Project.doc... mutual funds

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MUTUAL FUNDS MEANING 1

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Transcript of Project.doc... mutual funds

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MUTUAL FUNDS

MEANING

DEFINITION

WHO ARE THE PARTIES INVOLVED?

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MUTUAL FUNDS

ORIGIN

WHAT ARE MUTUAL FUNDS?

Mutual Fund is an investment company that pools money from shareholders

and invests in a variety of securities, such as stocks, bonds and money

market instruments. Most open-end mutual funds stand ready to buy back

(redeem) its shares at their current net asset value, which depends on the

total market value of the fund's investment portfolio at the time of

redemption. Most open-end mutual funds continuously offer new shares to

investors.

Also known as an open-end investment company, to differentiate it from a

closed-end investment company. Mutual funds invest pooled cash of many

investors to meet the fund's stated investment objective. Mutual funds stand

ready to sell and redeem their shares at any time at the fund's current net

asset value: total fund assets divided by shares outstanding.

In Simple Words, Mutual fund is a mechanism for pooling the resources by

issuing units to the investors and investing funds in securities in accordance

with objectives as disclosed in offer document.

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Investments in securities are spread across a wide cross-section of industries

and sectors and thus the risk is reduced. Diversification reduces the risk

because all stocks may not move in the same direction in the same

proportion at the same time. Mutual fund issues units to the investors in

accordance with quantum of money invested by them. Investors of mutual

funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their

investments. The mutual funds normally come out with a number of

schemes with different investment objectives which are launched from time

to time. In India, A mutual fund is required to be registered with Securities

and Exchange Board of India (SEBI) which regulates securities markets

before it can collect funds from the public.

 

In Short, a mutual fund is a common pool of money in to which investors

with common investment objective place their contributions that are to be

invested in accordance with the stated investment objective of the scheme.

The investment manager would invest the money collected from the investor

in to assets that are defined/ permitted by the stated objective of the scheme.

For example, an equity fund would invest equity and equity related

instruments and a debt fund would invest in bonds, debentures, gilts etc.

Mutual Fund is a suitable investment for the common man as it offers an

opportunity to invest in a diversified, professionally managed basket of

securities at a relatively low cost.

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MUTUAL FUNDS

DEFINITION

The securities & Exchange Board of India (mutual funds) regulations, 1993

defines a mutual fund as “a fund established in the form of a trust by a

sponsor, to raise money by trustees through the sale of units to the public,

under one or more schemes, for investing in securities in accordance with

these regulations”.

These mutual funds are referred to as Unit Trusts in the U.K. and as open

end investment companies in the U.S.A. therefore, Kamm, J.O. defines an

open end investment company as “an organization formed for the investment

of funds obtained from individuals & institutional investors who in exchange

for the funds receive shares which can be redeemed at any time at their

underlying asset values”.

According to Weston J. Fred & Brigham, Eugene, F., Unit Trusts are

“corporations which accepts dollars from savers and then use these dollars to

buy stocks, long term bonds, short term debt instruments issued by business

or government units; these corporations pool funds & thus reduce risk by

diversifications”.

Thus, mutual funds are corporations which pool funds by selling their own

shares & reduce risk by diversification.

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WHO ARE THE PARTIES INVOVED?

INVESTORS

Every investor, given her financial position & personal disposition, has a

certain inclination to take risk (risk profile or risk appetite). The hypothesis

is that by taking an incremental risk (of losing capital, wholly or partly), it

would be possible for the investor to earn an incremental return.

But assuming risk without regularly monitoring it is foolhardy. Therefore, it

would be prudent for investors who take a risk to be able to manage this risk.

A mutual fund is the solution for investors who lack the time, the

inclinations or the skills to actively manage their investment risk in

individual securities.

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The following categories of investors are eligible to invest in Indian mutual

funds:

Resident Indian adult individuals, either singly or jointly (not

exceeding three);

Parents & lawful guardians on behalf of minors;

Companies, corporate bodies registered in India;

Registered societies & co-operative societies authorized to invest in

such units;

Partners of partnership firms;

Hindu undivided families (HUFs), in the sole name of the karta;

Banks (including co-operative banks & regional rural banks) &

financial institutions & investment institutions;

Other mutual funds registered with SEBI;

TRUSTEES

Trustees are the people within a mutual fund organization who are

responsible for ensuring that investors’ interests in a scheme are properly

taken care of.

In return for their services, they are paid trustee fees, which are normally

charged to the scheme.

ASSET MANAGEMENT COMPANY (AMC)

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AMCs manage the investment portfolios of schemes. An AMCs incomes

comes the management fees it charges the schemes it manages. The

management fee is calculated as a percentage of net assets managed. Some

countries provide for performance based management fees as well.

In order to earn management fee, an AMC has naturally to employ people &

bear all the establishment cost that are related to its activity, such as for

premises, furniture, computers & other assets, software development,

communication costs, etc.

The break-even level of AUM is a function of cost structure of AMC &

distribution of assets between its different types of schemes since debt

schemes & index schemes generally yield a lower management fee.

DISTRIBUTORS

Distributors earn a commission for bringing investors into the schemes of a

mutual fund. This commission is an expense for the scheme, although there

are occasions when an AMC may choose to bear the cost, wholly or partly.

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Depending on the financial & physical resources at their disposal, the

distributors could be:

Tier 1 distributors who have their own or franchised network reaching out to

investors all across the country; or

Tier 2 distributors who are generally regional players with some reach

within their region; or

Tier 3 distributors who are small & marginal players with limited reach.

REGISTRARS

An investors holding in mutual fund schemes in typically tracked by the

scheme’s registrar & transfer agent (R&T). Some AMCs prefer to handle

this role in-house, i.e. on their own instead of appointing an R&T. The

registrar or the AMC as the case may be maintains an account of the

investor’s investments in and disinvestments from the scheme. Requests to

invest more money into a scheme or to redeem money against existing

investment in a scheme are processed by the R&T.

CUSTODIAN / DEPOSITORY

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The custodian maintains custody of the securities in which the schemes

invests as distinct from the registrars who tracks the investment by investors

in the schemes. This ensures an ongoing independent record of the

investments of the scheme. The custodian also follows up on various

corporate actions, such as rights, bonus & dividends declared by investee

companies.

In a situation where a securities are increasingly being dematerialized, the

role of the depository for such independent record of investments is

growing.

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SWOT ANALYSIS OF MUTUAL FUNDS

STRENGTHS WEAKNESS

Option available

Diversification

Professional management

Potential returns

Well regulated

Technical analysis

Convenient administration

Return potential

Low cost

Transparency

Affordability

Flexibility.

No control over cost

No tailor made portfolio

Managing a portfolio of funds

Cost of churn.

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OPPORTUNITIES THREATS

Bid scope for expansion

Saving rate in India

Growing cities

Online trading of mutual

funds

Like equity & commodity

Clubbing up with other

investments.

Uncertainity

Change of market trends

Increasing number of assets

management companies.

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EVALUATION & HISTORY OF MUTUAL FUND IN

INDIA

MUTUAL FUNDS INDUSTRY IN INDIA

TYPES OF MUTUAL FUND SCHEMES IN INDIA

FUTURE OF MUTUAL FUNDS IN INDIA

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MUTUAL FUND CONCEPT

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

share a common financial goal. The money thus collected is then invested in

capital market instruments such as shares, debentures and other securities.

The income earned through these investments and the capital appreciation

realised are shared by its unit holders in proportion to the number of units

owned by them. Thus a Mutual Fund is the most suitable investment for the

common man as it offers an opportunity to invest in a diversified,

professionally managed basket of securities at a relatively low cost. The

flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

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EVALUATION & HISTORY OF MUTUAL FUND IN INDIA

Unit Trust of India (UTI) was the first mutual fund set up in India in the year

1963. In early 1990s, Government allowed public sector banks and

institutions to set up mutual funds. UTI has an extensive marketing network

of over 40,000 agents all over the country.

In the year 1992, Securities and exchange Board of India (SEBI) Act was

passed. The objectives of SEBI are – to protect the interest of investors in

securities and to promote the development of and to regulate the securities

market.

In 1995, the RBI permitted private sector institutions to set up Money

Market Mutual Funds (MMMFs). They can invest in treasury bills, call and

notice money, commercial paper, commercial bills accepted/co-accepted by

banks, certificates of deposit and dated government securities having

unexpired maturity upto one year.

As far as mutual funds are concerned, SEBI formulates policies and

regulates the mutual funds to protect the interest of the investors. SEBI

notified regulations for the mutual funds in 1993. Thereafter, mutual funds

sponsored by private sector entities were allowed to enter the capital market.

The regulations were fully revised in 1996 and have been amended

thereafter from time to time. SEBI has also issued guidelines to the mutual

funds from time to time to protect the interests of investors.

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All mutual funds whether promoted by public sector or private sector entities

including those promoted by foreign entities are governed by the same set of

Regulations. There is no distinction in regulatory requirements for these

mutual funds and all are subject to monitoring and inspections by SEBI. The risks

associated with the schemes launched by the mutual funds sponsored by these entities are

of similar type.

1963 Establishment of Unit Trust of India

1964 Unit Scheme 1964 launched

1987 Entry of non-UTI, Public Sector mutual funds

1993 Entry of private sector funds

First Mutual Fund regulations came into being

1996 Substitution of prevalent rules by SEBI (Mutual Funds)

Regulations 1996

2003 UTI bifurcated into two separate entities

- Specified Undertaking of Unit Trust of India

- UTI Mutual Fund

2004 Existence of 421 schemes, managing assets worth Rs. 153108

MUTUAL FUNDS INDUSTRY IN INDIA

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The origin of mutual fund industry in India is with the introduction of the

concept of mutual fund by UTI in the year 1963. Though the growth was

slow, but it accelerated from the year 1987 when non-UTI players entered

the industry.

In the past decade, Indian mutual fund industry had seen a dramatic

imporvements, both qualitywise as well as quantitywise. Before, the

monopoly of the market had seen an ending phase; the Assets Under

Management (AUM) was Rs. 67bn. The private sector entry to the fund

family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; it

reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the

total of it is less than the deposits of SBI alone, constitute less than 11% of

the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India

is new in the country. Large sections of Indian investors are yet to be

intellectuated with the concept. Hence, it is the prime responsibility of all

mutual fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to

the development of the sector. Each phase is briefly described as under.

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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)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first 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 in 1989 and GIC in 1990. The end of

1993 marked Rs.47,004 as assets under management.

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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

This phase had bitter experience for UTI. It was bifurcated into two separate

entities. One is the Specified Undertaking of the Unit Trust of India with

AUM of Rs.29,835 crores (as on January 2003). 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 AUM 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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The major players in the Indian Mutual Fund Industry are:

GROWTH IN ASSETS UNDER MANAGEMENT

Note:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified

Undertaking of the Unit Trust of India effective from February 2003. The

Assets under management of the Specified Undertaking of the Unit Trust of

India has therefore been excluded from the total assets of the industry as a

whole from February 2003 onwards.

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TYPES OF MUTUAL FUND SCHEMES IN INDIA

A wide variety of Mutual Fund Schemes exist to cater to the needs such as

financial position, risk tolerance and return expectations etc. The table below

gives an overview into the existing types of schemes in the Industry.

BY STRUCTURE:

a) open-ended schemes

b) close-ended schemes

c) interval schemes

BY INVESTMENT OBJECTIVE:

a) growth schemes

b) income schemes

c) Balanced schemes

d) money market schemes

OTHER SCHEMES:

a) Tax saving schemes

b) special schemes

c) index schemes

d) sector specific schemes

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BY STRUCTURE

a) Open-ended schemes

Open-ended or open mutual funds are much more common than closed-

ended funds and meet the true definition of a mutual fund – a financial

intermediary that allows a group of investors to pool their money together to

meet an investment objective– to make money! An individual or team of

professional money managers manage the pooled assets and

choose investments, which create the fund’s portfolio. They are established

by a fund sponsor, usually a mutual fund company, and valued by the fund

company or an outside agent. This means that the fund’s portfolio is valued

at "fair market" value, which is the closing market value for listed public

securities. An open-ended fund can be freely sold and repurchased by

investors.

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Buying and Selling:

Open funds sell and redeem shares at any time directly to shareholders.

To make an investment, you purchase a number of shares through a

representative, or if you have an account with the investment firm, you

can buy online, or send a check. The price you pay per share will be

based on the fund’s net asset value as determined by the mutual fund

company. Open funds have no time duration, and can be purchased or

redeemed at any time, but not on the stock market. An open fund issues

and redeems shares on demand, whenever investors put money into the

fund or take it out. Since this happens routinely every day, total assets of

the fund grow and shrink as money flows in and out daily. The more

investors buy a fund, the more shares there will be. There's no limit to the

number of shares the fund can issue. Nor is the value of each individual

share affected by the number outstanding, because net asset value is

determined solely by the change in prices of the stocks or bonds the fund

owns, not the size of the fund itself. Some open-ended funds charge an

entry load (i.e., a sales charge), usually a percentage of the net asset

value, which is deducted from the amount invested.

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Advantages:

Open funds are much more flexible and provide instant liquidity as funds

sell shares daily. You will generally get a redemption (sell) request

processed promptly, and receive your proceeds by check in 3-4 days. A

majority of open mutual funds also allow transferring among various

funds of the same “family” without charging any fees. Open funds range

in risk depending on their investment strategies and objectives, but still

provide flexibility and the benefit of diversified investments, allowing

your assets to be allocated among many different types of holdings.

Diversifying your investment is key because your assets are not impacted

by the fluctuation price of only one stock. If a stock in the fund drops in

value, it may not impact your total investment as another holding in the

fund may be up. But, if you have all of your assets in that one stock, and

it takes a dive, you’re likely to feel a more considerable loss.

Risks:

Risk depends on the quality and the kind of portfolio you invest in. One

unique risk to open funds is that they may be subject to inflows at one

time or sudden redemptions, which leads to a spurt or a fall in the

portfolio value, thus affecting your returns. Also, some funds invest in

certain sectors or industries in which the value of the in the portfolio can

fluctuate due to various market forces, thus affecting the returns of the

fund.

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b) Close-ended schemes

Close-ended or closed mutual funds are really financial securities that are

traded on the stock market. Similar to a company, a closed-ended fund

issues a fixed number of shares in an initial public offering, which trade on

an exchange. Share prices are determined not by the total net asset value

(NAV), but by investor demand. A sponsor, either a mutual fund company

or investment dealer, will raise funds through a process commonly known as

underwriting to create a fund with specific investment objectives. The fund

retains an investment manager to manage the fund assets in the manner

specified.

Buying and Selling: 

Unlike standard mutual funds, you cannot simply mail a check and buy

closed fund shares at the calculated net asset value price. Shares are

purchased in the open market similar to stocks. Information regarding

prices and net asset values are listed on stock exchanges; however,

liquidity is very poor. The time to buy closed funds is immediately after

they are issued. Often the share price drops below the net asset value,

thus selling at a discount. A minimum investment of as much as $5000

may apply, and unlike the more common open funds discussed below,

there is typically a five-year commitment.

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Advantages:

The prospect of buying closed funds at a discount makes them appealing

to experienced investors. The discount is the difference between the

market price of the closed-end fund and its total net asset value. As the

stocks in the fund increase in value, the discount usually decreases and

becomes a premium instead. Savvy investors search for closed-end funds

with solid returns that are trading at large discounts and then bet that the

gap between the discount and the underlying asset value will close. So

one advantage to closed-end funds is that you can still enjoy the benefits

of professional investment management and a diversified portfolio of

high quality stocks, with the ability to buy at a discount.

Risks:

Investing in closed-end funds is more appropriate for seasoned investors.

Depending on their investment objective and underlying portfolio,

closed-ended funds can be fairly volatile, and their value can fluctuate

drastically. Shares can trade at a hefty discount and deprive you from

realizing the true value of your shares. Since there is no liquidity,

investors must buy a fund with a strong portfolio, when units are trading

at a good discount and the stock market is in position to rise.

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BY INVESTMENT OBJECTIVE:

A scheme can also be classified as growth scheme, income scheme, or

balanced scheme considering its investment objective. Such schemes may be

open-ended or close-ended schemes as described earlier. Such schemes may

be classified mainly as follows:

a) Growth / Equity Oriented Schemes

The aim of growth funds is to provide capital appreciation over the medium

to long- term. Such schemes normally invest a major part of their corpus in

equities. Such funds have comparatively high risks. These schemes provide

different options to the investors like dividend option, capital appreciation,

etc. and the investors may choose an option depending on their preferences.

The investors must indicate the option in the application form. The mutual

funds also allow the investors to change the options at a later date. Growth

schemes are good for investors having a long-term outlook seeking

appreciation over a period of time.

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Equity funds

As explained earlier, such funds invest only in stocks, the riskiest of asset

classes. With share prices fluctuating daily, such funds show volatile

performance, even losses. However, these funds can yield great capital

appreciation as, historically, equities have outperformed all asset classes. At

present, there are four types of equity funds available in the market. In the

increasing order of risk, these are:

Index funds

These funds track a key stock market index, like the BSE (Bombay Stock

Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty.

Hence, their portfolio mirrors the index they track, both in terms of

composition and the individual stock weightages. For instance, an index

fund that tracks the Sensex will invest only in the Sensex stocks. The idea is

to replicate the performance of the benchmarked index to near accuracy.

Investing through index funds is a passive investment strategy, as a fund’s

performance will invariably mimic the index concerned, barring a minor

"tracking error". Usually, there’s a difference between the total returns given

by a stock index and those given by index funds benchmarked to it. Termed

as tracking error, it arises because the index fund charges management fees,

marketing expenses and transaction costs (impact cost and brokerage) to its

unitholders. So, if the Sensex appreciates 10 per cent during a particular

period while an index fund mirroring the Sensex rises 9 per cent, the fund is

said to have a tracking error of 1 per cent.

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To illustrate with an example, assume you invested Rs 1,000 in an index

fund based on the Sensex on 1 April 1978, when the index was launched

(base: 100). In August, when the Sensex was at 3.457, your investment

would be worth Rs 34,570, which works out to an annualised return of 17.2

per cent. A tracking error of 1 per cent would bring down your annualised

return to 16.2 per cent. Obviously, the lower the tracking error, the better the

index fund.

Diversified funds

Such funds have the mandate to invest in the entire universe of stocks.

Although by definition, such funds are meant to have a diversified portfolio

(spread across industries and companies); the stock selection is entirely the

prerogative of the fund manager.

This discretionary power in the hands of the fund manager can work both

ways for an equity fund. On the one hand, astute stock-picking by a fund

manager can enable the fund to deliver market-beating returns; on the other

hand, if the fund manager’s picks languish, the returns will be far lower.

The crux of the matter is that your returns from a diversified fund depend a

lot on the fund manager’s capabilities to make the right investment

decisions. On your part, watch out for the extent of diversification prescribed

and practiced by your fund manager. Understand that a portfolio

concentrated in a few sectors or companies is a high risk, high return

proposition. If you don’t want to take on a high degree of risk, stick to funds

that are diversified not just in name but also in appearance.

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Tax-saving funds

Also known as ELSS or equity-linked savings schemes, these funds offer

benefits under Section 88 of the Income-Tax Act. So, on an investment of up

to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per

cent from your taxable income. You can invest more than Rs 10,000, but

you won’t get the Section 88 benefits for the amount in excess of Rs 10,000.

The only drawback to ELSS is that you are locked into the scheme for three

years.

In terms of investment profile, tax-saving funds are like diversified funds.

The one difference is that because of the three year lock-in clause, tax-

saving funds get more time to reap the benefits from their stock picks, unlike

plain diversified funds, whose portfolios sometimes tend to get dictated by

redemption compulsions.

Sector funds

The riskiest among equity funds, sector funds invest only in stocks of a

specific industry, say IT or FMCG. A sector fund’s NAV will zoom if the

sector performs well; however, if the sector languishes, the scheme’s NAV

too will stay depressed.

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Barring a few defensive, evergreen sectors like FMCG and pharmacy, most

other industries alternate between periods of strong growth and bouts of

slowdowns. The way to make money from sector funds is to catch this

cycles–get in when the sector is poised for an upswing and exit before it

slips back. Therefore, unless you understand a sector well enough to make

such calls, and get them right, avoid sector funds.

b) Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such as

bonds, corporate debentures, Government securities and money market

instruments. Such funds are less risky compared to equity schemes. These

funds are not affected because of fluctuations in equity markets. However,

opportunities of capital appreciation are also limited in such funds. The

NAVs of such funds are affected because of change in interest rates in the

country. If the interest rates fall, NAVs of such funds are likely to increase

in the short run and vice versa. However, long term investors may not bother

about these fluctuations.

Such funds attempt to generate a steady income while preserving investors’

capital. Therefore, they invest exclusively in fixed-income instruments

securities like bonds, debentures, Government of India securities, and money

market instruments such as certificates of deposit (CD), commercial paper

(CP) and call money. There are basically three types of debt funds.

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Income funds

By definition, such funds can invest in the entire gamut of debt instruments.

Most income funds park a major part of their corpus in corporate bonds and

debentures, as the returns there are the higher than those available on

government-backed paper. But there is also the risk of default–a company

could fail to service its debt obligations.

Gilt funds

They invest only in government securities and T-bills–instruments on which

repayment of principal and periodic payment of interest is assured by the

government. So, unlike income funds, they don’t face the spectre of default

on their investments. This element of safety is why, in normal market

conditions, gilt funds tend to give marginally lower returns than income

funds.

Liquid funds

They invest in money market instruments (duration of up to one year) such

as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds

are the least volatile. They are ideal for investors seeking low-risk

investment avenues to park their short-term surpluses.

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The ‘risk’ in debt funds

Although debt funds invest in fixed-income instruments, it doesn’t follow

that they are risk-free. Sure, debt funds are insulated from the vagaries of the

stock market, and so don’t show the same degree of volatility in their

performance as equity funds. Still, they face some inherent risk, namely

credit risk, interest rate risk and liquidity risk.

Interest rate risk: This is common to all three types of debt funds, and

is the prime reason why the NAVs of debt funds don’t show a steady,

consistent rise. Interest rate risk arises as a result of the inverse

relationship between interest rates and prices of debt securities. Prices

of debt securities react to changes in investor perceptions on interest

rates in the economy and on the prevelant demand and supply for debt

paper. If interest rates rise, prices of existing debt securities fall to

realign themselves with the new market yield. This, in turn, brings

down the NAV of a debt fund. On the other hand, if interest rates fall,

existing debt securities become more precious, and rise in value, in

line with the new market yield. This pushes up the NAVs of debt

funds.

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Credit risk: This throws light on the quality of debt instruments a fund

holds. In the case of debt instruments, safety of principal and timely

payment of interest is paramount. There is no credit risk attached with

government paper, but that is not the case with debt securities issued

by companies. The ability of a company to meet its obligations on the

debt securities issued by it is determined by the credit rating given to

its debt paper. The higher the credit rating of the instrument, the lower

is the chance of the issuer defaulting on the underlying commitments,

and vice-versa. A higher-rated debt paper is also normally much more

liquid than lower-rated paper. Credit risk is not an issue with gilt

funds and liquid funds. Gilt funds invest only in government paper,

which are safe. Liquid funds too make a bulk of their investments in

avenues that promise a high degree of safety. For income funds,

however, credit risk is real, as they invest primarily in corporate

paper.

Liquidity risk: This refers to the ease with which a security can be

sold in the market. While there is brisk trading in government

securities and money market instruments, corporate securities aren’t

actively traded. More so, when you go down the rating scale–there is

little demand for low-rated debt paper. As with credit risk, gilt funds

and liquid risk don’t face any liquidity risk. That’s not the case with

income funds, though. An income fund that has a big exposure to low-

rated debt instruments could find it difficult to raise money when

faced with large redemptions.

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c) Balanced Fund

The aim of balanced funds is to provide both growth and regular income as

such schemes invest both in equities and fixed income securities in the

proportion indicated in their offer documents. These are appropriate for

investors looking for moderate growth. They generally invest 40-60% in

equity and debt instruments. These funds are also affected because of

fluctuations in share prices in the stock markets. However, NAVs of such

funds are likely to be less volatile compared to pure equity funds.

As the name suggests, balanced funds have an exposure to both equity and

debt instruments. They invest in a pre-determined proportion in equity and

debt–normally 60:40 in favour of equity. On the risk ladder, they fall

somewhere between equity and debt funds, depending on the fund’s debt-

equity spilt–the higher the equity holding, the higher the risk. Therefore,

they are a good option for investors who would like greater returns than

from pure debt, and are willing to take on a little more risk in the process.

d) Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity,

preservation of capital and moderate income. These schemes invest

exclusively in safer short-term instruments such as treasury bills, certificates

of deposit, commercial paper and inter-bank call money, government

securities, etc. Returns on these schemes fluctuate much less compared to

other funds. These funds are appropriate for corporate and individual

investors as a means to park their surplus funds for short periods.

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Other types of funds

a) Pooled Funds

A "pooled fund" is a unit trust in which investors contribute funds that are

then invested, or managed, by a third party. A pooled fund operates like a

mutual fund, but is not required to have a prospectus under securities law.

Pooled funds are offered by trust companies, investment management firms,

insurance companies, and other organizations.

Pooled funds and mutual funds are substantially the same, but differ in their

legal form. Like a mutual fund, a pooled fund is a trust that is set up under a

"trust indenture". This specifies how the pooled fund will operate and what

the duties of the various parties to the trust indenture will be. The trust

indenture specifies an investment policy for the pooled fund and how

management fees will be charged. Pooled funds, like mutual funds, are "unit

trusts". This means that investors deposit funds into the trust in exchange for

"units" of the fund, which reflect a pro-rata share of the fund's investments.

The fund trust indenture will specify how units are issued and redeemed, as

well as, the frequency and procedures for valuations. Pooled funds can be

either "closed" or "open". An "open" pooled fund is the most common type

of pooled fund, and allows units to be redeemed at scheduled valuations.

A "closed" pooled fund does not allow redemptions, except in specific

circumstances or at termination of the trust. Closed pooled funds are usually

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established to hold illiquid investments such as real estate or very

specialized investment programs, such as hedge funds. The major difference

between pooled funds and mutual funds is their legal status under securities

law. Pooled funds are not "public" investments, which means investment

and trading in pooled funds is restricted. Securities legislation defines the

rules for a "public" security. Publicly issued securities must meet certain

requirements before issue, particularly in information disclosure through

their prospectus, or reporting by issuers. Pooled funds are exempt from

prospectus requirements under securities law, usually under the "private

placement", or "sophisticated investor", clauses in the Securities Act. This

means that investments in pooled funds must be over $150,000. Financial

institutions such as banks, trust companies or investment counselling firms

are allowed to invest their clients in their own pooled funds, by specific

exemptions granted under the Securities Act. Each pooled fund investment

must be reported to the relevant Securities Commission. Once a client is

invested in a pool fund, the result is identical to being in a mutual fund with

the same investment mandate. Fees for pooled funds can either be charged

inside or outside the fund. Valuation of pooled funds can be less frequent, as

there tends to be less activity with fewer and more sophisticated pooled fund

investors. Pooled fund fees are usually lower than mutual funds, as these

funds are created to deal with larger investors. Pooled funds are allowed to

charge their expenses from operations against the fund assets, and the trust

indenture provides for the sponsor, or trustee, to hire outside agents to

perform certain tasks, such as custody and unit record-keeping.

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b) Insurance Segregated Funds

An insurance segregated fund is an insurance contract issued under

insurance legislation by an insurance company. Its value is based on the

performance of a portfolio of marketable securities, such as stocks and

bonds.

As an insurance contract, a segregated fund is an obligation of an insurance

company and forms part of its assets. Insurance companies "segregate" the

portfolios which these contracts are based on, dividing these assets from

their general assets. The contracts have a minimum value, the price at which

they were issued.

It is important to realize that insurance segregated fund might look and act

like a mutual fund, but that it is actually something quite different. A mutual

fund is a trust, or sometimes a company, which owns title to the actual

securities in the funds. The unitholders own the trust which in turn owns the

assets. An insurance segregated fund is an insurance contract or a "variable

rate annuity". Legally, the insurance company issues the contract the same

way it would an annuity or life insurance policy under the relevant insurance

legislation. The buyer or "policy holder" has contracted for a payment that is

based on the underlying prices of the portfolio that supports the contract but

does not have a direct claim or ownership on the securities that form the

portfolio. Although insurance companies "segregate" the assets to support

these contracts, the holder of the contract does not own these assets.

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The insurance contract nature of a segregated fund makes for an interesting

feature that insurance companies often use in their marketing. The contract

can be issued with an initial "book value" that the company can agree to pay

no matter what the actual value of the portfolio supporting the contract. If

the market value of the portfolio falls below the book value, the company

agrees to pay no less than the book value which is known as the "minimum

value guarantee" or the "higher of book or market". Initially, this guarantee

feature has some value. Since marketable securities increase over longer

periods of time it becomes less important over time.

Another wrinkle of segregated funds is their tax status. Since they are

insurance contracts, they are taxed as such. Sometimes segregated funds are

used as investment options for "universal" or "whole life" life insurance

which provides a savings option as well as insurance. Life companies market

the tax shelter aspects of these contracts, which allow compounding of

investment income untaxed while inside the insurance contract.

Another sales aspect of segregated funds is their characteristics under

bankruptcy legislation in some jurisdictions. In Canada, for example, an

insurance contract is not available to creditors in a bankruptcy. This means

an RRSP that uses segregated funds would be protected from creditors in a

bankruptcy while an RRSP which invested in mutual funds would be

exposed.

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In summary, although insurance segregated funds look and function like

mutual funds, they are actually insurance contracts based on the valuation of

a portfolio of marketable securities. As always, investors are wise to

consider all the aspects of insurance contracts in their legal jurisdiction prior

to investment.

c) Specific Sectoral & Thematic funds /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. Thematic funds are those fund which invest in a

stocks which will benefit from a particular theme like Outsourcing,

Infrastructure 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. Restrain

the urge to invest in sector/thematic funds no matter how compelling an

argument your agent or the fund house makes. Over the long-term, there is

little value that a restrictive and narrow theme can bring to the table. It is

best to opt for a broad investment mandate that is best championed by well-

diversified equity funds.

UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and

Exchange Board of India for an omnibus fund that will have six options. The

UTI Thematic Fund is the umbrella fund.

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It will have sub-funds that will focus on large-cap stocks, mid-cap stocks,

auto, banking, PSU stocks and basic industries. UTI now has a UTI Growth

Sectors Umbrella with five options that focus on investing in stocks in the

services, petro, healthcare pharmaceuticals, information technology, and

consumer products.

The new fund also proposes to provide investors four automatic triggers that

could be used for exit: value, appreciation, date and stop loss.

FUTURE OF MUTUAL FUNDS IN INDIA

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By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore.

It is estimated that by 2010 March-end, the total assets of all scheduled

commercial banks should be Rs 40,90,000 crore. The annual composite rate

of growth is expected 13.4% during the rest of the decade. In the last 5 years

we have seen annual growth rate of 9%. According to the current growth

rate, by year 2010, mutual fund assets will be double.

Let us discuss with the following table:

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03Mar-

04Sep-04 4-Dec

Deposits 605410 851593 989141 1131188 1280853 - 1567251 1622579

Change in %

over last yr  15 14 13 12 - 18 3

Source - RBI

Mutual Fund AUM’s Growth

Month/YearMar-

98

Mar-

00

Mar-

01

Mar-

02

Mar-

03Mar-04 Sep-04 4-Dec

MF AUM's 68984 93717 83131 94017 75306 137626 151141 149300

Change in % over

last yr  26 13 12 25 45 9 1

Source – AMFI

SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN INDIA

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100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets

like Fidelity Investments, US based, with over US$1trillion assets

under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing

these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US

having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual

funds are concentrating on the 'A' class cities. Soon they will find

scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry

with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice

NEWS PAPER: ECONOMIC TIMES

DATE: 21- 8- 08

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WHAT IS NET ASSET VALUE?

The repurchase price is always linked to the net asset value (NAV). The

NAV in nothing but the market price of each unit of particular scheme in

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relation to all the assets of the scheme. It can other wise be called “the

intrinsic value” of each unit. This value is a true indicator of the

performance of the fund. If the NAV is more than the face value of the unit,

it clearly indicates that the money invested on that unit has appreciated &

the fund has performed well.

Illustration

For instance, fortune mutual fund has introduced a scheme called millionaire

scheme. The scheme size is 100 crores. The value of each unit is Rs. 10/-. It

has invested all the funds in shares & debentures & the market value of the

investment comes to Rs. 200 crores.

Now NAV = 200 crores x value of each unit 100 crores

Thus, the value of each unit of Rs. 10/- is worth Rs. 20.

Hence the NAV = Rs. 20.

This NAV forms the basis for fixing the repurchase price & reissue price.

The investor can call up the fund any time to find out the NAV. Some MFs

publish the NAV weekly in two or three leading daily news papers.

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BENEFITS OF INVESTING IN MUTUAL FUNDS &

RISK RETURN GRID

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BENEFITS OF INVESTING IN MUTUAL FUNDS

1. PROFESSIONAL MANAGEMENT

Mutual funds provide the services of experienced & skilled professionals,

backed by a dedicated investment research team that analyses the

performance & prospects of companies & selects suitable investments to

achieve the objective of the scheme.

2. DIVERSIFICATION

Mutual funds invest in a number of companies across a broad cross-selection

of industries & sectors. This diversification reduces the risk because seldom

do all stocks decline at the same time & in the same proportion. You achieve

this diversification through a mutual fund with far less money than you can

do on your own.

3. CONVENIENT ADMINISTRATION

Investing in a mutual fund reduces paperwork & helps you avoid many

problems such as bad deliveries, delayed payments & follow up with brokers

& companies. Mutual funds save your time & investing easy & convenient.

4. RETURN POTENTIAL

Over a medium to long-term, mutual funds have a potential to provide a

higher return as they invest in a diversified basket of selected securities.

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5. LOW COSTS

Mutual funds are a relatively less expensive way to invest compared to

directly investing in the capital markets because the benefits of scale in

brokerage, custodial & other fees translate into lower costs for investor.

6. LIQUIDITY

In open-end schemes, the investor gets the money back promptly at net asset

value related prices from the mutual fund. In closed-end scheme, the units

can be sold on a stock exchange at the prevailing market price or the

investor can avail of the facility of direct repurchase at NAV related prices

by the mutual fund.

7. 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

& outlook.

8. FLEXIBILITY

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Though features such as regular investment plans, regular withdrawals plans

& dividend reinvestment plans, you can systematically invest or withdraw

funds according to your needs & convenience.

9. AFFORDABILITY

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

stocks. A mutual fund because of its large corpus allows even a small

investor to take the benefit of its investment strategy.

10. CHOICE OF SCHEMES

Mutual funds offer a family of schemes to suit your varying needs over a

lifetime.

11. WELL REGULATED

RISK RETURN GRID

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RISK

TOLERANCE/

RETURN

EXPECTED

FOCUS SUITABLE

PRODUCTS

BENEFITS

OFFERED BY

MFs

LOW Debt Bank/ company

FD, debt based

funds

Liquidity, better

post-tax returns

MEDIAM Partially debt /

Partially equity

Balanced funds,

some diversified

equity funds &

some debt funds,

mix of shares &

FDs

Liquidity, better

post-tax returns,

better

management,

diversification

HIGH Equity Capital market,

equity funds

(diversified as

well as sector)

Diversification,

expertise in stock

picking, liquidity,

tax free dividends

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Their appeal is not just limited to these categories of investors. Specific

goals like career planning for children & retirement plans are also catered to

buy mutual funds. Essentially debt oriented, children funds invite

investments, where the funds are locked till the child attains majority &

requires money for higher education. One can invest today & assure

financial support to your child when he/she requires them. The schemes

have given very good returns of around 14 percent in the last one-year

period. These schemes are also designed to provide tax efficiency. The

returns generated by these funds come under capital gains and attract tax at

concessional rates.

Besides this, if the objective was to save taxes, the industry offers equity

linked savings schemes as well. Equity-based funds, they can take long-term

call on stock & market conditions without having to worry about redemption

pressure as the money is locked in for three years & provide good returns.

Some of the ELSS have been exceptional performers in past & cater to

equity investor with good performances. The industry offered tax benefits

under various sections of the IT Act. For e.g. dividend income is free in the

hands of the investor while capital gains are taxed after providing for cost

inflation indexation. Hitherto, the benefits under section 54 EA/EB were

available to take benefits of the tax provisions for capital gains but have now

been removed.

The benefits listed so far have essentially been for the small retail investor

but the industry can attract investment from institutional & big investor as

well. Liquid funds offer liquidity as well as better returns than banks & so

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attract investors. Many funds provide anytime withdrawal enabling a big

investor to take benefits.

Indeed, the appeal of mutual funds cuts across investor classes.

In other developed countries, mutual funds attract much more investments as

compared to the banking sector but in India the case is reverse. We lack

awareness about the benefits that are offered by these schemes. It is time that

investors irrespective of their risk capacities, made intelligent decisions to

generate better returns & mutual funds are definitely one of the ways to go

about it.

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MARKETING OF MUTUAL FUNDS

Marketing of services has been considered the most vital area of operation of

mutual fund industry keeping in view the ever increasing competition of

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similar or alternative products. Marketing is the management process which

identifies, anticipates & satisfies customers’ requirements profitably. Since

the purpose of any organization is to create, win & retain a customer, the

focal point of any marketing strategy of mutual funds should be the

customer or investor.

Virtually all providers of goods & services want to deliver good quality.

Mutual fund managers are also no exception to this. But a financial

investment is not a consumer product with identifiable, measurable

consistency of performance. For instance, a shampoo always looks, smells &

performs the same from bottle to bottle of the same brand. In contrast,

mutual fund managers cannot make any promises about the future

performance of the investment. They can talk only about how funds have

performed in the past & assure investors of the professional expertise of the

managers & their general expectations. Thus, the marketing of the fund

differs in some very important ways with the marketing of goods. As a

result, fund marketers must adapt their skills to fit the demands of a dynamic

investment environment. In the case of mutual funds, managerial efficiency

& investment skills would determine returns. Successful mutual fund

marketing, therefore, must create confidence among potential investors &

strengthen their desire to put their money with particular fund.

It is not only publicity, talking skills & public relations which will

strengthen confidence, but also evidence of good performance. Additionally

organizational image, visibility of operational policies & quality of

management form an indirect part of mutual fund marketing.

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MARKETING PLAN

In a wide market like India where investors’ awareness is yet to take shape,

mutual funds have important role to educate investors (particularly those

who are located in rural & semi-urban areas) about the main fold advantages

of investment in mutual funds. Therefore, a well planed marketing strategy

has to be designed to mobilize savings by educating investors & creating

confidence about safety & returns. In a changing environment of financial

services & increasing competition from a wide spectrum of financial

products & institutions offering them, mutual funds marketing has to

maximize customer’s satisfaction by optimizing internal & external

efficiency in resource use, competitive product development, cost efficient

distribution system, etc. this calls for a well designed marketing plan &

marketing strategy. It is essential that the marketing plan for mutual fund

services be based on a co-relation matrix of firm-product-customer relation

because of the very nature of products which are intangible & have the

elements of inseparability & perishability.

Any marketing plan for mutual funds should include the following tools of

marketing mix to form the marketing strategy to achieve the marketing

objectives, in the target market.

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PRODUCT PLANNING

Mutual funds provide financial services which are intangible like any other

financial services & the quality of services depends not only on product but

SERVICINGSERVICING

PROMOTION

PROMOTION

DISTRIBUTION DISTRIBUTION

PRICINGPRICING

BRANDING BRANDING

PRODUCT PLANNING

PRODUCT PLANNING

TARGET MARKET

TARGET MARKET

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also on performance. Mutual funds operate under a very volatile situation of

the stock market & their performance is closely scrutinized by taking stock

market performance as an index. Since the basic objective of setting up

mutual fund is to mobilize funds from the public it becomes a difficult task

of winning over the confidence of the investing public by directly appealing

to them. As the mutual fund deal with the savings of the public, they have to

shoulder more responsibility & be very cautious in introducing mutual fund

products (schemes) with innovations & new instruments to attract the

investors. The mutual fund products i.e., schemes are basically investment

object oriented & the savings mobilized by them are invested in the

instruments like shares, bonds, etc., that is protected in the schemes. There is

little scope of flexibility, therefore a lot of care need to be taken while

designing particular products. Expected changes in the financial market must

be kept in view for future investment returns & the changing profile of

customers or investors must be taken into account to identify the segments

of savings market likely to be tapped .thus it became an important function

for product designer to integrate the market segments & investment

instruments while designing new products or schemes.

Various segments of potential savings market have varied expectations.

Individual investor preferences also change under the influence of various

economic factors. Some are interested in long-term growth some in regular

income, tax benefits, etc. new products should be aimed at satisfying one or

more objectives & seasonality also has an important bearing on launching a

new product. Designing & developing a new product would need the help of

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market research to assess the market potential, availability of existing

product & future growth in demand. Formulation of a scheme, therefore,

will be a research based task & new ideas will require the support of facts &

exposure to feasibility tests before being acceptable.

BRANDING

This is an important part of product development. Like the manufactures of

consumer goods, sponsors of mutual fund also strive to differentiate their

products & instill recognition of their brand name in the consumers. They

seek to build the customers loyalty & generate repeat business. Brand name

signifies the market segments, inherent benefits & investment objectives &

ensures customer loyalty. Brand identity is an important marketing factor

because it facilitates product identification at the market place. In India,

most of the products or schemes are linked to the names of the mutual funds.

For example, alliance ’95 fund, alliance equity fund, alliance new

millennium fund, alliance buy India fund, alliance basic industry fund, etc.,

were launched by alliance capital mutual fund. Kothari internet opportunity

fund, kothari pioneer FMCG fund, kothari pioneer pharma fund, kothari

pioneer balances fund, kothai pioneer infotech fund, etc.

Were introduced kothari mutual funds. However, there are products not

linked to names of organizations. Example, ‘dhan series’ is identified with

LIC mutual funs, ‘master series’ with UTI & ‘magnum’ with SBI mutual

funds. It is observed that Indian mutual funds have been quite successful in

brand policy & brand identification.

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PRICING

We have learnt that low-cost strategy leads to success. Michael porter, a

Harvard business school professor who specializes in analyzing competition

in different industries, suggests that achieving low cost relative to the

competition is a way to cope successfully with competitive forces. Yet, we

observe that high cost load funds distributed through sales people have

dominated the industry. This happens because in the fund industry, it is the

distribution cost, not the manufacturing cost that separates one competitor

from another. Thus, we can say that the method of distribution is the primary

factor in setting prices in the fund industry. The prices of mutual fund is

inextricably linked with returns.

In comparing funds to typical consumer goods, there is a significant

difference. Mutual funds must disclose to the buyer any distribution fees

being paid. But it is not so in the case of consumer goods. Until sometime

ago up-front commissions as high as 8.5% of amt invested (paid on

purchase) were taken for granted. The commission rewarded the sales person

for their marketing efforts.

Now, many funds have started experimenting with a variety of pricing

techniques that are often confusing, if not misleading, for the investor.

Sometimes the load or sales charge is split into two, with a part deducted

from the purchase price & a part from redemption process (a back end-load).

Another pricing strategy eliminates all front-end loads but applies a stiff

back-end load, which declines the longer the shareholder remains in the fund

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& reaches zero in some cases. Some charge for services that were formally

free, such as switching from one fund to another within a group. Because

these pricing experiments are quite new, there is no evidence concerning

their effect on sales. But there is substantial documentation that the presence

or absence of sales charges does not prevent or guarantee good investment

performance.

DISTRIBUTION

Mutual funds are marketed through a variety of distribution channels. The

fund sponsor may directly market to the customer or funds may be

distributed through intermediaries or middlemen who in tern sell them to the

customers. Mutual fund may be having the desired qualities but that does not

ensure spontaneous acceptance of the product by the customers. Success

depends on the use of an appropriate distribution & promotion strategy.

It can be divided into the following.

a. Direct marketing

b. Selling through intermediaries

c. Joint calls.

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a. Direct Marketing:

This involves purchasing of fund shares directly from a mutual fund. It

constitutes 20% of the total sales of mutual funds.

1. Personal selling:

In this case an officer at a particular branch of a mutual fund takes

appointment from the potential prospect. Once the appointment is fixed, the

branch officer then meets the prospect & gives him all the details about the

various schemes being offered by his fund

2. Telemarketing:

Here, the emphasis is to inform people about the fund. The names & phone

numbers of people are linked at random from telephone directory.

3. Direct mail:

This is one of the most common methods followed by all mutual funds.

Addresses of people are picked at random from the telephone directory. The

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literature of the schemes offered by the fund are then mailed to the

prospective customers. The follow-up starts after 3-4 days mailing the

literature. The customer officers than calls on the people to whom the

literature was mailed & answers their queries.

Unlike selling through intermediaries, direct marketers have little personal

contact with their customers. In some cases they can not meet the customers

or make recommendations & arguments favoring one investment over

another. Direct sellers tend to be the industry’s low cost providers because

they do not have to pay any fees or commissions (loads) to any

intermediaries, thus they are usually referred to as “no load” funds. Direct

marketed funds are used by those investors who prefer to make investment

decisions themselves. Direct marketers, therefore, try to reach such investors

through print advertising, radio & TV, informative communications, word of

mouth, etc.

b. Selling through Intermediaries

This distribution channels is also referred to as sales force distribution. Most

sales force distributed funds charge a sales commission & are commonly

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referred to as load funds. Selling through intermediaries is the oldest

approach to mutual funds & accounts of more than two thirds of mutual fund

sales today. Intermediaries contribute towards 80% of the total sales of

mutual funds. They comprise people/ distributors/ dealers who are in direct

touch with the investors. They perform an important role in attracting new

customers. Most of these intermediaries are also involved in selling shares &

other investment instruments. They help a lot in convincing investors to

invest in mutual funds but a lot depends on the after sales services offered by

the intermediaries to the customer. Customers prefer to work with those

intermediaries who give them right information about the fund & keep them

abreast with the latest changes taking place in the market. The major market

intermediaries are: agents appointed by respective mutual funds, stock

brokers who are members of stock exchange & are registered with the

mutual fund, institutional & corporate agents.

The basic objective of any incentive schemes is to increase sales. In the

strategy formulation of any incentive scheme it is very important to decide

the period for which it can run in line with the profitability & selling

behavior of the people involved in the distribution channel structure.

c. Joint Calls

This is generally done when the prospective customer is a high net worth

investor. The mutual fund branch officer & an agent or intermediary like a

broker or a financial planner, together visit the prospect & brief him about

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the fund. Both the officer & the agent provide even after sales service in this

particular case.

PROMOTION

As the Indian markets move from a tough to a tougher position, the role of

marketing strategies has become the matter of core significance to fight the

fast growing competition. Almost a decade ago, the Indian market was more

of a sellers’ market as buyers did not have any options to choose from. With

the entry of the multinational corporations, the market slowly started

changing into a buyers’ market & the domestic mutual fund industry was

shaken up by the sudden competition growth. Mutual funds offer investors

hope – the hope of achieving acceptable investment returns on the

shareholders money. They also offer service & trustworthiness to investors.

Thus, these funds can survive & thrive only if they can live up to the hopes

& trusts of their individual members. Existing & potential investors must be

convinced of the expertise & skill with which the mutual funds operate.

Therefore, marketing manager must identify strategies & target promotion

efforts that will reach the different kinds of investors.

With the existence of the many players in mutual fund industry, it becomes

very difficult for the investor group to choose one mutual fund over another.

This has led the mutual funds to take to brand building by aggressive

promotion techniques. By their very nature, mutual funds require high

advertisement & sales promotion exercises to serve the needs of different

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classes of investors. As a part of their marketing campaign, mutual funds

compete by advertising heavily to reinforce brand loyalty & product

differentiation. Communication through advertisement is the most important

promotional aid for any mutual fund.

Funds regularly advertise in business newspapers & magazines besides

leading national dailies. Hoardings & banners of the funds are put at

important locations of the city where people’s movement is very high. The

loading & banner generally contains information either about one particular

scheme or brief information about all schemes of the fund. According to the

mutual fund marketers, advertising helps bring recall when customer looks

for investment opportunities. Attractive point of purchase (PoP) materials

like newsletters, intermediary magazines, etc., can also be used for

advertising. Advertising content by most of the funds has undergone a

marked change form concept-selling ads dispelling myths, to selling specific

schemes that meet defined objectives/goals. One of the limiting factors is,

however, the regulatory framework governing advertisements of mutual

fund products. For instance, in the offer documents, mutual funds are

required to mention the fund objectives in clear terms & the risk factor also

has to be mentioned.

Another hurdle is the statutory disclaimer required to be carried along with

every advertisement. Mutual funds advertisements are regulated by SEBI

which prohibit any contents that may mislead the investors. The SEBI also

lays down certain advertisement code to be followed by the mutual funds.

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SERVICING

Servicing has great significance in mutual funds like any other financial

service industry. The mutual fund industry has a large number of players &

each of them are differentiated by their orientation of servicing in the

competitive world of financial services. Services can be provided through

external agencies or internally through service department. Services like

timely & prompt issuing of certificates/ cheques & attending other requests,

continuous reporting of investment performance & other after sales services

like honoring the commitments made for redemptions & repurchase, paying

dividends & other entitlements, etc., aims at enduring customer relations. In

India most of the mutual fund provide after sales services through a mix of

external agencies. In order to ensure quality service to the customers, mutual

fund should conduct a service audit for controlling, monitoring & improving

the quality of service. A service standard can be fixed on the basis of

expectation level of customers. Mutual fund managers can than evaluate

their performance on each front.

Market Analysis & Research

Investment in mutual funds is not a one-time activity but is a continuous

one. An investor, if satisfied with the performance of a mutual fund, will

continue to be its customer; if not, he would switch over to other firms.

Therefore, to retain customers, it should be seen that the customers are

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satisfied & made happy. Since for a market driven product like mutual fund

the important determinant of success is customer satisfaction, it becomes

necessary for mutual funds to maximize customer satisfaction along with

cost minimization. Decisions regarding mutual fund schemes are to be made

after giving due thought to matters like opportunities in the market, the size

& future expansion of the market, consumer expectation, availability of

alternatives & so on. Thus, market analysis & market research becomes

important in providing insight into investor needs, preferences & behavior &

enables us to target customers, to achieve penetration, to identify new

opportunities in a highly competitive market, to monitor the effect of

economy on the savings & investment patterns of the public, etc.

HORDINGS

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BANNERS OUT SIDE THE OFFICE

SEMINAR ON MUTUAL FUND

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BROCHURES & FACT SHEET

NEWS PAPER

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PAMPHLETS

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ASSOCIATION OF MUTUAL FUND IN INDIA

(AMFI)

With the increase in mutual fund players in India, a need for mutual fund

association in India was generated to function as a non-profit organisation.

Association of Mutual Funds in India (AMFI) was incorporated on 22nd

August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which

has been registered with SEBI. Till date all the AMCs are that have launched

mutual fund schemes are its members. It functions under the supervision and

guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual

Fund Industry to a professional and healthy market with ethical lines

enhancing and maintaining standards. It follows the principle of both

protecting and promoting the interests of mutual funds as well as their unit

holders.

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THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN INDIA

The Association of Mutual Funds of India works with 30 registered AMCs

of the country. It has certain defined objectives which juxtaposes the

guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional

and ethical standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and

code of conduct which is followed by members and related people

engaged in the activities of mutual fund and asset management. The

agencies who are by any means connected or involved in the field of

capital markets and financial services also involved in this code of

conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines

in the mutual fund industry.

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Association of Mutual Fund of India do represent the Government of

India, the Reserve Bank of India and other related bodies on matters

relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It

implements a programme of training and certification for all

intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awarness programme for investors in order

to promote proper understanding of the concept and working of

mutual funds.

At last but not the least association of mutual fund of India also

disseminate information’s on Mutual Fund Industry and undertakes

studies and research either directly or in association with other bodies.

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THE SPONSORERS OF ASSOCIATION OF MUTUAL FUNDS IN

INDIA

Bank Sponsored

SBI Fund Management Ltd.

BOB Asset Management Co. Ltd.

Canbank Investment Management Services Ltd.

UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd.

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector

Indian:-

BenchMark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.

Credit Capital Asset Management Co. Ltd.

Escorts Asset Management Ltd.

JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.

Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.

Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:-

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Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Fidelity Fund Management Private Limited

Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Principal Asset Management Co. Pvt. Ltd.

Prudential ICICI Asset Management Co. Ltd.

Standard Chartered Asset Mgmt Co. Pvt. Ltd.

ASSOCIATION OF MUTUAL FUNDS IN INDIA PUBLICATIONS

AMFI publices mainly two types of bulletin. One is on the monthly basis

and the other is quarterly. These publications are of great support for the

investors to get intimation of the know-how of their parked money.

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ADVANTAGES OF MUTUAL FUNDS

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1. PROFESSIONAL MANAGEMENT

Mutual Funds provide the services of experienced and skilled professionals,

backed by a dedicated investment research team that analyses the

performance and prospects of companies and selects suitable investments to

achieve the objectives of the scheme. This risk of default by any company

that one has chosen to invest in, can be minimized by investing in mutual

funds as the fund managers analyze the companies’ financials more minutely

than an individual can do as they have the expertise to do so. They can

manage the maturity of their portfolio by investing in instruments of varied

maturity profiles.

2. DIVERSIFICATION

Mutual Funds invest in a number of companies across a broad cross-section

of industries and sectors. This diversification reduces the risk because

seldom do all stocks decline at the same time and in the same proportion.

You achieve this diversification through a Mutual Fund with far less money

than you can do on your own.

3. CONVENIENT ADMINISTRATION

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Investing in a Mutual Fund reduces paperwork and helps you avoid many

problems such as bad deliveries, delayed payments and follow up with

brokers and companies. Mutual Funds save your time and make investing

easy and convenient.

4. RETURN POTENTIAL

Over a medium to long-term, Mutual Funds have the potential to provide a

higher return as they invest in a diversified basket of selected securities.

Apart from liquidity, these funds have also provided very good post-tax

returns on year to year basis. Even historically, we find that some of the debt

funds have generated superior returns at relatively low level of risks. On an

average debt funds have posted returns over 10 percent over one-year

horizon. The best performing funds have given returns of around 14 percent

in the last one-year period. In nutshell we can say that these funds have

delivered more than what one expects of debt avenues such as post office

schemes or bank fixed deposits. Though they are charged with a dividend

distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10

percent), the net income received is still tax free in the hands of investor and

is generally much more than all other avenues, on a post tax basis.

5. LOW COSTS

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Mutual Funds are a relatively less expensive way to invest compared to

directly investing in the capital markets because the benefits of scale in

brokerage, custodial and other fees translate into lower costs for investors.

6. LIQUIDITY

In open-end schemes, the investor gets the money back promptly at net asset

value related prices from the Mutual Fund. In closed-end schemes, the units

can be sold on a stock exchange at the prevailing market price or the

investor can avail of the facility of direct repurchase at NAV related prices

by the Mutual Fund. Since there is no penalty on pre-mature withdrawal, as

in the cases of fixed deposits, debt funds provide enough liquidity.

Moreover, mutual funds are better placed to absorb the fluctuations in the

prices of the securities as a result of interest rate variation and one can

benefits from any such price movement.

7. TRANSPARENCY

Investors 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.

8. FLEXIBILITY

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Through features such as regular investment plans, regular withdrawal plans

and dividend reinvestment plans; you can systematically invest or withdraw

funds according to your needs and convenience.

9. AFFORDABILITY

A single person cannot invest in multiple high-priced stocks for the sole

reason that his pockets are not likely to be deep enough. This limits him

from diversifying his portfolio as well as benefiting from multiple

investments. Here again, investing through MF route enables an investor to

invest in many good stocks and reap benefits even through a small

investment. Investors individually may lack sufficient funds to invest in

high-grade stocks. A mutual fund because of its large corpus allows even a

small investor to take the benefit of its investment strategy.

10.CHOICE OF SCHEMES

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

lifetime.

11.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.

12.TAX BENEFITS

Last but not the least, mutual funds offer significant tax advantages.

Dividends distributed by them are tax-free in the hands of the investor. They

also give you the advantages of capital gains taxation. If you hold units

beyond one year, you get the benefits of indexation. Simply put, indexation

benefits increase your purchase cost by a certain portion, depending upon

the yearly cost-inflation index (which is calculated to account for rising

inflation), thereby reducing the gap between your actual purchase costs and

selling price. This reduces your tax liability. What’s more, tax-saving

schemes and pension schemes give you the added advantage of benefits

under Section 88. You can avail of a 20 per cent tax exemption on an

investment of up to Rs 10,000 in the scheme in a year

DISADVANTAGES OF MUTUAL FUNDS

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Mutual funds are good investment vehicles to navigate the complex and

unpredictable world of investments. However, even mutual funds have some

inherent drawbacks. Understand these before you commit your money to a

mutual fund.

1. NO ASSURED RETURNS AND NO PROTECTION OF CAPITAL

If you are planning to go with a mutual fund, this must be your mantra:

mutual funds do not offer assured returns and carry risk. For instance, unlike

bank deposits, your investment in a mutual fund can fall in value. In

addition, mutual funds are not insured or guaranteed by any government

body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by

the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve

Bank of India). There are strict norms for any fund that assures returns and it

is now compulsory for funds to establish that they have resources to back

such assurances. This is because most closed-end funds that assured returns

in the early-nineties failed to stick to their assurances made at the time of

launch, resulting in losses to investors. A scheme cannot make any

guarantee of return, without stating the name of the guarantor, and disclosing

the net worth of the guarantor. The past performance of the assured return

schemes should also be given.

2. RESTRICTIVE GAINS

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Diversification helps, if risk minimisation is your objective. However, the

lack of investment focus also means you gain less than if you had invested

directly in a single security.

Assume, Reliance appreciated 50 per cent. A direct investment in the stock

would appreciate by 50 per cent. But your investment in the mutual fund,

which had invested 10 per cent of its corpus in Reliance, will see only a 5

per cent appreciation.

3. TAXES

During a typical year, most actively managed mutual funds sell anywhere

from 20 to 70 percent of the securities in their portfolios. If your fund makes

a profit on its sales, you will pay taxes on the income you receive, even if

you reinvest the money you made.

4. MANAGEMENT RISK

When you invest in a mutual fund, you depend on the fund's manager to

make the right decisions regarding the fund's portfolio. If the manager does

not perform as well as you had hoped, you might not make as much money

on your investment as you expected. Of course, if you invest in Index Funds,

you forego management risk, because these funds do not employ managers.

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FRANKLIN INDIA BLUECHIP FUND (FIBCF)

FRANKLIN INDIA PRIMA FUND (FIPF)

FRANKLIN INDIA FLEXI CAP FUND (FIFCF)

TEMPLETON INDIA EQUITY INCOME FUND

(TIEIF)

FRANKLIN INDIA PRIMA PLUS (FIPP)

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CASE STUDY: INDIA -- FRANKLIN TEMPLETON

April 08, 2008

Franklin Templeton had an early presence in India's investment market and

was one of the first international firms to set up a local asset management

business in 1995.

Its initial focus was on fixed income, as Indian equity markets were then

undeveloped. Many of the early difficulties of setting up a fund were

smoothed by its local partner, Hathway Investments, an asset manager

whose stake it bought last year. Franklin Templeton also bolstered its

presence in India in 2002 through the acquisition of Pioneer ITI, formerly

part of Pioneer Group.

As well as providing local expertise, Pioneer ITI brought a strong equity

team to Franklin Templeton and helped boost the asset manager's retail

distribution activity and rapidly develop the mutual funds business.

Being among the first has also given it an edge, says Stephen Dover,

international chief investment officer at Franklin Templeton Investments.

Many of the senior managers on the ground have been together for 12 years

and know the companies and the economy, he says. He sees Franklin

Templeton as a long-term player in India.

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It manages $7.4bn (�3.7bn, Euro4.7bn) of assets, has offices in 33 locations

in India and a range of open-ended equity funds, such as the Franklin India

Bluechip Fund, the Templeton India Growth Fund, launched in 1996, and

the Franklin India High Growth Companies Fund, as well as debt funds.

It was also the first to set up a private pension fund in India, the Templeton

India Pension Plan, in 1997, and launched a fund of funds, the FT India Life

Stage Fund of Funds, in 2003.

Sukumar Rajah, chief investment officer of equity at Franklin Templeton

Investments, India, has seen a shift from traditional investments such as

bank deposits, property and gold, to mutual funds.

"With post-tax returns from traditional savings avenues becoming less

attractive and growing investor comfort with market-linked investment

products, investors are looking to professional fund managers to help them

achieve their financial goals."

Early on, the asset manager set up a distributor training programme, with

workshops to help financial advisers.

Mr Rajah also sees changes in the distribution landscape. "Government-

owned banks with theirwide branch network are also now beginning to

distribute mutual fund products," he says.

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FRANKLIN INDIA BLUECHIP FUND (FIBCF)

 Key Facts

 Fund Type  Steady Growth, Open end, Entry Load 2.25%

 Inception Date December 1, 1993

 Fund Manager  Anand Radhakrishnan

 Options Growth and Dividend

Investment Focus

FIBCF is a steady growth scheme that invests mainly in large cap bluechip

shares.

Launched in October 1993 as a 3-year closed end fund, FIBCF was

converted into an open end fund from January 1997. Ever since its inception,

FIBCF has been ranked consistently among India’s top performing funds.

Performance Snapshot

Last 6

Months

Last 1

Year

Last 3

Years*

Last 5

Years*

Last 7

Years*

Last 10

Years*

Since

Inception*

FIBCF (G) -20.11% -11.88% 22.06% 34.31% 32.12% 30.89% 26.62%

FIBCF (D) -20.11% -11.88% 22.06% 34.30% 32.11% 30.90% 26.63%

BSE Sensex -18.66% -7.69% 23.35% 30.53% 23.20% 16.14% 10.56%

Past performance may or may not be sustained in the future.

* Compounded and annualised. As on July 31, 2008.

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Highlights

Daily NAV 

Choice: Growth Plan and Dividend Plan (Reinvestment & Payout

options)

Low entry amount of Rs.5000 

Easy liquidity: transactions are processed within 4 working

days normally

Convenience of Systematic Investment Plan: the ideal way to accumulate

wealth over the long term

NRIs can invest on a fully repatriable basis

Fund Information

Net Asset Value: Calculated and disclosed on all business days

Minimum Investments:

New Investments Rs. 5,000

Additional Investments Rs. 1,000

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Load

Amount (Rs.) Entry Load Exit Load

< Rs. 5 Crs 2.25%

- 1% if the Units are

redeemed/switched-out within

6 months of allotment

- 0.5% if the Units are

redeemed/ switched-out after

6 months, but within 1 year of

allotment

     

=> Rs. 5 Crs< Rs. 25 Crs Nil 1% if the Units are redeemed/

switched-out within 6 months

of allotment

     

=> Rs. 25 Crs Nil Nil

Systematic Investment Plan

Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for

6 months

Systematic Withdrawal Plan

Minimum withdrawal of Rs.1000 or fixed number of units (Minimum

investment/account balance for availing this facility is Rs.25, 000)

Tax Benefits

Indexation benefits

Units are not liable to Wealth Tax and Gift Tax.

No TDS on redemptions for resident investors

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FRANKLIN INDIA PRIMA FUND (FIPF)

Key Facts

 Fund Type  Aggressive Growth, Open end fund.

 Inception Date December 1, 1993

 Fund Manager  K N Siva Subramaniam / Janakiraman

 Options Growth and Dividend

Investment Focus

Providing you exclusive access to the finest of India's smaller companies is

FIPF, India's only fund with a clear focus on this dynamic segment of the

stock market.

Research has shown that dynamic and well-managed, small and

medium sized enterprises experience higher growth rates than their well

established, larger counterparts. If identified early, investments in such

companies could give substantial capital appreciation over time. 

While there are thousands of listed smaller companies, not all of them

can experience the same level of growth and success. Identifying the

winners amongst them requires time, effort and research, which is something

that the professional fund managers at Franklin Templeton are experts at.

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Performance Snapshot

Last 6

Months

Last 1

Year

Last 3

Years*

Last 5

Years*

Last 7

Years*

Last 10

Years* Since Inception*

FIPF (G) -30.53% -23.57% 9.03% 31.41% 41.01% 32.74% 21.63%

FIPF (D) -30.53% -23.57% 9.04% 31.41% 41.01% 32.74% 21.62%

S&P CNX

500-20.52% -8.65% 19.41% 29.75% 25.68% 18.70% 10.08%

CNX

Midcap-24.23% -10.37% 17.50% 31.63% N.A N.A N.A

Past performance may or may not be sustained in the future.

* Compounded and annualised. As on July 31, 2008.

Highlights

Daily NAV 

Choice: Growth Plan and Dividend Plan (Reinvestment & Payout

options)

Low entry amount of Rs.5000 

Easy liquidity: transactions are processed within 4 working

days normally

Convenience of Systematic Investment Plan : the ideal way to

accumulate wealth over the long term

NRIs can invest on a fully repatriable basis

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Fund Information

Net Asset Value: Calculated and disclosed on all business days

Minimum Investments:

New Investment Rs. 5,000

Additional Investments Rs. 1,000

Load

Amount (Rs.) Entry Load Exit Load

< Rs. 5 Crs 2.25%

1% if redeemed/switched-out within 6

months of allotment; 0.5% if

redeemed/switched out after 6 months, but

within 1 year of allotment

=> Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6

months of allotment)

Systematic Investment Plan

Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for

6 months

Systematic Withdrawal Plan

Minimum withdrawal of Rs.500 or fixed number of units (Minimum

investment/account balance for availing this facility is Rs.25,000)

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Tax Benefits

Indexation Benefits

Units are not liable to wealth tax and gift tax.

No TDS on Redemptions for resident investors

# Applicable only for fresh investment accounts of Rs. 25 crores and above

made on or after April 1, 2005. In such accounts, every additional purchase

of Rs. 2 crores and above will also attract the same load structure provided

that a minimum balance of Rs. 25 crores is maintained throughout, other

than fluctuations in such value as a result of change in the Net Asset due to

market conditions. In case the balance falls below Rs. 25 crores (due to

redemption), an additional purchase (subject to a minimum of Rs. 2 crores)

will also attract the same load structure if such purchase makes up the short

fall to maintain the minimum balance at Rs. 25 crores.

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FRANKLIN INDIA FLEXI CAP FUND (FIFCF)

Key Facts

 Fund Type  Open end diversified equity fund

 Inception Date March 2, 2005

 Fund Manager  K N Siva Subramaniam & R Sukumar Rajah

 Options Growth and Dividend

Investment Focus

Stocks of companies are usually categorised as large-cap, midcap, and

small-cap depending on their market capitalisation. History has

demonstrated that these categories tend to perform differently through

economic and market cycles. For example, mid or small cap stocks could

move up sharply during a certain time period while large cap stocks remain

range bound and vice versa. On the other hand, large-cap stocks tend to be

less volatile than mid & small-cap stocks on account of factors such as size,

market leadership..etc. Moreover, such periods of outperformance are

typically followed by a consolidation phase and a possible reversal of the

situation. In order to derive optimal returns from the stock markets,

investments need to be diversified and have flexibility to shift allocations

across market caps.

Designed to help you achieve this with a single investment is Franklin India

Flexi Cap Fund (FIFCF). An open-end diversified equity fund, FIFCF seeks

to provide medium to long-term capital appreciation by investing in stocks

across the entire market capitalization range.

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Performance Snapshot

Last 3

Months 

Last 6

Months

Last 1

Year

Last 3

Years*

Since

Inception*

FIFCF (G) -18.09% -25.13% -17.00% 20.13% 22.46%

FIFCF (D) -18.09% -25.13% -17.00% 20.13% 22.46%

S&P CNX

500-18.13% -20.52% -8.65% 19.41% 20.55%

Past performance may or may not be sustained in the future.

* Compounded and annualised. As on July 31, 2008.

Highlights

Daily NAV 

Choice: Growth Plan and Dividend Plan (Reinvestment & Payout

options)

Low entry amount of Rs.5000 

Easy liquidity: transactions are processed within 4 working

days normally

Convenience of Systematic Investment Plan: the ideal way to

accumulate wealth over the long term

NRIs can invest on a fully repatriable basis

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MUTUAL FUNDS

Fund Information

Net Asset Value: Calculated and disclosed on all business days

Minimum Investments:

New Investments Rs. 5,000

Additional Investments Rs. 1,000

Load

Amount (Rs.) Entry Load Exit Load

< Rs. 5 Crs 2.25%

1% if redeemed/switched-out within 6

months of allotment; 0.5% if

redeemed/switched out after 6 months, but

within 1 year of allotment

=> Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6

months of allotment)

Systematic Investment Plan

Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for

6 months

Tax Benefits

Indexation benefits

Units are not liable to Wealth Tax and Gift Tax.

No TDS on redemptions for resident investors

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TEMPLETON INDIA EQUITY INCOME FUND (TIEIF)

Key Facts

 Fund Type  Open end diversified equity fund

 Inception Date May 18, 2006

 Fund Manager Dr. J. Mark Mobius (Assisted by Chetan Sehgal, Vikas

Chiranwal)

 Options Growth and Dividend

Investment Focus

The 'India Growth' story has attracted both global and domestic investors to

the Indian stock markets, which have been scaling fresh highs. At the same

time, volatility has also been on the rise. In such a situation, many investors

are looking for an investment avenue that can help them participate in the

long term equity story and also provide a smoother ride through the ups &

downs of the markets.

Designed to help you achieve this is the new equity fund from Franklin

Templeton - Templeton India Equity Income Fund (TIEIF). It is an open end

equity fund that seeks to provide a combination of long-term capital

appreciation and regular income by investing in stocks that have a current or

potentially attractive dividend yield, both in India and overseas.

Performance Snapshot

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Last 1

Month

Last 3

Months

Last 6

MonthsLast 1 Year

Since

Inception*

TIEIF (G) 2.27% -9.97% -5.90% 0.41% 17.86%

TIEIF (D) 2.27% -9.89% -5.82% 0.49% 17.90%

BSE 200 6.38% -18.93% -21.58% -7.66% 10.35%

Past performance may or may not be sustained in the future.

* Compounded and annualised. As on July 31, 2008.

Highlights

Daily NAV 

Choice: Growth Plan and Dividend Plan (Reinvestment & Payout

options)

Low entry amount of Rs.5000 

Easy liquidity: transactions are processed within 4 working

days normally

Convenience of Systematic Investment Plan: the ideal way to accumulate

wealth over the long term

NRIs can invest on a fully repatriable basis

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Fund Information

Net Asset Value: Calculated and disclosed on all business days

Minimum Investments

New Investments Rs. 5,000

Additional Investments Rs. 1,000

Load

Amount (Rs.) Entry Load Exit Load

< Rs. 5 Crs 2.25%

1% if redeemed/switched-out within 6

months of allotment; 0.5% if

redeemed/switched out after 6 months, but

within 1 year of allotment

=> Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6

months of allotment)

Systematic Investment Plan

Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for

6 months

Tax Benefits

Indexation benefits

Units are not liable to Wealth Tax and Gift Tax.

No TDS on redemptions for resident investors

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FRANKLIN INDIA PRIMA PLUS (FIPP)

Key Facts

 Fund Type  Growth, Open end fund,  

 Inception Date September 29, 1994

 Fund Manager  R.Sukumar / Anand Radhakrishnan

 Options Growth and Dividend

Investment Focus

The lifeblood of any successful business is wealth creation - simply

speaking, to generate returns in excess of its cost of capital. Time and again,

wealth creating companies have rewarded investors as the stock market

sooner or later acknowledges their unique contribution.

Giving you an easy and convenient access to such companies is FIPP. The scheme looks

to identify such companies by thorough research by giving due focus to the qualitative

aspects such as management capabilities, business strengths and unique business models

which given them a sustainable competitive advantage.  

Performance Snapshot

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Last 6

Months

Last 1

Year

Last 3

Years*

Last 5

Years*

Last 7

Years*

Last 10

Years*

Since

Inception*

FIPP (G) -22.08% -11.50% 24.87% 35.53% 33.34% 31.58% 21.23%

FIPP (D) -22.08% -11.50% 24.82% 35.50% 33.31% 31.57% 21.22%

S&P CNX

500-20.52% -8.65% 19.41% 29.75% 25.68% 18.70% 8.71%

Past performance may or may not be sustained in the future.

* Compounded and annualised. As on July 31, 2008.

Highlights

Daily NAV 

Choice: Growth Plan and Dividend Plan (Reinvestment & Payout

options)

Low entry amount of Rs.5000 

Easy liquidity: transactions are processed within 4 working

days normally

Convenience of Systematic Investment Plan : the ideal way to

accumulate wealth over the long term

NRIs can invest on a fully repatriable basis

Fund Information

Net Asset Value: Calculated and disclosed on all business days

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Minimum Investments:

New Investment Rs. 5,000

Additional Investments Rs. 1,000

Load

Amount (Rs.) Entry Load Exit Load

< Rs. 5 Crs 2.25%

1% if redeemed/switched-out within 6

months of allotment; 0.5% if

redeemed/switched out after 6 months, but

within 1 year of allotment

=> Rs. 5 Crs Nil 1% (if redeemed/switched-out within 6

months of allotment)

Systematic Investment Plan

Minimum Amount Rs. 500 per month for 12months, Rs. 1000 per month for

6 months

Systematic Withdrawal Plan

Minimum withdrawal of Rs.500 or fixed number of units (Minimum

investment/account balance for availing this facility is Rs.25,000)

Tax Benefits

Indexation Benefits

Units are not liable to wealth tax and gift tax.

No TDS on Redemptions for resident investors

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CONCLUSION

Mutual fund started long back four decades later, in 1986, the mutual fund

caravan reached England with the setting up of the foreign & colonial

government trust. In the U.S.A., the first mutual fund was launched in

Boston in 1924. The take off of mutual funds was however not spectacular.

Two factors contributed to their slow growth. One, a number of close end

mutual funds bombed in the market, and two, the crash of 1929. That the

factors killed the public interest in the funds. It was only in 1940 that the

formal attempt at regulating the functioning of mutual funds was made. But

the public enthusiasm was soon snuffed out as the market collapse in 1969-

70. The number of mutual funds grew during 1940-1990.

Though the concept of mutual funds was first introduced in India was early

as in 1964 with the setting of the unit trust of India, it emerged popular in

big way only from 1987 onwards. As financial intermediaries, mutual funds

mobilize savings from the mass & canalize them into productive investments

avenues through capital market. Particularly they are very useful to small

investors who do not have access to stock markets. With liberalization

gaining momentum & with the opening up of the financial sectors,

monopoly of public sector mutual funds has come to an end. Many private

sector mutual funds have now come to the picture. Kothari industries

promoted the kothari pioneers mutual fund in November 1993 followed by

the foreign mutual funds led by Morgan Stanley which entered the Indian

mutual funds industry in January 1994. The entry of private sector mutual

funds then imparted competitive efficiency in the industry, & help investors

to choose from funds with different maturity periods, & offer different risk

return trade offs.

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Indian investors got attracted to invest their money in mutual funds for two

reasons. First, they offer a better a return then fixed deposits. & second, the

funds are being run by professionals with requisite infrastructure to monitor

company workings & their out look of stock markets, etc. there are also a

good number of mutual funds operating various schemes tailored to meet the

needs of their target customers. Basically they can be grouped under open

ended mutual funds & close ended mutual funds. In addition to this,

different mutual funds are designed to meet the objectives of different types

of savers such as bond funds, growth oriented mutual funds, balanced fund,

industry funds, tax relief funds, index funds & off shore funds. However

open ended funds are more popular in India due to distinctive features of

regular sale & purchase of securities.

Despite, the entire disadvantages link with mutual funds, people still prefer

to invest in their money independently. So far mutual funds have not been

able to introduced schemes which are suitable to the needs of the farmers,

small entrepreneurs & merchants to tab the rural savings. Further mutual

funds have not yet developed product structuring to tab target customers.

There is a lack of product conceptualization & innovation. Weal distribution

& marketing channels are another problem which the mutual fund industries

are facing today. The merchant banking industry is not sufficiently mature &

this has led to slow development of mutual fund industry. The interesting

thing is that mutual funds are most misunderstood financial products in

India. Mutual fund industries are also not making efforts for investor’s

awareness programmes, which is the need of the day.

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MUTUAL FUNDS – FAQs

NET ASSET VALUE (NAV)

Net Asset Value is the market value of the assets of the scheme minus its

liabilities. The per unit NAV is the net asset value of the scheme divided by

the number of units outstanding on the Valuation Date.

SALE PRICE

Is the price you pay when you invest in a scheme. Also called Offer Price. It

may include a sales load.

REPURCHASE PRICE

Is the price at which a close-ended scheme repurchases its units and it may

include a back-end load. This is also called Bid Price.

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REDEMPTION PRICE

Is the price at which open-ended schemes repurchase their units and close-

ended schemes redeem their units on maturity. Such prices are NAV related.

SALES LOAD

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-

end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

REPURCHASE OR ‘BACK-END’ LOAD

Is a charge collected by a scheme when it buys back the units from the

unitholders.

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BIBLIOGRAPHY

BOOKLETS

1. SUNDAR SANKARAM, “INDIAN MUTUAL FUNDS

HANDBOOK”, VISION BOOKS PVT. LTD., 2003-07, Pg 23-28.

2. E. GORDAN & Dr. K. NATRAJAN, “FINANCIAL MARKETS

& SERVICES”, HIMALAYA PUBLISHING HOUSE, 3RD

REVISED ADDITION – 2006, Pg 294-324.

3. MUTUAL FUNDS, THE ICFAI UNIVERCITY, OCT 2004, Pg

82-101.

4. A.N. SHRIDHAR, MANAGEMENT ACCOUNTING &

FINANCIAL MANAGEMENT, Pg 15-36.

WEB SITES

1. www.amfi.com

2. www.franklintempletonindia.com

NEWS PAPERS

1. ECONOMIC TIMES – 21-8-08

2. THE SHOP LINK (PAMPHLET) -- 21-9-08

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