aman finance project

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A Report Submitted in the Partial Fulfillment

For the requirement of the award of

BBA Degr ee under Patna University, Patna (Bihar)

FRANKLIN TEMPLETON MUTUAL FUND

SUBJECT:-PROJECT REPORT

Paper:-12 SESSION:-07-10 2009-10

Project Report on Mutual Fund

InvestmentPattern in India

By Shreeharsh KumarRoll No: - 194Registration No:-1064 of 2007

A Report Submitted in the Partial FulfillmentFor the requirement of the award of

BBA Degre e under Patna University, Patna (Bihar)

UNDER THE GUIDANCE OF:-

PROF. (DR.) JAYANTI SIRCAR MR. ALOK TRIVEDIB.B.A CO-ORDINATOR BRANCH MANAGERPATNA COLLEGE, PATNA BRANCH OFFICEPATNA UNIVERSITY

BBA 3RD

YEAR

PATNA COLLEGEPATNA UNIVERSITY

F R A N K L I N T E M P L E T O N

P A T N A B R A N C H O F F I C E


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ACKNOWLEDGEMENT

With regard to my project with mutual fund I would like to thank each and

every one who offered help, guideline and support whenever required.

First and foremost I would like to express gratitude to Franklin

Templeton branch manager Mr. Alok Trivedi and other staffs for their

support and guidance in the project work. I am extremely grateful to my

guide, Pawan Kumar & Rajeev Kumar for their valuable guidance and

timely suggestions. I would like to thank all the bank manager of different

bank branches for the valuable guidance and support. I would also like

to thank our B.B.A coordinator Prof. (Dr.) Jayanti sircar for her valuable

suggestion to us.

It would be prudent

pleasure to have the opportunity to extend my heart- felt thanks to

everybody who helped me through the successful completion of thisproject.

SHREEHARSH KUMAR


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EXECUTIVE SUMMARY

In few years mutual fund has emerged as a tool for ensuring onesfinancial well being. Mutual funds have not only contributed to the India

growth story but have also helped families tap into the success of Indian

Industry. As information and awareness is rising more and more people

are enjoying the benefits of investing in mutual funds. The main reason

the number of retail mutual fund investors remains small is that nine in

ten people with incomes in India do not know that mutual fund exist. But

once people are aware of mutual fund investment opportunities, the

number of people who decide to invest in mutual funds increases to asmany as one in five people. The trick for converting a person with no

knowledge of mutual funds to a new mutual fund customer is to

understand which of the potential investors are more likely to buy mutual

funds and to use the right arguments in the sales process that

customers will accept as important and relevant to their decision.

This project gave me a great learningexperience and at the same time it gave me enough scope to implement

my analytical ability. The analysis and advice presented in this project

report is based on market research on the saving and investment

practices of the investors and preferences of the investors for investment

in mutual funds. This report will help to know about the investors

preferences in mutual fund means are they prefer any particular asset

management company (AMC), which type of product they prefer, which

option (growth or dividend) they prefer or which investment strategy theyfollow (systematic investment plan or one time plan).

This project as a whole can

be divided into two parts. The first part gives an insight about mutual

fund and its various aspects, the company profile, objectives of the

study, research methodology. One can have a brief knowledge about

mutual fund and its basics through the project.


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The second part of the project consists of data and

its analysis collected through survey done on 150 people. For the

collection of primary data I made a questionnaire and surveyed of 150people. I had taken interview of many people by visiting the different

branches of Bank of India, United Bank of India and Central Bank of

India where I have collected primary data for my project work. I have

collected my secondary data from the various type of document of

Franklin Templeton as well as by using the different types of website of

mutual fund. This project covers the topic Investment pattern in India.

The data collected has been well organized and presented. I hope the

research findings and conclusion will be of use.


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Index

Chapter Page No.

1. Introduction 8-35

2. Company profile 36-48

3. Financial planning &

Mutual fund 48-62

4. Objectives, scope &

Strategy 63-69

5. Research methodology 70-72

6. Data analysis & interpretation 73-93

7. Findings & conclusion 94-97

8. Suggestions & recommendations 98-101

9. Appendix (Questionnaire &

Bibliography) 102-109

10. Special Thanks 110


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Chapter 1

Introduction


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INTRODUCTION TO MUTUAL

FUND AND ITS VARIOUS ASPECTS.

MUTUAL FUND: -A mutual fund is a professionally managed type ofcollective investment scheme that pools money from many investors and investit in stocks, bonds, short-term money market instruments and other securities.Mutual funds have fund manager who invests the money on behalf of theinvestors buying/selling stocks, bonds etc.

Currently, the worldwide value of all mutualfunds totals more than $US 26 trillion (Source: - Wikipedia.com as on Dec 09).The United States leads with the number of mutual fund schemes. There aremore than 8000 mutual schemes in the U.S.A. Comparatively, India has around1000 mutual fund schemes, but this number has grown exponentially in the lastfew years. The Total Assets under Management in India of all mutual funds puttogether touched a peak of Rs.6,65,146 crs at the end of Dec 2009(source:-AMFI monthly report of Dec 2009)in India.

A Mutual Fund is an investment tool thatallows small investors access to a well diversified Portfolio of equities, bonds

and other securities. Each shareholder participates in the gain or loss of thefund. Units are issued and can be redeemed as needed. The funds Net Assetvalue (NAV) is determined each day. Investments in securities are spread acrossa wide cross-section of industries and sectors and thus the risk is reduced.Diversification reduces the risk because all stocks may not move in the samedirection in the same proportion at the same time. Mutual fund issues units tothe investors in accordance with quantum of money invested by them. Investorsof mutual funds are known as unit holders.


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HISTORY OF MUTUAL FUND INDUSTRY:-Massachusetts Investors Trust (now MFS Investment Management) wasfounded on March 21st 1924.After one year it had 200 shareholders and$392,000 in assets. The entire industry, which included a few closed-end funds,represented less than $10 million in 1924.

The stock market crash of1929 hindered the growth of mutual funds. In response to the stock market crashthe U.S.A. government passed the securities act of 1933 and the securitiesexchange act of 1934.These laws require that a fund be registered with thesecurities and exchange commission and provide prospective investors with aprospectus that contains required disclosures about the fund, the securitiesthemselves and fund manager. The sec helped draft the investment company actof 1940, which sets forth the guidelines with which all sec-registered funds

today must comply.With renewed

confidence in the stock market, mutual funds began to blossom. By the end ofthe 1960s, there were approximately 270 funds with $48 billion in assets. Thefirst retail index fund, First Index Investment trust, was formed in 1976 andheaded by John Bogle, who conceptualized many of the key tenets of theindustry in his 1951 senior thesis at Princeton University. It is now called theVanguard 500 index fund and is one of the worlds largest mutual funds, withmore than $100 billion in assets.

A key factor in mutualfund growth was the 1975 change in the internal revenue code allowingindividuals to open individual retirement accounts (IRAs).Even people alreadyenrolled in corporate pension plans could contribute a limited amount (at thetime, up to $2,000 a year).Mutual funds are mow popular in employer-sponsored defined-contribution retirement plans such as (401(k) s) and 403(b)s as well as IRAs including Roth IRAs.

As of October2007 there are 8,015 mutual funds that belong to the Investment Company

Institute (ICI), a national trade association of investment companies in theUnited States, with combined assets of $12.356 trillion. In early 2008, theworldwide value of all mutual funds totaled more than $26 trillion.


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HISTORY OF THE INDIAN MUTUAL FUND

INDUSTRYThe mutual fund industry in India started in 1963 with the formation ofUnit

Trust of India, at the initiative of the government of India and Reserve Bank.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 improvement, both qualitieswise as well as quantity wise. Before, the monopoly of the market had seen anending phase; the Assets under Management (AUM) were Rs 6700 crores. Theprivate sector entry to the fund family raised the AUM to Rs 47000 crores inMarch 1993 and till April 2004; it reached the height if Rs 154000 crores.

The mutual fund industry is obviouslygrowing at a tremendous space with the mutual fund industry can be broadly putinto five phases according to the development of the sector. Each phase isbriefly described as follows:-

1) First phase-1964-87 (Growth of unit trust of India):-Unit trust of India (UTI) was established on 1963 by an Act of parliament bythe Reserve Bank of India and functioned under the Regulatory andadministrative 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 overthe regulatory and administrative control in place of RBI. The first schemelaunched by UTI was Unit scheme 1964.At the end of 1988 UTI had Rs6700crores of assets under management.

2) Second Phase-1987-1993(Entry Of Public Sector Funds):-1987 marked the entry of non-UTI, public sector mutual funds set up by publicsector banks and Life Insurance Corporation of India (LIC) and GeneralInsurance Corporation of India(GIC).SBI Mutual Fund was the first non-UTI

Mutual fund established in June 1987 followed by Canara Bank Mutual Fund(Dec 87),Punjab National Bank Mutual Fund (Aug 89),Indian Bank MutualFund (Nov 89),Bank of India(Jun 90),bank of Baroda Mutual Fund(Oct 92).LICestablished its Mutual Fund in June 1989 while GIC had set up its mutual fundin December 1990.at the end of 1993,the mutual fund industry had assets undermanagement of Rs47,004crores.

3) Third Phase-1993-1996(Entry Of Private Sector Funds):-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.


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The erstwhile Kothari pioneer (now merged with Franklin Templeton) was thefirst private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a morecomprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996.

4) Fourth Phase1996-1999 (Growth and SEBI Regulation):-Since 1996, the mutual fund industry in India saw a tighter regulation andhigher growth. It scaled new heights in terms of mobilization of fundsand number of players. Deregulation and liberalization of the Indianeconomy had introduced competition and provided impetus to the growthof the industry. Finally, most investors-small or large-started showinginterest in mutual funds.

Measures were taken both by SEBI to protect theinvestor and by the Government to enhance investors returns through taxbenefits. A comprehensive set of regulations for all mutual fundsoperating in India was introduced with SEBI (mutual fund) Regulations,1996. These regulations set uniform standards for all funds. The erstwhileUTI voluntarily adopted SEBI guidelines for its new schemes. Similarly,the budget of union government 1999 took a big step in exempting allmutual fund dividends from income tax in the hand of investors. Both the1996 regulations and the 1999 budget must be considered of historicimportance, given their far-reaching impact on the fund industry.

5) Fifth Phase-1999-2004 (Emergence of a large and uniform industry):-The other major development in the fund industry has been the creationof a level playing field for all mutual funds operating in India. Thishappened in February 2003, when the UTI act was repealed. Unit Trust ofIndia has no longer special status as established by an act of parliament.Instead, it has also adopted the same structure as any other fund in India-a trust and an asset management company. UTI mutual fund is now underthe SEBI (Mutual Fund) Regulations, 1996 like all other mutual funds in

India. UTI mutual fund is still the largest in the Indian fund industry. AllSEBI complaint scheme of the erstwhile UTI are under its charge. Allnew schemes offered by UTI mutual fund are SEBI approved. Otherschemes (US 64, Assured Return Schemes) of erstwhile UTI have beenplaced with a special undertaking administered by the government ofIndia. These schemes are gradually wound up.

6) Sixth Phase-From 2004 onwards (Consolidation and Growth):-The industry has lately witnessed a spate of mergers and acquisitions,

most recent ones being the acquisition of schemes of Alliance Mutualfund by Birla Sun Life, Sun F& C Mutual Fund by Principal and PNB


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Mutual fund by principal. At the same time, more international playerscontinue to enter India, including Fidelity, one of the largest mutual fundsin the world. The stage is set now for growth through consolidation andentry of new international and private sector players. As at the end of

June 2009 there were 34 fund houses.

Fig:- Mobilization of mutual fund in India

Fig :- Assets under management in India


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One is the specified undertaking of the UnitTrust of India with assets under management of Rs 29,835 crores as at the endof January 2003, representing broadly, the assets of US 64 scheme, assuredreturn and certain other schemes. The specified undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed byGovernment of India and does not come under the purview of the Mutual FundRegulations.

The second is the UTI Mutual Fund, sponsored by SBI,PNB, BOB and LIC. It is registered with SEBI and functions under the MutualFund Regulations. With the bifurcation of the erstwhile UTI which had inmarch 2000 more than Rs.76, 000 crores of assets under management and withthe setting up of a mutual fund, conforming to the SEBI Mutual FundRegulations, and with recent mergers taking place among different privatesector funds, the mutual fund industry has entered its current phase ofconsolidation and growth.

The graph indicates the growth of assets over the years.

NOTE: - erstwhile UTI was bifurcated into UTI mutual fund and the specifiedundertaking of the Unit Trust of India effective from February 2003. The assetunder 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 fromFebruary 2003 onwards.


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ADVANTAGES OF MUTUAL FUND:-

Portfolio Diversification: -Mutual fund normally invests in welldiversified portfolio of securities. Each investor in a fund is a part owner

of all the funds assets. This enables him to hold a diversified investmentportfolio even with a small amount of investment, which would

otherwise require big capital.

Professional management: -Even if an investor has a big amount of

capital available to him, he benefits from the professional management

skills brought in by the fund in the management of the investors

portfolio. The investment management skills, along with the needed

research available investment options ensure a much better return than

what an investor can manage on his own. Few investors have the skills

and resources of their own to succeed in todays fast moving, global and

sophisticated markets.

Reduction / Diversification of Risk: -An investor in a mutual fund

acquires a diversified portfolio, no matter how small his investment.

Diversification reduces the risk of loss, as compared to investing directly

in one or two shares or debenture or other instruments. When an

investor invest directly, all the risk of potential loss is his own. Whileinvesting in the pool of funds with other investors, any loss on one or

two securities is also shared with other investors. This risk reduction is

one of the most important benefits of a collective investment vehicle

like mutual fund.

Liquidity: -Often, investors hold shares or bonds they cannot directly,

easily and quickly sell. Investment in a mutual fund, on the other hand, is

more liquid. An investor can liquidate the investment by selling the units

to the fund if it is open end fund, or by selling the units in the stockmarket if the fund is a close end fund, since close end fund have to list

on stock exchange. In any case, the investor in a close end fund receives

the sale proceeds at the end of a period specified by the mutual fund or

the stock exchange.

Flexibility & Convenience: - Mutual fund management companies offer

many investor services that a direct market investor cannot get. Within

the same fund family, investor can easily transfer/switch their holdings

from one scheme to another. They can also invest or withdraw their


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money at regular investors in open end schemes mutual fund

investment process has been made further more convenient with the

facility offered by the funds for the investors to buy or sell their units

through the internet or emails or using other communication means.

The investor also get updated the market information from the mutualfunds. The information about the schemes is also shared by the fund

managers in a transparent manner, with all material fact required by

regulators to be disclosed to the investors.

Reduction in Transaction cost: -With the help of mutual fund there is

reduction in transaction cost as the investor can indirectly invest in many

sector without paying the brokerage charge to the brokers.

Safety of regulated environment: -Mutual fund industry is wellregulated; all funds are registered with SEBI which lays down rules to

protect the investors. Thus investors also benefit from the safety of a

regulated investment environment.

Choice of schemes: -In the mutual fund there are large numbers of

schemes, having the different scheme being invested in different sector.

The person can have the opportunity to invest in different sector

through a single mutual fund as there are large numbers of diversifiedfund. The investor has the choice whether to choose open ended fund or

closed ended fund according to their financial need.

Transparency: -In India the mutual fund industry is regulated by SEBI,

RBI and ministry of finance. SEBI acts as the capital market regulator, RBI

acts as the money market regulator and the Ministry of finance as the

securities appellate tribunal. The SEBI gives the guide line to the mutual

fund industry and all the mutual fund has follow it. The mutual fund has

to give its customers the audited financial reports annual and have toshow them every aspect of their expenses.


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DISADVANTAGE OF MUTUAL FUND:-

No control over Cost in the Hands of an Investor: -An investor in a

mutual fund has no control over the overall cost of investing. He paysinvestment management fees as long as he remains with the fund, albeit

in return for the professional management and research. Fees are

usually payable as a percentage of the value of his investment, whether

the fund value is rising or declining. A mutual fund investor also pays

fund distribution costs, which he would not incur in direct investing.

However this shortcoming only means that there is a cost to obtain the

benefits of mutual fund services, and this cost is often less than the cost

of direct investing by the investors.

No tailor-made Portfolios: -Investors who invest on their own can build

their own portfolios of shares, bonds and other securities. Investing

through fund means he delegates this decision to the fund managers.

High net worth individuals or large corporate investor may find this to be

a constraint in achieving their objectives. However, most mutual funds

help investor by overcome this constraint by offering families of

schemes- a large number of different schemes-within the same fund. In

each scheme there are various plans and options. An investor can

choose from different investment schemes/plans/options and construct

an investment portfolio that meets his investment objectives.

Managing a Portfolio Funds: -Availability of a large number of options

from mutual funds can actually mean too much choice for the investor.

He may again need advice on how to select a fund to achieve his

objectives, quiet similar to the situation when he has to select individual

shares or bonds to invest in. Fortunately, India now has a large number

of AMFI registered and tested fund distributors and financial plannerswho are capable of guiding the investors.

Difficulty in selecting a Suitable Fund Scheme: -As there are a large

number of mutual funds from different AMC having different schemes it

became difficult for a simple man to select the mutual fund which could

meet his financial objective as this would require a study of different

mutual fund schemes. For this the investor requires an advice from the

AMFI registered mutual fund advisor.


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CATEGORIES OF MUTUAL FUND:-

Based ontheirstructure

Based oninvestment


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Mutual Funds Can Be Classified As Follow:-

Based on their structure:- On the basis of the structure of the mutual

fund the mutual fund can be classified into following two types:-

1. OPEN ENDED FUNDS

2. CLOSE ENDED FUNDS

1) OPEN ENDED FUNDS:- In an open ended fund, the fund is all the timeready to sell new units and repurchase issued units. An investor can buy orredeem units from the fund itself at a price based on the net asset value(NAV) unit.

2) CLOSE ENDED FUNDS:- A close-end fund makes a one-time sale of a

fixed number of units. Units are redeemed upon maturity of the scheme.Except at maturity and special buy-back offer periods, it does not allowinvestor to redeem units directly from the funds. However, to provide themuch needed liquidity to investors, closed-end funds are listed on stockexchange.

Based On Their Investment Objective:-

Equity funds: - These funds invest in equities and equity relatedinstruments. With fluctuating share prices, such funds show volatile

performance, even losses. However, short term fluctuations in the

market, generally smoothens out in the long term, thereby offering

higher returns at relatively lower volatility. At the same time, such funds

can yield great capital appreciation as, historically, equities have

outperformed all asset classes in the long term. Hence, investment in

equity funds is considered for a period of at least 3-5 years. It can be

further classified as:-

i) Index funds: - In this case a key stock market index, like BSE

Sensex or Nifty is tracked. Their portfolio mirrors the benchmark

index both in terms of composition and individual stock weight

ages.

ii)

Equity diversified funds: - 100% of the capital is invested in

equities spreading across different sectors and stocks.


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iii) Dividend yield funds: - It is similar to the equity diversified funds

except that they invest in companies offering high dividend yields.

iv) Thematic funds: - Invest 100% of the assets in sectors which are

related through some theme. e.g. - An infrastructure fund invests

in power, construction, cement sectors etc.

v) Sector funds: -Invest 100% of the capital in a specific sector. E.g.

A banking sector fund will invest in banking stocks.

vi) ELSS: - Investment in these schemes entitles the investor to claiman income tax benefits up to Rs. 1 lakh under section 80c of the

Income Tax Act, but usually has a lock-in period before the end of

which funds cannot be withdrawn.

Balanced fund: -Their investment portfolio includes both debt and equity. Asa result, on the risk-return ladder, they fall between equity and debt funds.Balanced funds are the ideal mutual funds vehicle for investors who preferspreading their risk across various instruments. Following are balanced fund

classes:-

i) Debt-oriented funds: - Investment below 65% in equities.

ii) Equity-oriented funds: -Investment at least 65% in equities, remaining

in debt.

Debt fund: -They invest only in debt instruments, and are a good option for

investors averse to idea of taking risk associated with equities. Therefore, theyinvest exclusively in fixed-income instruments like bonds, debentures,Government of India securities; and money market instruments such ascertificates of deposit (CD), commercial paper (CP) and call money. The debtfunds can be classified into following types:-

i) Liquid funds: - These funds invest 100% in money market instruments, a

large portion being invested in call money market.


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ii) Gilt funds: - They invest 100% of their portfolio in government securities

and treasury bills.

iii) Floating rate funds:-They invest in short-term debt papers. Floaters

invest in debt instruments which have variable coupon rate.

iv) Arbitrage fund: -They generate income through arbitrage opportunities

due to mispricing between cash market and derivatives market. Funds

are allocated to equities, derivatives and money market and derivatives

and money markets. Higher proportion (around 75%) is put in money

markets, in the absence of arbitrage opportunities.

v) Income funds: - Typically, such funds invest a major portion of theportfolio in long-term debt papers.

vi) MIPs: - Monthly Income Plans (MIPs) have an exposure of 70%-90% to

debt and an exposure of 10%-30% to equities.

vii) FMPs: - Fixed Monthly Plans (FMPs) invest in debt papers whose

maturity is in line with that of the fund.

RISK V/S. RETURN

Fig:-RISK AND RETURN OF DIFFERENT TYPE OF MUTUAL FUND


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Fig:-Risk Return Matrix


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FUND STRUCTURE AND CONSTITUENTS: -In USA

mutual funds are called investment companies. In UK open-ended funds arecalled unit trusts and close-ended fund are called investment trusts. In Indiamutual funds are established as trusts and fall under regulatory jurisdiction ofSEBI. In India the mutual fund has 3-tier structure. Unit holders are thebeneficial owners of the net assets of the mutual fund scheme. In India the mainconstituents of mutual fund are as follows:-

1) Sponsor: - Sponsor (the first tier) who thinks of starting amutual fund. The sponsor approaches the Securities & Exchange

Board of India (SEBI), which are the market regulator and also the

regulator for mutual funds. SEBI checks whether the person is of

integrity, whether he has enough experience in the financial

sector, his net worth etc. The minimum qualification for a sponsor

is that he must have firm financial track record for 5 years and as

well the contribution of 40% net worth of AMC. The sponsor

appoints the trustees, AMC and custodian.


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2) Trust: - Once the SEBI is convinced, the sponsor creates a

public trust (the second tier) as per the Indian Trust Act, 1882.

Trusts have no legal identity India and cannot enter into

contracts, hence the trustees are the people authorized to act on

behalf of the trust. Contracts are entered into the name of the

trustees. Once the trust is created, it is registered with SEBI after

which this trust is known as the mutual fund. All mutual fund

schemes are to be approved by trustees. The trustee has the right

to dismiss AMC (with SEBI approval). The trustees receive fees for

service rendered. They must furnish half-yearly report to SEBI on

fund activities.

3) Asset Management Company: - The Asset Management

Company (AMC), to manage investors money. The AMC in return

charges a fee for the services provided and this fee is borne by

the investors as it is deducted from the money collected from

them. The AMCs Board of Directors must have at least 50% of

Directors who are independent directors. The AMC has to be

approved by SEBI. The AMC functions under the supervision of its

Board of Directors, and also under the direction of the trustees

and SEBI. The AMC should have a net worth of Rs 10 cr. all the

time. AMC have to submit quarterly report to SEBI on activities

and must comply with SEBI regulations.

Other Fund Constituents:-

4)Custodian: - A custodian role is safe keeping of physical

securities and also keeping a tab on the corporate actions like

rights, bonus and dividends declared by the companies in

which the fund has invested. The custodian is appointed by

the Board of trustees. The custodian also participates in a

clearing and settlement system through approved depository

companies on behalf of mutual funds, in case of

dematerialized securities.


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5) Transfer agents: -They issue and redeem units on behalf of

the fund. The other related services of transfer agents such as

preparation of transfer documents and updating investor

records.

6) Distributors: -They are appointed by AMC and act on behalf

of different funds. The independent individuals are appointed

as agents and they should be registered with AMFI.

FREQUENTLY USED TERMS

Net Asset Value: -Net Asset Value is the market value of the assets of thescheme minus its liabilities. Per unit NAV is the net asset value of the schemedivided by the number of units outstanding on the Valuation Date.

Receivables + Accrued income(Liabilities+ A. Liabilities)NAV = -----------------------------------------------------------------

Number of outstanding share or Units

Sale Price: -It is the price when an investor invests in a scheme which is alsocalled as Offer Price. It may include a sales load.

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

Price.

Redemption Price: -It is the price at which open-ended schemesrepurchase their units on maturity. Such prices are NAV related.

Sales Load: -It is a charge collected by a scheme when it sells the unitswhich is also called, Front-end load. Schemes that do not charge a load arecalled No Load schemes


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Repurchase or Back-end Load: - It is a charge collected by a schemewhen it buys back the units from the unit holders.

Systematic Withdrawal Plan (SWP): -Such plans allow the investor tomake Systematic Withdrawals from his fund investment account on a periodicbasis, thereby providing the same benefit as regular Income.

Systematic Transfer Plan (STP): - These plans allow the investor totransfer on a periodic basis a specified amount from one scheme to anotherwithin the same fund family, or in other word, a specified amount will beinvested in (periodically) in one scheme which could be an investment benefit

of other Scheme.

Systematic Investment Plan (SIP): - It is the process of investingregularly at fixed intervals, say, monthly, quarterly, annually. Works like aRecurring Deposit A/c. This process of investment vehicle allows an investor tobuild wealth over a long period of time and get the benefit of compounding ofreturns. The investor need not keep track over the portfolio nor does he have toworry about timing the market. Continuous investment through SIP provides anaverage benefit to an investor even at the time of too much volatility of equity

market.

As an example

Investme

nt period

Fix

Investme

nt

NAV on Date Allotted

Units

2

nd

March 1000 11 90.912nd April 1000 13 76.922nd May 1000 9 111.112nd June 1000 15 66.672nd July 1000 10 100.00Total 5000 58 445.61


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Average Unit Price: -

Sum of NAVs--------------------- = 11.60

No. Of investment

Average unit cost: -

Total Investment-------------------------- = 11.22Total units allotted

So from this calculation we can say that an investor will be always in profit

Side when he chooses the option of SIP.

Performance Measures of Mutual Funds The Soul of

Mutual Fund Analysis

Mutual Fund industry today, with about 33 players and more than six

hundred schemes, is one of the most preferred investment avenues in India.

However, 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 cannot 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 AMCs and this fame is directly linked to

their superior stock selection skills. For mutual funds to grow, AMCs 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 AMCs.


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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 a

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--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 cannot. By using the risk return relationship, we try to assess

the competitive strength of the mutual funds vis--vis one another in a better

way.

In order to determine the risk-adjusted returns of investment portfolios,

several eminent authors have worked since 1960s to develop composite

performance indices to evaluate a portfolio by comparing alternative portfolios


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within a particular risk class. The most important and widely used measures of

performance are given which is the soul of Mutual Funds:-

Beta

Standard Deviation

R-Square

Treynor Measure

Sharpe Measure

Sortino Ratio

Fama Model

P/E Ratio

Expense Ratio

BETA:-

Beta is a measure of a funds sensitivity to market movements

but this does not give an indication of how much an investor has gained by

taking the risk of investing in equities. A beta of 1 implies that a funds returns

will move in exact tandem with the markets. This means that if the market

gains 10%, the fund will also gain 10%. Funds having a beta of greater than one

will exhibit greater volatility than the market. If a fund has a beta of 1.2 then a

ten percent up move in the index will bring about a 12%increase in the funds

NAV. This correlation will also apply on the downside.

In a bull market it is more advantageous to have a fund with a beta

higher than one, as the fund would provide greater returns than the

benchmark. Conversely in falling markets it is better to have funds with a beta

lower than one. Funds having defensive portfolios will usually have a beta of

less than one. Such funds gain less than the benchmark on the upside but are


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better able to protect the returns. Investors who are actively tracking the

market and their fund do better with a higher beta fund whereas investors not

actively managing their equity funds can consider lower beta funds as the exit

decision can be taken at a more leisurely pace.

BETA is calculated as,

BETA = COV(X, Y)/VAR (Y)

COV(X, Y)= (X-AVG X) (Y-AVG Y)/(N-1)

VAR (Y) = (Y-AVG Y) 2/(N-1)

Where, X is returns of the fund

Y is returns of the benchmark

STANDARD DEVIATION:-

The standard deviation is often used

by investors to measure the risk of a stock or a stock portfolio. The basic idea is

that the standard deviation is a measure of volatility: the more a stock'sreturns vary from the stock's average return, the more volatile the stock

R-SQUARE:-

While beta gives an idea about the degree of movement of a fund

against the market, R-square measures the funds co-relation to the benchmark.

R-square ranges between 0 to 1.A R-square value of 1 indicates a perfect

correlation with the index while the value of zero shows that factors other than

the market movements are influencing the returns. The beta of a fund with a

very low R-squared is not meaningful since the portfolio would have an

extremely low correlation with the market index. As with all performance

indicators, R-square and Beta are based on past performance. These give an

indication of the funds future performance but it is not necessary that this will

happen.


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TREYNOR MEASURE :-

Developed by Jack Treynor, this

performance measure evaluates funds on the basis of Treynor's Index. This

Index is a ratio of return generated by the fund over and above risk free rate of

return (generally taken to be the return on securities backed by the

government, as there is no credit risk associated), during a given period and

systematic risk associated with it i.e., beta.

Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta

of the fund.

All risk-averse investors would like to maximize this value. While a high

and positive Treynor's Index shows a superior risk-adjusted performance of a

fund, a low and negative Treynor's Index is an indication of unfavorable

performance.

SHARPE MEASURE:-

In this model, performance of a fund is evaluated

on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund

over and above risk free rate of return and the total risk associated with it.

According to Sharpe, it is the total risk of the fund that the investors are

concerned about. So, the model evaluates funds on the basis of reward per

unit of total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted

performance of a fund, a low and negative Sharpe Ratio is an indication of

unfavorable performance.


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FAMA MODEL:-

The Eugene Fama model is an extension of Jensen model. This model

compares the performance, measured in terms of returns, of a fund with the

required return commensurate with the total risk associated with it. The

difference between these two is taken as a measure of the performance of the

fund and is called net selectivity.

The net selectivity represents the stock selection skill of the fund

manager, as it is the excess return over and above the return required to

compensate for the total risk taken by the fund manager. Higher value of which

indicates that fund manager has earned returns well above the return

commensurate with the level of risk taken by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where, Sm is standard deviation of market returns. The net selectivity is then

calculated by subtracting this required return from the actual return of the fund.

SORTINO RATIO:-

The ratio was created by Brian M. Rom in 1986 as an

element of Investment Technologies

The Sortino ratio measures the risk-adjusted return of an investment asset,

portfolio or strategy. It is a modification of the Sharpe ratio but penalizes only

those returns falling below a user-specified target, or required rate of return,

while the Sharpe ratio penalizes both upside and downside volatility equally. It

is thus a measure of risk-adjusted returns that is demonstrably more accurate

than the Sharpe ratio.

The ratio is calculated as:

,


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Where R is the asset or portfolio realized return; T is the target or

required rate of return for the investment strategy under

consideration, (T was originally known as the minimum acceptable

return or MAR); DR is the downside risk.

Thus, the ratio is the actual rate of return

in excess of the investor's target rate of return, per unit of downside

risk.

PRICE-EARNINGS RATIO:-

The P/E gives you an idea of what the market is willing to pay for the

companys earnings. The higher the P/E the more the market is willing to pay

for the companys earnings. A high P/E suggests that investors are

expecting higher earnings growth in the future compared to companies with

a lower P/E. In case of mutual funds, the P/E ratio is the weighted average of

all the stocks' P/E ratios in the mutual fund's portfolio.

Conversely, a low P/E

may indicate a vote of no confidence by the market Known as value stocks,

many investors made their fortunes spotting these diamonds in the rough

before the rest of the market discovered their true worth. The price/earnings

(P/E) ratio of an individual stock can give you some idea about the riskiness ofthat fund relative both to its benchmark and to other funds.

P/E RATIO (price multiple) is calculated as:

P/E RATIO=Market Value per Share/Earnings per Share (EPS)


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EXPENSE RATIO:-

Mutual fund fees and expenses are charges that may be incurred by investors

who hold mutual funds. Running a mutual fund involves costs, including

shareholder transaction costs, investment advisory fees, and marketing and

distribution expenses. Funds pass along these costs to investors in a number of

ways.

Some funds impose "shareholder fees" directly on investors whenever

they buy or sell shares. In addition, every fund has regular, recurring, fund-wide

"operating expenses." Funds typically pay their operating expenses out of fundassetswhich mean that investors indirectly pay these costs.

Among the above performance measures, two models namely, Treynor

measure and Jensen model use systematic risk based on the premise that the

unsystematic risk is diversifiable. These models are suitable for large investors

like institutional investors with high risk taking capacities as they do not face

paucity of funds and can invest in a number of options to dilute some risks. Forthem, a portfolio can be spread across a number of stocks and sectors. However,

Sharpe measure and Fama model that consider the entire risk associated with

fund are suitable for small investors, as the ordinary investor lacks the necessary

skill and resources to diversify. Moreover, the selection of the fund on the basis

of superior stock selection ability of the fund manager will also help in

safeguarding the money invested to a great extent. The investment in funds thathave generated big returns at higher levels of risks leaves the money all the

more prone to risks of all kinds that may exceed the individual investors' risk

appetite.

For the risk-return analysis of mutual funds, the following parameters are

considered annual fund returns, Beta, Sharpe Measure, Treynor Measure,

Jensen Measure and Alpha.


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Chapter2Company Profile


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History of Franklin Resources, Inc.

Franklin Templeton Investments has grown from being recognized as one ofthe best small companies in America to being considered a premier global

investment management organization. It offers clients a valuable perspective

shaped by giving six decades of experience, investment expertise and growing

global reach.

1940s

The company was founded in 1947 in New York by

Rupert H. Johnson, Sr., who ran a successful retail

brokerage firm from an office on Wall Street. He named

the company for U.S. founding Father Benjamin

Franklin because Franklin epitomized the ideas of

frugality and prudence when it came to saving and

investing.The companys first line of mutual funds

Franklin Custodian Funds was a series of conservatively

managed equity and bond funds designed to appeal to most

investors.

1950s

After Rupert Sr. retired, his son Charles B. Johnson

(Charlie) took over as president and chief executive

officer in 1957 at age 24. There were only a handful of

employees at that time and the funds had total assets

under management of $2.5 million. Franklin was

swimming against the tide because insurance

companies dominated the middle class investing

markets, but Charlie was convinced that he has a good

story to tell.


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1960s

By the early 1960s Charlie and his teams

persistence was paying off and the company was

growing albeit slowly. It was a struggle to keep up

with the day-to-day demands of the business and

Charlie continued to wear many hats-mutual fund

manager, wholesaler accountant. Rupert Johnson,

Jr., Charlies brother, joined the company in 1965

and also took on multiple roles. A decade ofextreme bull and bear cycles, the 1960s was an

exciting time to be in the industry.

1970s

Franklin went public in 1971, which gave Charlieand team the capital needed to grow the

business and position it for the future. In 1973,

the company acquired Winfield & Company, a

San Mateo, California-based investment firm,

and moved Franklins offices from New York to

California.The combined organization had close

to $250 million in assets under management

and approximately 60 employees.In 1979,

Franklin MoneyFund began a growth surge that

made it Franklins first billion-dollar fund and

launched the companys tremendous asset growth in the 1980s.


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1980s

Starting in 1980, the companys total assets

under management doubled (or nearly doubled)

every year for the next six years. The companys

stock began trading on the New York stock

Exchange. In the same year, the company

opended its first office outside in North America

in Taiwan. In 1988, Franklin acquired

L.F.Rothschild Fund Management Company.Assets under management for Franklin grew

from just over $2 bllion in 1982 to more than

$40 billion in 1989 ( the crash of 1987 had little

impact on Franklins income and bond funds). Not one to rest on their laurels,

management was concerned about Franklins heavy emphasis on fixed income

investments that had become companys bread and butter.

1990s

Strategic acquistions in the 1990s helped Franklin

diversify its investment management capabilities

beyond fixed income and also expand its global

footprint throughout Europe and Asia. In 1992,

after striking a deal with famed global investor Sir

John Templeton for acquistion of Templeton,

Galbraith & Hansberger Ltd., Charlie was named

Fund Leader of the Year for spreading waht was

then the largest mutual fund company in history.

Templeton gave the compant a strong portfolio of

international equity funds as well as the expertise of emerging markets guruDr. Mark Mobius, who currently leads a team of emerging market analysts and


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manages emerging market portfolios. Dr. Mobius has spent more than 30

years working in emerging markets all over the world. Then in 1996, in an

effort to broaden its line of domestic equity products, Franklin Templeton

bought Heine Securities corporation, investment advisor to Mutual fund

series,Inc., from Wall Street icon Michael Price.

2000s

Several more key acquisitions solidified the

companys position as a premier global investment

management organization:- Bissett in 2000,

Fiduciary Trust in 2001 and Darby in 2003.In 2005,

Gregory E. Johnson (Greg), Charlies son, became

chief executive officer, assuming overall

responsibility for leading Franklin Templeton

Investments. Greg had grown up in the business

and worked his way through the organizationbeginning on the trading desk at age 24 in 1985.

Charlie retained his role as chairman and continued to provide guidance to

Greg and his leadrship team.

Franklin Templeton InvestmentsType Public company, Industry,

Financial Services

Founded New York,NYHeadquarters San Mateo,CAKey people Charles B. Johnson, Chairman,

Greg Johnson,CEORupert Johnson, Jr., Vice Chairman

Products Mutual funds,Retirement Planning

Revenue $6.02 BillionUSD(2008)Net income $1.588 BillionUSD(2008)Employees 8,233 (March 2009)Website [http://www.franklintempleton.com/

Fig: - Franklin Templeton HeadquartersIn San Mateo
http://en.wikipedia.org/wiki/Types_of_business_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Financial_Serviceshttp://en.wikipedia.org/wiki/Financial_Serviceshttp://en.wikipedia.org/wiki/New_York,_New_Yorkhttp://en.wikipedia.org/wiki/New_York,_New_Yorkhttp://en.wikipedia.org/wiki/NYhttp://en.wikipedia.org/wiki/NYhttp://en.wikipedia.org/wiki/NYhttp://en.wikipedia.org/wiki/San_Mateo,_Californiahttp://en.wikipedia.org/wiki/San_Mateo,_Californiahttp://en.wikipedia.org/wiki/Californiahttp://en.wikipedia.org/wiki/Californiahttp://en.wikipedia.org/wiki/Californiahttp://en.wikipedia.org/wiki/Greg_Johnsonhttp://en.wikipedia.org/wiki/Greg_Johnsonhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/Rupert_Johnson,_Jr.http://en.wikipedia.org/wiki/Rupert_Johnson,_Jr.http://en.wikipedia.org/wiki/Product_%28business%29http://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Retirementhttp://en.wikipedia.org/wiki/Retirementhttp://en.wikipedia.org/wiki/Retirementhttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Employmenthttp://en.wikipedia.org/wiki/Websitehttp://en.wikipedia.org/wiki/Websitehttp://en.wikipedia.org/wiki/Employmenthttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Retirementhttp://en.wikipedia.org/wiki/Mutual_fundhttp://en.wikipedia.org/wiki/Product_%28business%29http://en.wikipedia.org/wiki/Rupert_Johnson,_Jr.http://en.wikipedia.org/wiki/CEOhttp://en.wikipedia.org/wiki/Greg_Johnsonhttp://en.wikipedia.org/wiki/Californiahttp://en.wikipedia.org/wiki/San_Mateo,_Californiahttp://en.wikipedia.org/wiki/NYhttp://en.wikipedia.org/wiki/New_York,_New_Yorkhttp://en.wikipedia.org/wiki/Financial_Serviceshttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Types_of_business_entity


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Franklin Templeton office worldwide:-(Updated as on 30th April 2009)

AsiaBangaloreBeijingChennaiDubaiHo Chi Minh City

Hong KongHyderabadKolkataKuala LumpurMumbai

New DelhiSeoulShanghaiSingaporeTokyo

AfricaCape TownJohannesburg

AustraliaMelbourneSydney


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EuropeAmsterdamDublinEdinburghFrankfurt

GenevaIstanbul

LondonLuxembourgMadridMilan

MoscowParis

PoznanStockholmViennaWarsaw

Zurich

North AmericaCalgaryEdmontonFort LauderdaleFort LeeHalifaxLos AngelesMexico CityMiami

MontrealNassauNew York CityNorwalkRancho CordovaSalt Lake CitySan Mateo

Short HillsSt. PetersburgTorontoVancouverWashington, DCWilmingtonWinnipeg

South AmericaBuenos Aires

Rio De JaneiroSao Paulo


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Franklin Templeton India

Franklin Templetons association with India dates back to more than a decade

as an investor. As part of the groups major thrust on investing in marketsaround the world, the India office was set up in 1996 as Templeton Asset

Management India Pvt. Limited. It flagged off the mutual fund business with

the launch of Templeton India Growth Fund in September 1996, and since

then the business has grown at a steady pace.

Corporate details

Franklin Templeton Investment India or Franklin Templeton InternationalServices, part of the diversified Franklin Templeton Investments. Hyderabad

now has emerged as their single largest center outside its US facility near

California. Franklin Templeton Investment India to open new shops in Chennai

and Mumbai also. Franklin Templeton Investment India to expand its IT

services arm based in Hyderabad, with an investment of at least $18 million.

The company has moved on to a $40-million facility, which has the capacity

to host some 1,800 people, and announced plans to take up work on the

phase II of the project to host 1,000 more, with an investment of $18 million.

Franklin Templeton Investment India manages investment vehicles forindividuals, institutions, pension plans, trusts, partnerships and other clients.

Further, the Franklin Templeton Investment India activity in India relates to

transaction processing, data and risk management, equity research and net

asset valuations. Moreover, they also focus on grooming people on to career

path of investment management professionals. Franklin Templeton

Investment India has Rs 31,962-crore plus Assets under Management,

handling over 1 million investor accounts. They are exploring more areas for

off -shoring going forward. The Group, with over $552.9 billion (which is more

than all banks put together in India) in assets under management. FranklinTempleton Investment India offers immense scope for growth. About $5

billion has been invested by Indian investors in schemes of Franklin

Templeton and they in turn invested about $6 billion in India for its global

investors in securities.

Performance:-The group of Franklin Templeton Investment India has registered operating

revenues of Rs 30,505 crores and net income of 8,031 crores.


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Organization:-The Franklin Templeton Investment India Parent Company is headed by Mr.Greg Johnson, President and Chief Executive Officer. Franklin TempletonInvestment India employs around 1,100 personnel.

A long-term commitment:- Since starting its operations in India,Franklin Templeton has invested a

considerable amount of time, effort and

resources towards investor and distribution

education, the belief being to be

successful in the long term, the

fundamentals need to be corrected, atwhatever cost! This resulted in various

advertising campaigns aimed at educating

investors, participation in seminars and

distributor training programs. Franklin

Templeton has played a pivotal role in steering the industry to its current

stage, and as long term players, it has continue to achieve the objective of

making mutual funds an investment of choice for both individual and

institutional investors.

In July 2002, Franklin Templeton India acquiredPioneer ITI; another leading fund houses In India to create an organization

with rich investment experience over market cycles, one of the most

comprehensive product portfolios, footprint across the country and an in-

house shareholder servicing function. The huge synergies that existed in the

two organizations have helped the business to grow at a rapid pace,

catapulting the company to among the top two fund houses in India.

Franklin Templeton Vision: - To be the premier global investment

management organization by offering high quality investment solutions,

outstanding service and attracting, motivating and retaining talented

individuals.


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Franklin Templeton Investment Philosophy

Franklin Templetoninvestment philosophy that follows a disciplined approach

to investing with a strong focus towards process orientation is the common

thread running through all schemes.

The key guiding principle to Franklin Templeton

investment philosophy is - maximize the risk- adjusted returns for our investors

in the respective asset classes, and create wealth for them over the long-term.

Franklin Templeton has successfully demonstrated the ability to achieve this in

the past, and is confident that our process-oriented investment approach will

help us sustain the same in the years to come.

Equity

While broad economy and sector trends serve as a broad guideline, Franklin

Templeton portfolio managers are essentially 'bottom-up' investors, focusing

more on individual stocks and their potential to deliver long term capital

appreciation. The emphasis is more on in-house research and looking beyond

published reports, as often there is more to a company's story than numbers

alone reveal. While quantitative analysis using proprietary research model

serves as a first stage filter, the research team and portfolio managers speak

with key management and observe operations onsite to get a meaningfulinsight into a company's ability to translate vision into reality.

Debt

The overall objective is to minimize both liquidity and credit risk. Our fixed

income team looks to arrive at a general maturity/duration range for the

portfolio in relation to the market based on its interest rate outlook, which is

arrived after a rigorous and close monitoring of various macro variables. The

shifts within this range are then determined by short term cyclical trends in the

economy. They look to manage interest rate risk across different asset class

and duration buckets, in order to optimize risk-adjusted returns. All the

investment options are thoroughly analyzed to ensure that credit risk is kept at

the minimum level. Any major shifts in portfolio strategy are based on long-

term trends, as opposed to short-term aberrations in interest rates.


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Fundamental Approach

Our investment decisions are guided more by what we believe in, less by what

the market thinks. That is the reason once we buy into a stock, or take a

maturity position in a debt portfolio based on our fundamental research andanalysis, we stick to our position without paying heed to market rumors and

whisper estimates. We believe that while technicals can rule the roost in the

short term, it is the fundamentals that prove rewarding over time.

Long Term Orientation

Franklin Templeton's portfolio managers are strong believers in consistently

delivering good performance. The key word is consistency. We believe that it is

not important to be top performer at any time and we attach more importanceto being among the top quartile in the peer group consistently, and this

requires taking a long-term view, even at the cost of temporary

underperformance.

Team Approach

While individual portfolio managers are the ultimate decision makers for the

scheme they manage, the belief is that working together can achieve greater

results than acting alone. That is why every stock that is researched by theanalysts is discussed intensively at regular investment team meetings, and the

analysis is available to all investment team members on a common platform.

Moreover, the high degree of interaction between investment team members

across the globe helps share and learn from each other's experience and

expertise.

The regular awards and top ratings accorded to Franklin Templeton

schemes are recognition of the consistently superior performance across asset

classes, and through market and economic cycles. They also reflect FranklinTempleton's long cherished values of choosing the long-term, disciplined and

team approach to managing its funds and business.


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Getting started

The old adage, "Don't put all your eggs in one basket, "isn't just a clich. But

with so many investment options, where do you start?

Start with your financial needs

People have different investment needs depending on their financial goals,

tolerance for risk and time framewhen they need the money they invested.

Our mutual funds are created with these needs in mind-we start with you.Before you choose investments, think about your financial goals, risk tolerance

and time frame. Then choose investments that match them

The investment pyramid

At Franklin Templeton we offer a wide variety of mutual fund options to meet

the equally wide variety of investment needs of our investors. The investment

pyramid below shows fund categories that are suitable for different time

frames, with the longest time frames at the top and the shortest at the base ofthe pyramid.


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Location in India where Franklin Templeton branches are

located:-

Franklin Templeton Investment India corporate office in India is located at

Corporate office4th floor, Wockhardt Towers, Bandra Kurla Complex,Bandra (East), Mumbai400 051India


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Chapter-3

Financial Planning & Mutual Fund


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FINANCIAL PLANNING AND MUTUAL FUND

Financial Planning: -Financial planning is an exercise aimed at identifying

all the financial needs of an individual, translating the needs into monetarilymeasurable goals at different times in the future, and planning the financial

investments that will allow the individual to provide for and satisfy his future

financial needs and achieve his lifes goals.The objective of financial planning is

to ensure that the right amount of money is available in the right hands at the

right point in the future to achieve an individuals financial goal. Successful

financial planning makes considerable contribution to the sum total of human

happiness. Financial planning is a process that helps a person work out where

he or she is now, what he/she may need in the future and what he/she mustdo to reach the financial goals. The process involves gathering relevant

information, setting life goals, examining the persons current financial status

and coming up with a strategy or plan for how the person can meet his/her

goals given the persons current situation and future plans.

The need for

financial planning persists throughout the whole life of an individual. Most

people have at least one unsatisfied need at any time. Most people have at

least one unsatisfied need at any time. Most people will have both financial

protection and investment needs simultaneously throughout life. However, thepriorities of these financial needs change as people grow older and their

personal circumstances change. To appreciate how these changes come about,

financial planners uses the life cycle stage.

The life cycle of any individual can

be typically sub-divided into the following stage:-

1) Childhood stage

2) Young Unmarried stage

3) Young Married stage

4) Young Married with Children Stage

5) Married with Older Children Stage

6) Post-family/Pre-retirement Stage

7) Retirement stage


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1) Childhood stage: -The childrens financial needs are met by parentsor other relatives. Most of the basic requirements of children are met

from the income of parents or relatives. However, most people who

want to give their children more privileged opportunities will have to

start investing money for this purpose when their children are still

young. Hence, the main need for children may be to invest cash gifts to

provide a lump sum when they are adults. The parents or guardians

make even these arrangements until the children reach adulthood.

2) Young Unmarried Stage: -If they are single with no dependents,they have little need for life assurance products. Normally, the main

protection need of a young single person in work is to protect his or her

earnings against disability resulting from injury or long-term sickness.

Young unmarried persons will also have considerable investment needs.

They may wish to invest in equities as they have a longer time horizon

and as a result a higher risk appetite. They may also wish to take out a

long term saving plan. It is never too early to start contributing to a


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pension scheme, which will provide an income on retirement; the earlierthe scheme starts the lower the annual cost will be.

However, most young

people will have relatively low incomes and cannot afford to devotelarge amounts to financial planning. Also, the young person may already

have more urgent short term needs, such as saving up to marry and

establish a home. Thus, money should normally be devoted to long-term

plans only when adequate short-term savings have been set aside.

3) Young Married stage: - A young couple becomes interdependentwith a shared responsibility for the achievement of future goals. Both

partners may work and contribute to the family income or one may be inpaid employment with the other looking after the family home.

a) Where both partners work,they have two incomes to meet the

burden of their costs. Although each of them will often still be fairly

low on the earning scale, they should have sufficient surplus funds to

meet their most important financial needs. Since the couple depends

on two incomes, the loss of one income would be a serious blow to

their domestic economy. The priority need is therefore to protect

each of their incomes against loss through disability resulting frominjury or long term sickness.

b) If only one of the partners earns the family living, their financial

planning priorities will be different. The death of the wage earner

would deprive the non-working partner of family income and

therefore there is a need for life assurance on the earning members

life. The sum assured should be sufficient to replace a large part of

their earnings, possibly for the rest of the surviving partners life.

Also, with only one working partner, the need to start pension

provision early is greater, should the money available to pay for it.

4) Young Married with Children Stage: -The arrival of children veryquickly changes the financial situation of any young couple. This a

difficult stage as expenditure is rising at a faster rate than income. This

will reduce the money available to spend as a financial planning but the

protection needs of the family will increase greatly. A substantial life

assurance on the wage earners life is now absolutely necessary.Precisely how much cover is needed will depend on the familys


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standard of living and the age at which children are expected to

complete their education.

Once protection needs are taken care of, the

family will have to make provisions for investments. These investmentneeds could take various forms. The most common are saving for

childrens education and marriage. To achieve these objectives for their

children, the parents may have to start investing from the day the child

is born. Additional investment needs are saving for a house, car, holidays

and most importantly, adequate provisions for retirement.

5) Married with older Children stage: - By this stage, the parents areapproaching mid-career and their incomes would have usually have

increased. With improving finances, the family lifestyle will have

improved and become more affluent. The parents financial planning

priorities would also be changing from available protection needs to

investment needs. There are normally two reasons for investment

considerations becoming of paramount importance. Firstly, the couple

may be raising loans or may have raised loans for a house, cars or

childrens education. Plans have to be made to service these loans and

repay capital. Perhaps, most importantly, pension provision to provide

an income in retirement is becoming absolutely crucial by this stage. Theterm to retirement is becoming shorter. The annual investment required

to fund a good pension is growing with every year of delay. If adequate

contributions do not start now, it may become impossible to build a

sufficient fund to buy a pension that maintains the family standard of

living.

6) Post Family/Pre-Retirement Stage: - The children may havebecome financially independent by now and the need to protect them

against the financial consequences of parental death disappears. The

parents may have now reached the peak of their earning power. If they

did take out 10-or 20-year investment plans when they were younger,

these will now make capital sums available for them to spend or invest.

It is also their last opportunity to ensure they will have adequate income

to preserve their standard of living in retirement. In this stage, people

need to maximize investment into pension products. At this stage, most

stage, most people start experiencing some form of sickness or the

onset of a disease. Hence, protection from disability from health relatedproblems increase. On the life assurance side, one or both partners may


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still need financial protection against the effect of the others death, and

this protection may well be needed for the rest of their lives.

7) Retirement Stage: - Most people would like to maintain the same

standard of living in retirement as they did when they worked. It is athumb rule that people need an annual retirement income equal to two-

thirds of their final years income from employment. Unfortunately, very

few people are able to achieve this target. Most are able to achieve only

20% or less of their pre-retirement earnings. After retirement, the value

of these incomes is often further reduced by inflation. By the time

people reach retirement they fall into one of three categories:-

a) Low pension income and little capital with which tosupplement it: -There is little a financial planner can do to helpthe aged people who have low income and very little capital. The

unfortunate pensioner will have to either continue working to

earn a living or depend on others or the government for support.

The prime need in this case would be for whatever fixed income

can be produced from investments, with capital fully protected.

b) Relatively low pension income plus some accumulated

capital: - These people need to invest their capital to produceadditional income. They cannot afford to take even the least risk,

as this capital will support them for the rest of their lives. Most

people will need an annuity or a regular income plan to meet their

expenses.

c) Sufficient pension income plus substantial assets and

capital: - These are the fortunate people who had the foresight

to plan early. Their main need would be to preserve the real valueof their investments against inflation. They can afford to

apportion some capital to higher-risk, higher-return investments

to pass accumulated assets to their children.


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Constraints to Financial Planning: - There is several constraintspeople face in financial planning. The foremost among the constraints is

insufficient investible resources. Though people need to start planning early in

life, many individuals have inadequate resources available during their younger

years. Under the circumstances, a monthly budget statement goes a long way

towards achieving the financial discipline necessary to decrease discretionary

expenses and increase savings.

Another constraints lies within financial planning

products themselves. There may be a dearth of appropriate financial products

to meet some peoples special needs. Or financial products, especially

insurance products, may be available only to people within given age limits or

satisfying health-related criteria.

The two most important constraints on

investments to meet predictable needs are time and risk. Time is important to

benefit from the power of compounding by starting early. Different

investments carry different levels of risk. The basic principle of investing is the

greater the risk, the greater the reward. No matter how attractive the

potential returns on speculative investments, they are not for people who

cannot afford to lose money. This is particularly true of the aged who no longer

have the earning capacity to replace their losses.

Although the life cycle model is

useful to understand the benefits of financial planning, it is only a model. It

operates on a number of fixed assumptions that may apply to many but not all

situations. Some peoples lives do not fit into the life cycle pattern. Some

people will be permanent invalids, others may never marry or set up home and

some, by chance or design, will never have children. In some occupations

people will retire early, much like our cricketers. More common, however, are

the life cycle changes produced by the stress of modern living. Marital breakup

is perhaps the most common of these changes. Divorce is a distortion of the

life cycle model and will result in radically different financial planning needs.

We saw earlier that people need to protect their spouses and families against

the possibility of their early death. Yet early death is itself a distortion of the

life cycle pattern creating new needs for the surviving widows or widowers.

Forced early retirement from the job is another example of a situation that can

upset financial planning of an individual, particularly if he has significant

financial obligations.


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Financial planning and Mutual Funds:-

On the whole, despite these

constraints, financial planning offers to most people significant benefits-

including peace of mind and happiness. Unaided, most people find it difficult

to identify and accept their financial needs. It is for this reason that a financial

planner is one of the most respected professions in the developed countries. It

is for the same reason that financial planning profession is now emerging to be

important in India. After all, financial health is an important as physical and

spiritual health, and people should approach a financial planner who can

advise them on achieving financial fitness.

Generally people have two types of

financial needs protection and investment. Insurance companies seek to

offer products for protection needs. Mutual funds broadly cater to the

investment needs. Mutual fund products form a powerful set of tools available

to financial planners and investors. Hence, it is in the fitness of things that

those individuals who are in the business of disturbing fund products also learn

how to help investors do appropriate financial planning before making

investment decisions.

Stocks, bonds Investment experts recommend growth

investments such as stocks and stock funds for long-term goals, where you

won t need to sell your investment for 5 years or more. For short-term goals,

where you might sell your investment in 1 year or less, they recommend fixed

income funds and other liquid investments. Of course, their specific

recommendations will depend on your comfort with risk. Money market

instruments-as an investor, you have a wide variety of choices, and it would be

difficult to find one type of investment vehicle that effectively takes advantageof all of today investment options. That's why you may want to consider

diversifying your portfolio over a variety of investment vehicles as mutual

funds do for you.


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Model portfolio: -In preparing an investing program, the investor or theadvisor would have to deal with investors at different stages of their life cycle

and therefore with different needs. Each type of investor should have some

typically suitable model portfolio. There are four model portfolio of general

applicability and the mutual fund distributors in India are well-advised to

consider them as the basis to develop similar model portfolios for Indian

mutual fund investors.

Investor Recommended Model Portfolio

1) Young, Unmarried professional ---- 50% in Aggressive Equity Funds

-25% in High Yield Bond Funds, andGrowth and Income funds

-25% in Conservative Money Market

Funds

2) Young Couple with Two Incomes----10% in Money Market

and two children -30% in Aggressive Equity Funds

-25% in High Yield Bond Funds, and

Long Term Growth Funds

-35% in Municipal Bond Funds

3) Older couple, single Income -----30% in short-term municipal Funds

-35% in long-term Municipal Funds

-25%in moderately Aggressive Funds

-10% in Emerging Growth Equity

4) Recently Retired Couple -----35% in conservative Equity Funds

For capital preservation/income-25% in moderately Aggressive Equity

For modest capital growth

-40% in Money Market Fund

A good exercise will be to find the Indian mutual fund

equivalent recommendations for Indian investors, using the above guide.


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Risk associated to fixed income bearing securities

Interest rate risk: -As with all the securities, changes in interest rates may

affect the schemes Net Asset Value as the prices of the securities generallyincrease as interest rates decline and generally decrease as interest rates rise.Prices of long-term securities generally fluctuate more in response to interestrates changes then do short term securities. Indian Debt markets can bevolatile leading to the possibility of price movements p or down in the fixed

income securities and thereby to the possible movements in the NAV.

Liquidity or marketable risk: -

This refers to the ease with which asecurity can be sold at near to its valuation yield to maturity. The primarymeasure of liquidity risk is the spread between the bid price and the offerprice quoted by the dealer. Liquidity risk is inherent to the Indian Debtmarket.

Credit risk: -Credit risk or default risk refers to the risk that an issuer of

fixed income security may default (i.e. will be unable to make timelyprincipal and interest payments on the security). Because of those riskscorporate debentures are sold at a yield above those offered on Governmentsecurities, which are sovereign obligations and free of credit risk. Normallythe value of fixed income security will fluctuate depending upon theperceived level of credit risks well as the actual event of default. The greaterthe credit risk the greater the yield require for someone to be compensatedfor increased risk.

Business Risk: -

Anything that can harm a companys profitability,

from poor management to obsolete products, can be called a businessrisk. Because of the management who is holding the mutual fund theprice of NAV varies. It also depends upon the fund manager who isdealing with the mutual fund.


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Currency risk:-

The possibility that international investment will suffer

because the rupee (or dollar depending on the fund) gains strength againstthe currencies of other countries is known as currency risk.

Country risk:-

Political instability, financial woes and other problems thatweaken a countrys economy can spell trouble for money managers who

invest there.

HOW TO INVEST IN MUTUAL FUND:-

1. Identify Investment needs:-Financial goals vary drastically based on the

age of investors, their lifestyle, financial independence, family commitmentsand level of income and expenses among many other factors. Therefore, thefirst step is to assess your needs. One can begin by defining his investmentobjectives and needs, which could be regular income, buying a home or

finance a wedding or educate the children or a combination of all theseneeds, the quantum of risk one is willing to take and also according to hiscash flow requirements.

2. Choose the right Mutual Fund Scheme:-The important thing is to

choose the right mutual fund scheme, which can fulfill all the requirementsof the investor. The offer document of the schemes tell you its objectives andprovides supplementary details like the track records of other schemes

managed by the same AMC or by the same Fund Manager. Some otherfactors to evaluate the schemes before investing in a particular mutual fundare the track record of the performance of the fund, portfolio allocation,dividend yield and the degree of transparency as reflected in the frequencyand quality of their communications.

a)For an Equity Fund:For an equity fund there are some points to evaluate the

scheme, which mainly invests in equities:


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Investment Portfolio: -The first thing to calculate for an equity schemeis its portfolio of investment. How perfectly the investment is diversifiedin the different equities of the stock market is the main concern.

Risk Diversification: -As good as the portfolio is managed as low wouldbe the risk. For investment as an aggressive investor he should go for riskbut for a conservative investor he should evaluate the portfolio accordingto his risk taking capability.

Time Span: -Presently all the equity schemes are having the specialty to

invest anytime and also redeem as per the needs. Howev

aman finance project

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