capacity itself, rather it is the Trustee or the Trusteeswho have the legal capacity and therefore all acts in relation to the trusts are taken on itsbehalf by the Trustees. In legal parlance the investors or the unit-holders are thebeneficial owners of the investment held by the Trusts, even as these investments are heldin the name of the Trustees on a day-to-day basis. Being public trusts, Mutual Fund caninvite any number of investors as beneficial owners in their investment schemes.Trustees: A Trust is created through a document called the Trust Deed that is executed bythe fund sponsor in favor of the trustees. The Trust- the Mutual Fund – may be managedby a board of trustees- a body of individuals, or a trust company- a corporate body. Mostof the funds in India are managed by Boards of Trustees. While the boards of trustees aregoverned by the Indian Trusts Act, where the trusts are a corporate body, it would alsorequire to comply with the Companies Act, 1956. The Board or the Trust company as anindependent body, acts as a protector of the of the unit-holders interests. The Trustees donot directly manage the portfolio of securities. For this specialist function, the appoint anAsset Management Company. They ensure that the Fund is managed by ht AMC as per Page 34
  35. 35. Mutual funds August 10, 2011the defined objectives and in accordance with the trusts deeds and SEBI regulations. TheAsset Management Companies: The role of an Asset Management Company (AMC) is toact as the investment manager of the Trust under the board supervision and the guidanceof the Trustees. The AMC is required to be approved and registered with SEBI as anAMC. The AMC of a Mutual Fund must have a net worth of at least Rs. 10 Crores at alltimes. Directors of the AMC, both independent and non- independent, should haveadequate professional expertise in financial services and should be individuals of highmorale standing, a condition also applicable to other key personnel of the AMC. TheAMC cannot act as a Trustee of any other Mutual Fund. Beside sits role as a fundmanager, it may undertake specified activities such as advisory services and financialconsulting, provided these activities are run independent of one another and the AMC‘sresources (such as personnel, systems etc.) are properly segregated by the activity. TheAMC must always act in the interest of the unit-holders and reports to the trustees withrespect to its activities.Custodian and Depositories:Mutual Fund is in the business of buying and selling of securities in large volumes.Handling these securities in terms of physical delivery and eventual safekeeping is aspecialized activity. The custodian is appointed by the Board of Trustees for safekeepingof securities or participating in any clearance system through approved depositorycompanies on behalf of the Mutual Fund and it must fulfill its responsibilities inaccordance with its agreement with the Mutual Fund. The custodian should be an entityindependent of the sponsors and is required to be registered with SEBI. With theintroduction of the concept of dematerialization of shares the dematerialized shares arekept with the Depository participant while the custodian holds the physical securities.Thus, deliveries of a fund‘s securities are given or received by a custodian or a depositoryparticipant, at the instructions of the AMC, although under the overall direction andresponsibilities of the Trustees .Bankers :A Fund‘s activities involve dealing in money on a continuous basis primarily with respectto buying and selling units, paying for investment made, receiving the proceeds from saleof the investments and discharging its obligations towards operating expenses. Thus theFund‘s banker plays an important role to determine quality of service that the fund givesin timely delivery of remittances etcTransfer Agents:Transfer agents are responsible for issuing and redeeming units of the Mutual Fund andprovide other related services such as preparation of transfer documents and updatinginvestor records. A fund may choose to carry out its activity in-house and charge thescheme for the service at a competitive market rate. Where an outside Transfer agent isused, the fund investor will find the agent to be an important interface to deal with, since Page 35
  36. 36. Mutual funds August 10, 2011all of the investor services that a fund provides are going to be dependent on the transferagent. Page 36
  37. 37. Mutual funds August 10, 2011REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA:The structure of mutual funds in India is guided by the SEBI. Regulations,1996.Theseregulations make it mandatory for mutual fund to have three structures ofsponsor trustee and asset Management Company. The sponsor of the mutual fund andappoints the trustees. The trustees are responsible to the investors in mutual fund andappoint the AMC for managing the investment portfolio. The AMC is the business face ofthe mutual fund, as it manages all the affairs of the mutual fund. The AMC and themutual fund have to be registered with SEBI.SEBI REGULATIONS:• As far as mutual funds are concerned, SEBI formulates policies and regulates themutual funds to protect the interest of the investors.• SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual fundssponsored by private sector entities were allowed to enter the capital market.• The regulations were fully revised in 1996 and have been amended thereafter from timeto time.• SEBI has also issued guidelines to the mutual funds from time to time to protect theinterests of investors.• All mutual funds whether promoted by public sector or private sector entities includingthose promoted by foreign entities are governed by the same set of Regulations. The risksassociated with the schemes launched by the mutual funds sponsored by these entities areof similar type. There is no distinction in regulatory requirements for these mutual fundsand all are subject to monitoring and inspections by SEBI.• SEBI Regulations require that at least two thirds of the directors of trustee company orboard of trustees must be independent i.e. they should not be associated with thesponsors.• Also, 50% of the directors of AMC must be independent. All mutual funds are requiredto be registered with SEBI before they launch any scheme.• Further SEBI Regulations,inter-alia, stipulate that MFs cannot guarantee returns in any scheme and that eachscheme is subject to 20 : 25 condition [I.e. minimum 20 investors per scheme and oneinvestor can hold more than 25% stake in the corpus in that one scheme].•Also SEBI has permitted MFs to launch schemes overseas subject various restrictionsand also to launch schemes linked to Real Estate, Options and Futures, Commodities, etc. Page 37
  38. 38. Mutual funds August 10, 2011ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)With the increase in mutual fund players in India, a need for mutual fund association inIndia was generated to function as a non-profit organization. Association of Mutual Fundsin India(AMFI) was incorporated on 22nd August, 1995.AMFI is an apex body of allAsset Management Companies (AMC) which has been registered with Mutual FundsIndia has brought down the Indian Mutual Fund Industry to a professional SEBI. Till dateall the AMCs are that have launched mutual fund schemes are its members. It functionsunder the supervision and guidelines of its Board of Directors. Association of and healthymarket with ethical lines enhancing and maintaining standards. It follows the principle ofboth protecting and promoting the interests of mutual funds as well as their unit holders.The Objectives of Association of Mutual Funds in India:The Association of Mutual Funds of India works with 30 registered AMCs of the country.It has certain defined objectives which juxtaposes the guidelines of its Board of Directors.The objectives are as follows:•This mutual fund association of India maintains high professional and ethical standardsin all areas of operation of the industry.• It also recommends and promotes the top class business practices and code of conductwhich is followed by members and related people engaged in the activities of mutual fundand asset management. The agencies who are by any means connected or involved in thefield of capital markets and financial services also involved in this code of conduct of theassociation.• AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fundindustry.• Association of Mutual Fund of India do represent the Government of India, the ReserveBank of India and other related bodies on matters relating to the Mutual Fund Industry.• It develops a team of well qualified and trained Agent distributors. It implements aprogramme of training and certification for all intermediaries and other engaged in themutual fund industry.• AMFI undertakes all India awareness programme for investors in order to promoteproper understanding of the concept and working of mutual funds.• At last but not the least association of mutual fund of India also disseminateinformations on Mutual Fund Industry and undertakes studies and research either directlyor in association with other bodies.AMFI Publications: AMFI publish mainly two types of bulletin. One is on the monthlybasis and the other is quarterly. These publications are of great support for the investors toget intimation of the knowhow of their parked money. Page 38
  39. 39. Mutual funds August 10, 2011MUTUAL FUNDS VS. OTHER INVESTMENTSFrom investors‘ viewpoint mutual funds have several advantages such as:• Professional management and research to select quality securities.• Spreading risk over a larger quantity of stock whereas the investor has limited to buyonly a hand full of stocks. The investor is not putting all his eggs in one basket.• Ability to add funds at set amounts and smaller quantities such as $100 per month• Ability to take advantage of the stock market which has generally outperformed otherinvestment in the long run.• Fund manager are able to buy securities in large quantities thus reducing brokerage fees.However there are some disadvantages with mutual funds such as:• The investor must rely on the integrity of the professional fund manager.• Fund management fees may be unreasonable for the services rendered.• The fund manager may not pass transaction savings to the investor.• The fund manager is not liable for poor judgment when the investors fund loses value.• There may be too many transactions in the fund resulting in higher fee/cost to theinvestor -This is sometimes call "Churn and Earn".• Prospectus and Annual report are hard to understand.• Investor may feel a lost of control of his investment dollars. There may be restrictionson when and how an investor sells/redeems his mutual fund shares. Page 39
  40. 40. Mutual funds August 10, 2011Company Fixed Deposits versus Mutual Funds:Fixed deposits are unsecured borrowings by the company accepting the deposit. Creditrating of the fixed deposit program is an indication of the inherent default risk in theinvestment. The moneys of investors in a mutual fund scheme are invested by the AMCin specific investments under that scheme. These investments are held and managed in-trust for the benefit of scheme‘s investors. On the other hand, there is no such directcorrelation between a company‘s fixed deposit mobilisation, and the avenues where theseresources are deployed. A corollary of such linkage between mobilisation and investmentis that the gains and losses from the mutual fund scheme entirely flow through to theinvestors. Therefore, there can be no certainty of yield, unless a named guarantor assuresa return or, to a lesser extent, if the investment is in a serial gilt scheme. On the otherhand, the return under a fixed deposit is certain, subject only to the default risk of theborrower.Both fixed deposits and mutual funds offer liquidity, but subject to some differences:The provider of liquidity in the case of fixed deposits is the borrowing company. Inmutual funds, the liquidity provider is the scheme itself (for open-end schemes) or themarket (in the case of closed-end schemes)The basic value at which fixed deposits are enchased is not subject to a market risk.However, the value at which units of a scheme are redeemed depends on the market. Ifsecurities have gained in value during the period, then the investor can even earn a returnthat is higher than what he anticipated when he invested. But he could also end up with aloss. Early encashment of fixed deposits is always subject to a penalty charged by thecompany that accepted the fixed deposit. Mutual fund schemes also have the option ofcharging a penalty on ―early‖ redemption of units (through by way of an ‗exit load‘) If theNAV has appreciated adequately, then even after the exit load, the investor could earn acapital gain on his investment. Page 40
  41. 41. Mutual funds August 10, 2011 Bank Fixed Deposits verses Mutual Fund: Bank fixed deposits are similar to company fixed deposits. The major difference is that banks are generally more stringently regulated than companies. They even operate under stricter requirements regarding Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).While the above are causes for comfort, bank deposits too are subject to default risk. However, given the political and economic impact of bank defaults, the government as well as Reserve Bank of India (RBI) try to ensure that banks do not fail. Further, bank deposits up to Rs 100,000 are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), so long as the bank has paid the required insurance premium of 5 paisa per annum for every Rs 100 of deposits. The monetary ceiling of Rs100,000 is for all the deposits in all the branches of a bank, held by the depositor in the same capacity and right. Banks Mutual fundsReturns Low BetterAdministrative Expenses High LowRisk Low ModerateInvestment options Less MoreNetwork High Penetration Low but ImprovingLiquidity At a Cost BetterQuality of assets Not Transparent TransparentInterest Calculation Quarterly i.e. 3rd,6th,9th,12th Every MonthGuarantor Is Needed Not NeededAccount Needed Not Needed . Page 41
  42. 42. Mutual funds August 10, 2011Bonds and Debentures versus Mutual Funds:As in the case of fixed deposits, credit rating of the bond / debenture is an indication ofthe inherent default risk in the investment. However, unlike FD, bonds and debentures aretransferable securities. While an investor may have an early encashment option from theissuer (for instance through a ―put‖ option), generally liquidity is through a listing in themarket.Implications of this are:•If the security does not get traded in the market, then the liquidity remains on paper. Inthis respect, an open-end scheme offering continuous sale / re-purchase option is superior.• The value that the investor would realise in an early exit is subject to market risk. Theinvestor could have a capital gain or a capital loss. This aspect is similar to a MF scheme.It is possible for a professional investor to earn attractive returns by directly investing inthe debt market, and actively managing the positions. Given the market realities in India,it is difficult for most investors to actively manage their debt portfolio. Further, at times,it is difficult to execute trades in the debt market even when the transaction size is as highas Rs 1crore. In this respect, investment in a debt scheme would be beneficial. Debtsecurities could be backed by a hypothecation or mortgage of identified fixed and / orcurrent assets (secured bonds / debentures). In such a case, if there is a default, theidentified assets become available for meeting redemption requirements. An unsecuredbond /debenture is for all practical purposes like a fixed deposit, as far as access to assetsis concerned. The investments of a mutual fund scheme are held by a custodian for thebenefit of investors in the scheme. Thus, the securities that relate to a scheme are ring-fenced for the benefit of its investors. Page 42
  43. 43. Mutual funds August 10, 2011Advantages of Mutual Funds over Stocks:• A mutual fund offers a great deal of diversification starting with the very first dollarinvested, because a mutual fund may own tens or hundreds of different securities. Thisdiversification helps reduce the risk of loss because even if any one holding tanks, theover all value doesn‘t drop by much. If you‘re buying individual stocks, you cant getmuch diversity unless you have $10K or so.• Small sums of money get you much further in mutual funds than in stocks. First, youcan setup an automatic investment plan with many fund companies that lets you put in aslittle as$50 per month. Second, the commissions for stock purchases will be higher thanthe cost of buying no-load fund (Of course, the funds various expenses like commissionsare already taken out of the NAV). Smaller sized purchases of stocks will have relativelyhigh commissions on a percentage basis, although with the $10 trade becoming common,this is a bit less of a concern than it once was.• You can exit a fund without getting caught on the bid/ask spread.• Funds provide a cheap and easy method for reinvesting dividends.• Last but most certainly not least, when you buy a fund you‘re in essence hiring aprofessional to manage your money for you. That professional is (presumably) monitor inthe economy and the markets to adjust the funds holdings appropriately.Advantages of Stock over Mutual Funds:•The opposite of the diversification issue: If you own just one stock and it doubles, youare up 100%. If a mutual fund owns 50 stocks and one doubles, it is up 2%. On the otherhand, if you own just one stock and it drops in half, you are down 50% but the mutualfund is down1%. Cuts both ways.• If you hold your stocks several years, you aren‘t nicked a 1% or so management feeevery year (although some brokerage firms charge if there aren‘t enough trades).• You can take your profits when you want to and wont inadvertently buy a taxliability.(This refers to the common practice among funds of distributing capital gainsaround November or December of each year. See the article elsewhere in this FAQ formore details.)•You can do a covered write option strategy. (See the article on options on stocks formore details.)• You can structure your portfolio differently from any existing mutual fundportfolio.(Although with the current universe of funds I‘m not certain what could possiblybe missing out there!)• You can buy smaller cap stocks which aren‘t suitable for mutual funds to invest in. Page 43
  44. 44. Mutual funds August 10, 2011• You have a potential profit opportunity by shorting stocks. (You cannot, in general,short mutual funds.)• The argument is offered that the funds have a "herd" mentality and they all end upowning the same stocks. You may be able to pick stocks better. Page 44
  45. 45. Mutual funds August 10, 2011Life Insurance versus Mutual Fund:Life insurance is a hedge against risk – and not really an investment option. So, it wouldbe wrong to compare life insurance against any other financial product. Occasionally onaccount of market inefficiencies or miss-pricing of products in India, life insuranceproducts have offered a return that is higher than a comparable ―safe‖ fixed returnsecurity – thus, you are effectively paid for getting insured! Such opportunities are notsustainable in the long run. Page 45
  46. 46. Mutual funds August 10, 2011FUTURE PROSPECT OF MUTUAL FUNDS IN INDIA Financial experts believe that the future of Mutual Funds in India will be very bright.It has been estimated that by March-end of 2010, the mutual fund industry of India will reachRs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. In thecoming 10 years the annual composite growth rate is expected to go up by 13.4%. 100% growth in the last 6 years. Number of foreign AMCs are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion. B and C class cities are growing rapidly. Today most of the mutual funds are concentrating on the A class cities. Soon they will find scope in the growing cities. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. SEBI allowing the MFs to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice. Looking at the past developments and combining it with the current trends it can beconcluded that the future of Mutual Funds in India has lot of positive things to offer to itsinvestors. Page 46
  47. 47. Mutual funds August 10, 2011 BlackRock is a truly global enterprisecombining worldwide reach with localized service to help clients achieve a better financial future Page 47
  48. 48. Mutual funds August 10, 2011 ABOUT BLACK ROCKBlackRock is one of the worlds leading providers of investment, advisory and riskmanagement solutions.BlackRock offers a range of solutions — from rigorous fundamental and quantitative activemanagement approaches aimed at maximizing outperformance to highly efficient indexingstrategies designed to gain broad exposure to the worlds capital markets. Our clients canaccess our investment solutions through a variety of product structures, including individualand institutional separate accounts, mutual funds and other pooled investment vehicles.The foundation of BlackRocks business is a belief that their clients‘ needs are of paramountimportance. Our commitment to investment excellence is anchored in a shared culture thatalways places a client‘s interests first, from individual investors to the world‘s largestinstitutions . BlackRock‘s investment approach is based on our conviction that we cancombine our market insights, our global reach and scale, our proprietary technology, ourculture of information sharing and our unwavering focus on risk management into an abilityto deliver performance in all market environments. BlackRock is committed to providing abroad set of investment solutions for our clients, striving to achieve the best balance betweenrisk and opportunity.BlackRock is a truly global firm that combines the benefits of worldwide reach with localservice and relationships. We manage assets for clients in North and South America, Europe,Asia, Australia, the Middle East and Africa. The firm employs more than 9,300 talentedprofessionals and maintains offices in 26 countries around the world. Our client base includescorporate, public, union and industry pension plans; governments; insurance companies;third-party mutual funds; endowments; foundations; charities; corporations; officialinstitutions; sovereign wealth funds; banks; financial professionals; and individualsworldwide.As of March 31, 2011, BlackRocks assets under management total US$3.65 trillion acrossequity, fixed income, cash management, alternative investment, real estate and advisorystrategies. Through BlackRock Solutions® — the natural evolution of our long-standinginvestment in developing sophisticated and highly integrated systems — we offer riskmanagement, strategic advisory and enterprise investment system services to a broad base ofclients with portfolios totaling approximately US$10 trillion.Our firms ownership structure is designed to maintain the independence we believe isnecessary to retain our commitments to client focus and investment excellence. BlackRock,Inc. (NYSE: BLK) has no single majority stockholder and has a majority of independentdirectors. Page 48
  49. 49. Mutual funds August 10, 2011 BlackRocks road to success and growth in asset management Assets Under Management ($ Billions) 1988 11988: Founded Blackstone Financial Management 1989 2 1990 4 1991 8 1992 171992: Changed name to BlackRock 1993 23 CLIENTS 1994 53 1995 691995: Merged with PNC, offered common vision & platformWe are 1996 83 committedto always doingwhat is in 1997 105 ourclients‘ best long-term 1998 131 interests.Since our 1999 1651999: IPO (NYSE: BLK) Broad employee founding, ownership 2000 2042000: Launched BlackRock Solutions® 2001 239 2002 273 2003 309 2004 342 2005 4522005: State Street Research acquisition 2006 1,125Sept. 29: Combination of BlackRock and MLIM 2007 1,357Oct. 1: Acquired Quellos Group, LLC 2008 1,310 2009 3,190Dec. 1: Merged with Barclays Global Investors 2010 3,560 Page 49
  50. 50. Mutual funds August 10, 2011Clients ServicesBlackRock‘s core philosophy has been grounded in the belief that our clients‘ needs are ofparamount importance and our sole business is managing our clients‘ assets on their behalf.With this as a framework, BlackRock has assembled teams of investment professionals withsignificant expertise in global capital markets. Our focus on investment excellence and state-of-the-art analytics is complemented by an unwavering, senior-level commitment to service;this results in dynamic client relationships and enables us to assist clients with a range ofservices, including an understanding of liabilities and asset allocation needs.BlackRock takes a three dimensional approach to the management of the organization,incorporating functional, product and regional elements in support of our clients‘ goals. Thefunctional dimension looks at our operations by specific task, such as portfolio management,account management or operations. The product dimension brings together the cross-disciplinary expertise critical to managing client assets in each class. Finally, the regionalaspect of our model recognizes the unique, geography-specific needs of clients as well as theimportance of local regulatory issues.Distinct but interconnected, these factors work together to inform all of our businessdecisions and result in a firm that is globally efficient and locally effective. With our three-dimensional approach to managing the organization, we seek to: ensure consistency on a global basis; allow for the tailoring of products and services according to client or local needs; promote teamwork among our employees worldwide; and facilitate operational integrity and efficiencyGiven our size, scope and global footprint we strive for a consistent, interconnected approach"One BlackRock." Page 50
  51. 51. Mutual funds August 10, 2011 Institutional and Retail InvestorsInstitutional InvestorsBlackRock has built a diversified business by developing institutional-quality products thatseek to meet the needs of taxable and tax-exempt investors worldwide. Clients select us notonly for our expertise and flexibility, but also for our creativity in tackling business- andindustry-specific challenges. The depth and breadth of our product offerings reflects ourproactive approach to solving client problems. So, too, does the evolution of our business—we are continually searching for ways to add value to our client relationships.Retail InvestorsThe investment and risk management expertise that BlackRock brings to the management ofinstitutional products is also available globally through separately managed accounts, open-end and closed-end funds, offshore funds, unit trusts and alternative investment vehicles. AtBlackRock, coordinated marketing and client service efforts are tailored to ensure thedelivery of the firm‘s resources to help meet the unique needs of financial intermediaries andtheir clients throughout the world. Page 51
  52. 52. Mutual funds August 10, 2011BLACK ROCK “ROCK” SOLUTION BlackRock has long been recognized for its disciplined investment process and rigorous bottom-up approach to risk management. Since its inception, BlackRock has focused on the need to assess security-and portfolio-level risks, to make investment decisions in rapidly changing markets, and to execute transactions efficiently, while ensuring strict adherence to risk management and compliance guidelines. As a result, BlackRock developed an integrated suite of investment management tools. As of 30 September 2010, BlackRock Solutions provides services for approximately US$9.5 trillion in securities and derivatives across more than 140 clients, many of whom are among the largest and most sophisticated financial institutions in the world.Wards & RecognitionShareholder InformationExchangeNew York Stock ExchangeListed SecurityBLK Common StockTransfer AgentMellon Investor ServicesStock Transfer DepartmentP.O. Box 3312South Hackensack, NJ 07606Phone: (800) 851-9677Individual Investor Contacts:To change your registered name or address, and for inquiries regarding share balances, lost certificatesand all other account related matters, please contact:Mellon Investor ServicesAccount MaintenanceP.O. Box 3316South Hackensack, NJ 07606 Page 52
  53. 53. Mutual funds August 10, 2011 Awards and Achievements BlackRock Chief Operating Officer Sue Wagner rises through the ranks on Fortunes 12th annual list of "50 Most Powerful Women in Business."BlackRock receives an award from City Harvest, a non-profit organization founded in 1982- the worlds first and New York Citys only food rescue program.Financial News Asset Management Awards names Larry Fink CEO of the Year.Larry Fink listed on Smart Money‘s Power 30: Finance and Wall Street List in October2009.Wall Street & Technology selected BlackRock as the recipient of the "Best AnalyticsAward" for their Gold Book 2009 issue published in October.Managing Director Bob Connolly, BlackRocks General Counsel, receives Fund TitanAward for "Inside Counsel of the Year" by Ignites in September 2009.Global Pensions, a magazine for the institutional pension industry, honored BlackRockwith awards for Liability Driven Investments Manager of the Year and DerivativesManager of the Year, while iShares won the ETF Provider of the Year award. March 2010.BlackRock honored as Global Fund House of the Year by Asian Investor Magazine. Page 53
  54. 54. Mutual funds August 10, 2011The Asset Management CompanyDSP BlackRock Investment Managers Pvt. Ltd. is the investment manager to DSPBlackRock Mutual Fund.The philosophy of DSP BlackRock Investment Managers Pvt. Ltd. has been grounded in thebelief that experienced investment professionals, using a disciplined process andsophisticated analytical tools, can consistently add value to client portfolios.With our three-dimensional approach to managing the organization, we seek to:Ensure consistency on a global basis;Allow for the tailoring of products and services according to client or local needs;Promote teamwork among our employees worldwide; andFacilitate operational integrity and efficiency SponsorsDSP HMK Holdings Pvt. Ltd. and DSP ADIKO Holdings Pvt. Ltd.DSP HMK Holdings Pvt. Ltd. and DSP ADIKO Holdings Pvt. Ltd. are companiesincorporated in 1983 under the Companies Act, 1956 and are also registered with the ReserveBank of India as non deposit taking Non-banking Finance Companies. These companies havebeen functioning as investment companies.BlackRockBlackRock is a premier provider of global investment management services to institutionaland retail clients around the world managing total assets of US$ 3.45 trillion as on September30, 2010. Headquartered in New York, BlackRock serves clients from offices in 24 countries,maintaining a major presence in North America, Europe, Asia-Pacific, and the Middle East.With approximately 8,500 employees, including more than 700 investment professionalsworldwide, BlackRock offers clients in-depth local knowledge and understanding, whileleveraging the strength of their global presence and infrastructure to deliver focusedinvestment solutions. Today, BlackRock services clients in over 60 countries. Page 54
  55. 55. Mutual funds August 10, 2011 TrusteesDSP BlackRock Trustee Company Private Ltd., a company incorporated under theCompanies Act, 1956, is the trustee for the Fund vide Trust Deed dated December 16, 1996.The shareholding of the Trustee is as follows: BlackRock Advisors Singapore Pte. Ltd., awholly owned subsidiary of BlackRock Inc., holds 49% and the balance 51% is held by Mr.Hemendra Kothari. AMC DirectorMr. Hemendra M. Kothari, ChairmanMr. Laurence D FinkMs. Susan L. WagnerMr. K R V SubrahmanianMr. Ranjan PantDr. Omkar GoswamiMr. Piyush MankadMr. Quintin Price (Alternate Director to Mr. Laurence D Fink)Mr. John R Kushel (Alternate Director to Ms. Susan L. Wagner)Mr. Rakesh MohanMr. David Rowley GrahamMr. Rohit Bhagat Page 55
  56. 56. Mutual funds August 10, 2011PRODUCTS OF DSPBLACK ROCK MUTUAL FUNDDSP BlackRock Natural Resources and New Energy Fund The primary investment objective of the Scheme is to seek to generate capital appreciation and provide long term growth opportunities by investing in equity and equity related securities of companies domiciled in India whose predominant economic activity is in the:- (a) discovery, development, production, or distribution of natural resources,viz., energy, mining etc; (b) alternative energy and energy technology sectors, with emphasisgiven to renewable energy, automotive and on-site power generation, energy storage andenabling energy technologies. DSP BlackRock Micro Cap Fund An Open equity growth scheme that seeks to generate long-term capital appreciation from a portfolio that is substantially consituted of equity and equity related securities, which are not part of the top 300 companies by market captalisation. The Scheme was launched as a three year close ended scheme and has been converted into an open ended scheme witheffect from June 15, 2010.DSP BlackRock Equity Fund An Open Ended growth Scheme, seeking to generate long term capital appreciation, from a portfolio that is substantially constituted of equity securities and equity related securities of issuers domiciled in India DSP BlackRock Top 100 Equity Fund An Open Ended growth Scheme, seeking to generate capital appreciation, from a portfolio that is substantially constituted of equity securities and equity related securities of the 100 largest corporates, by market capitalisation, listed in India. Page 56
  57. 57. Mutual funds August 10, 2011 DSP BlackRock Opportunities Fund An Open Ended growth Scheme, seeking to generate long term capital appreciation and whose secondary objective is income generation and the distribution of dividend from a portfolio constituted of equity and equity related securities concentrating on the investment focus of the Scheme. DSP BlackRock India T.I.G.E.R. Fund An open ended diversified equity Scheme, seeking to generate capital appreciation, from a portfolio that is substantially constituted of equity securities and equity related securities of corporates, which could benefit from structural changes brought about by continuing liberalization in economic policies by the Government and/or from continuing investmentsin infrastructure, both by the public and private sector.DSP BlackRock Fund An Open Ended growth Scheme, seeking to generate long term capital appreciation, and whose secondary objective is income generation and the distribution of dividend from a portfolio constituted of equity and equity related securities concentrating on the investment focus of the Scheme.DSP BlackRock Small And Mid Cap Fund An open Ended equity growth scheme, primarily seeking to generate long term capital appreciation from a portfolio substantially constituted of equity Page 57