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PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH,...
Transcript of PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH,...
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PRESTIGE INSTITUTE OF MANAGEMENT
AND RESEARCH, INDORE
SUMMER TRAINING PROJECT REPORT
ON
“STUDY ON MUTUAL FUND”
From Religare Securities Ltd., Indore
Submitted for the partial fulfilment of the Degree
Of Master in Business Administration
(Batch: 2011-13)
Faculty Guide: Submitted By:
Prof. Deepak Jaroliya Rajni Pasrija
MBA 3rd SEM (Core)
Scholar No.
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CERTIFICATE
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DECLARATION
I hereby declare that this report is on‖ STUDY ON MUTUAL FUND‖ at Religare
securities ltd, Indore. Has been written and prepared by me during the academic
year 2011-2013. This project was done under the guidance and supervision of
Prof. Deepak Jaroliya, faculty PIMR Indore and Mohd. Quazi Shohib khan,
Branch Manager at Religare Securities ltd. Indore in partial fulfilment of Degree
of Master of Business Administration of Prestige Institute of Management And
Research, Indore.
I also declare that this project is result of my own effort and has not been submitted
to any other institution for award of any degree or diploma.
Rajni Pasrija
Place: Indore
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CERTIFICATE FROM THE FACULTY GUIDE
This is to certify that the project work entitled”STUDY OF MUTUAL FUND‖ is a piece of
work done by RAJNI PASRIJA , student of Prestige Institue Of Management And Research ,
under myguidance and supervision for the partial fulfillment of the course
Post Graduation Programme Management, Prestige Institute of Management And Research.
As per my knowledge her work is original and genuine.
Prof. Deepak Jaroliya
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ACKNOWLEDGEMENT It is said, the most important single word is ―WE‖ and the zero important single
word is ―I‖. This is true even in today‘s modern era. It is absolutely impossible for
a single individual to complete the assigned job without help and assistance from
others.
It is my greatest pleasure to acknowledge sincere gratitude towards to Mr. Vikrant
Dale and Mohd. Quazi Shoeib Khan from the Religare for giving me an
opportunity to work with Religare as an intern and helping me with almost all the
problems I encountered during the completion of this project work.
I would also like to express my sincere gratitude for Mohd. Shahid Khan and
other employees who mentored me on various aspects of Derivatives, as an
effective tool for investment during the course of my training and also helped me
in completing this project.
I am also thankful to all of my friends for their help in completing this project
work. Finally, I am thankful to my entire family members for their great support
and encouragement.
Under Religare Securities Ltd., Indore. I have learnt about the company, its
structure, operations, and the online trading system along with products and
services it offers to its customers. It provided me a platform to have a look of
corporate culture and the experience of working in office. The experience that I
have gained over month & a half training is impeccable. It will definitely help me
in future to take any sort of business assignment.
With Warm Regards
Rajni Pasrija
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CONTENT PAGE
1. INTRODUCTION TO ORGANISATION
2. ORGANISATION STUCTURE
3. FINANCIAL PERFORMANCE
4. PERSONNEL
5. PRODUCT AND SERVICES
6. MARKETING
7. STRENGTH AND WEAKNESS OF COMPANY
8. ANNEXURES – MUTUAL FUND
INTRODUCTION TO MUTUAL FUND
HISTORY OF INDIAN MUTUAL FUND INDUSTRY
MUTUAL FUND STRUCTURE
MUTUAL FUND OPERATION
MUTUAL FUND CLASSIFICATION
RISK HIERARCHY OF MUTUAL FUND
COMPARISON OF MUTUAL FUND
ADVANTAGES OF MUTUAL FUND
DISADVANTAGES OF MUTUAL FUND
RISK INVOLVED IN MUTUAL FUND
NET ASSET VALUE
BASIC CONCEPTS OF LOAD
FACTORS AFFECTING MUTUAL FUND
FUTURE OF MUTUAL FUND
MARKETING CHALLENGES TO MUTUAL FUND INDUSTRY
9. GLOSSARY
10.REFERENCES AND BIBLIOGRAPHY
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1. INTRODUCTION
Name
Religare is a Latin word that translates as 'to bind together'. This name has been chosen to reflect
the integrated nature of the financial services the company offers.
Symbol
The Religare name is paired with the symbol of a four-leaf clover. Traditionally, it is considered
good fortune to find a four-leaf clover as there is only one four-leaf clover for every 10,000
three-leaf clovers found. For us, each leaf of the clover has a special meaning. It is a symbol
of Hope. Trust. Care. Good Fortune. For the world, it is the symbol of Religare.
The first leaf of the clover represents Hope. The aspirations to succeed. The dream of
becoming. Of new possibilities. It is the beginning of every step and the foundation on which a
person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place one‟s own faith in another.
To have a relationship as partners in a team. To accomplish a given goal with the balance that
brings satisfaction to all, not in the binding, but in the bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the cement in every
relationship. The truth of feeling that underlines sincerity and the triumph of diligence in every
aspect. From it springs true warmth of service and the ability to adapt to evolving environments
with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that rare ability
to meld opportunity and planning with circumstance to generate those often looked for
remunerative moments of success.
Hope. Trust. Care. Good Fortune. All elements perfectly combine in the emblematic and
rare, four-leaf clover to visually symbolize the values that bind together and form the
core of the Religare vision.
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RELIGARE ENTERPRISES LIMITED
Religare, a Ranbaxy promoter group company, is one of India‘s largest and fastest growing
integrated financial services institutions. The company offers a large and diverse bouquet of
services ranging from equities, commodities, insurance broking, to wealth advisory, portfolio
management services, personal finance services, Investment banking and institutional broking
services.
The services are broadly clubbed across three key business verticals- Retail, Wealth management
and the Institutional spectrum. Religare Enterprises Limited is the holding company for all its
businesses, structured and being operated through various subsidiaries.
Religare‘s retail network spreads across the length and breadth of the country with its presence
through more than 900 locations across more than 300 cities and towns. Having spread itself
fairly well across the country and with the promise of not resting on its laurels, it has also
aggressively started eyeing global geographies
Religare is lead by a highly regarded management team that has invested crores of rupees into a
world class Infrastructure that provides there clients with real-time service & 24/7 access to all
information and products. Their flagship Religare Professional Network offers real-time prices,
detailed data and news, intelligent analytics, and electronic trading capabilities, right at your
fingertips. This powerful technology is complemented by there knowledgeable and customer
focused Relationship Manager.
Religare offers a full range of financial services and products ranging from Equities to Mutual
Funds to enhance your wealth and hence, achieve your financial goals. Religare‘s Client
Relationship Managers are available to you to help with your financial planning and investment
needs. To provide the highest possible quality of service, Religare provides full access to all our
products and services through multi-channels.
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Religare is a full service investment firm offering clients access to a tremendous range of
financial services from 150 locations across 180 cities. We have a strong team of over 750 Client
Relationship Managers focused on serving your unique needs. Our world-class infrastructure,
built with tens of cores of investment, provides our clients with real-time service, multi-channel
& 24/7 accesses to all information and products. As we‘ve expanded and developed to serve the
needs of all kinds of investors, we‘ve been guided by one underlying philosophy: You come
first.
VISION
To build Religare as a globally trusted brand in the financial services domain and present it as
the ‗Investment Gateway of India‘
MISSION
Providing financial care driven by the core values of diligence and transparency.
BRAND ESSENCE
Ethical and dynamic processes for wealth creation drive Religare
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GROUP DIVISIONS
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RELIGARE SECURITIES LIMITED
Religare Securities Limited was incorporated on July 1992 as Fortis Securities Limited at New
Delhi under the Companies Act, 1956 with Registration No. IN – 301774. The name of the
Company was changed to Religare Securities Limited in the year 2006 due to change in the main
objects of the Company from Hospital Services to Investment & Financial Services business.
Company was promoted by Ranbaxy Promoters Group Companies headquarters are co-located
in Mumbai and Delhi, allowing it to access the two most important regions for Indian financial
markets, the Western region including Mumbai, rest of Maharashtra and Gujarat; and the
Northern region, including the National Capital Territory of Delhi, nearby cities, parts of
Haryana, Uttar Pradesh and Punjab; and access the highly skilled and educated workforce in
these cities. The Marketing and Sales efforts are headquartered out of Mumbai; with a regional
headquarter in Delhi; and its back office, risk management, internal finances etc. are
headquartered out of Delhi, allowing our Company to scale these processes efficiently for the
nationwide network.
Religare Securities Limited (RSL) is a leading equity and securities firm in India. The company
currently handles almost 4-5% of the total volumes traded on NSE and in the realm of online
trading and investments it currently holds a share of close to 8% of the market, as per some
recent published reports. The major activities and offerings of the company today are Equity
broking, Depository participant services, Portfolio Management Services, Institutional Brokerage
& Research, Investment Banking and Corporate Finance. To broaden the gamut of services
offered to its investors, the company has also recently unveiled a new avatar of its online
investment portal armed with a host of revolutionary features.
RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange of India,
Depository Participant with National Securities Depository Limited and Central Depository
Services (I) Limited, and SEBI approved Portfolio Manager.
Religare has been constantly innovating in terms of product and services and to offer such
incisive services to specific user segments it has also started the NRI, FII, HNI and Corporate
Servicing groups. These groups take all the portfolio investment decisions depending upon a
client‘s risk / return Religare has a very credible research and analysis division, which not only
caters to the need of our institutional clients but also gives their valuable inputs to investment
dealers.
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Religare is also giving in house depository services to its clients and is one of the leading
depository service providers in the country.
In a span of less than five years of its retail operations, RSL has recorded a healthy growth rate
both in business volumes and profitability, which is clearly significant from the growth of its
footprints across India.
KEY EVENTS & MILESTONES
1994 RSL received membership of the NSE as „stock broker
2000 RSL received membership of the Futures and Options segment of the NSE RSL received
registration as „Depository Participant‟ with NSDL
2002 RSL received registration as „Portfolio Manager‟ from SEBI
2003 RSL received registration as „Depository Participant‟ with CDSL.
2004 RSL received membership of the BSE as „stock broker
2006 Establishment of representative office in London. RCL received membership of NMCE.
RIBL received licence from IRDA to act as „composite broker‟. Joint venture agreement with
Aegon International N.V. for carrying on the business of mutual fund asset management.RSL
received registration as „Merchant Banker in Category - I from SEBI.
2007 -RSL received membership of derivative segment of the BSE as trading-cum-clearing
member
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2. ORGANISATION STRUCTURE
MD & CEO
RETAIL HEAD
AREA MANAGER (INDORE)
BRANCH MANAGER
AREA MANAGER (BHOPAL)
BRANCH MANAGER
AREA MANAGER (GWALIOR)
BRANCH MANAGER
INSTITUTION CUSTODIAN
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3. FINANCIAL PERFORMANCE
Balance Sheet of Religare Enterprises
------------------- in Rs. Cr. -------------------
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds
Total Share Capital 176.43 152.81 101.29 76.08 64.40
Equity Share Capital 139.43 127.81 76.29 76.08 64.40
Share Application Money 0.00 0.18 1,800.16 0.00 0.00
Preference Share Capital 37.00 25.00 25.00 0.00 0.00
Reserves 3,014.85 2,408.07 617.19 405.24 223.89
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Networth 3,191.28 2,561.06 2,518.64 481.32 288.29
Secured Loans 0.00 0.00 0.00 0.00 0.00
Unsecured Loans 9.84 22.22 0.00 75.40 3.50
Total Debt 9.84 22.22 0.00 75.40 3.50
Total Liabilities 3,201.12 2,583.28 2,518.64 556.72 291.79
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Mar '11
Mar '10
Mar '09
Mar '08
Mar '07
12 mths 12 mths 12 mths 12 mths 12 mths
Application Of Funds
Gross Block 32.53 25.67 3.73 0.56 0.01
Less: Accum. Depreciation 8.63 4.54 0.36 0.05 0.00
Net Block 23.90 21.13 3.37 0.51 0.01
Capital Work in Progress 1.83 0.00 0.01 0.07 0.00
Investments 3,093.51 2,653.85 2,023.55 545.28 289.81
Inventories 0.00 0.00 0.00 0.00 0.00
Sundry Debtors 20.79 8.31 0.92 0.06 0.19
Cash and Bank Balance 53.29 25.81 0.36 1.07 3.03
Total Current Assets 74.08 34.12 1.28 1.13 3.22
Loans and Advances 62.88 51.19 22.69 19.59 4.31
Fixed Deposits 0.00 2.54 472.84 0.70 0.00
Total CA, Loans & Advances 136.96 87.85 496.81 21.42 7.53
Deffered Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 30.33 177.52 3.97 1.70 3.10
Provisions 24.76 2.02 1.13 8.87 2.46
Total CL & Provisions 55.09 179.54 5.10 10.57 5.56
Net Current Assets 81.87 -91.69 491.71 10.85 1.97
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
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Total Assets 3,201.11 2,583.29 2,518.64 556.71 291.79
Contingent Liabilities 712.18 380.01 585.01 92.03 30.00
Book Value (Rs) 226.22 198.40 90.90 63.26 44.77
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4. PERSONNEL
4.1 -RECRUITMENT PROCESS
Creating and managing an effective human capital supply-chain system
Fulfilling targeted recruiting campaigns and search projects
Locating, accessing and utilizing "flexible" professionals and associates to support defined
projects/functions and production cycles
Accelerated growth, major technological or process changes and acquisitions which in some
way affect their current or future talent needs
H/R outsourcing, payroll administration, benefits administration, workers comp
administration, unemployment administration.
4.2 PERSONNEL POLICIES
4.2.1 Brand and Corporate Communication Policy
4.2.2 Vendor / Agency Management Policy
4.2.3 Dress Code Policy
4.2.4 Notice Period Buyout Policy
4.2.5 Attendance Policy
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4.3 TRAINING AND DEVELOPMENT
Key Focus Areas
The Learning and Development Center of Excellencefocuses on 2key areas
1.Behavioral skills development
•Programs are based along a learning continuum mapped to role –skill complexity.
•Behavioral Skills Development Programs are categorized into two parts :
•Organization Role Based: To build the behavioral skills that employees are required to display
for that role to be able to perform effectively
•Skill/ Need Based: To build the skills that are specific only to a particular role and need to be
developed to ensure enhanced productivity in those roles
2.Product/Functionaltraining
•E-Learning caters to the crucial need of these employees to be thorough with their product
knowledge in order to:
•Build greater credibility in the eyes of the client
•Stay ahead of the competition in the market
•Influence higher sales thereby achieving greater targets
•Be able to cross sell products
Product/ Functional Training at Religare is deployed through the means of E-Learning at the :
ReligareAcademy
It is the online portal accessible by all regular employees.
Product/Functional Training through E-Learning caters to the crucial need of these employees to
be thorough with their product knowledge in order to do their job better and add to the overall
profit of the businessThere are certain courses which are mandatory to a particular business and
others which are good to study for knowledge enhancement and cross-selling.
Mandatory Courses
•These courses are mandatory to be finished by employees during their probation period
Other Courses
•These courses are meant to enhance product knowledge of employees for businesses other than
their core business
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•They will enable employees to have greater knowledge, see the bigger picture and be able cross-
sell products
•They can be completed over a due course of time
4.4 WELFARE ACTIVITIES
4.4.1 Corporate Social Responsibility
Religare runs an ‗Investor Awareness Program‘ which, through a number of awareness and
education led initiatives, helps people understand the economy and the financial markets.
Religare also partners the Save LIFE Foundation, a non- profit NGO that focuses on bystander
care for road accident victims in India, the Akshaya Patra Foundation, a school meal program to
facilitate the education of underprivileged children in India, and the SOS Children‘s Villages of
India which provides care to orphaned children.
4.4.2 Initiatives
Partnership with Save LIFE Foundation:
Partnered with the Save LIFE Foundation (SLF) a non- profit, non-governmental organization
that focuses on bystander care for road accident victims in India. Our support will enable SLF to
prepare professionally designed training material for distribution and enhance their primary
research capabilities.
Sponsorship of Family Home at SOS Children''s Village:
Approximately 5000 children die every day in India, due to lack of amenities or nutrition. To
tackle this problem Religare has partnered with SOS Children‘s Villages of India which sets up
‗homes‘ that look after orphaned children. Each village has homes with 8-10 children who stay
there till they complete their education.
Association with Give India: We''ve begun an employee initiative with the Give India Foundation, where employees donate a
part of their salaries to their pet causes.
Part of the Akshaya Patra Movement:
Joined hands with the Akshaya Patra movement, a pioneering school meal program that provides
unlimited, nutritious, hygienically cooked hot noon meals in government schools and
government run day-care centers (anganwadis). Religare has agreed to sponsor 1,000 children for
a period of one year.
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4.4.3 EVENTS
Fund Raiser for Ladakh Flash Floods:
We had partnered with NDTV to raise funds for victims of flash floods in Ladakh. The Religare
Art Gallery hosted a charity photography exhibition to show solidarity with families affected by
the tragedy.
―Save the Environmen‖t Week at SOS Children's Village:
In August 2010, we organized a ''Save the Environment'' week for British School children at the
SOS Children''s Village. The week began with the 6 children attending an introductory session at
Religare premises as part of their community service week. From day 2, the children spent 2
hours a day with over 20 children from the Village to spread awareness on environmental issues.
Activities undertaken by the children ranged from poster making, quizzes and a skit.
The Delhi Half Marathon:
Ran the Airtel Delhi Half Marathon 2010 in the Corporate Challenge segment, supporting
Sukarya, an NGO that works in rural health care and women empowerment in the Delhi NCR
region.
Painting Competition for Children from SOS Village:
On Children''s Day 2009, we held a painting competition at the Religare Art Gallery in
Connaught Place for children from the SOS Village. The theme was "I Aspire To Be" and the
children warmed to the theme. Anjolie Ela Menon, the acclaimed artist, judged the competition
and presented a certificate of participation to each child.
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5. PRODUCTS AND SERVICES OFFERED
EQUITY TRADING
COMMODITY TRADING
DERIVTIVES TRADING
PERSONAL LOANS
LOANS AGAINST SHARES
MUTUAL FUNDS
INSURANCE
SAVING PRODUCTS
PORTFOLIO MANAGENMENT SERVICES
OPPORTUNTIES FOR INVESTMENT IN ASSET CLASSES SUCH AS, art, fund, film
fund, real estate,etc.
STRUCTURED PRODUCTS
INTERNATIONAL EQUITIES
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6MARKETING
6.1COMPETITORS
1. Reliance Mutual Funds
2. HDFC
3. Fidelity
4. Franklin Templeton
5. ABN Amro
6. AIG
7. Bank of Baroda
8. Birla Sun Life
9. Canara Bank
10. DBS Chola Mandalam AMC
11. DSP Merrill Lynch
12. Deutsche Bank
13. Escorts Mutual
14. HSBC
15. ICICI Prudential
16. ING
17. JM Financial
18. JP Morgan
19. Kotak Mahindra
20. LIC
21. Lotus India
22. Morgan Stanley
23. Principal
24. Quantum
25. State Bank of India (SBI)
26. Sahara Mutual Funds
27. Standard Chartered
28. Sundaram BNP Paribas
29. Tata
30. Taurus Mutual Funds
31. UTI
32. Benchmark Funds
http://www.reliancemutual.com/http://www.hdfcfund.com/http://www.fidelity.co.in/http://www.franklintempletonindia.com/http://www.assetmanagement.abnamro.co.in/http://www.aiggig.co.in/http://www.bobmf.com/http://www.birlasunlife.com/http://www.canbankmutual.com/http://www.dbscholamutualfund.com/http://www.dspmlmutualfund.com/http://www.dws-india.com/http://www.escortsmutual.com/http://www.hsbcinvestments.co.in/http://www.icicipruamc.com/http://www.ingvysyamf.com/http://www.jmfinancialmf.com/http://www.jpmorganmf.com/http://www.kotakmutual.com/http://www.licmutual.com/http://www.lotusindiaamc.com/http://www.msgfindia.com/http://www.principalindia.com/http://www.quantumamc.com/http://www.sbimf.com/http://vangal.wordpress.com/2007/10/29/list-of-mutual-fund-companies-in-india/http/www.saharamutual.comhttp://www.standardcharteredmf.com/http://www.sundarambnpparibas.in/http://www.tatamutualfund.com/http://www.taurusmutualfund.com/http://www.utimf.com/http://www.benchmarkfunds.com/
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6.2 MARKET SHARE-
“Religare Enterprises eyes 5% market share this year” said Shachindra Nath, Group CEO,
Religare Enterprises In an exclusive interview with CNBC-TV18
6.3AREAS OF OPERATION
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7.STRENGTH AND WEAKNESS OF THE ORGANISATION
SWOT ANALYSIS
STRENGTH
PROMOTED BY FINANCIAL INSTITUTION
RELIGARE is promoted by all the major financial institution in India, i.e.
Industrial Development Bank of India
Life Insurance Corporation of India
Oriental Insurance Co. Ltd.
Industrial Credit and Investment Corporation of India
New India Insurance Corporation Ltd.
National Insurance Corporation Ltd.
LARGEST DEPOSITPORY PARTICIPANT
RELIGARE is at the good position as depositor participant in all over India.
BACK OFFICE SERVER
For perfection in work RELIGARE has back office server facility where all the branches
of RELIGARE meet their necessary requirements before any information takes place
with the NSDL.
EXPERIENCE
Stock Holding is the oldest organization in custodian business all over India and it has
more than 10 years of experience in the field. It has professional on its board to look after
the business and meet its current and future requirements in the market.
WEAKNESSES
SOME BRANCHES ARE NOT CONNECTED THROUGH VSAT
RELIGARE is the largest branch network depository participant in the custodian market
but till now some few of the branches are not yet connected through VSAT.
LESS ADVERTISEMENT SPILLS
RELIGARE has less advertisement spill compare to its main competitors like Kotak
Securities, HDFC, IDBI Bank and ICICI Bank. These are also producing the facilities of
banking services and other related services to the customers.
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OPPORTUNITIES
LARGE RURAL/SEMI-URBAN AREAS ARE STILL UNEXPLORED
RELIGARE has a growing structure of its branch network but still our rural and urban
areas are not covered in the process whereby the common man participates the growth of
the economy. Therefore it has become necessary to the growth of the economy. Therefore
it has become necessary to give attention to our rural and semi-urban sectors
immediately.
SELL-N-CASH
Sell-n- Cash is totally a new concept of RELIGARE where an investor can present his
share to knell in the market and can take payment within 48 hours without delays.
MUTUAL FUNDS MARKETING
Marketing and Distribution of Mutual Fund is providing the facility to the customer who
do have the time and the expertise and who are averse to risk.
INSURANCE MARKETING
Marketing of Insurance services recently started by RELIGARE is also a great
opportunity available for its growth. This field can enhance great opportunities and can
alleviate their position in the market.
THREAT
CHARGES ARE HIGHER
Indian Customers have less money at their disposal. Since RELIGARE is the No.1 in the
Custodial Sector in the market and for providing the best services, it has higher charges
detrimental for Small Investors.
TIE UP WITH EXTERNAL AGENCY
Now a days tie-ups, M& A are a regular phenomenon in the market to beat the
competition and create a place for itself. The merger and tie-ups of financial corporations
poses a bigger threat to RELIGARE.
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8. ANNEXURES- MUTUAL FUND A.INTRODUCTION TO MUTUAL FUND A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments and other securities. Mutual funds have a fund manager who invests the money on
behalf of the investors by buying / selling stocks, bonds etc. Currently, the worldwide value of
all mutual funds totals more than $US 26 trillion.
Mutual funds can fit well into either your long- or short-term investment strategy, but the success
COof your plan depends on the type of fund you choose. Because all funds invest in securities
markets, it is crucial to maintain realistic expectations about the performance of those markets
and choose funds best suited to your needs.
There are various investment avenues available to an investor such as real estate, bank deposits,
post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of investment
avenue available to investors.
Mutual fund invests their money in various assets based on the objective of the scheme. An
investor enters into a contract with the management company by buying the units of mutual fund.
Money is invested into variety of securities depending on the objectives of the scheme one select.
Characteristics of a Mutual Fund
Investors own the mutual fund units.
Professional managers manage the portfolio of schemes for a fee.
Investor's money is collectively invested in a portfolio of marketable securities based on the investment objective.
Value of portfolio is calculated as Net Asset Value (NAV).
NAV changes on every business day according to the Changes in the market value of investments
Value of the portfolio and investors' holdings, alters with change in market value of investments
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B.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 history of mutual funds in India can
be broadly divided into four distinct phases
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India . In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in place
of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had
Rs.6,700 crores of assets under management
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank 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 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.
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Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management
and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes
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C. MUTUAL FUND STRUCTURE
The above diagram gives an idea on the structure of an Indian mutual fund.
Sponsor: Sponsor is basically a promoter of the fund. For example Bank of Baroda, Punjab
National Bank, State Bank of India and Life Insurance Corporation of India (LIC) are the sponsors of
UTI Mutual Funds. Housing Development Finance Corporation Limited (HDFC) and Standard Life
Investments Limited are the sponsors of HDFC mutual funds. The fund sponsor raises money from
public, who become fund shareholders. The pooled money is invested in the securities. Sponsor
appoints trustees.
Trustees: Two third of the trustees are independent professionals who own the fund and supervises
the activities of the AMC. It has the authority to sack AMC employees for non-adherence to the rules
of the regulator. It safeguards the interests of the investors. They are legally appointed i.e. approved
by SEBI.
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AMC: Asset Management Company (AMC) is a set of financial professionals who manage the fund.
It takes decisions on when and where to invest the money. It doesn’t own the money. AMC is only a
fee-for-service provider.
The above 3 tier structure of Indian mutual funds is very strong and virtually no chance for fraud.
Custodian: A Custodian keeps safe custody of the investments (related documents of securities
invested). A custodian should be a registered entity with SEBI. If the promoter holds 50% voting
rights in the custodian company it can’t be appointed as custodian for the fund. This is to avoid
influence of the promoter on the custodian. It may also provide fund accounting services and
transfer agent services. JP Morgan Chase is one of the leading custodians.
Transfer Agents: Transfer Agent Company interfaces with the customers, issue a fund’s units, help
investors while redeeming units. Provides balance statements and fund performance fact sheets to
the investors. CAMS is a leading Transfer Agent in India.
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D. MUTUAL FUND OPERATION.
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E. MUTUAL FUND CLASSIFICATION
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.
Overview of existing schemes existed in mutual fund category:
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:
These schemes have a pre-specified maturity period. One can invest directly in the scheme at
the time of the initial issue. Depending on the structure of the scheme there are two exit
options available to an investor after the initial offer period closes. Investors can transact
(buy or sell) the units of the scheme on the stock exchanges where they are listed. The
market price at the stock exchanges could vary from the net asset value (NAV) of the scheme
on account of demand and supply situation, expectations of unitholder and other market
factors. Alternatively some close-ended schemes provide an additional option of selling the
units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however
one cannot buy units and can only sell units during the liquidity window. SEBI Regulations
ensure 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.
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise 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 increases in the same
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proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesn‘t
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.
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 manager‘s 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)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the
risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private
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.
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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 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 parameter
viz,
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.
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.
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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.
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 weightage. And hence, the returns from such schemes
would be more or less equivalent to those of the Index.
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 funds
are 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 the performance of those sectors/industries and
must exit at an appropriate time
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F. RISK HIERARCHY OF VARIOUS MUTUAL FUND
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G. COMPARISON OF MUTUAL FUND SCHEMES:
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H.ADVANTAGES OF MUTUAL FUND:
Mutual funds make saving and investing simple, accessible, and affordable. The advantages of
mutual funds include professional management, diversification, variety, liquidity, affordability,
convenience, and ease of recordkeeping—as well as strict government regulation and full
disclosure.
Professional Management: Even under the best of market conditions, it takes an astute,
experienced investor to choose investments correctly, and a further commitment of time to
continually monitor those investments. With mutual funds, experienced professionals manage a
portfolio of securities for you full-time, and decide which securities to buy and sell based on
extensive research. A fund is usually managed by an individual or a team choosing investments
that best match the fund‘s objectives. As economic conditions change, the managers often adjust
the mix of the fund‘s investments to ensure it continues to meet the fund‘s objectives.
Diversification: Successful investors know that diversifying their investments can help reduce
the adverse impact of a single investment. Mutual funds introduce diversifi cation to your
investment portfolio automatically by holding a wide variety of securities. Moreover, since you
pool your assets with those of other investors, a mutual fund allows you to obtain a more
diversified portfolio than you would probably be able to comfortably manage on your own—and
at a fraction of the cost. In short, funds allow you the opportunity to invest in many markets and
sectors. That‘s the key benefit of diversification.
Variety: Within the broad categories of stock, bond, and money market funds, you can choose
among a variety of investment approaches. Today, there are about 8,200 mutual funds available
in the U.S., with goals and styles to fi t most objectives and circumstances.
Low Costs: Mutual funds usually hold dozens or even hundreds of securities like stocks and
bonds. The primary way you pay for this service is through a fee that is based on the total value
of your account. Because the fund industry consists of hundreds of competing fi rms and
thousands of funds, the actual level of fees can vary. But for most investors, mutual funds
provide professional management and diversifi cation at a fraction of the cost of making such
investments independently.
Liquidity: Liquidity is the ability to readily access your money in an investment. Mutual fund
shares are liquid investments that can be sold on any business day. Mutual funds are required by
law to buy, or redeem, shares each business day. The price per share at which you can redeem
shares is known as the fund‘s net asset value (NAV). NAV is the current market value of all the
fund‘s assets, minus liabilities, divided by the total number of outstanding shares.
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Convenience: You can purchase or sell fund shares directly from a fund or through a broker,
financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by
personal computer. You can also arrange for automatic reinvestment or periodic distribution of
the dividends and capital gains paid by the fund. Funds may offer a wide variety of other
services, including monthly or quarterly account statements, tax information, and 24-hour phone
and computer access to fund and account information.
Protecting Investors: Not only are mutual funds subject to compliance with their self-imposed
restrictions and limitations, they are also highly regulated by the federal government through the
U.S. Securities and Exchange Commission (SEC). As part of this government regulation, all
funds must meet certain operating standards, observe strict antifraud rules, and disclose complete
information to current and potential investors. These laws are strictly enforced and designed to
protect investors from fraud and abuse. But these laws obviously cannot help you pick the fund
that is right for you or prevent a fund from losing money. You can still lose money by investing
in a mutual fund. A mutual fund is not guaranteed or insured by the FDIC or SIPC, even if fund
shares are purchased through a bank. For more information about how funds are regulated and
supervised
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I.DISADVANTAGES OF MUTUAL FUND:
There are certainly some benefits to mutual fund investing, but you should also be aware of the
drawbacks associated with mutual funds.
No Insurance: Mutual funds, although regulated by the government, are not insured against
losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at
banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-
reducing diversification benefits provided by mutual funds, losses can occur, and it is possible
(although extremely unlikely) that you could even lose your entire investment.
Dilution: Although diversification reduces the amount of risk involved in investing in mutual
funds, it can also be a disadvantage due to dilution. For example, if a single security held by a
mutual fund doubles in value, the mutual fund itself would not double in value because that
security is only one small part of the fund's holdings. By holding a large number of different
investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.
Fees and Expenses: Most mutual funds charge management and operating fees that pay for the
fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual
funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and
trade shares so often that the transaction costs add up significantly. Some of these expenses are
charged on an ongoing basis, unlike stock investments, for which a commission is paid only
when you buy and sell .
Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average,
around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a
growing number of critics now question whether or not professional money managers have better
stock-picking capabilities than the average investor.
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Loss of Control: The managers of mutual funds make all of the decisions about which securities
to buy and sell and when to do so. This can make it difficult for you when trying to manage your
portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset
at a certain time might not be optimal for you. You also should remember that you are trusting
someone else with your money when you invest in a mutual fund.
Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds
(called open-ended funds) cannot be bought or sold in the middle of the trading day. You
can only buy and sell them at the end of the day, after they've calculated the current value of their
holdings.
Size: Some mutual funds are too big to find enough good investments. This is especially true of
funds that focus on small companies, given that there are strict rules about how much of a single
company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an
average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a
result, the fund might be forced to lower its standards when selecting companies to invest in.
Inefficiency of Cash Reserves: Mutual funds usually maintain large cash reserves as protection
against a large number of simultaneous withdrawals. Although this provides investors with
liquidity, it means that some of the fund's money is invested in cash instead of assets, which
tends to lower the investor's potential return.
Different Types: The advantages and disadvantages listed above apply to mutual funds in
general. However, there are over 10,000 mutual funds in operation, and these funds vary greatly
according to investment objective, size, strategy, and style. Mutual funds are available for
virtually every investment strategy (e.g. value, growth), every sector (e.g. biotech, internet), and
every country or region of the world. So even the process of selecting a fund can be tedious.
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J .RISK INVOLVED IN MUTUAL FUND:
Risk
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility
that you will lose money (both principal and any earnings) or fail to make money on an
investment. A fund's investment objective and its holdings are influential factors in determining
how risky a fund is. Reading the prospectus will help you to understand the risk associated with
that particular fund.
Generally speaking, risk and potential return are related. This is the risk/return trade-off. Higher
risks are usually taken with the expectation of higher returns at the cost of increased volatility.
While a fund with higher risk has the potential for higher return, it also has the greater potential
for losses or negative returns. The school of thought when investing in mutual funds suggests
that the longer your investment time horizon is the less affected you should be by short-term
volatility. Therefore, the shorter your investment time horizon, the more concerned you should
be with short-term volatility and higher risk.
Defining Mutual fund risk
Different mutual fund categories as previously defined have inherently different risk
characteristics and should not be compared side by side. A bond fund with below-average risk,
for example, should not be compared to a stock fund with below average risk. Even though both
funds have low risk for their respective categories, stock funds overall have a higher risk/return
potential than bond funds.
Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability
but have yielded the lowest long-term returns. Bonds typically experience more short-term price
swings, and in turn have generated higher long-term returns. However, stocks historically have
been subject to the greatest short-term price fluctuations—and have provided the highest long-
term returns. Investors looking for a fund which incorporates all asset classes may consider a
balanced or hybrid mutual fund. These funds can be very conservative or very aggressive. Asset
allocation portfolios are mutual funds that invest in other mutual funds with different asset
classes. At the discretion of the manager(s), securities are bought, sold, and shifted between
funds with different asset classes according to market conditions.
Mutual funds face risks based on the investments they hold. For example, a bond fund faces
interest rate risk and income risk. Bond values are inversely related to interest rates. If interest
rates go up, bond values will go down and vice versa. Bond income is also affected by the
change in interest rates. Bond yields are directly related to interest rates falling as interest rates
fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-
term bond fund.
.
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TYPES OF RISK IN MUTUAL FUND
1.THE RISK-RETURN TRADE-OFF
The most important relationship to understand is the risk-return trade-off Higher the risk greater
the returns/loss and lower the risk lesser the returns/loss.
Hence it is up to you, the investor to decide how much risk you are willing to take. in order to do
this you must first be aware of the different types of risks involved with your investment
decision.
2.MARKET RISK:
Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the
market in general lead to this. This is true, may it be big corporations or smaller mid-sized
companies. This is known as Market Risk. A Systematic investment Plan (―SlP‘) that works on
the concept of Rupee Cost Averaging (―RCA‖) might help mitigate this risk.
3.CREDIT RISK:
The debt se i ic in g ability (may it be interest payments or repayment of pri nc ip al) of a
company through its cash flows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like CRISIL who rate companies and their paper. An
rating is considered the safest whereas a ‗D rating is considered poor credit quality. A well-
diversified portfolio might help mitigate this risk.
4.INFLATION RISK:
Things you hear people talk about: ―Rs. 100 today is worth more than Rs. 100
tomorrow.‖―Remember the time when a bus ride costed 50 paisa?1
―Mchangai Ka Jainana Hai.‘
The root cause, Inflation, inflation is the loss of purchasing power over time. A lot of times
people make conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified porttblio with
some investment in equities might help mitigate this risk.
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5.INTEREST RATE RiSK:
in a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. if interest rates raise the prices of
bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
6.POLITICAL/GOVERNMENT POLICY RISK:
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.
7.LIQUIDITY RISK:
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well
as internal risk controls that lean towards purchase of liquid securities.
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K. NET ASSET VALUE (NAV):
The Mutual Fund NAV or Net Asset Value is a key indicator of the market value of each share
or unit of a mutual fund on a given day. It is the price per share or unit of the mutual fund.
For example, if the NAV of a Templeton Mutual fund is quoted as $10, it means that an investor
can buy a single share or unit of the templeton fund for $10.
CALCULATION OF NAV:
To calculate a Mutual Fund's Net Asset Value or NAV, the value of the total assets of the mutual
fund is subtracted by its liabilities, and then this amount is divided by the total number of shares
or units in the mutual fund.
Mutual Fund NAV = Total Assets - Liabilities / Total number of shares or units
The assets of a mutual fund would consist of its investments and cash. (For more info on mutual
fund investments, read Getting to know Mutual Fund Basics). The liabilities of a mutual fund
include operating expenses.
For example, a mutual fund has assets in stocks and other investments to the value of $100, 000
and liabilities worth $20, 000. Assuming the mutual fund has issued 10, 000 shares, then its
NAV would be:
NAV = (100, 000 - 20, 000)/ 10, 000
NAV = 80, 000 / 10, 000
NAV = $8
The NAV or price per share of this mutual fund would be $8.
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MUTUAL FUND V/S STOCK PRICES:
Mutual Fund NAV seems similar to stock prices as they are both indicative of the price per unit
or share. Both funds and shares can be bought on the basis of the unit price.
However, there are some differences between a mutual fund NAV and stock price:
The price of a stock is determined by company information - the performance of the
company, public confidence in its services and other economic factors. The mutual fund
NAV is a calculation of the fund assets divided by the number of total shares.
Mutual fund NAV is calculated at the end of the day after the daily closure of stock
markets. Therefore NAV changes only on a daily basis. Stock prices, however, change
any time during the day during stock market trading hours.
It is important to note that the mutual fund NAV is linked to share prices, if the concerned
mutual fund has invested in those shares in its fund portfolio. It can be seen that Mutual Fund
NAVs are directly proportional to the value of its assets. If all other factors remain constant, and
the share prices, in which the mutual fund has invested, depreciate, then the NAV of the mutual
fund will also reduce.
NAV FLUCTUATION
A Mutual fund NAV changes value under these conditions: -
Rise or drop in value of stock investments.
Change in number of shares in the mutual fund.
Payout of dividends and capital gains by the mutual fund to its investors.
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NAV and its impact on the returns
We feel that a MF with lower NAV will give better returns. This again is due to the wrong
perception about NAV. An example will make it clear that returns are independent of the NAV.
Say, you have Rs 10,000 to invest. You have two options, wherein the funds arc same as far as
the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has
NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y.
After one year, both funds would have grown equally as their portfolio is same, say by 25%.
Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of
your investment would be 1000*12.50 — Rs 12,500 for Fund X and 200*62.5= Rs 12,500 for
Fund Y. Thus your returns would be same irrespective of the NAV.
it is quality of fund, which would make a difference to your returns. In fact for equity shares also
broadly this logic would apply.
Misconception about NAV
This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100.
However, this perception is totally wrong and investors would be much better off once they
appreciate this fact.
Two funds with same portfolio arc same, no matter what their NAV is. NAV is immaterial.
Why people carry this perception is because they assume that the NAV of a MF is similar to the
market price of an equity share. This, however, is not true.
MUTUAL FUND PERFORMANCE THROUGH NAV
While a stock's performance can be judged by its price in the stock market, the daily NAV is not
necessarily the indicator of mutual fund performance. In order to gauge a mutual fund
performance, the NAV should be monitored over a long term and annual returns of the mutual
fund should be examined.
Mutual Funds usually publish fund performance data in websites and brochures. These fund
performance data include annual return data, computed using NAV on an annualised basis. This
data reveals positive or negative percentage changes in the mutual fund performance.
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L.BASIC CONCEPTS OF LOAD
ENTRY LOAD: The load charged at the time of investment in known as entry load.It is
meant to cover the cost that AMC spends in the process of acquiring subscriber‘s commission
payable to brokers, advertisement, register expenses etc.The load is recovred by chargingselling
charges higher than prevailing NAV.
EXIT LOADS: Exit Loads, are paid by the investors in the scheme, if they exit one of the scheme before a specified time period.Exit Loads reduce the amount receivedby the investor.
Not all schemes have an Exit Load, and not all schemes have similar exit loads as well. Some
schemes have Contingent Deferred Sales Charge (CDSC). This is nothing but a modified form of
Exit Load, wherein the investor has to pay different Exit Loads depending upon his investment
period. If the investor exits early, he will have to bear more Exit Load and if remains invested for
a longer period of time, his Exit Load will reduce. Thus the longer the investor remains invested,
lesser is the Exit Load. After some time the Exit Load reduces to nil; i.e. if the investor exits after
a specified time period, he will not have to bear any Exit Load.
UNIT: The unit means investment of unit holder in scheme.Each unit represents one undevided share in the assets of scheme. The value of each unit changes depending upon the performance of
the fund.
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M. FACTORS AFFECTING MUTUAL FUNDS
1. Governmental influences
Mutual fund business is a highly regulated business throughout the world as it seeks to ensure
that quality and fairly priced schemes are available. Governmental intervention thus in mutual
fund market usually is most needed to ensure that insurers are reliable, And in the developing
countries the additional goal may be promotion of domestic mutual fund industry and ensuring
the national mutual fund industry contributes to overall economic development. In a non
technical sense mutual fund is purchased in a good faith so the duty of government intervention
in mutual fund industry is to ensure that this principle of mutual fund is never defeated.
The ideology of government plays an important role in mutual fund industry also. For example in
the past during 1991, the P .V Narsimha Rao government strongly believed in liberalization also
liberalized the mutual fund sector which helped to allow private players in the industry from
1993 and enhancing joint ventures with foreign companies.
The present government with more focuses on foreign direct investments has declared to favor
the rise FDI in mutual fund to 49% which further enhances competition in the industry.
2. Taxation Policy
Social equity being one of the motives behind tax collections, government give certain
exemptions from such levying. One such exemption is deduction incurred by taxpayers towards
investment in mutual fund coverage. Similarly, capital invested in infrastructure bonds etc is
offered with certain concession under tax laws. The central idea behind such exemptions is that
the capitals so allocated by individuals reduce the ultimate burden on the public infrastructure or
helps in creating such infrastructural facilities.
The income tax rules related to the mutual fund transactions can be classified under:
[A] Exemptions available to companies or businesses
[B] Exemptions available to insured individuals
A. Exemptions available to companies
• Expenses deductible from commission earned by distributor, banker, national distributor.
• Tax concessions under risk management practices of an enterprise
• In growth option equity schemes there no long tcrn capital gain by company.
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• In dividend option equity schemes there no tax.
• Return received by charitable trust is total exempted from tax.
• Else schemes give to advantage of tax saving, growth potential and return.
B .Tax rules governing investment by individuals
Deduction in respect of ELSS schemes (sec 80C):
investment in this fund would enable you to avail the benefits under clause (xiii) of a section 80C
of the income Tax Act investment made in the schemes up to 1lakh by the eligible investor for
deduction under this section of the Act.
Since it will be an income deduction an investment of Rs 1lakh in this fund can save off Rs.
33600 from your tax payable liability (assuming you are in the highest tax bracket) investor will
also receive tax free dividend by investing equity schemes in dividend option investors also
receive tax free return by investing equity schemes in growth option for long term capital gain.
C. Tax plannings
An individual can think of health ELSS schemes purchase as a tool of tax planning exercise. For
example people who are marginally affected by tax liability can be as well
purchase a ELSS fund get benefits of Rs. 33600 from tax. In this way tax burden is become less
by purchasing ELSS fund.
Thus tax law offer benefit to individuals/companies by way of exemptions/deductions of
expenditure incurred towards purchase of mutual fund various schemes coverage from total
taxable income.
3. Foreign Trade Regulations
With the vast potential for mutual fund in India due its large population in the country many
foreign companies are ready to enter into the indian market. But companies can be permitted in
India through joint ventures with an Indian partner as well as come separately and the foreign
equity shall be restricted to only 25%. Another statement also tells that Indian subsidiaries of
foreign companies shall not be allowed to participate in banking sector unless they entered in to
joint ventures with the indian partners.
But at present the mutual fund regulator is in favor of hike in FDI cap from 25% to 49%, and is
finalizing a report that will be submitted to the government for a comprehensive legislation for
the industry. The security exchange board of India and association of mutual fund India have
been advocating a hike in FD1 limit for mutual fund companies so that the foreign partners can
infuse additional funds in these companies to sustain their growth.
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The government will need to amend the separate mutual fund Act for FDI capital as well as
domestic company as this is the statutory provision unlike sectors like civil aviation and telecom,
which have come through notification.
4. National income
The relative importance of the mutual fund Market within a country will also be dependent upon
economic development. With greater rates of economic growth, consumption of investment
should increase as a result of increased income, and an increased stock of assets requiring mutual
fund. Furthermore, the development of mutual fund is likely to facilitate greater economic
growth, implying that economic growth may be endogenous. Consistent with these arguments,
studies find that the level of financial development and economic development arc positively
related to the level of mutual fund across emerging markets.
5. Consumptions and Savings
The gross capital formation of any country is important for indication of its growth in the future
years. it is quite necessary to set up the rate of capital formation so that a large stock of
machines, tools and equipments are accumulated in a country. Experience of development in
other countries suggests that a high rate of capital formation was achieved to trigger rapid rate of
economic growth. With the hike in foreign capital coming to India the rate of capital formation is
becoming boom to insurers, which has given them opportunities. It is heartening to them to note
that latest savings rate of 28% is highest till now and with the growth rate near to 8% is bringing
a pool of buyer‘s purchasing power. This directly influences the demand for mutual fund
products.
6. Employment
The effect of employment on mutual find industry is as direct as that on economic development
of any country. With the rising levels of employment the effect on mutual fund industry is
positive because employment adds to the insured properties and assets from every prospective be
it due to organized or unorganized.
7. Inflation
The midterm policy review the strong macroeconomic indicators and RBI has revised its GDP
growth estimates to the upper limit of the earlier projection range 8% inflation (WPI) has been
steadily moving up in recent times and RB I has highlighted that primary articles prices have
been on of the key contributors. However one needs to keep in mind that recent increase in
global oil prices.
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8. Money supply
The central banks has indicated that credit growth and money supply number are likely to be
above its prosecution for the current fiscal year, the statement ―to consider promptly all possible
measures as appropriate to the evolving global and domestics situation ―is indicative of phased
increase in FII limits for gilt investment could help in depending the securities market and is part
of the road map towards fuller convertibility.
9. Interest
Interest is major factor for investment when a person find less return from investment tool
than people move towards the higher returns tool of investment.\
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N REASON FOR POOR PERFORMANCE OF MUTUAL FUND
Most investors associate mutual funds with Master gain. Monthly Equity Plans of SHI Mutual
Fund, UTI and canbank Mutual Fund and of course Morgan Stanley Growth Fund. This is so
because these funds truly had participation from masses, with a fund like Morgan Stanley having
more than I million investors. Investors feel that after 5 years, Morgan Stanley Growth Fund
units still trade below the original IPO price of Rs 10.
It is incorrect to think that all mutual funds have performed poorly. If one looks at some income
funds, they have come with reasonable returns. It is only the performance of equity funds, which
has been poor. Their poor performance has been amplified by the closed end discounts i.e. units
of these funds quoting at sharp discounts to their NAN‘ resulting in an even poorer return to the
investor.
One must remember that a Mutual Fund does not provide assured returns and neither can it
―manufacture‖ returns out of thin air. Returns provided by mutual funds are a function of the
returns in the underlying asset class in which the fund invests. Good funds can beat returns in
their asset class to some extent but that‘s all. E.g. take the case of a sector specific fund like a
pharma fund which invests only in shares of pharmaceutical companies. If the Govt. comes with
new regulation that severely restricts the pricing freedom of these companies resulting in
negative outlook for the sector, the prices of all stocks in the sector could fall substantially
resulting in severe erosion in the NAV of the fund. No one can do anything about it. A good fund
manager would probably sell part of the fund before prices fall too much and wait for an
opportune time to reinvest at lower Levels once the dust has settled. In that case, the NA‘ of the
fund would fall to a lesser extent
Most mutual fund managers took some time to realize the changed circumstances wherein the
open economy ushered in by the Liberalization took the full impact of the global deflation in
commodity prices. This problem was compounded further by the Asian crisis after which cheap
imports from Asia caused severe pressure on profits.
One more issue is that the fund managers in many funds were not ―professionally qualified and
experienced‖. This is especially true of some of the funds floated by nationalized banks. Some of
these individuals were transferred from the parent organization and did not really know much
about investment management.
Lastly. investors would do well to have a look at the investments, which they made on their own,
in most cases, they would have done much worse than the mutual funds. We have received
numerous requests for advice from individual investors on what to do about their own
investments. If that were any indicator, investors would have done really badly.
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O. FUTURE OF MUTUAL FUND INDUSTRY IN INDIA
GOLD
Historically, gold has been a proven method of preserving value when a national currency was
losing value. If your investments are valued in a depreciating currency, allocating a portion to
gold assets is similar to a financial insurance policy. In the past year, the climb in the price of
gold above $700 per ounce is due to many factors, one being that the dollar is losing value.
Reasons fav