102422864 a Project Report on a Mutual Fund Concept at Birla Sun Life Insurence

7/29/2019 102422864 a Project Report on a Mutual Fund Concept at Birla Sun Life Insurence

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Objectives and Research Methodology

Objective

1. To understand the behavior pattern of business class with respect toinvestments.

2. To test the awareness of various investment products among the businessclass.

3. Build relations with the newly interested business class

Research Methodology:

Conclusive research

The research undertaken was conclusive research as the data needs

were clear. The research was conducted to study about the investment pattern of business

people.

Sampling processPopulation:-

Element: The research was restricted to business people.

Extent: Bhosari Industrial Area, Pune

Sample size:

The total sample size consists of 100 business people.

Sampling method:-

Non probability:-

The business people were selected on the basis of convenience.


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Data Collection:-

For the research purpose the data is collected in the form of Primary data and Secondary

data. Primary data is collected in the form of Structured Questionnaire.

Secondary data is collected from various Bouchers, Books, Magazines and Web

sites.

Primary Data:-

Primary data is collected through direct interviews and telephonic

interviews. The data is collected from the business person through questionnaires

which was prepared depending upon the need of study. A structured

questionnaire was prepared to collect the data

Secondary Data:-

The source of secondary data were published Journals, magazines, like

investime and web sites,

www.amfi.com

www.indiainfolin.com

www.birlasunlife.com

www.mutualfundindia.com

www.valuereserchonline.com
http://www.amfi.com/http://www.indiainfolin.com/http://www.birlasunlife.com/http://www.mutualfundindia.com/http://www.valuereserchonline.com/http://www.amfi.com/http://www.indiainfolin.com/http://www.birlasunlife.com/http://www.mutualfundindia.com/http://www.valuereserchonline.com/


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Limitations:-

Sample size is very small as compared to the total population.

Most of the business people dont five out the exact invest figures their assets and

their finical planning

The method which is applied for the data collection may not be right

Lack of knowledge in the survey sample about the mutual funds.

The result obtained from the sample may not be the result of the whole

population.


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Introduction to Mutual Funds

A mutual fund is the ideal investment vehicle for todays complex & modern

financial scenario. Markets for enquiry shares bonds and other fixed income instruments,

real estate, derivatives and other assets have become mature and information driven.

Price changes in these assets are driven by global events occurring in faraway places. A

typical individual is unlikely to have the knowledge, skills, inclination and time to keep

track of events, understand their implications and act speedily. An individual also finds it

difficult to keep track of ownership of this assets, investments, brokerage dues & banktransactions etc.

A mutual fund is the answer to all these situations. It appoints professionally

qualified and experienced staff that manages each of these functions on a full time bases.

The large pool of money collected in the fund allows it to hire such staff at a very; low

cost to each investor. In effect the mutual fund vehicle exploits economies of scale in all

three areas research, investments, transaction processing. While the concept of

individual coming together to invest the money collectively is not new, the mutual fund

in its present form is a 20 th century phenomenon. In fact mutual funds gained popularity

only after the Second World War. Globally there are thousands of firms offering tens of

thousands of mutual funds with different investment objectives. Today mutual funds

collectively manage almost as much as or more money as compared to banks.

To get a better understanding of mutual funds it is necessary to know the industry in

detail. In the following sections a detailed descriptions of the mutual funds industry will

be discussed.


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Concept of a mutual fund

A mutual fund is a common pool of money into which investors place their

contributions that are to be invested with a stated objective. The ownership of the fund is

thus joint or mutual and the fund belongs to all investors. A single investors ownership of

the fund is in the same ratio as the amount of contribution made by him or bears to the

total amount of the fund.

Meaning of Mutual Fund

Mutual Funds are investment products that operate on the principles of Strength

in Numbers. They collect money from a large group of investors, pool it together, and

invest it in various securities in line with their objective. They are an alternative to

investing directly. A more convenient alternative yet no less rewarding. Take stocks,

trading into the market by yourself would mean knowing at the very least, how to analyze

and track companies, the way of the market and the intermediaries who will help you buy

and sell shares. A mutual fund that invests in stocks relieves you of all such hassles,

while giving you the same investment option for individuals handicapped by a lack ofinvesting acumen or time, or generally disciplined to take charge of their personal

finances.

Mutual funds are not magic investment vehicles that do it all youll have to come to terms

with the fact that they assure neither returns nor the value of yours original investment.

Youll have to accept the reality that even they, who are supposedly experts in

investments matter, can go wrong. These are inherent risks, but these can be managed.

Mutual funds offer several advantages that make them a powerful and convenient wealth

creation vehicle worthy of yours consideration


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Characteristics of a Mutual Fund

A Mutual fund actually belongs to the investors who have pooled their funds.

The ownership of the mutual funds is in the hands of the investors.

In case of mutual fund the contributors and the beneficiaries of the funds are the

same class of people namely the investors.

Investment professionals manage a mutual fund and other service providers,

who earn a fee for their services provided, from the fund.

The pool of funds is invested in a portfolio of marketable investments. The value

of the portfolio is updated every day.

The investors share in the fund is denominated by UNITS. The value of the units

changes with the change in the portfolios value, everyday. The value of one unit of

investment is called as the net asset value or NAV

HOW ARE THE MUTUAL FUNDS STRUCTURED?

Mutual funds can be structured in the following ways:

Company form, in which investors hold shares of the mutual fund. In this

structure, management of the fund is in the hands of an elected board, which in

turn appoints investment managers to manage the fund.

Trust form, in which the funds of the investors are held by a trust, on behalf of the

investors. The trust appoints investment managers and monitors their functioning

in the interest of investors.


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The company form of organization is very popular in the United States. In India,

mutual funds are organized as trusts. The trust is created by sponsor, who is the

actually the entity interested in creating the mutual fund business. The trust is either

managed by a Board of trustees, or by a trustee company, formed for this purpose.

The investors funds are held by the trust.

Types of Mutual Funds

Open-End Funds

An open-ended fund is one that has units available foe sale and repurchase at all

times. An investor can buy or redeem units from the fund itself at a price based on the

Net Asset Value (NAV) per unit. NAV per unit is obtained by dividing the amount of the

market value of the funds assets by the number of units outstanding. The number of

outstanding goes up or down every time the fund issues new units or repurchase existing

units.

Closed-End Funds

Unlike an open-end fund, the unit capital of a closed-ended fund is fixed, as it

makes a one-time sale of a fixed number of units. Closed-ended funds do not allow

investors but or redeem units directly from the funds. However, to provide the much-

needed liquidity to investors, any closed-end funds get themselves listed on stock

exchanges. Trading through a stock exchange enables investors to buy or sell units of a

closed-end mutual fund from each other.

Load and No-Load Funds


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Marketing of a new mutual fund scheme involves initial expenses. These expenses

may be recovered from the investors in different ways at different times. Three usual

ways in which a fund's sales expenses may recover from the investors are:

1. At the time of investor's entry into the fund/scheme, by deducting a specific

amount from his Initial contribution, or

2. By charging the fund/scheme with a fixed amount each year, during the stated

number of years, or

3. At the time of the investor's exit from the fund/scheme, by deducting a specified

amount from the redemption proceeds payable to the investor.

These charges made by the fund managers to the investors to cover

distribution/sales/marketing expenses often called "loads". The load charged to the

investor at the time of his entry into a scheme is called front-end or entry load". The

load amount charged to the scheme over period of time is called a deferred load. The load

that the investor pays at the time his exit is called a "back-end or exit load".

Some funds may also charge different amounts of loads to the investors, depending upon

how many years the investor is stayed with the fund; the longer the investor stays with

the fund, less the amount of exit load" he charged. This is called contingent deferred

sales charge".

Funds that charge front-end, back-end or deferred loads are called load funds. Funds that

make no such charges or loads for sales expenses are called no-load funds.

A load fund's declared NAV does not include the loads. Hence, a new investor must add

any front-end load amount per unit the NAV per unit to calculate his purchase price. An

outgoing investor needs to deduct the amount of any back-end load per unit from his sale

price per unit to get to know the net sale proceeds he would receive.


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Tax Exempt and Non-Tax Exempt Funds

Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. In

the U.S.A, For example, municipal bonds pay interest that is tax-free, while interest on

corporate and other bonds is taxable. In India, after the 1999 Union Government Budget,

all of the dividend income received from many of the Mutual funds is tax-free in the

hands of the investor.

However, funds other than Equity Funds have to pay a distribution tax, before

distributing income to investors. In other words, equity mutual fund schemes are tax-

exempt investment avenues, while other funds are taxable for distributable income.

While Indian Mutual funds currently offer tax-free income, any capital gains arising out

of sale of fund nits are taxable. All these tax considerations are important in the decision

on where to invest as the tax exemptions or concessions alter returns obtained from these

investments. Hence, classification Of Mutual funds from the taxability perspective has

great significance for investors.

Broad Fund types by Nature of Investments

Mutual funds may invest in equities, bonds or other fixed income securities, or

short-term money market securities. So we have Equity, Bond and Money Market Funds.

All of them invest in financial assets. But there are funds that invest in physical assets.

For example, we may have Gold or other Precious Metals Funds, or Real Estate Funds.

Broad Fund Types by Investment Objective

Investors and hence the mutual funds pursue different objectives while investing.

Thus, Growth Funds invest for medium to long-term capital appreciation. Income Funds

invest to generate regular income, and less for capital appreciation. Value Funds invest


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in equities that are considered under-valued today, whose value will be unlocked in the

future.

Broad Fund Types by Risk Profile

The nature of a fund's portfolio and its investment objective imply different levels

of risk undertaken. Funds are therefore often grouped in order of risk. Thus, Equity funds

have a greater risk of capital loss than a Debt Fund that seeks to protect the capital while

looking for income. Money Market Funds are exposed to less risk than even the Bond

Funds,' since they invest in short-term fixed income securities, as compared to longer-

term portfolios of Bond Funds.

Money Market Funds

Often considered the lowest rung order of risk level, Money Market Funds

invest in securities of a short-term nature, which generally means securities of less than

one-year maturity. The typical, short-term interest-bearing instruments these funds

invest in include Treasury Bills issued by governments. Certificates of Deposit issued

by banks and Commercial Paper issued by companies. In India Money market Mutual

funds also invest in the inter-bank call money market. The major strengths of money

market funds are the liquidity and safety or principal that investors can normally expect

from short-term investments.


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Gilt Funds

Gilts are government securities with medium to long-term maturities, typically of

over one year (under one-year instruments being money market securities). In India we

have now seen the emergence of Government Securities or Gilt Funds that invest in

government paper called dated securities (unlike Treasury Bills that mature less These

funds have little risk of default and hence offer better protection of principal.

However, investors have to recognize the potential changes in values of debt securities

held by the funds that are caused 'by changes in the market price of debt securities

quoted on the stock exchanges (Just like the equities).Debt securities' prices fall wheninterest rate levels increase (and vice versa).

Debt Funds (or Income Funds)

Next in the order of risk level, we have the general category Debt Funds. Debt

funds invest in debt instruments issued not only by governments, but also by private

companies, banks and financial institutions and other entities such as infrastructure

companies/utilities.

By investing in debt, these funds target low risk and stable income for the investor as

their key objectives. However, as compared to the money market funds, they do have a

higher price fluctuation risk, since they invest longer-term securities. Similarly

compared to Gilt Funds, general debt funds do have a higher risk of default by their

borrowers.

Debt Funds are largely considered as Income Funds as they do not target capital

appreciation, look for high current income, and therefore distribute a substantial part of

their surplus to investors. Income funds that target returns substantially above market


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levels can face more risks. The Income Funds fall largely in the category of Debt Funds

as they invest primarily in fixed income generating debt instruments. Again, different

investment objectives set by the fund managers would result in different risk profiles.

Diversified Debt Funds

A debt fund that invests in all available types of debt securities, issued by entities

across all industries and sectors is a properly diversified debt fund.

While debt funds offer high income and less risk than equity funds, investors need to

recognize that debt securities are subject to risk of default by the issuer on payment of

interest or principal.

A diversified debt fund has the benefit of risk reduction through diversification and

sharing of any default-related losses by a large number of investors. Hence a diversified

debt fund is less risky than a narrow-focus fund that invests in debt securities of a

particular sector or industry.

Focused Debt Funds

Some debt funds have a narrower focus, with less diversification in its investments.

Examples include sector, specialized and offshore debt funds.

These funds are similar to the funds described later in the equity category except that

debt funds have a substantial part of their portfolio invested in debt instruments and are

therefore more income oriented and inherently less risky than equity funds. However

'the Indian financial markets have demonstrated that debt funds should not be

automatically considered to be less risky than equity funds, as there have been

relatively large default by issuers of debt and many funds have non-performing assets

in their debt portfolios. It should also be recognized that market values of debt

securities will also fluctuate more as Indian debt markets witness more trading and

interest rate volatility in the future.


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High Yield Debt Funds

Usually, Debt Funds control the borrower default risk by investing in securities issued by

borrowers who are rated by credit rating agencies and are considered to be of

"investment grade". There are High Yield Debt Fund that seek to obtain higher returns by

investing in debt instruments that are considered "below investment grade. Clearly,

these funds are exposed to higher risk.

In U.S.A., funds that invest in debt instruments that are not backed by tangible assets and

rated below investment grade (popularly known as junk bonds) are called Junk Bond

Funds. These funds tend to be more volatile than other debt funds, although they may

earn higher returns as a result of the higher risks taken.

Assured Return Funds

Fundamentally, mutual funds hold assets in trust for investors. All returns and risks are

for account of the investor. The role of the fund Manager is to provide the professional

management service and to ensure the highest possible return consistent with the

investment objective of the fund. Assured return debt fund certainly reduce the risk level.


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Fixed Term Plans

Fixed Term Plans are closed-end, but usually for shorter term-less than a year. Being ofshort duration, they are not listed on a stock exchange.

As investors move from Debt Fund category to Equity Funds they face increased risk

level.

However, there is a large variety of Equity Funds and all of them are not equally risk-

prone. Investors and their advisors need to sort out and select the right equity fund that

suits their risk appetite

Equity funds invest a major portion of their corpus in equity shares issued by companies,

acquired directly in initial public offerings or through the secondary market. Equity funds

would be exposed to the equity price fluctuation risk at the market level at the industry or

sector level and at the company-specific level. Equity Funds Net Asset Values fluctuate

with all these price movements. These prices are caused by all kinds of external factors,

political and social as well as economic. Hence, Equity Funds are generally considered at

the higher end of the risk spectrum among all funds available in the market. Equity funds

adopt different investment strategic resulting in different levels of risk. Hence, they are

generally separated into different types in terms of their investment styles. Some of the

major types of equity funds, arranged in order of higher to lower risk level.

Aggressive Growth Funds

There are many types of stocks/shares available in the market; Blue Chips that are

recognized market leaders, less researched stocks that are considered to have future

growth potential, and even some speculative stocks of somewhat unknown or unproven

issuers. Fund managers seek out and invest in different types of stocks in line with their

own perception of potential returns and appetite for risk.


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Aggressive growth funds target maximum capital appreciation, invest in less researched

or speculative shares and may adopt speculative investment strategies to attain their

objective of high returns for the investor. Consequently, they tend to be more volatile and

riskier than other funds.

Growth Funds

These funds invest in companies whose earnings are expected to rise at an above average

rate. These companies may be operating in sectors like technology considered having a

growth potential, but not entirely unproven and speculative. The primary objective of

Growth Funds is capital appreciation over a three to five year span. Growth funds are

therefore less volatile than funds that target aggressive growth.

Specialty Funds

These funds have a narrow portfolio orientation and invest in only companies that meet

pre-defined criteria. For example, at the height of the South African apartheid regime,

many funds in the U.S. offered plans that promised not to invest in South African

companies. Some funds may build portfolios that will exclude Tobacco companies.

Funds that invest in particular regions such as the Middle East or the ASEAN countries

are also an example of specialty funds. Within the Specialty Funds category, some funds

may be broad-based in terms of the types of investments in the portfolio. However, most

specialty funds tend to be concentrated funds, since diversification is limited to one type

of investment. Clearly, concentrated specialty funds tend to be more volatile than

diversified funds.


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Sector Funds

Sector funds' portfolios consist of investments in only one industry or sector of the

market such as Information on Technology, Pharmaceuticals or Fast Moving Consumer

Goods that have recently been launched in India. Since sector funds do not diversify into

multiple se Offshore Funds.

Offshore Funds

These funds invest in equities in one or more foreign countries thereby achieving

diversification across the country's borders. However they also have additional risks -

such as the foreign exchange rate risk - and their performance depends on the economic

conditions of the countries they invest in. Offshore Equity Funds may invest in a single

country (hence riskier) or many countries (hence more diversified).

Small Cap Equity Funds

These funds invest in shares of companies with relatively lower market capitalization

than that of big, blue chip companies. They may thus be more volatile than other funds,

as smaller companies' shares are not very liquid in the markets. In terms of risk

characteristics, small company funds may be aggressive-growth or just growth type.


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Option Income Funds

Option Income Funds write options on a significant part of their portfolio. While options

are viewed as risky instruments, they may actually help to control volatility, if properly

used. Conservative option funds invest in large, dividend paying companies, and then sell

options against their stock positions. This ensures a stable Income stream in the form of

premium income through selling options and dividends.

Diversified Equity Funds

A fund that seeks to invest only in equities except for a very small portion in liquid

money market securities, but is not focused on any one or few sectors or shares, may be

termed a diversified equity funds seek to reduce the sector or stock specific risks through

diversification. They have mainly market risk exposure. Diversified funds arc clearly at

the lower risk level than growth funds

Equity Linked Saving Schemes: An Indian Variant

In India, the investors have been given tax concessions to encourage them to invest in

equity markets through these special schemes. Investment in these schemes entitles the

investor to claim an income tax rebate, but usually has a lock-in period before the end of

which funds cannot be withdrawn. These funds are subject to the general SEBI

investment guidelines for all equity funds, and would be in the Diversified Equity Fund

category. However, as there are no specific restrictions on which sectors these funds

ought to invest in, investors should clearly look for where the Fund Management

Company proposes to invest and accordingly judge the level of risk involved.


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Equity Index Funds

An index fund tracks the performance of a specific stock market index. The objective is

to match the performance of the stock market by tracking an index that represents the

overall market. The fund invests in shares that constitute the index and in the same

proportion as the index. Since they generally invest in a diversified market index

portfolio, these funds take only the overall market risk, while reducing the sector and

stock specific risks through diversification.

Value Funds

Value Funds try to seek out fundamentally sound companies whose shares arc currently

under-priced in the market. Value Funds will add only those shares to their portfolios that

are selling at low price-earnings ratios, low market to book value ratios and are

undervalued by other yardsticks.

Value funds have the equity market price fluctuation risks, but stand often at a lower end

of the risk spectrum in comparison with the Growth Funds. Value Stocks may be from a

large number of sectors and therefore diversified.

Equity Income funds

Usually income funds are in the Debt Funds category, as they target fixed income

investments. However, there are equity funds that can be designed to give the investor a

high level of current income along with some steady capital appreciation, investing

mainly in shares of companies' with high dividend yields.


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Hybrid Funds Quasi Equity/Quasi Debt

Money market holdings will constitute a lower proportion in the overall portfolios of debt

or equity funds. There are funds that, however, seek to hold a relatively balanced holding

of debt and equity securities in their portfolio. Such funds are termed "hybrid funds" as

they have a dual equity/bond focus.

Balanced Fund

A balanced fund is one that has a portfolio comprising debt instruments, convertible

securities, and Preference equity shares. Their assets are generally held in more or less

equal proportions between debt/money market securities and equities. By investing in a

mix of this nature, balanced funds seek to attain the objectives of income, moderate

capital appreciation and preservation of capital, and are ideal for investors with a

conservative and long-term orientation.

Growth-and-Income Funds

Unlike income-focused or growth-focused funds, these funds seek to strike a balance

between capital appreciation and income for the investor. Their portfolios are a mix

between companies with good dividend paying records and those with potential for

capital appreciation. These funds would be less risky than pure growth funds, though

more risky than income fund.


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Commodity Funds

Commodity funds specialize in investing in different commodities directly or through

shares of commodity companies or through commodity future contracts. Specialized

funds may invest in a single commodity or a commodity group such as edible oils or

grains, while diversified commodity funds will spread their assets over many

commodities.

Real Estate Funds

Specialized Real Estate Funds would invest in Real Estate directly, or may fund real

estate developers, or lend to them, or buy shares of housing finance companies or may

even buy their securities assets.

The funds may have a growth orientation or seek to give investors regular income. There

has recently been an initiative to offer such an income fund by the HDFC.

TYPES OF MUTUAL FUND:-

MUTUALFUND

TYPE

WHO

SHOULD

INVEST

Objective Investment

portfolio

Risk Ideal

investment

Diversified equityfunds

Moderate andaggressiveinvestors

High growth Equity shares High 1-3years

Sector fund Aggressiveinvestors

High growth Equity shares Very high 1-3years

Index fund Moderateinvestors

To generatereturns whichare similar tothe returns ofthe respectiveindex

Portfolio likeBSE. Sensex,Nifty,etc

Returns ofNAV, verywith indexperformance

1-3years


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Equity linkedsavingscheme(ELSS)

Moderate andaggressiveinvestors

Long-termgrowth withtax saving

Equity shares High 1-3years

Balance fund Moderate andaggressive

investors

Growth andregular

income

Balance ratio ofequity and debt

fund to ensurehigher returns atlower risk

Capitalmarket risk

and interestrate risk

Over 2years

Bond funds Salaried andconservativeinvestors

Regularincome

Predominantlydebenturegovernmentsecurities,corporate bonds

Credit riskand interestrate risk

Over9-12months

Gilt fund Salaried andconservative

investors

Security andincome

Governmentsecurities

Interest raterisk

Over 12months

Short-term funds Investors withsurplus short-term fund

Liquidity andmoderateincome

Call moneycommercialpapers, treasurybill short-termG-secs

Linkedinterest raterisk

3weeks3months

Liquidity funds Investors whopark theirfund incurrentaccount or

short termbank fixeddeposits

Liquidity+moderateincomepreservationof capital

Treasury bills,certificate ofdeposits ,commercialpapers,

securities callmoney

NegligibleRisk

2days3weeks


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Benefits of Mutual Fund

Portfolio Diversification

Return on investment from just one industry or sector are subject to how well or poorly

the industry fares. But with mutual fund ones money is invested across different sector.

This reduces the risk of low returns on investments, because rarely do different sectors

decline at the same time.

Professional Management

A mutual fund draws on the professional expertise of a team of research analysts and

fund managers in investing ones saving in a number of securities.

Reduction of Transaction Costs

The purchase or sale of financial assets through the exchanges entails a certain proportion

of changes known as transaction made. Investments through mutual fund reduce these

costs considerably as they enjoy the benefits of economies of scale.

Liquidity

If one invests in an open-ended mutual fund, one can claim the money at net asset value

related prices from the mutual fund itself.


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Convenience and Flexibility

One has access to up-to-date information on the value of the investment in addition to the

investments that have been made by the scheme, the proportion allocated to different

assets and the fund managers investment strategy.

Return Potential

Investing in a Mutual Fund reduces paperwork and helps to avoid many problems such as

bad deliveries, delayed payments and follow up with brokers and companies. Mutual

Funds save time and make investing easy and convenient.

Transparency

Through features such as regular investment plans, regular withdrawal plans and dividend

reinvestment plans, one can systematically invest or withdraw funds according to once

needs and convenience.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the

benefit of its investment strategy.


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Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions of

strict regulations designed to protect the interests of investors. The operations of Mutual

Funds are regularly monitored by SEBI.

Mutual Fund Industry-A Profile

Origin of Mutual Funds

The Mutual Fund industry traces its roots to England in the mid 1800s. The

enactment of two British laws, the joint stock companies Acts of 1862 and 1867,

permitted investors, for the first time to share in the profits of an investments enterprise,and limited investor liability to the amount of investment capital devoted to the

enterprise. Shortly thereafter, in 1868, the Foreign and Colonial Government Trust

formed in London. This trust resembled a mutual fund in basic structure, providing the

investor of moderate means the same advantage as the large capitalists by spreading

the investment over a number of different stocks.

This concept of offering the investment potential of financial markets to all individuals

spawned additional investment companies in Britain and Scotland and among other

things helped finance the development of the post-civil was US economy. Most of the

early British investment companies or trusts resembled todays closed-end funds by

issuing a fixed number of shares to groups of investors whose pooled assets were

invested in various companies. The Scottish American Investment Trust, formed on


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February 1, 1873 by fund pioneer Robert Fleming, was significant because it invested in

the economic potential of the United States Chiefly through American railroad bonds.

Many other trusts followed that not only target investment in America, but more

importantly led to the introduction of investment fund concept on U. S shares in the late

1800s and early 1900s.

History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust

of India, at the initiative of the Government of India and Reserve Bank the. The history of

mutual funds in India can be broadly divided into four distinct phases

--------------------------------------------------------------------------------

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up

by the Reserve Bank of India and functioned under the Regulatory and administrative

control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the

Industrial Development Bank of India (IDBI) took over the regulatory and administrative

control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the

end of 1988 UTI 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

banks and 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


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1987 followed 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 fund in 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 fund

industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the

year in which the first Mutual Fund Regulations came into being, under which all mutual

funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer

(now merged with 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

and revised 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 funds

setting 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. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under

management was way ahead of other mutual funds.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust

of India 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


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administrator and under the rules framed by Government of India and does not come

under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations. With the

bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of

assets under management and with the setting up of a UTI Mutual Fund, conforming to

the SEBI Mutual Fund 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 the end of September, 2004, there were 29 funds, which

manage assets of Rs.153108 crores under 421 schemes.

The graph indicates the growth of assets over the years

GROWTH IN ASSETS UNDER MANAGEMENT


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0

50000

100000

150000

200000

250000

Rs. in Crores

Mar-

65

Mar-

87

Mar-

93

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Year

Growth of MF

Rs. In Crore

LIST OF MUTUAL FUNDS IN INDIA

Mutual Fund Sponsors Year of

Entry

Bank sponsored

BOB Asset Management Co. Ltd Bank of Baroda 1992

Can Bank Investment ManagementServices Ltd.,

Canara Bank 1987

S.B.I. Funds Management Ltd., State Bank of India 1987

UTI Asset Management Co., Pvt.

Ltd.,

SBI, PNB, BOB, LIC 1963

Institutions

G.I.C. Asset Management Co. Ltd., General InsuranceCorporation & other 4PSU GIC

1990

Jeevan Bhima Sahyoga AssetManagement Co. Ltd.,

LIC 1989

Private Sectors


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Benchmark Asset Management Co.Pvt. Ltd.,

NICHE FinancialServices

2001

Chola Mandalam AssetManagement Co. Ltd.,

Chola MandalamInvestments

1997

Escorts Asset Management Ltd., Escorts Finance 1996

J. M. Capital Management Pvt.Ltd.,

J.M. Shares and StockBrokers

1994

Kotak Mahindra Asset ManagementCo. Ltd.,

Kotak Mahindra Bank 1998

Reliance Capital AssetManagement Co. Ltd.,

Reliance Capital 1995

Sahara Asset Management Co. Pvt.Ltd.,

Sahara India Finance 1996

Sundaram Asset Management Co.Ltd.,

Sunadaram Finance 1996

Tata Asset Management Pvt. Ltd., Tata Sons 1995

Joint Ventures Predominantly IndianBirla Sun Life Asset ManagementPvt. Ltd.,

Birla Global Finance 1994

D.S.P. Merrill Lynch FundManager Ltd.,

D.S.P. Merrill Lynch 1996

HDFC Asset Management Co. Ltd., HDFC & Std LifeInvestment

2000

Joint Ventures Predominantly ForeignAlliance Capital Asset ManagementPvt. Ltd.,

Alliance CapitalManagement

1994

Deutsche Asset Management Pvt.

Ltd.,

Deutsche Asset

Management

2002

Franklin Templeton AssetManagement Pvt. Ltd.,

Franklin TempletonInvestments

1996

HSBC Asset Manageent Pvt. Ltd., HSBC Security 2002

ING Inveatment Management Pvt.Ltd.,

ING Group 1999

Morgan Stanley InvestmentManagement Pvt. Ltd.,

Morgan Stanley 1993

Prudential ICICI AssetManagement Pvt. Ltd.,

Prudential ICICI 1993

Principal Asset Management Co.Pvt. Ltd.,

Principal FinancialService

1994

Standard Charted AssetManagement Ltd.,

Standard Charted Bank 2000

( Source: Outlook Money : Laymens guide to MUTUAL FUND )


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Sales Practices in the Indian Mutual Fund Market

Agent commissions

Agents are compensated by the funds through commissions, commission rates.

In India there are no rules prescribed for governing the minimum r maximum commis-

sions payable by a fund to its agents. Each fund has discretion to decide the commission

structure for its agents. Thus sundaram pays commission to its agents as a basic rates plus

an incentive that depends on the volume of business. In recent times funds have been

paying commissions in the range of 1.5-2 % on equity oriented funds and 0.4-0.8 % on

debt based funds. Higher commissions are generally paid in case of investments that are

made with the purpose of taking tax benefits, since investors are required to lock in their

funds for a longer period.

SEBI Regulations

Although SEBI does not prescribe the minimum or maximum amount of commission

payable by a fund to agents under SEBI (MF) Regulations, 1996, all initial expenses in-

cluding Brokerage paid to agents are limited to 6 % of resources raised under the

schemes. In additions, SEBI regulated open-end funds are authorized to charge the in-


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vestors are entry & exit loads to cover the fund distribution expenses. These loads

should not exceed the percentage specified in the schemes offer document. In case the

agents commissions paid by the fund result in over all distribution expenses are to be

borne by AMC i.e. the excess cannot be passed on to the unit holders.

A no load, charging no entry or exit loads is authorized to charge the schemes with the

commissions paid to agents as part of the regular management & marketing expenses

allowed by SEBI. SEBI puts a cap on the total expenses (including commissions) that can

be charged to a scheme each year. Any excess over allowable expenses is required to be

borne by the AMC.

Marker Practice

Some funds pay the entire commission up- fronts to the agents (i.e. at the time of sale of

units), while others pay apart of it up-front and the balance in phases. The latter practice

is known as trail commission. Some funds follow the practice of non-paying the balance

to the agent if the investor exits the scheme before a specified period or stop paying the

commission after the investor exits whenever he does.

On the issue of commissions, is that of rebating by the agent to the investor of a part of

the commission received from the fund on the sale to that investor. Although agent

commissions in the in the mutual industry are not at the same levels as in insurance,

investors have come to expect such rebates from agents of all financial products. It is

possible in future such rebates might reduce in future & may even disappear. He

distributors themselves will tend to realize that they provide useful processing and

advisory services to investors, & have to incur costs in the process that need to be

covered from their well deserve commissions received from the funds

Agents Obligation

Commission/other arrangements are between the fund and agent/broker. Sub-brokers

serve as agents of the principle agent and the fund is not answerable for their activities.

Clearly, given the need for and widespread existence of a sub-broker network in India


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their role cannot be washed away. But the distributors need to make the investors aware

of whom they are dealing with, whom the commission rebate is received from, & whom

should they contact in case of any problems. Agents are well advised to practice honesty

& transparency in explaining the commission structure & the timing of any rebate

payment to the investors, whose trust will build a long-term relationship.

The AMFI Code of Ethics

One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the

investors interest by defining and maintaining high ethical and professional standards in

the mutual fund industry. In pursuance of this objective, AMFI had constituted a

Committee under the Chairmanship of Shri A. P. Pradhan with Shri S. V. Joshi, Shri C.

G. Parekh and Shri M. Laxman Kumar as members. This Committee, working in close

co-operation with Price WaterhouseLLP under the FIRE Project of USAID, has drafted

the Code, which has been approved and recommended by the Board of AMFI for

implementation by its members. I take opportunity to thank all of them for their efforts.

The AMFI Code of Ethics, The ACE for short, sets out the standards of good practices

to be followed by the Asset Management Companies in their operations and in their

dealings with investors, intermediaries and the public. SEBI (Mutual Funds) Regulation

1996 requires all Asset Management Companies and Trustees to abide by the Code of

conduct as specified in the Fifth Schedule to the Regulation. The AMFI Code has been

drawn up to supplement that schedule, to encourage standards higher than those

prescribed by the Regulations for the benefit of investors in the mutual fund industry.

This is the first edition of the Code and it may be supplemented further as may be

necessary. I hope members of AMFI would implement the code and ensure that their

employees are made fully aware of the Code.


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1.0 INTEGRITY

1.1 Members and their key personnel, in the conduct of their business shall observe

high standards of integrity and fairness in all dealings with investors, issuers,

market intermediaries, other members and regulatory and other government

authorities.

1.2 Mutual Fund Schemes shall be organized, operated, managed and their portfolios

of securities selected, in the interest of all classes of unit holders and not in the

interest of

Sponsors

Directors of Members

Members of Board of Trustees or directors of the Trustee company

Brokers and other market intermediaries

Associates of the Members

A special class selected from out of unit holders

2.0 Due Diligence

2.1 Members in the conduct of there Asset Management business shall at all time.

Render high standards of service.

Exercise due diligence.

Exercise independent professional judgement.

2.2 Members shall have and employ effectively adequate resources and procedures,

which are needed for the conduct of Asset Management activities.

3.0 Disclosures


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3.1 Members shall ensure timely dissemination to all unit holders of adequate,

accurate, and explicit information presented in a simple language about the

investment objectives, investment policies, financial position and general affairs

of the scheme.

3.2 Members shall disclose to unit holders investment pattern, portfolio details, ratios

of expenses to net assets and total income and portfolio turnover wherever

applicable in respect of schemes on annual basis.

3.3 Members shall in respect of transactions of purchase and sale of securities entered

into with any of their associates or any significant unit holder.

Submit to the Board of Trustees details of such transactions, justifying its fairness

to the scheme.

Disclose to the unit holders details of the transaction in brief through annual and

half yearly reports.

3.4 All transactions of purchase and sale of securities by key personnel who are

directly involved in investment operations shall be disclosed to the complianceofficer of the member at least on half yearly basis and subsequently reported to

the Board of Trustees if found having conflict of interest with the transactions of

the fund.

4.0 Professional Selling Practices

4.1 Members shall not use any unethical means to sell, market or induce any investor

to buy their products and schemes

4.2 Members shall not make any exaggerated statement regarding performance of any

product or scheme.

4.3 Members shall endeavor to ensure that at all times


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Investors are provided with true and adequate information without any misleading

or exaggerated claims to investors about their capability to render certain services

or their achievements in regard to services rendered to other clients,

Investors are made aware of attendant risks in members schemes before the

investors make any investment decision,

Copies of prospectus, memoranda and related literature is made available to

investors on request,

Adequate steps are taken for fair allotment of mutual fund units and refund of

application moneys without delay and within the prescribed time limits and,

Complaints from investors are fairly and expeditiously dealt with.

4.4 Members in all their communications to investors and selling agents shall

Not present a mutual fund scheme as if it were a new share issue

Not create unrealistic expectations

Not guarantee returns except as stated in the Offer Document of the scheme

approved by SEBI, and in such case, the Members shall ensure that adequate

resources will be made available and maintained to meet the guaranteed returns.

Convey in clear terms the market risk and the investment risks of any scheme

being offered by the Members.

Not induce investors by offering benefits, which are extraneous to the scheme.

Not misrepresent either by stating information in a manner calculated to mislead

or by omitting to state information which is material to making an informed

investment decision.

5.0 Investment Practice

5.1 Members shall manage all the schemes in accordance with the

fundamental investment objectives and investment policies stated in the offer

documents and take investment decisions solely in the interest of the unit holders.


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5.2 Members shall not knowingly buy or sell securities for any of their schemes from

or to

Any director, officer, or employee of the member

Any trustee or any director, officer, or employee of the Trustee Company

6.0 Operations

6.1 Members shall avoid conflicts of interest in managing the affairs of the schemes

and shall keep the interest of all unit holders paramount in all matters relating to

the scheme.

6.2 Members or any of their directors, officers or employees shall not indulge in front

running (buying or selling of any securities ahead of transaction of the fund, with

access to information regarding the transaction which is not public and which is

material to making an investment decision, so as to derive unfair advantage).

6.3 Members or any of their directors, officers or employees shall not indulge in self-

dealing (using their position to engage in transactions with the fund by which theybenefit unfairly at the expense of the fund and the unit holders).

6.4 Members shall not engage in any act, practice or course of business in connection

with the purchase or sale, directly or indirectly, of any security held or to be

acquired by any scheme managed by the members, and in purchase, sale and

redemption of units of schemes managed by the members, which is fraudulent,

deceptive or manipulative.

6.5 Members shall not, in respect of any securities, be party to-

Creating a false market,

Price rigging or manipulation


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Passing of price sensitive information to brokers, Members of stock exchanges

and other players in the capital markets or take action, which is unethical or unfair

to investors.

6.6 Employees, officers and directors of the Members shall not work as agents/

brokers for selling of the schemes of the Members, except in their capacity as

employees of the Member or the Trustee Company.

6.7 Members shall not make any change in the fundamental attributes of a scheme,

without the prior approval of unit holders except when such change is consequent

on changes in the regulations.

6.8 Members shall avoid excessive concentration of business with any broking firm,

and excessive holding of units in a scheme by few persons or entities.

7.0 Reporting Practices

7.1 Members shall follow comparable and standardized valuation policies in with the

SEBI Mutual Fund Regulations.

7.2 Accordance Members shall follow uniform performance reporting on the basis of

total return.7.3 Members shall ensure scheme wise segregation of cash and securities

accounts.

8.0 Unfair Competition

Members shall not make any statement or become privy to any act, practice or

competition, which is likely to be harmful to the interests of

other Members or is likely to place other. Members in a disadvantageous position

in relation to a market player or investors, while competing for investible funds.


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9. O Observance of Statutes, Rules and Regulations

Members shall abide by the letter and spirit of the provisions of the Statutes, rules

and regulations, which may be applicable, and relevant to the activities carried on

by the members.

10.0 Enforcement

Members shall

Widely disseminate the AMFI Code to all persons and entities covered by it

Make observance of the Code a condition of employment

Make violation of the provisions of the code, a ground for revocation of

contractual arrangement without redress and a cause for disciplinary action

Require that each officer and employee of the Member sign a statement that

he/she has received and read a copy of the Code

Establish internal controls and compliance mechanisms, including assigning

supervisory responsibility

Designate one person with primary responsibility for exercising compliance with

power to fully investigate all possible violations and report to competent authority

File regular reports to the Trustees on a half yearly and annual basis regarding

observance of the Code and special reports as circumstances require

Maintain records of all activities and transactions for at least three years, which

records shall be subject to review by the Trustees

Dedicate adequate resources to carrying out the provisions of the Code


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Procedure for registering a mutual fund with SEBI.

An applicant proposing to sponsor a mutual fund in India must submit an

Application in Form A along with a fee of Rs.25, 000. The application is

examined and once the sponsor satisfies certain conditions such as being in the

financial services business and possessing positive net worth for the last five

years, having net profit in three out of the last five years and possessing the

general reputation of fairness and integrity in all business transactions, it is

required to complete the remaining formalities for setting up a mutual fund. Theseinclude inter alias, executing the trust deed and investment management

agreement, setting up a trustee company/board of trustees comprising two- thirds

independent trustees, incorporating the asset management company (AMC),

contributing to at least 40% of the net worth of the AMC and appointing a

custodian. Upon satisfying these conditions, the registration certificate is issued

subject to the payment of registration fees of Rs.25.00 lacs for details; see the

SEBI (Mutual Funds) Regulations, 1996.


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SECURITIES AND EXCHANGE BOARD OF INDIA

INVESTMENT MANAGEMENT DEPARTMENT

Trends in Transactions on Stock Exchanges by Mutual Funds (since January 2000)

Equity (Rs in Crores) Debt (Rs in Crores)

GrossPurchase

GrossSales

NetPurchase/Sales

GrossPurchase

GrossSales

NetPurchSales

Jan 2000-March 2000. 11070.54 11492.19 -421.65 2764.72 1864.29 900.43

April 2000 -March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 5023.49

April 2001-March 2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 10959.2

April 2002-March 2003 14520.89 16587.59 -2066.70 46663.83 34059.41 12604.4

April 2003-March 2004 36663.58 35355.67 1307.91 63169.93 40469.18 22700.7

April 2004-March 2005 45045.25 44597.23 448.02 62186.46 45199.17 16987.2

April 2005-March 2006 100389.30 86083.64 14305.66 109622.51 73003.67 36618.8

April 2006. 12752.47 9631.91 3120.56 11227.96 6800.08 4427.88

May 2006 (upto 19th) 11837.29 7406.65 4430.64 9746.45 4110.53 5635.92

Total (April - May '06) 24589.76 17038.56 7551.20 20974.41 10910.61 10063.8

Trends in Transactions on Stock Exchanges by Mutual Funds

(Provisional and subject to revision) May 2006

Equity (Rs in crores) Debt (Rs in crores)

Transaction DateGrossPurchases Gross Sales

Net Purchases/ Sales

GrossPurchases Gross Sales

Net Purchases/Sales

02.05.06 543.63 494.80 48.83 389.58 324.42 65.16

03.05.06 722.59 580.21 142.38 555.27 229.88 325.39

04.05.06 855.53 580.62 274.91 285.41 119.01 166.40

05.05.06 761.83 527.42 234.41 409.98 152.30 257.68

08.05.06 401.00 571.78 -170.78 537.41 204.32 333.09

09.05.06 726.92 575.41 151.51 564.28 234.27 330.01

10.05.06 981.53 453.30 528.23 813.02 397.06 415.96

11.05.06 456.65 524.58 -67.93 1475.45 246.91 1228.54

12.05.06 778.21 422.04 356.17 619.55 365.87 253.68

15.05.06 1274.82 489.46 785.36 748.34 344.06 404.28

16.05.06 1103.60 760.39 343.21 925.49 271.92 653.57

17.05.06 707.24 513.94 193.30 1325.27 636.61 688.66

18.05.06 1244.54 481.85 762.69 738.64 360.11 378.53

19.05.06 1279.20 430.85 848.35 358.76 223.79 134.97

Total 11837.29 7406.65 4430.64 9746.45 4110.53 5635.92

Market meltdown shows Mutual Funds run with the bulls, get mauled by the bears


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Underperformance is worrying: MFs have lagged the Sensex by 3.5 percentage points

over a month to 8.7 percentage points over a year

Take all diversified equity mutual fund schemes. Find out how they fared over various

time periods. Crunch the numbers. Put them against the market benchmark, the BSE

Sensex. What do you get? A rather uninspiring look at fund managers, experts who we

pay about 2.5 per cent of our investment to outperform markets.

Take a look:

During the past month, when the Sensex crashed by 25.4 per cent, the average fall in

158 diversified equity funds was 28.9 per cent-an underperformance of 3.4 percentage

points. Only one out of 10 funds managed to beat the Sensex in this period.

In the past two weeks, when the Sensex fell by 12.8 per cent, the funds on an average

fell by 16.6 per cent, an underperformance of 3.8 percentage points, with just 16 of 161

funds being able to beat the Sensex. In other words, just 9.9 per cent of funds were able

to deliver returns better than the Sensex.

A study of 161 diversified mutual funds over the past week, two weeks, one month,

three months, six months, 12 months and 36 months shows that on an average the funds

have been lagging the Sensex in all but the 36-month period.

But it is not merely the level but the extent of underperformance that's disturbing. Barring

36-month comparisons, in all other time frames, the percentage of funds that has lagged

the Sensex has ranged from 74.6 per cent for 12-month performance to 96.3 per cent over

one week-which means more than nine out of 10 funds delivered below benchmark

returns.

Now, the industry is likely to say that when you invest in an equity mutual fund, it is not

for weeks or months but years. Which is right? Over a three year period, between June

2003 and June 2006, when the Sensex rose by 40.7 per cent per annum, 52 out of 61

funds (or 85.2 per cent) outperformed. On an average, the funds outperformed the Sensex

by 9.6 percentage points, rising 50.3 per cent per annum during the period (SBI Magnum

Global and SBI Magnum Umbrella dished out returns of 82 and 79 per cent, per annum).


42/81

The former is an arbitrage fund, buying companies as well as futures with a minimum 25

per cent debt exposure, and because of which its volatility, and hence the

underperformance, is low. The latter invests in international equities, with exposures to

companies like 3M, Atlas Cop co AB, BASF AG and so on.

On the other end of the spectrum, the one fund that consistently figures among the three

worst performers is Taurus Discovery Stock, whose objective is to "identify and select

low priced stocks through price discovery mechanism" to bring long term capital

appreciation. Its top holdings include J P Associates, NDTV, SRF and Reliance Capital.

The problem with many underperforming funds is really their exposure to mid-cap and

small-cap stocks. These stocks are neither liquid enough to sell in quantities, nor do they

have futures to hedge with (only 142 actively traded shares do). As a result, when a fall

comes, funds are unable to exit on time or in quantities as the stocks hit lower circuits.

Much of which points to the direction of investments in the last leg of the Bull run that

began in April 2003. Fund managers have not been seeking value or growth but riding

momentum, that is, following the latest fast-growing fad and moving to the next.

Something likes stocks staccato.

A strategy that has worked well for them on the rise. But today, when the bulls are taking

a much needed breather before stampeding on the 8-10 per cent GDP growth highway,

the short-term weak links are showing that while funds can match the Indian bull march,

they're in a Canadian forest when it comes to dealing with the Grizzly.

Mutual fund (MF) houses disappointed investors during the May 10 to June 9 periods

with equity schemes across-the-board showing sharp fall in returns.

Equity funds of LIC Mutual Fund lead the pack, registering a fall of 29.91% on return

during the period under review. The average NAV (net asset value) of two equity fund

schemes decreased from Rs 18.08 to Rs 12.67.

Among the two equity fund schemes, the highest decline in NAV was registered in the

case of LIC MF Equity Fund-D. The fund's NAV declined from Rs 14.67 to Rs 10.28.

R Swami Nathan, Associate VP, IDBI Capital, said, "Over heated market was waiting for

an opportunity to cool down. The correction started in a broad-based manner irrespective


43/81

of large cap, mid cap or small cap scrips. The effect of the market downfall has been

experienced in the erosion of the net asset value of mutual fund equity schemes."

"At this juncture when the market is volatile, an investor should take stock of his

portfolio for a review. He can add some equity funds, provided his asset allocation plan

permits. This is the time one can look at the equity funds again for investment with a

medium to long-term perspective," Mr. Swami Nathan pointed out.

The top 5 MF houses according to the average NAV of equity fund schemes as on June 9,

2006 are Reliance Capital MF (Rs 81.79), Franklin Templeton MF (Rs 57.88), Birla Sun

Life MF (Rs 52.50), HDFC MF (Rs 40.78) and Prudential ICICI MF (Rs 34.09). Among

these, highest decline in average NAV of equity funds was seen in the case of Reliance

Capital MF (26.82%).

Abstract

International mutual funds are key contributors to the globalization of financial

markets and one of the main sources of capital flows to emerging economies. Despite

their importance in emerging markets, little is known about their investment allocation

and strategies. This article provides an overview of mutual fund activity in emerging

markets. It describes their size, asset allocation, and country allocation and then focuses

on their behavior during crises in emerging markets in the 1990s. It analyzes data at both

the fund-manager and fund-investor levels. Due to large redemptions and injections,

funds' flows are not stable. Withdrawals from emerging markets during recent crises were

large, which is consistent with the evidence on financial contagion.


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Structure of Mutual Funds in India

Like other countries, India has a legal framework within which mutual funds be

constituted. Unlike in the UK, where two distinct trust and corporate structures are

followed with separate regulations, in India open-end and closed end funds operate under

the same regulatory structure and are constituted along one unique structure as unit

trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes under

a common legal structure. Therefore, a mutual fund may have several different schemes

(open-end and closed-end) under it. That is under one unit trust, at any point of time.

The structure is required to be followed by mutual funds in India is laid down under SEBI

(mutual fund) regulations, 1996. In the following paragraphs, we look at the structure of

each of the fund constituent


45/81

SEBI

TRUSTEE SPONSOR

OPERATIONS AMC

FUND MANAGER MARKET / SALES

MUTUAL FUND

SCHEMES

INVESTOR


46/81

Sponsor

What a promoter is to a company, a sponsor is to a mutual fund. The sponsor initiates the

idea to set up a mutual fund. It could be a financial services company, a bank or a

financial institution. It could be Indian of foreign. It could do it alone or through a joint

venture. In order to run a mutual fund in India, the sponsor has to obtain a license from

SEBI. For this, it has to satisfy certain conditions, such as a capital and profits, back

records (at least five years in financial services), default free dealings and a general

reputation for fairness.

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. Its the AMC

that employs fund managers and analyst, and other personnel. Its the AMC that handles

all operational matters of a mutual fund from launching schemes to managing them to

interacting with investors.

The people in the AMC who should matter the most to you are those who take investment

decisions. There is the head of the fund house, generally referred to as the chief executive

officer (CEO). Under him comes the chief investment officer (CIO), who shapes the

funds investment philosophy and fund managers who manage its schemes. A team of

analysts, who track markets, sectors and companies, assists them.

Trustees


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Trustees are like internal regulations in a mutual fund, and their job is to protect the

interests of unit holders. Trustees are appointed or corporate bodies. In order to ensure

they are impartial and fair, SEBI rules mandate that at least two thirds of the trustees be

independent that is, not have any association with the sponsor.

Trustees appoint the AMC, subsequently seeks their approval for the work it does and

reports periodically to them on how the business is being run. Trustees float and market

schemes and secure necessary approvals. They check if the AMC investments are within

defined limits and whether the funds accountable for financial irregularities in the mutual

fund.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities

include receipt and delivery of securities, collection of income, and distribution of

dividends and segregation of assets between schemes. The sponsor of a mutual fund

cannot act as a custodian to the fund. This condition, formulated in the interest of

investors, ensures that the assets of a mutual fund are not in the hands of its sponsor. For

example Deutsche Bank is a custodian but it cannot service Deutsche Mutual Fund, its

mutual fund arm.

Registrar

Registrars also known as transfer agents, handles all investor related services. This

includes issuing and red reaming units. Sending fact sheet and annual reports. Some fund


48/81

houses handle such functions in house. Others outsource it to registrars; Karvy and

CAMS are the more popular ones. It doesnt really matter which model your mutual fund

opts for, as long as it is prompt and efficient in servicing you. Most mutual funds in

addition to registrars also have investor service centers of their own in some cities.

Recent Trends in Mutual Fund Industry

The most important trend in the mutual fund industry is the aggressive expansion of the

Foreign owned mutual fund companies and the decline of the companies floated by

Nationalized Banks and smaller Private Sector players.

Many Nationalized banks got into the mutual fund business in the early nineties and got

off to a good start due to the stock market boom prevailing then. These banks did notreally understand the mutual fund business and they just viewed it as another kind of

banking activity. Few hired specialized staff and generally chose to transfer staff from the

parent organization. The performance of the schemes floated by these funds was not

good.

Some schemes offered guaranteed returns and their parent organization had to bail out

these AMCs by paying large amounts of money as the difference between the guaranteed

and actual returns. The service levels were also very bad. Most of these AMCs have not

been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few

exceptions they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also

very similar. They quickly realized that the AMC business, which makes money in the

long term and requires deep-pocketed support in the intermediate years. Some have sold

out to Foreign owned companies, some have merged with others and there is general

restructuring going on.

The Foreign owned companies have deep pockets and come in here with the expectation

of a long haul. They can be credited with introducing many new practices such as new


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product innovation, sharp improvement in service standards and disclosure, usage of

technology, broker education and support etc. In fact they have forced the industry to

upgrade itself and service levels of organizations like UTI have improved dramatically in

the last few years in response to the competition provided by these companies.

Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35% over the next

few years as investors shift their assets from banks and other traditional avenues. Some of

the older and private sector players will either close shop or be taken over.

In the coming years the market will witness a flurry of new players entering the arena.

There will be a large number of offers from various AMCs in the time to come. Some big

names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously.

One important reason for it is that most major players already have presence here and

hence these big names would hardly like to get left behind. The mutual fund industry is

awaiting the introduction of

Derivatives in India as this would enable it to hedge its risk and this in turn would be

reflected in its NAV.

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in

derivatives. Importantly, many market players have called on the regulator to initiate the

process immediately, so that the mutual funds can implement the changes that are

required to trade derivatives.


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Global Scenario

Some basic facts

The money market mutual fund segment has a total corpus of $ 1.48 trillion in the

U.S. against a corpus of $ 100 million in India.

Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only

Fidelity and Capital are non-bank mutual funds in this group.

In the U.S. the total number of schemes is higher than that of the listed companies

while in India we have just 277 schemes

Internationally, mutual funds are allowed to go short. In India fund managers do

not have such leeway.

In the U.S. about 9.7 million households will manage their assets on-line by theyear 2003, such a facility is not yet of avail in India.

On- line trading is a great idea to reduce management expenses from the current 2

% of total assets to about 0.75 % of the total assets.

85% of the core customer bases of mutual funds in the top 50-broking firms in the

U.S. are expected to trade on-line by 2003.

Internationally, on- line investing continues its meteoric rise. Many have debated

about the success of e- commerce and its breakthroughs, but it is true that this aspect

of technology could and will change the way financial sectors function. However,


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mutual funds cannot be left far behind. They have realized the potential of the

Internet and are equipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have

already begun on the Net, while in India the Net is used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs and better services

for all. A research agency that specializes in Internet technology estimates that over the

next four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion

to $ 1,227 billion; whereas equity assets traded on-line will increase during the period

from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from

34% to 40% during the period. Such increases in volumes are expected to bring aboutlarge changes in the way Mutual Funds conduct their business.

Here are some of the basic changes that have taken place since the advent of the Net.

Lower Costs

Distribution of funds will fall in the online trading regime by 2003. Mutual funds could

bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI

regulations, bond funds can charge a maximum of 2.25% and equity funds can charge

2.5% as administrative fees. Therefore if the administrative costs are low, the benefits are

passed down and hence Mutual Funds are able to attract mire investors and increase their

asset base.

Better advice


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Mutual funds could provide better advice to their investors through the Net rather than through

the traditional investment routes where there is an additional channel to deal with the Brokers.

Direct dealing with the fund could help the investor with their financial planning . In India,

brokers could get more Net savvy than investors and could help the investors with the

knowledge through get from the Net.

New investors would prefer online

Mutual funds can target investors who are young individuals and who are Net savvy,

since servicing them would be easier on the Net.

India has around 1.6 million net users who are prime target for these funds and this could

just be the beginning. The Internet users are going to increase dramatically and mutual

funds are going to be the best beneficiary. With smaller administrative costs more funds

would be mobilized .A fund manager must be ready to tackle the volatility and will have

to maintain sufficient amount of investments which are high liquidity and low yielding

investments to honor redemption.

Net-based advertisements

There will be more sites involved in ads and promotion of mutual funds. In the U.S. sites

like AOL offer detailed research and financial details about the functioning of different

funds and their performance statistics. a is witnessing a genesis in this area . There are

many sites such as indiainfoline.com and indiafn.com that are doing something similar

and providing advice to investors regarding their investments.


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In the U.S. most mutual funds concentrate only on financial funds like equity and debt.

Some like real estate funds and commodity funds also take an exposure to physical

assets. The latter type of funds are preferred by corporate who want to hedge their

exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month of January

could buy an equivalent amount of copper by investing in a copper fund. For Example,

Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed percentage of

its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around the

world, short term and long-term U.S. treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real

estate funds (investing in real estate and other related assets as well.). In India, the

Canada based Dundee mutual fund is planning to launch a gold and a real estate fund

before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybodys requirement,

but in India only the tip of the iceberg has been explored. In the near future India too will

concentrate on financial as well as physical funds.

Corpus:-

Investing in a scheme is a simple process. Juts walk into any office of the

mutual fund or that of its representatives. Fill up a short and simple form, and

hand over a cheque. Yours money gets added to the pool already with the scheme,

given to it by numerous other investors like you. The total money available with ascheme at any point in time is referred to as the Corpus or Asset under

management the mutual fund, on your and other investors behalf invests this

corpus in various securities in line with its sated objectives


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Units:

Mutual fund issues you units against your investment. A unit is the currency

of a fund. What a share is to company, a unit is to a fund.

Net asset value (NAV):

NAV: (Net asset of the scheme /number of units o/s)

(Number of units outstanding as at the NAV)

You are allotted units on the basis of a scientific mechanism. This price, measured

per unit, is called the Net Asset Value (NAN) of the unit. Just as share or land is

bought and sold at its NAV. if for example, you were to invest Rs 10000 in

scheme when its NAV

Is Rs 10. You will be allotted 1000 units (10000/10) roughly the fund charges a

nominal processing fee.

The NAV of any scheme tells how much each units of its is worth at any

point in time, and is therefore the simplest measure of how it is performing.

Schemes NAV is its net assets (Market value of the securities its own minus it

owes) divided by the number of units it has issued.

A scheme NAV is dynamic figure. The market value of a schemes portfolio,

changes from day to day, as prices of shares and bonds move up or down. The number of

units outstanding also changes as new investors come into the scheme and told ones


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leave. If the NAV of your scheme rises from Rs 10 to Rs, 11 over a period of time, your

scheme is said to have generated a return of 10%. Similarly, if its NAV falls from Rs 10

to Rs 9, it is said to have lost 10%

Fund house have to calculate and disclose the NAVs of their schemes daily fund

NAVs can be easily looked up. While dailies give a random listing of schemes the

financial papers are more exhaustive in their coverage. NAV information is also available

on website, of the mutual fund concerned and of independent data providers. When

invested in a scheme, its NAV is the figure to track as it qualifies your returns and your

purchase price and sale price will be based on it.

Load:-

Although the NAV represents scheme current market value it is not the exact price at

which an investor enters or exits the scheme. Fund houses levy a nominal charge, on

most of their schemes, to meet their processing costs and to discourage investors from

lacking. This charge is referred to as load and it is price you pay over and above the

fund NAV when you buy or cell units.

You pay an entry load at the time buying units and an exit load while selling.

Loads are always ex

102422864 a Project Report on a Mutual Fund Concept at Birla Sun Life Insurence

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