Sei sulla pagina 1di 49

A Management of Financial Services Report On

Mutual Fund

Submitted to: Mrs.Kaumudi Upadhyay


Faculty Member
( S.V.Institute of Management,Kadi)

Submitte d By:
Patel Neha .. . (18) Mistri Julika ......(07) Modh Kaushal ..(09)

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

he origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6700 crores of assets under management. Second Phase 1987-1993 (Entry Of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase 1993-2003 (Entry Of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21805 crores. The Unit Trust of India with Rs.44541 crores of assets under management was way ahead of other mutual funds. Fourth Phase Since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. 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.

INTRODUCTION TO MUTUAL FUND


WHAT IS A MUTUAL FUND?

MUTUAL FUND - CONCEPT


A Mutual Fund is a trust that pools the savings of a number of investor 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 appreciations realized 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.

DEFINITION OF MUTUAL FUND


A mutual fund is a pool of assets invested on behalf of investors. Mutual funds invest in a diversified portfolio of securities, which can include equity securities( such as common and preferred shares), debt securities (such as bonds and debentures) and other financial instruments issued by corporations and governments, according to the stated investment objectives of the funds. Individual investors own a percentage of the value of the fund as represented by the number of units they purchase. A collection of money invested in a group of assets and managed by an investors company (a mutual fund company or other). The money comes from investors who want to buy shares in the fund. The benefits to investors in buying shares of mutual funds come primarily from diversification, professional money management, and capital gains and dividend reinvestment.

ORGANIZATION STRUCTURE OF MUTUAL FUND INDUSTRY


Unit Holders Sponsors Trustee
Mutual Fund

AMC
Transfer Agent

SEBI

Mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and a custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of a company. The AMC, approved by SEBI, manages the funds by making investments in various types of securities. The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

ORGANISATION OF A MUTUAL FUND

Sponsor

Custodian

Mutual Fund

Asset Management Company

Trustee Company

Scheme

Scheme

Schem e

Portfolio Cos.

Portfolio Cos.

Portfolio Cos

MUTUAL FUND
The Mutual Fund Regulations lay down several criteria that need to be fulfilled in order to be granted registration as a mutual fund must be registered with SEBI and must be constituted in the form of a trust in accordance with the provisions of the Indian Trusts Act, 1882. The instrument of trust must be in the form of a deed between the sponsor and

the trustees of mutual fund duly registered under the provision of the Indian Registration Act,1908.

SPONSOR
The sponsor is required, under the provisions of the Mutual Fund Regulations, to have a sound track record, a reputation of fairness and integrity in all his business transactions Additionally, the sponsor should contribute at least 40% to the net worth of the an AMC shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in the Mutual Fund Regulations. The sponsor or any of its directors or the principal officer employed by the mutual fund should not be guilty of fraud, not be convicted of an offence involving moral turpitude or should have not been found guilty of any economic offence.

TRUSTEES
The mutual fund is required to have an independent Board of Trustees, i.e. two thirds of the trustees should be independent persons who are not associated with the sponsors in any manner whatsoever. An AMC or any of its officers or employees are not eligible to act as a trustee of any mutual fund. In case a company is appointed as trustee, then its directors can act as trustees of any other trust provided that the object of such other trust is not in conflict with the object of the mutual fund. Additionally, no person who is appointed as a trustee of a mutual fund can be appointed as a trustee of any other mutual fund unless he is an independent trustee and prior approval of the mutual fund of which he is a trustee has been obtained for such an appointment. The trustees are responsible for-inter alia- ensuring that the AMC has all its systems in place, all key personnel, auditors, registrars etc. have been appointed prior to the launch of any scheme. It is also the responsibility of the trustees to ensure that the AMC does not act in a manner that is favorable to i9ts associates such that it has a detrimental impact on the unit holders, or that the management of one scheme by the AMC does not compromise the management of another scheme. The trustees are also required to ensure that an AMC has been diligent in empanelling and monitoring any securities transactions with brokers, so as to avoid any undue concentration of business with any broker. The Mutual Fund Regulations further mandates that the trustees should prevent any conflicts of interests between the AMC and the unit holders in terms of deployment of net worth. The trustees are also responsible for ensuring that there is no change carried out in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change that would modify the scheme and affect the interest of unit holders, unless each unit holder is provided with written communication thereof. In addition, the unit holders must be given the option to exit at the prevailing Net Asset Value (NAV) without any exit load. They are obli9ged to perform a quarterly review of all transactions carried out between the mutual funds, AMC and its associates. As far as professional indemnity cover for the trustees or the AMC is concerned, industry practice in India reveals that the 8

insurance policy is taken out by an Indian insurance company (as is required by the Insurance Act, 1938) while the risk is subsequently ceded to an overseas re-insurer who underwrites the primary policy issued by the Indian insurance company.

ASSET MANAGEMENT COMPANY


The sponsor or the trustees are required to appoint an AMC to manage the assets of the mutual fund. Under the Mutual Fund Regulations, the applicant must satisfy certain eligibility criteria in order to qualify to register with SEBI as an AMC The sponsor must have at least 40% stake in the AMC; The directors of the AMC should be persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws; The AMC should have and must at all times maintain, a minimum net worth of Rs.100 million; The board of directors of such AMC has at least 50% directors, who are not associate of , or associated i9n any manner with, the sponsor or any of its subsidiaries or the trustees; Tue Chairman of the AMC is not a trustee of any mutual fund In addition to the above eligibility criteria and other on going compliance requirements laid down in the Mutual Fund Regulations, the AMC is required to observe the following restrictions in its normal course of business: Any director of the AMC cannot hold office of a director in another AMC unless such person is an independent director and the approval of the board of the AMC of which such person is a director, has been obtained; The AMC shall not act as a trustee of any mutual fund; The AMC cannot undertaken any other business activities except activities in the nature of portfolio management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, and management. Of insurance funds, financial consultancy an d exchange of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund; However, the AMC may, Itself or through its subsidiaries, undertake such activities if it satisfies the board that the key personnel of the asset management company, the systems, back office, bank and securities accounts are segregated activity wise and there exist systems to prohibit access to inside information of various activities. The AMC shall not invest in any of its sxhemes unless full disclosure of its intention to invest has been made in the offer. However, an AMC shall not be entitled to charge any fees on its investment in that schem

CUSTODIAN

The mutu8al fund is required, under the Mutual Fund Regulations, to appoint a custodian ot carry out the custodial services for the schemes of the fund. Only institutions with substantial organizational strength, service capability in terms of computerization, and other infrastructure facilities are approved to act as custodians. The custodian must be totally declined from the AMC and must be registered with SEBI. Under the Securities and Exchange Board of India (Custodian of Securities) Guidelines, 1996,any person proposing to carry on the business as a custodian of securities must register with the SEBI and is required to fulfill specified eligibility criteria. Additionally, a custodian in which the sponsor or its associates holds 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 he interest of the sponsor or its associates cannot act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company.

SCHEMES
Under the Mutual Fund Regulations, a mutual fund is allowed to float different schemes. Each scheme has to be approved by the trustees and the offer document is required to be filed with the SEBI. The offer document should contain disclosures which are adequate enough to enable the investors to make informed investment decision, including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor . If the SEBI does not comment on the contents of the offering documents within 21 days from the date of filing, the AMC would be free to issue the offer documents to public. There are obligation on the AMC and the trustee to ensure that the statements made in the offer documents are true and correct. The AMC is also required to provide an option to the unit-holder to nominate a person in whom the units held by him shall vest in the event of his death. SEBI has also prescribed an advertising code that has to be observed while launching a new scheme. Close-ended schemes are required to be listed on a recognized stock exchange within six months from the closure of the subscription. However, this requirement is not mandatory if the scheme provides for periodic repurchase facility to all the unit-holders or monthly income or caters to special classes of persons, if the details of such repurchase facility are clearly disclosed in the offer document or if the scheme opens for repurchase within a period of six months from the closure of subscription. The units of close-ended scheme may be converted into open-ended scheme if the offer document of such scheme discloses the option and the period of such conversion or if the unit-holders are provided with an option and the period of such conversion or if the unit-holders are provided with an option to redeem their units in full. A close-ended scheme is required to be fully redeemed at the end of the maturity period. However, a close-ended scheme may be allowed to be rolled over if the purpose,

10

period and other terms of the roll over and all other material details of the scheme including the likely composition of assets immediately before the roll over, net assets and NAV of the scheme, are disclosed to the unit-holders and a copy of the same4 has been filed with SEBI. Additionally, such a roll over would be permitted only in case of those unit-holders who have wxpessed their consent in writing and the unit-holders who do not opt for the roll over or have not given written consent shall be allowed to redeem their holdings in full at NAV based price.

INVESTMENT CRITERIA
The Mutual Fund Regulations lay down certain investment criteria that the mutual funds need to observe. The money collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securities debts. However, in the case of securities debts such fund may invest in asset-backed securities and mortgaged backed securities. Furthermore, the mutual fund having an aggregates of securities which are worth Rs.100 million or more shall be required to settle their transactions through dematerialized securities. In addition to the above, mutual fund are not permitted to borrow money from the market except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders. Even such borrowing cannot exceed 20% of the net asset of a scheme and the duration of such a borrowing cannot exceed a period of six months. Similarly, a mutual fund is not permitted to advance any loans for any purpose. A mutual fund is permitted to lend securities in accordance with the stock lending scheme of SEBI. The funds of a scheme are prohibited from being used in option trading or in short selling or carry forward transactions. However, SEBI has permitted mutual fund to enter into derivative transactions on a recognized stock exchange for the purpose of hedging and portfolio balancing and such investments in derivative instruments have to be made in accordance with SEBI guidelines issued in this regard.

Limitation of Fees and Expenses


The mutual Fund Regulations lay down certain restrictions on the fees that can be charged by the AMC and also caps the express that can be loaded on to the Fund. The AMC can charge the mutual fund with investment and advisory fees subject to the following restrictions: One and a quarter of one per cent of the weekly average net assets outstanding in each accounting year for the scheme concerned, as long as the net assets do not exceed Rs.1 billion, and

11

One per cent of the excess amount over Rs.1 billion, where net assets so calculated exceeds RS.1 billion. For schemes launched on a load basis, the AMC can collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. In addition to the aforesaid fees, the AMC may charge the mutual fund with the initial expenses including agents commission, if any, brokerage and transaction cost, fees and expenses of trustees, audit fees , custodian fees etc. The Mutual Fund Regulations also lay down a cap on the initial expense and the ongoing expense that can be borne by a scheme. In respect of a scheme, initial expenses, they cannot exceed 6% of the initial resources raised under that scheme and any excess over the 6% initial issue expense shall be borne by the AMC. Ongoing expenses (excluding issue or redemption expenses ) including the investment management and advisory fee cannot exceed the following limits: 1. 2. 3. 4. The first Rs.100 cores of the average weekly net assets 2.5% On the next Rs.300 cores of the average weekly net assets 2.25% On the next Rs.300 cores of the average weekly net assets 2.0% On the balance on the assets 1.75%

In addition to the above provisions, the Mutual Fund Regulations lay down several compliance /filing requirements pertaining to reporting to the SEBI , guidelines for calculation of Net Assets Value, disclosure requirements, accounting norms, etc.

MUTUAL FUND OPRTATION FLOW CHART

12

A Mutual Fund is a trust that pools the saving of number of investors who shares a common financial goal. The money thus collected is the invested in capital market instrument such as shares, debentures. The income earned through these investments and the capital appreciation realized is shares 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.

TYPE OF MUTUAL FUNDS Type of Funds, as per structure.


Open-ended Daily sale/purchase No fixed maturity Fund is secondary market

Closed-ended

Sale during IPO Fixed Maturity SE is secondary market

Interval

Periodic sale/purchase No fixed maturity SE is secondary market


13

Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme.

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Interval Fund/ Scheme

These schemes combine the features of open-ended and closed-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices.

Type of Funds, as per investment objective.

14

Equity

Debt

Money Market

Equity Fund Index Funds Sector Funds

Fixed Income Funds

Money Market Mutual

Balanced Funds

Liquid Funds

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows

Equity Oriented Scheme

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term. Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

15

General Purpose The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure.

Sector Specific These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these

16

schemes are inherently more risky than general-purpose schemes. They are suited for informed investors who wish to take a view and risk on the concerned sector. Special Schemes Index schemes

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. An Index also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. An example to such a fund is the HDFC Index Fund. 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 rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched out until completion of 3 years from the date of allotment of the respective Units. The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS. Subject to such conditions and limitations, as prescribed under Section 88 of the Incometax Act, 1961, subscriptions to the Units not exceeding Rs.10, 000 would be eligible to a deduction, from income tax, of an amount equal to 20% of the amount subscribed. HDFC Tax Plan 2000 is such a fund. Real Estate Funds

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.

17

Debt Oriented Scheme

These schemes, also commonly called Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. 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. These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. 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. Income Schemes 18

These schemes invest in money markets, bonds and debentures of corporate with medium and long-term maturities. 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. 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.. Liquid Income Schemes Similar to the Income scheme but with a shorter maturity than Income schemes. An example of this scheme is the HDFC Liquid Fund Money Market Schemes These schemes invest in short term instruments such as commercial paper (CP), certificates of deposit (CD), treasury bills (T-Bill) and overnight money (Call). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. These schemes have become popular with institutional investors and high net worth individuals having shortterm surplus funds. Gilt Funds 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. Hybrid Schemes These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. Fund of Funds (FoF) schemes

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. A FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe. Load or no-load Fund

19

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund, which are more important. Efficient funds may give higher returns in spite of loads. Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

ADVANTAGES OF MUTUAL FUNDS


Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. Professional Management: Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. When you buy in to a mutual fund, you are handing your money to an investment professional who has experience in making investment decisions. It is the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required. Transparency

20

Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager. Diversification The nuclear weapon in your arsenal for your fight against risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives.

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. Liquidity: You are free to take your money out of open-ended mutual funds whenever you want, no questions asked. Most open-ended funds mail your redemption proceeds, which are linked to the fund's prevailing NAV (net asset value), within three to five working days of your putting in your request Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money

21

in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme Flexibility Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time. Convenience An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan (SWAP). In addition to this an investor receives account statements and portfolios of the schemes Tax Benefits Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%.

In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax.

Regulations: Securities Exchange Board of India (SEBI), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors.

22

DISADVANTAGES OF MUTUAL FUNDS


Some of the Disadvantages of investing in Mutual Funds are given below: Risks Involved Changing market conditions can create fluctuations in the value of a Mutual Fund investment. There are fees & expenses associated with investing in Mutual Funds that do not usually occur when purchasing individual securities directly. As with any type of investment, there are drawbacks associated with Mutual Funds. No Guarantees The value of your Mutual Fund investment, unlike a bank deposit, could fall & be worth less than the principle initially invested. And, while a money market fund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. In addition, Mutual Funds are not insured or guaranteed by an agency of the U.S. government. Bond funds, unlike purchasing a bond directly, will not repay the principle at a set point in time. Potential Loss Unlike a bank deposit, the investment in a Mutual Fund could fall in value, as the fund is nothing but a portfolio of different securities. Apart from a few assured returns schemes, the fund does not guarantee any minimum percentage of return. The Diversification Penalty While diversification reduces the risk of loss from holding a single security, it also limits the larger gains if a single security increases dramatically in value. Also, diversification does not protect the unit holders totally from an overall decline in the market.

23

Hidden Costs In some cases, the efficiencies of fund ownership are offset by a combination of sales commissions, 12b-1 fees, redemption fees, & operating expenses. If the fund is purchased in a taxable account, taxes may have to be paid on capital gains. Keep track of the cost basis of your initial purchase & new shares that are acquired by reinvesting distributions. It's important to compare the costs of funds you are considering. Always look at "net" returns when comparing fund performances. Net return is the bottom line; an investment's true return after all costs is deducted. Prospectuses will not contain all the costs that affect the net return on your investment. This is why it is important to compare net returns whether or not the fund in a no-load or load fund. Expenses Because Mutual Funds are professionally managed investments, there are management fees & operating expenses associated with investing in a fund. These fees & expenses charged by the fund are passed onto shareholders & deducted from the fund's return. These expenses are typically expressed as the expense ratio - the percent of fund assets spent (annually) on day-to-day operations. Expense ratios can vary widely among funds. Expense ratios for Mutual Funds commonly range from 0.2% to 2.0%, depending on the fund. Consult the fund's prospectus to determine the expense ratio for a specific fund.

Impact Analysis on the Mutual Fund Industry


24

Of the Union Budget 2008-09


Fixed Income Markets to Benefit
Measures:
Revenue deficit target reduced to 1% in FY09 from 1.4% in FY08; fiscal deficit target reduced to 2.5% in FY09 from 3.1% in FY08 Gross borrowings lower at Rs.1.45 trillion in FY09 from Rs.1.56 trillion in FY08; net borrowing also lower at Rs.1.01 trillion from Rs.1.11 trillion in FY08 Measures announced to develop bond, currency and derivatives markets that will include launching exchange-traded currency and interest rate futures and developing a transparent credit derivatives market with appropriate safeguards. Measures announced to enhance tradability of domestic convertible bonds by putting in place a mechanism that will enable investors to separate embedded equity options from convertible bonds and trade them separately. Measures announced to encourage development of a market-based system for classifying financial instruments based on their complexity and implicit risks. Proposal announced to exempt from TDS, corporate debt instruments issued in demat form and listed on recognized stock exchanges.

Impact
Decision of expanding the corporate debt market will help in increased focus towards bond funds and in a scenario where interest rates are not expected to be adverse in the medium term, this would further assist in increasing the popularity of bond funds which have not been doing well in the last few 25

years. Development of the derivatives markets can in turn enhance the development of the structured products market. Better than targeted fiscal position of the government can impart some bullishness to G-Secs and hence to Gilt funds.

Service Taxes Realigned for ULIPs


Measures

Asset management services provided under Unit Linked Insurance Plans (ULIPs) would be brought on par with asset management services provided under mutual funds as regards chargeability to service tax. Services provided by stock/commodity exchanges and clearing houses would also be brought under the service tax net.

Impact
The competitiveness of mutual funds vis--vis ULIPs in the investment basket of investors is expected to increase somewhat. Transactional expense levels of mutual funds are expected to go up marginally on account of their exposure to stock and commodity exchanges which are expected to pass on the service tax. But clarity on what would define services here and on what amount the service tax would be levied is awaited.

Easing in Income Tax Slabs


Measures
Threshold limit of Income Tax exemption for individuals raised as follows o Up to Rs.150,000 - NIL o Rs.150,001 to Rs.300,000 - 10% o Rs.300,001 to Rs.500,000 - 20% o Rs.500,001 and above - 30%

Impact

26

This is expected to increase the disposable income in the hands of the individuals to some extent which could translate into increased retail investments in mutual funds.

Increase in Short Term Capital Gains Tax


Measures Impact

Short Term Capital Gains Tax raised from 10% to 15% Since long term capital gains tax has been left unchanged, this hike in shortterm capital gains tax could encourage long-term investments which augur well to the development of the concept of long termism in the Indian Mutual Fund industry, which is conspicuous by its absence but which is coveted by the fund industry given the greater flexibility that this provides in fund management. At the same time since the short term capital gains tax is still lower than the income tax slabs of typical capital market investors, it is not expected to cause too many investors to turn away from mutual funds. The fact that the dividend distribution tax structure has not changed would mean that dividend reinvestment plans in liquid schemes will continue to be popular and also the liquid plus category will continue to attract inflows as the tax rates there would continue to be lower than the liquid category.

Thrust on Infrastructure Sector


Measures
Call for more reforms in coal and electricity sectors Coal sector regulator to be appointed. Fourth Ultra Mega Power Project (UMPP) at Tilaiya to be awarded shortly; five more UMPPs in Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamil Nadu likely Allocation for National Highway Development Programme (NHDP) raised from Rs.109 billion in FY08 to Rs.130 billion in FY09 Rural Infrastructure Development Fund (RIDF) corpus in FY09 raised to 27

Rs.140 billion Oil and Gas - New Exploration Licensing Policy (NELP) to attract investment of the order of $3.5 - 8 bn for exploration and discovery. Government of India is expected to list more PSUs to unlock their values.

Impact
With so much focus on the infrastructure sector, it is expected that infrastructure funds which have been the key out-performers in the industry of late both in terms of returns performance as well as attracting fund flows, will continue to occupy a prominent place.

ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI)

ith the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors. Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and

28

maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders. The objectives of Association of Mutual Funds in India The Association of Mutual Funds of India works with 38 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical standards in all areas of operation of the industry. It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association. AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry. Association of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. AMFI undertakes all India awarness programme for investors in order to promote proper understanding of the concept and working of mutual funds. At last but not the least association of mutual fund of India also disseminate informations on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

SEBI Regulations Regarding Mutual Fund


The SEBI regulations for the establishment and issue by mutual funds are s follows; Mutual Funds shall be established in the form of trusts under the Indian Trust Act and managed separately formed asset Management Company. Money Market mutual Fund would be regulated by the RBI and Other Mutual Funds Would be regulated by SEBI.

29

Fifty percent (50%) members of the board of AMC must be independent directors and must have no connection with sponsoring organization. The directors should have at least 10 years experience in the field of Portfolio management, Financial Administration. The AMC should have minimum Net Worth of RS 10 crores An AMC can not act as the AMC for another Mutual Fund AMCS are also allowed to do other fund based businesses such as providing investment management services to offshore funds, other mutual funds, venture capital funds, and insurance companies. The minimum amount to be raised with each Closed-End scheme should be Rs. 20 crores and for the Open-Ended scheme Rs 50 crores. Each Scheme of the Mutual Fund is registered with SEBI before it is floated in the market. Closed end schemes should not be kept open for subscription for more than 45 days. For open ended schemes, the first 45 days should be considered for determining the target figure. The initial issue expenses should not exceed 6% of the funds raised under each scheme. For each scheme there should be a separate and responsible Fund Manager. All Mutual Funds mu8st distribute a minimum of 90% of their profits in any given year.

Major Mutual Fund Companies in India


CLASSIFICATION OF AMCS CURRENTLY OPERATING
Bank Sponsored

SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd. 30

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector Indian:

BenchMark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd. DWS Mutual Fund JP Morgan Mutual Fund Lotus India Mutual Fund Tuarus Mutual Fund PNB Mutual Fund

Predominantly India Joint Ventures:

Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd. Jardine Fleming Mutual Fund Quantum Mutual Fund

Predominantly Foreign Joint Ventures:

ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Optimix Mutual Fund Principal Asset Management Co. Pvt. Ltd. Prudential ICICI Asset Management Co. Ltd. Standard Chartered Asset Mgmt Co. Pvt. Ltd.

31

ABN AMRO Mutual Fund


ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund


Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group & Sun Life Financial. Sun Life Financial is a global organization evolved in 1871 & is being represented in Canada, the US, the Philippines, Japan, Indonesia & Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)


Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund & was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund


HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing Development Finance Corporation Limited & Standard Life Investments Limited.

HSBC Mutual Fund


HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities & Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund


ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya & ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

32

Prudential ICICI Mutual Fund


The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsors, Prudential Plc. & ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. & the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund


Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund


State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes .

Tata Mutual Fund


Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., & Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited & its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund


Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. 33

Unit Trust of India Mutual Fund


UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), & Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund


Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited & Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market & to provide investors the opportunities to make investments in diversified securities.

Standard Chartered Mutual Fund


Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund


The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes to offer.

Morgan Stanley Mutual Fund India


Morgan Stanley is a worldwide financial services company & its leading in the market in securities, investment management & credit services. Morgan Stanley

34

Investment Management (MISM) was established in the year 1975. It provides customized asset management services & products to governments, corporations, pension funds & non-profit organizations. Its services are also extended to high net worth individuals & retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) & its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation.

Escorts Mutual Fund


Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund


Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. & AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

Benchmark Mutual Fund


Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer & Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 & headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund


Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund


Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company & AMC is Cholamandalam AMC Limited.

35

LIC Mutual Fund


Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

GIC Mutual Fund


GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking & the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) & United India Insurance Co. Ltd. (UII) & is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.

NFO comes in 2008


Welcome to the 'NFO Update' division of Mutual Funds India. The following is the list of ongoing new schemes launched by various mutual funds in India. In order to view the details of the scheme or to invest in the scheme, Click on the Scheme Name.

36

Scheme Name AIG World Gold Fund - Dividend

Mutual Fund AIG Global Investment Group Mutual Fund AIG Global Investment Group Mutual Fund DSP Merrill Lynch Mutual Fund

Close Date May 14, 2008

AIG World Gold Fund - Growth

May 14, 2008

DSP Merrill Lynch FMP - 3 Months - Series 8 - Regular - Growth

Apr 29, 2008

Franklin Templeton FTF - Series IX (3 Years) - Plan A - Dividend

Franklin Templeton Investments Franklin Templeton Investments Franklin Templeton Investments Franklin Templeton Investments ICICI Prudential Mutual Fund ICICI Prudential Mutual Fund ICICI Prudential Mutual Fund Kotak Mahindra

Apr 30, 2008

Franklin Templeton FTF - Series IX (3 Years) - Plan A - Growth

Apr 30, 2008

Franklin Templeton FTF - Series IX (5 Years) - Plan B - Dividend Franklin Templeton FTF - Series IX (5 Years) - Plan B - Growth

May 12, 2008

May 12, 2008

ICICI Prudential Focused Equity Fund Institutional I - Growth ICICI Prudential Focused Equity Fund Retail Growth ICICI Prudential Focused Equity Fund Retail - Dividend Kotak Fixed Maturity Plan - 12 Months -

May 7, 2008

May 7, 2008

May 7, 2008

Apr 29, 2008 37

PEST ANALYSIS

38

(1)

POLITICAL AND LEGAL FACTORS:

REGULATORS IN INDIA:

SEBI- The Capital Market Regulator:

The Govt. of India constituted SEBI, by an act of Parliament in 1992, as the apex regulator of all entities that either raise funds in the capital markets or invest ion capital market securities such as shares and debentures listed on stock exchanges. Mutual Funds have emerged as an important institutional investor in capital market securities. Hence they come under the preview of SEBI. SEBI requires all mutual funds to be registered with them. It issues guidelines for all Mutual Funds operations including where they can invest, What investment limits and restrictions must be complied with, how they should account for income and expenses, How they should make disclosures of information to the investor and generally acts in the interest of investor protection.

RBI- The Money Market Regulators


RBI as Supervisor of Bank-Owned Mutual Funds:

The first non-UTI Mutual Funds were started by Public Sector Banks. Banks come under the preview of the regulatory jurisdiction of the RBI, Therefore; the operations of bank owned Mutual Funds are governed by guidelines issued by the Reserve Bank of India. Subsequently, it has been clarified that all Mutual Funds, being primarily capital market players, come under the regulatory umbrella of SEBI. It is generally understood that all market related and investor related activities of the funds are to be supervised by SEBI, while any issues concerning the ownership of the AMCs by banks fall under the regulatory ambit of the RBI. For example, if banks as funds sponsors have offered assured return schemes, RBI would have to review the capital adequacy and financial implications of the guaranteeing bank. RBI as Supervisor of Money Market Mutual Fund:

Reserve Bank of India is the only Govt. agency that is charged with the sole responsibility to control the money supply in the country. They also have the sole supervisory responsibility over all entities that operate in the money markets, be it banks and companies that issues securities such as Certificate of Deposit or Commercial Paper or banks and mutual funds who are allowed to borrow from or lend in the call money market.

39

Money Market Mutual Funds are regulated by RBI guidelines dated 23-11-1995 specially issued for the purposes. The following are the salient features of these guidelines: Banks, institutions and private sectors allowed to set up MMMFs. There are no restrictions on fund size. Private sector MMMFs must however obtain clearance from SEBI to ensure that they do not infringe SEBI guidelines on Money market investments. MMMFs can invest in treasury bills, Govt. securities with an unexpired maturity up to one year, call and notice money, commercial paper and certificate of deposit. Units of MMMFs can only be issued to individuals. Setting up of MMMFs requires the prior approval of RBI. Recently, it has been decided that MMMFs of registered Mutual Funds will be regulated by SEBI, and SEBI is to frame guidelines for such funds.

Ministry of Finance:
The Ministry of Finance, which is charged with implementing the government policies, ultimately supervises both the RBI and the SEBI. Besides being the ultimate policy making and supervising entity. The Ministry of Finance has also been playing the role of an appellate authority foe any major disputes over SEBI guidelines on certain specific capital market related guidelines in particular any case of insider trading or merger and acquisition.

Stock Exchange:
Stock Exchanges are self regulatory organization supervised by SEBI. Many closed Ended schemes of Mutual Funds are listed one or more stock exchanges. Such Schemes are subject to regulations by the concerned stock exchanges through a listing agreement between the fund and the stock exchange. Funds or AMCs do not get directly involved with purchase and sale of units of such listed Closed-end schemes, as the registrars handle such transfers as in case of shares.

Company law Board and Registrar of Companies:


Mutual Fund regulation- How is it Important? While the Mutual fund industry in India is four decades old major developments in improving regulatory framework had taken place only during the last 7 years. Many regulatory changes have been implemented to improve surveillance and protect rights of investors.

40

After the UTI debacle the market regulator SEBI has taken several measures to develop a comprehensive regulatory framework for mutual Fund in association with AMFI. Regulatory guidelines relating to insider trading, late trading, Switching assets, minimum number of investor for each scheme and marketing of mutual funds have been issued to protect small investors. Regulatory Environment in India-What has been done so far??? Late Trading: Guidelines have just been issued by SEBI (after consultation with AMFI) for uniform cut-off time. Guidelines issued with respect to non-traded/thinly-traded debt and equity securities, to bring uniformly in valuation across funds. Comprehensive risk Mgt systems put in to place with which Mutual Funds most comply. Minimum of 20 investors; no single investor should hold more than 25% of the scheme corpus. All individuals involves in Mutual Funds selling, marketing an investor service activities required to be AMFI-certified.

Legal and Regulatory Frame Work: Mutual; Fund are regulated by the SEBI (Mutual Fund) Regulation,1996. SEBI is the regulator of all funds, except offshore funds. Bank sponsored Mutual Fund are jointly regulated by SEBI and RBI permission. If there is a bank sponsored fund, it cannot provide a guarantee with out permission. RBI regulates money and government securities markets, in which mutual fund invest. Since the AMC and Trustee Company are companies they are by the department of company affairs. They have to send periodic reports to the ROC (Registrar of companies) and CLB (Company Law Board) is the appellate authority.

(2)

ECONOMICAL ENVIRONMENT:

Indian Economy Overview


Economic experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. The rich countries of Europe have been see the greatest decline in global GDP share by 4.9% points, followed by the US and Japan with a decline of about 1% point each. Within Asia , the rising share of China and India has more than made up the declining global share of Japan since 1990.During the seventies and the eighties, ASEAN 41

countries and South Korea, along with China and India, contributed to the rising share of Asia in world GDP. According to some experts, the share of the US in the World GDP is expected to fall (from 21% to 18%) and that of India to rise from 6% to 10% and hence the letter will emerge as the third pole in the global economy after the US and China. By 2020 the Indian economy is projected to be about 60% the size of the US economy. The transformation into a tri-polar economy will be complete by 2030, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035 India is likely to be a larger growth than the six largest Countries in the EU, though its impact will be a little over half of the US. India, which is now the Fourth largest economy in terms of purchasing power parity, will overtake Japan and become Third major economic power within 10 years.

Issues and Priorities for India


As India prepares for becoming an economic superpower, it must expedite socioeconomic reforms and take steps for overcoming institutional and infrastructure bottlenecks inherent in the system. Availability of both physical and social infrastructure is central to sustainable economic growth. Currently the Indian Economy facing the following changes. Sustaining the growth momentum and achieving an annual average growth of 10%-11% in the next five years. Simplifying procedures and relaxing entry barriers for business activites. Checking the growth of Population; India I the second highest populated country in the world after china. However in terms of density India exceeds China as Indias land area is almost half of Chinas total land. Boosting agriculture growth through diversification and development of agro processing. Expanding industry fast, by at least 13% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. Developing the world class infrastructure for sustaining growth in all the sectors of the economy. Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Empowering the population through universal education and health care. India needs to improve its HDI rank, as at 127 it is way below many other developing countries performance. The UPA Govt. is committed to furthering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance.

The Saving Pattern of India


42

The double task of alleviating poverty up with fast growing Asian neighbors prompted the Indian Govt. to announce a target of 9% or more for annual GDP growth over the next 10 years. A key question is whether India will be able to finance the investment necessary to reach this target through increased domestic saving and avoid a much greater recourse to foreign with its associated risks on the external front. A strategy to improve Indias saving needs to take account of recent insights in the saving literature. Over the past few years, several studies of saving in developing countries have found that tax and interest rate incentives have been largely ineffective. Moreover, empirical studies suggest that higher growth generally tends to precede higher saving. In sight of this evidence, it may be more effective to increase domestic saving by rising public saving and implementing a strong structural reform program, including financial liberalization.

Measuring Savings
Indias saving rate is relatively high, compared that of other countries. It has shown an uneven upward trend over the past four (4) decades, and there have been considerable changes in its composition. Historically, domestic saving has been dominated by household saving in physical assets. However, the recent increase in saving has been driven mainly by financial household saving, partly reflecting a continuing expansion of financial institutions branch networks into rural areas and more recently the increasing availability of alternative investment opportunities. Private corporate savings has also show a steady increase over the last 20 years, although it remains below 5 % of GDP.

Measurement Problems
The interpretation of Indian saving is complicated by a number of weakness in the Central Statistical Methodology for measuring both investment and saving. The most important shortcomings are: The estimates for physical savings is set equal to household investment, which itself is calculated only indirectly as a residual. Not surprisingly, measured physical household saving has been highly volatile. There are errors and omissions in the estimates of both savings and invt. But adjustments are made only to investment. The CSO thinks the ssaving is more reliable and therefore adjusts investments to equal the sum of domestic and foreign saving. The commodity flow method used to estimates total investment based on fixed production coefficient has remained for decades. While it might still be useful for comparing investment in adjacent years, new technologies and the growing amount of investment in the informal sector are not reflected in the estimates.

43

Finally, the CSO estimates do not cover some assets preferred by households, namely jewellary and Gold Probably increased after import restrictions were liberalized in 1992, implying an increase in the underestimation of saving.

Sufficient Savings?
Economic regression analysis suggests that private saving is likely to continue to increasealbeit graduallyover the coming years, driven by rising per capita income and continued financial deepening. In addition, a lower share of agriculture in the economy and an increase in the age dependency ratio would tend to increase private savings. Taking into account likely developments in public saving, this would result in a saving rate of about 28% of GDP after 2000. But this is not likely to be enough to finance the investment needed to reach the Govt. growth objective. Even assuming some improvement in investment efficiency the growth target implies that the investment rate would need to increase to well above 30%, which even with higher recourse to foreign savingwould require a domestic saving rate of around 30 by the turn of the century. If the target is to be achieved, stronger action on both the public and private saving fronts is called for.

Strategy for Higher Savings


While higher domestic saving is needed to finance faster growth, policies aimed directly at mobilizing saving are not necessarily the best instrument to achieve this target. In case of India it has been argued that growth has suffered less from a low saving rate than from inefficient investment, in part because of the dominant role of the public sector in the economy. The main policy focus should be on initiating a various growth-saving circle by fostering growth through fiscal consolidation and strong structural reforms, including Privatization and financial liberalization. Under such a strategy, initially growth would need to be financed mainly through higher public saving. Financial liberalization in particular, reforms of long term saving instrument would help to ensure that private saving was efficiently allocated. The case for an indirect approach to higher saving is supported by recent findings that traditional saving policy instrumentlike higher interest or special tax benefits---fail to raise private saving rate in the long run.

Public Saving
Studies suggest that the most direct way to raise domestic saving is by generating higher public saving. However, India has seen a steady decline in public saving over the past two decades, both at the central and state Govt. levels. This trend has been partly reversed since 1993/94, but further strong efforts would need to restore public saving to the level of the early 1980s.Such efforts would need to involve a series of actions in the areas of tax policy, expenditure management and public enterprise reforms. However, judging from an estimated long run relationship between private and public saving, the offset factor for India could be as low as 25% to 30%. Nevertheless, in the short run, the trade off could be somewhat larger, as fiscal consolidation would have to be achieved partly through higher taxation. 44

Changing Lifestyle
In addition to the annual review, whenever you make a major life change, its time to reassess your financial situation. Some common example of life change: switching careers, retiring, getting marred or divorced, having a child etc. Most of these events are likely to affect your ability to invest, your time horizon, and your overall financial picture, both short term and long term. Its never easy to find the time to review your investment plan when you are in the midst of any of these life changes, bt its worth making the effort. By staying on course with your asset allocations, you will help ensure that your overall portfolio continues to work effectively toward achieving your investment goals.

(3)

SOCIAL ENVIRONMENT:

Code of Conduct
The trustee should abide by the code of conduct as specified below. Mutual Fund schemes should not be organized, managed or the portfolio of securities selected, in the interest of sponsors, directors of AMCs, member of Board of trustee, associated persons as in the interest of social class of unit holders other than in interest of unit and in interest of all classes of unit holders of the scheme. Trustees and AMCs: Must ensure the dissemination to all unit holders of adequate, accurate, explicit and timely information fairly presented in a simple language about the investment policies, investment objectives, financial position and general affairs of the scheme. Should avoid excessive concentration of business with broking firms, affiliates and also excessive holding of units in a scheme among a few investors. Must avoid conflicts of interest in managing the affairs of the scheme and keep the interest of all unit holders paramount in all matters. Should carry out the business and invest in accordance with the investment objectives stated in the offer document and the investment decisions solely in the interest of unit holders. Must not use any unethical means to sell, market or induce my investor to buy their schemes Render at all time high standards service, exercise due diligence, ensure proper care and exercise independently professional judgment.

45

Rules Regarding Advertisement- Social Aspects:


The advertisement for each scheme shall disclose investment objective for each scheme. An advertisement shall not be truthful, fair and clear and shall not contain a statement, promise or forecast which is untrue or misleading. Advertisement shall not be so framed as to exploit the lack of experience or knowledge of all investors. All advertisement issued by a mutual fund or its sponsor or asset management company, shall state all investment in mutual funds and securities are subject to market risks and NAV of the schemes may go up or down depending upon the factors and forces affecting the securities market. The advertisement shall not compare one fund with another, implicitly or explicitly unless the comparison is fair and all information to the comparison is included in the advertisement.

Investment Objectives and valuation policies:


The moneys collected under any schemes of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitized debts. Provided that money colleted under any money market scheme of a mutual fund shall be invested only in money market instrument in accordance with directions issued by the Reserve Bank of India. The mutual shall not advance any loans for any purpose. Every mutual fund shall compute and carry out valuation of its investment in its portfolio and publish the same in accordance with the valuation norms specified in Eight Schedule. The net asset value of the scheme shall be calculated and published at least in two daily newspaper at intervals of not exceeding one week. The price at which the units may be subscribed or sold and the price at which such units may at any repurchased by the mutual fund shall be made available to the investment.

(4)

TECHNOLOGICAL FACTORS:

The technology wave, which have transform many industry many industry in how they operates and survive has also come to the aid of MF industry to widen its reach, offers flexibilities to investor. The advantage includes lower distribution cost through

46

online transactions, more customized and personal advised to customer and reaching out to growing young and net-savvy population of India. Technology plays an important role especially to the MF industry. The MF transaction become fast and it provides the services to the client very rapidly the technology is the only reason to meet such kind of qualitative service. Market reach ness is also possible through the technologies. Still MF industry requires some sort of technological to tap the market of small town and cities so as to grow in a rapid manner.

PORTERS FIVE-FORCE ANALYSIS

Potential Entry Of New Competitors

47

Until 1987, the UTI was the sole Mutual Fund in India. Then Banks, LIC & GIC floated Mutual Fund. In the past 1992 public & private financial institution with foreign collaboration came in the market. Thus we can see the entry of new competitors is high. Banking companies, NBFCs, Merchant Bankers, Insurances Companies are now entering into the Mutual Fund as the purpose of diversified business. New entrance increase in the competition & decline market share of exiting company. In the Mutual Fund industry the investors loyalty level is very low. So, the investors will switchover the new company which gives him high returns. Competitive Pressure from substitute products: Equity shares, Bank Deposits, Insurance etc. are substitute of the Mutual Fund. Currently there is boom period in the stock market as investor prefers to invest directly to the stock market. Risk aversion people prefer the insurance or post office schemes. New insurance company gives the better product & security for the long term plan.

Rivalry Among Competing Sellers Types of Schemes


All companies provide different types of schemes, which are best, suited to the investors objectives. Companies in the industry are more & more concern to the investors objective & try to give them same.

Better Services
In the industry companies are trying to provide better services to the investors. Competitors are providing better communication facility as well as the guidelines.

Switching Cost
Rivalry is strong because of cost of switching the scheme is low. Investors can easily switchover to another company or scheme. When investor feels better return or security then he will switchover to the other company or scheme.

Suppliers (Investor) Bargaining Power


We can consider the investor investing in Mutual Funds is the supplier of the company. For bargaining power to suppliers provide different scheme to the investor 48

which is reach the investor objective like High Liquidity, High Return, Low Risk, Safety against investment. Investors prefer those securities which fulfill their investment objective. There are so many companies in the market which give different kinds of schemes. Investor can choose the best scheme according to his objective & bargain for the same. Companies are facing threats from the bargain power of investors. Investor can easily switchover the scheme & cost of switching is also low. Investor fully utilizes their bargain skill while choosing the fund.

Bargaining Power of Customer (Listed Companies)


We can consider the Listed Companies in Indian Stock market, Stock Market, Govt. Security, & Money Market etc. are the customer of the Mutual Fund. Blue chip companies attract the Mutual Fund companies to invest in their securities. Companies are more concentrate on Mutual Fund companies because of there is wide scope of investment in Mutual Fund.

49