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SUMMER TRAINING REPORT

ON

MUTUAL FUNDS

ANAND RATHI SECURITIES PVT.


LTD.
YOUR FINANCIAL ADVISOR

SUBMITTED BY:
MAYANK SOLANKI
(M.F.C. IIIrd SEMESTER)
(BATCH: 2004 - 06)
JAI NARAIN VYAS UNIVERSITY
MY FIRST REGARDS
On the completion of my training, I have a great opportunity to
convey my regards from whom I have always received warmth and support.
Even I know that I can make only a little effort for expressing my gratitude.
I express my deepest sense of indebtedness to him with whom I spent
many hours discussing the problems, I encountered during my training. He
has been abundantly generous with his time and many of his valuable
suggestions have helped me to give the report in the present form.
I am grateful to him for the keen interest he showed in my work, the
insights he shared with me and the clarification he gave regarding the
Mutual Fund Industry. Without his apt suggestions, guidance and bountiful
benevolence, this report would have remained a dream.
I hope that he will understand my feelings lest unsaid with
thoughtfulness.

With this belief........

(Mayank Solanki)

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ACKNOWLEDGEMENT
I would like to thank Anand Rathi Securities Pvt. Ltd. for giving me
the opportunity to pursue my summer training in their respected
organization.
Preparing a training report is always teamwork and I realized the
advantage of working in a team. This acknowledgement is an effort to
recognize these professionals who have made this training a combination of
coordination, cooperation and success.
I would like to thank my faculty guide – Prof. Sushil J. Lalwani and
Dr. Sunil Mehta because without their guidance and valuable
recommendations it would not have been possible for me to reach at this
destination.
Now, I take the opportunity to thank my training guide – Mr. Tabish
Mehmood (Relationship Manager, Mutual Fund, Anand Rathi Securities
Pvt. Ltd. – Jaipur Branch) for lending his valuable time and suggestions, his
kind support made us to possess in depth knowledge in the Mutual Fund.
I would also like to thank Mr. Rajkumar Jain (Branch Manager,
Anand Rathi Securities Pvt. Ltd. – Jaipur Branch) for his support, whenever
I needed.
I also thank all the colleagues whom I worked with. They lend a
part of their valuable time, gave some precious suggestions and exchange
their experience.
Nothing is perfect in this world and so is this report.
Instead of all the precautions and applying all the skills that I have, there are
some loopholes left.
But even after doing all this, my training
report remains incomplete if I don’t thank Mr. Sachin Khadilkar (HR Head,
Anand Rathi Securities Pvt. Ltd.) for his kind attention and accepting our
humble request.

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PREFACE
Summer training is an integral part of MFC curriculum. Main
objective behind this training is to link the theoretical inputs and their
practical applications, which are essential to keep pace with the dynamic
environment.
To survive, thrive and beat the competition in today’s brutally
competitive world, one has to manage the future. Managing the future means
managing your savings. One can manage his/her savings by investing them
in Mutual Fund Companies, Banks and other Financial Institutions.
The training undergone provides an overview of the complexities of
today’s financial market. It also showed my errors, which were not
discovered until I worked on this project. The training enriched my
knowledge regarding Mutual Funds. It also helps me to analyze the mindset
of the Fund Manager while he is investing the fund in the diversified
equities, bonds and any other financial market instruments.
Instead of the efforts there might be some mistakes left in the project.

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CONTENTS
1. My First Regards 1
2. Acknowledgement 2
3. Preface 3
4. Objective 6
5. About Anand Rathi Securities: 7
 As a Whole Group 7
 Jaipur Branch 9
6. Introduction to Mutual Fund: 10
 Definition 10
 Concept 11
 Benefits 13
 Disadvantage 15
 History 16
 Role 18
 Types of Schemes/ Funds 19
 Types of Returns 24
 Frequently Used Terms 24
7. Procedure for Investment: 26
 Who can apply 26
 How to apply 26
 Mode of Payment 27
 How to Redeem 27
 How to Switch 27
 Systematic Withdrawal Plan (SWP) 28
 Systematic Transfer Plan (STP) 29
 Rights of Mutual Fund Unit holder 29
 Resolving the Grievances 30
8. Regulation/Constitution of Mutual Fund: 32
 Constitution 32
 Trustee 34
 Asset Management Company 38

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 Custodian & Depositories 40
 Bankers 41
 Transfer Agents 41
9. Operations of Mutual Fund 42
10 Association of Mutual Funds of India (AMFI) 50
.
11 Restriction on Investment of Fund Money 51
.

12 General Risk Factors: 54


.
 Managing Risk 55
 Types of Risks 57
13 Systematic Investment Plan 60
.
 Meaning 60
 How does it work 60
 Benefits 64
14 Investment in Mutual Funds by NRIs: 65
.
 Basics 65
 Procedure for investment of NRI/ PIO/ FII 66
 Redemption 68
 Taxes 70
 Some Special Terms 72
15 Tax Implications of Mutual Fund Investment 74
.
16 Some Interesting Terms: 81
.
 Floating Rate Fund 81
 Dividend Sweep 82
 Triggers 83
17 Tips for Investment in Mutual Funds: 86
.
 5 Pointers to Mutual Fund Performance 86
 5 Easy Steps to Invest in Mutual Funds 89
 Top 11 Tips to Invest in Mutual Funds 92
 The Right Asset Allocation 100
18 Equity & Debt Funds: 103

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.
 5 Reason for investing in Equity Funds 103
 Valuation of Debt Funds: 106
19 Performance Measures of Mutual Funds: 112
.
 Sharpe Ratio 113
 Treynor Ratio 113
 Jensen’s Ratio 114
 Expense Ratio 115
20 How to Play in an Over-Heated Market 116
.
21 New Fund Offers (NFOs): 118
.
 SBI Magnum Comma Fund 118
 PruICICI Infrastructure Fund 122
 Reliance Tax Saver (ELSS) Fund 127
22 Glossary 134
.
23 General Facts regarding Mutual Fund Industry 172
.
24 Conclusion 173
.
25 Bibliography 174
.
OBJECTIVE
The report aims at imparting education about Mutual Funds, as there
is a potentially large market for Mutual Fund Industry left. As I interviewed
the Chartered Accountants, Company Secretaries, Investment Consultant,
Tax Consultants etc, I visualize the importance of this project because many
of them lack adequate knowledge about mutual funds.
The purpose was to answer their questions, like:
• What is a Mutual Fund,
• Why should they invest in a mutual fund and what are the benefits,
• What is the concept of Mutual Fund,
• What are the myths and the facts about mutual funds,
• What are the various options to invest in a mutual fund,
• What is the constitution of AMC and how it is constituted,
• Risk awareness of the investor,

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• Some general tips for investing in the Mutual Funds,
• Tax implication of the income earned by investors from Mutual
Funds,
• NRIs investment in the Mutual Funds,

and many more…

ABOUT ANAND RATHI SECURITIES


With Anand Rathi Securities, part of the Anand Rathi Group,
everyone can count on the expertise and stability of a major financial
services player behind them.
• Single-mindedly research driven.
• Distinguished for transparency in execution and settlement
practices.
• Professional to the core.
• A comprehensive range of services that are aimed at building
robust relationships.

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It's largely due to a team of vastly experienced specialists who provide
you the momentum to make the most of whatever you need on financial
solutions.
From sophisticated analysis and trading expertise, to efficient
settlements, and ongoing investment research of more than 150 leading
Indian companies, Anand Rathi Securities assist everyone in developing
actionable strategies that maximise the potential of the market. Their
appreciation of the power of technology to everyone’s needs at a much faster
pace adds to their responsiveness in every situation. Which is why their
clients find themselves in good company with almost all the institutional
investors based in India. The scope and depth of their research activities is
continually being enhanced with exacting guidelines that minimise
subjective judgment, provide everyone greater transparency and ensure
everyone a competitive advantage.
To capitalise on opportunities as they emerge, what anyone need most
is information on a real time basis wherever he is. That’s why Anand Rathi
Securities is bringing about aggressive changes through a dramatically
enhanced IT infrastructure. Everyone can access critical information simply
and cost effectively through their web site. Their internal systems and
processes are designed to international standards, enabling them to leverage
their comprehensive knowledge of the way the markets function, for
everyone benefit. Allowing more accurate decisions and speedier settlements
to be carried out.
With a commitment to spend up to 25% of their revenue on upgrading
systems and adopting the latest technologies, everyone benefit from cutting
edge systems, everyone can rely on round the clock, around the world. In
conclusion Anand Rathi Securities see technology as the compelling driving
force in assisting everyone to attain his investment objectives and long term
goals.
Wherever in the country if anyone needs professional and transparent
retail broking services, he will find Anand Rathi Securities present. With the
BSE permitting establishment of terminals across the country, they were
among the first to set up an all-India network, getting closer to investors,
extending their reach nationwide.

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ANAND RATHI SECURITIES COUNTRY WIDE NETWORK

Currently, branches in most of the major cities handle all financial


requirements. With state-of- the-art Infrastructure such as networking
through the Internet as well as experienced specialists at investor’s call in
every branch, he has direct access to online trading, besides a host of other
facilities.

Anand Rathi Group, Corporate Office:


J. K. Somani Building,
3rd Floor,
British Hotel Lane,
Bombay Samachar Marg,
Fort, Mumbai 400023.
Tel.: 56377000
ABOUT ANAND RATHI SECURITIES, JAIPUR BRANCH
The Anand Rathi Securities, Jaipur branch is dealing in the
followings: -
• Demat Services
• NSE, BSE, F&O Trading Services

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• Commodity Trading
• Mutual Fund Distribution
• Life and Non-life Insurance
• IPO
• Financial Advisor
• Research Assistance

The organizational structure of Anand Rathi Securities, Jaipur Branch


is as follows: -
• Regional Director - Mr. Rajkumar Jain
• Business Development Manager - Mr. Anurag
Rastogi
• Accounts Manager - Mr. R. K. Agarwal
• Relationship Manager (Accounts) - Mr. R. C. Somani
• Operation Manager (Trading) - Mr. K. C. Sharma
• Depository Participant - Mr. V. K. Indoria
• Assistant Depository Participant - Mr. H. K.
Wadhwa
• Relationship Manager (Mutual Fund) - Mr. Tabish Mehmood

Anand Rathi Securities, Jaipur Branch:


Sanghi Upasana, Tower,
C – 98, Subhash Marg,
C-Scheme,
Jaipur – 302001
Tel.: 0141 – 5115472 / 74 / 75
Fax: 0141 – 2365135
E-mail: jaipur@rathi.com

INTRODUCTION TO MUTUAL FUND


DEFINITION

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According to SEBI (MF) Regulations, 1996 “ Mutual Fund means a
fund established in the form of a trust to raise monies through the sale of
units to the public or a section of the public under one or more schemes for
investing in securities, including money market instruments.”
The other common and well-known definitions of Mutual Funds are
as follows:
A Mutual Fund is an investment tool that allows small investors
access to a 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.
A Mutual Fund is a company that pools the money of many investors,
it’s shareholders – to invest in a variety of different securities.
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 equity markets or have a steady and comparatively secure
investment as offered by debt instruments.
In conclusion, we can say that Mutual Fund collects the money of
individuals, partnership firms, association of persons/body of individuals,
trust, HUFs, banks, company/body corporate, society, financial institutions,
foreign individuals, foreign financial institutions or any other person, or of
public or any part of public at large and deploys the collected fund according
to the scheme into the diversified portfolio of equities, bonds, financial
market instruments and other securities to generate returns. As and when any
person redeems his/her units, the Mutual Fund Asset Management Company
(AMC) will pay him his invested amount with the return generated
depending on the option chosen by the person.

CONCEPT

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A Mutual Fund is not an alternative investment option to stocks and
bond; rather it pools the money of several investors and invests this in
stocks, bonds, money market instruments and other types of securities.
A Mutual Fund is a trust that pools the savings of a number of
investors who share a common financial goal. The money thus collected is
then invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and the
capital appreciation realised are shared by its unit holders in proportion to
the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low
cost. The flow chart below describes broadly the working of a mutual fund:

MUTUAL FUND OPERATION FLOW CHART

Anybody with an investible surplus of as little as a few hundred


rupees can invest in mutual funds. The investors buy units of a fund that best
suit their investment objectives and future needs. A Mutual Fund invests the
pool of money collected from the investors in a range of securities
comprising equities, debt, money market instruments etc. after charging for
the AMC fees. The income earned and the capital appreciation realised by
the scheme, are shared by the investors in same proportion as the number of
units owned by them.
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.

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When you deposit money with the bank, the bank promises to pay you
a certain rate of interest for the period you specify. On the date of maturity,
the bank is supposed to return the principal amount and interest to you.
Whereas, in a mutual fund, the money you invest, is in turn invested by the
manager, on your behalf, as per the investment strategy specified for the
scheme. The profit, if any, less expenses of the manager, is reflected in the
NAV or distributed as income. Likewise, loss, if any, with the expenses, is
to be borne by you.
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.
Mutual funds can be divided into various types depending on asset
classes. They can also invest in debt instruments such as bonds, debentures,
commercial paper and government securities apart from equity.
Every mutual fund scheme is bound by the investment objectives outlined
by it in its prospectus. The investment objectives specify the class of
securities a mutual fund can invest in.
There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:

MUTUAL FUND ORGANISATIONAL FLOW CHART


The structure indicated by the new regulations is indicated as under.
A mutual fund comprises four separate entities, namely sponsor,

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mutual fund trust, AMC and custodian. The sponsor establishes the mutual
fund and gets it registered with SEBI.
The mutual fund needs to be constituted in the form of a trust
and the instrument of the trust should be in the form of a deed registered
under the provisions of the Indian Registration Act, 1908.
The sponsor is required to contribute at least 40% of the
minimum net worth (Rs. 10 crore) of the asset management company. The
board of trustees manages the MF and the sponsor executes the trust deeds
in favour of the trustees. It is the job of the MF trustees to see that schemes
floated and managed by the AMC appointed by the trustees are in
accordance with the trust deed and SEBI guidelines.

BENEFITS
There are several benefits from investing in a Mutual Fund:

• Small investments:
Mutual funds help you to
reap the benefit of returns by a portfolio spread across a wide spectrum of
companies with small investments. Such a spread would not have been
possible without their assistance.

• Professional Fund Management:


Professionals having
considerable expertise, experience and resources manage the pool of
money collected by a mutual fund. They thoroughly analyse the markets
and economy to pick good investment opportunities.

• Spreading Risk:
An investor with a limited
amount of fund might be able to invest in only one or two stocks / bonds,
thus increasing his or her risk. However, a mutual fund will spread its
risk by investing a number of sound stocks or bonds. A fund normally
invests in companies across a wide range of industries, so the risk is
diversified at the same time taking advantage of the position it holds.
Also in cases of liquidity crisis where stocks are sold at a distress, mutual
funds have the advantage of the redemption option at the NAVs.

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• Transparency and interactivity:
Mutual Funds regularly
provide investors with information on the value of their investments.
Mutual Funds also provide complete portfolio disclosure of the
investments made by various schemes and also the proportion invested in
each asset type. Mutual Funds clearly layout their investment strategy to
the investor.

• Liquidity:
Closed ended funds have their
units listed at the stock exchange, thus they can be bought and sold at
their market value whereas in open-ended schemes, you can get your
money back promptly at net asset value related prices from the mutual
fund itself.

• Choice:
The large amount of
Mutual Funds offers the investor a wide variety to choose from. An
investor can pick up a scheme depending upon his risk / return profile.

• Diversification:
Mutual funds invest in a broad
range of securities. This limits investment risk by reducing the effect of a
possible decline in the value of any one security. Mutual fund unit-
holders can benefit from diversification techniques usually available only
to investors wealthy enough to buy significant positions in a wide variety
of securities.

• Low Cost:
A mutual fund let's you
participate in a diversified portfolio for as little as Rs.5,000/-, and
sometimes less. And with a no-load fund, you pay little or no sales
charges to own them.

• Convenience and Flexibility:


You own just one security
rather than many, yet enjoy the benefits of a diversified portfolio and a
wide range of services. Fund managers decide what securities to trade,
collect the interest payments and see that your dividends on portfolio
securities are received and your rights exercised. It also uses the services
of a high quality custodian and registrar in order to make sure that your

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convenience remains at the top of our mind.

• Personal Service
One call puts you in touch with
a specialist who can provide you with information you can use to make
your own investment choices. They will provide you personal assistance
in buying and selling your fund units, provide fund information and
answer questions about your account status. Our Customer service
centers are at your service and our Marketing team would be eager to
hear your comments on our schemes.

• Tax Benefits:
Some of the schemes of
the Mutual Funds like Equity Linked Saving Schemes (ELSS) give the
benefits of tax saving also as the investment in ELSS upto Rs. 1lakh is
allowable as deduction u/s 80(C). The dividend earned through mutual
funds is also exempt from tax. There is no tax on long term capital gain
on equity funds.

• Ease of investing:
As one can invest in mutual
funds with small amount of his/her savings therefore it is easy for him to
invest in mutual funds and the AMC will take care of his investment.

• Record Keeping Services:


All Asset Management
Companies (AMC) maintains all the records regarding the investments
made by each and every investment e.g. account statement or account
summary.
• Regulations:
All the mutual funds are
registered with SEBI and they function within the provisions of strict
regulation designed to protect the interests of the investor.

DISADVANTAGES OF MUTUAL FUNDS


• Investor can not choose the securities which they want to invest in.
• Investors face the risk of Fund Manager not performing well.

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• If Fund Manager's pay is linked to performance of the fund, he may be
tempted to perform only on short term and neglect long term
performance of the fund.
• The management fees charged by the fund reduce the return available to
the investors.
• Investors in Mutual Fund have to rely on the fund manager for receiving
any earning made by the fund, i.e. they are not automatic.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY


The mutual fund industry in India started in 1963 with the formation
of Unit Trust of India, at the initiative of the Government of India and
Reserve Bank of India. The history of mutual funds in India can be broadly
divided into four distinct phases.

• First Phase – 1964-87


An Act of Parliament
established Unit Trust of India (UTI) on 1963. It was set up by the
Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and the Industrial Development Bank of India
(IDBI) took over the regulatory and administrative control in place of
RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management
(AUM).
• Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non-
UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation
of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (Dec 87),
Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund
(Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).
LIC established its mutual fund in June 1989 while GIC had set up its
mutual fund in December 1990.
At the end of 1993, the mutual
fund industry had assets under management of Rs.47,004 crores.

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• Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector
funds in 1993, a new era started in the Indian mutual fund industry,
giving the Indian investors a wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund Regulations came into being,
under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July
1993. The 1993
SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The
industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many


foreign mutual funds setting up funds in India and also the industry has
witnessed several mergers and acquisitions. As at the end of January
2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

• Fourth Phase – since February 2003


In February2003,
following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of
the Unit Trust of India with assets under management of Rs.29,835
crores as at the end of January 2003, representing broadly, the assets of
US 64 scheme, assured return and certain other schemes. The Specified
Undertaking of Unit Trust of India, functioning under an administrator
and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the Mutual
Fund Regulations. With the bifurcation of the erstwhile UTI which had in
March 2000 more than Rs.76,000 crores of assets under management and
with the setting up of a UTI Mutual Fund, conforming to the SEBI
Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of October 31,

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2003, there were 31 funds, which manage assets of Rs. 1,26,726 crores
under 386 schemes.
The graph indicates the growth of
assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT


Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking
of the Unit Trust of India effective from February 2003. The Assets under management
of the Specified Undertaking of the Unit Trust of India has therefore been excluded from
the total assets of the industry as a whole from February 2003 onwards.

ROLE OF MUTUAL FUNDS


Mutual Funds have opened new vistas to investors and imparted much
needed liquidity to the system. In this process they have challenged the
hitherto dominant role of the commercial banks in the financial market and
national economy.

• Mutual Funds and Household Savings


In 1997 the share of mutual
funds in household financial assets was over 5% in the USA, 8% in
Germany, 3% in Japan, 3% in Italy and about 5% in India. The other
indicator which highlights their importance is the rate of growth of this
share. The economists’ magazine in its issue of 9 October 1995 reported
that in 1980, 58% on the personal sector wealth in the USA was held in

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financial assets, by 1992 this had risen to 63%. Out of these financial
assets the share of mutual funds stood at 5.4% as against 0.7% in 1980.
In India there has been a
steady increase in the share of mutual funds in house holds savings
(financial assets) since 1988-89 i.e. after the entry of public sector mutual
funds. The most significant growth during 1980-81 to 1992-93 was in
respect of UTI. It increased from 0.3% of the total household savings in
1980-81 to 7.0% in 1992-93. However the percentage share of bank
deposits declined from 45.8% in 1980-81 to 40.2% in 1994-95.

• Mutual Funds and the Capital Market


According to Center for
Monitoring Indian Economy (CMIE), "Mutual Funds" cornered 12% of
the total market capitalization, the share of UTI being 9.4% of the total
market capitalization of Indian Stock Markets in 1994. Out of the total
investment of Rs. 71,828.62 crores, 51% was invested in equities while
about 21% was invested in debt instruments like debentures and bonds.
This indicates that mutual funds have strongly supported the equity
market. While non UTI mutual funds have tended more towards equities
and debentures, UTI due to its special structure, has rendered better
support to government securities market.

• Mutual Funds and Corporate Finance


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 54.42% in
1988-89 to 2.3% in 1991-92, while of the other financial sector
(including mutual funds) has increased from 39.9% to 102.58%. RBI has
noted that "The rapid growth of mutual funds and increase in term
lending by other financial institutions appear to have contributed to this
trend."
TYPES OF SCHEMES/FUNDS

I. By Structure II. By Investment Objective III. Other Schemes

1. Open – Ended Scheme 1. Growth Scheme 1. Tax Saving Scheme


2. Close – Ended Scheme 2. Income Scheme 2. Index Scheme
3. Interval Schemes 3. Balanced Scheme 3. Sector Specific

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4. Money Market Schemes 4. Real Estate Scheme
5. Gilt Schemes

Open ended Schemes


1. The units offered by these schemes are available for sale and
repurchase on any business day at NAV based prices.
2. Unit capital of the schemes keeps changing each day.
3. Offer very high liquidity to investors and are becoming
increasingly popular in India.

• Closed ended Scheme


1. The unit capital of close-ended products is fixed as
it makes a one-time sale of fixed number of units.
2. Are launched with a New Fund Offer (NFO) with
a stated maturity period after which the units are fully redeemed at
NAV linked prices.
3. In the interim, investors can buy or sell units on
the stock exchanges where they are listed.
4. Unlike open-ended schemes, the unit capital in
closed-ended schemes usually remains unchanged.
5. After an initial closed period, the scheme may
offer direct repurchase facility to the investors.
6. Are usually more illiquid as compared to open-
ended schemes and hence trade at a discount to the NAV.
7. This type of scheme does not exist in present.

• Interval Scheme
1. Basically a close ended scheme with a
peculiar feature that every year for a specified period (interval) it is
made open.
2. Prior to and such interval the scheme
operates as close ended.
3. During the said period, mutual fund is
ready to buy or sell the units directly from or to the investors.

• Growth Schemes
1. Commonly called as Equity Schemes.

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2. Seek to invest a majority of their
funds in equities and a small portion in money market instruments and
have the potential to deliver superior returns over the long term.
3. They are exposed to fluctuations in
value especially in the short term.
4. Hence not suitable for investors
seeking regular income or needing to use their investments in the
short-term. Ideal for investors who have a long-term investment
horizon and risk bearing capacity.
5. The return comes in two sizes in this
type of schemes, one is small i.e. dividend and another is medium i.e.
at redemption time.

GENERAL PURPOSE EQUITY SCHEMES

Income Schemes
1. Commonly known as Debt Schemes.
2. These schemes invest in money markets, bonds and
debentures of corporate with medium and long-term maturities.
3. These schemes primarily target current income instead of
capital appreciation. They therefore distribute a substantial part of
their distributable surplus to the investor by way of dividend
distribution.
4. Such schemes usually declare quarterly dividends and are
suitable for conservative investors who have medium to long term
investment horizon and are looking for regular income through
dividend or steady capital appreciation.

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5. The prices of these schemes tend to be more stable
compared with equity schemes and most of the returns to the investors
are generated through dividends or steady capital appreciation.
6. These schemes are ideal for conservative investors or those
not in a position to take higher equity risks, such as retired
individuals.
7. However, as compared to the money market schemes they
do have a higher price fluctuation risk and compared to a Gilt fund
they have a higher credit risk.

General Purpose Debt Schemes

Balanced Schemes
1. Aim of balanced funds is to provide both growth and regular income
as such schemes invest both in equities and fixed income securities.
2. Appropriate for investors looking for moderate growth.
3. They generally invest 40-60% in equity and debt instruments.
4. NAVs of such funds are likely to be less volatile and bear lower risk
compared to pure equity funds.
5. Theses funds are also known as Hybrid Schemes.

Money Market Schemes


1. Invest in short term instruments such as Commercial
Paper (“CP”), Certificates of Deposit (“CD”), Treasury Bills and Call
Money.
2. Least volatile of all the types of schemes because of
their investments in money market instrument with short-term
maturities.

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3. Are popular with institutional investors and high net
worth individuals having short-term surplus funds.

Tax Saving Schemes


Investors (individuals and Hindu Undivided Families (“HUFs”)) are
being encouraged to invest in equity markets through Equity Linked
Savings Scheme (ELSS) by offering them a tax deduction u/s 80(C).
The deduction is allowable upto the limit of Rs. 1 lakh u/s 80(C).

Index Schemes
1. Replicate the portfolio of a particular index such as the BSE
Sensitive Index, S&P NSE 50 index (Nifty), etc
2. Invest in the securities in the same weight age comprising of an
index.
3. NAVs of such schemes would rise or fall in accordance with
the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms.
4. Exchange traded index funds launched by the mutual funds
which are traded on the stock exchanges.
5. The primary purpose of an Index is to serve as a measure of the
performance of the market as a whole, or a specific sector of the
market.

• Sector Specific Schemes


1. These schemes restrict their investing
to one or more pre-defined sectors, e.g. technology sector, pharma
sector, power sector etc.
2. Depend upon the performance of
select sectors only, these schemes are inherently more risky than
general-purpose schemes.
3. They are suited for informed investors
who wish to take a view and risk on the concerned sector.

• Real Estate Schemes


1. Specialized real estate
funds would invest in real estates directly, or may fund real estate
developers or lend to them directly or buy shares of housing finance
companies or may even buy their securitized assets.

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Gilt Schemes
1. This scheme primarily invests in Government Debt. Hence the
investor usually does not have to worry about credit risk since
Government Debt is generally credit risk free.

TYPES OF RETURNS
Mutual Funds give returns in two ways - Capital Appreciation or
Dividend Distribution.

• Capital Appreciation
An increase in the value of the
units of the fund is known as capital appreciation. As the value of
individual securities in the fund increases, the fund's unit price increases.
An investor can book a profit by selling the units at prices higher than the
price at which he bought the units.

• Dividend Distribution
The profit earned by the fund is
distributed among unit holders in the form of dividends. Dividend
distribution again is of two types. It can either be re-invested in the fund
or can be on paid to the investor.
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.

FREQUENTLY USED TERMS


• Net Asset Value (NAV)
Net Asset Value is the market
value of the assets of the scheme minus its liabilities. The per unit NAV
is the net asset value of the scheme divided by the number of units

26
outstanding on the Valuation Date.

• Sale Price
Sale price is the price you pay
when you invest in a scheme. Also called Offer Price. It may include a
sales load.

• Repurchase Price
Repurchase price is the
price at which a close-ended scheme repurchases its units and it may
include a back-end load. This is also called Bid Price.

• Redemption Price
Redemption price is the
price at which open-ended schemes repurchase their units and close-
ended schemes redeem their units on maturity. Such prices are NAV
related.

• Sales or Entry Load


Sale load is a charge
collected by a scheme when it sells the units. Also called, ‘Front-end’
load. Schemes that do not charge a load are called ‘No Load’ schemes.

• Repurchase, Exit or Back-end Load


Repurchase load is a charge
collected by a scheme when it buys back the units from the unit holders.

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PROCEDURE FOR INVESTING IN MUTUAL FUNDS
WHO CAN APPLY
The following persons are eligible to apply for subscription to
the Units of Mutual Fund Scheme. However that purchase of units of Mutual
Funds is governed by relevant statutory regulations. Changes in such
regulations may affect eligibility.
• Resident adult individuals either singly or jointly; the number of joint
subscribers cannot exceed three,
• Minors through parent/lawful guardian,
• Companies, Bodies Corporate, Public Sector Undertaking,
Association of Persons or Bodies of Individuals and Societies registered
under the Societies Registration Act, 1860 (so long as the purchase Units
is permitted under the respective constitutions),
• Religious and Charitable Trusts, Wakfs or Endowments and
Registered Societies (including registered Co-operative Societies) and
Private Trusts (subject to receipt of necessary approvals as required),
• Partnership Firms,
• Karta of Hindu Undivided Family (HUF),
• Banks and Financial Institutions,
• Scientific and Industrial Research Organisations and
• Other Associations, Institutions, Bodies, etc. who are permitted to
invest in this Scheme as per their respective constitutions.

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Subject to the regulations, the Trustee may reject any application
received, in case the application is found invalid or incomplete or for any
other reasons, at the Trustee's sole discretion.

HOW TO APPLY
For convenience of investors some application forms are
attached with the offer document.
Applicants should use the appropriate Application
Form. Application Forms will be available at all places as specified in the
Application form, investor service centers, Marketing Associates, and at the
office of the AMC.
Applications complete in all respects may be submitted at
the designated branches of Investors Service Centers and the registered
office of AMC.
As per the directives issued by SEBI, it is
mandatory for applicants to mention their bank account numbers in their
applications for purchase or redemption of Units.
Kindly ensure that the
acknowledgement slip is initialed/ stamped by the collecting authority and
retain it.

MODE OF PAYMENT
Investors may pay by local cheque/bank draft, drawn on any
bank which is a member of Bankers clearing house located at a place where
the application is submitted. Cheques/demand drafts should be crossed
"Account Payee Only".

HOW TO REDEEM
Redemption of Units will be made on any business day at
the Applicable NAV of the option within the scheme.
In order to redeem Units, unit holders must submit a redemption request in
the proper form accompanied by account statements. Alternatively, unit
holders may download redemption request form.

29
Under normal circumstances, the scheme will endeavour to
dispatch the redemption cheques by courier or by Registered Post within
three business days from the redemption day.
The application / redemption request shall be handed
over to any of the investor service centre of the fund.

HOW TO SWITCH
Unit Holders will have the option to switch all or part of
their investment in the Scheme, to any other scheme(s) established by the
mutual Fund, which is available for investment at that time. The switch will
be affected by way of redemption of Units of this Scheme and reinvestment
of the redemption proceeds in the other scheme(s) selected by the Unit
Holders, at the prevailing terms of that scheme. The other scheme(s) may at
discretion of Trustee or the AMC, may waive entry load to the extent of the
entry load paid by the investor while joining this scheme. In other words, the
difference in the Net Asset Values (NAVs) of the two schemes and
applicable loads will be reflected in the number of units allotted.
Unit Holders should note that each switch
would represent the sale of Units from one scheme (which may result in a
capital gain or loss) and purchase of Units in another scheme. Unit Holders
who have subscribed under Section 54EA / 54EB facility will be permitted
to switch their investment only after the completion of their respective lock-
in periods. Switching between Investment plans within the Scheme
will also be permitted.

FIXED SYSTEMATIC WITHDRAWAL PLAN (SWP)


SWP is a Tax efficient way of obtaining regular
income. Investor can opt for SWP for periodic withdrawal of sums from
their accounts. Investor can opt for any one of the following two options
offered by the Schemes:
• Amount Encashment
Under this facility, the Unit
holders can opt to redeem/ switch (transfer) fixed amount of money from
their accounts at periodic intervals.

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• Capital Appreciation Encashment
Under this facility,
the Unit holders can opt to redeem amounts equivalent to the
appreciation in their investment value at periodic intervals. Thus the
appreciation, if any, earned by the Scheme during the specified period
shall be automatically redeemed and paid to the investors at the
Applicable NAV. Presently this option is available only for investors in
Growth Plan/Option.
The amount thus withdrawn / switched shall be converted into units at
the Applicable NAV, subject to load, if any, and such units shall be
subtracted from the Unit balance of that unit holder. This facility shall be
subject to the terms and conditions contained in the SWP / STP enrollment
form. The Registrar may terminate SWP/ STP on receipt of appropriate
notice from the Unit holder. It will terminate automatically if all Units are
liquidated or withdrawn from the account or upon the receipt of notification
of death or incapability of the Unit holder.
SWP / STP shall not be available for investments under 54 EA /
54 EB of the Income Tax Act, 1961, during the stipulated lock-in-period of 3
years / 7 years respectively.
The withdrawal / Transfer would happen on the date prescribed by the
Investment Manager and would be subject to applicable load structures for
respective schemes. Investors desiring to opt for these benefits are requested
to read the instructions contained in the enrollment form carefully.
SWP can be modified/terminated by the unit holder by
submitting a written request 5 days in advance.

SYSTEMATIC TRANSFER PLAN (STP)


The Systematic Transfer Plan gives investors the option
of systematic transfer of fixed amounts/ capital appreciation on a periodic
basis to another Plan/ Scheme of the Mutual Fund. STP can availed of as a
monthly or quarterly basis from one plan to another plan in the same scheme
or to another scheme within the fund All transfers will take place on the
30th/ 31st of every Month/ Quarter based on the NAV of that day.
An investor can opt for systematic transfer of fixed
amount or of the Capital Appreciation on investment in the scheme to any
desired scheme on a monthly or quarterly basis. STP of Capital Appreciation
is available only under the Growth plan and not under Dividend Plan. The
amount of transfer under STP will be considered as redemption and will be

31
made at the applicable redemption price on the day of transfer and at the
applicable load, if any.
STP can be modified/terminated by the unitholder
by submitting a written request 5 days in advance.

RIGHTS OF A MUTUAL FUND UNITHOLDER


The offer documents of a scheme lay down the investor’s rights. The
important rights of the unitholders are outlined below:
• Receive unit certificates or statements of accounts confirming the title
within 6 weeks from the date of closure of the subscription or within 6
weeks from the date of request for a unit certificate is received by the
Mutual Fund.
• Receive information about the investment policies, investment
objectives, financial position and general affairs of the scheme.
• Receive dividend within 42 days of their declaration and receive the
redemption or repurchase proceeds within 10 days from the date of
redemption or repurchase.
• Right of beneficial ownership of the schemes assets as well as any
dividend or income declared under the scheme.
• Right to information regarding any adverse happening.
• Right to inspect major documents of the fund i.e. material contracts,
the investment management agreement, the custodian services
agreement, registrar and transfer agency agreement, memorandum and
articles of association of the AMC, recent audited financial statements
and the offer document of the scheme.
• Vote in accordance with the Regulations to:
1. Approve or disapprove any change in the fundamental
investment policies of the scheme, which are likely to modify the
scheme or affect the interest of the unit holder. The dissenting unit
holder has a right to redeem the investment.
2. Change the Asset Management Company.
3. Wind up the schemes.
• Legal Limitations to Investor’s Rights:
1. Unitholder can not sue the trust but they can initiate
proceedings against the trustees, if they feel that they are being
cheated.

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2. Except in certain circumstances AMC can not assure a specified
level of return to the investors. AMC can not be sued to make good
any shortfall in such schemes.

RESOLVING THE GRIEVANCES


Investors can get in touch with the contact person named in the offer
document, trustees and directors of the AMC with their grievances. Mutual
funds are regulated by SEBI. The investor has the recourse to approach
SEBI for any grievances towards a mutual fund in connection with non-
receipt of dividends, redemption, account statement, etc. Various investor
forums also take up the case of individual investors.
Investors can contact:

• Securities and Exchange Board of India (SEBI)


Mutual Funds Department,
Mittal Court,
B Wing, First Floor,
224, Nariman Point,
Mumbai 400 021.
Phone: 285 0451-56
Website: www.sebi.gov.in

• Consumer and Education Research Society


Gandhi Nagar Highway,
Ahmedabad 380 054.
Phone: 079-7489945
Fax: 079-7489947
Website: www.cercindia.org

• Investor’s Grievance Forum


9/C Neelam Nagar,
Mulund East,
Mumbai 400 084.
Phone: 022-25644151
Fax: 022-25647432
Email: igfmumbai@vsnl.net

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REGULATION/CONSTITUTION OF MUTUAL FUNDS
SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI)
(INVESTMENT IN MUTUAL FUNDS)

DEFINITION OF MUTUAL FUND


It is a pool of investors money invested and managed by an
investment adviser. Money can be invested in the fund or withdrawn at any
time, with few restrictions, at net asset value (the per share market value of
all securities held) minus any loads and/or fees. Definition of mutual fund as
given in the regulations is a fund established in the form of a Trust by a
sponsor to raise monies by the trustees through the sale of units to the public
or a section of the public under one or more schemes for investing in
securities including money market instruments in accordance with the SEBI
Regulations.

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CONSTITUTION OF A MUTUAL FUND
In India, a mutual fund is allowed to issue both close ended and open
ended funds under the common law. This is against the practice as followed
in UK. A mutual fund in India is constituted in the form of trust created
under the Indian Trusts Act, 1882. The fund sponsor acts as the Settlor of the
trust, contributing to its initial capital and appoints a Trustee to hold the
assets of the trusts for the benefit of the unitholders, who are the
beneficiaries of the trust. Under the Indian Trusts Act, the trust or the fund
has no independent legal capacity itself, rather it is the trustee or trustees
who have the legal capacity and therefore all acts in relation to the trust are
taken on its behalf by the trustees. The trustees hold the unitholders money
in a fiduciary capacity i.e. the money belongs to the unitholders and it is
entrusted to the fund for the purpose of investment. The fund sponsor can be
compared to a promoter of a company. The Asset Management Company
(AMC) is appointed to act as the investment manager of the trust under the
Board supervision and direction of the trustees. The sponsor appoints the
AMC which would in the name of trust, float and then manage the different
investment schemes as per SEBI guidelines.
The above aspects can be understood easily in the following
paragraphs.

• Who can establish a mutual fund


A mutual fund is to be
established through the medium of a sponsor – A sponsor means any
body corporate who, acting alone or in the combination with another
body corporate, establishes a mutual fund after completing the formalities
prescribed in the SEBI’s Mutual Funds Regulations. The sponsor should
have a sound track record and general reputation of fairness and integrity
in all his business transactions.

“Sound track record” shall mean that


the sponsor should:
1. be carrying on business in financial services for a period of not
less than five years,
2. the net worth is positive in all the immediately preceding five
years,
3. the net worth in the immediately preceding year is more than
the capital contribution of the sponsor in the asset management
company,

35
4. the sponsor has profits after providing for depreciation, interest
and tax in three out of the immediately preceding five years, including
the fifth year, and
5. the sponsor should be a fit and proper person.

• How to establish a mutual fund


1. The mutual fund has to be established as a trust and the
instrument of trust shall be in the form of a deed. The deed shall be
executed by the sponsor in favour of the trustees named in the
instrument of trust. The trust deed shall be duly registered under the
provisions of the Indian Registration Act, 1908. The trust deed shall
contain clauses specified in the Third Schedule of the Regulations.
2. An Asset Management Company, who holds an approval from
SEBI. Is to be appointed to manage the affairs of the mutual fund and
it should operate the schemes of such fund.
3. The sponsor should contribute at least 40% to the net worth of
the Asset Management Company.
The Trustee should hold
the property of the mutual fund in trust for the benefit of the
unitholders.

36
Sponsor Establishes MF as Trust,
Company Registers MF with SEBI
Hold Unitholders fund in
Managed by a MF, Ensure compliance
Board of Trustees Mutual Fund to SEBI, Enter into
agreement with SEBI

Float Mutual Funds fund,


Appointed by Manages funds as per
Board of Trustees SEBI guidelines and
AMC AMC agreement

Appointed by
Trustees Provides necessary
Custodian Services
Custodian
Appointed by
Trustees Provides Banking
Services
Bankers
Appointed by
Trustees Provide Registrars
Register Transfer Services and act as a
Agents transfer Agents

TRUSTEE
• Definition
“Trustee means the Board of Trustees
or the Trustee Company who hold the property of the Mutual Fund in
trust for the benefit of the unitholders.

• Eligibility for Appointment as Trustee


1. No person shall be eligible to be appointed as a trustee unless:

 he is person of ability, integrity and standing;

37
 has not been found guilty of moral turpitude;
 has not been convicted of any economic offence or violation of
any securities laws; and
 has furnished particulars as specified in Form C specified in
SEBI Regulations.
2. An asset management company or any of its officers or
employees shall not be eligible to act as a trustee of any mutual fund.
3. No person who is appointed as a trustee of a mutual fund can be
appointed a trustee of any other mutual fund unless:
 Such a person is an independent trustee, and
 Prior approval of the mutual fund of which he is a trustee
has been obtained for such an appointment.
4. Two-thirds of the trustees shall de independent persons and
shall not be associated with the sponsors or be associated with them in
any manner whatsoever.
5. In case a company is appointed as a trustee then its directors
can act as trustees of any other trust provided that the object of the
trust is not in conflict with the object of the mutual fund, trustee shall
initially or any other time thereafter be appointed without prior
approval of SEBI.

• Rights and Obligations of the Trustees – Operation of the Trust


1. The trustee shall have a right to obtain from the Asset
Management Company such information as is considered necessary
by the trustees.
2. If the trustees have reason to believe that the business of the
Mutual Fund is not conducted in conformity with the SEBI
regulations, they shall forthwith take such remedial steps as are
necessary to rectify the situation and keep SEBI informed of the
violation and the action taken by them.
3. The trustees shall ensure that the transactions entered into by
the Asset Management Company are in accordance with the SEBI
Regulations and the scheme.
4. The trustees shall be accountable for and be the custodian of the
property of the respective schemes and shall hold the same in trust for
the benefit of the unitholders in accordance with the SEBI Regulations
and the provisions of the trust deed.
5. The trustees shall be responsible for calculation of any income
due to be paid to the mutual fund and also of any income received in

38
the mutual fund for the holders of the units of any scheme in
accordance with the SEBI Regulations and the trust deed.
The trustees shall ensure that an Asset
Management Company has been diligent in empanelling the brokers, in
monitoring securities transactions with brokers and avoiding undue
concentration of business with any broker.
The trustees shall ensure that the
Asset Management Company has not given any undue or unfair
advantage to any associates or dealt with any of the associates of the
asset management company in any manner detrimental to interest of the
unit holders.
The trustees shall ensure that the
Asset Management Company has been managing the mutual fund
schemes independently of other activities and have taken adequate steps
to ensure that the interest of investors of on scheme are not being
compromised with those of any other scheme or other activities of the
Asset Management Company.
The trustees shall call for the details
of transactions in securities by the key personnel of the Asset
Management Company in his own name or on behalf of the asset
Management Company on a six monthly basis and shall repot to SEBI, as
and when required.
The trustees shall quarterly review all
transactions carried out between mutual funds, Asset Management
Company and its associates.
The trustee shall quarterly review the
net worth of the asset Management company and in case of any shortfall,
ensure that the Asset Management Company make up for the shortfall as
per clause (f) of sub-regulation (1) of regulation 21.
The trustees shall ensure that there is
no conflict of interest between the manner of deployment of its net worth
by the Asset Management Company and the interest of the unitholders.
Each trustee shall file the details of
his transactions of dealings in securities with the Mutual Fund on a
quarterly basis.

• Report to SEBI
The trustees shall furnish to
SEBI on a half yearly basis:
1. a report on the activities of the mutual fund,

39
2. a certificate stating that the trustees have satisfied themselves that
there have been no instances of self-dealing or front running by any of
the trustees, directors and key personnel of the Asset Management
Company,
3. a certificate to the effect that the Asset Management Company has
been managing the scheme independently of any other activities and
in case of activities of the nature referred to in the regulation 24 have
been undertaken by the Asset Management Company and has taken
adequate steps to ensure that the interest of the unitholders are
protected,
4. the independent trustees referred to in regulation 16 shall give their
comments on the report received from the Asset Management
Company regarding the investments by the mutual fund in the
securities of group companies of the sponsor.

• Due Diligence by Trustees


1. General Due Diligence:
 The trustees shall be discerning in the appointment
of the Board of the Asset Management Company.
 Trustees shall review the desirability of
continuance of Management Company if substantial irregularities
are observed of the schemes and shall not allow the asset
management to float new schemes.
 The trustees shall ensure that the trust property is
properly held and administered by proper reasons and by a proper
number of such persons.
 The trustees shall ensure that all service providers
are holding the registrations from SEBI or concerned regulatory
authority.
 The trustees shall arrange for test checks for
service contracts.
 Trustees shall immediately report to SEBI of any
special development in the mutual fund.
2. Specific Due Diligence
The trustee
shall
 obtain internal audit reports at regular intervals from independent
auditors appointed by the trustees,
 obtain compliance certificates at regular intervals from the Asset
Management Company,

40
 hold meeting of trustees more frequently,
 consider the reports of the independent auditor and compliance
reports of Asset Management Company at the meetings of trustees
for appropriate action,
 maintain records of the decisions of the trustees at their meetings
and of the minutes of the meetings,
 prescribe and adhere to a code of ethics by the trustees, Asset
Management Company and its personnel,
 communicate in writing to the Asset Management Company of the
deficiencies and checking on the rectification of deficiencies.

• Reports to Trustees
The AMC
shall submit a monthly report to the trustees giving details and adequate
justification about the purchase and sale of the securities of the group
companies of the sponsor or the AMC, as the case may be, by the mutual
fund during the said quarter.
The
AMC shall submit to the trustees, quarterly reports of each year on its
activities and the compliance with SEBI regulations.

ASSET MANAGEMENT COMPANY (AMC)


• Who can be Asset Management Company
A company
formed and registered under the Companies Act, 1956 and which has
obtained the approval of SEBI to function as an Asset Management
Company may be appointed by the sponsor of the mutual fund as such.

If the trust deed of a mutual fund authorizes the trustees, the


later shall appoint the aforesaid terminated by majority of the trustees or
by seventy five percent of the unitholders of the scheme. Any change in
the appointment of the Asset Management Company shall be subject to
prior of SEBI and unitholders.
SEBI’s approval of an Asset Management
Company – before granting an approval to the Asset Management
Company, SEBI will take into account the following factors:

41
1. all matters which are relevant to efficient and orderly
conduct of the affairs of the Asset Management Company.
2. the existing Asset Management Company has a sound
track record, general reputation and fairness in transactions. For this
purpose, sound track record means the net worth, and the profitability
of the Asset Management Company.
3. the Asset Management Company is a fit and proper
person.
4. the directors of the Asset management Company are
persons having adequate professional experience in finance and
financial service related field and not found guilty of moral turpitude
or convicted of any economic offence or violation of any securities
laws.
5. the Board of Directors of the Asset Management
Company has at least fifty percent directors, who are not associate of
or associated in an manner with the sponsors or any of its subsidiaries
or the Trustees.
6. the Chairman of the Asset Management Company
should not be trustee of any mutual fund.
7. the Asset Management Company shall have a
minimum net worth of rupees ten crores. If an Asset Management
Company was already granted approval under the provisions of SEBI
(Mutual Fund) Regulations, 1993, it shall, within a period of 12
months from the date of notification of SEBI (Mutual Funds)
Regulations, 1996, increase its net worth to rupees ten crores.
 the period of 12 months referred to above may
be extended by SEBI upto three years in appropriate cases for
reasons to be recorded in writing. However, no new schemes
should be allowed to be launched or managed by such Asset
Management Company till the net worth has been raised to rupees
ten crores.
 Net Worth – It means the aggregate of paid up
capital and free reserves of the AMC after deducting there from
miscellaneous expenditure to the extent not written off or adjusted
or deferred revenue expenditure, intangible assets and accumulated
losses.
8. the key personnel of the Asset Management Company
have not been found guilty of moral turpitude or convicted of
economic offence or violation of securities laws or worked for any
Asset Management Company or Mutual Fund or any intermediary

42
during the period when registration has been suspended or cancelled
at any time by SEBI.

• Conditions to be fulfilled by the Asset Management Company


1. Any director of the AMC shall not hold the place of a director
in another AMC unless such person is independent director referred to
in clause (d) of Sub-regulation (1) of Regulation 21 of the Regulations
and approval of the Board of AMC of which such person is a director,
has been obtained.
2. The AMC shall forthwith inform SEBI of any material change
in the information or particulars previously furnished which have a
bearing on the approval granted by SEBI.
3. No appointment of a director of an AMC shall be made without
the prior approval of the trustees.
4. The AMC undertakes to comply with SEBI (Mutual Funds)
Regulations, 1996.
5. No change in controlling interest of the AMC shall be made
unless prior approval of the trustees and SEBI is obtained:
 a written communication about the proposed change is
sent to each unitholder and an advertisement is given in one
English daily newspaper 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 are given an option to exit at the
prevailing Net Asset Value without any exit load.
 the AMC shall furnish such information and documents
to the trustees as and when required by the trustees.

• Obligation of the Asset Management Company


1. The AMC shall manage the affairs of the
mutual fund and operate the schemes of such fund.
2. The AMC shall take all reasonable steps and
exercise due diligence to ensure that the investment of the mutual
funds pertaining to any scheme is not contrary to the provisions of
SEBI Regulations and the trust deed of the Mutual Fund. The AMC
shall exercise due diligence and care in all its investment decisions as
would be exercised by other persons engaged in the same business.
Recording of investment decisions – SEBI has advised AMCs to
maintain records in support of each investment decision.

43
3. The AMC shall be responsible for the acts of
commissions by its employees or the persons whose services have
been obtained by that company.

CUSTODIAN AND DEPOSITORIES


Custodian is a person appointed for safe keeping of the
securities. Mutual funds deal in buying and selling of large number of
securities. AMC appoints a Custodian for safe keeping of these securities
and for participating in clearing system on its behalf. In case of
dematerialized securities, holdings will be held by Depository through
Depository participant.
• Definition
Custodian means a person who
has been granted a certificate of registration by SEBI to carry on the
business of custodian of securities under the Securities and Exchange
Board of India (Custodian of Securities) Regulations, 1996.
The mutual fund shall
appoint a custodian to carry out the custodial services for the schemes of
the fund and send intimation of the same to SEBI within fifteen days of
the appointment of the custodian.
No custodian in which the
sponsor or its associates hold 50% or more of the voting rights of the
share capital of the custodian or where 50% or more of the directors of
the custodian represent the interest of the sponsor or its associates shall
act as custodian for a mutual fund constituted by the same sponsor or any
of its associate or subsidiary company.

• Agreement with Custodian


The mutual fund shall
enter into a custodian agreement with the custodian, which shall contain
the clauses which are necessary for the efficient and orderly conduct of
the affairs of the custodian. The agreement, the service contract, terms
and appointment of the custodian shall be entered into with the prior
approval of the trustees.

44
BANKERS
The AMC of the mutual fund appoints bankers to the
mutual funds. It provides facilities like receiving the proceeds on sale of
investments, enchasing high value cheques, giving multi city cheque book
facilities etc.

TRANSFER AGENTS
He is responsible for issuing and redeeming units of mutual
funds. He prepares transfer documents and update investor records.

OPERATIONS OF MUTUAL FUND


The operations of mutual funds generally include the following heads:
• Valuation of Investment
• Pricing of Units
• Dividend Distribution
• Apportionment of Expenses
• Advertisement Norms
• Investment Approaches
• Offer Document
In detail;

• Investment Valuation Norms


Mutual fund value the traded
securities on a “Mark to Market” basis. They are valued at a date known
as valuation date. The unrated securities are valued by the SEBI given
principles of valuation.

1. Traded Securities
The traded securities should be
valued at the last quoted closing price on the stock exchange than the
valuation should be as per the last quoted closing price on the Stock
Exchange where the security is principally traded. When on a
particular valuation day, a security has not been traded on the selected
Stock Exchange, the value at which it is traded on another Stock

45
Exchange may be used.

2. Non Traded Securities


When a security is not traded
on any Stock Exchange for a period of sixty days prior to the
valuation date, the scrip must be valued as non traded scrip. They
should be valued “in good faith” by the AMC on the basis of
appropriate valuation methods based. Such method must be approved
by the Board of the AMC. The auditors should also report it as fair
and reasonable in their report. The following principles should be
adopted:
 Equity instruments shall generally be valued on the basis of
capitalization of earnings solely or in accordance with the net asst
value. The price or earning ratios of comparable traded securities,
with an appropriate discount for lower liquidity, should be used for
the purposes of capitalization.
 Debt instruments should be valued on YTM (yield to maturity)
basis. The capitalization factor being determined for comparable
traded securities with an appropriate discount for lower liquidity.
 Government Securities will be valued at YTM based on the
prevailing market rate.
 Call money, bills purchased under rediscounting and short term
deposits with banks are to be valued at cost plus accrual, other
money market instruments are traded at the yield at which they are
currently traded.
 For Convertible Debentures and Bonds, Non Convertible
component should be valued as a debt instrument and convertibles
as any equity instrument. If after conversion, the resultant equity
instrument would be traded pari passu with an existing instrument
which is traded, the value of the latter instrument can be adopted
after an appropriate discount for the non tradability of the
instrument.

• Pricing of Units
Mutual funds shall
provide to the investors the price at which the units of the scheme may be
subscribed. In case of open ended scheme the mutual funds shall publish
at least in once a week in daily newspaper of all India circulations, the
sale and repurchase price of units. Every mutual fund shall compute the
net asset value of each scheme by dividing the net assets of the scheme

46
by the number of units outstanding in the valuation date. The NAV shall
be calculated and published at least in two daily newspapers at intervals
not exceeding one week.
It should ensure
that the repurchase price is not lower than 93% of the NET Asset Value
and the sale price is not higher than 107% of the NAV. Care should be
taken that the repurchase price of the units of a close ended scheme shall
not be lower than 95% of the NAV. The difference between the
repurchase price and the sale price of the units shall not exceed 7%
calculated on sale price.
• Dividend Distribution
Every mutual fund
and AMC shall dispatch to the unit holders the dividend warrants within
42 days of the declaration of the dividend. It should dispatch to the
redemption or repurchase proceeds within 10 working days from the date
of redemption or repurchase. The AMC shall be liable for penalty for
failure to dispatch the redemption or repurchase proceeds within the
stipulated period. It is liable to pay interest to the unit holders @ 15% p.a.

• Apportionment of Expenses
An AMC incur
various expenses such as initial expenses, recurring expenses and
investment management and advisory fees. Whatever be the expenses but
it should clearly identify all the expenses and apportion it in the
individual schemes.
1. Limits on Investment and Advisory Fees
1.25% of the first Rs. 100
crores of the weekly average net assets outstanding in the accounting
year, and @ 1% of weekly average net assets in excess of Rs. 100
crores. For schemes launched on a no load basis, the AMC shall be
entitled to collect an additional management fee not exceeding 1% of
the weekly average net assets outstanding in each financial year.

2. Initial Issue Expenses


When a scheme is launched, the
AMC incur some initial launching expenses. The benefits of theses
expenses accrue over many years. So they can not be charged to any
single year. SEBI permits amortization of initial expenses as follows:

47
 For a close ended scheme floated on a load basis,
the initial issue expenses shall be amortised on a weekly basis over
the period of the scheme.
 For a open ended scheme floated on a load basis,
initial issue expenses may be amortised over a period not
exceeding five years. Issue expenses incurred during the life of an
open ended scheme can not be amortised.

3. Recurring Expenses
It includes the following:
 Marketing and selling expenses including agent’s
commission
 Brokerage and transaction costs
 Registrar services for transfer of units sold or
redeemed
 Audit Fees
 Custodian charges
 Cost related to investor communication
 Costs of fund transfers from location to location
 Costs of providing accounts statements and
dividend/redemption cheques and warrants
 Insurance premium paid by the fund
 Winding up costs for terminating a fund or a
scheme
 Costs of statutory advertisements
 Other costs as approved by SEBI

4. Total Expenses
The total expenses of the
scheme as charged by the AMC excluding issue or redemption
expenses but including management and advisory fees, are subject to
the following limits:
 On the first Rs. 100 crores of the average weekly
net assets 2.5%
 On the next Rs. 300 crores of the average weekly
net assets 2.25%
 On the next Rs. 300 crores of the average weekly
net assets 2.0%
 On the balance of the assets 1.75%

48
• Advertisement of Schemes
An advertisement
relating to any scheme of the mutual fund has to comply with the
provisions of Advertisement Code Prescribed by SEBI in Sixth Schedule
of its Regulations. The advertisement shall be submitted to SEBI within
seven days from the date of issue. The advertisement for each scheme
shall disclose investment objectives of each scheme.
The important points of
the Advertisement Code for compliance in respect of an advertisement
are:
1. It shall be truthful, fair and clear.
2. It shall not contain a statement, promise or forecast which is
untrue or misleading.
3. It shall be considered to be misleading if it contains:
 misleading statements i.e. representations about the
performance or activities of the mutual fund in the absence of
necessary explanatory or qualifying statements and which give an
exaggerated picture of the performance or activities of the fund,
than what it really is.
 an inaccurate portrayal of a past performance or its
portrayal in a manner which implies that past gains or income will
be repeated in the future.
 statements promising the benefits of owning units or
investing in the schemes of mutual funds without simultaneous
mention of material risks associated with such investments.
4. Its design in content and format or in print should not be in such
a way as likely to be misunderstood or likely to disguise the
significance of any statement.
5. It shall not contain statements which directly or by implication
or by omission may mislead the investor.
6. It shall not be so framed as to exploit the lack of experience or
knowledge of the investors. As the investor may not be sophisticated
in legal or financial matter care should be taken that the advertisement
is set forth.
7. It shall be in a clear, concise and understandable manner.
Extensive use of technical or legal terminology or complex language
or the inclusion of excessive details which may detract the investors
should be avoided.

49
8. It should not contain information, the accuracy of which is to
any extent dependant on assumptions. Any advertisement that makes
claims about the performance of the fund shall be supported by
relevant figures.
9. It should not contain comparisons of one fund with another,
implicitly or explicitly, unless the comparison is fair and all
information relevant to such comparison is included in the
advertisement.
10. If it indicates yield on investment, the mutual fund must use
standardized computations such as annual dividend on face value,
annual yield on the purchase price and annual compounded rate of
return.
11. If it gives the mutual funds guarantee or assurance of any
minimum rate of return or yield to prospective investors, it should also
indicate the resources to take such a guarantee.
12. If it gives particulars of the past performance of the mutual
fund, it shall give the basis for computing the rates of return yield and
adjustments made, if any, must be expressly indicated. It should also
be made clear that such information is not necessarily indicative of
future results and may not necessarily provide a basis for comparison
with other investments. Any advertisement containing information
regarding information regarding performance, NAV, yield or returns
shall give such data for the past three years, wherever applicable.
13. It shall indicate names of the Settlor, Trustee, Manager and/or
Financial Advisor to the fund, bringing out clearly their legal status,
and liability, of these entities. All advertisements containing
information regarding performance, advertising yield, return or any
scheme detail or inviting subscription to the scheme shall contain
disclosures of all the scheme detail or inviting subscription to the
scheme shall contain disclosures of all the risk factors.
14. All advertisements shall clearly state all the risk factors
associated with mutual funds and securities investments. It should
state that they are subject to market risks, and there can be no
assurance that the fund’s objectives will be achieved.
15. All advertisements issued by a mutual fund or its sponsor or
AMC shall state that all investments in mutual funds and securities are
subject to market risks and the NAV of the schemes may go up or
down depending upon the factors and forces affecting the securities
market. These advertisements also disclose all the risk factors.

50
16. All advertisements launched in connection with the scheme
should also disclose prominently the risk factors as stated in the offer
document along with the warning statements. However if no reference
has been made to the past figures of NAV and/or purchase
 is only the name of the scheme and does not in any manner
indicate either to quality of the scheme, its future prospects or
returns; and
 please read the offer document before investing.
17. No name can be given to a scheme with a view to subtly
indicate an, assurance of return, except in the cases of guaranteed
return scheme in accordance with Regulation38.
18. No advertisement shall be issued stating that the scheme has
been subscribed or oversubscribed during the period the scheme is
open for subscription.
19. If a corporate advertisement is issued by the sponsor or any of
the companies in the group, or an associate company of the sponsor
during the subscription period, no reference shall be made to the
scheme of the mutual fund or mutual fund itself; otherwise it will be
treated as an issue advertisement.
20. If a corporate advertisement of a sponsor issued prior to the
lunch of a scheme makes a reference to the mutual fund sponsored by
it or any of its schemes launched/to be launched, it shall contain a
statement to the effect that the performance of the sponsor has no
bearing on the expected performance of the mutual fund, or any of its
schemes.
21. Advertisements on the performance of a mutual fund or its
AMC shall compare the past performance only or the basis of per unit
of statistics as per these Regulations. Advertisements for NAVs must
indicate the past as well as the latest NAV of scheme. The yield
calculations will be made as provided in these Regulations.
Apart from these guidelines SEBI has
issued various other advertisement codes relating to standards of
communication, forms of advertisements, use of rankings in
advertisement and sales literature. The basic aim of these guidelines is
the protection of investor’s interest and providing a level playing field to
all the competitors.

• Investment Approaches
There are two types of
investment approaches practiced by the investment managers. There are

51
top down approach and bottom up approach. The top down approach
begins by analyse the national and international market environment
through quantitative forecasting and scenario planning. The bottom
approach begins with the analysis of concerned company. The top down
approach helps in long term investment goals, whereas the bottom
approach is utilized for short term or speculative gains.
Institutions like
mutual funds would benefit by top down approach because they have
long term investment goals and their portfolio includes a variety of assets
with different degree of risks.
The
success of the mutual fund depends on the ability of the fund managers to
predict the future behavior of the scrips. The five most effective methods
to predict stock performance are as follows:
 Price/ Earning Ratio
 Price to Cash Flow Ratio
 Price to Book Value Ratio
 EBIDT
 Dividend Yield
 Price gain in the last year

These parameters are our personal


opinion and in no way they are the standard parameters. These above
readings should be accompanied by a good quality investment research.
Although the research culture has not grown in India but it is an
indispensable part of any investment in securities. Theses research should
broadly cover the following three points:

1. Macro Level

It includes studying the past trend and forecasting


about future performance of Indian as well as other world economies.
Importance should be given to interest rate, inflation rate,
unemployment, GDP figures, and change in Government policies in
and around the world. The research should try to conclude the out
performing sector of the economy in future.

2. Industry Level

It includes foretelling the performance of a


particular industry in the prevailing socio, economic, legal and

52
political situations. Different parameters should be given to each
independent industry. In this second step the research should try to
conclude the growing industry.

3. Micro Level Research

It includes studying the particular company in the


above concluded profitable industry for the investment.

This type of research is


for long term investment and should be on a continuous basis.

• Offer Document
Before the launching of any
scheme, such scheme should be approved by the trustee and a copy of
offer document should be filled with SEBI. The document containing the
details of a new scheme that the AMC or sponsor prepares for and
circulates to the prospective investor is called the Prospectus or the offer
document.
In case of close ended scheme
the offer document is issued only once at the time of issue where as in
case of open ended scheme it is valid for all the time. Although it is
issued only at the time of issue but it remain valid during the life of the
units or till amended. It is called as “Key Information Memorandum” and
it is most important document for investors. It contains details of AMC,
sponsors, bankers, registrars etc. along with the term and conditions of
the issue. It also mentions the rights and duties of the investors.

Apart from the above seven, NAV and investments of fund money
also plays an important part in operations of mutual fund.
ASSOCIATION OF MUTUAL FUNDS OF INDIA
(AMFI)
Followings are the members of AMFI:
• ABN Amro Mutual Fund
• Alliance Capital Mutual Fund
• Benchmark Mutual Fund
• Birla Sun Life Mutual Fund
• BOB Mutual Fund

53
•Canbank Mutual Fund
•Chola Mutual Fund
•Deutsche Mutual Fund
•DSP Merrill Lynch Mutual Fund
•Escorts Mutual Fund
•Fidelity Mutual Fund
•Franklin Templeton Mutual Fund
•GIC Mutual Fund
•HDFC Mutual Fund
•HSBC Mutual Fund
•ING Vyasa Mutual Fund
•JM Financial Mutual Fund
•Kotak Mahindra Mutual Fund
•LIC Mutual Fund
•Morgan Stanley Mutual Fund
•Principal Mutual Fund
•PruICICI Mutual Fund
• Reliance Mutual Fund
• Sahara Mutual Fund
• SBI Mutual Fund
• Standard Chartered Mutual Fund
• Sundaram Mutual Fund
• Tata Mutual Fund
• Taurus Mutual Fund
• UTI Mutual Fund
• Zurich India Mutual Fund
Investor can invest in any one or more of the schemes of the above
AMFI members.

RESTRICTION ON INVESTMENT OF FUND MONEY


The monies collected under any scheme of the Mutual Fund can be
invested only in transferable securities:
• in the money market
• in the capital market
• in privately placed debentures
• in securitised debts
54
Moneys collected under any money market scheme of a mutual fund
shall be invested only in money market instruments in accordance with
directions issued by the RBI. In a case of securitised debts such fund may
invest in asset-backed securities and mortgaged-backed securities.
A mutual fund scheme shall not invest more than 15% of its NAV in
debt instruments issued by a single issuer which are rated not below
investment grade by a credit rating agency authorized to carry out such
activity under the SEBI Act. Such investment limit may be extended to 20%
of NAV of the scheme with the prior approval of the Board of Trustees and
the Board of AMC provided that such limit shall not be applicable for in
Government Securities and money market instrument. The investment
within such limit can be made in mortgaged backed securitised debts which
are rated not below investment grade by a credit rating agency registered
with SEBI.
A mutual fund scheme shall not invest more than 10% of its NAV in
unrated debt instruments issued by a single issuer and the total investment in
such instruments shall not exceed 25% of the NAV of the scheme. All such
investments shall be made with the prior approval of the Board of Trustees
and the Board of AMC. No mutual fund scheme shall make any investment
in:
• any unlisted security of an associate or group company of sponsor,
• any security issued by way of private placement by an associate or the
group company of the sponsor,
• the listed securities of group companies of the sponsor which is in
excess of 25% of the net assets.
No mutual fund scheme shall invest more than 10% of its NAV in the
equity shares or equity related instruments of any company. The limit of
10% shall not be applicable for investments in case of index fund or sector
or industry specific scheme. A mutual fund scheme shall not invest more
than 5% of its NAV in the unlisted equity shares or equity related
instruments in case of open ended scheme and10% of its NAV in the case of
close ended scheme.

• Investment in ADRs/GDRs
All mutual funds will
henceforth be permitted to invest in ADRs/GDRs upto 10% of the net
assets managed by them as on the date of the last balance sheet, subject
to a maximum of US $ 50 million per mutual fund. The mutual funds
shall also have to obtain approval from RBI to invest in overseas market
from exchange control angle. The mutual funds should forward to SEBI

55
their proposals for undertaking investments and the amount which is
proposed to be invested in the schemes in ADRs/GDRs. The proposal
should give details of the modalities for making such investments and
engaging the services of overseas intermediaries, if any. In case
investments are proposed to be made by an existing scheme, the proposal
should also specify whether these investments are consistent with the
investments objectives of the scheme and the offer document provides for
investments in overseas securities.

• Index Funds
All investment
restrictions shall be applicable at the time of making investment. With
reference to the proviso to clause 10 of Seventh Schedule, the
investments by index funds shall be in accordance with the weightage of
the scrips in the specific index as disclosed in the offer document. In case
of sector/industry specific scheme, the upper ceiling on investments may
be in accordance with the weightage of the scrips in the representative
index/sub-index as disclosed in the offer document or10% of the NAV
scheme whichever is higher.

• Limit on Investments
The mutual funds have the
following maximum investment limits:
1. The mutual fund under all its schemes should own more than
10% of any company’s paid up capital carrying voting rights.
2. Aggregate inter scheme investment made for all schemes under
the same management or in scheme under the management of any
asset management company shall not exceed 5% of the net asset value
of the mutual fund.
3. A mutual fund can invest in short term deposits of scheduled
commercial banks, pending deployment of funds of a scheme in terms
of investment objectives.

• Restrictions on Investments in
Unrated Debt
Instruments With a view
to give operational flexibility SEBI has decided that the mutual funds
may constitute committees who can approve proposals for investments in
unrated instruments. However the details of such investments must be
approved by the AMC Boards and the trustees.

56
• Restriction of Borrowing/Lending
The
mutual fund shall not borrow except to meet temporary liquidity need of
the mutual funds for the purchase of the repurchase, redemption of the
units or payment of interest or dividend to the unit holders. They should
not borrow more than 20% of the net assets of the scheme and the
duration of such a borrowing shall not exceed a period of six months.

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.
Past performance of the Sponsor/AMC/Mutual Fund is
not indicative of the future performance of the Scheme.
The Sponsor is not responsible or liable for any

57
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 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. Therefore, the discussion on
investment objectives would not be complete without a discussion on the
risks that investing in a mutual fund entails.
At the cornerstone of investing
is the basic principle that the greater the risk you take, the greater the
potential reward. Remember that the value of all financial investments will
fluctuate. Typically, risk is defined
as short-term price variability. But on a long-term basis, risk is the
possibility that your accumulated real capital will be insufficient to meet
your financial goals. And if you want to reach your financial goals, you must
start with an honest appraisal of your own personal comfort zone with regard
to risk. Individual tolerance for risk varies, creating a distinct "investment
personality" for each investor. Some investors can accept short-term
volatility with ease, others with near panic. So whether you consider your
investment temperament to be conservative, moderate or aggressive, you
need to focus on how comfortable or uncomfortable you will be as the value
of your investment moves up or down.
Recognizing the type of
investor you are will go a long way towards helping you build a meaningful
portfolio of investments that you can live with. Take the test "Tolerance
Questionnaire" to determine where your preferences lie.

58
Risk

Managing Risk

Diversification

SIP

Types of Risk

Market

Inflation

Credit

Interest Rate

Employees

Exchange Rate

Investment

Government
Policies

Questionnaire

MANAGING RISK
Mutual funds offer incredible flexibility in managing investment risk.
Diversification and Automatic Investing (SIP) are two key techniques you

59
can use to reduce your investment risk considerably and reach your long-
term financial goals.

• Diversification
When you invest
in one mutual fund, you instantly spread your risk over a number of
different companies. You can also diversify over several different kinds
of securities by investing in different mutual funds, further reducing your
potential risk. Diversification is a basic risk management tool that you
will want to use throughout your lifetime as you rebalance your portfolio
to meet your changing needs and goals. Investors, who are willing to
maintain a mix of equity shares, bonds and money market securities have
a greater chance of earning significantly higher returns over time than
those who invest in only the most conservative investments.
Additionally, a diversified approach to investing -- combining the growth
potential of equities with the higher income of bonds and the stability of
money markets -- helps moderate your risk and enhance your potential
return.
• Systematic Investment Plan (SIP)
The Unit holders
of the Scheme can benefit by investing specific Rupee amounts
periodically, for a continuous period. Mutual fund SIP allows the
investors to invest a fixed amount of Rupees every month or quarter for
purchasing additional units of the Scheme at NAV based prices.
Here is an illustration using
hypothetical figures indicating how the SIP can work for investors:
Suppose an
investor would like to invest Rs.1,000 under the Systematic Investment
Plan on a quarterly basis.

Amount Invested Purchase Price No. of units


(Rs.) (Rs.) Purchased
Initial
1000 10 100
Investment
1 1000 8.20 121.95
2 1000 7.40 135.14
3 1000 6.10 163.93
4 1000 5.40 185.19
5 1000 6.00 166.67
6 1000 8.20 121.95

60
7 1000 9.25 108.11
8 1000 10.00 100.00
9 1000 11.25 88.89
10 1000 13.40 74.63
11 1000 14.40 69.44
TOTAL 12,000 - 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36


Average unit price 109.6/12 = Rs 9.13
Unit price at beginning of next quarter Rs 14.90
Market value of investment 1435.9 * 14.90= Rs 21,395/-
The investor liquidates his units and gets back Rs 21,395/-
Using the SIP strategy the
investor can reduce his average cost per unit. The investor gets the
advantage of getting more units when the market is turned down.

TYPES OF RISKS
All investments involve some form of risk. Even an insured bank
account is subject to the possibility that inflation will rise faster than your
earnings, leaving you with less real purchasing power than when you started
(Rs. 1000 gets you less than it got your father when he was your age).
Consider these common types of risk and evaluate them against potential
rewards when you select an investment.

• Market Risk
At times the
prices or yields of all the securities in a particular market rise or fall due
to broad outside influences. When this happens, the stock prices of both
an outstanding, highly profitable company and a fledgling corporation
may be affected. This change in price is due to "market risk".
• Inflation Risk
Sometimes
referred to as "loss of purchasing power." Whenever inflation sprints
forward faster than the earnings on your investment, you run the risk that
you'll actually be able to buy less, not more. Inflation risk also occurs

61
when prices rise faster than your returns.
• Credit Risk
In short, how
stable is the company or entity to which you lend your money when you
invest? How certain are you that it will be able to pay the interest you are
promised, or repay your principal when the investment matures?
• Interest Rate Risk
Changing
interest rates affect both equities and bonds in many ways. Investors are
reminded that "predicting" which way rates will go is rarely successful. A
diversified portfolio can help in offsetting these changes.
• Effect of Loss of key professionals and inability to adapt
An
industries' key asset is often the personnel who run the business i.e.
intellectual properties of the key employees of the respective companies.
Given the ever-changing complexion of few industries and the high
obsolescence levels, availability of qualified, trained and motivated
personnel is very critical for the success of industries in few sectors. It is,
therefore, necessary to attract key personnel and also to retain them to
meet the changing environment and challenges the sector offers.
Failure or inability to attract/retain such qualified key personnel
may impact the prospects of the companies in the particular sector in
which the fund invests.
• Exchange Risks
A number of
companies generate revenues in foreign currencies and may have
investments or expenses also denominated in foreign currencies. Changes
in exchange rates may, therefore, have a positive or negative impact on
companies which in turn would have an effect on the investment of the
fund.
• Investment Risks
The sector fund
schemes invest predominantly in equities of select companies in the
particular sectors. Accordingly, the NAV of the schemes are linked to the
equity performance of such companies and may be more volatile than a
more diversified portfolio of equities.

62
• Change in the Government Policy

Changes in Government policy


especially in regard to the tax benefits may impact the business prospects
of the companies leading to an impact on the investments made by the
fund.

63
SYSTEMATIC INVESTMENT PLAN
Typically caught in day to day work, most of people can afford very
little time for financial planning. They are all constrained by paucity of time
to do anything beyond routine. Moreover, with little access to real time
information and lack of ability to interpret and use financial information,
investment decisions just do not figure in our list of priorities.
Creating wealth is not rocket science. All it requires is discipline and
direction in financial planning. This is where a Systematic Investment Plan
(SIP) helps bring in the much-needed discipline to your world of investing.

MEANING
A Systematic Investment Plan (SIP) is an investment vehicle that
allows people to invest fixed amount of money at regular intervals of time
(monthly or quarterly) in a mutual fund scheme for a continuous pre-defined
period; just like a recurring deposit account with a bank or a post office.
SIP applies to the process of investing regularly i.e. at fixed intervals.
SIP lets the investment in small amounts of money on a pre-determined
basis and gives the option of increasing these amounts as investment
capacity increases.
Therefore SIP applies to invest regularly a fixed amount for
purchasing units of schemes at prevailing NAV based prices. SIP can be
activated by giving post dated cheques for the duration of the SIP or by
using an auto debit facility where a fixed amount is debited from bank
account on a monthly/quarterly basis.

HOW DOES AN SYSTEMATIC INVESTMENT PLAN


WORK
SIP uses two basic principles for wealth creation over time.

64
• Power of Compounding
Most people tend to continually
delay their financial planning process. This results in savings being
postponed to a later date. To break this habit, SIP offers the facility to
invest small amounts regularly instead of investing large amounts
sporadically. SIP
inculcates a discipline in investment habits not only by making
investment early rather than postponing investment till the point of
accumulating a sizeable amount.
It will be amazing to see that what one can achieve by investing a
small sum of money regularly from an early age. In other words, the
earlier one invests, greater will be the power of compounding and higher
will be the benefits.
The example below shows the difference in accumulative savings
between Mr. Early and Mr. Late, who start saving at different times. Mr.
early saves for 10 years and then stops. Mr. Late starts 10 year later and
saves for 20 years. But Mr. Early still gets 87% more than Mr. Late
(assuming 10% annual growth, not taking into account the annual
inflation). The table below demonstrates this:
Mr. Early Mr. Late
Year Saving Accumulation Saving Accumulation
1 1000 1100 0 0
2 1000 2310 0 0
3 1000 3641 0 0
4 1000 5105 0 0
5 1000 6716 0 0
6 1000 8487 0 0
7 1000 10436 0 0
8 1000 12579 0 0
9 1000 14937 0 0
10 1000 17531 0 0
11 0 19284 1000 1100
12 0 21213 1000 2310
13 0 23334 1000 3641
14 0 25667 1000 5105
15 0 28234 1000 6716
16 0 31058 1000 8487
17 0 34163 1000 10436
18 0 37580 1000 12579
19 0 41338 1000 14937

65
20 0 45471 1000 17531
21 0 50018 1000 20384
22 0 55020 1000 23523
23 0 60522 1000 26975
24 0 66575 1000 30772
25 0 73232 1000 34950
26 0 80555 1000 39545
27 0 88611 1000 44599
28 0 97472 1000 50159
29 0 107219 1000 56275
30 0 117941 1000 63002

As shown by the table, Mr.


Early has accumulated far greater wealth over time compared to Mr.
Late. This example clearly illustrates the benefits of investing early and
regularly, both of which are features offered by the SIP. The table given
above can be easily understood by the graph:
Start Early: Invest Regularly
120000
100000
Accumulation

80000
60000
40000
20000

Mr. Early 0
5th 10th 15th 20th 25th 30th
Mr. Late
Year

The key therefore lies in Starting


Early, and giving the investments time to grow.

• Rupee Cost Averaging


Investment would be simple if
one could always pick the best time to buy and sell. However, timing the
market consistently can be a difficult task and one could be hit sooner or
later. The stock markets may be volatile, but in the long run it can help
create wealth for everyone. Had anyone invested a fixed amount every

66
month he would tend to buy more when the prices are less and buy less
when the prices are high. He can seldom time the market. This automatic
market timing mechanism is known as “Rupee Cost Averaging”.
Therefore with SIP investor
buy more units when the prices are low and fewer units when the prices
are high. This results in averaging of the cost per unit which may lead to
gains arising out of even market volatility. Market volatility which is
generally a negative has been used effectively for the benefit of the
investor by SIP. Rupee Cost
Averaging does not guarantee a profit. However, with a disciplined
approach and a long term investment horizon, it can smoothen out of the
market bumps and spikes and reduce the risk of investing in a volatile
market. This
has been illustrated in the table below. I have considered three types of
markets – rising, falling and volatile. The table shows that the average
unit cost will always be less than the average unit price, irrespective of
whether the markets are rising, falling or fluctuating.

Amount
Month

Invested Rising Market Falling Volatile Market


(in Rs.) Market
NAV Units NAV Units NAV Units
1 1000 10.00 100.00 10.00 100.00 10.00 100.00
2 1000 10.50 95.24 9.50 105.26 9.50 105.26
3 1000 11.00 90.91 9.00 111.11 9.00 111.11
4 1000 11.50 86.96 8.50 117.65 8.20 121.95
5 1000 12.00 83.33 8.00 125.00 7.50 133.33
6 1000 12.50 80.00 7.50 133.33 8.00 125.00
7 1000 13.00 76.92 7.00 142.86 9.00 111.11
8 1000 13.50 74.07 6.50 153.85 9.75 102.56
9 1000 14.00 71.43 6.00 166.67 10.50 95.24
10 1000 14.50 68.97 5.50 181.82 11.25 88.89
11 1000 15.00 66.67 5.00 200.00 12.40 80.65
12 1000 15.50 64.52 4.50 222.22 13.00 76.92
Total 12000 153.00 959.02 87.00 1759.77 118.10 1252.02
Average Unit 12.75 7.25 9.84
Price (Sum of
NAVs / No. of (153.00/ (87.00/ (118.10/
Investments) 12) 12) 12)

67
Average Unit 12.51 6.82 9.58
Cost (Total
Investment / (12000/ (12000/ (12000/
Total Units) 959.02) 1759.77) 1252.02)

The key therefore is Time and not


Timing the market, in the growth of an investment.

BENEFITS OF SYSTEMATIC INVESTMENT PLAN


A SIP is beneficial for the investor in the following ways:

• Ideal Saving Habit


SIP is a plan that lets
people save money as they earn.

• Convenience
Investor can redeem their
units as and when required under this scheme. They have the option of
directly debiting or crediting their bank account for payments and
redemptions after giving standing instructions once towards the same.

• Small Amount
A SIP can be started with
as little as Rs. 500 or 1,000 per month (according to the schemes) for 6 or
12 months (according to the schemes).

• Prevents Sentiment Driven Investments


By making investment through
SIP one can avoid the common error of investing larger sums in Bull
markets and smaller sums in Bear markets.

• No Entry Load
In order to facilitate a saving
habit, almost all Fund Houses have waived the entry load on all schemes
invested through SIP. However, such investments will be charged an exit
load equivalent to the waived entry load if redeemed/switched out within
1 year or 2 year (depends on the Fund Houses and Schemes) from the
date of allotment.

68
INVESTMENT IN INDIAN MUTUAL FUNDS BY NRIs
BASICS
• Non Resident Indian (NRI)
A Non Resident
Indian (NRI) is a person resident outside India who is an
Indian citizen who stays abroad for employment / carrying
on business or vocation outside India or stays abroad
under circumstances indicating an uncertain duration of
stay abroad or a person of Indian origin resident outside
India and includes a student who has gone outside India
for further studies.
• Person of India Origin (PIO)
A Person of Indian Origin
means a citizen of any country (other than Bangladesh or Pakistan), if:
(a) he at any time held an Indian passport; or

(b) he or either of his parents or grand parents was a citizen of India by


virtue of the Constitution of India or the Citizenship Act,1955 (57 of
1955); or
(c) he is a spouse of an Indian citizen, or of a person referred to in (a) or
(b) above.
• Foreign Institutional Investor (FII)
A FII means an
institution established or incorporated outside India, which
proposes to make investment in Indian securities, and is
registered with SEBI.

• NRI’s bank account in India


NRIs can
maintain accounts in rupees as well as in foreign currency.
Accounts in foreign currencies can, however be
maintained in India with authorized dealers only.
• Can NRIs invest in Mutual Funds
NRIs are eligible to invest in

69
Mutual Funds on a repatriable as well as a non-repatriable basis. RBI
has granted general permission in this regard and as such no special
permission is required each time an NRI desires to invest.

• Different types of NRIs/PIOs Bank Accounts:


The different kind of Bank
Accounts and their characteristics are depicted in the following table:

Non Resident Foreign Currency Non Resident


[External] Rupee Non resident Bank Ordinary Rupee
Particulars
Account Scheme Account Scheme Account Scheme
(NRE) (FCNR) (NRO)
Account US $, GBP, Yen,
Maintained in Indian Rupees Euro, DM, Pound Indian Rupees
currency Sterling
Term Deposit for a
specific period of 1
year and above but
Account type Normal Bank
less than 2 years, 2 Normal Bank Account
and tenure Account
years and above but
less than 3 years and
3 years.
Yes. Deposits as Yes. Deposits as
Whether No. Only interest is
well as interest are well as interest are
Repatriable repatriable.
repatriable. repatriable.
Investment
could be done
Yes Yes Yes
in Mutual
Fund

PROCEDURE FOR INVESTMENT OF NRI/PIO/FII IN


MUTUAL FUND
The following summary outlines the various provisions related to
investments by Non-Resident Indians (NRIs), Persons of Indian Origin
(PIOs) and Foreign Institutional Investors (FIIs) in the Schemes of the
Mutual Fund and is based on the relevant provisions of the Income-tax Act,
1961 (the Act), regulations issued under the Foreign Exchange Management

70
Act, 1999 and the Wealth-tax Act, 1957 (collectively called the relevant
provisions), as they stand on the date of this abridged Offer Document.

• Purchase Applications
1. NRIs and other overseas investors can invest in Mutual
Fund Schemes on Repatriable /Non-Repatriable basis as per the
provisions of Schedule 5 of the Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000 (the ‘Regulations') as explained below. A Common
Application Form duly completed together with cheques or bank
drafts should be remitted through Investor Service Centres (ISC).
2. All cheques/demand drafts accompanying the
application form must be made in favour of “Mutual Fund – Scheme
Name" and crossed "A/c payee" only and should be made payable at a
city where the application is accepted by any Mutual fund ISC.
3. Once an account is opened the investor may purchase
additional units by filling-up the Common Application Form or by
simply filling in the account number in the application form and
mailing the same to a Mutual Fund ISC, along with the cheque or the
bank draft.
• Repatriable Basis – NRIs, PIOs:

In case of NRIs, PIOs seeking to


apply for purchase of units on a repatriable basis, payments may be made
by way of inward remittances, or by way of cheques drawn on the
NRE/FCNR Account of the investor [Clause 3(2) of the Regulations]
payable at the city where the application form is accepted by any Mutual
Fund ISC.

• Non-Repatriable Basis – NRIs, PIOs:

In case of NRIs/PIOs seeking to apply


for units on a non - repatriable basis, payments may be made by way of
inward remittances, or by way of cheques/demand drafts drawn on the
NRE/FCNR/NRO account of the investor [Clause 3(3) of the
Regulations], payable at the city where the application form is accepted
by any Mutual Fund ISC.

• FII Investors

FIIs may pay for their subscription

71
amounts out of funds held in Foreign Currency Account or Non-resident
Rupee Account maintained in a designated branch of an authorized dealer
[Clause 3(1) of the Regulations]. Payments may be made by way of
cheques payable at a city where any Mutual Fund ISC accepts the
application.

Similarly, in case of an application made under a


Power of Attorney or by an FII, the original Power of Attorney (or a duly
notarized certified true copy thereof), or the relevant resolution/authority
to make the application, along with a certified copy of the Memorandum
and Articles of Association and/or bye laws and Certificate of
Registration should be submitted to the nearest ISC. The officials should
sign the application under their official designation.
The NRIs/PIOs/FIIs shall also
be required to furnish such other documents as may be desired by the
Fund in connection with the investment in the Schemes.

1. Investment in Mutual Fund in Foreign Currency:


An NRI
choosing to invest in Mutual Fund cannot make the
investment in foreign currency. (Any investment in
India except in FCNR account is in rupees only). He
needs to give us a Rupee cheque from his NRE, NRO,
and bank account in India. He may also send a Rupee
cheque from abroad payable in a bank in India.

2. Income earned on Investments is repatriable or not:


NRIs/PIOs can
invest in units of the schemes on a fully repatriable
basis or on a non - repatriable basis where the principal
is non-repatriable, but the income distributed is
repatriable.

REDEMPTION:
• Procedure for Redemption:
Redemption proceeds will be
paid by a payable at par cheque and payments will be made in favour of

72
the first Investor and the bank account number shall be mentioned on the
cheque as well.
Redemption proceeds/
repurchase price and/or dividend or income earned (if any) will be
payable in Indian Rupees only. The Mutual Fund will not be liable for
any loss on account of exchange fluctuations, while converting the rupee
amount in US Dollar or any other currency.

• Procedure for the repatriation of redemption proceeds:

1. Investments made on Repatriation basis:


Under the
exchange control regulations general permission is granted to
authorised dealers to allow repatriation of proceeds of investments
made under repatriable Schemes. The investments shall carry the right
of repatriation of capital invested and capital appreciation so long as
the investor continues to be a resident outside India, after payment of
tax, if any. In the case of an FII, the
designated branch of the authorized dealer may allow remittance of
net sale/maturity proceeds (after payment of taxes) or credit the
amount of sale/ maturity proceeds to the Foreign Currency account or
Non-resident Rupee Account of the FII investor maintained in
accordance with the approval granted to it by the RBI [Clause 5(i) of
the Regulations].
In any other case, where
the investment is made out of inward remittance or from funds held in
NRE/FCNR account of the investor, the maturity proceeds/repurchase
price of units (after payment of taxes) may be credited to NRE/FCNR/
NRO Account of the non-resident investor maintained with an
authorized dealer in India [Clause 5(ii) of the Regulations].

2. Investment made on non-repatriable basis:


Where the
purchase of units is made on a non-repatriable basis, the maturity
proceeds/repurchase price of units (after payment of taxes) will not
qualify for repatriation out of India and the same may be credited to
the NRO account of the non-resident investor [Clause 5(ii) of the
Regulations]. However the interest earned on an NRO Account is
repatriable.
Similarly, investments in units purchased in Rupees
while the investor was resident of India and becomes non-resident

73
subsequently will not qualify for repatriation of repurchase proceeds
of units.
The entire income distribution on
investment will however qualify for full repatriation. Investors are
advised to contact their banks/tax consultants if they desire remittance
of the income distribution on units abroad.
The entire income
distribution on investment will however qualify for full
repatriation. Investors are advised to contact their banks/tax
consultants if they desire remittance of the income distribution on
units abroad.

TAXES ON INCOME FROM MUTUAL FUNDS FOR


NRIS There are essentially two kinds of incomes that NRI
investors would earn from Mutual Funds Dividend and Capital gains (upon
redemption of units). Capital gains are further segregated into short-term
gains and long-term gains. Taxation treatment differs as per the kind of
income. Dividends from Mutual Funds are completely tax-
free in the hands of the investor as per Sec. 10(35) of the Income Tax Act.
However, there is a dividend distribution tax @ 12.8125% (including
surcharge) payable by the Mutual Fund directly to the exchequer. Equity
based schemes were exempted from this tax. It is widely expected that this
provision would be extended once the new government comes into power.
As far as capital redemption is concerned, if the units of any Mutual
Fund for more than 12 months, the same would qualify as long-term capital
assets. Else, these would be termed as short-term capital assets. Upon sale,
any short-term capital asset is taxed at the normal rates applicable to the
investor. These are Income Tax Rate:

upto Rs. 50,000 Nil


between Rs. 50000 to 60000 10%
between Rs. 60,000 to Rs. 1,50,000 20%
above Rs. 150000 30%

There is a surcharge of 10% of the income tax for income over Rs.
8.50 lakhs. In such cases the surcharge payable is limited to the income over
Rs. 8.50 lakhs. Surcharge is payable by both Residents and NRIs.

74
There is also Education Cess of 2% over the income tax and surcharge
charged on it whether the income is above Rs. 8.50 lakhs or not.

For instance, if the income is Rs. 9 lakhs

Rs. Rs.
Tax on 60,000 1,000
Tax on 90,000 18,000
Tax on 7,50,000 2,25,000
9,00,000 2,44,000
Surcharge@ 10% 24,400
2,68,400
Education Cess @ 2% 5,368
Total Tax Payable 2,73,768
In the case of sale of Mutual Fund units which are long-term capital
assets capital gains tax is payable @ 10% without indexation or @ 20% with
indexation, whichever is lower.
Such long-term gains of NRIs are not eligible for the Rs.50,000 basic
exemption threshold, income below which tax is not payable. Therefore, for
any amount of long-term capital gains income, tax is payable and tax returns
would need to be filed. However, the Rs. 50,000 threshold is available for
short-term capital gains and therefore short-term capital gains would not be
taxable up to Rs.50,000 of course, assuming that the NRI has no other
income in India.
If the funds are invested in growth option of MF schemes, the growth
is not taxable as long as there are no withdrawals.

• Provision regarding Tax Deduction at Source:


Since the dividends from units
are tax free in the hands of the investor, there is no question of TDS
thereon.
However, capital gains are
subject to TDS. The TDS on long-term capital gain is @
20% and on short-term gains is @ 30%. If income is more
than Rs. 8.50 lakhs a surcharge of 10% would be levied on
such rates. Education Cess @ 2% is charged on the
income and surcharge irrespective of the income level.

• Special Provision relating to NRIs u/s 115C to 115I:

75
Units are not included in the
definition of “foreign exchange asset” under the Special Provisions.
However, under these provisions, the benefit is in the form of investment
income being taxed @ 20% and long-term capital gain @ 10%. In the
case of Mutual Funds, dividends are tax-free in any case and long-term
gains are taxed @10%. Therefore, the non-applicability of the Special
Provisions is of no consequence to the NRI.

• Tax saving methods for NRI’s income from Mutual Funds:


There are several ways to save
tax on long-term gains that an NRI can employ.

1. Investment u/s 54EC:


Sec. 54EC offers tax exemption if the
long-term gains are invested in Bonds of NABARD, NHAI, REC,
NHB and SIDBI within a period of six months from the date of
transfer. These bonds have a lock-in of three years. The interest
payable on the bonds (in the range of 5% - 5.25%) is fully taxable.
However there is no TDS. If only a part of the capital gain is invested,
exemption would be proportional.
2. Investment u/s 54ED:
Sec. 54ED offers tax exemption if the
long-term gains are invested in acquiring equity shares forming part of
an eligible issue of capital (IPO) within a period of six months from
the date of transfer. If the newly acquired shares are sold or
transferred within one year, the capital gains from the original asset
will be charged to tax in the year of the sale of transfer. If only a part
of the capital gain is invested, exemption would be proportional.

3. Investment u/s 54F:


Exemption u/s 54F is available if the
investor purchases within one year before or two years after the date
of transfer of constructs within three years after such date a residential
house. If the cost of the house is not less than the net consideration,
the entire capital gain is exempt from tax. Else, the exemption would
be proportional.

SOME SPECIAL TERMS:


76
• Can an NRI gift the units of a mutual fund to another NRI:
The Foreign Exchange
Management Act, 1999 (the “Act”) or the rules or regulations under the
Act do not contain any specific provision, which prohibits an NRI from
gifting the units of a mutual fund to another NRI. However the RBI may
by regulations prohibits, restrict or regulate the transfer or issue of units
by a person resident outside India. Currently there are no regulations
issued by the RBI prohibiting an NRI from gifting units in a mutual fund.

• Interest on NRE, FCNR & RFC Account:


Earlier interest earned on NRE A/c
was fully exempt. In this budget it has been proposed that any interest
paid or credited on or after 1st September, 2004 in respect of deposits in
NRE and interest paid by banks to Non Resident or to a Not Ordinarily
Resident on deposits in foreign currency shall be taxable at normal rates
of taxation. The bank shall be required to deduct tax at 33.66% (i.e.
Income tax @ 30% + Surcharge @ 10% + Education Cess 2%).
However, if such deposits are with an Indian Company or bank, which is
an Indian Company not being a private company as defined in the Indian
Companies Act 1956, the rate of tax will be 22.44% (i.e. Income Tax @
20% + Surcharge @ 10% + Education Cess 2%).

• Tax Perspective:

1. Income up to Rs. 100000 would be fully exempt from tax – applicable


to residents only.
2. Gifts from unrelated persons above Rs. 25,000 to be taxed as income.
However, gifts received from blood relations and on certain occasions
like marriage would enjoy the tax benefit.
3. Service Tax lifted increased from 8% to 10% and several new services
would be covered under service tax regime

• Security Transaction Tax (STT):

1. The budget has proposed to levy a 0.15% STT on all the delivery
based transactions on any recognized stock exchange. Both buyer and
seller will share the same equally.

77
2. On non-delivery based transactions, the security transaction would be
1.5 basis point (0.015%)
3. In the derivative segment the transaction tax has to be paid 1 basis
point (0.01%) of the transaction value.
4. Debt securities/papers will have no transaction tax.
5. The income by way of long-term capital gain in respect of securities is
exempted from tax, if the transaction of sale is entered into a
recognized Stock Exchange in India.
6. The income on short term capital gains in respect of securities shall be
taxable at a flat rate of 10%
7. Any dividends received would be tax free in the hand of the investor.

TAX IMPLICATIONS OF MUTUAL FUND


INVESTMENTS
• Tax Status of a Mutual Fund:
A mutual fund is exempt from
paying taxes on its income, by virtue of exemption granted under the
Income Tax Act, 1961. The incomes earned by the fund are on its
investment, and these incomes are passed on to the investors. Therefore
the mutual fund is merely a “pass –through” entity, which does not
generate income on its own. It is therefore exempt from paying taxes on
its income-dividends, interest and capital gains-both long and short term.

• Tax Status of an Investor:


An investor can earn his
income from mutual fund investments in two different forms: dividends
and capital gains.
Dividends again
are of two types-regular periodic dividend, as indicated in the scheme
(daily, monthly, quarterly and the like) or ad-hoc dividend (can be
announced any time) as approved by the trustees.

78
Capital gain (or loss) accrues to the investor, when the investor makes
the decision to redeem the units. If he redeems the units at a price that is
higher than his cost of purchase, there is a capital gain. If the redemption
price is lower than his cost, there is a capital loss.

• Tax Status of the Options:


An investor can choose the
form in which he likes to earn his income from the mutual fund.
Basically there are two options in each scheme, first is ‘Growth’ and the
other is ‘Dividend Payout’ or ‘Dividend Reinvest’.
If an investor chooses the
growth option, he does not earn a dividend income. To realize his returns,
he has to redeem his units, such redemption is subject to the applicable
capital gains tax.
If he chooses dividend
option, he earns dividend that is subject to tax as such. If he chooses a
dividend reinvestment option, he is deemed to have received the dividend
and subsequently reinvested the same, therefore the same tax provisions
that apply to dividends will apply in this case.
• Tax Status of Capital Gains:
Capital gain may be
categorized as ‘Short Term Capital Gain’ and ‘Long Term Capital Gain’.
If an investor
redeems his investments in a mutual fund before a period of 12 months is
over from the date of buying the units, he is said to have held the units
for the short term. The capital gains are taxed as short term capital gains.
Short term capital gains from equity oriented funds are taxable at 10%
(plus surcharge and cess). In the cases of all other funds, the short term
capital gains will be taxed as normal income, at the marginal rates of
taxation applicable to the investor. Income tax rates apply in slabs,
specified for each level of income. The marginal rate is the highest rate
an assessee given his level of taxable income.
If an
investor redeems his investments in a mutual fund after a period of 12
months from the date of buying the units, he is said to have held the units
for the long term. The capital gains are taxed as long term capital gains.
These are subject to the indexation. This means an investor can claim that
since he held the investment for more than a year, due to inflation, the
value of his investments has gone up. The CBDT therefore publishes a

79
Cost of Inflation Index, and allows the investor to adjust his cost of the
inflation index, before computing the capital gains. This process is called
indexation. The rates are different depending on whether the capital gains
are indexed or not. Long term capital gains from equity oriented funds
are fully exempt from tax. Long term capital gains from all other funds
are subject to taxation. The applicable tax rates are 10% (without
indexation) or 20% (with indexation), surcharge and cess apply. NRIs are
not eligible for indexation benefits, since they can avail currency value
adjustment for computing capital gains.

Cost of Acquisition x Index in the year of sale


Indexed Cost =
Index in the year of Purchase

• Tax Status of Dividends:


Dividend from mutual funds
are exempt from tax. However, in the case of all other funds, except
equity and equity oriented funds, the mutual funds will have to deduct a
dividend distribution tax at 12.5% + applicable surcharge (2.50%) and
cess (2%), before paying out the dividend to the investor.
In case of a fund that is not
equity oriented, the income of the fund is mostly earned as interest
income, and is normally subject to tax. But when the mutual fund
distributes the same as dividend, it is exempt from tax. Therefore all
funds other than equity oriented funds are subject to dividend distribution
tax. In an equity oriented fund, the dividends that are earned are exempt
from tax anyway, and the company that pays the dividend has paid the
dividend distribution tax, before distributing the dividend to the mutual
fund. An equity
oriented fund is one that invests at least 50% of its net assets in equity
shares of domestic companies. The monthly opening and closing
holdings in equity should be computed and the annual average of this
number should be at least 50%, for the fund to be classified as an equity
oriented fund and be exempt from the provisions of the dividend
distribution tax. The
exemption for equity oriented funds had expired on March 31, 2004. The
Finance Act (No 2) 2004 has extended this benefit unconditionally for
equity oriented funds. It has also made a distinction between Individuals
and HUFs and others. The dividend distribution tax applicable to all
assesses, other than Individuals and HUFs, has been increased to 20%
(plus surcharge and cess).

80
• Securities Transaction Tax (STT):
A 0.15% STT to be paid by the
seller, on all transactions in equity oriented funds, where the units sold to
a mutual fund. This means, no STT applies on purchase of units from the
fund. Only on redemption, in an equity oriented fund, the investor is
required to pay 0.15% of the transaction value as STT. In the case of all
other funds, that are not equity oriented, there is no STT for the
investor’s transaction with the mutual fund.
The capital gain tax and the
securities transaction tax, go together. The new capital gain tax rates will
become applicable from the date the CBDT notifies the STT.
Section 48 has
been amended to provide that no deduction shall be allowed in respect of
STT paid, for the purpose of computing capital gains.

• Set-Off and Carry Forwards:


The act of reducing the capital
gains by deducting the capital loss is called set off. The rules for set off
are as under:
1. Loss arising from a short term capital asset can be set off against the
gains arising from the sale of a long or short term capital asset.
2. Loss arising from a long term capital asset can be set off only against
the gains from the sale of long term assets.
3. Any loss under the head capital gains, either short or long term, can be
set off only against income from the same head (capital gains). Short
or long term capital losses can not be set off against any other source
of income.
4. If there is a loss under any other head of income, that can be set off
against short or long term capital gains.
An investor, who makes a capital loss
from his investments, is allowed to carry forward this loss for 8 years
from the date of the loss. He can deduct the loss that is carried forward,
from the capital gains that he makes in the subsequent years, so that his
capital gains tax in the subsequent years is reduced.
Under the current provisions an
investor who has carried forward a long term capital loss, can set it off
only against long term capital gains from debt funds and other funds that
have less than 50% in equity. This is because long term capital gains
from tax for equity oriented funds are exempt from tax.

81
• New Provisions for set off of Capital Loss on Ex-dividend basis:
Dividend stripping is the
practice of buying into a mutual fund prior to declaration of dividend and
selling the units after dividends at the ex-dividend price. The investor
then earns tax-free dividends and also has a capital loss that can be used
for purposes of set off. Section 94(7) as amended by the Finance Act
(No2) 2004, has plugged this loophole. If an investor acquires a unit any
time in the period of 3 months before the ex-dividend date, and sells it
within a period of 9 months from the ex-dividend date, the loss in the
value of investments, to the extent of the dividend declared, will be
ignored for the purposes of computing income chargeable to tax. What
this means is that such loss in value will not be capital loss, available for
set off against capital gains.
A new section
94(8) has been introduced which makes the provisions of 94(7) apply
even if the dividend distribution is in the form of bonus units. The same
rules of 3 months before and 9 months after ex dividend dates apply, and
the loss in the value of units will be deemed to be the purchase price of
the bonus units.
• Applicable Tax Rates and Effective Tax Rates:

Resident Individuals Partnership Firms Non Resident Foreign


and HUFs and Indian Companies Indians Companies

1. Resident Individuals and HUFs:

Maximum Applicable Tax Rate – 30%


Applicable Surcharge for Capital Gains – 10% (max. if
income is over
8.50 lakhs)
Applicable Surcharge for Dividend Distribution Tax – 2.50%
Applicable Cess – 2%

Capital Gain Equity Funds Debt Funds


Short Term 10%+10%SC+2%Cess 30%+10%SC+2%Cess
Capital Gain Effective – 11.22% Effective – 33.66%

82
10%+10%SC+2%Cess
(without indexation)
Effective – 11.22%
Long Term
Nil or 20%
Capital Gain
+10%SC+2%Cess (with
indexation) Effective –
22.44%
Dividends are tax free.
Subject to DDT @
Dividends Nil 12.5%+2.5%SC+2%Cess
Effective – 13.07%

2. Partnership Firms and Indian Companies:

Maximum Applicable Tax Rate – 35%


Applicable Surcharge for Capital Gains – 2.50%
Applicable Surcharge for Dividend Distribution Tax – 2.50%
Applicable Cess – 2%

Capital Gain Equity Funds Debt Funds


Short Term 10%+2.5%SC+2%Cess 35%+2.5%SC+2%Cess
Capital Gain Effective – 10.46% Effective – 36.5925%
10%+2.5%SC+2%Cess
(without indexation)
Effective – 10.46%
Long Term or
Capital Gain Nil 20%
+2.5%SC+2%Cess
(with indexation)
Effective – 20.91%
Dividends are tax free.
Subject to DDT @
Dividends Nil
20%+2.5%SC+2%Cess
Effective – 20.91%

3. Non Resident Indians:

83
Applicable Rate for STCG – 30% (Deducted as TDS)
Applicable Rate for LTCG – 20% (Deducted as TDS)
Applicable Surcharge for Capital Gains – 10%
Applicable Surcharge for Dividend Distribution Tax –
2.50% Applicable Cess – 2%

NRIs can opt for computation of


LTCG under section 112, which enables adjusting for depreciation in
value of the rupee before computing LTCG.

Capital Gain Equity Funds Debt Funds


Short Term 10%+10%SC+2%Cess 30%+10%SC+2%Cess
Capital Gain Effective – 11.22% Effective – 33.66%
Long Term 10%+10%SC+2%Cess
Capital Gain Nil Effective – 11.22%
Dividends are tax free.
Subject to DDT @
Dividends Nil 12.5%+2.5%SC+2%Cess
Effective – 13.07%

All these taxes on long term capital gain and short term
capital gain is deducted as TDS (Tax Deducted at Source).
4. Foreign Companies:
Maximum Applicable Tax Rate – 35%
Applicable Surcharge for Capital Gains – 2.50%
Applicable Surcharge for Dividend Distribution Tax – 2.50%
Applicable Cess – 2%

Capital Gain Equity Funds Debt Funds


Short Term 10%+2.5%SC+2%Cess 40%+2.5%SC+2%Cess
Capital Gain Effective – 10.46% Effective – 41.82%
Long Term 10%+2.5%SC+2%Cess
Capital Gain Nil (without indexation)
Effective – 10.46%
or
20%
+2.5%SC+2%Cess
(with indexation)

84
Effective – 20.91%
Dividends are tax free.
Subject to DDT @
Dividends Nil 20%+2.5%SC+2%Cess
Effective – 20.91%

A FEW INTERESTING TERMS


FLOATING RATE FUNDS
A floating rate fund is a fund that by its investments in floating rate
instruments seeks to provide stable returns with low level of interest rate risk
and volatility. A Floating Rate Instrument is a debt instrument whose
interest rate (coupon) is not fixed and is linked to a benchmark rate and is
adjusted periodically. For example the Grindlays Floating Rate Fund invests
primarily in:
• Floating rate debentures and bonds
• Short tenor fixed rate instruments
Long tenor fixed rate instrument swapped to floating rate (Interest
Rate Swaps).

85
• Floating Rate Funds, Why?
In a declining interest rate
scenario older securities issued at higher coupon rates (interest paid on
the face value of a debt instrument) appear much more attractive than the
ones that are currently issued. Consequently older higher interest bearing
securities would go at a premium. Thus long term income funds by virtue
of their investments in longer maturing securities would see a rise in their
Net Asset Values.
However, when interest rates
are on the rise newer securities appear more attractive than the ones that
were issued earlier, as they offer higher coupons than their predecessors.
The lesser paying older securities therefore will be sold at a discount. So
the same income fund with a majority of investment in longer maturing
securities, now start earning you lesser as newer securities continues to
earn higher returns than the ones in the portfolio.
This bearish scenario lasts as
long as interest rates continue to show an upward trend. It is during these
times that floating rate funds offer the best utility.

• Right time to Invest in Floating Rate Funds


In a rising interest rate
scenario, the interest rate on a Floating Rate instrument is periodically
reset to a higher level due to the fact that accompanying benchmark rate
is anyway at a higher level. On account of this periodic reset the
difference in returns between a floating rate fund and a security that is
issued currently is marginal. So the price difference is marginal leading
to a marginal impact on the NAV.
Floating
Rate funds are protective funds and shield your investments from interest
rate fluctuations.
• Benchmark Rate
A benchmark or a reference
rate is a rate that is an accurate measure of the market price. In the fixed
income market, it is an interest rate that the market respects and closely
watches. A benchmark rate should be from an unbiased source, be
representative of the market, transparent, reliable and continuously
available and most importantly be widely acceptable to the market as the
benchmark rate. Such
benchmark rates issued by unbiased sources are the Treasury Bill T-Bill)
rate issued by the Government of India, the bank rate as decided by the

86
Reserve Bank of India, the Mumbai Inter Bank Offering Rate (MIBOR)
released by the National Stock Exchange of India and GOI Securities.
An
Example: A company issues debentures at 1 year GOI Security yield +
100 basis points (simply 1%) with a tenor of 5 years, periodically reset
every six months. If the1 year GOI security is currently ruling at 5.75%,
the interest rate that is fixed for the first six months is 5.75%
+1%=6.75%.

DIVIDEND SWEEP
One more convenient method of investing is provided by the Mutual
Funds. In this option one can invest the Dividend declared in a particular
scheme in other scheme.
The Dividends (net of TDS if any) earned by the Unit holder
will be sweeped/ transferred into any desired Scheme or Plan. This facility
helps the unit holder to build up his wealth continuously. No load will be
applicable for sweep in, even if the Scheme in which the sweep is taking
place has an entry load.
There are no minimum amount restrictions.
Further there is no facility for transfer of partial dividend or transfer of
dividend to multiple schemes. With the introduction of above option,
the Investor can either opt for:-
• Pay out of full Dividend, subject to deduction of tax
• Reinvestment of full dividend into the same scheme, subject to
payment of tax
• Transfer of full dividend to some other plan in the same scheme of
other schemes
Investors may avail any of the above facilities by ticking the
appropriate box in the Application Form or may contact the ISCs or the
AMC for further details.

TRIGGERS
Triggers are options provided to the unit holder as part of systematic
withdrawal plan to enable automatic redemption on the happening of the
desired event. Triggers can help Investor make the most of market

87
movements without the hassle of constant tracking. Triggers can also be
used as an efficient downside protection tool.

• How to opt for Triggers


A unit holder may opt for this
facility at any time by submitting a written application or by filling the
relevant form. Under this option, the entire account will be redeemed
when the chosen event occurs.

• Cancellation of Triggers
A mandate of triggers
could be cancelled by giving a letter to that effect mentioning
information like Folio No, Name of the scheme, the transaction for which
Trigger is to be cancelled etc When a request is made for canceling a
trigger, it may take up to a maximum 5 business days to implement it.

• How to opt for Triggers


A unit holder may opt for this
facility at any time by submitting a written application or by filling the
relevant form. Under this option, the entire account will be redeemed
when the chosen event occurs.

• Different Trigger Options


Following are the types
of triggers offered by UTI Mutual Fund:

1. The Value Trigger:


Redemption will be
triggered when your investment reaches a value that you have defined.
For example - You have invested Rs 10,000 with us, and have set the
Trigger at Rs 15,000/-. We will automatically redeem you when the
repurchase value reaches Rs 15,000/-

2. The Date Trigger:


Redeem on a
date
specified by you.
For example - You may want to redeem your investment on a specific
date - Your 25th Wedding Anniversary, your retirement date, three
years from today, when your son reaches the age of 21 etc.

88
3. Capital Gains Distribution and Reinvestment Facility:
Allows you to redeem or
reinvest when the requisite period for realization of long-term capital
gain is reached.

4. Triggers at Transaction Level:


An investor carries out
two separate investment transactions with the Fund at two different
times (even within the same folio), he could specify separate triggers
for each of his transactions and these triggers could be of different
types.
5. Downside Triggers:
For Value Trigger, an
investor now can specify the desired value being lower than the
investment amount i.e. a Stop Loss Concept. For example if an
investor invest say Rs. 10,000/-, he can specify a Value Trigger of
8,000/-. In case of depreciation in NAV, as and when his investment
value reaches 8,000/- or lower, the Trigger would be fired.

• Switch Option for Triggers


Earlier redemption was the only
available option on the happening of a particular event. Now investors
can switch to other Plan within the same Scheme or another Scheme of
the UTI Mutual Fund as and when the Trigger is fired. The Switch option
is available ONLY for Date, Value and Index Trigger and not for Capital
Gains Trigger.

• Index Based Triggers


All equity schemes can now
avail a new trigger based on NSE Nifty / BSE Sensex values. An investor
has to specify the Index value on reaching of which, investments should
be redeemed/ switched.

• Alerts
Instead of Redemption or
Switch, an investor may only opt to be alerted as and when the Trigger
gets fired (happening of specified event). The alert option is available
ONLY for Date, Value and Index Triggers and an email will be sent to
the investor informing him about the happening of event. Email address
of the investors is a must for this option.

89
TIPS FOR INVESTMENT IN MUTUAL FUNDS
5 POINTERS TO MUTUAL FUND PERFORMANCE

90
More often than not meritocracy of investments is often decided by
the returns. Quite simply then a fund generating more returns than the other
is considered better than the other. But this is just half the story.
What most of us would appreciate is the level of risk that a fund has
taken to generate this return? So what is really relevant is not just
performance or returns. What matters therefore are Risk Adjusted Returns.
The only caveat whilst using any risk-adjusted performance is the fact
that their clairvoyance is decided by the past. Each of these measures uses
past performance data and to that extent are not accurate indicators of the
future.
As an investor you just have to hope that the fund continues to
be managed by the same set of principles in the future too.

• Standard Deviation
The most basic of all measures-
Standard Deviation allows you to evaluate the volatility of the fund. Put
differently it allows you to measure the consistency of the returns.
Volatility is often a direct
indicator of the risks taken by the fund. The standard deviation of a fund
measures this risk by measuring the degree to which the fund fluctuates
in relation to its mean return, the average return of a fund over a period of
time. A security that is volatile
is also considered higher risk because its performance may change
quickly in either direction at any moment.
A fund that has a
consistent four-year return of 3%, for example, would have a mean, or
average, of 3%. The standard deviation for this fund would then be zero
because the fund's return in any given year does not differ from its four-
year mean of 3%. On the other hand, a fund that in each of the last four
years returned -5%, 17%, 2% and 30% will have a mean return of 11%.
The fund will also exhibit a high standard deviation because each year
the return of the fund differs from the mean return. This fund is therefore
more risky because it fluctuates widely between negative and positive
returns within a short period.
• Beta
Beta is a fairly
commonly used measure of risk. It basically indicates the level of
volatility associated with the fund as compared to the benchmark.
So quite naturally the success of Beta
is heavily dependent on the correlation between a fund and its

91
benchmark. Thus if the fund's portfolio doesn't have a relevant
benchmark index then a beta would be grossly inadequate.
A beta that is greater than one
means that the fund is more volatile than the benchmark, while a beta of
less than one means that the fund is less volatile than the index. A fund
with a beta very close to 1 means the fund's performance closely matches
the index or benchmark.
If, for example, a fund
has a beta of 1.03 in relation to the BSE Sensex, the fund has been
moving 3% more than the index. Therefore, if the BSE Sensex increased
10%, the fund would be expected to increase 10.30%.
Investors
expecting the market to be bullish may choose funds exhibiting high
betas, which increase investors' chances of beating the market. If an
investor expects the market to be bearish in the near future, the funds that
have betas less than 1 are a good choice because they would be expected
to decline less in value than the index.

• R-Squared
The success of Beta is dependent on
the correlation of a fund to its benchmark or its index. Thus whilst
considering the beta of any security, you should also consider another
statistic- R squared that measures the Correlation.
The R-squared of a fund
advises investors if the beta of a mutual fund is measured against an
appropriate benchmark. Measuring the correlation of a fund's movements
to that of an index, R-squared describes the level of association between
the fund's volatility and market risk, or more specifically, the degree to
which a fund's volatility is a result of the day-to-day fluctuations
experienced by the overall market.
R-squared values
range between 0 and 1, where 0 represents no correlation and 1
represents full correlation. If a fund's beta has an R-squared value that is
close to 1, the beta of the fund should be trusted. On the other hand, an
R-squared value that is less than 0.5 indicates that the beta is not
particularly useful because the fund is being compared against an
inappropriate benchmark.

• Alpha
Alpha = (Fund return –

92
Risk free return) – Funds beta *(Benchmark return – risk free return).
Alpha is the
difference between the returns one would expect from a fund, given its
beta, and the return it actually produces. An alpha of 1.0 means the fund
produced a return 1% higher than its beta would predict. An alpha of -1.0
means the fund produced a return 1% lower.
If a fund returns
more than its beta then it has a positive alpha and if it returns less then it
has a negative alpha. Once the beta of a fund is known, alpha compares
the fund's performance to that of the benchmark's risk-adjusted returns. It
allows you to ascertain if the fund's returns outperformed the market's,
given the same amount of risk.
The higher a funds
risk level, the greater the returns it must generate in order to produce a
high alpha. Normally one
would like to see a positive alpha for all of the funds you own. But a high
alpha does not mean a fund is doing a bad job nor is the vice versa true.
Because alpha measures the out performance relative to beta. So the
limitations that apply to beta would also apply to alpha.
Alpha can
be used to directly measure the value added or subtracted by a fund's
manager. The
accuracy of an alpha rating depends on two factors: 1) the assumption
that market risk, as measured by beta, is the only risk measure necessary;
2) the strength of fund's correlation to a chosen benchmark such as the
BSE Sensex or the NIFTY.

• Sharpe Ratio:
Sharpe Ratio = Fund
returns in excess of risk free return/ Standard deviation of Fund
So what does one
do for funds that have low correlation with indices or benchmarks? Use
the Sharpe ratio. Since it uses only the Standard Deviation, which
measures the volatility of the returns there is no problem of benchmark
correlation. The
higher the Sharpe ratio, the better a funds returns relative to the amount
of risk taken.
Sharpe ratios are ideal for comparing funds that have a mixed asset
classes. That is balanced funds that have a component of fixed income
offerings.

93
5 EASY STEPS TO INVESTING IN MUTUAL FUNDS
• Search: Where to look for if you want to begin saving in mutual
funds
Mutual funds are much like any
other product, in that there are manufacturers who provide the product
and there are dealers who sell them.
Large banks to organized
brokerage houses to Individual Financial agents get empanelled with
Mutual Funds to provide advice and assistance to customers who want to
buy units. Mutual funds units can now also be bought over the Internet.
Contacting an
Investment advisor in a bank or a brokerage house or an Independent
Financial Advisor is the first step to gathering information.

• Evaluation: choosing the right mutual fund for you


Each Mutual fund offers
a variety of schemes to suit differing needs of investors. The Bank/
Brokerage house/ Individual Financial Advisor help you make the choice
based on your needs.
As an investor one may:
1. want to invest for the short term or long term
2. want regular income or growth
3. want to target lower risk or higher returns
4. be convinced of a particular sector and want to invest in it.
Remember, just like a salesman
in a gift shop, your investment advisor can help you the most if he knows
what you are looking for.

• Purchase
After you have decided to save,
you may have to decide among the various investment and withdrawal
options that any fund offers to its investors.
Most of these schemes also
offer various options to customize your operation of the fund to your
needs:
1. Systematic Investment Plan (SIP)
Allows you to save a part

94
of your income regularly. Also used to reduce risk when investing in
schemes targeting aggressive growth.

2. Systematic Withdrawal Plan (SWP)


Allows you to withdraw
a part of your investment regularly. Used when you want to withdraw
your investment for a specific regular payment, like insurance
premium payments of monthly/quarterly frequency.

3. Automatic Debit
Saves the hassle of
writing a cheque when making an investment. Your account is debited
automatically for the amount invested.

4. Automatic Credit
The reverse of Automatic
Debit. Saves the hassle of enchasing a cheque when withdrawing an
investment. Your account is credited automatically with the amount
withdrawn.
5. Dividend Plan
Allows you to get Tax-
free dividends from your investment. (As per current Tax laws).

6. Growth Plan
Allows the income
generated from investment to be ploughed back into the scheme. Used
by investor targeting growth in their investment.
Some funds carry an entry load,
which is a percentage fee deducted from the amount invested before
investment. Thus a 2.5% entry load will mean that if you invest Rs 1 lakh
in a Rs. 10 per unit IPO, instead of getting 10,000 units, you will be
allotted 9,750 units. Check for presence of such loads and other
conditions before investing.
After deciding the choice of
mutual fund, investment and withdrawal, you are ready to begin your
savings. You need to now fill up an application form and attach a cheque
of the value of your investment or mention your account number to have
it automatically debited from your account.

• Post Purchase Monitoring:


Once you have invested

95
in an ongoing fund, expect a period of two to three days before you
receive an account statement on the address mentioned by you in your
application form.
The Account Statement
Your account statement
indicates your current holding in the scheme that you have invested.
Please ensure that all your details have been correctly captured in account
statement. Please point out any discrepancies to your nearest CAMS
investor Service Centre or the Mutual Fund office. You can request an
account statement any time by calling up your nearest CAMS/ Mutual
fund offices usually mentioned on the back of the account statement.
The
transaction slip at the end of the account statement can be used for
additional purchases, redemptions or to intimate the mutual fund on any
change in bank mandates/address.
The NAVs of all the open-ended schemes are published at the
fund's website, financial newspapers and AMFI (Association of Mutual
Funds) web-site www.amfiindia.com.

• Exit
While you should periodically
monitor the performance of your investments, we recommend you do not
get swayed by short term considerations in deciding your exit. If you
have invested in a long term fund, you can spare yourself undue worries
by not monitoring the NAV every day or week. Checking the
performance once in a while along with your advisor should be fine.
Most mutual funds will provide
you with a toll free number that works from 9 am to 5 am and a website.
For specific assistance you can also use your financial advisors help.

Redemption/ Withdrawal
Just submit your completed
transaction within the transacted time for the scheme that you are
invested in and deposit the same at the nearest CAMS Investor Service
Centre or the office of the fund. You can either get a direct credit to your
bank account or you can generally collect the cheque at the CAMS
Investor Service Centre/ AMC offices. If you fail to do so then the
cheque is couriered to the address mentioned in your account statement.
Most funds take 1-3 days to credit your account with your redemption
proceeds.

96
In case an exit load is
applicable to your withdrawal and you have redeemed a fixed amount, an
additional number of units equivalent to the exit load amount will be
liquidated from your investment. You can check this amount with the
mentioned exit load when you get the account statement using a simple
calculator.

TOP 11 TIPS FOR SUCCESSFUL INVESTMENT


1. Start early
2. Keep some cash aside
3. Decide how much risk you can tolerate
4. Bear in mind that inflation will eat into your savings
5. Think carefully about how long you will be investing for
6. Invest regularly
7. Spread your money across a range of investments
8. Choose your funds carefully
9. Remember that time not timing is the key to successful investing
10.Don’t let the Sensex guide your senses
11.Review your investments
In detail, we can understand these easily:

• Start early
The sooner one
invests, the more time his money will have to grow. If he delays, he will
almost certainly have to invest much more to achieve a similar result e.g.
if you started investing Rs. 5,000 a month on your 40th birthday, in 20
years time you would have put aside Rs. 12 lakhs. If that investment
grew by an average of 7% a year, it would be worth Rs. 25,52,994 when
you reach 60. But if you started investing ten years earlier, your Rs.
5,000 each month would add up to Rs. 18 lakhs over 30 years. Assuming
the same average annual growth of 7%, you would have Rs. 58,82,545 on
your 60th birthday – more than double the amount you would have
received if you had started ten years later! The bottom line – your
investments gain most from compounded interest when you have time on
your side.
• Keep some cash aside
It is always a good
idea to have some money in a deposit account in case of emergencies.

97
Enough to cover three months living expenses is often a rough guide to
how much you need and make sure you can withdraw it when you need
to, without penalties. The following may be the reasons for which you
might need your money at short notice:
1. making a major purchase,
2. taking an unplanned holiday,

3. seeing you through an emergency such as sudden hospitalization or


job loss etc.

• Decide how much risk you can tolerate


There is no
point having a stock market investment you are going to lose sleep every
time share prices go through a rough patch. It’s vital that you are realistic
about your appetite for risk – an Investment Adviser may be able to help
you decide how much risk you can tolerate. Peter Lynch, Vice Chairman
of Fidelity Management & research Company has expressed his opinion
as “In many ways, the key organ for investing is the stomach, not the
brain. What is your stomach going to do when an investment your brain
selected declines for a year or two?”
The following factors
will all have a bearing on the result:

1. Your time horizon


Decide for how long you can
have your money invested in equities before you need to dip into it for
important outgoings, such as buying a house, paying for your
children’s higher education or funding your retirement. As a general
principle, equity investments should only be considered if your time
horizon is over five years. Markets move in cycles and what goes
down in quite likely to come up again, but it could take some time.
You should be willing to stay focused on your goal through these
difficult parts of the cycle.
2. Your attitude to losses
How do you think you would
feel when your investments get hit temporarily during a volatile twist
of the market? If you are the sort to lose sleep at times like these,
equities are best avoided.

98
3. Your investment objective
Think about what your primary
objective is. Is it to preserve the values of the savings you have
painstakingly built up over the years or is it to increase your savings
into something far more substantial over time?
Your Investment Adviser will
discuss these and other important issues with you to get an idea of
your appetite for risk. You can then decide on a mix of assets that
would suit your particular circumstances.

• Bear in mind that inflation will eat into your savings


Returns on risk –
free cash investments may sound respectable, but when you subtract the
current rate of inflation you may not be so impressed. For significant
long – term grow you need to make your money work a little harder e.g.
if you have Rs. 10,000 in a savings account earning 3% interest each
year, in 20years time, your savings would be worth Rs. 18,061. That’s a
return of just over 80%. However, if inflation is about 7%, Rs. 18,061
would only be worth Rs. 4,688 in today’s terms.

• Think carefully about how long you will be investing for


Only look at
the stock market if you are prepared to put your money away for five or
ten years, or perhaps even longer. If you are likely to need your money
any sooner, keep it in a lower – risk investment so there is less chance of
a fall in value just before you make a withdrawal. As Peter Lynch, Vice
Chairman of Fidelity Management & Research Company has said earlier
“If you are going to need money within the near future to pay college
tuition or put a down payment on a house – the stock market is not the
place to be. You can flip a coin over where the market is headed over the
next year. But if you are in the market for the long haul – five, ten or
twenty years – then time is on your side and you should stick to your long
– term investment plan.”
The
longer you stay invested, the better the chances that your investment will
grow.
One Year Three Years Five Year
% of one year periods where investors % of three year periods where investors % of five year periods where investors
Made Money Made Money Made Money Lost Money Made Money Lost Money
71.1% 28.9% 90.4% 9.6% 100% 0%

99
Just as the big falls in stock
markets tend to be concentrated in short periods, the best rises happen
quickly. And since these large gains often occur in the early days of an
upward trend, an investor trying to time the market is highly likely to
miss out. Missing the ten best days over the nine year period would have
cut the average annual market return from 25.64% to 22.21% for actively
managed funds. Similarly your annual returns from a fund tracking the
BSE Sensex would have dropped significantly from 8.95% to 1.95% if
you had not stayed invested throughout. So, far from minimizing
investment risk, market timing seems to be high risk strategy.

COMPOUNDED ANNUALISED RETURNS 1996-2004


30%

25% Missed ten best


20% days
Stayed invested
15%

10%

5%

0%

Actively managed funds BSE Sensex

• Invest regularly
Investing regularly
can be a great way to build up a significant lump sum. You will also
benefit from what is known as “Rupee Cost Averaging”. This means that,
if you are investing in a mutual fund, over the years you will pay the
average price for units. If the market goes up, the units you already own
will increase in value. If it goes down, your next payment will buy more
units. This can be frequently understood at the time of studying about the
“Systematic Investment Plan”. The regular saver finishes the period with
an investment that is worth more than that of the lump sum investor –
even though the starting price, finishing price and average price are
exactly the same. It sounds unlikely, but it’s true.

100
• Spread your money across a range of investments
It’s rarely a
good idea to have all your eggs in one basket. Depending upon your
goals and your attitude to risk, you will probably want to spread your
money across different types of investment – equities, bonds and cash.
You may also want to diversify within each of these categories.

The principle of diversification holds true within equities


as well. Investing across a range of companies, sectors and even markets
ensure that you are not reliant on the performance of any one type of
equity and hence, do not run the risk of having “all your eggs in one
basket”.
Diversification within equities should ideally be
considered at three levels:
1. Across stocks
2. Across sectors
3. Across markets

Type Of
Advantage Disadvantages
Asset
Interest rates are variable
High level of security
and currently very low
Cash High liquidity The best rates may only be
available on special terms
Interest will always be paid
or for larger amounts
Interest is set in advance and The bond issuer may
paid regularly default on interest
The value of the bond in the payments or be unable to
open market may go up make the final payment
Bonds
Paying interest on bonds is a
The value of a bond in the
higher priority than paying
open market may go down
dividends on shares
Equities can increase Equities can also fall
significantly in value significantly in value
Equities It’s very difficult to predict
Dividends can increase as
what will happen in the
company profits increase
short term

• Choose your funds carefully


You should select

101
investments on the basis of what is right for your personal circumstances
and goals. If you are deciding on a mutual fund to invest in, don’t opt for
the one that is the flavour of the month, unless you are sure it will be
right for your needs in the years to come. And don’t assume that all funds
investing in Indian equities are essentially the same – look at the details
of what a fund invests in and check if you are comfortable with its
investment style and objectives.

200 200 200 200 200


Industry Sector 0 1 2 3 4
(%) (%) (%) (%) (%)
Info. Technology (BSE IT Index) -37.2 -39.4 4.1 23.0 24.7
Public Sec. Utilities (BSE PSU Index) -37.0 -4.2 73.9 144.2 11.6
Capital Goods (BSE CG Index) -35.9 -19.6 47.8 167.8 27.2
Consumer Goods (BSE FMCG Index) -7.2 -10.9 -11.4 35.4 -6.9

• Remember that time not timing is the key to successful investing


When you are planning your
investment, it can be tempting to wait for the market to reach a low point.
But how will you know when this happens? You run the risk missing out
on the significant rises that often occur in the early days of an upward
trend. Even the experts can not “time the market” with consistent
success. It is better to choose an investment that you feel confident about
and take a long term view, so that you have time to ride out any ups and
downs in the market.

• Don’t let the Sensex guide your senses


Investors often form their
views on equities by looking at the BSE Sensex. Devotees of equities
argue that this shows they yield superior returns over the long term. But
the sceptics point out that the Sensex crossed 4,600 ways back in 1992. It
has since gone up and down several times and by August 2005 has
crossed 7,800. You could say that a 69% increase in 13 years (around 5%
p.a.) is not much to show for the last 13 years – surely this is long enough
for the market to have delivered the superior performance it is capable
of? The fact is that an equity
market is more than a benchmark index. The BSE Sensex only represents
30 actively traded large companies. The Indian equity market offers an
immense variety of other investment opportunities. Active equity fund
managers have demonstrated that they can look beyond the index and

102
spot companies that can deliver much better returns for investors.
A passive or index – tracking
fund holds stocks not because they are worth investing in, but they are in
the index. And it has to hold them as long as they stay in the index, even
if they are over priced or on their way down. An actively managed fund,
on the other hand, holds a stock because the fund manager wants it in the
portfolio.
Your Investment Adviser will
be able to help you select actively managed equity funds that are right for
your particular circumstances and goals. You will be investing in equities
without having to worry about where the Sensex is, or where it is likely
to go.
The table shows the
compounded annualized growth of the BSE Sensex, compared with the
returns from actively managed funds over four different periods up to
nine years. .

COMPOUNDED ANNUALISED RETURNS

60%
Actively managed funds
50% BSE Sensex
40%

30%

20%

10%

0%
1 Year 3 Years 5 Years 9 Years

Over each of these periods,


actively managed funds have outperformed the Sensex. Over a five year
period this out performance has been quite substantial – more than four
times better than the index. This is the benefit of active management.
Active fund mangers
make their own decisions about which shares to buy. Some use statistical
analysis, others follow fashion. A good fund manager will choose stocks

103
on the basis of thorough research, seeking companies with the potential
of reward investors.
Passive of index –
tracking funds, on the other hand, attempt to replicate an index, such as
the Sensex, by holding the same stocks and in the same proportions.
Investment decisions are often made by the computers and no research is
involved so these funds usually have lower charges.
When you invest
in actively managed funds your returns are more dependent on the stock
selection skills of the fund manager and less on the movements of a
major index like the Sensex. Active management has worked well in the
Indian market and there appears to be no reason why it should not
continue working as well in the future.
This
tip is applicable only for the investors who are investing in diversified
equity funds.
• Review your investments
A portfolio that is right
for you at one point in your life may not be quite so suitable a few years
later. Your investments need to adapt to changes in your circumstances,
such as getting married, having children or starting a business. It is also a
idea to check that each of the funds in your portfolio is living up to your
expectations. Talking to an Investment Adviser could help you decide
whether you need to switch money between funds.
For the greatest long term
growth potential you could simply invest all your money in equity mutual
funds, right from the start of your investing period to the end. But, of
course, this would be a high risk strategy. The markets could dip just
before you need the money. That’s why you need to think about changing
your portfolio over time. You may want to aim for strong growth in the
early years, and then, as the years go by, lock in any gains you have made
and move into lower risk investments, such as bonds. As you get closer
to needing your money, lower risk bond and cash investments could
become your emphasis. .

25 Years to go 10 Years to go 5 Years to go

Bonds Equities Cash Bonds Equities Cash Bonds Equit ies Cash

104
THE RIGHT ASSET ALLOCATION FOR INVESTORS
There are three major asset classes that you can put your money into,
namely equities, fixed income and money market instruments. In order to
decide how much of your money goes into which investment class you must
first consider a few important factors (most of these will be tackled by you
during your goal definition phase):
• Return expected on your investment,
• Amount you will be able to save (present as well as future),
• Cash outflows you might have at certain points of time in the
future,
• Risk appetite,
• Amount you will require for your retirement,
• Liquidity and
• Your Age
Hence due to the variable nature of the investor’s finances and
requirements there are no set strategies used by financial consultants. But we
can provide you with broad strategies that you can adapt to meet you own
needs. But first please take a look at the chart below to see which category
you broadly fall into. Investment protection leads to safer interest generating
asset allocations where as Investment Growth leads to higher volatility
assets, that may tend to grow over a period of time.

INVESTMENT PROTECTION V/S INVESTMENT GROWTH


Investment Investment
Investor Characteristic
Growth Protection
Time Horizon Short-term Long-term
Future Income Requirements Steady / High Variable / Low
Volatility Limit (Risk Averseness) Low High
Low Protection High Protection
Inflation Protection
Needed Needed
Investor take on Equity Market Mostly Bearish Mostly Bullish

If you are a person who broadly falls into the Investment Growth
category you might be interested in looking at an Aggressive portfolio. On
the other hand if you are leaning towards an interest income with minimal
risk investments you might look at a Conservative asset allocation. Someone
105
who wants a bit of steady income as well as asset growth might go in for a
moderate or a balanced asset allocation.
AGGRESIVE PORTFOLIO
2%
18%

80%
Equity Fixed Income Cash

MODERATE PORTFOLIO
3%

37%

60%

Equity Fixed Income Cash

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CONSERVATIVE PORTFOLIO
6%

35%

59%

Equity Fixed Income Cash

Another way to ascertain the right asset allocation is by looking at


your life cycle. The basis of this theory lies in the simple maxim that
younger people with secure jobs will normally opt for higher returns and
take higher risks compared to older retired people. One must remember that
these are only indicative strategies and will probably have to be fine-tuned to
meet your individual needs.

Age Main Objectives Portfolio Strategy


Aggressive Growth – Sow the 50% - Growth Funds
20-29 seeds, plan for housing and 30% - Balanced Funds
create a safety cushion 20% - Money Markets / Cash
Growth – Save for housing, 45% - Growth Funds
children’s expenses (present and 30% - Balanced Funds
30-39
future – education etc.) and 05% - Blue Chip Stocks
safety cushion 20% - Money Markets / Cash
40% - Growth Funds
Growth – Children’s expenses
30% - Balanced Funds
40-49 (present and future – education
10% - Blue Chip Stocks
etc.) and safety cushion
20% - Money Markets / Cash
30% - Growth Funds
Retirement – Save for retirement 40% - Balanced Funds
50-59
and build on safety cushion 10% - Blue Chip Stocks
20% - Money Markets / Cash
60-69 Safety – Preserve investments/ 10% - Balanced Funds
savings and opt for minimal 15% - Income Funds
growth 10% - Blue Chip Stocks
20% - Dividend Stocks

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30% - Certificates of Deposits
15% - Money Markets / Cash
30% - Income Funds
70
Safety – Preserve investments/ 25% - Dividend Stocks
&
savings 35% - Certificates of Deposits
Above
10% - Money Markets / Cash

EQUTIY AND DEBT FUNDS


5 REASONS FOR INVESTING IN EQUITY FUNDS
• Your money needs to generate much higher returns to secure
your retirement
Connect the dots of your
ages, your 30s/ 40s or 50s and they WILL connect to 60,70 and even 80.
You will turn old one day. And you will not want to depend on someone
then, even your kids. The good news is that you can start today and build
sizeable savings by -50% the time you retire.

108
The chart shows how saving at a more
than average rate of 20% can make your savings increase substantially
over the next 20 years. By how much? A 1 lakh savings today can
increase to close to Rs. 40 lakhs by the time you are ready to hang up
your boots.
The trick is not to be satisfied
with the 5% or 10% returns and hunt for investments that can give you
above average returns. Your search ends here.

• Equity markets can give the returns needed to secure your future
The graph below shows that
returns generated by the Sensex over the past 20 year period have been a
healthy 15%. This while the Indian economy grew at 3-4% for more than
half that 150% period. Going forward, this growth is targeted to be 6-8%,
now you know why we are optimistic about the equity markets.

If you have been wary of


investing in equity funds because of the risk involved, we have some
news for you…

• Historical data proves that investing in the Equity market


becomes less risky in the long term

109
As shown above, the peaks and
troughs of returns can be mellowed by remaining invested for the long
term. The historical analysis shows how the maximum and minimum
returns generated by the Sensex behave from 1 year to 20 years.
But you may be a complete
beginner and may know nothing about how to invest. Fortunately, there
are collections of investors called Mutual funds that have professional
fund managers that invest in the stock market collectively on behalf of
investors.

• Mutual funds offer a better route to investing in equities for lay


investors
A mutual fund acts like a
professional fund manager, investing your money and passing the returns
to you. All it deducts is a management fee and its expenses, which are
declared in its offer document.
As seen in
the following graph, looking at the past 10 years, mutual funds have
given higher returns over the BSE Sensex, even when measured on a 5
year rolling basis.
5 Years Rolling Returns (Daily Basis) for Last 10 Years
Sensex Equity Mutual Fund Average
Min -7.90% 8.94%
Max 14.51% 33.53%

110
The logic is simple, it makes sense to
leave your investments in the hand of professionals you can trust.
However, you may ask, why
invest now. Because…

• The Indian Economy is booming right now


The Indian economy is
growing strongly as shown by the growth rate of Gross Domestic Product
(Broadly the Total Production of goods and services in the country). A
booming markets.
Investing now in the stock
market can enable you to benefit from a growing Indian economy.

VALUATION OF DEBT FUNDS


• Need of Valuation
Mr. Patel's Maruti car is
a year old. With the blitzkrieg of new car launches Mr. Patel was really
tempted to upgrade his Maruti to a Palio or an Indica by selling off his
existing Maruti car. Being an accountant he found that taking the
mentioned depreciation rate of 20% as per the Income Tax rules, the
value of his Maruti bought initially for Rs 250,000 was now 200,000. He
gathered that as per this he would have to invest another Rs 50,000 for a
new Indica.

111
Mr. Patel armed with this
information decided to cross check this with his second car dealer and
found to his utter surprise that the best he was getting was Rs 175,000.
However as per the IT rules the car should give him Rs 200,000, Mr.
Patel argued. The dealer
patiently explained to him that the price of a second hand car depends on
a host of factors.
Obvious factors like usage, mileage and present condition of the car
apart, extraneous market factors like:
1. The demand for a second hand cars,
2. The availability of newer models in a similar price range, and
3. The availability of older models in a similar price range.
Mr. Patel returned a wiser man that
day having learnt a new fact that a fair valuation is one that has to take
into account market realities.

• Valuation of Debt Funds


Debt funds like any other
asset are driven by the same basic tenet. A fair valuation is one that has to
take into account market realities at prices that are market driven.
A debt fund at any given
point in time holds different debt instruments. Thus the NAV, which
reflects the value of all the underlying assets in the portfolio, to be fair
and correct should take into account the market price of each of the
instruments that comprise the portfolio. This process where each asset is
valued at current market prices is called "Marking to Market".
Marking to
market has become very essential as it indicates the financial health of a
portfolio. To a large extent this procedure indicates the amount of risk the
fund carries. Essentially
any portfolio can either have liquid or illiquid securities. While valuing
liquid securities is a no-brainer as the prices can be taken from the
exchanges, valuation does assume great significance when it comes to
valuing illiquid securities. The
problem of valuation gets compounded when it comes to valuing debt
securities in India. The absence of a broad based market resulted that
trades were concentrated around a few securities.
A
Debt fund at any given point of time can hold three different types of
assets:

112
1. Government securities,
2. Corporate debentures with a residual maturity of more than 6
months,
3. Money market instruments and corporate debentures with a
residual maturity of less than 6 months.
Different categories of assets are
marked to market in different ways depending mainly on the liquidity of
the asset. As a thumb rule, higher the credit, higher the liquidity.
Consequently the most liquid among debt instruments are the securities
issued by the Government as the risk is sovereign.

• Bond Valuation
The value of a bond can be
defined as the present value of the future cash flows discounted at an
appropriate rate. The cash flows expected from the bond are made up of
1. Coupon Payments and
2. redemption of Principal
Thus the value of the bond in general
terms:
Bond Price= C/(1+i) + C/(1+I)2 + C/(1+I)3+ …..+ C/(1+I)n +M/(1+I)n
Where, C = Coupon Payments
M = Redemption Amount
N = Number of Coupon Payments
I = Discounting rate or the yield of the bond.

• Yield or Discounting Rate


The price of the bond
depends significantly on the rate which is used to discount the future cash
flows. To get a uniform pricing for various debt instruments a matrix
known as the CRISIL Bond Valuer maintained and developed by CRISIL
and approved by SEBI is used for bond valuation.

• Valuation of Government Securities


Government
securities are marked to market on a daily basis. Since the G Sec market
in our country is the most liquid segment of our debt markets, it is
possible to get a price of G-Secs on any given day. Hence the G-sec
portion of the portfolio is marked to market on a daily basis at the last
traded price. Earlier fund houses used differing sources ranging from
NSE to the RBI's SGL. However circa March 2002 it is mandatory for all
fund houses to use prices provided by CRISIL.

113
CRISIL uses the Spread over Benchmark concept while valuing
non traded government securities.
Any event like an interest rate change triggers the rise or fall of
government securities. But the impact is not similar across all G-Secs.
The impact depends on a host of factors chiefly duration, coupon rate and
the liquidity level of the security.
Benchmarks are set up for different tenor buckets
e.g. securities with 1-2 years outstanding maturity, 2-3 years 3-4 years
and so on. For each of these tenor buckets benchmarks are identified
based on the turnover, frequency of trading in the secondary market.
These prices are provided by CRISIL on a daily basis.
• Valuation of Money Market instruments
Money market
instruments and corporate debentures with residual maturity of less than
6 months are valued by amortization. The difference between the face
value and the cost is amortised over the life of the instrument. SEBI has
provided that all money market instruments and corporate debentures
maturing within 6 months have to be valued on a cost plus accrual basis
instead of marking to market.
So the next time you decide to invest in a fund you know
what to look out for.
Valuation therefore is a critical element of
the entire funds management business. It takes time and hence funds have
cut-off times so that all transactions for the day can be accounted for the
days NAV. Any transaction that gets missed out implies that the resulting
NAV is not the accurate NAV. It is for this reason that AMFI along with
SEBI has started getting stricter on adherence to cut-off times.

114
• Valuation of Corporate Securities
Debt securities like bonds,
debentures are valued differently depending on whether they are traded
or non- traded and additionally depending on the value of the traded
securities. The valuation for
the traded securities of traded value in excess of Rs 5 crores is done
based on the YTM. The YTM is calculated on the last traded price and is
maintained till the next CRISIL matrix.

Thinly traded securities and non-traded securities valued at more Rs 5


crores and with a residual maturity of more than 182 days are valued
using the CRISIL Bond Valuer.
The CRISIL Bond Valuer uses a benchmark YTM built using
GOI Sec as the base for each duration bucket. There are 7 duration
buckets starting from 0.5 to > 6 years. CRISIL provides a matrix of
yields across various duration buckets (the topmost row in the table
below) and rating categories (the leftmost column) on a weekly basis.

Here is how it works. When deciding the price of a


corporate debenture the key is to determine the yield of the debenture.
CRISIL arrives at this table after taking into account various macro and
micro economic factors and the repaying capacity. Once the yield is
known the price computation is easily accomplished.
When deciding the price of a
corporate debenture the key is to determine the yield of the debenture.
CRISIL arrives at this table after taking into account various macro and

115
micro economic factors and the repaying capacity. Once the yield is
known the price computation is easily accomplished.

23/10/2002 Average 0.5-1 1.0-2.0 2.0-3.0 3.0-4.0 4.0-5.0 5.0-6.0 >6.0


Gilt 6.46% 5.85% 6.01% 6.17% 6.31% 6.54% 7.05% 7.28%
AAA 7.21% 0.75% 0.87% 0.83% 0.80% 0.78% 0.59% 0.64%
AA+ 7.58% 1.11% 1.16% 1.08% 1.05% 1.14% 1.11% 1.19%
AA 7.95% 1.45% 1.43% 1.40% 1.40% 1.63% 1.54% 1.62%
AA- 8.47% 1.95% 1.89% 1.86% 1.89% 2.15% 2.10% 2.26%
A+ 9.15% 2.60% 2.62% 2.62% 2.65% 2.84% 2.73% 2.78%
A 9.73% 3.00% 3.18% 3.22% 3.30% 3.52% 3.39% 3.33%
A- 10.66% 3.70% 4.16% 4.31% 4.28% 4.41% 4.31% 4.28%
BBB+ 11.59% 4.47% 5.03% 5.22% 5.25% 5.38% 5.28% 5.28%

If you buy a bond at face value, its


rate of return, or yield, is just the coupon rate. However, after they're first
issued, bonds rarely sell for exactly face value. The yield differs from the
coupon. While the coupon rate is the stated interest rate offered by the
debenture and is always calculated on the principal value, the yield is
often the return that one would get considering the future interest flows
and the prevailing interest rate scenario.
To give an example using the
above matrix say a corporate debenture issued by a Corporate rated AA+
with a residual duration of 2.5 years would be calculated as under. The
yield of this will be the benchmark yield plus the markup depending on
the bucket the debenture falls into. Therefore yield used for valuation
would be 6.17(benchmark) + 1.08(spread) = 7.25%.

116
All corporate debentures that
fall in a particular slot within the matrix are valued at rates specified by
CRISIL matrix. Additionally the fund house is at a liberty to add a
discretionary discount/premium upto +100/-50 bps for rated paper with
duration upto 2 yrs and upto +75/-25 bps for rated paper with duration
over 2 yrs. In case of an
unrated paper the fund house needs to assign an internal credit rating
which is then used for valuation. In this case the yield would be marked
up by adding 50 basis points for securities having a duration upto two
years and by 25 basis points for securities of duration higher than two
years.

117
PERFORMANCE MEASURES OF MUTUAL FUNDS
With a plethora of schemes to choose from, the retail investor faces
problems in selecting funds. Factors such as investment strategy and
management style are qualitative, but the funds record is an important
indicator too. Though past performance alone can not be indicative of future
performance, it is frankly the only quantitative way to judge how good a
fund is at present. Therefore, there is a need to correctly assess the past
performance of different mutual funds.
Worldwide, good mutual fund companies over are known by
their AMC’s and this fame is directly linked to their superior stock selection
skills. For mutual funds to grow, AMC’s must be held accountable for their
selection of stocks. In other words, there must be some performance
indicator that will reveal the quality of stock selection of various AMC’s.
Return alone should not be considered as the basis of measurement of
the performance of a mutual fund scheme, it should also include the risk
taken by the fund manager because different funds will have different levels
of risk attached to them. Risk associated with a fund, in general, can be
defined as variability or fluctuations in the returns generated by it. The
higher the fluctuations in the returns of a fund during a given period, higher
will be the risk associated with it. These fluctuations in the returns generated
by a fund are resultant of two guiding forces. First, general market
fluctuations, which affect all the securities present in the market, called
market risk or systematic risk and second, fluctuations due to specific
securities present in the portfolio of the fund, called unsystematic risk. The
total risk of a given fund is sum of these two and is measured in terms of
standard deviation of returns of the fund. Systematic risk, on the other hand,
is measured in terms of Beta, which represents fluctuations in the NAV of
the fund vis-à-vis market. The more responsive the NAV of a mutual fund is
to the changes in the market; higher will be its Beta. Beta is calculated by
relating the returns on a mutual fund with the returns in the market. While
unsystematic risk can be diversified through investments in a number of
instruments, systematic risk can not. By using the risk return relationship,
we try to assess the competitive strength of the mutual funds vis-à-vis one
another in a better way.
The criteria for evaluating the performance are as follows:
• Sharpe Ratio
• Treynor Ratio
• Jensen’s Alpha

118
• Expense Ratio
In detail,

SHARPE RATIO
The ratio measures the return earned in excess of the risk free
rate (normally Treasury Instruments) on a portfolio’s total risk as measured
by the Standard Deviation in its returns over the measurement period. Nobel
Laureate William Sharpe developed the model and the results of it indicate
the amount of return earned per unit of risk. The Sharpe Ratio is often used
to rank the risk-adjusted performance of various portfolios over the same
time. The higher a sharpe ratio, the better a portfolio’s returns have been
relative to the amount of investment risk the investor has taken. The major
advantage of using the Sharpe Ratio over other models (CAPM) is that the
Sharpe Ratio uses the volatility of the portfolio return instead of measuring
the volatility against a benchmark (i.e. index). The primary disadvantage of
the Sharpe Ratio is that it is just a number and it is meaningless unless you
compare it to several other types of portfolios with similar objectives

Return of Portfolio – Return of Risk Free Investment


S =
Standard Deviation of Portfolio

For example: Let’s assume that we look at one year period of time
where an index fund earned 11%, treasury bills earned 6% and Standard
Deviation of the index fund was 20%.

11 - 6
Therefore S = = 25%
0.20

The Sharpe Ratio is an appropriate measure of performance for an


overall portfolio particularly when it is compared to another portfolio, or
another index such as the S&P 500, Small Cap Index, etc.
That said however, it is not often provided in most rating
services.

TREYNOR RATIO
This ratio is similar to the above except it uses Beta instead of
Standard Deviation. It is also known as the Reward to Volatility Ratio, it is
the ratio of a fund’s average excess return to the fund’s Beta. It measures the
returns earned in excess of those that could have been earned on a riskless

119
investment per unit of market risk assumed. The formula is typically used in
ranking Mutual Funds with similar objectives.

Return of Portfolio – Return of Risk Free Investment


T =
Beta of Portfolio

The absolute risk adjusted return is the Treynor plus the risk free rate.
For example: Assume two portfolios A and B, return and Beta of
which are 12, 14 and 0.7, 1.2 respectively. Risk free rate is 9%.

0.12 – 0.09 Risk Adjusted Rate of Return of A


T (A) = = .043
.07 = 0.043 + 0.09 = 0.133 or 13.3%

0.14 - 0.09 Risk Adjusted Rate of Return of B


T (B) = = 0.04
1.20 = 0.04 + 0.09 = 0.13 or 13%

For many investors, without any analysis of risk, if we ask them what
is the better number (12% or 14%) almost universally they state 14%.
However, when we point out the risk adjusted rate of return, many adjust
their thinking.
For example: In 1990-93 where Fidelity Magellan had earned
about 18%. Many bond funds had earned 13%. Which is better? In absolute
numbers, 18% beats 13%, but if we then state that the bond funds had about
the half risk, now which is better? We don’t even need to do the formula for
that analysis. But that is missing in almost all reviews by all brokers. For
clarification we do not suggest they put all the money into either one – just
that they need to be aware of the implications.

JENSEN’S ALPHA
This is the difference between a fund’s actual return and those
that could have been made on a benchmark portfolio with the same risk i.e.
Beta. It measures the ability of active management to increase returns above
those that are purely a reward for bearing market risk. Caveats apply
however since it will only produce meaningful results if it is used to
compare two portfolios which have similar Betas.

Assume Two Portfolios:

120
A B Market Return
Return 12% 14% 12%
Beta 0.7 1.2 10%
Risk Free Rate = 9%

Expected Return = Risk Free Return + Beta of Portfolio (Return of


Market – Risk Free Return)

Alpha = Return of Portfolio – Expected Return

Expected Return = 0.09 + 0.7 (0.12 – 0.09) = 0.11


Portfolio A:
Alpha = 0.12 – 0.11 = .01 or 1%

Expected Return = 0.09 + 1.2 (0.10 – 0.09) = 0.102


Portfolio B:
Alpha = 0.10 – 0.102 = -0.002 or -0.2%

As long as “apples are compared to apples” – in other words a


computer sector fund A to computer sector fund B – it is viable number, but
if taken out of context, it loses meaning. Alphas are found in many rating
services but are not always developed the same way – so you can’t compare
an Alpha from one service to another. However we have usually found that
their relative position in the particular rating service is to be viable. Short
term Alphas are not valid. Minimum time frames are one year – three year is
more preferable.

EXPENSE RATIO
The percentage of the
assets that were spent to run a mutual fund. It includes things like
management and advisory fees, travel costs and consultancy fees. The
expense ratio does not include brokerage costs for trading the portfolio. Also
referred to as the Management Expense Ratio (MER).
Pay close attention
to the expense ratio, it can sometimes be as high as 2-3% which can
seriously undermine the performance of your mutual fund.

121
HOW TO PLAY AN OVER – HEATED MARKET
At a time like this one is reminded of the old story
where Birbal kept the weight of a goat constant by giving it
as unlimited fodder and then caging a wolf next to it, so that
it never ate more than it needed. The investor is equally
strongly driven today by the fear of investing in an over-
heated market and the desire to participate in the general
prosperity.
Let us begin with one salient fact – investing cannot
be ignored nor can it be postponed. Your choice of assets is
limited – gold, bank deposits; government sponsored or
promoted savings schemes, the debt market and the equity
market. What you should be doing in the equity market in
these times is as follows:

• Time Horizon
This is an extreme
market. A huge amount of liquidity is chasing stocks,
because India is happening – let no one tell you that the
rationale institutional investors are not swayed by
sentiment. Like any sentiment there is a sound basis in
fact: India is set to realize its economic potential, but it
won’t happen overnight.
So the first tip is that you can invest with one
of two horizons: either 3-5 years or day trading. By
committing to a 3-5 year horizon, you must be prepared
to weather short-term corrections (by which I mean even
sustained negative phases lasting months with everyone
talking about how it would be wise to stay away from the
market).
If you don’t have the ability to
commit money of this nature, the alternative is to develop
a good broker as a friend and seek his help in trading on
stocks on a daily basis for a profit (after brokerage and
STT) of between 15 paisa to 25 paisa and a stop loss of
say 10 paisa. Don’t worry, this is not gambling; it provides
legitimate liquidity to the market. But it is risky, since
most of your dealings will be in little known stocks with
often little or no fundamental merit, and very low

122
volumes. You can get stuck in your position.
Try the former unless you are
in a job, which gives you ample free time, or are retired
and have adequate time to monitor your broker’s activity.

• Directly or through a Mutual Fund


Again the
argument in favour of mutual fund investing is that you
may not have the time to do some serious investment
analysis. But even in investing in mutual funds, you need
to play to a strategy. The best way to do this is:
1. If you have a lump sum, place it in a liquid or floater fund, and
leave instructions with the fund to transfer it systematically into the
equity fund of your choice.
2. If you are investing a small amount each month, use the SIP
route, invest a little bit each month in 3 or 4 funds
3. Do look at index funds for at least half your money, even for
SIP. Fund managers are human, and they can be tempted by better job
offers and promotions. An index fund does not face the problem of
change of hands. Index funds are also cheaper
4. A very aggressive fund choices like mid-cap or sector funds
unless you have some special knowledge of a sector.

• Fear or Greed – How to beat both


Don’t forget
debt funds. They are still good for your bread and butter
investing. The interest rates have stabilized and the
returns are tending towards the normal. Keep your main
savings and profits from equity investing in debt funds.
Suddenly MIPs are also looking like an attractive option
once again. Unfortunately the brief period of uncertainty
for these funds last year has given them a bad name, but
these are ideal options for the safety seeking investor,
who wants limited exposure to equity. Look at taking an
SIP in an MIP; this may be your best bet if you are a
conservative investor.
Conclusion
Actually, if you get
down to basics the norms of good investing remain true –

123
but markets like this require that we be reminded of these
strategies once again. The only difference between investing
in a hot market and one that is just getting hot is that the
risk-reward ratio for the mid-term time horizon (3 to 6
month) becomes so bad that it is bests an Ed. When the
index was at 5000, you may have probably profited from the
stag approach; but no longer.

NEW FUND OFFERS DURING THE TRAINING


PERIOD
During the training, we have come across the three following New
Fund Offers (NFO):
• SBI Magnum Comma Fund
• PruICICI Infrastructure Fund
• Reliance Tax Saver (ELSS) Fund

SBI MAGNUM COMMA FUND

• What is SBI Magnum Comma Fund


A first of its kind scheme. COMMA
is an acronym for Commodities in Oil, Metals, Materials and Agriculture.
SBI Magnum Comma Fund is an open-ended equity fund focused on
investing across commodity (such as oil and gas, metals, materials,
agriculture etc) based companies. SBI Magnum Comma Fund intends to

124
follow a disciplined investment process to create a diversified portfolio of
commodity based companies.

• Investment Objective
To generate opportunities for growth
along with possibility of constituent returns by investing predominantly
in a portfolio of stock of companies engaged in the commodity business
within the following sectors – Oil and Gas, Metals, Materials and
Agriculture and in the debt and money market instruments.

• Asset Allocation Pattern

Normal Allocation
Types of Instruments Risk Profile
(% of Net Assets)
Equity and equity related
High
instruments of commodity based 65% - 100%
companies
Foreign Securities/ADR/GDR of
0% - 10% High
commodity based companies
Fixed/Floating rate debt
0% - 30% Medium
instruments including derivatives
Money Market Instruments 0% - 30% Low

1. Maximum limit of stock lending – not more than 20% of the net
assets of the scheme
2. The scheme would at all times have an exposure of at least 65% of
its investment in stocks of companies engaged in the commodity
business.
3. The scheme intends to take exposure only in the following four
sectors – (a) Oil and Gas (Petrochemicals, Power, Gas etc.), (b)
Metals (Zinc, Copper, Aluminum, Bullion, Silver etc.) (c) Materials
(Paper, Jute, Cement etc.) (d)Agriculture (Sugar, Edible Oil, Soya,
Tea, Tobacco etc.).
4. The scheme would also invest in companies providing inputs to
commodity manufacturing companies.
5. Exposure to derivatives instruments in the scheme can be upto a
maximum of 50% of the equity portfolio of the scheme. Exposure to
the derivative instrument may be through either Stock Option and
Future or Index Options or Futures. Investment in Stock Options and

125
Futures would be limited only to the stocks within the four sectors of
Oil and Gas, Metals, materials and Agriculture.
6. Investments in foreign securities/ADR/GDR would comply with
the guidelines and overall limits laid down for Mutual Funds by SEBI
for investments in foreign securities. Investments in foreign securities
would be only in the stocks of the following sectors – oil and gas,
metals, materials and agriculture.
7. Money market instruments will include Commercial Paper,
Commercial Bills, Certificate of Deposit, Treasury Bills, Bills
Rediscounting, Repos, Government Securities having an unexpired
maturity of less than one year, Call or Notice Money, Usance Bills
and any other such short term instruments as may be allowed under
the regulations prevailing from time to time.

• Dividend Policy
Dividend
declaration under the dividend option of the scheme is subject to the
availability of distributable surplus and at the discretion of the Fund
Manager and no returns is assured under the scheme.

• Options
Growth
option and Dividend option. Dividend option provides facility for payout
and reinvestment.

• Minimum Application Amount

Purchase Additional Purchase Repurchase


Rs. 5000 and in Multiples of Rs. 1000 Rs. 1000 or 100
multiples of Rs. 1000 magnums whichever is
lower

• Benchmark Index: BSE 200 Index

Fund Manager : Mr. Sandip Sabharwal


Trustee Company : SBI Mutual Fund trustee Company Pvt. Ltd.

• Load Scheme

126
New Fund Offer Period Continuous Offer
The initial issue expenses of the Entry Load:
fund upto an extent of 6% of the • Investment below Rs. 5
new fund offer mobilization would crores – 2.25%
be borne by the scheme and any • Investments of Rs. 5 crores
expenses over and above 6% and above – NIL
would be borne by the Asset
Management Company.
Entry Load: NIL Exit Load: NIL
Exit Load: For systematic Investment Plan (on
• For investments below Rs. 5 an ongoing basis)
crores – (1) 2% for exit within • Entry Load: NIL
6 months from the date of • Exit Load: (1) for exit within
reopening of the scheme (2) 6 months of investment – 1.00%
1% for exit after 6 months but (2) for exit after 6 months but
within 12 months from the date within 1 year of investment –
of reopening of the scheme 0.50% (for the purpose of
• For investments of Rs. 5 calculating the exit load, the
crores and above – 1% for exit unit allotment date for each
within 3 months from the date installment would be reckoned)
of reopening of the scheme

• Recurring Expenses

1. First Rs. 100 cr. of average weekly net assets – 2.50%


2. Next Rs. 300 cr. of average weekly net assets – 2.25%
3. Next Rs. 300 cr. of the average weekly net assets – 2.00%
4. Balance of the average weekly net assets – 1.75%

• Tax Treatment for the Investors


1. Tax benefit is available under sections 48 & 112 of
the Income tax Act, 1961 on the capital gains for Resident Indians.
Short Term Capital Gains from equity schemes will be taxed at 10%
(plus applicable surcharge) while long term capital gains will not be
subject to any tax.
2. Income distributed by equity schemes will not be
subject to dividend distribution tax and will be tax free in the hands of
the investor.
3. Magnums held under this scheme will not be liable
to wealth tax and gift tax.

127
4. Securities transaction Tax (STT) of 0.20% would
be levied at the time of redemption from all investors irrespective of
the amount/tenure of investment.

• Key Features
1. An open-ended equity scheme investing in stocks of commodity based
companies
2. Launch Date? 30th June 2005
3. New Fund Offer Period? 30th June 2005? 25th July 2005
4. Scheme reopens on 17th August 2005
5. Minimum Investment? Rs. 5000 and in multiples of Rs. 1000
6. Dividend and Growth options available. Reinvestment and Payout
facility available.
7. Dividends will be completely tax-free. Long term capital gains to be
completely tax-free. STT would be at the rate of 0.20% at the time of
repurchase.
8. Entry load – Nil (during new fund offer period)
9. Exit load (only for investments during new fund offer period)
For investments below Rs. 5 crores:
• 2% for exit within 6 months from the date of reopening of the
scheme
• 1% for exit after 6 months but within 12 months from the date
of reopening of the scheme
For investments of Rs. 5 crores and above:
• 1 % for exit within 3 months from the date of reopening of the
scheme.

PRUICICI INFRASTRUCTURE FUND

128
• What is PruICICI Infrastructure Fund
PrulCICI
Infrastructure Fund is an open-ended equity fund focused on investing
across Infrastructure sectors such as Cement, Power, Telecom, Oil and
Gas, Construction, Banking, etc. PrulCICI Infrastructure Fund intends to
follow a disciplined investment process to create a diversified portfolio of
companies engaged in the Infrastructure sector providing optimum risk-
adjusted long-term return. Prudential ICICI Mutual Fund seeks to
optimise the risk-adjusted return by a mix of top-down macro and
bottom-up micro research to pick up stocks providing long-term return
potential.
• Why invest in the Infrastructure Sector
India has to invest
large amounts in the Infrastructure sector like Roads, Ports, Power,
Telecom, etc to sustain higher economic growth rate. Lack of adequate
Infrastructure is acting as a speed breaker for rapid economic growth.
The Government alone cannot spend large amounts on the development
of Infrastructure, and it has actively encouraged private sector to invest in
the Infrastructure sector.
One
such example of public-private participation is in the Telecom Sector. As
can be seen in the table below, the Telecom Sector has seen tremendous
improvement in availability as well as cost in the last few years.

Telecom Services
Particulars 1999 2005
No. of Connections(Mobile + Basic) in mn 22.8 100.1
Teledensity 2.32 9.26
Tarrifs - STD Rs per minute 30.00 2.40
Tarrifs - ISD Rs per minute 61.20 7.20
Tarrifs - (Mobile Phones) Rs per minute 16.00 1.00

129
The Infrastructure sector has
received tremendous boost from the various initiatives taken in the recent
past as under:
1. Public-private Participation: The Government announced clear-cut
policies for active participation by the private sector in areas like
Power, Telecom, Roads and Ports. Establishment of Independent
Regulators like Telecom Regulatory Authority (TRAI), Central
Electricity Regulatory Commission (CERC) has helped in enhancing
the private sector participation.
2. Increase in FDI Limit: The Government enhanced FDI Limit in
Telecom to 49%, 100% in Roads, Ports and Power Generation to
remove funding constraint and enhance technical knowledge.
3. Adequate Funding: The Government created adequate funding for
roads development by charging cess on petrol and diesel and social
Infrastructure by education cess on direct taxes.
4. User Charges: The Government allowed market determined user
charges for various services ensuring adequate return on the
investments.
The companies engaged in the
Infrastructure sector witnessed robust growth in terms of performance
over the last couple of years due to initiatives as mentioned above. The
stock markets recognised their performance as can be seen from the chart
below. The Infrastructure index comprising of companies belonging to
the Infrastructure sector out of the SENSEX like ACC, BHEL, Bharthi,
Grasim, Gujarat Ambuja, HDFC Bank, Hindalco, HDFC, ICICI Bank,
ONGC, Reliance Energy, SBI, TISCO and Tata Power have
outperformed both the SENSEX and NIFTY between the June 02 -June
05 period. Moreover, the outperformance has come at a lower volatility
as can be seen in the lower Beta of the Infrastructure Index at 0.97.

130
We believe that the Infrastructure
Sector has reached an inflection point on the back of initiatives taken in
the past and the spending proposed for the future as can be seen in the
table below:

INFRASTRUCTURE SECTOR SPENDING


US $ BILLION FY 2001-2004 FY 2004-2007 E FY 2006-2008 E
ROADS 7.1 13.3 12.46
TRANSPORT 2.0 3.4 6.51
POWER 8.5 18.4 32.67
OIL AND GAS 8.1 14.5 16.90
TELECOM 14.3 15.9 25.77
TOTAL 40.1 65.5 94.30

• What is the investment objective and asset allocation of fund


The PrulCICI
Infrastructure Fund is an open-ended equity fund investing in the
Infrastructure sector for long-term capital appreciation. The fund may
move up to 30% in debt securities if the risk reward ratio is favourable to
such allocation.
• What are the risk to the investor

1. Infrastructure Fund like any normal equity fund carries the


market risk.
2. Infrastructure projects have long gestation periods. They may
not produce immediate return for the shareholders. The Infrastructure

131
Fund will be exposed to such companies and may under perform the
broad market in the short-term. Investors should have at least a 5-year
investing horizon to match with the Fund's investment philosophy.
3. Growth of the Infrastructure sector is dependent upon
Government policies. Any adverse change in the policies can impact
the valuation of Infrastructure sector companies.
4. Significant investments in the sector can happen in the form of
debt instruments, creating a high level of financial leverage and
corresponding risk to the equity investors.

• Is this a good time to invest


The
equity markets are unpredictable. Equities have a high volatility. Timing
the market is not easy. One cannot make money in equity markets every
day. We believe that at this point of time, India is an attractive long-term
investment destination. The Infrastructure sector provides an attractive
investment opportunity based on its long-term growth potential. We will
recommend investors to diversify towards longer term growth stories as
is intended to be offered in the PrulCICI Infrastructure Fund. We believe
the best route for investment will be through Systematic Investment Plan.
The use of SIP provides the investor a regular investment option with the
benefits of rupee cost averaging.

• Who should invest

PrulCICI Infrastructure Fund is a multi sector fund, and


therefore has much lower concentration risks than a typical sector fund.
The concentration risk will be managed in an optimum manner to seek
diversification across various industries within the Infrastructure sector.
The investment focus of this fund is on the core Infrastructure sectors,
and the sectors that directly feed off the growth in the core sector. The
fund intends to bring to the investor, a focused investment opportunity, at
a risk level lower than a typical sector fund.
1. Investors who like a long term investment in equity that captures
growth opportunities in Infrastructure sectors.
2. Investors who have been long term investors in debt products and are
seeking some exposure to long-term equity with steady growth
prospects.

• What are the scheme features

132
Key Features PruICICI Infrastructure Fund
Type of the Scheme Open-ended Equity fund
Objective is to generate capital appreciation
and income distribution to unit holders by
investing predominantly in equity/equity
Investment Objective related securities of the companies belonging
to the Infrastructure industries and balance in
debt securities and money market instruments
including call money.
70% to 100% in Equity & equity related
Asset Allocation securities instruments of companies engaged in
Pattern the Infrastructure sector, 0% to 30% in Debt,
Money Market Instruments & call money.
Growth, Dividend Payout & Dividend
Options
Reinvestment
Default Option Dividend Reinvestment
Minimum Application
Rs.5,000 and in multiples of Re.1/-
Amount
Minimum Additional
Rs.500 and in multiples of Re.1/-
Investment
(i) For investment of less than Rs. 5 Crores:
2.25%
Entry Load (ii) For investment of Rs.5 Crores & above:
NIL
(iii) For SIP investments: NIL
(I) If the redemption amount is less than Rs. 5
Crores and the redemption request is made
before completion of 6 months from the date
of allotment of units: 1.00% c d e e d

Exit Load (II) For investment of Rs. 5 crores and above


or the redemption request is made on or after
the completion of 6 months from the date of
allotment of units: Nil f ffffffffffffffffffffffff
(III) For SIP investment: 2% if redeemed
within 365 days of allotment of units.
Benchmark Index S & P CNX Nifty hay I am mayank solanki a
Generally within 3 business days for specified
Redemption Cheques RBI locations and an additional 3 Business
Issued Days for Non-RBI locations.

133
10th Aug, 2005 but extended to 16th Aug, 2005
Closing Date
due to heavy rainfall and flood in Mumbai
Minimum Redemption
Rs. 500/-
Amount
Monthly: Minimum of Rs.1000 + 5 post dated
SIP Investment
cheques for a minimum of Rs.1000 each.
SWP Available
Investment Mgt. Exp. 1.25%
Other Recurring Exp. 1.25%
Total 2.50%

Moreover, this is not the first type of the fund. Before this the DSP
Merrill Lynch Mutual Fund and Tata Mutual Fund has launched the
Infrastructure based funds.
• DSP Merrill Lynch Mutual Fund has launched “India Tiger Fund”
which is infrastructure based fund and has given an absolute return about
60% in just a year.
• Tata Mutual Fund has launched “Infrastructure Fund” which is
infrastructure based fund and has given an absolute return about 20% just
within the period of eight months.

RELIANCE TAX SAVER (ELSS) FUND

This is the first fund of its own category from the Reliance Mutual
Fund in its working of over ten years.

• Objective of the Fund


The Reliance Tax saver (ELSS)
Fund is an open – ended equity – linked savings fund. The primary
objective of this fund is to generate long term capital appreciation from a

134
portfolio that is invested predominantly in equity and equity related
instruments and offer tax benefits under Section 80C of the Income Tax
Act, 1961.
• The 3 – Way Advantage

1. Tax Savings
Investment in this fund
would enable the investor to avail the benefits under Clause (XIII) of
Sub-section (2) of Section 80C of the Income Tax Act, 1961.
Investment made in the scheme up to Rs. 1 lakh by the eligible
investor being an Individual or a Hindu Undivided Family will qualify
for deduction under this Section of the Act. Since it will be an income
deduction, an investment of Rs. 1 lakh in this fund can shave off Rs.
33,660 from investor’s tax payable liability (assuming the investor is
in the highest tax bracket). Moreover investor will receive tax free
dividends.
2. Growth Potential
Give your investments in
a fund with an active investment strategy, which makes the most of
the opportunities available in the equity markets. The experienced
fund management team at Reliance Mutual Fund follows a disciplined
approach to investment, focusing on minimizing risk by creating a
well diversified portfolio. Proper asset allocation, Bottoms Up and
Top Down stock selection and systematic use of derivatives are some
of the tools the team uses to effectively maximize the growth potential
of your investments.

3. Personal Accident Death Insurance Cover


Accident Death
Insurance Cover: All eligible investments would qualify for Personal
Accident Death Insurance Cover up to the maximum cover of rs. 5
lakhs. (The term accident death would cover death occurring out of
any Road or Rail accident only.)

For Investment Amount Level of Cover


Less than or equal to Rs. 10,000 Rs. 50,000
Between Rs. 10,001 and Rs. 25,000 Rs. 2,00,000
Between Rs. 25,001 and Rs. 50,000 Rs. 3,00,000
Greater than Rs. 50,001 Rs. 5,00,000

135
• Long Term Perspective
Funds can be redeemed only
after a minimum period of three years from the date of investment. The
three year lock in period (as per Government Notifications) inculcates a
discipline, which protects your money from short term market
fluctuations. It also allows the Fund manager to plan your investment
with a long – term perspective.

• More Benefits
1. Systematic Investment Plan: Also available during the NFO
2. Greater Convenience: Through Systematic Withdrawal Plan,
available after the 3-year lock-in period
3. Greater flexibility: through the Systematic Transfer Plan.
However, the scheme can not become a transferor scheme before 3-
years lock-in period
4. Switch Out Facility: Available after the 3-year lock-in period
5. Nomination facility

• Benefit from our Experience


Think
equity. Think Reliance Mutual Fund. With over a decade of experience in
the equity markets, Reliance Mutual Fund today is a trusted name with
over 4.5 lakh investors. We at Reliance Mutual Fund are committed to
the growth of our investors, who have invested their faith in us.

Reliance Tax Saver (ELSS) Fund


Scheme Features
Type An Open-ended Equity Linked Savings Scheme.
Investment 80-100% in equity and equity related securities.
Pattern Upto 20% in Debt and Money Market Instruments.
The primary objective of the scheme is to generate
Investment long-term capital appreciation from a portfolio that is
Objective invested predominantly in equity and equity
related instruments.
Net Asset Value Calculated & declared every working day
Growth Option
Plans / Options Dividend Pay-out Option and Dividend
Reinvestment Option

136
The minimum amount for all category of investors is
Rs. 500/- and in multiples of Rs. 500 thereafter. There
Application is no cap on the maximum amount. However
Amount investments only upto Rs. 1 lakh by the eligible
investor in the scheme will qualify for deduction
under the Act.
Min. Additional
Minimum additional purchases of Rs. 500.
Investment
Portfolio
Half-yearly
Disclosures
Entry Load During New Fund Offer: NIL
Exit Load During New Fund Offer: NIL
Contingent
Deferred Sales NIL
Charge
Unit holders 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
Inter-Scheme between all the scheme(s)/plans/options of the Mutual
Switch Fund, after the statutory lock-in period of 3 Years. No
load applicable for switches between the equity
schemes. However, differential load shall be charged
for switching from Reliance Index Fund and switching
to Reliance NRI Equity Fund.
Unit holders will have the flexibility to alter the
allocation of their investments among the scheme(s)
Inter Plan/Inter offered by the Mutual Fund, in order to suit their
Option Switch changing investment needs, by easily switching
between all the scheme (s)/plans/options of the Mutual
Fund, after the statutory lock-in period of 3 Years.
Redemption Will be allowed only after the expiry of the lock in
Cheques Issued period of 3 years.
Minimum
Will be allowed only after the expiry of the lock in
Redemption
period of 3 years.
Amount
Recurring
Investment Plan Available
(RIP)
Cut off time 3:00 p.m. on working days as defined in the Offer

137
Document
Regular
investment option
Available
for corporate
employees
Regular
Available. Only after the expiry of the lock in period
withdrawal Plan
of 3 years.
(RWP)
Value & NAV Trigger to introduce a Stop loss or a
Trigger Facility Gain Cap. Available only after the expiry of the lock
in period of 3 years.
Switch Facility Available after the statutory lock-in period of 3 Years.
Systematic
Transfer Plan / Available. However, the scheme cannot become a
Dividend Transfer transferor scheme before 3 year lock-in-period.
Plan
Nomination
Available
Facility
Mode of Holding Single, Joint or Anyone or Survivor
Benchmark Index BSE 100
Available only after the expiry of the lock in period of
Switching Option
3 years.
AMC Fees 1.25%
Operational Expenses 0.25 %
Marketing Expenses 1.00 %
Total 2. 50%
Recurring
Expenses The above expenses are estimates only and are subject
to change as per actual. Expenses on an ongoing basis
will not exceed the maximum limits as may be
specified by SEBI Regulations from time to time.
Please read the offer document for details.
For Subscriptions received at the DISC's within the
cut-off timings and considered accepted for that day,
Allotment of the units will be allotted on the T day. Where the T
Units day is the transaction day, provided the application is
received within the cut-off timings for the transaction
day.
Applicable NAV i)Purchases:
In respect of valid applications received upto 3 p.m.

138
by the Mutual Fund alongwith a local cheque or a
demand draft payable at par at the place where the
application is received, the closing NAV of the day on
which application is received shall be applicable. In
respect of valid applications received after 3 p.m. by
the Mutual Fund alongwith a local cheque or a
demand draft payable at par at the place where the
application is received, the closing NAV of the next
business day shall be applicable.
ii)Redemptions:
In respect of valid applications received upto 3 p.m.
by the Mutual Fund, same day's closing NAV shall be
applicable. In respect of valid applications received
after 3 p.m. by the Mutual Fund, the closing NAV of
the next business day shall be applicable.
Accident Death Insurance Cover: All eligible
investments would qualify for Personal Accident
Death Insurance Cover up to the maximum cover of
Rs. 5 lakh. (The term accidental death would cover
death occurring out of any Road or Rail accident
only). (Please read the terms & conditions carefully
before investing).hay I am mayank solanki and who ar
The insurance cover will be linked to the investment
value of the individual (at NAV related prices) & will
not be linked to the capital appreciation on his
investment. i.e.: if his capital appreciates on account
Special Benefit of market conditions, his insurance cover will not
Under this change.
Scheme Insurance Cover

For investment
Level of Cover
amount
Less than or equal
Rs 50,000
to Rs 10,000
Between Rs 10,001
Rs 2,00,000
to Rs 25,000
Between Rs 25,001
Rs 3,00,000
to Rs 50,000
Greater than Rs
Rs 5,00,000
50,001

139
1. Investment in this fund would enable you to avail
the benefits under clause (xiii) of Sub-section (2) of
Section 80C of the Income-tax Act, 1961. Investment
made upto Rs 1 lakh by the eligible investor being an
Individual or a Hindu Undivided Family in the
scheme will qualify for deduction under this Section
of the Act. Hay I am mayank solanki and who are you

2. Dividends received will be absolutely TAX FREE


in the hands of investors. Hay I am mayank solanki an
3. The dividend distribution tax (payable by the
AMC) for equity schemes is also NIL. Hay I am maya
4. Attractive Capital Gains Tax on Equity Schemes,
shown as under:
Tax Benefits
Type of Long term Short term Capital
Scheme Capital Gains Gains
Equity
Nil *10%
Schemes
*plus surcharge & education cess PS: STT is levied
at the time of redemption of units. It is applicable
only in Equity Funds.

The above should not be construed to be tax advice


and the same is subject to any change that may be
affected in the Act or any guidelines /amendments
/rules /clarifications issued in respect thereof from
time to time.

GLOSSARY

140
• Account Statement
A document
issued by the mutual fund, giving details of transactions
and holdings of an investor.
• Adjusted NAV (Total Return)
The net asset
value of a unit assuming reinvestment of distributions
made to the investors in any form.
• Advisor
Your financial
consultant who gives professional advice on the fund's
investments and who supervise the management of its
assets.
• Age of Fund
The time elapsed
since the launch of the fund.

• Alpha Coefficient
It is the excess return of the
fund above risk adjusted market return, given its level of
risk as measured by beta. An investment with a positive
alpha indicates that the fund has performed better than
expected, given its beta. And a negative alpha indicates
that the fund has under performed.

• American Depository Receipt (ADR)


A security issued by
a company outside the U.S. which physically remains in
the country of issue, usually in the custody of a bank, but
is traded on U.S. stock exchanges. ADRs are issued to
offer investment routes that avoid the expensive and
cumbersome laws that apply sometimes to non-citizens
buying shares on local exchanges. The first ADR was
issued in 1927. ADRs are listed on the NYSE, AMEX, or
NASDAQ.

• Amortization
A method of
equated monthly payments over the life of a loan.

141
Payments usually are paid monthly but can be paid
annually, quarterly, or on any other schedule. In the early
part of a loan, repayment of interest is higher than that of
principal. This relationship is reversed at the end of the
loan.
• Annual Return
The percentage of
change in net asset value over a year's time, assuming
reinvestment of distribution such as dividend payment
and bonuses.

• Appreciation
When an
investment increases in value, it appreciates. For
example, equity share whose price goes from Rs. 20/- to
Rs. 25/- has appreciated by Rs. 5/-.

• Application Form
Form prescribed for
investors to make applications for subscribing to the units
of a fund.
• Arbitrage
The practice of
buying and selling an interlisted stock on different
exchanges in order to profit from minute differences in
price between the two markets.

• Asset
Property and
resources, such as cash and investments, comprise a
person's assets; i.e., anything that has value and can be
traded. Examples include stocks, bonds, real estate, bank
accounts, and jewellery.

• Asset allocation
When you divide
your money among various types of investments, such as
stocks, bonds, and short-term investments (also known as
"instruments"), you are allocating your assets. The way in
which your money is divided is called your asset

142
allocation.

• Asked or Offering Price


The price at
which a mutual fund's shares can be purchased. The
asked or offering price means the current net asset value
(NAV) per share plus sales charge, if any. For a no-load
fund, the asked price is the same as the NAV.

• Asset Allocation Fund


A fund that spreads
its portfolio among a wide variety of investments,
including domestic and foreign stocks and bonds,
government securities, gold bullion and real estate stocks.
This gives small investors far more diversification than
they could get allocating money on their own. Some of
these funds keep the proportions allocated between
different sectors relatively constant, while others alter the
mix as market conditions change.

• Automatic Investment Plan


Under these plans,
the investor mandates the mutual fund to allot fresh units
at specified intervals (monthly, quarterly, etc.) Against
which the investor provides post-dated cheques. On the
specified dates, the cheques are realized by the mutual
fund and on realization, additional units are allotted to the
investor at the prevailing NAV.

• Automatic Reinvestment
A service
offered by most mutual funds whereby income, dividends
and capital gain distributions are automatically invested
into the fund by buying additional shares and thus
building up holdings through the effects of compounding.

• Annualised Return
This is the
hypothetical rate of return, if the fund achieved it over a
year's time, would produce the same cumulative total
return if the fund performed consistently over the entire

143
period. A total return is expressed in a percentage and
tells you how much money you have earned or lost on an
investment over time, assuming that all dividends and
capital gains are reinvested.
• Average Cost Method
A method of finding
out the cost per unit by adding up all the costs involved in
purchasing all the units of investment and then dividing
the sum by the total number of units.
• Average Credit Quality
The composite
indicator of the credit quality of the scheme's portfolios. It
is an average of each debt instrument's credit rating,
weighted by the instruments relative weight in the
portfolio. For these calculations, Government of India
securities, cash and call money instruments are taken as
AAA credit quality and non-rated debt instruments are
taken as having bbb credit quality.
• Back End Load
The difference
between the NAV of the units of a scheme and the price at
which they are redeemed. The difference is charged by
the fund.
• Balance Sheet
A financial
statement showing the nature and amount of a company's
assets, liabilities and shareholders' equity.

• Balanced Fund
A mutual fund that
maintains a balanced portfolio, generally 40% bonds and
60% equity.
• Balance Maturity Tenure of a Scheme
In the
case of close-ended schemes, the balance period till the
redemption of the scheme.
• Barter
The exchange of
goods and services for other goods and services without
the use of money.

144
• Basis Point
A phrase used to
describe differences in bond yields, with one basis point
representing one-hundredth of a percentage point. Thus if
bond x yields 8.5 per cent and bond y 8.75 per cent, the
difference is 25 basis points.

• Bear Market
Period during which
investors are on a selling spree and the share prices are
going down.
• Benchmark
A parameter with
which a scheme can be compared. For example, the
performance of a scheme can be benchmarked against an
appropriate index.

• Beta
A measure of the
relative sensitivity of a stock or mutual fund to the
market. The higher the beta, the more volatile (or more
sensitive) the stock or fund is considered to be relative to
the market as a whole. The BSE Sensex is assigned a beta
of 1.
• Bid or Sell Price
The price at which a
mutual fund's shares are redeemed (bought back) by the
fund. The bid or redemption price means the current net
asset value per share, less any redemption fee or back-
end load.

• Blue Chip
A share in a large,
safe, prestigious company, of the highest class among
stock market investments. A blue-chip company would be
called thus by being well-known, having a large paid-up
capital, a good track record of dividend payments and
skilled management.

145
• Board of Directors
A committee
elected by the shareholders of a company, empowered to
act on their behalf in the management of company affairs.
Directors are normally elected each year at the annual
meeting.

• Bond
An interest-bearing
promise to pay a specified sum of money -- the principal
amount -- due on a specific date.
• Bond Funds
Registered
investment companies whose assets are invested in
diversified portfolios of bonds primarily fixed income
securities.

• Bond Rating
System of
evaluating the probability of whether a bond issuer will
default. CRISIL, ICRA, CARE and other rating agencies
analyze the financial stability of both corporate and state
government debt issuers. Ratings range from AAA
(extremely unlikely to default) to d (likely to default).
Mutual funds generally restrict their bond purchases to
issues of certain quality ratings, which are specified in
their prospectus.

• Bonus
Additional units
allotted to investors on the basis of their existing holdings.
Basically, there is a split of existing units into more than
one unit resulting in the reduction of the NAV per unit.

• Broker
One who guides the
investors on one or more investments and facilitates the
process of investment. A broker is a member of a
recognized stock exchange who buys and sells or

146
otherwise deals in securities.

• Brokerage
The fee payable to
a broker for acting as an intermediary in a transaction. For
example, brokerage is payable by a fund for getting fresh
investments from investors.
• BSE Index
An index reflecting
the stock prices of 30 companies listed on the Bombay
Stock Exchange (BSE) which is taken to be representative
of the stock market movement.
• Bull Market
Period during which
the prices of stocks in the stock market keep continuously
rising for a significant period of time on the back of
sustained demand for the stocks.
• Capital
This is the amount
of money you have invested. When your investing
objective is capital preservation, your priority is trying not
to lose any money. When your investing objective is
capital growth, your priority is trying to make your initial
investment grow in value.

• Capital Appreciation
As the value of the
securities in a portfolio increases, a fund's net asset value
(NAV) increases, meaning that the value of your
investment rises. If you sell units at a higher price than
you paid for them, you make a profit, or capital gain. If
you sell units at a lower price than you paid for them,
you'll have a capital loss.
• Capital Appreciation Fund
A mutual fund
that seeks maximum capital appreciation through the use
of investment techniques involving greater than ordinary
risk, such as borrowing money in order to provide
leverage and high portfolio turnover.

147
• Capital Gains
The difference
between an asset's purchased price and selling price,
when the difference is positive. A capital loss would be
when the difference between an asset's purchase price
and selling price is negative.

• Capital Gains Distributors


Payments
(usually annually) to mutual fund shareholders of gains
realized on the sale of portfolio securities.

• Capital Growth
A rise in market
value of a mutual fund's securities, reflected in its NAV per
share. This is a specific long-term objective of many
mutual funds. Capital loss realized when an instrument or
asset is sold at a price below its cost.

• Capital Market
The market where
capital funds, debt (Bonds) and equity (Stocks) are traded.

• Cash & Other Category


A mutual fund
asset allocation theory that includes net cash, short-term
securities, and any other securities (such as options) not
included in other asset allocation categories.

• Callable Bond
A bond which
the issuer is permitted or required to redeem before the
stated maturity date at a specified price, usually at or
above par, by giving notice of redemption in a manner
specified in the bond contract.

• CDSC
Contingent Deferred
Sales Charge (CDSC), a charge imposed when the units
are redeemed within the first four years of unit ownership.
The SEBI (Mutual Funds) Regulations, 1996, direct that a

148
CDSC may be charged only for the first four years after
purchase and mandates the maximum amount that can
be charged in each year.

• Certificate of Deposit
These are issued by
banks in denominations of Rs. 5 lakhs and have maturity
ranging from 30 days to 3 years. Banks are allowed to
issue CDs with a maturity of less than one year while
financial institutions are allowed to issue CDs with a
maturity of at least one year.

• Closed-Ended Mutual Fund


A mutual fund that
offers a limited number of shares. They are traded in the
securities markets. Price is determined by supply and
demand. Unlike open-ended mutual funds, closed-ended
funds do not redeem their shares.

• Collateral Security
This is extra
security provided by a borrower to back up his/her
intention to repay a loan.
• Common Stocks
Stocks represent a
share in the ownership of a particular company. If the
company does well, the value of each share generally
goes up. Although common stocks have a history of long-
term growth, their prices fluctuate based on changes in a
company's financial condition and on overall market and
economic conditions.

• Commercial Paper
A Commercial Paper
is a short term unsecured promissory note issued by the
raiser of debt to the investor. In India Corporates, Primary
Dealers (PD), Satellite Dealers (SD) and Financial
Institutions (FIs) can issue these notes.
It is generally companies
with very good ratings which are active in the CP market,

149
though RBI permits a minimum credit rating of Crisil-P2.
The tenure of CPs can be anything between 15 days to
one year, though the most popular duration is 90 days.
Companies use CPs to save interest costs.

• Commission
The broker's or
agent's fee for buying or selling securities for a client. The
fee is usually based on a percentage of the transaction's
market value.
• Compliance Officer
Officer
appointed by the AMC to comply with regulatory
requirement and to redress investor grievances.

• Compounding
When you
deposit money in a bank, it earns interest. When that
interest also begins to earn interest, the result is
compound interest. Compounding occurs if bond income
or dividends from stocks or mutual funds are reinvested.
Because of compounding, money has the potential to
grow much faster.
• Consideration
The
'consideration' is the total purchase or sale amount
associated with a transaction. The amount you 'pay' or
'receive'. It may also be the basis for working out the
commission, taxes and any other charges you are asked
to pay.
• Continuous Offer
Offer of the units
when the scheme becomes open ended, after closure of
the initial offer. The scheme became open ended on
January 1, 1998
• Convertible Bond
A corporate bond,
usually a junior subordinated debenture, which can be
exchanged for shares of the issuer's common stock.

150
• Convexity
A mathematical
concept that measures the sensitivity of the market price
of interest- bearing bonds to changes in interest rate
levels. See also duration.

• Corpus
The total amount of
money invested by all the investors in a scheme.

• Correlation Measures
Measures that show
the validity of a comparison to a benchmark index based
on the historical relationship between portfolio returns
and index returns. See r"2". See also volatility measures.

• Cost of Churning/Turnover Cost


The portfolio of
a scheme changes from time to time. The rate of change
depends on the style of the fund manager. Such portfolio
changes have associated costs of brokerage, custody
fees, transaction fees and registration fees, which lower
the returns. These costs comprise the cost of churning.

• Coupon
The term is used
colloquially to refer to a security's interest rate.

• Coupon Rate
The annual rate of
interest payable on a debt security expressed as a
percentage of the principal amount.
• Currency Fluctuation
Changes in the
value of a currency in relationship to other major
currencies. Currency fluctuations can have a significant
effect on the value of international mutual funds.

• Currency Risk
The risk that
shifts in foreign exchange rates may undermine the dollar

151
or any other foreign currency value of overseas
investments.

• Current Income
Monies paid during
the period an investment is held. Examples include bond
interest and stock dividends.
• Current Load
Load structure
applicable currently. Funds keep revising the load
structures from time to time.

• Current Market Value


The amount a
willing buyer will pay for a bond today, which may be at a
premium (above face value) or a discount (below face
value).
• Current yield
The ratio of interest
to the actual market price of the bond stated as a
percentage:
Annual Interest
Current Yield = Current Market
Value

• Custodian
The bank or trust
company that maintains a mutual fund's assets, including
its portfolio of securities or some record of them. Provides
safekeeping of securities but has no role in portfolio
management. For reliance capital asset management,
deutsche bank ac, Mumbai, is custodian to the schemes,
or any other custodian who is appointed by the trustee.

• Cut Off Time


In respect of all
mutual funds regulated by SEBI, fresh subscriptions and
redemptions are processed at a particular NAV. Every
fund specifies a cut-off time in respect of fresh
subscriptions and redemption of units. All requests

152
received before the cut-off times are processed at that
day's NAV and thereafter at the next day's NAV.

• Date of Redemption
The date
specified for the redemption of a scheme. No such date is
specified for an open-ended scheme.
• Debt /Income Funds
Funds that
invest in income bearing instruments such as corporate
debentures, PSU bonds, gilts, treasury bills, certificates of
deposit and commercial papers. Although these funds are
less volatile, the underlying investments carry a credit
risk. Comparatively, these funds are the least risky and
are preferred by risk-averse investors.

• Deficit
The shortfall
between government revenues and budgetary spending in
any given year. A surplus occurs when annual revenues
exceed expenditures.

• Derivative
A derivative is an
instrument whose value is derived from the value of one
or more underlying security, which can be commodities,
precious metals, currency, bonds, stocks, stocks indices,
etc. Four most common examples of derivative
instruments are Forwards, Futures, Options and Swaps.

• Designated Investor Service Centres


Any
location, as may be defined by the asset management
company from time to time, where investors can tender
the request for subscription, redemption, switching of
units, or any other request.

• Depository
Depository as

153
defined in the depositories act, 1996 (22 of 1996).

• Diversification
Diversification
is the concept of spreading your money across different
types of investments and/or issuers to potentially
moderate your investment risk.

• Dividend
Income distributed by
the scheme on the units.

• Dividend Distribution Tax


A tax payable
by a debt oriented mutual fund (a mutual fund that
invests more than 50% of its portfolio in the debt market)
before dividend is distributed to the unit holders. The
current dividend distribution tax is 20% plus the 10%
surcharge
• Dividend Frequency
The periodicity
of dividend payout of a scheme. This is especially valid in
the case of an income/debt scheme.
• Dividend History
The track record of
dividends declared by a fund till date.

• Dividend Per Unit


Total amount of
dividend declared by a fund for a scheme divided by total
number of units issued to all the investors.

• Dividend Period
The period for
which the dividend is declared.

• Dividend Plan
In a dividend
plan, the fund pays dividend from time to time as and
when the dividend is declared.

154
• Dividend Reinvestment
In a dividend
reinvestment plan, the dividend is reinvested in the
scheme itself. Hence instead of receiving dividend, the
unit holders receive units. Thus the number of units
allotted under the dividend reinvestment plan would be
the dividend declared divided by the ex-dividend NAV.

• Dividend Warrant
An instrument
issued by companies/ mutual funds to an investor for the
purpose of payment of dividends
• Dividend Yield
The dividend
earned per unit of a scheme at the prevailing per unit
price.
• Duration
Duration estimates how
much a bond's price fluctuates with changes in
comparable interest rates. If rates rise 1.00%, for
example, a fund with a 5-year duration is likely to lose
about 5.00% of its value. Other factors also can influence
a bond fund's performance and share price. A bond fund's
actual performance may differ.

• Endorsement
Assigning or
transferring a lien to another person is accomplished
through the use of an endorsement. The words "pay to the
order of" and then the name of the person to whom the
lien is being assigned to, is written. If there is not enough
space on the original note to write an endorsement, it is
written on a separate piece of paper that is permanently
affixed to the original note. This is called an allonge.

• Entry Load
Load on purchases/
switch-out of units.

155
• Equity Schemes
Schemes where
more than 50% of the investments are done in equity
shares of various companies. The objective is to provide
capital appreciation over a period of time.

• Exchange Priviledge
The right to
transfer investments from one fund into another,
generally within the same fund group, at nominal cost.

• Exchange Rate
The price at
which one currency trades for another.

• Ex-dividend Rate
The day that a
fund's board of directors declares the amount of income
or capital gain to be distributed to shareholders and
deducts that amount from the fund's net asset value.

• Expense Ratio
Annual
percentage of fund's assets that is paid out in expenses.
Expenses include management fees and all the fees
associated with the fund's daily operations.

• Exit Load
Load on
redemptions dividend switch-out of units.

• Face Value
The face value is
the term used to describe the value of a bond in terms of
what the company which issued the bond will actually
repay when the loan matures. It's sometimes described as
nominal or par value.

• FII
Foreign Institutional

156
Investors, registered with SEBI under the securities and
exchange board of India (foreign institutional investors)
regulations, 1995.

• Fiscal Year
An accounting
period consisting of 12 consecutive months. Fund a
mutual fund is a trust under the Indian trust act. Each
fund manages one or more schemes.

• Fund Category
Classification of a
scheme depending on the type of assets in which the
mutual fund company invests the corpus. It could be a
growth, debt, balanced, gilt or liquid scheme

• Fund Family
All the schemes,
which are managed by one mutual fund.

• Fund Management Costs


The charge
levied by an AMC on a mutual fund for managing their
funds.

• Fund Manager
The person
who makes all the final decisions regarding investments of
a scheme.
• Gilt Funds
Funds, which invest
only in government securities of different maturities. With
virtually no default risk, they are very secure. While
returns are steady and secure, they are lower than those
from other debt funds.
Like T-bills, gilts are issued by
RBI on behalf of the Government. These instruments form
a part of the borrowing program approved by Parliament
in the Finance Bill each year (Union Budget). Typically,
they have a maturity ranging from 1 year to 20 years.

157
Like T-Bills, Gilts are issued
through the auction route but RBI can sell/buy securities
in its Open Market Operations (OMO). OMOs include
conducting repos as well and are used by RBI to
manipulate short-term liquidity and thereby the interest
rates to desired levels.

• Global Depository Receipt


Similar to the
ADR described above, except the GDR is usually listed on
exchanges outside the U.S., such as Luxembourg or
London. Dividends are usually paid in U.S. dollars. The first
GDR was issued in 1990.

They are shares without voting rights. The ratio of one


depository receipt to the number of shares is fixed per
scrip but the quoted prices may not have strict correlation
with the ratio. Any foreigner may purchase these
securities whereas shares in India can be purchased on
Indian Stock Exchanges only by NRIs or PIOs or FIIs. The
purchaser has a theoretical right to exchange the receipt
without voting rights for the shares with voting rights (RBI
permission required) but in practice, no one appears to be
interested in exercising this right.

• Growth
Fund's growth funds
are designed to pursue capital appreciation over the long-
term. Some growth funds are broad-based, meaning that
they have a wide range of stocks and industries in which
they can invest. Others have a narrower focus - for
example, they may invest in a particular type of stock,
such as small-cap or cyclical stocks, or use a specialized
approach to stock selection, such as investing only in
stocks that are currently underpriced. Growth funds are
more volatile than more conservative income or money
market funds and generally reflect changes in market

158
conditions and other company, political, and economic
news.
• Growth Fund
A mutual fund
whose primary investment objective is long-term growth
of capital. It invests principally in common stocks with
significant growth potential. Growth stocks of companies
that have shown or are expected to show rapid earnings
and revenue growth. Growth stocks have relatively more
risk than other conventional forms of investment.

• Income Fund
A mutual fund that
primarily seeks current income rather than growth of
capital. It will tend to invest in stocks and bonds that
normally pay high dividends and interest.
• Index Fund
A passively
managed, limited-expense (advisor fee no higher than
0.50%) fund designed to replicate the performance of an
unmanaged stock index on a reinvested basis.

• Inflation
When the price of
goods and services rises, the result is called inflation. This
means that things you buy today at one price are likely to
cost more in the future.

• Inflation Risk
The chance that the
value of assets or income will be diminished as inflation
shrinks the value of a currency.
• Initial Offer/Initial Issue
Offer of
reliance income fund units during the initial offer period.

• Initial Offer Price


The price at which
units of a scheme are offered in its Initial Public Offer
(IPO).

159
• Initial Offer Period
The dates on
or the period during which the initial subscription to units
of the scheme can be made i.e. December 20, 1997 to
December 27, 1997 in the case of reliance income fund.

• Institutional Investor
An institutional
investor is a professional money manager whose job it is
to put money into shares and other assets on behalf of
private investors who entrust them with money via their
pension and life insurance funds.

• Interest
The amount paid by
a borrower as compensation for the use of borrowed
money. This amount is generally expressed as an annual
percentage of the principal amount.

• Interest Rate
The annual rate,
expressed as a percentage of principal, payable for use of
borrowed money.
• International Funds / Emerging Market Funds
Funds
investing in assets or bonds/shares of companies from
emerging economies. These are not permissible in India
due to regulations against investing abroad. Most of the
schemes of Foreign Institutional Investors (FII's) investing
in India are funds of this type.

• In the Money Securities


An option
contract on a stock whose current market price is above
the striking price of a call option or below the striking
price of a put option. For example, a call option on ABC
fund at a striking price of 100 would be "in the money" if
ABC fund were selling at 10"2", and a put option with the
same striking price would be "in the money" if ABC were
selling at 98.

160
• Investment Grade or Investment Grade Bond
The broad
credit designation given to corporate and municipal bonds
which have a high probability of being paid and minor, if
any, speculative features. Bonds rated BAA and higher by
Moody’s investor’s service or BBB and higher by Standard
& Poor's are deemed by those agencies to be "Investment
Grade."
• Investment Management Agreement (IMA)
The
agreement entered into between reliance capital trustee
co. Limited and reliance capital asset management limited
by which reliance capital asset management ltd. Has been
appointed the investment manager for managing the
funds raised by RCMF under the various schemes, and all
amendments thereof.
• Investment Objective
The identification of
attributes associated with an investment or investment
strategy, designed to isolate and compare risks, define
acceptable levels of risk, and match investments with
personal goals.

• Issue Date
The date on which a
security is deemed to be issued or originated.

• Issuer
A state, political
subdivision, agency or authority that borrows money
through the sale of bonds or notes.
• Issued Share Capital
This is the
total number of shares a company has made publicly
available multiplied by the total nominal value of the
shares. A company may have 10 million shares in issue,
each with a nominal value of Rs. 1. So the issued share
capital is Rs. 10 million.

161
• Junk Bond
A speculative bond
with higher credit risk.

• Launch Date
The date on which a
scheme is first made open to the public for subscription.

• Lessee
The person who
makes lease payments. He has right of possession and
use of a property under the terms of a lease.

• Lessor
The person who
receives lease payments. He leases property.

• LIBOR
Libor stands for
London Inter Bank Offer Rate. It's the rate of interest at
which banks offer to lend money to one another in the so-
called wholesale money markets in the city of London.
Money can be borrowed overnight or for a period of in
excess of five years. The most often quoted rate is for
three month money. '3 month libor tends to be used as a
yardstick for lenders involved in high value transactions.
They tend to quote rates as libor. So if 3 month libor were
(say) six per cent, a bank may choose to lend to another
bank at (say) 6 and a quarter per cent. E.g. A quarter per
cent above 3 month libor.

• Lien
A type of security
instrument (i.e., a tax lien), placed against property,
making it security for the payment of a debt, judgment,
mortgage, or taxes. If the lien is not paid, the lien holder
has the right to confiscate the property in order to recover
the money that was loaned.

• Liquidity
The ability to buy or sell

162
an asset quickly or the ability to convert to cash quickly

• Liquid Funds/Money Market Funds


Funds
investing only in short-term money market instruments
including treasury bills, commercial paper and certificates
of deposit. The objective is to provide liquidity and
preserve the capital.

• Load
A charge that may
be levied as a percentage of NAV at the time of entry into
the scheme/plans or at the time of exiting from the
scheme/plans.

• Local Cheque
A cheque handled
locally and drawn on any bank, which is a member of the
banker's clearing house located at the place where the
application form is submitted.

• Lock in Period
The period
after investment in fresh units during which the investor
cannot redeem the units.
• Management Fee
Money paid by a
mutual fund to its investment manager or advisor for
overseeing the portfolio. A management fee is usually
between one-half and one percent of the fund's net asset
value.
• Margin Trading
Securities can be
paid for in cash or a mix of cash and some borrowed
funds. Buying with borrowed funds permits the investors
to buy a security at a good price at a good time. This act
of borrowing money from a bank or a broker to execute a
securities transaction is referred to as using "margin". As
of now in India, only brokers are allowed to provide the
margins. Traders can put up part of the payment. Brokers

163
borrow the remaining funds from a moneylender with
whom they would lodge the shares as collateral for the
loan. The safety of this mechanism rests on the risk
management capabilities of both the stockbroker and the
lender.
However, recently SEBI has proposed to RBI that
banks could lend to exchanges on margin trading and the
exchanges could provide assistance to brokers. When this
happens, the volumes should increase in the markets
making them more vibrant.
• Market
A public place
where the buying and selling of all types of bonds, stocks
and other securities takes place. A stock exchange is a
market.

• Market Price
The price at which
the units of a scheme are quoted on a stock exchange.

• Market Risk
The risk that the
price of a security will rise or fall due to changing
economic, political, or market conditions, or due to a
company's individual situation.

• Marketability
The ease or
difficulty with which securities can be sold in the market.

• Maturity or Maturity Date


The date upon
which the principal of a security becomes due and payable
to the security holder.
• Maturity Value
The amount (other
than periodic interest payment) that will be received at
the time a security is redeemed at its maturity. On most
securities the maturity value equals the par value.

164
• MIBOR
Stands for Mumbai
Inter Bank Offered Rate and is closely modeled on the
LIBOR. Currently there are two calculating agents for the
benchmark - Reuters and the National Stock Exchange
(NSE). The NSE MIBOR benchmark is the more popular of
the two and is based on rates polled by NSE from a
representative panel of 31 banks/institutions/primary
dealers
• Minimum Additional Investment
The
minimum amount, which an existing investor should
invest for purchasing fresh units.

• Minimum Balance
Minimum amount
specified by a fund that should remain invested in a
scheme after any redemption.
• Minimum Subscription
The minimum
amount required to be invested to purchase units of a
scheme of a mutual fund.

• Minimum Withdrawal
The smallest sum
that an investor can withdraw (get redeemed) from the
fund at one time.
• Money Market Fund
A mutual fund
that aims to pay money market interest rates. This is
accomplished by investing in safe, highly liquid securities,
including certificates of deposit, commercial paper, and
government securities. Money funds make these high
interest securities available to the average investor
seeking immediate income and high investment safety.

• Money Market Instruments


Commercial Paper,
Treasury Bills, GOI securities with an unexpired maturity
up to one year, call money, certificates of deposit and any

165
other instrument specified by the reserve bank of India.

• Mortgage
A legal instrument
given by a borrower to the lender entitling the lender to
take over pledged property if conditions of the loan are
not met.
• Moving Averages
The average price
of a mutual fund calculated periodically over some
designated period of time and plotted on a chart against
actual price. The effect of a moving average is to minimize
short-term price fluctuations and highlight long-term price
fluctuations.

• Mutual Fund
An investment that
pools shareholders money and invests it toward a
specified goal. The funds are invested by a professional
investment manager usually called the AMC (Asset
Management Company).

• Mutual Fund Regulations


Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996
as amended up to date and such other regulations, as
may be in force from time to time, to regulate the
activities of the mutual fund.

• No-load Scheme
A scheme where
there is no initial entry or exit load.

• NAV
Net Asset Value of
the units in each plan of the scheme is calculated in the
manner provided in this offer document or as may be
prescribed by regulations from time to time. The NAV will
be computed upto four decimal places. NAV formula :

166
Market/Fair Value of Scheme's Investments (+)
Receivables (+) Accrued Income (+) Other Assets (-)
Accrued Expenses (-) Payables (-) Other Liabilities
Number of Units Outstanding

• NAV Change
The difference
between today's closing net asset value (NAV) and the
previous day's closing net asset value (NAV).

• NAV Change %
The percentage
change between today's closing net asset value (NAV) and
the previous day's closing net asset value (NAV).

• Net Worth
A person's net
worth is equal to the total value of all possessions, such as
a house, stocks, bonds, and other securities, minus all
outstanding debts, such as mortgage and revolving credit
lines.

• Net Yield
Rate of return on a
security net of out-of-pocket costs associated with its
purchase, such as commissions or markups.

• Non Performing Investments


Part of the
portfolio investment of a debt fund which is not making
interest payment or principal amount repayments in time.

• Nifty
An index of prices of
a group of fifty stocks listed on the NSE.

• NRI
Non-Resident Indian

167
• OCB
Overseas Corporate
Bodies, firms and societies which are held directly or
indirectly, but ultimately, to the extent of at least 60% by
NRIs and trusts in which at least 60% of the beneficial
interest is held irrevocably by NRIs.

• Offer Document or Prospectus


The official
document issued by mutual funds prior to the launch of a
fund describing the characteristics of the proposed fund to
all its prospective investors. It contains information
required by the Securities and Exchange Board of India,
such as investment objective and policies, services, and
fees. Individual investors are encouraged to read and
understand the fund's prospectus.
• Offering Period
The period during
which the initial offer to subscribe for the units of a
scheme is open.
• Offer Price
The lowest price
that a seller is willing to accept from a prospective buyer.
In the case of a mutual fund with a sales charge, this price
is the net asset value (NAV) plus the sales charge. In the
case of no-load funds, it is the NAV.

• Offering Date
The date on which a
distribution of stocks or bonds will first be available to the
public.

• Open-Ended Schemes/ Funds


A fund whose
units are redeemable at any time at asset value, except
for funds that no longer accept new unitholder, new units
are offered continuously.

• Opening NAV
The NAV disclosed

168
by the fund for the first time after the closure of an IPO.

• Option
A device used to
speculate or hedge in securities markets. Buying a "call"
option gives an investor the right to buy 100 shares of a
stock at a certain price within a specified time; buying a
"put" option allows an investor to sell a stock under the
same conditions.

• Opportunity Risk
The risk that a
better opportunity may present itself after you have
already committed your money elsewhere.

• Plans
The scheme offers
five plans, growth plan and four dividend plans viz.
Monthly, quarterly, half yearly and annual dividend plans.

• PIO
Person of Indian Origin.

• Portfolio
The list of securities
owned by the Mutual Fund. This list may be long, for
example, Fidelity Magellan, with over 2000 stocks, or
relatively short, for example, Sequoia, with only 16 stocks.

• Portfolio Churning
Switches
between different stocks in the market, keeping in view
the market conditions, in order to give unit holders a
better yield.

• Premium
The amount by which a

169
bond/ or a stock (in case of a IPO) sells above its par (face)
value.

• Price of Units
Price offered by a
mutual fund for repurchase or sale of a unit on a daily
basis. Price/earnings ratio this is the price of a stock
divided by its earnings per share. This ratio gives an
investor an idea of how much they are paying for a
particular company's earning power. A trailing P/E refers
to a ratio that is based on earnings from the latest year,
while a forward P/E uses an analyst's forecast of next
year's earnings. For instance, a stock selling for Rs. 20 a
share that earned re. 1 last year has a trailing P/E of 20. If
the same stock has projected earnings of Rs. 2 next year,
then it has a forward P/E of 10.

• Price Stability
Price stability
protects the original amount you put into an investment. A
mutual fund's price stability is seen in changes in its net
asset value over time.

• Primary Market (New Issue Market)


The market on
which newly issued securities are sold, including
government security auctions and underwriting purchases
of blocks of new issues, which are then resold.

• Prospectus
An official
document that each investment company must publish,
describing the mutual fund and offering its shares for sale.
It contains information that has been mandatory required
by SEBI.

• Purchase Price
Purchase price
to the investor of units of any of the plans computed in
the manner indicated in this offer document.

170
• Rate of Return
The total
proceeds derived from the investment per rupee initially
invested. Proceeds must be defined broadly to include
both cash distributions and capital gains. The rate of
return is expressed as a percentage.

• Ratings
Designations given
by credit rating agencies indicating relative credit quality
as compared to other funds.

• Record Date
The date the fund
determines who its unit holders are; "unit holders of
record" who will receive the fund's income dividend and/or
net capital gains distribution.

• Recurring Sales Expenses


The Asset
Management Company may charge the fund a fee for
operating its schemes, like trustee fee, custodian fee,
registrar fee, transfer fee etc. This fee is called recurring
expense and is expressed as a percentage of the
scheme's average net assets. The recurring expenses are
subject to certain limits as per the regulations of SEBI.

Weekly Average Net Assets Equity Debt


(Rs.) Schemes Schemes
First 100 Crores 2.50% 2.25%
Next 300 Crores 2.25% 2.00%
Next 300 Crores 2.00% 1.75%
Balance Assets 1.75% 1.50%

• Redemption
The paying off or
buying back of units of a mutual fund / bond by the issuer.

• Redemption Fee
A fee charged by a

171
limited number of funds for redeeming, or buying back,
fund units.

• Redemption Price
The price at which a
mutual fund's units are redeemed (bought back) by the
fund. The redemption price is usually equal to the current
NAV per unit.

• Refund
The act of returning
money to an investor by the fund. This could be on
account of rejection of an application to subscribe units or
in response to an application made by the investor to the
fund to redeem units held by him.

• Registrar
Who have been
appointed as the registrar; or any other registrar who is
appointed by Asset Management Company.

• Reinvestment Date
The date on
which a share's dividend and/or capital gains will be
reinvested (if requested) in additional fund shares.

• Reinvestment Privilege
A service that
most mutual funds offer whereby a shareholder's income
dividends and capital gains distributions are automatically
reinvested in additional shares. See automatic
reinvestment.

• Relative Volatility
A ratio of a
portfolio's standard deviation to the standard deviation of
a benchmark index. See volatility measures.

• Repatriation Conversion of Foreign Currency to


an Investor's Base Currency
With

172
Rupee – Cost – Averaging, you invest a fixed amount on a
regular basis - regardless of the current market trends.
The investor buys more shares when the price is low and
fewer shares when the price is high; the overall cost is
lower than it would be if a constant number of shares
were bought at set intervals. Rupee-cost-averaging does
not assure a profit or protect against a loss in a declining
market. You must continue to purchase shares both in
market ups and downs. The goal of rupee-cost-averaging
is to attain a lower average cost per share.

• REPO
Sale of securities
with simultaneous agreement to repurchase them at a
later date.

• Repurchase
Buying back/
cancellation of the units by a fund on an ongoing basis or
for a specified period or on maturity of a scheme. The
investor is paid a consideration linked to the NAV of the
scheme.

• Repurchase Date/Period
In the case of
close-ended schemes, the specified date on which or
period during which the investor can redeem units held by
him in the scheme before the maturity of the scheme.

• Repurchase Price
The price of a unit
(net of exit load) that the fund offers the investor to
redeem his investment.

• Returns
The dividend and
capital appreciation accruing to the investor on the
investment held by him.

• Reverse REPO
Purchase of

173
securities with simultaneous agreement to sell them at a
later date.

• Risk Adjusted Returns


Generally, the
expected returns from an investment are dependent on
the risk involved in the investment. For the purpose of
comparing returns from investments involving varying
levels of risk, the returns are adjusted for the level of risk
before comparison. Such returns (reduced for the level of
risk involved) are called Risk - Adjusted Returns.

• SAPs
Special purpose
vehicles approved by the appropriate authority or the
government of India.

• Sale Price
The price at which a
fund offers to sell one unit of its scheme to investors. This
NAV is grossed up with the entry load applicable, if any.

• Sales Charge
Fee on the purchase
of new shares of a mutual fund. A sales charge is similar
to paying a premium for a security in that the customer
must pay a higher offering price. Sometimes called a load.

• Scheme
A mutual fund can
launch more than one scheme. With different schemes, in
spite of there being a common trust, the assets
contributed by the unit holders of a particular scheme are
maintained and managed separately from other schemes
and any profit/loss from the assets accrue only to the unit
holders of that scheme

• SEBI
The Securities and

174
Exchange Board of India.

• SEBI Regulations
Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996
or such other SEBI (MF) Regulations as may be in force
from time to time and would include circulars, guidelines
etc., unless specifically mentioned to the contrary.

• Secondary Market
The market where
the securities are traded i.e. purchased or sold after they
have been initially offered to the public through a public
offer in the primary market.

• Sector Allocation
That portion of a
fund which invests in narrowly defined segments of the
economy, i.e. Utilities, healthcare services,
telecommunications, etc.

• Sector Funds
Sector Funds invest
in the stocks of one specific sector of the economy, such
as health care, chemicals, or information technology.

• Security
Generally, an
instrument evidencing debt of or equity in a common
enterprise in which a person invests on the expectation of
financial gain. The term includes notes, stocks, bonds,
debentures or other forms of negotiable and non-
negotiable evidences of indebtedness or ownership.

• Share Price
The value of one
share in a listed company fund. With most funds, the NAV
is calculated every day, because the value of a fund's
securities changes every day in response to the
movements of the stock, bond and money markets. For

175
some funds, share price is calculated on an hourly basis.

• Share Holder
The owner of one or
more shares of stock in a corporation. Shareholder rights
can vary according to the articles of incorporation of the
by-laws of a particular company.

• Sharpe Ratio
The Sharpe Ratio
measures the risk-adjusted return of a fund. Simply put,
the ratio measures the variability of ' excess returns'
(defined by returns of the fund over the 'risk less' 91 day
t-bill). Mathematically, the formula takes a fund's return in
excess of a risk-free investment and divides this by the
standard deviation of the returns. The higher the Sharpe
Ratio, the better the fund.

• Spread
The difference
between the rates at which money is deposited in a
financial institution and the higher rates at which the
money is lent out. Also, the difference between the bid
and ask price for a security.

• Subsidy
A financial
contribution by government (including any form of income
or price support) that also confers a benefit to the
recipient (i.e., producers of goods or services or buyers of
goods). Many types of government practices constitute a
financial contribution, including traditional forms of
subsidies such as grants and loans, as well as foregone
revenues such as tax credits.
• Switch
Switching provides
investors with an option to transfer the funds amongst
different types of schemes or plans.
Investors can opt to switch units between

176
Dividend Plan and Growth Plan at NAV based prices.
Switching is also allowed into/from other select open-
ended schemes currently within the Fund family or
schemes that may be launched in the future at NAV based
prices.
While switching between Debt and
Equity Schemes, one has to take care of exit and entry
loads. Switching from a Debt Scheme to Equity scheme
involves an entry load while the vice versa does not
involve an entry load.

• Systematic Investment Plan (SIP)


Many mutual
funds offer investment programs whereby unit holders can
invest. The unit holders of the scheme can benefit by
investing specific rupee amounts periodically, for a
continuous period. The sip allows the investors to invest a
fixed amount of rupees every month or quarter for
purchasing additional units of the scheme at NAV based
prices.

• Systematic Withdrawal Plans


Many mutual
funds offer withdrawal programs whereby unit holders
receive payments from their investments. These
payments are usually drawn from the fund's dividend
income and capital gain distributions, if any, and from
principal only when necessary.

• Systematic Transfer Program (STP)


A plan that
allows the investor to give a mandate to the fund to
periodically and systematically transfer a certain amount
from one scheme to another.

• Standard Deviation
A statistical
measurement of the dispersion of a fund's return over a
specified time period. Investors may examine historical
standard deviation in conjunction with historical returns to

177
decide whether a fund's volatility would have been
acceptable given the returns it would have produced. A
higher standard deviation indicates a wider dispersion of
past returns and thus greater historical volatility. Standard
deviation does not indicate the absolute performance, but
merely indicates the volatility of its returns over time.

• Takeover
A change in the
controlling interest of a corporation. A takeover may be a
friendly acquisition or a hostile bid. A hostile takeover is
usually attempted through a public tender offer.

• Taxable Equivalent Yield


The interest
rate return which must be received on a taxable security
to provide the holder the same after-tax return as that
earned on a tax-exempt security.

• Term
The time during
which interest payments will be made on a bond or
certificate of deposit.

• Total Return
Return on an
investment, taking into account capital appreciation,
dividends or interest, and individual tax considerations
adjusted for present value and expressed on an annual
basis.

• Trade Date
The actual date on
which your shares were purchased or sold. The
transaction price is determined by the closing net asset
value on that date.

• Transaction Cutoff Timings


Currently 2 p.m. on
all working days.

178
• Transaction Day
A transaction day
( day 'T' commences after the previous working day's cut
off time to the following working day's cut off time.
Presently 'T' day commences after 2 p.m. of the previous
working day and ends at Z p.m. of the following working
day.

• Transaction Slip
A brief form to be
filled at the time of additional purchases or redemption.

• Treasury Bills
Treasury Bills
are instruments issued by RBI at a discount to the face
value and form an integral part of the money market. In
India Treasury Bills are issued in four different maturities -
14 days, 90 days, 182 days and 364 days.
Apart from the above
money market instruments, certain other short-term
instruments are also in vogue with investors. These
include short-term corporate debentures, bills of
exchange and promissory notes.

• Trustee
A person or a group
of persons having an overall supervisory authority over
the fund managers. They ensure that the managers keep
to the trust deed that the unit prices are calculated
correctly and the assets of the funds are held safely.

• Trust Deed
The trust deed
entered into on April 24, 1995 between the sponsor and
the trustee, and any amendment thereof.

• Trust Fund
The corpus of the
trust, unit capital and all property belonging to and i or

179
vested in the trustee.

• Turnover
The extent to which the
fund's portfolio is turned over during the course of a year.
High turnover results in greater investment expenses and
therefore in an erosion of the value of share assets.

• Turnover Rate
A measure of
the fund's trading activity calculated by dividing total
purchases or sales of portfolio securities (whichever is
lower) by the fund's net assets over a period of time.

• Underwriter
The organisation
that acts as the distributor of an initial offer share to
broker/dealers and investors and undertakes to subscribe
to any under-subscription of the offer.

• Unit
The interest of the
investors in any of the plans of the scheme which consists
of each unit representing a share in the assets of the
corresponding plan of the scheme.

• Unit holder
A person who holds
unit(s) under any plan of the scheme.

• Unit holder of Record


Unit holders whose
names appear on the unit holders register of the
concerned plan/ (s) on the date of determination of
dividend, subject to realisation of the proceeds towards
subscription

• Valuation
Calculation of the
market value of the assets of a mutual fund scheme at

180
any point of time.

• Value Date
The date on which a
foreign exchange transaction or a cash movement takes
place. Can be used interchangeably with settlement date.

• Value Stocks
Stocks that are
considered to be undervalued based upon such ratios as
price-to-book or price-to-earnings (P/E). These stocks
generally have lower price-to-book and price-earnings
ratios, higher dividend yields and lower forecasted growth
rates than growth stocks.

• Vertical Integration
This is where a
company merges or takes over other companies in the
same supply chain. If a shoe manufacturer, takes over his
supplier it would be vertical integration.

• Volatility
In investing, volatility
refers to the ups and downs of the price of an investment.
The greater the ups and downs, the more volatile the
investment.

• Voluntary Plan
A flexible plan for
capital accumulation, involving no specified time frame or
total sum to be invested.

• Volatility Measures
Volatility
measures the variability of historical returns. Relative
Volatility, beta, and R"2" compare a portfolio's total return
to those of a relevant market, represented by the
benchmark index. Standard Deviation is calculated
independent of an index.

181
• Working Day
Any day, provided
such day is not a Saturday or a Sunday any day on which
banks in Mumbai and / or the Stock Exchange, Mumbai
and National Stock Exchange are closed for transactions
or a day on which sale and repurchase of units is
suspended by the AMC or a day on which normal business
could not be transacted due to storms, floods, bandhs,
strikes etc., subject to modifications by AMC from time to
time.

• 52 Week High
The highest
market value of a unit (in terms of NAV) during the
immediately preceding 52 weeks.

• Week Low
The lowest value of
a unit (in terms of NAV) during the immediately preceding
52 weeks
• Yield
The percentage of
return an investor receives based on the amount invested
or on the current market value of holdings.

• Yield Curve
The relationship at
a given point in time between yields on a group of fixed-
income securities with varying maturities -- commonly,
treasury bills, notes, and bonds. The curve typically slopes
upward since longer maturities normally have higher
yields, although it can be flat or even inverted.

• Yield to Maturity
Used to determine
the rate of return an investor will receive if a long-term,
interest-bearing investment, such as a bond is held to its
maturity date. It takes into account purchase price,
redemption value, time to maturity, coupon yield and the
time between interest payments.

182
• Zero-Coupon Bond
A bond where
no periodic interest payments are made. The investor
purchases the bond at a discounted price and receives
one payment at maturity. The maturity value an investor
receives is equal to the principal invested plus interest
earned compounded semiannually at the original rate to
maturity. Interest income from zero-coupon bonds is
subject to taxes annually even though no payments will
be made. 'Points above

GENERAL FACTS REGARDING MUTUAL FUND


INDUSTRY
• The size of Mutual Fund Industry in terms of money is Rs. 1,75,898
Crores whereas the size of Bombay Stock Exchange (BSE) in terms of
money is about Rs. 20 lakh thousand Crores as on 31/07/2005.
• The size of Mutual Fund Industry of Rajasthan in terms of money is
Rs. 1,100 crores approximately.
• The largest city of Rajasthan in terms of investment in Mutual Fund is
Jaipur which has the corpus of Rs. 850 crores approximately.
• The largest investor of Mutual Fund from Rajasthan is Hindustan Zinc
which has the portfolio of Rs. 1,100 crores i.e. equivalent of whole
Rajasthan investment but it invests through its Head Office which is
situated in Mumbai.
• The relationship of Stock Indices (i.e. Sensex, Nifty, Nifty Junior etc.)
and Mutual Funds is such that if Stock Indices rise/fall, the NAVs will
also rise/fall but in lesser proportion.
• The largest Asset Management Company (AMC) in terms of corpus is
Unit Trust of India (UTI) amounting to Rs. 30,000 crores.
• The top Asset Management Companies (AMC) in terms of
performance is Franklin Templeton Investment in diversified equity
funds and Standard Chartered Mutual Fund in debt funds.

183
• The largest Mutual Funds in terms of corpus are Franklin India Flexi
Cap Fund in diversified equity funds and Prudential Cash Fund in debt
funds.
• The top Mutual Funds in terms of performance are shown in the
following diagram:
Top Mutual Fund

Diversified Equity Fund Monthly Income Plan


(MIP)
Reliance Growth Fund
(since last I Year) HDFC Monthly Income
Plan - Long Term Plan
Franklin India Blue chip
Fund (since last 13 Years) Franklin Templeton
Monthly Income Plan

CONCLUSION
The report enlightened many facts, which were not known before. It
also enlightened, where the Mutual Funds are lagging behind.
The investors are of a mixed breed, some of them are risk averse and
some are risk taking. The investors who are risk taking have adequate
knowledge of mutual funds, but those who are risk averse either lacks
knowledge or they have some misconception regarding the concept of
mutual funds. The main problem was that there were more myths and fewer
facts known to the investors. Like some of them were only aware of the
equity oriented schemes offered by the companies and not about the Debt
oriented schemes; so the perception that was in their mind was that mutual
fund investment is a very risky game as it involves stock market. To some
extent it is true that investment in mutual fund involves risk but not in all
types of schemes that today’s fund houses offer.
The schemes that mutual fund companies are offering are so
diversified that it suits the investment criteria of every investor. Let the
investor be risk averse or risk taking or a combination of both there are
schemes for everyone.
There are a potentially large number of investors but they lack
knowledge regarding the benefits of investing in a mutual fund. Every type
of investment in this world involves risk, some has high risk and some has

184
low risk. Mutual Fund investments have both types of plans (schemes);
higher the risk – higher is the returns and lower the risk-comparatively lower
is the return. There are advantages and disadvantages in all kinds of
investments.
In the end let me finish by saying that during the training the market
crossed the magical figure of 7,800 (BSE Sensex) for the first time but the
Mutual Funds Scheme will definitely give returns in long term investment.
The experience I gained from the training will help me to understand
the market in a better manner in future.

BIBLIOGRAPHY

WEBSITES
 Standard Chartered Mutual Fund – www.standardcharteredmf.com
 Franklin Templeton Mutual fund – www.franklintempletonindia.com
 Fidelity Mutual Fund – www.fidelity.co.in
 HSBC Mutual Fund – www.hsbcinvestments.co.in
 ABN Amro Mutual Fund – www.abnamro.com
 Association of Mutual Funds in India – www.amfiindia.com
 Securities and Exchange Board of India (SEBI) – www.sebi.gov.in
 Reliance Mutual Fund – www.reliancemutual.com
 Prudential ICICI Asset Management Company – www.pruicici.com
 HDFC Mutual Funds – www.hdfcfund.com
 Unit Trust of India (UTI) Mutual Funds – www.utimf.com
 Kotak Mahindra Mutual Funds – www.kotakmutual.com
 www.mfea.com
 www.mutualfundindia.com
 www.moneycontrol.com

185
 SBI Mutual Fund – www.sbimf.com
 Birla Sun Life Mutual Fund – www.birlasunlife.com
 Tata Mutual Fund – www.tatamutualfund.com
 Search Engine – www.google.com

PRINTED LITERATURE
 Fact Sheets of various AMCs
 C.A. Final Study Material
 Reviews of Experts

186