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A

PROJECT REPORT

ON

STUDY OF TAX SAVING SCHEMES IN MUTUAL FUNDS

IN

ICICI PRUDENTIAL LIFE INSURANCE CO. LTD.

Submitted to Punjab technical university

In the partial fulfillment of the requirement for degree of

MASTERSOF

BUSINESS ADMINISTRATION

BY

Nitesh Uppal

ROLL NO: 1176091

DEPARTMENT OF BUSINESS MANAGEMENT

DEVRAJ GROUPS TECHNICAL CAMPUS

AFFILATED TO

PUNJAB TECHNICAL UNIVERSITY, JALANDHAR

2011-2013

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DECLARATION

This is to certify that the project report titledSTUDY OF TAX SAVING SCHEMES

IN MUTUAL FUNDS ICICI PRUDENTIAL LIFE INSURANCE CO. LTD.

carried out by NITESH UPPAL S/o Sh: MUKESH KUMAR UPPAL has been

accomplished under the guidance and supervision ofMRS. PARVEEN BALA & MS.

NITIKA GUPTA

This is an original work and has not been submitted by her anywhere else for the award

of any degree. All sources of information and help have been duly mentioned and

acknowledged.

Signature of Student

Signature of faculty Guide

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ACKNOWLEDGEMENT

My very special gratitude and heart felt thanks to our beloved Chairperson, for his blessings

and best wishes to carry out my project work. Who is responsible for moulding our thinking to

complete this project.

It is my great pleasure to express my sincere gratitude and thanks to my heads of the

Department Mrs. Parveen, for his valuable guidance and help.

I am extremely thankful to my project guide Ms. Nitika Gupta, Department of management

studies for imitating keen interest and giving valuable guidance atevery stage of this project.

I wish to express my sincere thanks to the company guide Mr. Rohit Gupta & Chakshina

Gupta who is my external guide for his kind support and guidanceto complete my project.I am also thankful to all the faculty members of the Department of management studies for

their kind and valuable cooperation during the course of the project. I would also like to thank

my parents, Friends and well wishers who encourage me to complete this project successfully.

Date:

NITESH UPPAL

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LIST OF CHAPTERSCHAPTER NO. CONTENTS PAGE NO.

1 Introductions about company

1.1 Organization chart

1.2 SWOT analysis

2 Introduction about project topic

2.1 Need of study

3 Objectives of study

4 Review of literature

5 Research Methodology

6 Data analysis & interpretation

7 Results & findings

8 Limitations

9 Suggestions

10 Conclusion

11 Bibliography

CHAPTER NO: 1

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INTRODUCTION

ABOUT

ICICI PRUDENTIAL LIFEINSURANCE

ICICI PRUDENTIAL LIFE INSURENCE - AN INTRODUCTION

First of all one must have knowledge about what is life insurance:

Life insurance is a form of insurance that pays monetary proceeds upon the death of the

insured covered in the policy. Essentially, a life insurance policy is a contract between

the named insured and the insurance company wherein the insurance company agrees to

pay an agreed upon sum of money to the insured's named beneficiary so long as the

insured's premiums are current.

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With a large population and the untapped market area of this population insurance

happens to be a very big opportunity in India. Today it stands as a business growing at

the rate of 15-20% annually. Together with banking services, it adds about 7 percent to

the countries GDP. In spite of all this growth statistics of the penetration of the

insurance in the country is very poor. Nearly 80% of Indian populations are without life

insurance cover and the health insurance. This is an indicator that growth potential for

the insurance sector is immense in India.

It was due to this immense growth that the regulations were introduced in the insurance

sector and in continuation Malhotra Committee was constituted by the government in

1993 to examine the various aspects of the industry. The key element of the reform

process was participation of overseas insurance companies with 26% capital. Creating a

more competitive financial system suitable for the requirements of the economy was the

main idea behind this reform.

Since then the insurance industry has gone through many changes. The liberalization of

the industry the insurance industry has never looked back and today stand as one of the

most competitive and exploring industry in India. The entry of the private players and

the increased use of the new distribution are in the limelight today. The use of new

distribution techniques and the IT tools has increased the scope of the industry in the

longer run.

Insurance is the business of providing protection against financial aspects of risk, such

as those to property, life health and legal liability. It is one method of a greater concept

known as risk management which is the need to mange uncertainty on account of

exposure to loss, injury, disadvantage or destruction.

Insurance is the method of spreading and transfer of risk. The fortunate many who are

exposed to some or similar risk shares loss of the unfortunate. Insurance does not

protect the assets but only compensates the economic or financial loss.

In insurance the insured makes payment called premiums to an insurer, and in return

is able to claim a payment from the insurer if the insured suffers a defined type of loss.

This relationship is usually drawn up in a formal legal contract.

Insurance companies also earn investment profits, because they have the use of the

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premium money from the time they receive it until the time they need it to pay claims.

This money is called the float. When the investments of float are successful they may

earn large profits, even if the insurance company pays out in claims every penny

received as premiums. In fact, most insurance companies pay out more money than they

receive in premiums. The excess amount that they pay to policyholders is the cost of

float. An insurance company will profit if they invest the money at a greater return than

their cost of float.

An insurance contract or policy will set out in detail the exact circumstances under

which a benefit payment will be made and the amount of the premiums.

Classification of insurance

The insurance industry in India can broadly classified in two parts. They are.

1) Life insurance.

2) Non-life (general) insurance.

1) Life insurance:

Life insurance can be defined as life insurance provides a sum of money if the person

who is insured dies while the policy is in effect.

In 1818 British introduced to India, with the establishment of the oriental life insurance

company in Calcutta. The first Indian owned Life Insurance Company; the Bombay

mutual life assurance society was set up in 1870.the life insurance act, 1912 was the

first statuary measure to regulate the life insurance business in India. In 1983, the earlier

legislation was consolidated and amended by the insurance act, 1938, with

comprehensive provisions for detailed effective control over insurance. The union

government had opened the insurance sector for private participation in 1999, also

allowing the private companies to have foreign equity up to 26%. Following the

opening up of the insurance sector, 12 private sector companies have entered the life

insurance business.

Benefits of life insurance

Life insurance encourages saving and forces thrift.

It is superior to a traditional savings vehicle.

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It helps to achieve the purpose of life assured.

It can be enchased and facilitates quick borrowing.

It provides valuable tax relief.

Thus insurance is found to be very useful in the lives of the person both in short term

and long term.

Fundamental principles of life insurance contract;

1) Principle of almost good faith:

A positive duty to voluntary disclose, accurately and fully, all facts, material to the risk

being proposed whether requested or not.

2) Principle of insurable interest:

Relationships with the subject matter (a person) which is recognized in law and gives

legal right to insure that person.

2) Non-life (general) Insurance:

Triton insurance co. ltd was the first general insurance company to be established in

India in 1850, whose shares were mainly held by the British. The first general insurance

company to be set up by an Indian was Indian mercantile insurance co. Ltd., which wasstabilized in 1907. there emerged many a player on the Indian scene thereafter.

The general insurance business was nationalized after the promulgation of General

Insurance Corporation (GIC) OF India undertook the post-nationalization general

insurance business.

1. INDUSTRY PROFILE

1.1 Insurance in India

The insurance sector in India has come a full circle from being an open competitive

market to nationalization and back to a liberalized market again. Tracing the

developments in the Indian insurance sector reveals the 360 degree turn witnessed over

a period of almost two centuries.

1.2 A Brief history of the Insurance Sector

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The business of life insurance in India in its existing form started in India in the year

1818 with the establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance in India are;

1912: The Indian Life Assurance

For over 50 years, life insurance in India was defined and driven by only one company-

the Life Insurance Corporation of India (LIC). With the Insurance Regulatory and

Development Authority (IRDA) Bill 1999 paving the way for entry of private

companies into both life and general sectors there was bound to be new-found

excitement- and new success stories. Today, just three years since their entry, their

cumulative share has crossed 13% (source: IRDA), far exceeding expectations. Clearly

insurance is on a growth path.

The percentage of premium income to GDP which was just 2.3% in 2000-01 rose to

3.3% in 2002-03; and life insurance has emerged as the dominant contributor to this

growth.

The industry presented a huge opportunity. Life insurance penetration, for instance, was

at an abysmal 22% of the insurable population. However, private players have had to

rise to many challenges. They were faced with attitudinal barriers towards the category

and the perception that insurance was only a tax saving tool. Insurance per se had lost it

basic rationale: protection. It wasnt surprising then that its potential lay frozen and

unexploited. The challenge for private insurance players was to change the established

category driver and get customers to evaluate life insurance as an investment-cum-

protection tool.

1.3 Brief Review of Scenario Insurance

Insurance in India started without any Regulation in Nineteenth century.

It was story of a typical colonial era. A few British companies dominated

the market mostly in large urban centers.

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Insurance was nationalized mainly on 3 counts First, Indian lives were not insured.

Second, even if they were insured, they were treated as substandard lives and extra

premium was charged. Third, there were gross irregularities in the functioning of

Life insurance was nationalized in the year 1956, and then general insurance was

nationalized in the year 1972. In 1999, the private insurance companies were

allowed back again into insurance sector with maximum cap of 26 percent foreign

holding.

1818 The British introduce to India, with the establishment of the Oriental

Life Insurance company in Calcutta.

1850 Non life insurance debuts, with Triton Insurance Company.

1870 Bombay Mutual life Assurance Society is the first Indian-owned life

insurer

1907 Indian mercantile Insurance is the first Indian non-life insurer.

1912 The Indian life assurance companies act enacted to regulate the life

insurance business.

1938 The insurance act, which forms the basis for most current insurance

laws, replaces earlier act.

1956 Life insurance nationalized, government takes over 245 Indian and

foreign insurers and provident societies.

1956 Government sets up LIC

1972 Non life insurance nationalized, GIC set up.

1993 Malhotra committee, headed by former RBI governor R.N.Malhotra,

set up to draw up a blue print for insurance sector reforms.

1994 Malhotra Committee recommends re-entry of private players,

autonomy to PSU insurers.

1997 Insurance regulator IRDA (Insurance Regulatory and Development

Authority) set up.

2000 IRDA starts giving licensed to private insurers

2001 ICICI Prudential Life Insurance came into the market to sell a policy.

2002 Banks were allowed to sell insurance plans, as TPAs enter the scene,

insurers start settling non-life claims in the cashless mode.

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1.4 The Insurance Regulatory and Development Authority (IRDA):

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in

Parliament in December 1999. The IRDA since its incorporation as a statutory body in

April 2000 has fastidiously stuck to its schedule of framing regulations and registering

the private sector insurance companies.

The other decisions taken simultaneously to provide the supporting systems to the

insurance sector and in particular the life insurance companies were the launch of the

IRDAs online service for issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has also ensured that the

insurance companies would have a trained workforce of insurance agents in place to sell

their products, which are expected to be introduced by early next year.

Since being set up as an independent statutory body the IRDA has put in a framework

of globally compatible regulations. In the private sector 12 life insurance and 6 general

insurance companies have been registered.

With the demographic changes and changing life styles, the demand for insurance

cover has also evolved taking into consideration the needs of prospective

policyholder for packaged products. There have been innovations in the types of

products developed by the insurers, which are relevant to the people of different agegroups, and suit their requirements. Continued innovations in product development has

resulted in a wide range of flexible products to meet the requirements for cover at

different stages of life -today a variety of products are available ranging from traditional

to Unit linked providing protection towards child, endowment, capital guarantee,

pension and group solutions. A number of new products have been introduced in the life

segment with guaranteed additions, which were subsequently withdrawn/toned down;

single premium mode has been popularized; unit linked products; and add-on/riders

inc lu ding accidental death; dismemberment, critical illness, fixed term assurance

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risk cover, group hospital and surgical treatment, hospital cash benefits, etc.

Comprehensive packaged products have been popularized with features of endowment,

money back, whole life, single premium, regular premium, rebate in premium for higher

sum assured, premium mode rebate, etc., together with riders to the base products.

1.5 Historical Perspective

Prior to 1956 -242 companies operating

1956 -Nationalization- LIC monopoly player -Government control

2001 -Opened up sector

1.6 Contribution to Indian Economy

Life Insurance is the only sector which garners long term savings.

Spread of financial services in rural areas and amongst socially less privileged.

Long term funds for infrastructure.

Strong positive correlation between development of capital markets and

insurance/pension structure.

Employment generation.

1.7 Insurance Industry prior to de-regulation

Prior to deregulation in 2000, market was a public monopoly.

Public Monopoly

- 2000 Offices

- Over 800,000 agents

Distribution through tied agents only

Sales approach primarily on a tax savings platform

Traditional style product offering : Endowment and money back plans

Inadequate and inflexible products

Pensions: Small part of product offer

Limited focus on customer needs

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Types of insurance companies

Insurance companies may be classified as

Life insurance companies, who sell life insurance, annuities and pensions

products.

Non-life orgeneralinsurance companies, who sell other types of insurance.

In most countries, life and non-life insurers are subject to different regulations, tax and

accounting rules. The main reason for the distinction between the two types of company

is that life business is very long term in nature coverage for life assurance or a

pension can cover risks over many decades. By contrast, non-life insurance cover

usually covers a shorter period, such as one year.

Insurance companies are generally classified as eithermutualorstockcompanies. This

is more of a traditional distinction as true mutual companies are becoming rare. Mutual

companies are owned by the policyholders, while stockholders, (who may or may not

own policies) own stock insurance companies.

Reinsurance companies are insurance companies that sell policies to other insurance

companies, allowing them to reduce their risks and protect themselves from very large

losses. The reinsurance market is dominated by a few very large companies, with huge

reserves.

Captive Insurance companies may be defined as limited purpose insurance companies

established with the specific objective of financing risks emanating from their parent

group or groups. This definition can sometimes be extended to include some of the risks

of the parent company's customers.

In short terms, it is an in-house self-insurance vehicle. Captives may take the form of a

"pure" entity (which is a 100% subsidiary of the self-insured parent company); of a

"mutual" captive (which insures the collective risks of industry members); and of an

"association" captive (which self-insures individual risks of the members of a

professional, commercial or industrial association).

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Size of global insurance industry

Global insurance premiums grew by 9.7% in 2004 to reach $3.3 trillion. This follows

11.7% growth in the previous year. Life insurance premiums grew by 9.8% during the

year due to rising demand for annuity and pension products. Non-life insurance

premiums grew by 9.4% as premium rates increased. Over the past decade, global

insurance premiums rose by more than a half as annual growth fluctuated between 2%

and 10%..

Financial viability of insurance companies

Financial stability and strength of the insurance company should be a major

consideration when purchasing an insurance contract. An insurance premium

paid currently provides coverage for losses that might arise many years in the future.

For that reason, the viability of the insurance carrier is very important. In recent years, a

number of insurance companies have become insolvent, leaving their policyholders

with no coverage (or coverage only from a government-backed insurance pool with less

attractive payouts for losses). A number of independent rating agencies, such as Best's,

provide information and rate the financial viability of insurance companies.

Health insurance

Health insurance, which is coverage for individuals to protect them against medical

costs, is a highly charged and political issue in the United States, which does not have

socialized health coverage. In theory, the market for health insurance provision should

function in a manner similar to other insurance coverage, but the skyrocketing cost of

health coverage has disrupted markets around the globe, but perhaps most glaringly in

the U.S. Please see health insurance for a discussion of this category.

Dental insurance

Dental insurance, like health insurance, is coverage for individuals to protect them

against dental costs. Dental insurance usually goes hand-in-hand with health insurance,

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with most people in the United States receiving it included in their health insurance plan

from their employer. Along with receiving dental insurance from your employer, there

are ways to receive dental insurance through resellers and companies for individuals

and families; although this way tends to be too expensive for most people.

2. COMPANY PROFILE

ICICI Prudential Life Insurance Company Limited (the Company) a joint venture

Between ICICI Bank Limited and Prudential plc of UKwas incorporated on July 20,

2000 as a company under the Companies Act, 1956 (the Act). The Company is

licensed by the Insurance Regulatory and Development Authority (IRDA) for carryinglife insurance business in India.

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a

premier financial powerhouse and prudential plc, a leading international financial

services group headquartered in the United Kingdom (UK). The company brings

together the local market expertise and financial strength of ICICI Bank and

Prudentials International life insurance experience. The company was granted a

certificate of Registration by the IRDA on November 24, 2000 and eighteen days later,

issued its first policy on December 12. ICICI Prudential was amongst the first private

sector insurance companies to begin operations in December 2000 after receiving

approval from Insurance Regulatory Development Authority (IRDA).

From its early days, ICICI Prudential seemed to have the wherewithal for a large-scale

business. By March 31, 2002, a little over a year since its launch, the company had

issued 100,000 policies translating into premium income of approximately Rs. 1,200million on a sum assured of over Rs.23 billion. When the company began its operations,

the need was to build a brand that was relatable to, symbolized trust and was easily

recognized and understood. It launched a corporate campaign ICICI Prudential also

made using the theme of Sindoor to epitomize protection, trust, togetherness and all

that is Indian; endearing itself to the masses. The success of the campaign, the calling

card of the company saw the brand awareness scores almost at par with its 40 year old

competitor. The theme of protection was also extended to subsequent product and

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category specific campaigns from child plans to retirement solutions which highlight

how the company will be with its customers at every step of life.

From day one, the company has unflinchingly focused on being mass-market player,

developing products, creating a distribution network and deploying resources that

would further its goal. Apart from ramping up thoroughly training its advisors, the

company has twelve Bancasurance partners the largest in the country. It swiftly

revised and added to its initial range of products, pioneering market-linked products and

pension plans, to offer customers the most flexible life insurance policies in the country.

In February 2004, ICICI Prudential increased its capital base by Rs. 500 million, its

ninth capital hike, bringing the total paid up equity capital to Rs. 6,750 million. With

the authorized capital of the company standing at Rs. 12 billion, ICICI Prudential

continues to have the highest

capital base amongst all life insurers in the country. The challenge ICICI Prudential

now faces is to retain its top-notch position and continue to deliver the finest life

insurance and pension solutions to its ever-growing customer base.

ICICI Prudentials equity base stands at Rs. 1185 crore with ICICI Bank and Prudential

plc holding 74% and 26% stake respectively. For the year ended March 31, 2006, the

company garnered Rs.2, 412 crore of weighted new business premium and wrote

837,963 policies. The sum assured in force stands at Rs.45, 888 crore. The company has

a network of over 72,000 advisors; as well as 9 bancasurance partners and over 200

corporate agent and broker tie-ups.

ICICI Prudential is also the only private life insurer in India to receive a National

Insurer Financial Strength rating of AAA (Ind) from Fitch ratings. The AAA rating isthe highest credit rating, and is a clear assurance of ICICI Prudentials ability to meet its

obligations to customers at the time of maturity or claims.

For the past five years, ICICI Prudential has retained its position as the No.1 private

insurer in the country, with a wide range of flexible products that meet the needs of the

Indian customer at every step in life.

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Beginning operations in December 2000, ICICI Prudentials success has been meteoric,

becoming the number one private life insurer within months of launch. Today, it has

one of the largest distribution networks amongst private life insurers in India, with

branches in 54 cities. The total number of policies issued stands at more than 780,000

with a total sum assured in excess of Rs.160 billion.

ICICI Prudential closed the financial year ended march 31, 2004 with a total received

premium income of Rs. 9.9 billion; up 135% last years total premium income of

Rs.4.20 billion. New business premium income shows a 106% growth at Rs. 7.5 billion,

driven mainly by the companys range of unique unit-linked policies and pension plans.

The companys retail market share amongst private companies stood at 36%, making it

clear leader in the segment. To add to its achievements, in the year 2003/04 it was

adjudged Most Trusted Private Life Insurer (Economic Times Most Trusted Brand

Survey by AC Nielsen ORG-MARG). It was also conferred the Outlook Money-Best

Life Insurer award for the second year running. The company is also proud to have

won Silver at EFFIES 2003 for its Retire from work, not life campaign. Notably,

ICICI Prudential was also short-listed to the final round for its Sindoor campaign in

EFFIES 2002.

ICICI Prudentials success is rooted in its philosophy to always offer the customer a

choice. This has been the driving force behind its multi-channel distribution strategy,

which includes advisors, banks, direct marketing and corporate agents. In fact, ICICI

Prudential was the first life insurer to invest in multiple channels and offer the customer

choice and access; thus reducing dependency on any one channel, great strides in the

retirement solutions and pensions market.

The Companys penetration of the retirement market was driven by the focused

approach towards creating awareness through sustained campaign; Retire from work,

not life. Within six months, the campaign rewarded ICICI Prudential with an increased

share of 23% of the total pensions market and 78% amongst private players. ICICI

Prudential has one of the largest distribution networks amongst private life insurers in

India, having commenced operations in 132 cities and towns in India, stretching from

Bhuj in the west to Guwahati in the east, and Jammu in the north to Trivandrum in the

south.

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The company has 9 bank partnerships for distribution, having agreements with ICICI

Bank, Bank of India, Federal Bank, South Indian Bank, Lord Krishna Bank, and some

co-operative banks, as well as over 200 corporate agents and brokers, it has also tied up

with NGOs, MFIs and corporate for the distribution of rural policies.

ICICI Prudential has recruited and trained more than 72,000 insurance advisors to

interface with and advise customers. Further, it leverages its state-of-the-art IT

infrastructure to provide superior quality of service to customers.

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1.1 ORGANISATION CHART

ORGANISATION CHART

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1.2 SWOT ANALYSIS

SWOT ANALYSIS

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Strength

1. ICICI Prudential is the 1stlife insurance company to introduce UNITLINKED,

PENSION PRODUCTS AND LIFE TIME it can get the pioneer advantage.

2. Prudential is the 156 year old company founded in 1848 so it has full fledge

experience in this industries.

3. ICICI enjoys a rating with the Moodys which is higher than the severing rating.48

4. Large distribution channel with 30 branches and more than 30,000financial advisors.

5. ICICI Prudential has the best incentives which motivate and encourage the advisors

to work and fulfill the commitment.

6. The financial condition of both companies is very sound.

7. Good customer has service.

8. Company has created a brand name.

Weaknesses

1. It has to do operation with in the boundary of IRDA.

2. Up till now no more option of product for middle class offered by ICICI prudential

life insurance.

3. No option in rural area.

4. Yet to build a strong distribution network in the market.

Opportunity

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1. Today ICICI prudential covers 40% market so yet there is a great potentiality to

increase market share.

2. Insurance plan like pension plan, child plan & investment plan of ICICI prudential

go good response from the market. So in future company can take benefit for it.

3. The brand name that creates ICICI prudential and awareness level of it is

comparatively quite higher than competition. So it will be helpful in future while

lunching new innovation products

.4.Untapped market of India.

Threats

1 . . It is a private company so there is a doubt about solvency & liquidity among

the general people.

2. Change in the environmental factors may effects the company.

3. The GOVT. policies and the annual budget may effect the insurance market.

4. Large distribution network of LIC and trust of people in LIC.

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CHAPTER NO: 2

Introduction

About

Project Topic

INTRODUCTION OF MUTUAL FUNDS

There are a lot of investment avenues available today in the financial market for an

investor with an investable surplus. He can invest in Bank Deposits, Corporate

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Debentures, and Bonds where there is low risk but low return. He may invest in Stock

of companies where the risk is high and the returns are also proportionately high. The

recent trends in the Stock Market have shown that an average retail investor always lost

with periodic bearish tends. People began opting for portfolio managers with expertise

in stock markets who would invest on their behalf. Thus we had wealth management

services provided by many institutions. However they proved too costly for a small

investor. These investors have found a good shelter with the mutualfunds.

CONCEPT OF MUTUAL FUND

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

contributions that are to be invested in accordance with a stated objective. Theownership of the fund is thus joint or mutual; the fund belongs to all investors. A

single investors ownership of the fund is in the same proportion as the amount of the

contribution made by him or her bears to the total amount of the fund Mutual Funds are

trusts, which accept savings from investors and invest the same in diversified financial

instruments in terms of objectives set out in the trusts deed with the view to reduce the

risk and maximize the income and capital appreciation for distribution for the members.

A Mutual Fund is a corporation and the fund managers interest is to professionally

manage the funds provided by the investors and provide a return on them after

deducting reasonable management fees. The objective sought to be achieved by Mutual

Fund is to provide an opportunity for lower income groups to acquire without much

difficulty financial assets. They cater mainly to the needs of the individual investor

whose means are small and to manage investors portfolio in a manner that provides a

regular income, growth, safety, liquidity and diversification opportunities.

DEFINITION OF MUTUAL FUND

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Mutual funds are collective savings and investment vehicles where savings of small

(or

Sometimes big) investors are pooled together to invest for their mutual benefit and

returns Distributed proportionately.A mutual fund is an investment that pools your

money with the money of an unlimited number of other investors. In return, you and the

other investors each own shares of the fund. The fund's assets are invested according to

an investment objective into the fund's portfolio of investments. Aggressive growth

funds seek long-term capital growth by investing primarily in stocks of fast-growing

smaller companies or market segments. Aggressive growth funds are also called capital

appreciation funds.

Why Select Mutual Fund?

The risk return trade-off indicates that if investor is willing to take higher risk then

correspondingly he can expect higher returns and vice versa if he pertains to lower risk

instruments, which would be satisfied by lower returns. For example, if an investors opt

for bank FD, which provide moderate return with minimal risk. But as he moves ahead

to invest in capital protected funds and the profit-bonds that give out more return which

is slightly higher as compared to the bank deposits but the risk involved also increasesin the same proportion. Thus investors choose mutual funds as their primary means of

investing, as Mutual funds provide professional management, diversification,

convenience and liquidity. That doesnt mean mutual fund investments risk free.

This is because the money that is pooled in are not invested only in debts funds which

are less riskier but are also invested in the stock markets which involves a higher risk

but can expect higher returns. Hedge fund involves a very high risk since it is mostly

traded in the derivatives market which is considered very volatile.

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THE CYCLE OF INVESTMENT IN MUTUAL FUNDS

HISTORY OF MUTUAL FUNDS IN INDIA

27

MOBILIZATION OF SERVICES

SAVINGINVESTMENT

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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 history of

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

FIRST PHASE

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 corers of assets under

management.

SECOND PHASE (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 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 corers.

THIRD PHASE (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 a revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996.

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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 cores. The Unit Trust of India with Rs.44, 541 cores of assets under

management was way ahead of other mutual funds.

FOURTH PHASEIn 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 corers 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. 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 corers 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 corers under

421 schemes.

ADVANTAGES OF MUTUAL FUNDS

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If mutual funds are emerging as the favorite investment vehicle, it is because of the

many advantages they have over other forms and the avenues of investing, particularly

for the investor who has limited resources available in terms of capital and the ability to

carry out detailed research and market monitoring. The following are the major

advantages offered by mutual funds to all investors:

Portfolio Diversification

Each investor in the fund is a part owner of all the funds assets, thus enabling him to

hold a diversified investment portfolio even with a small amount of investment that

would otherwise require big capital.

Professional Management

Even if an investor has a big amount of capital available to him, he benefits from the

Professional management skills brought in by the fund in the management of the

investors portfolio. The investment management skills, along with the needed research

into available investment options, ensure a much better return than what an investor can

manage on his own. Few investors have the skill and resources of their own to succeed

in todays fast moving, global and sophisticated markets.

Reduction/Diversification of Risk

When an investor invests directly, all the risk of potential loss is his own, whether he

places a deposit with a company or a bank, or he buys a share or debenture on his own

or in any other from. While investing in the pool of funds with investors, the potential

losses are also shared with other investors. The risk reduction is one of the most

important benefits of a collective investment vehicle like the mutual fund.

Reduction of Transaction Costs

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What is true of risk as also true of the transaction costs. The investor bears all the costs

of

Investing such as brokerage or custody of securities. When going through a fund, he has

the benefit of economies of scale; the funds pay lesser costs because of larger volumes,

a benefit passed on to its investors.

Liquidity

Often, investors hold shares or bonds they cannot directly, easily and quickly sell.

When they invest in the units of a fund, they can generally cash their investments any

time, by selling their units to the fund if open-ended, or selling them in the market if the

fund is close-end. Liquidity of investment is clearly a big benefit.

Convenience and Flexibility

Mutual fund management companies offer many investor services that a direct market

investor cannot get. Investors can easily transfer their holding from one scheme to the

other; get updated market information and so on.

Tax Benefits

Any income distributed after March 31, 2002 will be subject to tax in the assessment of

all Unit holders. However, as a measure of concession to Unit holders of open-ended

equity oriented funds, income distributions for the year ending March 31, 2003, will be

taxed at a concessional rate of 10.5%.In case of Individuals and Hindu Undivided

Families a deduction up to Rs. 9,000 from the Total Income will be admissible in

respect of income from investments specified in Section 80L,Wealth-Tax and Gift-Tax.

Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated:

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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.

Transparency:

You get regular information on the value of your investment in addition to disclosure on

the specific investments made by your scheme, the proportion invested in each class of

assets and the fund manager's investment strategy and outlook.

DISADVANTAGES OF MUAUAL FUNDS

No Control over Costs

An investor in a mutual fund has no control of the overall costs of investing. The

investor pays investment management fees as long as he remains with the fund, albeit in

return for the professional management and research. Fees are payable even if the value

of his investments is declining. A mutual fund investor also pays fund distribution costs,

which he would not in curing direct investing. However, this shortcoming only means

that there is a cost to obtain the mutual fund services.

No Tailor-Made Portfolio

Investors who invest on their own can build their own portfolios of shares and bonds

and other securities. Investing through fund means he delegates this decision to the fund

managers. The very-high-net-worth individuals or large corporate investors may find

this to be a constraint in achieving their objectives. However, most mutual fund

managers help investors overcome this constraint by offering families of funds- a large

number of different schemes- within their own management company. An investor can

choose from different investment plans and constructs a portfolio to his choice.

Managing a Portfolio of Funds

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Availability of a large number of funds can actually mean too much choice for the

investor. He may again need advice on how to select a fund to achieve his objectives,

quite similar to the situation when he has individual shares or bonds to select.

The Wisdom of Professional Management

That's right, this is not an advantage. The average mutual fund manager is no better at

picking stocks than the average nonprofessional, but charges fees.

No Control

Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat

of somebody else's car.

Dilution

Mutual funds generally have such small holdings of so many different stocks that

insanely great performance by a fund's top holdings still doesn't make much of a

difference in a mutual fund's total performance.

Buried Costs

Many mutual funds specialize in burying their costs and in hiring salesmen who do not

make those costs clear to their clients.

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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. thus mutual funds has Variety of

flavors, Being a collection of many stocks, an investors can go for picking a mutual

fund might be easy. There are over hundreds of mutual funds scheme to choose from. It

is easier to think of mutual funds in categories, mentioned below:

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A). BY STRUCTURE

1. Open - Ended Schemes

An open-end fund is one that is available for subscription all through the year. These do

not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset

Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes

Closed-end fund has a stipulated maturity period which generally ranging from 3 to 15

years. The fund is open for subscription only during a specified period. Investors can

invest in the scheme at the time of the initial public issue and thereafter they can buy or

sell the units of the scheme on the stock exchanges where they are listed. In order to

provide an exit route to the investors, some close-ended funds give an option of selling

back the units to the Mutual Fund through periodic repurchase at NAV related prices.

SEBI Regulations stipulate that at least one of the two exit routes is provided to the

investor.

3. Interval Schemes

Interval Schemes are that scheme, which combines the features of open-ended and

close- ended schemes. The units may be traded on the stock exchange or may be open

for sale or redemption during pre-determined intervals at NAV related prices.

B). BY NATURE

1. Equity Fund

These funds invest a maximum part of their corpus into equities holdings. The structure

of the fund may vary different for different schemes and the fund managers outlook on

different stocks. The Equity Funds are sub-classified depending upon their investment

objective, as follows:

Diversified Equity Funds

Mid-Cap Funds

Sector Specific Funds

Tax Savings Funds (ELSS)

2. Debt Funds

The objective of these Funds is to invest in debt papers. Government authorities, private

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Companies, banks and financial institutions are some of the major issuers of debt

papers. By investing in debt instruments, these funds ensure low risk and provide stable

income to the investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly known

as

Government of India debt papers. These Funds carry zero Default risk but are

associated with Interest Rate risk. These schemes are safer as they invest in papers

backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds,

corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take

minimum exposure in equities. It gets benefit of both equity and debt market. These

scheme ranks slightly high on the risk-return matrix when compared with other debt

schemes.

Short Term Plans (STPs)

Meant for investment horizon for three to six months. These funds primarily invest in

short-term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).

Some portion of the corpus is also invested in corporate debentures.

Liquid Funds:

Also known as Money Market Schemes, These funds provides easy liquidity and

preservation of capital. These schemes invest in short-term instruments like Treasury

Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-

term cash management of corporate houses and are meant for an investment horizon of

1day to 3 months. These schemes rank low on risk-return matrix and are considered to

be the safest amongst all categories of mutual funds

3. Balanced Funds

As the name suggest they, are a mix of both equity and debt funds. They invest in both

equities and fixed income securities, which are in line with pre-defined investment

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objective of the scheme. These schemes aim to provide investors with the best of both

the worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment

parameterize,Each category of funds is backed by an investment philosophy, which is

pre-defined in the objectives of the fund. The investor can align his own investment

needs with the funds objective and invest accordingly.

C). BY INVESTMENT OBJECTIVE

Growth Schemes

Growth Schemes are also known as equity schemes. The aim of these schemes is to

provide capital appreciation over medium to long term. These schemes normally invest

a major part of their fund in equities and are willing to bear short-term decline in value

for possible future appreciation.

Income Schemes

Income Schemes are also known as debt schemes. The aim of these schemes is to

provide

Regular and steady income to investors. These schemes generally invest in fixed

income securities such as bonds and corporate debentures. Capital appreciation in such

schemes may be limited.

Balanced Schemes

Balanced Schemes aim to provide both growth and income by periodically distributing

a part of the income and capital gains they earn. These schemes invest in both shares

and fixed income securities, in the proportion indicated in their offer documents

(normally 50:50).

Money Market Schemes

Money Market Schemes aim to provide easy liquidity, preservation of capital and

moderate income. These schemes generally invest in safer, short-term instruments, such

as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

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Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time you

buy or sell units in the fund, a commission will be payable. Typically entry and exit

loads range from1% to 2%. It could be worth paying the load, if the fund has a good

performance history.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no

Commission is payable on purchase or sale of units in the fund. The advantage of a no

load fund is that the entire corpus is put to work.

OTHER SCHEMES

Tax Saving Schemes

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from

time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity

Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes

Index schemes attempt to replicate the performance of a particular index such as the

BSE

Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks

that constitute the index. The percentage of each stock to the total holding will be

identical to the stocks index weight age. And hence, the returns from such schemes

would be more or less equivalent to those of the Inde

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Sector Specific Schemes

These are the funds/schemes which invest in the securities of only those sectors or

industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast

Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these fundsare dependent on the performance of the respective sectors/industries. While these

funds may give higher returns, they are more risky compared to diversified funds.

Investors need to keep a watch on theperformance of those sectors/industries and mustexit at an appropriate time.

MUTUAL FUND INDUSTRY

An Overview

The mutual fund industry in india began with the setting up of the Unit Trust of

india (UTI) in 1963 by the Government of India. Till the year 2000, UTI has grown to

be a dominant player in the industry with the assets of over Rs. 76,547 crores as of

March 31, 2000. the UTI is governed by a special legislation, the Unit Trust of India

Act, 1963. in 1987 public sector banks and insurance companies were permitted to set

up mutual funds. Also the two insurance companies LIC and GIC established mutual

funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund

(Regulation) 1993, which for the first time established a comprehensive regulatory

framework for the mutual fund industry. Since then several mutual funds have been set

up by the private and the joint sectrors.

Growth of Mutual Funds

The Indian Mutual Fund has passed through three phases. The first phase was

between 1964 and 1987 and the only player was the Unit Trust of India, which had a

total assets of Rs. 6700 crores at the end of 1988. The second phase is between 1987

and 1993 in which period 8 funds were established (6 by banks and one each by LIC

and GIC). The total assets under management had grown to rs. 61028 crores at the end

of 1994 and the number of schemes were 167.

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INTRODUCTION

The third phase began with the entry of private and foreign sectors in the Mutual

Fund industry in 1993. Kothari Pioneer Mutual Fund was the first fund to be

established the private sector in association with a foreign fund. At the end of financial

year 2000 (31st March) funds were functioning with Rs. 113005 crores as total assets

under management. As on August end 2000 there were 33 funds with 391 schemes and

assets under management with Rs. 102849 crores.

As you probably know, mutual funds have become extremely popular over the

last 20 years. What was once just another obscure financial instrument is now a part of

our daily lives. More than 80 million people, or one half of the households in America,

invest in mutual funds That means that, in the United States alone, trillions (yes, with a

"T") of dollars are invested in mutual funds.

In fact, to many people, investing meaying mutual funds. After all, it's common

knowledge that incesting in mutual funds is (or at least should be) better than simply

letting your cash waste away in a savings account, but, for most people, that's where the

understanding of funds ends. It doesn't help that mutual fund salespeople speak a

strange language that, sounding sort of like English, is interspersed with jargon like

MER, NAVPS, load/no-load, etc.

Originally mutual funds were heralded as a way for the little guy to get a piece of

the market. Instead of spending all your free time buried in the financial pages of the

Wall Street Journal, all you have to do is buy a mutual fund and you'd be set on your

way to financial freedom. As you might have guessed, it's not that easy. Mutual fundsare an excellent idea in theory, but, in reality, they haven't always delivered. Not all

mutual funds are created equal, and investing in mutuals isn't as easy as throwing your

money at the first salesperson who solicits your business.

Trend in Mutual Funds Industry

The Indian Mutual fund industry, despite all that has been said about it is still in

a nascent stage and has extremely bright future ahead. The industry is still one-tenth

size of the banking deposits in the country.

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The private sector mutual fund industry in its resent avatar is barely 7 years

old. The total asset under management over the past 4 to 5 tears has almost remain

stagnant around the Rs 100, 000 crore mark.

This has put a question mark in front of the claims that mutual funds are

growing part of the financial savings and planning industry in India. It holds scope for

growth. In India this industry began with the setting up of the Unit Trust Of India

(UTI) in 1964 by the government of India in order to mobiles small saving. During the

past 37 years, UTI has grown to be a dominant player in the industry with assets with

over Rs 76,547 crore as of March2000. However, trouble hit UTI has lost its dominant

position in the industry and the asset under management has slipped drastically to Rs

46,396 crore.

Private sector mutual funds, which were permitted along with foreign partners in

1993, now enjoy a dominant position in the country. Kothari Pioneer Mutual fund was

the first fund to be established in the private sector with foreign fund. The private

sector now controls around RS 45,818 crore assets under management, almost half the

size of the industry.

The mutual fund industry has become a fastest growing sector in the countrys

capital and financial market with an average compounded growth rate of 20 percent

over the past five years. This is despite increasing competition with more than 30 asset

management companies for investors money. As on June 2002, the industry has Rs

100,703 crore asset under management spread across 36 funds with more than 390

schemes.

Exchange Board of India (SEBI) came out with comprehensive regulation in 1993,

which defined the structure of the mutual fund and asset management, Companies for

the first time. The industry is in the process of evolving into a bigger and better

investment medium for all market segment, Say Kavita Hurry, CEO ING Investment

Management, further, currently, ING Investments manages around Rs.364 crore as on

June 2002.

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Drastic Transformation:

The industry is undergoing a transformation and is witnessing large number of

mergers, acquisitions and takeovers in the schemes and asset management companies.

Mutual fund products are competing with the banks deposits, Reserves Banks of India

(RBI) bonds, pension funds and post offices schemes that provide not only guaranteed

return but also tax-free returns. However, mutual funds are unable to provide assured

return since they are investing in financial markets and returns from them are, by

definition, uncertain. These transformation benefiting the investor friendly open-ended

schemes, increasing the range of funds to choose from, enhanced transparency and

improvement regulation.

Market Trends:

A lone UTI with just one scheme in 1964 now competes with as many as 400

odd products and 34 players in the market. In spite of the stiff competition and losing

market share, UTI still remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the

industry. New players have come in, while others have decided to close shop by either

selling off or merging with others. Product innovation is now pass with the game

shifting to performance delivery in fund management as well as service. Those directly

associated with the fund management industry like distributors, registrars and transfer

agents, and even the regulators have become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI

has always been a dominant player on the bourses as well as the debt markets, the new

generations of private funds, which have gained substantial mass, are now seen flexing

their muscles. Fund managers by their selection criteria for stocks have forced

corporate governance on the industry. By rewarding honest and transparent

management with higher valuations, a system of risk-reward has been created where the

corporate sector is more transparent then before.

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Funds have shifted their focus to the recession free sectors like pharmaceuticals,

FMCG and technology sector. Funds performances are improving. Funds collection,

which averaged at less than Rs100bn per annum over five-year period spanning 1993-

98 doubled to Rs210bn in 1998-99. In the current year mobilization till now have

exceeded Rs300bn. Total collection for the current financial year ending March 2000 is

expected to reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has been by the

private sector mutual funds rather than public sector mutual funds. Indeed private MFs

saw a net inflow of Rs. 7819.34 crore during the first nine months of the year as against

a net inflow of Rs. 604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in the race for

retail investors savings and corporate float money. The power shift towards mutual

funds has become obvious. The coming few years will show that the traditional saving

avenues are losing out in the current scenario. Many investors are realizing that

investments in savings accounts are as good as locking up their deposits in a closet.

The fund mobilization trend by mutual funds in the current year indicates that money is

going to mutual funds in a big way. The collection in the first half of the financial year

1999-2000 matches the whole of 1998-99.

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ASSET MANAGEMENT COMPANIES

I 1 UTI Asset Management Co. Ltd.

II BANK SPONSORED

1 BOB Asset Management Services Ltd.

2 Canbank Investment Management Services Ltd.

3 PNB Asset Management Co. Ltd.

4 SBI Funds Management Ltd.

III INSTITUTIONS

1 GIC Asset Management Co Ltd;

2 Idbi Principal Asset Management Co. Ltd.

3 IL & FS Asset Management Co. Ltd.

4 Jeevan Bima Sahayoog Asset Management Co. Ltd.

IV PRIVATE SECTOR

1 Benchmark Asset Management co. Ltd.

2 Cholamandalam Asset Management Co. Ltd.

3 Escorts Asset Management Ltd.

4 J.M.Capital Management Pvt. Ltd.

5 Kotak Mahindra Asset Management Co. Ltd.

6 Reliance Capital Asset Management Ltd.

7 Sundaram Asset Management Company Ltd.

V JOINT VENTURES-PREDOMINANTLY INDIAN

1 Birla Sun Life Asset Management Co. Ltd.

2 Credit Capital Asset Management Co. Ltd.

3 DSP Merrill Lynch Fund Managers Ltd.

4 First Indian Management Private Ltd.

5 HDFC Asset Management Co. Ltd.

6 Tata TD Waterhouse Asset Management Private Ltd.

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VI JOINT VENTURES-PREDOMINANTLY FOREIGN

1 Alliance Capital Asset Management (India) Pvt. Ltd.

2 Deutsche Asset Management (India) Pvt. Ltd.

3 Dundee Investment management & Research (Pvt.) Ltd.

4 HSBC Asset Management (India) Pvt. Ltd.

5 ING Investment Management (India) Pvt. Ltd.

6 Morgan Stanley Dean Writer Investment Management Pvt. Ltd.

7 Prudential ICICI Asset management Co. Ltd.

8 Standard Chartered Asset Management Co. Pvt. Ltd.

9 Sun F & C Asset Management (India) Pvt. Ltd.

10 Templeton Asset Management (India) Pvt. Ltd.

11 Zurich Asset Management Co. (India) Pvt. Ltd.

VALUE CHAIN

As a business organisation, a mutual fund management company or fund

complex (firm) undertakes a series of activities designed to generate value ofr its

customers. By arraying a firms strategically important activities, one can construct a

firms value chain representation. This analytic tool has been advanced by Micheael

Porter. In grouping a firms activities the analyst must consider the manner in which

the economies of various activities differ and how rivals distinguish themselves on the

basis of these activities. We identify five links in the value chain for a typical mutual

fund, as shown in the figure (previous page).

The first activity is the investment selection. Mutual funds implement their

investments strategy through their selection of security holdings. Funds vary in the

amount of latitude they grant to portfolio managers. Investments may be dectated

completely by fund charter, as is done in an S& P 500 index fund,or security selection

may be left completely to the fund managers discretion, as in a growth fund. To

support this function, funds require research which may be conducted in-house or

purchased from vendors either with cash or with soft-dollar payment from brokers.

The next activity is trading and execution. Once the decision has been made

to buy or sell a particular security, a trade must be executed in the capital markets. This

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process involves not only getting the best price for the security, but also administering

backoffice functions such as custodial servies. This particular link in the chain may

seem minor at first glance, trading and execution expertise are increasingly being

recognised as critical activities.

The third item in the chain is customer record keeping and reporting. This

refers to the tasks performed by transfer agents and to the activities and resources

required to produce periodic statements for funds share holders.

The fourth activity, marketing and distribution, describes how the funds

communicate with potential customers and sell their products. Traditionally, open-

ended mutual funds were categorized as either no-laid funds used print and electronic

media, word of mouth, and mailing to appeal to consumers directly whereas load funds

hired sales people to market and sell their products. To pay the sales people, load funds

charged customers one-time fees, called loads.

The final activity in our value chain is investor liquidity services. By this we

mean the activities funds undertake to permit investors to switch among various

investment or to liquidate portfolios.

SYSTEMATIC PORTFOLIO MANAGEMENT

The goal of portfolio management is to assemble various securities and other

assets into portfolios that address investor needs and then to manage those protfolios so

as to achieve investment objectives. The investors needs are defined in term of risk,

and the portfolio manager maximizes return for investment undertaken.

Asset allocation

Security selection within asset classes asset allocation can best be characterized

as the blending together of major asset classes to obtain the highest long-run return at

the lowest risk. Managers can make opportnistic shifts in asset class weightings in

order to improve return prospects over the long-term objective. Also managers can

improve return prospects by selecting securities that have above average expected

return within the individual asset classes.

Investment managers

Multitudes of investment management organization offer portfolio management

services to clients including mutual funds. Investments organization differ not only in

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size and degree of specialization but also in their approaches to investment analysis and

portfolio management. On the whole, however the business portfolio management has

tended toward greater structure and discipline in the investment process and toward

greater use of systematic approaches to investing. Those organizations at the forefront

in implementing systematic approaches to portfolio management have gained market

share at the expense of other firms, in large part because they have been more effective

in addressing client needs and achieving investment objectives.

Participants

Several groups other than professional portfolio managers are important

participants in the portfolio management process.

In marketing the asset allocation decision, major portfolio investors employ the service

of investment management consultants. These are organizations that specialize in not

only advising on asset allocation but other critical aspects, such as setting of goal and

selection of investment managers.

Asset classes

Developing the appropriate asset allocation is a critical phase of the portfolio

management process.

Equities, bonds and money market instruments are major asset categories that are large,

are generally highly marketable and have tradionally been used extensively by longterm

portfolio investors.

Asset classes for portfolio investment

Corporates

Common stocks

Domestic equities

Large-capitalization

Small-capitalization

International equities

Major-country markets

Emerging markets

Bonds

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Government and agencies

AAA-rated

Highly-yield (junk) bonds

Mortgage-backed securities

International bonds

Money market instruments

Treasury bills

CDs and commercial paper

Guaranteed investment contracts

Real estate

Venture capital

The portfolio management industry has evolved over the last two decades into a

structure with several distinct groupings of highly professional participants. Although

the current structure differs from the past, the critical components of the investment

decision process remain the same. Investors need to establish goals and be aware of the

capital market tradeoff in developing an asset allocation that the best meets the return

target at an acceptable level.

There are three based areaswhich investing styles differ. All influence the risk,

returns and period of investment and involve finding a sport between the extremes that

suits the fund and investors the best.

Attitude: does it follow a top-down approach (first list industries or sectors for

investment and then select specific companies within these industries) or a bottom-up

approach (individual stocks which are likely to outperform the market are identified

first and only then study the industry or macro level factors)?

Intensity of management: is the scheme actively (review the portfolios regularly) or

passively (less intensely managed stocks)?

Distribution network:

The rapid accumulation in assets of mutual funds creates more challenges, most

important among them being the distribution network. For the long-term health of the

industry, it is crucial that investors who come into a fund come with a full

understanding of the risks involved in the investment. And distributors play an

important role in dissemination of such information. At present, the majority of funds

rely on branch network of banks in order to sell their products since the branch network

of most fund houses is restricted to a few cities.

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After-sales service:

In India typically the distributors role comes to an end as soon as the product is

sold to the investor. For subsequent transactions-redemption or switchovers-the

investors often has to get back to the fund itself. An investors interface with a fund

would be simpler if the whole range of services, from deciding on the right product to

processing the final redemption request, is handled by a singled entity.

BASIC MUTUAL FUND INVESTMENT INSTRUMENT

Mutual Funds are investing in 3 types of funds:

Stocks

Bonds

Money market instruments

Broadly, Mutual Funds invest basically in 3 types of asset classes.

1. Stocks:- Stocks represent ownership or equity in a company popularly known

as shares.

2. Bonds:- These represent debt from companies, financial institutions or

government agencies.

3. Money Market Instruments:- These include short term dent instrument such

as treasury bills, certificate of deposits, and inter bank call money.

Mutual Fund can be classified based on their objectives as:

Sector equity schemes:- These schemes invest in share of companies in as

specific sector.

Diversified equity schemes:- These schemes invest in shares and fixed income

of the economy of companies across different sectors.

Hybrid economy schemes:- These schemes invest in a mix shares and fixed

income instruments.

Income schemes:- These schemes invest in fixed income instruments such as

bonds issued by corporate and financial institutions, and government securities.

Money Market schemes:- These schemes invest in short term instrument

such as certificate of deposits, treasury bills and short term bonds.

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ANALYSIS OF MUTUAL FUND

Broadly the analysis categories in 3 types:

Fundamental analysis

Technical analysis

Beta/Modern portfolio theory (MPT)

FUNDAMENTAL ANALYSIS:

The analysis of such fundamental factor general business conditions,

industry outlook, earnings, dividends, quality of management etc.,

In this take consideration on the some following factors:-

1. Company net asset value.2. Estimation of True.

3. Value of profit earning ratio.

4. Estimating the market value of current and forecasting.

5. Compare with various ratios like US, UK.

6. Estimate the future yield dividends.

Stock rating:

The rating for common stock depends over the certain of dividend in take the

consideration followings.

1. Ingredients of security analysis.

2. It include historical data, sales, capital etc.,

Economic analysis:

1. Cyclic effect

2. Economic analysis (fashions)

Financial analysis:

1. EPS

2. EBIT

3. ROI

4. PAT

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Bond rating;

1. AAA high investment grade: Debentures rated AAA are judged tooffer highest safety of timely payment and interest and principles.

2. AA high safety: It is offer highest safety of timely payment and interest

and principles.

Investment grades

3. A adequate safety: Debentures rates A are judged offer highest safety

of timely payment and interest and principles.

4. BBB moderate safety BBB are judged to offer sufficient safety of timely

payment and interest and principles.

Speculative grade:

5. BB Inadequate safety: Debentures rated BB are judged to offer timely

payment and interest and principles.

6. B high risk

7. C substantial risk: Timely payment possible only in favorable

circumstances continues.

8. D- In default

BETA / MPT ANALYSIS

Analysis the responsiveness of the price of a particular company

stock to change in the value some market average.

TECHNICAL ANALYSIS:

An analysis of market based factors such as Stock price

movements, charts etc.,

TYPES OF MUTUAL FUND SCHEMES

BY STRUCTURE:

OPEN ENDED SCHEME

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CLOSED ENDED SCHEME

INTERVAL SCHEME

BY INVESTMENT OBJECTIVE:

GROWTH SCHEME

INCOME SCHEME

MONEY MARKET SCHEME

OTHER SCHEMES:

TAX SAVING SCHEME

SPECIAL SCHEME

INDEX SCHEME

Mutual Fund broadly classified into TWO categories:

1. Open Ended Scheme funds

2. Closed Ended Scheme funds

Now discuss details regarding above fund

OPEN - ENDED SCHEME FUND:

The concept of these funds is that the investors are free to enter or exit

the scheme at any point of time during the fund period. The investors can purchase/ sale

units of mutual fund through mutual fund trust. The prices at which the units are

purchased/ sold depend on the NAV of the fund. At that point of time as specified by

the funds. The NAV of fund is the current market value of their investments. Besides

the Net Asset Value, certain funds take an additional charge from the investors in the

form of Entry load or Exit load. Some Examples of Open Ended scheme funds are:

Templeton India Growth Fund.

PruICICI Discovery Fund.

Kotak Opportunities

Principal Dividend Yield Fund.

Reliance Growth Fund.

CLOSED ENDED SCHEME FUND:

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In the care of close ended fund, the investors have to look their funds

with the trust for particular periods of time as a specified y the terms of the offer. The

main problem for the investor is that they cannot move in out of the fund freely. In the

case of Closed Ended schemes the prices of the units are calculated in the same

manner as in the case of Open Ended schemes. However these schemes do not charge

an Entry/ Exit load as in the case of open ended scheme.

INTERVAL SCHEME FUND:

The concept of these funds is that the investors are free to Enter/ Exit the

scheme at any point of time during the fund period and the investors have to lock their

funds with the trust for a particular periods of time as a specified by the terms of the

offer.

GROWTH FUND:

It is primarily look for growth of capital such funds invests in shorter

with potential for growth and capital appreciation. They invest in well established

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

to have well long term growth potential and hence growth fund provide low current

income. Growth potential generally incurred higher risks than Income Fund, 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 offer to assume the risk of potential loss in value their

investment in the short term in the hope of achieving substantial and risings gains.

Eventually they are not suitable for investors who must conserve their

principal or who must maximize current income.

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GROWTH AND INCOME FUND:

Growth and Income funds seek long term growth of capital as well as

current income. The investment strategies used to reach there goals very among funds.

Some invest in a dual portfolio consisting of growth stock and income stocks, or a

combination of growth stocks paying high dividends preferred stock, convertible

securities or fixed income securities such as corporate bonds and money market

instruments.

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.

MONEY MARKET SCHEME:

It is invested only in high liquidity; 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.

LAW RELATING TO TAX SAVINGS U/S 80

B.Deductions in respect of certain payments

75[Deduction in respect of life insurance premia, deferred annuity, contributions to

provident fund, subscription to certain equity shares or debentures, etc.

7680C. 77(1) In computing the total income of an assessee, being an individual or a

Hindu undivided family, there shall be deducted, in accordance with and subject to the

provisions of this section, the whole of the amount paid or deposited in the previous

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year, being the aggregate of the sums referred to in sub-section (2), as does not exceed

one lakh rupees.

(2) The sums referred to in sub-section (1) shall be any sums paid or deposited in the

previous year by the assessee

(i) to effect or to keep in force an insurance on the life of persons specified in sub-

section (4);

(ii) to effect or to keep in force a contract for a deferred annuity, not being an annuity

plan referred to in clause (xii), on the life of persons specified in sub-section (4):

Provided that such contract does not contain a provision for the exercise by the insured

of an option to receive a cash payment in lieu of the payment of the annuity;

(iii) by way of deduction from the salary payable by or on behalf of the Government to

any individual being a sum deducted in accordance with the conditions of his service,

for the purpose of securing to him a deferred annuity or making provision for his spouse

or children, in so far as the sum so deducted does not exceed one-fifth of the salary;

(iv) as a contribution by an individual to any provident fund to which the Provident

Funds Act, 1925 (19 of 1925) applies;

(v) as a contribution to any provident fund set up by the Central Government and

notified78 by it in this behalf in the Official Gazette, where such contribution is to an

account standing in the name of any person specified in sub-section (4);

(vi) as a contribution by an employee to a recognised provident fund;

(vii) as a contribution by an employee to an approved superannuation fund;

(viii) as subscription to any such security of the Central Government or any such

deposit scheme as that Government may, by notification in the Official Gazette, specify

in this behalf;

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(ix) as subscription to any such savings certificate as defined in clause (c) of section 279

of the Government Savings Certificates Act, 1959 (46 of 1959), as the Central

Government may, by notification80 in the Official Gazette, specify in this behalf;

(x) as a contribution, in the name of any person specified in sub-section (4), for

participation in the Unit-linked Insurance Plan, 1971 (hereafter in this section referred

to as the Unit-linked Insurance Plan) specified in Schedule II of the Unit Trust of India

(Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);

(xi) as a contribution in the name of any person specified in sub-section (4) for

participation in any such unit-linked insurance plan of the LIC Mutual Fund

80a[notified under] clause (23D) of section 10, as the Central Government may, by

notification81 in the Official Gazette, specify in this behalf;

(xii) to effect or to keep in force a contract for such annuity plan of the Life Insurance

Corporation or any other insurer as the Central Government may, by notification82 in

the Official Gazette, specify;

(xiii) as subscription to any units of any Mutual Fund 82a[notified under] clause (23D)

of section 10 or from the Administrator or the specified company under any plan

formulated in accordance with such scheme as the Central Government may, by

notification83 in the Official Gazette, specify in this behalf;

(xiv) as a contribution by an individual to any pension fund set up by any Mutual Fund

83a[notified under] clause (23D) of section 10 or by the Administrator or the specified

company, as the Central Government may, by notification84 in the Official Gazette,

specify in this behalf;

(xv) as subscription to any such deposit scheme of, or as a contribution to any such

pension fund set up by, the National Housing Bank established under section 3 of the

National Housi