Mutual Funds in Kotak 2011-1

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CHAPTER-I

INTRODUCTION


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INTRODUCTION

A mutual fund is just the connecting bridge or a financial intermediary that allows a group

of investors to pool their money together with a predetermined investment objective. The mutual

fund will have a fund manager who is responsible for investing the gathered money into specific

securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions

of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered as one of the best available investments as

compare to others they are very cost efficient and also easy to invest in, thus by pooling money

together in a mutual fund, investors can purchase stocks or bonds with much lower trading coststhan if they tried to do it on their own. But the biggest advantage to mutual funds is

diversification, by minimizing risk & maximizing returns


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NEED OF THE STUDY

1. Mutual funds are dynamic financial intuitions which play crucial role in an economy by

mobilizing savings and investing them in the capital market.

2. The activities of mutual funds have both short and long term impact on the savings in the

capital market and the national economy.

3. Mutual funds, trust, assist the process of financial deepening & intermediation.

4. To banking at the same time they also compete with banks and other financial intuitions.

5. India is one of the few countries to day maintain a study growth rate is domestic savings.

OBJECTIVES

1. To show the wide range of investment options available in MFs by explaining various

schemes offered by different AMCs.

2. To help an investor to make a right choice of investment, while considering the inherent risk

factors.

3. To understand the recent trends in the MF world.

4. To understand the risk and return of the various schemes.

5. To find out the various problems faced by Indian mutual funds and possible solutions.

SCOPE THE STUDY

1. The study is limited to the analysis made for a Growth scheme offered by four AMCs.

2. Each scheme is calculated their risk and return using different performance measurement

theories.

3. Because of the reason for such performance is immediately analyzed in the issue.

4. Graphs are used to reflect the portfolio risk and return.


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RESEARCH METHODOLOGY & TOOLS

This study is basically depends on

1. Primary Data

2. Secondary Data

Primary data: The primary data collected from the different companies through enquiry.

Secondary data:

The secondary data collected from the different sites, broachers, news papers, company offer

documents, different books and through suggestions from the project guide and from the faculty

members of our college.

TOOLS USED IN THIS PROJECT

The following parameters were considered for analysis:

Beta

Alpha

Correlation coefficient

Treynors Ratio

Sharpes Ratio

ADVANTAGES OF THE MUTUAL FUNDS

1. The investors risk is reduced to the minimum.2. The funds managers maximize the income of the funds.

3. To achieve a similar degree of diversification, an individual investor as to spend

considerable and money.

4. In a mutual fund, it is possible to reinvest the dividend and capital gains.

5. Selection of shares debentures etc and timing is made available to investors. .


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LIMITATIONS OF THE STUDY:

1. The study is conducted in short period, due to which the study may not be detailed in all

aspects.

2. The study is limited only to the analysis of different schemes and its suitability to different

investors according to their risk-taking ability. 3. The study is based on secondary data available

from monthly fact sheets, web sites; offer documents, magazines and newspapers etc., as primary

data was not accessible.

4. The study is limited by the detailed study of various schemes.

5. The NAVS are not uniform.

6. The data collected for this study is not proper because some mutual funds are not disclosing

the correct information.

7. The study is not exempt from limitations of Sharpe Treynor and Jenson measure.

8. Unique risk is completely ignored in all themeasure.


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CHAPTER-II

INDUSTRY PROFILE

&

COMPANY PROFILE


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INDUSTRY PROFILE

A bank is a financial institution that accepts deposits and channels those deposits into lending

activities. Banks primarily provide financial services to customers while enriching investors.

Government restrictions on financial activities by banks vary over time and location. Banks are

important players in financial markets and offer services such as investment funds and loans. In

some countries such as Germany, banks have historically owned major stakes in industrial

corporations while in other countries such as the United States banks are prohibited from owning

non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity

known as the keiretsu. In France, bancassurance is prevalent, as most banks offer insurance

services (and now real estate services) to their clients.

The level ofgovernment regulation of the banking industry varies widely, with countries such as

Iceland, having relatively light regulation of the banking sector, and countries such as China

having a wide variety of regulations but no systematic process that can be followed typical of a

communist system.

The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy,

which has been operating continuously since 1472.

History

Origin of the word

The name bankderives from the Italian word banco "desk/bench", used during the Renaissance

by Jewish Florentine bankers, who used to make their transactions above a desk covered by a

green tablecloth. However, there are traces of banking activity even in ancient times, which

indicates that the word 'bank' might not necessarily come from the word 'banco'.

In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders

would set up their stalls in the middle of enclosed courtyards called macellaon a long bench

called a bancu, from which the words banco and bankare derived. As a moneychanger, the
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merchant at the bancu did not so much invest money as merely convert the foreign currency into

the only legal tender in Romethat of the Imperial Mint.

The earliest evidence of money-changing activity is depicted on a silver drachm coin from

ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented

in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a

pun on the name of the city.

In fact, even today in Modern Greekthe word Trapeza () means both a table and a bank.

Traditional banking activities

Banks act as payment agents by conducting checking or current accounts for customers, payingcheques drawn by customers on the bank, and collecting cheques deposited to customers' current

accounts. Banks also enable customer payments via other payment methods such as telegraphic

transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current accounts, by accepting term

deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by

making advances to customers on current accounts, by making installment loans, and by

investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered indispensable by

most businesses, individuals and governments. Non-banks that provide payment services such as

remittance companies are not normally considered an adequate substitute for having a bank

account.

Banks borrow most funds from households and non-financial businesses, and lend most funds to

households and non-financial businesses, but non-bank lenders provide a significant and in many

cases adequate substitute for bank loans, and money market funds, cash management trusts and

other non-bank financial institutions in many cases provide an adequate substitute to banks for

lending savings to.
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Entry regulation

Currently in most jurisdictions commercial banks are regulated by government entities and

require a special bank licence to operate.

Usually the definition of the business of banking for the purposes of regulation is extended to

include acceptance of deposits, even if they are not repayable to the customer's orderalthough

money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the market,

i.e. a government-owned (central) bank. Central banks also typically have a monopoly on the

business of issuing banknotes. However, in some countries this is not the case. In the UK, for

example, the Financial Services Authority licences banks, and some commercial banks (such as

the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of

England, the UK government's central bank.

Definition

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the business ofbanking, which is specified as:

conducting current accounts for his customers

paying cheques drawn on him, and

collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law

in relation to negotiable instruments, including cheques, and this Act contains a statutorydefinition of the term banker: bankerincludes a body of persons, whether incorporated or not,

who carry on the business of banking' (Section 2, Interpretation). Although this definition seems

circular, it is actually functional, because it ensures that the legal basis for bank transactions such

as cheques do not depend on how the bank is organised or regulated.
http://en.wikipedia.org/wiki/Banknoteshttp://en.wikipedia.org/wiki/Financial_Services_Authorityhttp://en.wikipedia.org/wiki/Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Banknoteshttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/English_common_lawhttp://en.wikipedia.org/wiki/Negotiable_instrumentshttp://en.wikipedia.org/wiki/Chequeshttp://en.wikipedia.org/wiki/Chequeshttp://en.wikipedia.org/wiki/Chequeshttp://en.wikipedia.org/wiki/Chequeshttp://en.wikipedia.org/wiki/Negotiable_instrumentshttp://en.wikipedia.org/wiki/English_common_lawhttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/Bank_of_Englandhttp://en.wikipedia.org/wiki/Banknoteshttp://en.wikipedia.org/wiki/Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Financial_Services_Authorityhttp://en.wikipedia.org/wiki/Banknotes


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The business of banking is in many English common law countries not defined by statute but by

common law, the definition above. In other English common law jurisdictions there are statutory

definitions of the business of banking or banking business. When looking at these definitions it is

important to keep in mind that they are defining the business of banking for the purposes of the

legislation, and not necessarily in general. In particular, most of the definitions are from

legislation that has the purposes of entry regulating and supervising banks rather than regulating

the actual business of banking. However, in many cases the statutory definition closely mirrors

the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit account,

paying and collecting cheques drawn by or paid in by customers, the making of advances

to customers, and includes such other business as the Authority may prescribe for thepurposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

"banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar

account repayable on demand or within less than [3 months] ... or with a period of call or

notice of less than that period;

2. paying or collecting cheques drawn by or paid in by customers

[6]

Since the advent ofEFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct

debit and internet banking, the cheque has lost its primacy in most banking systems as a payment

instrument. This has led legal theorists to suggest that the cheque based definition should be

broadened to include financial institutions that conduct current accounts for customers and

enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.

Accounting for bank accounts

Bank statements are accounting records produced by banks under the various accounting

standards of the world. Under GAAP and IFRS there are two kinds of accounts: debit and credit.

Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses.
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This means you credit a credit accountto increase its balance, and you debit a debit accountto

decrease its balance.

This also means you debit your savings account every time you deposit money into it (and the

account is normally in deficit), while you credit your credit card account every time you spend

money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the oppositethat you credit your account

when you deposit money, and you debit it when you withdraw funds. If you have cash in your

account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or

deficit) balance.

The reason for this is that the bank, and not you, has produced the bank statement. Your savings

might beyourassets, but the bank's liability, so they are credit accounts (which should have a

positive balance). Conversely, your loans areyourliabilities but the bank's assets, so they are

debit accounts (which should also have a positive balance).

Where bank transactions, balances, credits and debits are discussed below, they are done so from

the viewpoint of the account holderwhich is traditionally what most people are used to seeing.

Economic functions

1. issue of money, in the form ofbanknotes and current accounts subject to cheque or

payment at the customer's order. These claims on banks can act as money because they

are negotiable and/or repayable on demand, and hence valued at par. They are effectively

transferable by mere delivery, in the case ofbanknotes, or by drawing a cheque that the

payee may bank or cash.

2. netting and settlement of paymentsbanks act as both collection and paying agents for

customers, participating in interbank clearing and settlement systems to collect, present,

be presented with, and pay payment instruments. This enables banks to economise on

reserves held for settlement of payments, since inward and outward payments offset each

other. It also enables the offsetting of payment flows between geographical areas,

reducing the cost of settlement between them.
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3. credit intermediationbanks borrow and lend back-to-back on their own account as

middle men.

4. credit quality improvementbanks lend money to ordinary commercial and personal

borrowers (ordinary credit quality), but are high quality borrowers. The improvement

comes from diversification of the bank's assets and capital which provides a buffer to

absorb losses without defaulting on its obligations. However, banknotes and deposits are

generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise

the funding it needs to continue to operate, this puts the note holders and depositors in an

economically subordinated position.

5. maturity transformationbanks borrow more on demand debt and short term debt, but

provide more long term loans. In other words, they borrow short and lend long. With a

stronger credit quality than most other borrowers, banks can do this by aggregating issues

(e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and

redemptions of banknotes), maintaining reserves of cash, investing in marketable

securities that can be readily converted to cash if needed, and raising replacement funding

as needed from various sources (e.g. wholesale cash markets and securities markets).

Law of banking

Banking law is based on a contractual analysis of the relationship between the bank(defined

above) and the customerdefined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer:

when the account is in credit, the bank owes the balance to the customer; when the

account is overdrawn, the customer owes the balance to the bank.

2. The bank agrees to pay the customer's cheques up to the amount standing to the credit of

the customer's account, plus any agreed overdraft limit.

3. The bank may not pay from the customer's account without a mandate from the customer,

e.g. a cheque drawn by the customer.
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4. The bank agrees to promptly collect the cheques deposited to the customer's account as

the customer's agent, and to credit the proceeds to the customer's account.

5. The bank has a right to combine the customer's accounts, since each account is just an

aspect of the same credit relationship.

6. The bank has a lien on cheques deposited to the customer's account, to the extent that the

customer is indebted to the bank.

7. The bank must not disclose details of transactions through the customer's account

unless the customer consents, there is a public duty to disclose, the bank's interests

require it, or the law demands it.

8. The bank must not close a customer's account without reasonable notice, since cheques

are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer

and the bank. The statutes and regulations in force within a particular jurisdiction may also

modify the above terms and/or create new rights, obligations or limitations relevant to the bank-

customer relationship.

Some types of financial institution, such as building societies and credit unions, may be partly or

wholly exempt from bank licence requirements, and therefore regulated under separate rules.

The requirements for the issue of a bank licence vary between jurisdictions but typically include:

1. Minimum capital

2. Minimum capital ratio

3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior

officers

4. Approval of the bank's business plan as being sufficiently prudent and plausible.

Types of banks

Banks' activities can be divided into retail banking, dealing directly with individuals and small

businesses; business banking, providing services to mid-market business; corporate banking,

directed at large business entities; private banking, providing wealth management services to
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high net worth individuals and families; and investment banking, relating to activities on the

financial markets. Most banks are profit-making, private enterprises. However, some are owned

by government, or are non-profit organizations.

Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They

generally provide liquidity to the banking system and act as the lender of last resort in event of a

crisis.

Types of retail banks

Commercial bank: the term used for a normal bank to distinguish it from an investment

bank. After the Great Depression, the U.S. Congress required that banks only engage in

banking activities, whereas investment banks were limited to capital market activities.

Since the two no longer have to be under separate ownership, some use the term

"commercial bank" to refer to a bank or a division of a bank that mostly deals with

deposits and loans from corporations or large businesses.

Community Banks: locally operated financial institutions that empower employees to

make local decisions to serve their customers and the partners.

Community development banks: regulated banks that provide financial services andcredit to under-served markets or populations.

Postal savings banks: savings banks associated with national postal systems.

Private banks: banks that manage the assets of high net worth individuals.

Offshore banks: banks located in jurisdictions with low taxation and regulation. Many

offshore banks are essentially private banks.

Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even

18th century. Their original objective was to provide easily accessible savings products to

all strata of the population. In some countries, savings banks were created on public

initiative; in others, socially committed individuals created foundations to put in place the

necessary infrastructure. Nowadays, European savings banks have kept their focus on

retail banking: payments, savings products, credits and insurances for individuals or

small and medium-sized enterprises. Apart from this retail focus, they also differ from
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commercial banks by their broadly decentralised distribution network, providing local

and regional outreachand by their socially responsible approach to business and

society.

Building societies and Landesbanks: institutions that conduct retail banking.

Ethical banks: banks that prioritize the transparency of all operations and make only what

they consider to be socially-responsible investments.

Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for

their own accounts, make markets, and advise corporations on capital market activities

such as mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance. The modern

definition, however, refers to banks which provide capital to firms in the form of shares

rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined

Universal banks, more commonly known as financial services companies, engage in

several of these activities. These big banks are very diversified groups that, among other

services, also distribute insurancehence the term bancassurance, a portmanteau word

combining "banque or bank" and "assurance", signifying that both banking and insurance

are provided by the same corporate entity.

Other types of banks

Islamic banks adhere to the concepts ofIslamic law. This form of banking revolves

around several well-established principles based on Islamic canons. All banking activities

must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit

(markup) and fees on the financing facilities that it extends to customers.
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COMPANY PROFILE


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Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a

steady and confident journey leading to growth and success. The milestones of the group growth

story are listed below year wise.

2010

Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored

enterprise, became operational as a national commodity exchange.

2009 Kotak Mahindra Bank Ltd. opened a representative office in Dubai

Entered Ahmedabad Commodity Exchange as anchor investor.

2008 Launched a Pension Fund under the New Pension System.

2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital

Company and Kotak Securities.

2005 Kotak Group realigned joint venture in Ford Credit; their stake in Kotak

Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus

Ltd) and Kotak groups stake in Ford credit Kotak Mahindra was sold.

Launched a real estate fund.

2004

Launched India Growth Fund, a private equity fund.

2003 Kotak Mahindra Finance Ltd. converted into a commercial bank - the first Indian

company to do so.


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2001 Matrix sold to Friday Corporation.

Launched Insurance Services.

Kotak Securities Ltd. was incorporated

2000 Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business.

Kotak Securities launched its on-line broking site.

Commencement of private equity activity through setting up of Kotak

Mahindra Venture Capital Fund.

1998

Entered the mutual fund market with the launch of Kotak Mahindra Asset

Management Company.

1996 The Auto Finance Business is hived off into a separate company - Kotak

Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).

Kotak Mahindra takes a significant stake in Ford Credit Kotak

Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information

Services Limited marks the Group's entry into information distribution.

1995 Brokerage and Distribution businesses incorporated into a separate company -

Securities. Investment banking division incorporated into a separate company -

Kotak Mahindra Capital Company

1992

Entered the Funds Syndication sector

1991 The Investment Banking Division was started. Took over FICOM, one of India's

largest financial retail marketing networks


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1990 The Auto Finance division was started

Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market

1986 Kotak Mahindra Finance Ltd started the activity of Bill Discounting

Our Businesses

Multiple businesses. One brand.

Kotak Mahindra is one of India's leading banking and financial services groups, offering a wide

range of financial services that encompass every sphere of life.

Kotak Mahindra Bank Ltd

Kotak Mahindra Bank Ltd is a one stop shop for all banking needs.

The bank offers personal finance solutions of every kind from savings accounts to credit

cards, distribution of mutual funds to life insurance products. Kotak Mahindra Bank

offers transaction banking, operates lending verticals, manages IPOs and provides

working capital loans. Kotak has one of the largest and most respected Wealth

Management teams in India, providing the widest range of solutions to high net worth

individuals, entrepreneurs, business families and employed professionals.

For more information, please visit the Kotak Mahindra Bank website

www.kotak.com/bank/personal-banking/
http://www.kotak.com/bank/personal-banking/http://www.kotak.com/bank/personal-banking/


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Kotak Mahindra Old Mutual Life Insurance Ltd

Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint

venture between Kotak Mahindra Bank Ltd., its affiliates and Old Mutual plc. A

Company that combines its international strengths and local advantages to offer its

customers a wide range of innovative life insurance products, helping them take

important financial decisions at every stage in life and stay financially independent. The

company covers over 3 million lives and is one of the fastest growing insurance

companies in India. www.kotaklifeinsurance.com

Kotak Securities Ltd

Kotak Securities is one of the largest broking houses in India with a

wide geographical reach. Kotak Securities operations include stock broking and

distribution of various financial products including private and secondary placement of

debt, equity and mutual funds.

Kotak Securities operate in five main areas of business:

o Stock Broking (retail and institutional)

o Depository Services

o Portfolio Management Services

o Distribution of Mutual Funds

o Distribution of Kotak Mahindra Old Mutual Life Insurance Ltd products

For more information, please visit the Kotak Securities website www.kotaksecurities.com
http://www.kotaklifeinsurance.com/http://www.kotaksecurities.com/http://www.kotaksecurities.com/http://www.kotaklifeinsurance.com/


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Kotak Mahindra Capital Company (KMCC)

Kotak Investment Banking (KMCC) is a full-service investment bank

in India offering a wide suite of capital market and advisory solutions to leading domestic

and multinational corporations, banks, financial institutions and government companies.

Our services encompass Equity & Debt Capital Markets, M&A Advisory, Private Equity

Advisory, Restructuring and Recapitalization services, Structured Finance services and

Infrastructure Advisory & Fund Mobilization.

For more information, please visit the Kotak Investment Banking website

www.kmcc.co.in

Kotak Mahindra Prime Ltd (KMPL)

Kotak Mahindra Prime Ltd is among India's largest dedicated

passenger vehicle finance companies. KMPL offers loans for the entire range of

passenger cars, multi-utility vehicles and pre-owned cars. Also on offer are inventory

funding and infrastructure funding to car dealers with strategic arrangements via various

car manufacturers in India as their preferred financier.

For more information, please visit the KMPL website http://carloan.kotak.com

Kotak International Business

Kotak International Business specialises in providing a range of

services to overseas customers seeking to invest in India. For institutions and high net

worth individuals outside India, Kotak International Business offers asset management
http://www.kmcc.co.in/http://carloan.kotak.com/http://carloan.kotak.com/http://www.kmcc.co.in/


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through a range of offshore funds with specific advisory and discretionary investment

management services.

For more information, please visit the Kotak Mahindra International Business website

www.investindia.kotak.com

Kotak Mahindra Asset Management Company Ltd (KMAMC)

Kotak Mahindra Asset Management Company offers a complete

bouquet of asset management products and services that are designed to suit the diverse

risk return profiles of each and every type of investor. KMAMC and Kotak Mahindra

Bank are the sponsors of Kotak Mahindra Pension Fund Ltd, which has been appointed

as one of six fund managers to manage pension funds under the New Pension Scheme

(NPS).

For more information, please visit the KMAMC website

www.kotakmutual.com/kmw/main.htm

Kotak Private Equity Group (KPEG)

Kotak Private Equity Group helps nurture emerging businesses and

mid-size enterprises to evolve into tomorrow's industry leaders. With a proven track

record of helping build companies, KPEG also offers expertise with a combination of

equity capital, strategic support and value added services. What differentiates KPEG is

not merely funding companies, but also having a close involvement in their growth as

board members, advisors, strategists and fund-raisers.

For more information, please visit the KPEG website www.privateequityfund.kotak.com
http://www.investindia.kotak.com/http://www.kotakmutual.com/kmw/main.htmhttp://www.privateequityfund.kotak.com/http://www.privateequityfund.kotak.com/http://www.kotakmutual.com/kmw/main.htmhttp://www.investindia.kotak.com/


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Kotak Realty Fund

Kotak Realty Fund deals with equity investments covering sectors such

as hotels, IT parks, residential townships, shopping centres, industrial real estate, health

care, retail, education and property management. The investment focus here is on

development projects and enterprise level investments, both in real estate intensive

businesses.

For more information, please visit the Kotak Realty Fund website

www.realtyfund.kotak.com

Senior Management

Mr. Uday S. Kotak

Executive Vice Chairman and Managing Director

Mr. Uday Kotak, is the Executive Vice-Chairman and Managing Director of the Bank, and its

principal founder and promoter. Mr. Kotak is an alumnus of Jamnalal Bajaj Institute of

Management Studies.

In 1985, when he was still in his early twenties, Mr Kotak thought of setting up a bank when

private Indian banks were not even seen in the game. First Kotak Capital Management Finance

Ltd (which later became Kotak Mahindra Finance Ltd), and then with Kotak Mahindra Finance

Ltd, Kotak became the first non-banking finance company in India's corporate history to be

converted into a bank. Over the years, Kotak Mahindra Group grew into several areas like stock

broking and investment banking to car finance, life insurance and mutual funds.

Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the Year Award

in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003. He was featured as one

of the Global Leaders for Tomorrow at the World Economic Forum's annual meet at Davos in

1996. He was also featured among the Top Financial Leaders for the 21st Century by Euromoney
http://www.realtyfund.kotak.com/http://www.realtyfund.kotak.com/


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magazine. He was named as CNBC TV18 India Business Leader of the Year 2008 and as the

most valued CEO by businessworld in 2010.

Mr. C Jayaram

Joint Managing Director

Mr. C. Jayaram, is a Joint Managing Director of the Bank and is currently in charge of the

Wealth Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has been

with the Kotak Group since 1990 and member of the Kotak board in October 1999. He also

oversees the international subsidiaries and the alternate asset management business of the group.

He is the Director of the Financial Planning Standards Board, India. He has varied experience of

over 25 years in many areas of finance and business, has built numerous businesses for the

Group and was CEO of Kotak Securities Ltd. An avid player and follower of tennis, he also has a

keen interest in psephology.

Mr. Dipak Gupta

Joint Managing Director

An electronics engineer and an alumnus of IIM Ahmedabad, Mr. Gupta has been with the Kotak

Group since 1992 and joined the board in October 1999.

He heads commercial banking, retail asset businesses and looks after group HR function. Early

on, he headed the finance function and was instrumental in the joint venture between Kotak

Mahindra and Ford Credit International. He was the first CEO of the resulting entity, Kotak

Mahindra Primus Ltd.


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Awards

Recent achievements

At Kotak Mahindra Group we take a client-centric view and constantly innovate to provide you

with the best of services and infrastructure. We have regularly received accolades that standtestimony to our success in this endeavour. Some of our recent achievements are:

Banking

ICAI AwardExcellence in Financial Reporting under Category 1 - Banking Sector for the year ending

31st March, 2010

Asiamoney

Best Local Cash Management Bank 2010

IDG India

Kotak won the CIO 100 'The Agile 100' award 2010

IDRBT

Banking Technology Excellence Awards Best Bank Award in IT Framework and

Governance Among Other Banks' - 2009

Banking Technology Award for IT Governance and Value Delivery, 2008

IR Global Rankings

Best Corporate Governance Practices - Ranked among the top 5 companies in AsiaPacific, 2009

FinanceAsia

Best Private Bank in India, for Wealth Management business, 2009

Kotak Royal Signature Credit Card

Was chosen "Product of the Year" in a survey conducted by Nielsen in 2009

IBA Banking Technology Awards

Best Customer Relationship Achievement - Winner 2008 & 2009

Best overall winner, 2007

Best IT Team of the Year, 4 years in a row from 2006 to 2009

Best IT Security Policies & Practices, 2007

Euromoney

Best Private Banking Services (overall), 2009


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Emerson Uptime Champion Awards

Technology Senate Emerson Uptime Championship Award in the BFSI category, 2008

Corporate Responsibility

Community investment and development

Kotak Mahindra views Corporate Social Responsibility as an investment in society and in its

own future. Kotak uses the power of its human and financial capital to help in transforming

communities into vibrant, desirable places for people to live. The group leverages its core

competencies in three areas:

Sustainability

An integral part of all Kotak Mahindra Group activities is to be consistently responsible

to shareholders, clients, employees, society and the environment.

Economic Development

By helping people achieve their financial goals, Kotak strengthens the fabric of

communities and helps them overcome unemployment and poverty to help them shape

their future.

Doing My Bit

A growing number of employees are committed to civic leadership and responsibility

with the support and encouragement of the Kotak Group. A number of employees have

been involved in strengthening communities through voluntary work, payroll giving and

management inputs.

For any CSR related queries, please contact:

Group CSR

Kotak Mahindra Bank Ltd

Tel. Board +91 22 6720 6720

Email: [email protected]
mailto:[email protected]:[email protected]


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CHAPTER-III

REVIEW OF LITERATURE


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CONCEPT OF MUTUAL FUNDS

Like most developed and developing countries the mutual fund culture has been catching

on in India. There are various reasons for this. Mutual funds make it easy and less costly for

investors to satisfy their need for capital growth, income and/or income preservation. And in

addition to this a mutual fund brings the benefits of diversification and money management to

the individual investor, providing an opportunity for financial success that was once available

only to a select few.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as

shares, debentures and other securities. The income earned through these investments and the

capital appreciations realized are shared by its unit holders in proportion to the number of units

owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it

offers an opportunity to invest in a diversified, -professionally managed basket of securities at a

relatively low cost. The flow chart below describes broadly the working of a mutual fund:


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Mutual Fund Operation Flow Chart

Organization of a Mutual

BENEFITS OF MUTUAL FUNDS

Investing in mutual has various benefits which makes it an ideal investment avenue. Following

are some of the primary benefits.

Professional investment management

One of the primary benefits of mutual funds is that an investor has access to professional

management. A good investment manager is certainly worth the fees you will pay. Good mutual

fund managers with an excellent research team can do a better job of monitoring the companies

they have chosen to invest in than you can, unless you have time to spend on researching the

companies you select for your portfolio. That is because Mutual funds hire full-time, high-level

investment professionals. Funds can afford to do so as they manage large pools of money. The

managers have real-time access to crucial market information and are able to execute trades on

the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are

buying is the manager, who will be controlling which assets are chosen to meet the funds' stated

investment objectives.


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Diversification

A crucial element in investing is asset allocation. It plays a very big part in the success of any

portfolio. However, small investors do not have enough money to properly allocate their assets.

By pooling your funds with others, you can quickly benefit from greater diversification. Mutual

funds invest in a broad range of securities. This limits investment risk by reducing the effect of a

possible decline in the value of any one security. Mutual fund unit-holders can benefit from

diversification techniques usually available only to investors wealthy enough to buy significant

positions in a wide variety of securities.

Low Cost

A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000, and

sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

Convenience and Flexibility

Investing in mutual funds has its own convenience. While you own just one security rather than

many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund

managers decide what securities to trade, collect the interest payments and see that your

dividends on portfolio securities are received and your rights exercised. It also uses the services

of a high quality custodian and registrar. Another big advantage is that you can move your funds

easily from one fund to another within a mutual fund family. This allows you to easily rebalance

your portfolio to respond to significant fund management or economic changes.

Liquidity

In open-ended schemes, you can get your money back promptly at net asset value related prices

from the mutual fund itself.

Transparency

Regulations for mutual funds have made the industry very transparent. You can track the

investments that have been made on you behalf and the specific investments made by the mutual


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fund scheme to see where your money is going. In addition to this, you get regular information

on the value of your investment.

VarietyThere is no shortage of variety when investing in mutual funds. You can find a mutual fund that

matches just about any investing strategy you select. There are funds that focus on blue-chip

stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be

sorting through the variety and picking the best for you.

TYPES OF MUTUAL FUNDS

Getting a handle on what's under the hood helps you become a better investor and put together amore successful portfolio. To do this one must know the different types of funds that cater to

investor needs, whatever the age, financial position, risk tolerance and return expectations. The

mutual fund schemes can be classified according to both their investment objective (like income,

growth, tax saving) as well as the number of units (if these are unlimited then the fund is an

open-ended one while if there are limited units then the fund is close-ended).

This section provides descriptions of the characteristics -- such as investment objective and

potential for volatility of your investment -- of various categories of funds. The type of securities

purchased by each fund organizes these descriptions: equities, fixed-income, money market

instruments, or some combination of these.

Open-Ended Schemes

Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at

NAV-related prices from and to the mutual fund on any business day. These schemes have

unlimited capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the

amount you can buy from the fund and the unit capital can keep growing. These funds are not

generally listed on any exchange.


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Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any

time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily

basis. The advantages of open-ended funds over close-ended are as follows:

Any time exit option. The issuing company directly takes the responsibility of providing an entry

and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds,

signature verifications and bad deliveries. Any time entry option, an open-ended fund allows one

to enter the fund at any time and even to invest at regular intervals.

Close-Ended Schemes

Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the

period when these funds are open in the initial issue. After that such schemes can not issue new

units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell

units of the scheme on the stock exchanges where they are listed. The market price of the units

could vary from the NAV of the scheme due to demand and supply factors, investors

expectations and other market factors

Classification According To Investment Objectives

Mutual funds can be further classified based on their specific investment objective such as

growth of capital, safety of principal, current income or tax-exempt income.

In general mutual funds fall into three general categories:

1] Equity Funds are those that invest in shares or equity of companies.

2] Fixed-Income Funds invest in government or corporate securities that offer fixed rates of

return are

3] While funds that invest in a combination of both stocks and bonds are called Balanced Funds.

Growth Funds

Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such

funds invest in shares with a potential for growth and capital appreciation. They invest in well-

established companies where the company itself and the industry in which it operates are thought


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to have good long-term growth potential, and hence growth funds provide low current income.

Growth funds generally incur higher risks than income funds in an effort to secure more

pronounced growth.

Some growth funds concentrate on one or more industry sectors and also invest in a broad range

of industries. Growth funds are suitable for investors who can afford to assume the risk of

potential loss in value of their investment in the hope of achieving substantial and rapid gains.

They are not suitable for investors who must conserve their principal or who must maximize

current income.

Growth and Income Funds

Growth and income funds seek long-term growth of capital as well as current income. The

investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio

consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying

high dividends, preferred stocks, convertible securities or fixed-income securities such as

corporate bonds and money market instruments. Others may invest in growth stocks and earn

current income by selling covered call options on their portfolio stocks.

Growth and income funds have low to moderate stability of principal and moderate potential for

current income and growth. They are suitable for investors who can assume some risk to achieve

growth of capital but who also want to maintain a moderate level of current income.

Fixed-Income Funds

Fixed income funds primarily look to provide current income consistent with the preservation of

capital. These funds invest in corporate bonds or government-backed mortgage securities that

have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability

of principal and in their dividend yields. High-yield funds, which seek to maximize yield by

investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-

income funds that invest in higher-rated but lower-yielding securities.

Some fixed-income funds seek to minimize risk by investing exclusively in securities whose

timely payment of interest and principal is backed by the full faith and credit of the Indian

Government. Fixed-income funds are suitable for investors who want to maximize current

income and who can assume a degree of capital risk in order to do so.


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Balanced

The Balanced fund aims to provide both growth and income. These funds invest in both shares

and fixed income securities in the proportion indicated in their offer documents. Ideal for

investors who are looking for a combination of income and moderate growth.

Money Market Funds/Liquid Funds

For the cautious investor, these funds provide a very high stability of principal while seeking a

moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt

securities of agencies of the Indian Government, banks and corporations and Treasury Bills.

Because of their short-term investments, money market mutual funds are able to keep a virtually

constant unit price; only the yield fluctuates.

Therefore, they are an attractive alternative to bank accounts. With yields that are generally

competitive with - and usually higher than -- yields on bank savings account, they offer several

advantages. Money can be withdrawn any time without penalty. Although not insured, money

market funds invest only in highly liquid, short-term, top-rated money market instruments.

Money market funds are suitable for investors who want high stability of principal and current

income with immediate liquidity.

Specialty/Sector Funds

These funds invest in securities of a specific industry or sector of the economy such as health

care, technology, leisure, utilities or precious metals. The funds enable investors to diversify

holdings among many companies within an industry, a more conservative approach than

investing directly in one particular company.

Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in

favor" but also entail the risk of capital losses when the industry is out of favor. While sector

funds restrict holdings to a particular industry, other specialty funds such as index funds give

investors a broadly diversified portfolio and attempt to mirror the performance of various market

averages.


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Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty

or other broad stock market indices. They are not suitable for investors who must conserve their

principal or maximize current income.

RISK Vs. REWARD

Having understood the basics of mutual funds the next step is to build a successful

investment portfolio. Before you can begin to build a portfolio, one should understand some

other elements of mutual fund investing and how they can affect the potential value of your

investments over the years. The first thing that has to be kept in mind is that when you invest in

mutual funds, there is no guarantee that you will end up with more money when you withdraw

your investment than what you started out with. That is the potential of loss is always there. The

loss of value in your investment is what is considered risk in investing. Even so, the opportunity

for investment growth that is possible through investments in mutual funds far exceeds that

concern for most investors. Heres why At the cornerstone of investing is the basic principal that

the greater the risk you take, the greater the potential reward. Or stated in another way, you get

what you pay for and you get paid a higher return only when you're willing to accept more

volatility.

Risk then, refers to the volatility -- the up and down activity in the markets and individual issues

that occurs constantly over time. This volatility can be caused by a number of factors -- interestrate changes, inflation or general economic conditions. It is this variability, uncertainty and

potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest

in will fall substantially. But it is this very volatility that is the exact reason that you can expect

to earn a higher long-term return from these investments than from a savings account.

Different types of mutual funds have different levels of volatility or potential price change, and

those with the greater chance of losing value are also the funds that can produce the greater

returns for you over time. So risk has two sides: it causes the value of your investments to

fluctuate, but it is precisely the reason you can expect to earn higher returns. You might find it

helpful to remember that all financial investments will fluctuate. There are very few perfectly

safe havens and those simply don't pay enough to beat inflation over the long run.


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TYPES OF RISKS

All investments involve some form of risk. Consider these common types of risk and evaluate

them against potential rewards when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due to broad

outside influences. When this happens, the stock prices of both an outstanding, highly profitable

company and a fledgling corporation may be affected. This change in price is due to "market

risk". Also known as systematic risk.

Inflation Risk

Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster

than the earnings on your investment, you run the risk that you'll actually be able to buy less, not

more. Inflation risk also occurs when prices rise faster than your returns.


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Credit Risk

In short, how stable is the company or entity to which you lend your money when you invest?

How certain are you that it will be able to pay the interest you are promised, or repay your

principal when the investment matures?

Interest Rate Risk

Changing interest rates affect both equities and bonds in many ways. Investors are reminded that

"predicting" which way rates will go is rarely successful. A diversified portfolio can help in

offsetting these changes.

Exchange riskA number of companies generate revenues in foreign currencies and may have investments or

expenses also denominated in foreign currencies. Changes in exchange rates may, therefore,

have a positive or negative impact on companies which in turn would have an effect on the

investment of the fund.

Investment Risks

The sectoral fund schemes, investments will be predominantly in equities of select companies inthe particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance

of such companies and may be more volatile than a more diversified portfolio of equities.

Call Risks

Call risk is associated with bonds have and embedded call option in them. This option gives the

issuer the right to call back the bonds prior to maturity. Then investor how ever is exposed to

some risks here. The price of the callable bond many not rise much above the price at which the

issuer may call the bond.


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Changes in the Government Policy

Changes in Government policy especially in regard to the tax benefits may impact the business

prospects of the companies leading to an impact on the investments made by the fund. Effect of

loss of key professionals and inability to adapt business to the rapid technological change.

An industries' key asset is often the personnel who run the business i.e. intellectual

properties of the key employees of the respective companies. Given the ever-changing

complexion of few industries and the high obsolescence levels, availability of qualified, trained

and motivated personnel is very critical for the success of industries in few sectors. It is,

therefore, necessary to attract key personnel and also to retain them to meet the changing

environment and challenges the sector offers. Failure or inability to attract/retain such qualified

key personnel may impact the prospects of the companies in the particular sec


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Investment cycle in Mutual Funds


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Types of mutual funds

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 Phase1964-87(UTI MONOPOLY)

An Act of Parliament established Unit Trust of India (UTI) on 1963. 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 Phase1987-1993 (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).


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SBI Mutual Fund was the first non- UTI Mutual Fund established in June 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, 004 cores.

Third Phase1993-2003 (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 I am

dearmutual funds setting up funds in India and also the industry has witnessed several mergersand acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of

Rs. 1, 21,805 crores.

Fourth Phasesince 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 administrator and under the rules framed by

Government of India and does not come under the purview of the Mutual Fund Regulations.


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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

June 30, 2003, there were 31 funds, which manage assets of Rs.104762 crores under 376

schemes.

The graph indicates the growth of assets over the years.


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GROWTH IN ASSETS UNDER MANAGEMENT

India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an

Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even

10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in

the first quarter of the current fiscal year.


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At least half the trustees should be independent persons. The AMC or its employees

cannot act as a trustee. No person who is appointed as a trustee of a mutual fund can be

appointed as a trustee of any other mutual fund unless he is an independent trustee and prior

permission is obtained from the mutual fund in which he is a trustee.

The trustees are required to submit half-yearly reports to SEBI on the activities of the

mutual fund. The trustees appoint a custodian and supervise their activities. The trustees can be

removed only with prior approval of SEBI.

As per SEBI guidelines, an asset management company is appointed by the trustees to

float the schemes for the mutual fund and manage the funds raised by selling units under a

scheme. The AMC must act as per SEBI guidelines, trust deeds and management agreement

between trustee & the AMC.

The Importance of Accounting Knowledge

Mutual funds in India are required to follow the accounting policies laid down in SEBI (Mutual

Fund) Regulations, 1996 and the amendments in 1998. This section of the workbook summarizes

the important Regulations, and periodical budgets.

Net Asset Value (NAV)A mutual fund is a common investment vehicle where the assets of the fund belong directly to

the investors. The fund does not account for investors' subscriptions as liabilities or deposits but

as Unit Capital. On the other hand, the investments made on behalf of the investors are reflected

on the assets side and are the main constituents of the balance sheet. There are, however,

liabilities of a strictly short-term nature that may be part of the balance sheet. The fund's Net

Assets are therefore defined as the assets minus the liabilities. As there are many investors in a

fund, it is common practice for mutual funds to compute the share of each investor on the basis

of the value of Net Assets Per Share/Unit, commonly known as the Net Asset Value (NAV).

The following are the regulatory requirements and accounting definitions lay down by SEBI.

NAV = Net Assets of the scheme / Number of Units Outstanding, i.e. Market value of

investments + Receivables + Other Accrued Income + Other Assets


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Accrued Expenses-Other Payables-Other Liabilities

No. Of Units Outstanding as at the NAV date

A fund's NAV is affected by four sets of factors:

-- Purchase and sale of investment securities

-- Valuation of all investment securities held

-- Other assets and liabilities, and

-- Units sold or redeemed

Pricing of Units:

Although NAV per share defines the value of the investor's holding in the fund, the fund

may not repurchase the investor's units at the same price as NAV. However, SEBI requires that

the fund must ensure that repurchase price is not lower than 93% of NAV (95% in the case of a

closed end fund). On the other side, a fund may sell new units at a price that is different from the

NAV, but the sale price cannot be higher than 107% of NAV. Also, the difference the repurchase

price and the sale price of the unit is not permitted to exceed 7% of the sale price.

Fees and Expenses:

An AMC may incur many expenses specifically for given schemes, and other common

expenses. In any case, all expenses should be clearly Unidentified and allocated to the individual

schemes. The AMC may charge the scheme with investment management and advisory fees that

are fully disclosed in the offer document subject to the following limits:

@ 1.25% of the first Rs. 100 crore of weekly average net assets outstanding in the accounting

year, and @ 1% of weekly average net assets in excess of Rs. 100 crore.

For no load schemes, the AMC may charge an additional management fee up to 1% of weekly

average net assets outstanding in the accounting year.

=


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Investment management and advisory fees are subject to the overall ceiling for expenses.

A. Initial expensesof launching schemes (not to exceed 6% of initial resources raised under the

scheme); and

B. Recurring expensesincluding:

i. Marketing and selling expenses including agents' commission

ii. Brokerage and transaction costs

iii. Registrar services for transfer of units sold or redeemed

v. Fees and expenses of trustees

v. Audit fees

vi. Custodian fees

vii. Costs related to investor communication

viii. Costs of fund transfers from location to location

ix. Costs of providing account statements and dividend / redemption

cheques and warrants

x. Insurance premium paid by the fund

xi. Winding up costs for terminating a fund or a scheme

xii. Other costs as approved by SEBI

The total expenses charged by the AMC to a scheme, excluding issue or redemption expenses

but including investment management and advisory fees are subject to the following limits:

On the first Rs. 100 Crores of average weekly net assets-2.5%

On the next Rs. 300 Crores of average weekly net assets -2.0%

On the balance of average weekly net assets-1.75%

For bond funds, the above percentages are required to be lower by 0.25%


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Initial Issue Expenses:

When a scheme is first launched, the AMC will incur significant expenses, whose benefit

will accrue over many years. All expenses cannot, therefore, be charged to a scheme in the first

year itself. SEBI permits "amortization" of initial expenses as follows:

For a closed-end scheme floated on a 'load' basis, the initial issue expenses shall be amortized

on a weekly basis over the period of scheme. For example, a 5-year (i.e. 260 week) closed-end

scheme with initial issue expenses of Rs. 5 lakhs must charge Rs.1923 (5 lakhs / 260 weeks)

every week to the fund. It cannot charge the entire amount of Rs. 5 lakhs at the time of issue.

For an open-end scheme floated on a 'load' basis, initial issue expenses may be amortized over a

period not exceeding five years. For example, if an open-end scheme has initial issue expenses of

Rs. 10 lakhs, it need not charge this entire amount to the fund in the year of issue. Instead, it may

charge Rs. 2 lakhs (10 lakhs / 5 years) per year to the fund, thereby spreading the charge of

initial issue expenses over a maximum of 5 years. Issue expenses incurred during the life of an

open-end scheme cannot be amortized.

Un amortized portion of initial issue expenses shall be included for NAV calculation,

considered as "other asset". The investment advisory fee cannot be claimed on this asset. Hence,

they have to be excluded while determining the chargeable investment management / advisory

fees. While calculating the maximum amount of chargeable expenses, the un amortized portion

of the initial issue expenses will not be included as part of the average weekly net assets figure.

Accounting Policies:Investments are required to be marked to market using market prices. Any unrealized

appreciation cannot be distributed, and provision must be made for the same.

Dividend received by the fund on a share should be recognized, not on the date of declaration,

but on the date the share is quoted on ex-dividend basis. For example, if a fund owns shares on


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which dividend is declared on April 5, and the shares are quoted on ex-dividend basis on April

20, the dividend income will be included by the fund for distribution/NAV computation only

April 20.

In determining gain or loss on sale of investments, the average cost method must be followed to

determine the cost of purchase. This will be applied by security.

Purchase / sale of investments should be recognized on the trade date and not settlement date

Bonus / rights shares should be recognized only when the original shares are traded on the stock

exchange on an ex-bonus /ex-rights basis

Income receivable on investments, which is accrued, but not received for 12 months beyond

due date, should be provided for, and no further accrual should be made for such investment

An investment shall be regarded as non-performing if it has provided no returns through

dividend/interest for more than 2years at the end of the accounting year

Investments owned by mutual funds are marked to market. Therefore, the value of investments

appreciates or depreciates based on market fluctuations, which is reflected in the balance sheet.

However, this change in value constitutes unrealized gain/loss. When any investments are

actually sold, the proportion of the unrealized gain / loss that pertains to such investments

becomes realized gain/loss. Therefore, at any given time, the NAV includes realized and

unrealized gain/loss on investments. While SEBI prohibits the distribution of unrealized

appreciation on investments, realized gain in available for distribution.

An open-end scheme sells and repurchases units on the basis of NAV. SEBI therefore

prescribes the use of an equalization account, to ensure that creation / redemption of units does

not change the percentage of income distributed. This involves the following steps:

- Computation of distributable reserves:

- Income + Realized Gain on Investments- Expenses-Unrealized Losses (unrealized gains are

excluded)

- If distributable reserves are positive, the following percentage is computed:

Distributable Reserve / Units Outstanding


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- The above percentage is multiplied with the number of new units sold, and the equalization

account is credited by this amount, if units are sold above par; if the units are sold below par, the

equalization account is debited by this amount. The same percentage is multiplies with the

number of units repurchased, and the equalization account is debited by this amount if the units

are repurchased above par; if the units are repurchased below par, the equalization account is

credited.

- The net balance in the equalization account is transferred to the profit and loss account. It is

only an adjustment to the distributable surplus and does not affect the net income for the period.

VALUATION

Mutual funds value their investments on a 'mark-to-market' basis with reference to the date on

which they are valued i.e., the valuation date.

Valuation of Traded Securities:

Where a security is traded on a stock exchange, it is valued at the last quoted closing price on

the stock exchange where it is "principally traded".

If a security is not traded on any stock exchange on a particular valuation day, the value at

which it was traded on the selected/other stock exchange on the

Earliest previous day may be used, provided such date is not more than 60 days prior to the

valuation date.

Valuation of traded securities, once the market price is obtained as above, is quite simple. The

fund will multiply its current holding in number of shares or bonds by the applicable market

price to get the "mark to market" value.

valuation of Non-traded Securities:

When a security is not traded on any stock exchange for 60 days prior to the valuation date, it

must be treated as non-traded' scrip.

Non-traded securities shall be valued 'in good faith' by the AMC on the basis of appropriate

valuation methods, which shall be periodically reviewed by the trustees and reported by the


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auditors as fair and reasonable. The following principles are to be applied for the valuation of

non-traded securities:

Equity instruments: are to be valued on the basis of capitalization of earnings solely or in

combination with its balance sheet Net Asset Value. For this purpose, capitalization rate will be

determined by reference to the price or earning rations of comparable traded securities with an

appropriate discount for lower liquidity to be used.

Debit instruments:are to be valued on a yield to maturity basis, the capitalization factor

being determined for comparable traded securities with an appropriate discount for lower

liquidity.

Call money, bills purchased: under rediscounting and short term deposits with banksare to be

valued at cost + accrual: other money market instruments at yield at which they are currently

traded; non-traded instruments (not traded for 7 days) will be valued at cost plus interest accrued

till the beginning of the valuation day plus the difference between redemption value and cost,

spread uniformly over the remaining maturity of the instruments

Government Securities:are to be valued at yield to maturity based on prevailing market

rate

Convertible debentures and bonds:non-convertible component is to be valued as a

debt instrument, and convertible as any equity instrument. If after Conversion, the resultant

equity instrument would be traded pari passu with an existing instrument, which is traded, the

value of the latter instrument can be adopted after an appropriate discount for the non-tradability

of the instrument.

RISK INVOLVED IN MUTUAL FUNDS INDUSTRY:

Mutual funds are not free from risk. It is so because basically the mutual funds also invest their

funds in stock markets on shares, which are volatile in nature and are not risk free, the following

risk are inherent in their dealing.


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INHERENT RISK FACTORS:

1) Market Risks:

In general there are certain risks associated with the every kind of investment on shares. They are

called market risks. These market risks can be reduced, but cannot be completely eliminatedeven by a good investment.

2) Scheme Risks

There are certain risks inherent in the scheme itself. It all depends upon the nature of the

scheme. For instance, in a pure growth scheme, risks are greater.

3) Investment Risks

Whether the mutual fund makes money in shares or loses depends upon the investment expertise

of the Asset Management Company. If the investment advice goes wrong, the fund has to suffer

a lot.

4) Business Risks

The corpus of a mutual fund might have been invested in a companys shares. If the business of

that company suffers any set back, it cannot declare any dividend. It may even go to the extent

of winding up its business.

5) Political RisksSuccessive Governments bring with them fancy new economic ideologies and policies. It is

often said that many economic decisions are politically motivated.


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PARAMETERS DESCRIPTION

The following parameters were considered for analysis:

Beta

Alpha

Correlation coefficient

Treynors Ratio

Sharpes Ratio

Jensens Ratio

Beta

Beta is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the

market as a whole. Beta measures a stock's volatility, the degree to which a stock price fluctuates

in relation to the overall market. Investment analysts use the Greek letter beta,. It is calculated

using regression analysis. A beta of 1 indicates that the security's price will move with the

market. A beta greater than 1 indicates that the security's price will be more volatile than the

market, and a beta less than 1 means that it will be less volatile than the market.

While standard deviation determines the volatility of a fund according to the disparity of its

returns over a period of time, beta, another useful statistical measure, determines the volatility, or

risk, of a fund in comparison to that of its index.

Investors expecting the market to be bullish may choose funds exhibiting high betas, which

increase investors' chances of beating the market. If an investor expects the market to be bearish

in the near future, the funds that have betas l

Mutual Funds in Kotak 2011-1

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