Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
1
EXECUTIVE SUMMARY
2
RESEARCH OBJECTIVES
3
INTRODUCTION
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 invested by the fund
manager in different types of securities depending upon the objective of the
scheme. These could range from shares to debentures to money market
instruments. The income earned through these investments and the capital
appreciation realized by the scheme is shared by its unit holders in proportion to
the number of units owned by them (pro rata). 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 portfolio at a relatively low cost. Anybody with
an inventible surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and
strategy.
A mutual fund is the ideal investment vehicle for today’s complex and modern
financial scenario. Markets for equity shares, bonds and other fixed income
instruments, real estate, derivatives and other assets have become mature and
information driven. Price changes in these assets are driven by global events
occurring in faraway places. A typical individual is unlikely to have the
knowledge, skills, inclination and time to keep track of events, understand their
implications and act speedily. An individual also finds it difficult to keep track of
ownership of his assets, investments, brokerage dues and bank transactions etc.
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.
The investors in proportion to their investments share the profits or losses. The
mutual funds normally come out with a number of schemes with different
investment objectives that are launched from time to time. 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.
4
A mutual fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full
time basis. The large pool of money collected in the fund allows it to hire such
staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits
economies of scale in all three areas - research, investments and transaction
processing. While the concept of individuals coming together to invest money
collectively is not new, the mutual fund in its present form is a 20th century
phenomenon. In fact, mutual funds gained popularity only after the Second World
War. Globally, there are thousands of firms offering tens of thousands of mutual
funds with different investment objectives. Today, mutual funds collectively
manage almost as much as or more money as compared to banks.
In the Indian context, the sponsors promote the Asset Management Company
also, in which it holds a majority stake. In many cases a sponsor can hold a
100% stake in the Asset Management Company (AMC). E.g. Birla Global
Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.,
which has floated different mutual funds schemes and also acts as an asset
manager for the funds collected under the schemes.
The following are some of the more popular definitions of a Mutual Fund
A Mutual Fund are an investment tool that allows small investors access to a
5
well-diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed
as needed. The fund's Net Asset Value (NAV) is determined each day.
Mutual Funds are financial intermediaries. They are companies set up to receive
your money, and then having received it, make investments with the money Via
an AMC. It is an ideal tool for people who want to invest but don't want to be
bothered with deciphering the numbers and deciding whether the stock is a good
buy or not. A mutual fund manager proceeds to buy a number of stocks from
various markets and industries. Depending on the amount you invest, you own
part of the overall fund.
The beauty of mutual funds is that anyone with an investible surplus of a few
hundred rupees can invest and reap returns as high as those provided by the
Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver
for growth of the country. Indian financial scene too presents a plethora of
avenues to the investors. Though certainly not the best or deepest of markets in
the world, it has reasonable options for an ordinary man to invest his savings. Let
us examine several of them:
Banks
Considered as the safest of all options, banks have been the roots of the financial
systems in India. Promoted as the means to social development, banks in India
have indeed played an important role in the rural upliftment. For an ordinary
person though, they have acted as the safest investment avenue wherein a
person deposits money and earns interest on it. The two main modes of
investment in banks, savings accounts and fixed deposits have been effectively
6
used by one and all. However, today the interest rate structure in the country is
headed southwards, keeping in line with global trends. With the banks offering
little above 9 percent in their fixed deposits for one year, the yields have come
down substantially in recent times. Add to this, the inflationary pressures in
economy and you have a position where the savings are not earning. The
inflation is creeping up, to almost 8 percent at times, and this means that the
value of money saved goes down instead of going up. This effectively mars any
chance of gaining from the investments in banks.
7
The options discussed above are essentially for the risk-averse, people who think
of safety and then quantum of return, in that order. For the brave, it is dabbling in
the stock market. Stock markets provide an option to invest in a high risk, high
return game. While the potential return is much more than 10-11 percent any of
the options discussed above can generally generate, the risk is undoubtedly of
the highest order. But then, the general principle of encountering greater risks
and uncertainty when one seeks higher returns holds true. However, as enticing
as it might appear, people generally are clueless as to how the stock market
functions and in the process can endanger the hard-earned money.
For those who are not adept at understanding the stock market, the task of
generating superior returns at similar levels of risk is arduous to say the least.
This is where Mutual Funds come into picture.
Mutual Funds are essentially investment vehicles where people with similar
investment objective come together to pool their money and then invest
accordingly. Each unit of any scheme represents the proportion of pool owned by
the unit holder (investor). Appreciation or reduction in value of investments is
reflected in net asset value (NAV) of the concerned scheme, which is declared by
the fund from time to time. Respective Asset Management Companies (AMC)
manages mutual fund schemes. Different business groups/ financial institutions/
banks have sponsored these AMCs, either alone or in collaboration with reputed
international firms. Several international funds like Alliance and Templeton are
also operating independently in India. Many more international Mutual Fund
giants are expected to come into Indian markets in the near future. The benefits
on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them. Some of the other major benefits
of investing in them are:
8
associated with them. So, while equity funds are a good bet for a long term, they
may not find favour with corporates or High Net worth Individuals (HNIs) who
have short-term needs.
Diversification
Investments are spread across a wide cross-section of industries and sectors
and so the risk is reduced. Diversification reduces the risk because all stocks
don’t move in the same direction at the same time. One can achieve this
diversification through a Mutual Fund with far less money than one can on his
own.
Professional Management
Mutual Funds employ the services of skilled professionals who have years of
experience to back them up. They use intensive research techniques to analyze
each investment option for the potential of returns along with their risk levels to
come up with the figures for performance that determine the suitability of any
potential investment.
Potential of Returns
Returns in the mutual funds are generally better than any other option in any
other avenue over a reasonable period of time. People can pick their investment
horizon and stay put in the chosen fund for the duration. Equity funds can
outperform most other investments over long periods by placing long-term calls
on fundamentally good stocks. The debt funds too will outperform other options
such as banks. Though they are affected by the interest rate risk in general, the
returns generated are more as they pick securities with different duration that
have different yields and so are able to increase the overall returns from the
portfolio.
9
Liquidity
Fixed deposits with companies or in banks are usually not withdrawn premature
because there is a penal clause attached to it. The investors can withdraw or
redeem money at the Net Asset Value related prices in the open-end schemes.
In closed-end schemes, the units can be transacted at the prevailing market price
on a stock exchange. Mutual funds also provide the facility of direct repurchase
at NAV related prices. The market prices of these schemes are dependent on the
NAVs of funds and may trade at more than NAV (known as Premium) or less
than NAV (known as Discount) depending on the expected future trend of NAV
which in turn is linked to general market conditions. Bullish market may result in
schemes trading at Premium while in bearish markets the funds usually trade at
Discount. This means that the money can be withdrawn anytime, without much
reduction in yield.
Besides these important features, mutual funds also offer several other key traits.
Important among them are:
Well Regulated
Unlike the company fixed deposits, where there is little control with the
investment being considered as unsecured debt from the legal point of view, the
Mutual Fund industry is very well regulated. All investments have to be
accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this
case and can impose penalties on the AMCs at fault. The regulations, designed
to protect the investors’ interests are also implemented effectively.
Transparency
Being under a regulatory framework, mutual funds have to disclose their
holdings, investment pattern and all the information that can be considered as
material, before all investors. This means that the investment strategy, outlooks
of the market and scheme related details are disclosed with reasonable
frequency to ensure that transparency exists in the system. This is unlike any
other investment option in India where the investor knows nothing as nothing is
disclosed.
10
Flexible, Affordable and a Low Cost affair
Mutual Funds offer a relatively less expensive way to invest when compared to
other avenues such as capital market operations. The fee in terms of brokerages,
custodial fees and other management fees are substantially lower than other
options and are directly linked to the performance of the scheme. Investment in
mutual funds also offers a lot of flexibility with features such as regular
investment plans, regular withdrawal plans and dividend reinvestment plans
enabling systematic investment or withdrawal of funds. Even the investors, who
could otherwise not enter stock markets with low investible funds, can benefit
from a portfolio comprising of high-priced stocks because they are purchased
from pooled funds.
As has been discussed, mutual funds offer several benefits that are unmatched
by other investment options. Post liberalization, the industry has been growing at
a rapid pace and has crossed Rs. 100000 crore size in terms of its assets under
management. However, due to the low key investor awareness, the inflow under
the industry is yet to overtake the inflows in banks. Rising inflation, falling interest
rates and a volatile equity market make a deadly cocktail for the investor for
whom mutual funds offer a route out of the impasse. The investments in mutual
funds are not without risks because the same forces such as regulatory
frameworks, government policies, interest rate structures, performance of
companies etc. that rattle the equity and debt markets, act on mutual funds too.
But it is the skill of the managing risks that investment managers seek to
implement in order to strive and generate superior returns than otherwise
possible that makes them a better option than many others.
Different investment avenues are available to investors. Mutual funds also offer
good investment opportunities to the investors. Like all investments, they also
carry certain risks. The investors should compare the risks and expected yields
after adjustment of tax on various instruments while taking investment decisions.
The investors may seek advice from experts and consultants including agents
and distributors of mutual funds schemes while making investment decisions.
11
Reliance Mutual Fund
Reliance Capital Asset Management Ltd. is a part of the Reliance Group - India's
largest private sector company founded by Dhirubhai H. Ambani (1932-2002) and
has total revenues of over Rs 99,000 crore (US$ 22.6 billion), with activities
spanning oil and gas, refining and marketing, petrochemicals, textiles, financial
services and insurance, power, telecom and infocom initiatives. The Group
contributes nearly 10% of the country’s indirect tax revenues and over 6% of
India’s exports.
Reliance Mutual Fund was established as a Trust in 1995 with Reliance Capital
Asset Management Ltd as the Investment Manager. With total Assets Under
Management of Rs.10,806 crores (as on 31st. May '04) we're amongst the
fastest growing mutual fund companies in India. Our vision is to be India's largest
and most trusted wealth creator.
12
TYPES OF MUTUAL FUNDS
Mutual fund schemes may be classified on the basis of its structure and its
investment objective.
By Structure:
Open-ended Funds
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units
at Net Asset Value ("NAV") related prices. The key feature of open-end schemes
is liquidity.
13
Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges
where they are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate
that at least one of the two exit routes is provided to the investor.
Interval Funds
Interval funds combine the features of open-ended and close-ended schemes.
They are open for sale or redemption during pre-determined intervals at NAV
related prices.
By Investment Objective:
Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities. It
has been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors
having a long-term outlook seeking growth over a period of time.
Income Funds
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 and Government securities. Income Funds are ideal for
capital stability and regular income.
Balanced Funds
14
The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in equities
and fixed income securities in the proportion indicated in their offer documents. In
a rising stock market, the NAV of these schemes may not normally keep pace, or
fall equally when the market falls. These are ideal for investors looking for a
combination of income and moderate growth.
Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically
entry and exit loads range from 1% to 2%. It could be worth paying the load, if the
fund has a good performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The
advantage of a no load fund is that the entire corpus is put to work.
OTHER SCHEMES:
15
1961. The Act also provides opportunities to investors to save capital gains u/s
54EA and 54EB by investing in Mutual Funds.
Special Schemes :
Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.
• Index Schemes
Index Funds attempt to replicate the performance of a particular index such as
the BSE Sensex or the NSE 50
• Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a
group of industries or various segments such as 'A' Group shares or initial public
offerings.
Debt Scheme:-
16
• Reliance Guilt Securities Fund
Equity Scheme:-
Role of people :-
Reliance play a role that directly impinges upon the welfare and
competitiveness of a large number of households and businesses in India.
They have made the pursuit of productivity the most important corporate goal.
17
Financial engineering heightens a company's need to serve its customers and
hastens its extinction if it fails to serve its customers. A company's human
resources lose the most when it fails; they gain when it succeeds.
Reliance Vision Fund `Dividend Plan (RVF-DP) an Open End Equity -Growth
scheme of Reliance Mutual Fund (RMF) has declared yet another dividend of
30 per cent (i.e. a dividend of Rs. 3.00/- per unit on a face value of Rs.
10/- per unit), in the dividend plan option.
Reliance Vision Fund has the highest ranking from CRISIL Limited. It has been
ranked CRISIL CPR 1. CRISIL CPR 1 indicates very good performance in the
category (Top 10 per cent of the Universe) while CRISIL CPR 2 indicates good
performance in the category (Next Top 20 per cent), January 2002-December
2003.
Reliance Mutual Fund on Monday said it has collected over Rs 147 crore thorugh
initial public offer of its Pharma Fund, an open-ended pharma sector scheme.
The fund would be available at Net Asset Value-based prices from Tuesday, the
company said in a release.
The fund received over 24,000 applications which has led the RMF to cross the
investor base of 2.25 lakh.
18
It can invest up to 100 per cent in equity and equity-related securities in the pharma
sector and shift its focus to fixed income securities of the sector and money market
instruments up to 100 per cent in extreme cases of bearish equity market.
The Fund managed by Reliance Capital Asset Management Ltd (RCAM) offers both
dividend and growth plans.
The dividend plan offers dividend payout and reinvestment options while growth plan
offers a bonus and growth option.
Phases of development:-
Reliance Energy (REL), formerly BSES, has invested Rs 525 crore in various mutual
funds (MFs) operated by the group during ’03-04, against Rs 59 crore in the previous
year.
During the past fiscal, the Mumbai-based power utility cut exposure in the equity
market by selling all the equity shares of Tata Power, Larsen and Toubro (L&T), Digital
Globalsoft, ITC, GE Shipping and Surat Electricity Company (SEC) in ’02-03 that it
was holding, while retaining Rs 1.5-crore worth of Hindustan Lever (HLL) shares. The
MF schemes that have attracted major investments from REL include the Reliance
Short-Term Fund Growth Plan (Rs 403.5 crore), Reliance Liquid Fund Treasury Plan -
Institutional (Rs 120.2 crore) and Reliance Liquid Fund Treasury Plan - Growth Option
(Rs 1.3 crore). During the previous year, REL invested Rs 59.3 crore in group mutual
fund schemes and cut its investments in other MFs including the Tata Gilt Securities
Fund, LICMF Bond Fund and Prudential ICICI Gilt Fund.
19
Net Asset Value (NAV)
The net asset value of the fund is the cumulative market value of the assets fund
net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling
off all the assets in the fund, this is the amount that the shareholders would
collectively own. This gives rise to the concept of net asset value per unit, which
is the value, represented by the ownership of one unit in the fund. It is calculated
simply by dividing the net asset value of the fund by the number of units.
However, most people refer loosely to the NAV per unit as NAV, ignoring the "per
unit". We also abide by the same convention.
Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by
the fund. Once it is calculated, the NAV is simply the net value of assets divided
by the number of units outstanding. The detailed methodology for the calculation
of the asset value is given below.
For liquid shares/debentures, valuation is done on the basis of the last or closing
market price on the principal exchange where the security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the value has to
be estimated. For shares, this could be the book value per share or an estimated
market price if suitable benchmarks are available. For debentures and bonds,
value is estimated on the basis of yields of comparable liquid securities after
adjusting for illiquidity. The value of fixed interest bearing securities moves in a
20
direction opposite to interest rate changes Valuation of debentures and bonds is
a big problem since most of them are unlisted and thinly traded. This gives
considerable leeway to the AMCs on valuation and some of the AMCs are
believed to take advantage of this and adopt flexible valuation policies depending
on the situation.
Usually, dividends are proposed at the time of the Annual General meeting and
become due on the record date. There is a gap between the dates on which it
becomes due and the actual payment date. In the intermediate period, it is
deemed to be "accrued".
Net Asset Value (NAV) is the actual value of one unit of a given scheme on any
given business day. The NAV reflects the liquidation value of the fund's
investments on that particular day after accounting for all expenses. It is
calculated by deducting all liabilities (except unit capital) of the fund from the
realisable value of all assets and dividing it by number of units outstanding.
21
Benefits of Investing In Mutual Funds
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.
Diversification
Convenient Administration
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.
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.
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 and other fees translate into lower costs for investors.
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
22
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.
Transparency
Flexibility
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.
Affordability
Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
Well Regulated
All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations
of Mutual Funds are regularly monitored by SEBI.
23
Basic Mutual Fund FAQs
CONCEPT
Mutual Fund Operation Flow Chart
What is the history of Mutual Funds in India and role of SEBI in mutual
funds industry?
Unit Trust of India 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.
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.
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.
24
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. It may be mentioned here that Unit Trust of India (UTI)
is not registered with SEBI as a mutual fund (as on January 15, 2002).
SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered with SEBI before they
launch any scheme. However, Unit Trust of India (UTI) is not registered with
SEBI (as on January 15, 2002).
25
How are mutual funds different from portfolio management schemes?
In case of mutual funds, the investments of different investors are pooled to form
a common investible corpus and gain/loss to all investors during a given period
are same for all investors while in case of portfolio management scheme, the
investments of a particular investor remains identifiable to him. Here the gain or
loss of all the investors will be different from each other.
What are the types of returns one can expect from a Mutual Fund?
Mutual Funds give returns in two ways - Capital Appreciation or Dividend
Distribution.
26
Why do Mutual Funds come out with different schemes?
A Mutual Fund may not, through just one portfolio, be able to meet the
investment objectives of all their Unit holders. Some Unit holders may want to
invest in risk-bearing securities such as equity and some others may want to
invest in safer securities such as bonds or government securities. Hence, the
Mutual Fund comes out with different schemes, each with a different investment
objective.
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes
To they are inherently risky. However, different funds have different risk profile
that is stated in its objective. Funds that categorize themselves as low risk, invest
generally in debt that is less risky than equity. Anyway, as mutual funds have
access to services of expert fund managers, they are always safer than direct
investment in the stock markets, they also have an ideal balance of debt and
equity to counter risk, and hence mutual funds have more control over the risk.
Anyway, as mutual funds have access to services of expert fund managers, they
are usually safer than direct investment in the stock markets.
27
What is the difference between Growth Plan and Dividend Reinvestment
Plan?
Under the Growth Plan, the investor realizes the capital appreciation of his/her
investments while under the Dividend Reinvestment Plan; the dividends declared
are reinvested automatically in the scheme. This gives the investor the benefit of
earning tax-free dividends without giving up on capital appreciation since
currently the dividends are tax free in the hands of the investor.
What is a Portfolio?
A portfolio of a mutual fund scheme is the basket of financial assets held by that
scheme. It comprises of investments in a variety of securities and asset classes.
This diversification helps reduces the overall risk. A mutual fund scheme states
the kind of portfolio it seeks to construct as well as the risks involved under each
asset class.
A no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NAV and no additional charges are
payable on purchase or sale of units.
28
Can a mutual fund impose fresh load or increase the load beyond the level
mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer
document. Any change in the load will be applicable only to prospective
investments and not to the original investments. In case of imposition of fresh
loads or increase in existing loads, the mutual funds are required to amend their
offer documents so that the new investors are aware of loads at the time of
investments.
Can a mutual fund change the asset allocation while deploying funds of
investors?
Considering the market trends, any prudent fund managers can change the asset
allocation i.e. he can invest higher or lower percentage of the fund in equity or
29
debt instruments compared to what is disclosed in the offer document. It can be
done on a short term basis on defensive considerations i.e. to protect the NAV.
Hence the fund managers are allowed certain flexibility in altering the asset
allocation considering the interest of the investors. In case the mutual fund wants
to change the asset allocation on a permanent basis, they are required to inform
the unitholders and giving them option to exit the scheme at prevailing NAV
without any load.
30
How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for
and such other information as required in the application form. He must give his
bank account number so as to avoid any fraudulent encashment of any
cheque/draft issued by the mutual fund at a later date for the purpose of dividend
or repurchase. Any changes in the address, bank account number, etc at a later
date should be informed to the mutual fund immediately.
31
How long will it take for transfer of units after purchase from stock markets
in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within
thirty days from the date of lodgment of certificates with the mutual fund.
Can a mutual fund change the nature of the scheme from the one specified
in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as
fundamental attributes of the scheme e.g. structure, investment pattern, etc. can
be carried out unless a written communication is sent to each unitholder and an
advertisement is given in one English daily having nationwide circulation and in a
newspaper published in the language of the region where the head office of the
mutual fund is situated. The unitholders have the right to exit the scheme at the
prevailing NAV without any exit load if they do not want to continue with the
scheme. The mutual funds are also required to follow similar procedure while
converting the scheme form close-ended to open-ended scheme and in case of
change in sponsor.
How will an investor come to know about the changes, if any, which may
occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are
required to inform any material changes to their unitholders. Apart from it, many
mutual funds send quarterly newsletters to their investors.
32
At present, offer documents are required to be revised and updated at least once
in two years. In the meantime, new investors are informed about the material
changes by way of addendum to the offer document till the time offer document is
revised and reprinted.
The mutual funds are also required to publish their performance in the form of
half-yearly results that also include their returns/yields over a period of time i.e.
last six months, 1 year, 3 years, 5 years and since inception of schemes.
Investors can also look into other details like percentage of expenses of total
assets as these have an affect on the yield and other useful information in the
same half-yearly format.
The mutual funds are also required to send annual report or abridged annual
report to the unit holders at the end of the year.
Investors can compare the performance of their schemes with those of other
mutual funds under the same category. They can also compare the performance
of equity-oriented schemes with the benchmarks like BSE Sensitive Index, S&P
CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide
when to enter or exit from a mutual fund scheme.
33
How to know where the mutual fund scheme has invested money mobilized
from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes on
half-yearly basis that are published in the newspapers. Some mutual funds send
the portfolios to their unit holders.
The scheme portfolio shows investment made in each security i.e. equity,
debentures, money market instruments, government securities, etc. and their
quantity, market value and % to NAV. These portfolio statements also required to
disclose illiquid securities in the portfolio, investment made in rated and unrated
debt securities, non-performing assets (NPAs), etc.
Some of the mutual funds send newsletters to the unit holders on quarterly basis
that also contain portfolios of the schemes.
34
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at
Rs.90. Both schemes are diversified equity oriented schemes. Investor has put
Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in
scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go
up by 10 per cent and both the schemes perform equally good and it is reflected
in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B
to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600*
16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B
(100*99). The investor would get the same return of 10% on his investment in
each of the schemes. Thus, lower or higher NAV of the schemes and allotment of
higher or lower number of units within the amount an investor is willing to invest,
should not be the factors for making investment decision. Likewise, if a new
equity oriented scheme is being offered at Rs.10 and an existing scheme is
available for Rs. 90, should not be a factor for decision making by the investor.
Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV
may give higher returns compared to a scheme which is available at lower NAV
but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently
managed scheme at higher NAV may not fall as much as inefficiently managed
scheme with lower NAV. Therefore, the investor should give more weightage to
the professional management of a scheme instead of lower NAV of any scheme.
He may get much higher number of units at lower NAV, but the scheme may not
give higher returns if it is not managed efficiently.
35
Are the companies having names like mutual benefit the same as mutual
funds schemes?
Investors should not assume some companies having the name "mutual benefit"
as mutual funds. These companies do not come under the purview of SEBI. On
the other hand, mutual funds can mobilize funds from the investors by launching
schemes only after getting registered with SEBI as mutual funds.
Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance
including the net worth of the sponsor for a period of three years is required to be
given. The only purpose is that the investors should know the track record of the
company that has sponsored the mutual fund. However, higher net worth of the
sponsor does not mean that the scheme would give better returns or the sponsor
would compensate in case the NAV falls.
36
AN OVERVIEW OF THE INDIAN FINANCIAL MARKET
37
Changes in Economic Policy
Institutional Arrangements
The Indian financial sector has two broad segments - organized and
unorganized. The organized segment includes commercial banks, development
financial institutions, insurance companies, and other non-bank financial
institutions, including mutual funds, unit trusts, etc. An important characteristic of
the Indian financial system is the predominant presence of public sector
institutions and a very high degree of public ownership and control, in keeping
with the policy of planned development in force since 1951. the public sector
financial institutions in the organized sector can be grouped itn the following
broad categories:
38
Term Lending Development Institutions: These are Industrial Development
Bank Of India (IDBI), Industrial Finance Corporation (IFCI) and Industrial Credit
and Investment Corporation of India (ICICI). They cater to the needs of long-term
finance for the corporate sector.
UTI and Mutual Funds: There are 35 mutual funds in India. The three
categories of mutual funds are public sector mutual funds, domestic private
sector mutual funds and foreign mutual funds. they have emerged as dynamic
financial intermediaries and are very important institutional investors in India. In
the savings market, mutual funds compete with the banks and in the capital
markeyt they are the most influential players to influence market movements.
Pension and Provident Fund Trusts: These are also important savings
institutions that are subject to strict regulatory provisions. There are several other
specialized financial institutions, namely, Export Import Bank, National Bank for
Agriculture and Rural Development, Industrial Reconstruction Bank of India,
State Financial Corporations, State Industrial Development Corporations and
Technology Finance Corporation of India. These institutions operate specialized
financial packages for industrial and agricultural enterprises.
39
Flow of Funds Accounts
India is one of the few countries today to maintain a steady growth rate in
domestic savings. Savings being the prime mover of economic development,
Indian planners have always focused on this aspect of economic development. A
significant trend in savings has been the decline of public sector savings over
time. Institutional developments in the financial market influenced the savings
patterns, particularly in the household sector. Financial intermediaries assist the
transfer of savings to the real sector of the economy through the formation of
financial assets. The changing patterns of household savings in India indicate
this trend. The household savings in gross financial assets went up significantly,
from 39.41 percent in 1980-81 to 64.19 percent in 1993-94, though they declined
40
to 59.56 percent in 1994-95. This indicates growing financial intermediation in the
Indian economy.
With the growth of capital markets, bank deposits have lost their charm. The
statistical data shows that the share of bank deposits in gross household financial
assets declined from 45.8 percent in 1980-81 to 33.3 percent in 1993-94, and
then rose to 42.2 percent in 1995-96. With the growth of capital markets and the
emergence of alternative saving instruments, investors are tending to move
towards more liquid, short term instruments like units, shares, debentures, etc.
the percentage share of corporate equity and debentures, together with UTI units
increased from 3.7 percent in 1980-81 to 17.2 percent in 1992-93, while the
share of less liquid investment like LIC, PF and pension increased marginally
from 25.1 percent to 27.2 percent during the same period. However, depressed
conditions in the stock market affected mutual funds mobilization along with the
other capital market instruments, and in 1995-96, the share of the former was 0.2
percent, and the latter 4.7 percent, indicating a change in favour of less risky,
less liquid and more assured returns.
Two important constituents of the capital market are primary market (or new
issue market) and secondary market. The primary market helps both corporates
and the government to raise funds by issuing securities. The secondary market,
through continuous trading activities, provides liquidity in the system. The
secondary market is also a reflection of the changing mood and perception of
investors. As can be imagined, stability and growth in the capital market depend
on the efficient functioning of both the markets since they are closely
interdependent. Mutual funds play as all-important role in both the markets and
strengthen the transfer mechanism.
The Securities and Exchange Board of India (SEBI) has brought out several
regulations to improve the efficiency and quality of the capital market. The SEBI
Act promulgated in Jan 1992 encompasses the entire gamut of securities
industries in India. There are several other regulations of respected activities
based upon which the transparency, quality and competition is improved in the
capital market. Several steps have been initiated to improve the activities in the
secondary markets.
41
India has emerged as one of the important stock markets of the world. The
opening up of the economy and the introduction of reforms as part of the
structural adjustment programme have made the Indian capital market one of the
Most attractive emerging markets in the world, as evident from the flow and entry
of foreign brokers and financial institutions into India.
The reforms in the primary market, with respect to the relaxing of public issue
norms, have induced the corporate sector to approach capital markets for
cheaper funds.
The total amounts raised by the private sector increased from Rs. 4312.2 crores
in 1990-91 to Rs. 26416.7 crores in 1994-95, i.e., by 512.6 percent. However, the
period 1990-91 to 1995-96 witnessed a radical shift in corporate public issues.
While the share of equities in the total amount raised by the corporate sector
from the markets increased from 29.8 percent in 1990-91 to 65.9 percent in
1994-95, the share of debentures – certificate of deposits (CDs) and non-
convertible debentures (NCDs) in the total amount raised declined from 69.9
percent to 33.5 percent in 1994-95 and further to 24.6 percent in 1995-96.
Another important trend in the primary market has been the increase in the
amount of public subscription to capital issues during the post-reform period,
though the share of public subscription to private capital issue declined from 66.7
percent in 1980-81 to 43.11 percent in 1991-95. Another notable feature was that
the percentage of public issues underwritten went up significantly from 56.8
percent in 1980-81 to 113.2 percent in 1993-94 owing to market uncertainties
that induced lack of confidence among promoters/issues.
42
The Secondary Market
The growth of the primary market in the post-reform period has also boosted the
activities of the secondary market in terms of growth of stock exchanges, listed
capital, market capitalization, etc. the number of stock exchanges in India
increased substantially over the period of time. There has also been significant
increase in the number of companies listed with the stock exchanges particularly
during 1990-96 (an increase of 31.4 percent). An equally significant increase is
noted in respect of market capitalization. During the period from 1980 to 1990,
market capitalization increased by 944.7 percent, while the same in the five-year
period from 1990 to 1995 increased by 806.9 percent. Market capitalization as a
percentage of GNP is an important indicator to measure the importance of the
capital market in the economy. Market capitalization as percentage of GNP was
only 6.6 percent in 1979-80 but reached 40.8 percent in 1992-93. Liberalization
of the economy further boosted this ratio and market capitalization went up to
75.8 percent in 1994-95.
Stock market indices indicate the changing sentiment and direction of economy.
In the post-reform period, particularly1992, the market witnessed a bullish phase
and the 30-share Sensex reached a peak of 4467 on 22nd April 1992. However
the movement of indices was moderated subsequently in 1993-94. 0ne of the
significant happenings during the period was also a moderation in P\E ratios,
considered to be the most important determinant of investment decision. The P\E
ratio which reached its peak in 1994 gradually came down and in December
1996 it touched its lowest when Sensex P\E was 16.57 and Natex P\E 12.20.The
lower P\E ratio was an attraction to foreign investors.
43
The debt market comprises of bond instruments (central and state government
bonds, public sector undertaking (PSU) bonds and corporate debentures) and
money market instruments (treasury bills, certificate of deposits, commercial
papers, etc.). The total outstanding value of the debt market was estimated to be
a little under Rs 300000 crore in 1995. Between 1990 and 1995 the total
outstanding value increased by 78.5 percent. The Indian bond market in terms of
outstanding value ranked next to Japan and South Korea, in Asia
The bond market accounted for 89.1 percent of the total value of the debt market
in 1995, while money market instruments accounted for the rest. The size of the
bond and money markets (in 1995) increased by 19.5 times and 5.5 times
respectively, since 1976. The reforms under way since 1991 are expected to
further develop the secondary market improve the depth of the debt market so as
to substantially boost market activities. The proposed money market mutual
funds and gilt-edged bond funds are further likely to attract small investors to the
debt market.
Reforms pertaining to the capital market and the increase in the activities of the
primary and secondary markets in India have significantly influenced the
development of equity culture. the number of shareholders and investors in
mutual funds in India has increased from 0.2 crore in 1980 to 4 crore in 1994,
making the Indian population the second largest shareholding one of the world,
next to the USA. The growth in equity culture particularly among the middle class
has greatly influenced the growth of mutual funds in India.
44
Mutual Funds and Corporate Finance
The private corporate sector in India is a deficit sector and the gap between
demand and supply of financial resources is met by funds raised through loans,
advances and issuance of securities. However, the buoyancy in the capital
market has increased the reliance of the corporate sector on security financing.
The share of this instrument in financing the resource gap of the corporate sector
has more than doubled between 1988-89 and 1991-92 i.e. from 16.72 percent in
1988-89 to 36.28 percent in 1991-92. The changing pattern of corporate
financing indicates that the banking sector is losing its importance vis-à-vis the
“other financial sector” (including mutual funds). According to the flow of funds
statistics published by the RBI, the share of the banking sector in filling the
resource gap of the corporate sector has declined from 54.52 percent in 1988-89
to 2.3 percent in 1991-92, while that of the “other financial sector” (including
mutual funds) has increased from 39.9 percent to 102.58 percent during the
same period. RBI has noted “The rapid growth of mutual funds and increase in
term lending by OFIs (other financial institutions) appear to have contributed to
this trend.” Direct financing by mutual funds have also widened the private
placement market for corporate securities. Mutual funds have enabled the
corporate sector to raise capital at reduced costs and have opened an avenue for
alternate source of capital.
45
GENERAL RISK FACTORS
Mutual Funds and securities investments are subject to market risks and there is
no assurance or guarantee that the objectives of the Scheme will be achieved.
As with any investment in securities, the NAV of the Units issued under the
Scheme can go up or down depending on the factors and forces affecting the
capital markets.
The Sponsor is not responsible or liable for any loss resulting from the operation
of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up
of the Mutual Fund and such other accretions and additions to the corpus.
The NAV of the Scheme may be affected, inter-alia, by changes in the market
conditions, interest rates, trading volumes, settlement periods and transfer
procedures.
The Mutual Fund is not guaranteeing or assuring any dividend. The Mutual Fund
is also not assuring that it will make periodical dividend distributions, though it
has every intention of doing so. All dividend distributions are subject to the
investment performance of the Scheme.
Similarly, RCAM, in consultation with the Trustees, reserve the right to modify the
dividend date(s)/ periodicity for declaration of dividends.
46
GLOBAL SCENARIO
• The money market mutual fund segment has a total corpus of $ 1.48
trillion in the U.S. against a corpus of $ 100 million in India.
• Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only
Fidelity and Capital are non-bank mutual funds in this group.
• In the U.S. the total number of schemes is higher than that of the listed
companies while in India we have just 277 schemes
• Internationally, mutual funds are allowed to go short. In India fund
managers do not have such leeway.
• In the U.S. about 9.7 million households will manage their assets on-line
by the year 2003, such a facility is not yet of avail in India.
• On- line trading is a great idea to reduce management expenses from the
current 2 % of total assets to about 0.75 % of the total assets.
• 72% of the core customer base of mutual funds in the top 50-broking firms
in the U.S. is expected to trade on-line by 2003.
In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions
have already begun on the Net, while in India the Net is used as a source of
Information.
47
Such changes could facilitate easy access, lower intermediation costs and better
services for all. A research agency that specializes in Internet technology
estimates that over the next four years Mutual Fund Assets traded on- line will
grow ten folds from $ 128 billion to $ 1,227 billion; whereas equity assets traded
on-line will increase during the period from $ 246 billion to $ 1,561 billion. This
will increase the share of mutual funds from 34% to 40% during the period.
(Source: The Financial Express September 99)
Such increases in volumes are expected to bring about large changes in the way
Mutual Funds conduct their business.
Here are some of the basic changes that have taken place since the advent of
the Net.
• Lower Costs: Distribution of funds will fall in the online trading regime by
2003. Mutual funds could bring down their administrative costs to 0.75% if
trading is done on- line. As per SEBI regulations, bond funds can charge a
maximum of 2.25% and equity funds can charge 2.5% as administrative
fees. Therefore if the administrative costs are low, the benefits are passed
down and hence Mutual Funds are able to attract mire investors and
increase their asset base.
• Better advice: Mutual funds could provide better advice to their investors
through the Net rather than through the traditional investment routes
where there is an additional channel to deal with the Brokers. Direct
dealing with the fund could help the investor with their financial planning.
• In India, brokers could get more Net savvy than investors and could help
the investors with the knowledge through get from the Net.
• New investors would prefer online: Mutual funds can target investors who
are young individuals and who are Net savvy, since servicing them would
be easier on the Net.
• India has around 1.6 million net users who are prime target for these funds
and this could just be the beginning. The Internet users are going to
increase dramatically and mutual funds are going to be the best
beneficiary. With smaller administrative costs more funds would be
mobilized .A fund manager must be ready to tackle the volatility and will
have to maintain sufficient amount of investments which are high liquidity
and low yielding investments to honor redemption.
• Net based advertisements: There will be more sites involved in ads and
promotion of mutual funds. In the U.S. sites like AOL offer detailed
research and financial details about the functioning of different funds and
their performance statistics. a is witnessing a genesis in this area.
48
FUTURE SCENARIO:
The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investor’s shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close
shop or be taken over.
Out of ten public sector players five will sell out, close down or merge with
stronger players in three to four years. In the private sector this trend has already
started with two mergers and one takeover. Here too some of them will down
their shutters in the near future to come.
But this does not mean there is no room for other players. The market will
witness a flurry of new players entering the arena. There will be a large number
of offers from various asset management companies in the time to come. Some
big names like Fidelity, Principal, and Old Mutual etc. are looking at Indian
market seriously. One important reason for it is that most major players already
have presence here and hence these big names would hardly like to get left
behind.
In the U.S. most mutual funds concentrate only on financial funds like equity and
debt. Some like real estate funds and commodity funds also take an exposure to
physical assets. The latter type of funds is preferred by corporates who want to
hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month
of January could buy an equivalent amount of copper by investing in a copper
fund. For Example, Permanent Portfolio Fund, a conservative U.S. based fund
invests a fixed percentage of it’s corpus in Gold, Silver, Swiss francs, specific
stocks on various bourses around the world, short –term and long-term U.S.
treasuries etc.
In U.S.A. apart from bullion funds there are copper funds, precious metal funds
and real estate funds (investing in real estate and other related assets as well.).In
India, the Canada based Dundee mutual fund is planning to launch gold and a
real estate fund before the year-end.
49
In developed countries like the U.S.A there are funds to satisfy everybody’s
requirement, but in India only the tip of the iceberg has been explored. In the
near future India too will concentrate on financial as well as physical funds.
SEBI is working out the norms for enabling the existing mutual fund schemes to
trade in Derivatives. Importantly, many market players have called on the
Regulator to initiate the process immediately, so that the mutual funds can
implement the changes that are required to trade in Derivatives.
50
51
GROWTH AND PERFORMANCE OF MUTUAL FUNDS
Over the past ten years, the Indian mutual fund industry has been one of the
fastest-growing sectors in the Indian capital and financial markets. From 1991 to
2002, the industry’s compound annual growth rate averaged around 20%. The
rapid growth has led to considerable changes in regulation, the structure of funds
available and the composition of net assets across various industry segments, as
well as in the portfolio of investment funds
As the Indian mutual fund market has grown in size and number of funds, the
traditional prospectus-based mutual fund classification has steadily lost much of
its value as an explanatory tool. Over the past 18 months, Moody’s/ICRA has
identified 14 distinct management style categories, which indicates that
comparisons between mutual funds within the traditional categories are
problematic and, in certain cases, impossible.
OBJECTIVE OF CATEGORISATION
The principal objective of mutual fund categorization and of performance-based
mutual fund indices is to offer the investor the opportunity to evaluate single fund
performance and risk characteristics in the context of objective peer groupings.
By analyzing the exposure of each fund to changes in the average return of the
category, accurate mutual fund categorization and the resulting benchmarks can
provide investors with appropriate information on funds’ over- or under-
performance.
In October 2002, Moody’s Investors Service and ICRA Ltd. launched a new
approach to Indian fund categorization and a series of 18 mutual fund indices
tracking the performance of equity and fixed income mutual funds.
52
which uses a quantitative procedure called "cluster analysis", is that it offers a
view of the actual performance being delivered whereas traditional industry
classification does not always capture the evolving nature of investment
strategies. In other words, a fund, which has historically performed like a
balanced fund, should be grouped and monitored in relation to other balanced
funds even if the prospectus or the fund manager markets the fund as an equity
growth fund.
BENEFITS
We believe our categories and indices can be used for the following purposes:
53
Reliance Growth Fund: Hold
The Reliance Growth Fund has comfortably outpaced the indices over five-,
three- and one-year periods. The fund also ranks among the top-performing
diversified equity funds, based on absolute returns generated over a five-year
period. But due to an unimpressive performance in the bear markets of 2000 and
2001, the five-year track record is less consistent than that of funds such as
HDFC Equity, Franklin Bluechip Fund or HDFC Tax saver. Investors can retain
exposures in the fund; but fresh exposures may be avoided now.
Suitability: One factor that may peg the risk profile of Reliance Growth Fund a
notch above that of a normal diversified equity fund is its investment style. It
relies on an aggressive churning of its portfolio to generate returns, which results
in substantial changes in its top holdings from month to month.
This may peg up transaction costs and increase the number of right calls to be
made by the manager. However, it has so far outperformed the market
significantly, and this has helped compensate for such risks.
In terms of absolute returns earned over this period, the fund has done as well as
peers such as HDFC Taxsaver, HDFC Equity or the Franklin Bluechip Fund.
However, the returns have been earned less consistently than some of these
funds.
For instance, while Reliance Growth Fund fared very well in each of bull markets
since 1997; it has had a less consistent track record of outpacing the indices in
the bear phases. The fund beat the indices by a big margin in 1997, 1998, 1999,
2002 and 2003; but trailed it in 2000 and 2001.
This pattern has, however, been reversed in the latest market correction. Since
December 2003, the fund has generated a negative return of 14.7 per cent, faring
much better than the Nifty, which has declined 20 per cent in value.
54
There have been some changes in the fund's portfolio strategy over the past
year.
In June 2003, the top three sectors made up 36 per cent of its portfolio. But by
May 2004, this was down to 27 per cent and the portfolio weights differed
significantly from the benchmark index it tracks — the BSE-100.
HIGHLIGHTS
1. The Sponsor of the Fund is Reliance Capital Limited (RCL) having a net worth
of over Rs. 1,336.33 crores as on March 31, 2003 and is a member of the
Reliance Group.
Growth Plan: The Growth Plan is designed for investors interested in capital
appreciation on their investment and not in regular income. Accordingly, the Fund
will not declare dividends under the Growth Plan. The income earned on the
Growth Plan’s corpus will remain invested in the Growth Plan.
• Growth Option: The Growth Plan has a Growth Option. Under this
Option, there will be no distribution of income and the returns to the
investor is only by way of capital gains/ appreciation, if any, through
redemption at applicable NAV of the units held by them.
• Bonus Option: The Growth Plan has a Bonus Option. Guided by the
philosophy of value-oriented returns, the Trustees may decide to
periodically capitalize the sums from reserves including the amount of
distributable surpluses of the scheme by way of allotment/ credit of bonus
units to the unitholders accounts, the intent being to enhance the
unitholders interests.
55
Dividend Plan: The Dividend Plan has been designed for investors who require
regular income in the form of dividends. Under the Dividend Plan, the Fund will
endeavor to make regular dividend payments to the unitholders though the fund
endeavors to pay within three working days.
Dividend will be distributed from the available distributable surplus after the
deduction of TDS and applicable surcharge, if any.
• Dividend Payout Option: Under this option the Dividend declared under
the Dividend Plan will be paid to the unitholders within 30 days from the
declaration of the dividend though the fund endeavors to pay the dividend
proceeds within three working days.
• Reinvestment Option: The Dividend Plan has a Reinvestment Option
whereby the dividend distributed under the plan will be automatically
reinvested at the ex-dividend NAV on the transaction day following the
date of declaration of dividend and additional units will be allotted
accordingly. Investors desirous of opting for the same should indicate the
same in the space provided in the application form.
The Fund, however, does not assure any targeted annual return/ income nor any
capitalization ratio. Accumulation of earnings and/ or capitalization of bonus units
and the consequent determination of NAV, may be suspended temporarily or
indefinitely under any of the circumstances as stated under the Para on
‘Suspension of Purchases and/or Redemption of units’ of the Offer Document.
Please note that if no Plan is mentioned / indicated in the Application form, the
units will, by default, be allotted under the Growth Plan. Similarly, under the
Dividend Plan, if no choice (payout or reinvestment) is indicated, the applicant
will be deemed to have applied for the dividend reinvestment option under the
plan. If no Option is indicated under the Growth Plan, the applicant will be
deemed to have applied for the Growth Option under the Growth Plan. The
unitholder is subsequently free to switch the units from the default plan / option to
any other eligible plans / options of the Scheme, at the applicable NAV.
3. Investment Objective
The primary investment objective of the Scheme is to seek to generate consistent
returns by investing in equity / equity related or fixed income securities of
pharma and other associated companies.
56
4. Transparency
The AMC will calculate and disclose the first NAV not later than 30 days from the
closure of Initial Offer Period. Subsequently, the NAV will be calculated and
disclosed at the close of every Working Day which shall be published in at least
two daily newspapers and also uploaded on the AMFI site and Reliance Capital
Mutual Fund site i.e. www.reliancemutual.com.
5. Liquidity
The Scheme will offer for Sale / Switch-in and Redemption / Switch-out of Units
on every Working Day on an ongoing basis, commencing not later than 30 days
from the closure of Initial Offer Period.
As per SEBI Regulations, the Mutual Fund shall despatch Redemption proceeds
within 10 Working Days of receiving a valid Redemption request. A penal interest
of 15% per annum or such other rate as may be prescribed by SEBI from time to
time will be paid in case the Redemption proceeds are not made within 10
Working Days of the date of receipt of a valid redemption request. However,
under normal circumstances, the Mutual Fund will endeavor to despatch the
redemption cheque within 3 Working Days from the receipt of a valid redemption
request.
6. Flexibility
Unitholders will have the flexibility to alter the allocation of their investments
among the scheme(s) offered by the Mutual Fund, in order to suit their changing
investment needs, by easily switching between the scheme(s) / plans of the
Mutual Fund.
57
Tax Benefits (as per Finance Act, 2003)
• Under Section 10(35) of the Income Tax Act, introduced by Finance Bill,
2003, income received in respect of units of Fund specified under clause
10(23D) on or after 01.04.2003 is exempt from tax in the hands of
unitholders.
• Section 115R of the Act provides that any amount of income distributed by
a Mutual Fund to its unitholders shall be Chargeable to tax and such
Mutual Fund shall be liable to pay additional income-tax at the rate of 12.5
percent w.e.f. 01.04.2003. A surcharge as applicable on this additional tax
would be payable.
• However, these provisions will not be applicable in respect of any income
distributed to a unitholder of an open ended equity oriented fund in respect
of any distribution made from such fund for a period of one-year
commencing from 01.04. 2003.
• Benefits of concessional long-term capital gains tax under Section 112 of
the Income Tax Act, 1961 for units held for more than 12 months.
• Units of the Scheme(s) are not subject to Wealth Tax.
• The disclosures made hereinabove with respect to the tax benefits
available to the Mutual Fund and the Unitholders is in accordance with
prevailing tax laws.
• The tax benefits described in this Offer Document, are as available under
the present taxation laws and are available subject to relevant conditions.
The information given is included only for general purpose and is based on
advise received by the AMC regarding the law and practice currently in
force in India and the Unitholders should be aware that the relevant fiscal
rules or their interpretation may change. As is the case with any
investment, there can be no guarantee that the tax position or the
proposed tax position prevailing at the time of an investment in the
Scheme will endure indefinitely. In view of the individual nature of tax
consequences, each Unit holder is advised to consult his / her own
professional tax advisor.
58
Performance of Growth Schemes
According of the data available with the Sebi, there has been a net inflow of
Rs1,076 crore into open-ended schemes despite market volatility during April-
May. While the gross inflows were Rs 5,028 crore the gross outflows were Rs
3,952 crore.
The investment into equities has mainly come from investors who wanted to
increase their exposure whenever there has been a fall in the market.
Though the returns generated by the equity funds ranged between 37.12 per cent
and 108.27 per cent for the last one-year period, the recent market crash has
dented the performance of the Growth funds.
Over the last one month only two schemes, namely the Principal Global
Opportunities (G) fund and Tata Growth Fund Bonus, managed to give positive
returns of 4.84 per cent and 2.63 per cent respectively.
But the situation is showing some signs of improvement over the last one week
as the schemes of 32 funds has returned to the positive territory. Though these
schemes have managed to return to the positive region, the returns have been
meager ranging between 0.04 per cent and 2.5 per cent.
The performance of the index funds over the last one-month period has been
very poor and not even one scheme has managed to give positive return. The
same has been the case with basic, FMCG, Pharma and other sectoral funds.
Among the sectoral Fund of Funds (FoFs) only Pru ICICI Very Cautious Plan
managed to give a positive return of 0.30 per cent over the last one month
In recent months, monthly income plans (MIPs) generated a lot of interest among
investors, and it attracted huge inflows. The total corpus of these schemes
crossed Rs 15,193 crore.
MIPs, which were providing returns between 4 -12 per cent even in poor market
conditions, have attracted a large number of debt investors who moved to hybrid
funds like MIP. These huge returns were possible only due to the high exposure
of the MIPs to the equities.
The MIPs, which were traditionally investing just 10-15 per cent of their schemes
money in the equities, have now increased their exposure to the extent of 20-25
per cent. The MIPs that increased their exposure to equities to generate more
returns are now caught on the wrong foot. MIPs that have invested a major
portion of corpus in debt papers and part of it in equities have taken the hit on
both the fronts. MIPs have given the worst performance among all available debt-
oriented mutual fund products.
The debacle in the stock market has made most of the MIPs to skip their dividend
payments and their average return is quoting in negative. Over the last one-
month period almost all the schemes have given negative return except the
Magnum NRI Investment STP (G) and ING VYSYA MIP A (G) that have
delivered the positive returns of 0.18 per cent and 0.09 per cent respectively.
Among the long time Gilt funds only five schemes managed to give positive
returns in the last one month. And their returns ranged between 0.16 per cent
and 0.41 per cent. In the short time gilts, seven schemes managed to give
positive returns ranging between 0.05 per cent and 0.56 per cent.
Among the long-term Income funds 17 schemes managed to give positive returns
between 0.03 per cent and 0.39 per cent. As many as 27 short-term income
funds schemes are in the positive region with their returns raging between 0.07
per cent and 0.39 per cent.
Balanced Schemes
All balanced fund schemes showed negative returns for the last one-month
period except Pru ICICI STP INST. (G) scheme, that has given a positive return
of 0.22 per cent. The negative returns of the balanced funds in the last one-
month ranges between -0.94 per cent and -9.16 per cent. But in the last one-
week the balanced schemes have recovered to some extent and the schemes of
17 funds have turned positive.
The performance of the balanced funds over the last one-year has been quite
impressive and they have delivered returns ranging from 5.33 to 65.57 per cent.
The good performance of balanced funds were due to their high exposure in
major old economy stocks like RIL, Mahindra & Mahindra,Tata Power, ACC and
Grasim Industries.
The share price of RIL increased by 42.0 per cent to Rs 444.8 on June 7, 2004
from Rs 313.2 on June 6, 2003. The price of another heavyweight company,
M&M rose by 244.5 per cent during the same period.
Performance Outlook
The fund managers expect the market to be choppy for another 3-6 months time.
They add that even if the markets stabilize by then, they caution that the returns
would not be comparable to that of the previous years in equity, hybrid and debt
funds.
Apart from the outcome of elections, the other factors like slowdown of Chinese
economy and possibility of hike in interest rate in the US are also affecting the
Indian equity market. However the next trigger now appears to be the budget.
Till then the volumes may be low and the markets are likely to drift and settle at
lower levels.
A Performance Review of Equity Oriented Mutual Funds
The three months of January to March 2001 were one of the most testing times
for investors in equity oriented mutual fund schemes. In the first three months of
2001, the BSE Sensex declined by 9.3% while the S & P CNX Nifty declined by
9.1%. The movement of the Sensex has been like a see-saw in the first quarter
of 2001. In January, BSE Sensex gained 8.9% followed by a marginal decline of
1.8% in February, and thereafter dropped sharply by 15.1% in March. To
understand how various equity oriented mutual funds including balanced funds
fared, we undertook a detailed performance analysis of different schemes of
certain leading mutual fund houses for the period January 2001 to March 2001.
The performance of Equity Funds has revealed that many of them were able to
ride the boom but
were unable to get off at the right time thereby reporting underperformance vis a
vis the benchmark indices
The performance of the Sector Funds in this quarter has confirmed that investing
in sector funds involves high risk. Unless the sector is in the limelight and is a
clear favourite of the markets, investors in these schemes are unlikely to get any
abnormal gains from this sector. On the contrary it is likely that investors will
suffer higher in the process compared to a diversified equity fund.
Investors that had chosen to invest in Balanced Funds have also suffered in this
period. This is because Balanced Funds are generally supposed to increase
asset allocation to debt and reduce equity allocation during high volatility in the
stock markets or when the BSE Sensex shows a continuous downward trend.
This was not the case during the first three months of the current year as can be
seen from the performance of all the balanced funds.
Unless the fund managers of various fund houses are able to beat the
benchmark indices in the near future, investor interest and inflows into these
schemes will remain lackluster.
INVESTMENT MANAGEMENT OF MUTUAL FUND
Apart from the risk of inflation which reduces real returns over
a period of time, total returns, principal and even income are influenced by
other factors.
The AMC shall manage the funds in accordance with the provision
of the trust deed and regulations.
The AMC shall not acquire any assets out of scheme property
which may involve unlimited liability, or may result in encumbrance of
the scheme property in any way.
The AMC shall not undertake any business other than management
of mutual funds and activites specified in regulation 23 but may
take up financial services consultancy, research analysis on
commercial basis with prior approval of trustees and the boards, as
long as these are not in conflict with the fund management activity
itself.
Funds shall be invested as per trust deed and regulations.
A scheme may invest in any other scheme under the same AMC or
any other mutual fund without charging fees, provided that aggregate
interim investment by all schemes under the same management or
in schemes under any other AMC shall not exceed 5 per cent of
the NAV of the mutual fund.
No mutual fund under all its schemes should own more than 10 per
cent of any company's paid-up capital carrying voting rights.
Every mutual fund shall buy and sell securities on the basis of
deliveries.
EMERGING SCENARIO
Complex managed
Basic managed
Tax-minimising
Simple managed
Basic index
Readymade convenience
Blue-chip stocks
Cyclical stocks
Interest-sensitive stocks
ASSET ALLOCATION
Under the dynamic asset allocation (DAA) strategy the asset mix
is mechanically shifted in response to changing market conditions. Portfolio
insurance is the best known variant of this strategy. According to Fabozzi
dynamic strategies enable investors to reshape the entire returns
distribution. By dynamically shifting the asset mix, investors can control the
downside risk and surplus volatility or can directly build a shortfall
constraint into their stratregy.
The changes in the economic policy in India and the role of the state In managing
the financial services of the country, are taking place in an environment of a near
unanimous opinion that freedom of individual economic action is more effective
for economic growth and development of a country than the interventionist policy
of the government. It is being increasingly believed that the role of the
government should be restricted in the financial sector, and that the liberalization
of the financial sector is necessary for allocative efficiency.
The liberalization of the financial market ensures competition in the market place.
But the most important condition for a competitive market is the free flow of
correct information. In a perfect market buyers and sellers of any financial service
should be able to receive the same information, at the same time and the same
cost. However, in reality, this does not happen, because although ‘information’ is
considered to be a public good, a competitive market does not provide sufficient
quantity of the good. Moreover, financial information is a high value added good
and its cost is often beyond the reach of individual investors. Therefore, there is
always the chance of market collapse in a free economy due to the flow of
imperfect information. Mutual funds, or any other investment management
business, operating in such a market are exposed to this imperfection of the
market condition and carry great risks in transacting their business.
While the above-mentioned risks are common to all investors, individuals as well
as institutions, when an investor invests through an investment management firm
(e.g., a mutual fund) he/she faces three important classes of risks, namely:
• Portfolio selection risk
• Organizational (investment firm) risk
• Management process risk
Portfolio selection risk arises due to adverse portfolio selection. This could occur
if an investment manager of an investment firm/mutual fund, who selects the
portfolio on behalf of investors, is incapable of judging future market conditions,
or intentionally selects securities with the possibility of negative returns, of
indiscriminately selects high risk securities.
Organizational risk or failure of the firm arises due to several factors related to
the firm. These important factors are:
Failure of the firm may also occur due to a general collapse of the market. A
stock market crash may lead to a bank crash, which may cause the breakdown of
the transaction machinery. These factors may put an investment management
firm on the path of insolvency. Unless an investment manager is sufficiently alert
to the situation and can take action to reverse the process, investors may suffer
huge losses.
The provision of insurance against financial loss is effective in the case of firm-
specific risks, but may not cover the loss arising out of general market failure.
However, for systematic risks, insurance can be available to the extent that risks
can be internationally diversified. Insurance is considered to be an incomplete
form of protection, effective in the case of fraud due to wealth transfer.
Effective regulation should take into account both the cost of regulation and value
addition. Tow types of costs are usually associated with any regulatory
measures: Direct and Indirect.
Direct cost is the cost of administration and implementation, and indirect cost is
the loss of welfare due to restrictions on competition. It is essential that any
regulation must be formulated after taking into account the total cost and implicit
benefits. This is more so in a developing country and emerging market in India,
where regulatory expenditure is an additional burden on the public exchequer
and expenses are incurred at the cost of development expenditure. Moreover, in
an emerging and semi0efficient market like India, investors are exposed to more
volatility and risks, therefore, regulation should be effective, be able to protect
investor interests, and the direct benefits must be more than the indirect benefits
and costs of regulation.
Regulation and Investor Protection in India
Though the system of SRO has not yet taken root in India, once SEBI is judicially
fully empowered as the main regulator of all aspects of the securities market and
investor protection in India, it would become possible to promote various SROs
responsible for various segments of the security industry, these SROs would
function under the overall supervision and jurisdiction of SEBI.
SEBI’s basic objective as the prime regulator of capital market activities in India
is to protect the interests of investors. This objective has been stated in the
preamble of the Securities and Exchange Board of India Act, 1991. Accordingly
all the capital market activities, including that of mutual funds, are covered under
the above objective so far as investor protection is concerned.
The Securities and Exchange Board of India (mutual funds) Regulations, 1993,
was the first attempt to bring mutual funds under a regulatory framework and to
give direction to its functioning. However, it was observed in the course of time
that the industry needed a more flexible work environment. Therefore SEBI came
out with new regulations in 1996 which eliminated many of the rigidities contained
in the 1993 regulations, and at the same time introduced new provisions as
regards disclosure, transparency and obligations on the part of mutual funds,
AMCs, trustees and key personnel. The Securities and Exchange Board of India
(mutual funds) Regulations,1996, (hereafter regulations) has many similarities
with the Investment Company Act, 1940, of the USA so far as mutual fund
regulation and investor protection are concerned. The regulatory and supervisory
powers of SEBI also stand strengthened by the Securities Law (Amendment)
Ordinance, 1995, which empowers SEBI to impose penalty for violation of SEBI
regulations. Under this amendment SEBI is allowed to file complaints in the
courts without prior approval of the central government. SEBI has thus emerged
as an autonomous and powerful regulator of mutual funds in India. The
regulations lay down many measures to protect mutual fund investors. Some of
these measures are discussed below.
SEBI has incorporated several provisions to check mutual funds at the entry level
similar to the provision of ‘fit and proper’ test in the UK. Every mutual fund shall
be registered with SEBI and the registration will be granted on fulfillment of
certain conditions laid down in the regulations for efficient and orderly conduct of
the affairs of a mutual fund’. The regulations further speculate that the sponsor
must have a sound track record and experience in the relevant field of financial
services for a minimum period of five years, professional competence, financial
soundness and general reputation of fairness and integrity in all business
transactions.
SEBI has laid down conditions of appointment and obligations of trustees and
detailed guidelines on trust deed. The Asset Management Company (AMC) to
mange the assets of mutual funds are to be approved by SEBI. SEBI also lays
down the terms and conditions for the approval of the AMC, one of the conditions
for approval being that the AMC has a net worth of not less than Rs10 crore. The
directors of the AMC are to be persons having adequate professional experience
in finance and financial services related fields. The key personnel of the AMC
should not have been working for any AMC or mutual fund or any intermediary
whose registration has been suspended or cancelled at any time by the board.
Mutual funds must have a custodian to be approved by SEBI and one of the
preconditions for approval is the ‘sound track record, general reputation and
fairness in transaction’.
SEBI has laid down several provisions for pre-launch and post-launch disclosure
to ensure that investors can take informed decision on the basis of factual
information supplied by a mutual fund.
No new scheme can be launched by any mutual fund unless the trustees
approve the same and a copy of the document has been filed with the board.
SEBI has also stipulated that the AMC should stipulate the minimum amount it
seeks to raise under the scheme and the extent of oversubscription to be
retained. There are clear regulatory provisions regarding listing of close-ended
schemes, refunds, transfer and sending of unit certificates to investors. There is
also provision for disclosing the names of trustees of mutual funds and directors
of AMC in the prospectus of the funds, as also investment objectives and
strategy, and approximate percentage share of investment to be made in various
instruments. No guarantee of returns can be given unless it is fully guaranteed by
the sponsor of AMC and a statement indicating the manner of guarantee and the
name of the person who will guarantee the returns is made in the offer document.
SEBI can inspect the books of accounts, records and documents of a mutual
fund, trustees, AMC and custodian.
As we can see, the regulatory framework as discussed above indicates that SEBI
is a highly powerful regulator. The Indian regulatory mechanism is centered on
statutory provisions. There is a strong emphasis on ex-post investigation and
disciplining of mutual funds through financial penalty for violation of regulation.
The implicit tone of regulation is correction through control. There are enough
provisions for disclosure. Thus, the regulatory mechanism and supervisory
control are both strong enough for protecting can be strengthened further by
including a few more elements like SRO, investors protection fund and credit
rating.
• It can help the mutual fund industry to grow on sound business principles
by helping member organizations to overcome environmental,
organizational and procedural constraints.
• It can develop an internal code of conduct to be followed by members to
prevent them from adopting unethical business practices.
• It can also conduct periodic checks on the activities of member funds. This
will increase the chances of fair business, prevent frauds and increase the
confidence of investors.
• It can undertake investor education through publications and seminars.
• An SRO can also develop a code of conduct for associates like registrars,
custodians, brokers and agents. A uniform code of conduct can also be
formulated for brokers, sub-brokers and agents who are involved in selling
mutual fund products.
• SROs can actively undertake research studies and training for members
as well as investors. SROs can play an active role in promoting the mutual
fund culture by conducting research and producing literature.
• Business growth and development require efficient and trained managers.
The association can undertake the training activities to develop a band of
competent managers for mutual funds.
SROs can be very effective if given certain authority under the regulatory system
to ensure that members do accept the mandate of the SRO. For example, the
Investment Trust Association of Japan that acts as a SRO has a statutory status
as a ‘juridical person’ under the Securities Investment Trust Law amended in
August 1967. This amendment gives the SRO power to adopt rules that would
strengthen its supervisory authority. In the UK SROs are ‘certified clubs’ and no
designated investment business can be conducted unless on e is a member of
the respective club (SRO). Although these clubs do not have any direct power,
the system of self-regulation has been so developed that two SROs (FIMBRA
and IMRO) regulate the investment management business. India does need to
have a strong SRO for the mutual fund industry. The Japanese model of a self-
regulatory organization, which plays a balancing role in regulating the mutual
fund industry, would be suitable for India.
The Association of Mutual Funds in India (AMFI) was formed in August 1995 by
the Indian mutual funds with a view to ‘promoting and protecting the interest of
mutual funds and their unitholders, increasing public awareness of mutual funds,
and serving the investors interest by defining and maintaining high ethical and
professional standards in the mutual funds industry’. To achieve this goal, AMFI
has undertaken investor’s awareness programmes and is also working to bring
out a comprehensive code of ethics for mutual funds. By the end of March 1996,
26 mutual funds were members of AMFI.
CONCLUSION
Notwithstanding the many problems, Indian mutual fund industry has, within
a short period, emerged as a significant financial intermediary, assisting
efficient resource allocation, providing strong support to capital markets and
helping investors to realize the benefits of stock market investing. The
growing importance of Indian mutual funds in the marketplace may be
noted in term of increased mobilization of funds and growing number of
investor accounts with Indian mutual funds.
Indian mutual funds have remained cent red around a limited product
range-basically income, income-cum-growth and tax-saving schemes. Efforts
to develop and expand the market through innovative new products have
been negligible. This has happened due to the tendency to avoid risk,
inability to understand future market developments, and changes in investor
preference. While therefore, the extent of the mutual funds market has
remained limited, there have been innovations even in debt instruments,
resulting in the mobilization of a significant amount of resources by the
financial institutions. Probably the introduction and implementation of new
regulatory norms has contributed in some measure to market sluggishness,
as the emerging market was, initially, not able to respond to the regulatory
objectives.
The absence of product diversification and a confused market situation has
been made worse by the absence of an innovative marketing network for
mutual funds. The agent-oriented network has largely been a failure
because most of the agents have not been specifically trained to sell
mutual fund products. This has led to a significant communication gap
which has come in the way of market expansion.
In the light of the problems identified above, corrective actions are called
for, for the sustained growth of the industry. A training programme for
those directly associated with the industry should be the first objective.
Well-informed managers/agents/brokers would then be able to educate
investors. The association of mutual funds of India should take the initiative
to produce standard training literature, as well as establish an institute for
trainning and research.
Investor education is the key to the growth and survival of mutual funds.
While some efforts are being made by individual mutual funds in this
direction, no coordinated efforts have been made so far. Investor
understanding about mutual fund product, especially the risk-absorption
ability of, and capital protection through, mutual funds must be increased
not only by the efforts of individual mutual funds, but also jointly with
AMFI through structured programmes, commissioned writings, seminars,
conferences, meetings and so on.
SEBI has been playing a significant role in the regulation of the mutual
fund industry, to increase investor confidence and steer the industry on a
structured development path. But considering the prevailing investor
psychology and indifferent health of the mutual fund industry, a more
supportive role is called for.
Indian mutual funds should give up their complacent and defensive attitude
and be ready to take a position in the global market. According to
Micropal data, 45 per cent of the assets of unit trusts in the UK, 16 per
cent of the assets of Japanese investment trusts, 6.9 per cent of the
assets of US mutual funds and 4.7 per cent of the assets of German
mutual funds are being invested abroad. It is further estimated that by the
year 2010 about US $ 1.5 trillion, or 20 per cent of the total assets of US
mutual funds will be invested abroad.
India beyond 2000 would become a major world market and foreign funds
would continue to flow along with the flow of foreign mutual funds and
fund managers. This would lead to increased competition. Therefore, the
domestic Indian funds need to think in terms of competitive edge.
Friedman, A.G. (1992) 'How Mutual Fund Works' - Management & Working
Selected Websites:-
www.amfi.com
www.reliancemutual.com
www.indiainfoline.com
www.google.com