2791632 basic information on mutul funds
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CHAPTER ONE:
1) INTRODUCTION:
1.1.1 MUTUAL FUND:
The SEBI regulations, 1993 defines a mutual fund as a fund in the form of a
trust by a sponsor, to raise money by the trustees trough the sale of units to the public,
under one or more schemes, for investing in securities in accordance with these
regulations
A mutual fund is a professionally-managed firm of collective investments thatpools money from many investors and invests it in stocks, bonds, short-term money
market instruments, and/or othersecurities. In a mutual fund, the fund manager, who is
also known as the portfolio manager, trades the fund's underlying securities, realizing
capital gains or losses, and collects the dividend or interest income. The investment
proceeds are then passed along to the individual investors. The value of a share of the
mutual fund, known as the net asset value per share (NAV), is calculated daily based on
the total value of the fund divided by the number of shares currently issued and
outstanding.
1.1.2 HISTORY OF THE MUTUAL FUND:
In the beginning:
Historians are uncertain of the origins of investment funds; some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William I as the first
mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose
investment trust created in 1774 may have given the king the idea. Van Ketwich probably
theorized that diversification would increase the appeal of investments to smaller
investors with minimal capital. The name of van Ketwich's fund, EENDRAGT MAAKT
MAGT, translates to "unity creates strength". The next wave of near-mutual funds
included an investment trust launched in Switzerland in 1849, followed by similar
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vehicles which is followed by many kind of companies created in Scotland in the 1880s.
The idea of pooling resources and spreading risk using closed-end investments soon took
root in Great Britain and France, making its way to the United States in the 1890s. The
Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S.
The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an
important step in the evolution toward what we know as the modern mutual fund. The
Alexander Fund featured semi-annual issues and allowed investors to make withdrawals
on demand.
The Arrival of the Modern Fund :
The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded
the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually
spawning the mutual fund firm known today as MFS Investment Management. State
Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later,
State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall
and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and
Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in
the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which
was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank
style of investments in business and trade.
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Regulation and Expansion:
By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-
end funds. With the stock market crash of 1929, the dynamic began to change as highly-
leveraged closed-end funds were wiped out and small open-end funds managed to
survive.
Government regulators also began to take notice of the fledgling mutual fund industry.
The creation of the Securities and Exchange Commission (SEC), the passage of
the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934put
in place safeguards to protect investors: mutual funds were required to register with the
SEC and to provide disclosure in the form of a prospectus. The Investment Company Act
of 1940 put in place additional regulations that required more disclosures and sought to
minimize and minimize grievience of investor of different catogeries conflicts of interest.
The mutual fund industry continued to expand. At the beginning of the 1950s, the numberof open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak,
and the mutual fund industry began to grow in earnest, adding some 50 new funds over
the course of the decade. The 1960s saw the rise of aggressive growth funds, with more
than 100 new funds established and billions of dollars in new asset inflows.
Hundreds of new funds were launched throughout the 1960s until the bear market of
1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as
quickly as investors could redeem their shares, but the industry's growth later resumed.
Massachusetts Investors Trust (now MFS Investment Management) was founded on
March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The
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entire industry, which included a few closed-end funds, represented less than $10 million
in 1924.
The stock market crash of 1929 slowed the growth of mutual funds. In response to the
stock market crash, Congress passed the Securities Act of 1933 and the Securities
Exchange Act of 1934. These laws require that a fund be registered with the (SEC) .
1.1.3 SETUP OF MUTUAL FUNDS:
A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders.
Asset management company (AMC) approved by SEBI managers the fund by
making investments in various schemes of the 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.
SEBI regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e., they should not be associated with
the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds
are required to be registered with SEBI before they launch any scheme. The performance
of a particular scheme of a mutual fund is denoted by net value (NAV).
1.1.4 MUTUAL FUND VS OTHER INVESTMENT:
Mutual funds offer several advantages over investing in individual stocks. For example,
the transaction costs are divided among all the mutual fund shareholders, who also
benefit by having a third party (professional fund managers) apply expertise and dedicate
time to manage and research investment options. However, despite the professional
management, mutual funds are not immune to risks. They share the same risks associated
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with the investments made. If the fund invests primarily in stocks, it is usually subject to
the same ups and downs and risks as the stock market.
1.1.5 SHARE CLASES:
Many mutual funds offer more than one class of shares. For example, you may have seen
a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool
(or investment portfolio) of securities and will have the same investment objectives and
policies. But each class will have different shareholder services and/or distribution
arrangements with different fees and expenses
1.1.6 DISTRIBUTION CHANNELS IN THE MUTUAL FUND INDUSTRY:
In India, AMCs work with five distinct distribution channels those are direct , banking,
retail, corporate and indiual financial adviser.
The Direct Channels:
In the direct channel, customers invest in the schemes directly through AMC. In
most cases , the company does not provide any investment advice, so these
investors have to carry out their own research and select schemes themselves. The
fund companies provide several tools to investors who invest through this
channel. This includes monthly a/c statement, processing of transaction, and
maintaince of records. In this channel most investors can invest through websites,
or receive information through telephonic services provided by the company.
About 10-20% of the total sales of an AMC come through this direct channel.
The banking channel:
The large customer base of banks, in devolped countries, have played an
important role in the selling MFs. In the recent years, this cahannel has also
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opened up in india. Banks operating in india , including public sector, private and
foreign banks have established tie-up with various fund companies for providind
distribution and servicing.
The banking channel is likely to develop as the most vital distribution channel for
fund companies there are several reaons for the same. Customers remain invested
in banks for long periods of time and therefore banks maintain a relationship of
trust with their customers. Customers are rely on advice provided to them by
bankers as they are always on the look out for better investment avenues.
Managers are guiding to customers about various funds.
An additional advantage that banks provide is that the concerned customer
becomes a permanent contact of the banks and therefore can be reached during
launch of (new fund offer) NFO or new schemes any time in the future.
The retail channel:
A customer can deal with directly with a sub broker belonging to a distribution
company, instead of taking trouble of dealing with several agents. Distribution
companies sell the schemes of several fund houses simultaneously and brokerage
is paid by the AMC whose funds they sell. The retail channel offer the benefits of
specialist knowledge and established client contact and, therefore private fund
houses are generally prefer this channel. Some of the major players in India in this
in this channel are national players lke Karvey, Birla sunlife IL&FS and
cholamandalam. The key factor for this channel to sell a companys fund used to
be the brokerage paid. The banking and retail channel generally contribute to
about 50-70% of the total Asset Under Management(AUM).
The corporate channel:
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The corporate channel includes a variety of institutions that invest in shares on the
companys name. these are businesses, trust, and even state and local
governments. For institutional investors, fund managers prefer to create special
funds and share classes. Corporate can either invest directly in mutual funds, or
through an intermediary such as a distribution house or a bank.
Corporate exhibit varying degrees of awareness of mutual fund products. Most of
the established corporate, such as the TVS industries in Hyderabad, are well-
versed with the performance and composition of various funds. The smaller
companies and start-up firms, however, need to be educating on several aspects of
mutual funds. In order to provide information to such clients, fund companies
usually organize presentation for these companies or set-up meetings with the
finance managers.
Individual Financial Advisors(IFA) or Agents:
i. The IFA channel is the oldest channel for distribution and was widely employed
at the time when UTI monopoly in the market. In recent times with the
emergence significantly decreased.
ii. An agent who basically acts as an interface between the customer and the fund
house there is a unique systems in place in India , wherein several sub-brokers are
working under one main broker. The huge network of sub-brokers, thus ensure
larger market penetration and geographic coverage. As per AMFI, over one lakh
agents are registered to sell mutual funds and other financial products such as
insurance across the country.
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1.1.7 SEBI REGULATION ON THE INVESTMENT OF A MUTUAL FUND:
The investments of a mutual fund are subjected to a set of regulations prescribed by
SEBI. Presently following restrictions apply.
No term loan shall be granted by a mutual fund scheme.
A mutual fund, under all its schemes taken together, will not own more than 10
% of any companys paid up capital carrying voting rights.
A scheme may invest in another scheme under the same asset managementcompany or any other mutual fund withought charging any fees, provided
A scheme may invest in another sheme under the same asset management
company or any other mutual fund without charging any fees, provided that the
aggregate inter scheme investment made by all the schemes under the same
management.
Transfers of investment from one scheme to another scheme of mutual fund
permitted provided that:
a. Such transfers are done at the prevailing market price for quoted
instruments on spot basis.
b. The securities so transferred shall be in conformity with the investment
objectives of the schemes to which such transfer has been made.
c. The registration and accounting of the transactions is completed and
ratified in the next meeting of the board of trustees.
A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase,redemption of units, or repayment of interest or dividend to the unitholders. Such
borrowings shall not exceed 20% of the net asset of the scheme and the duration
of the borrowing shall not exceed 6 months. The fund may borrow from
permissible entities at prevailing market rates and may offer the assets of the
schemes as collateral for such borrowings.
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A scheme shaal not invest more than 15% of its NAV in debt instruments issued
by a single issuer which are rated not below investment grade by an authorized
credit rating agencu. Such investment limit may be extended to 20% of the NAV
of the scheme with the prior approval of Board of Trusttes and the Board of Asset
Management Company. This limit, however, is not applicable for investment in
governments securities and money market instruments.
A scheme shaal not invest more than 10% of its NAV in unrated debt instruments
issued by a single issuer and the total investment in such instruments shall not
exceed 25% of the NAV of the scheme.
A mutual fund will buy and sell securities on the basis of deliveries. It cannot
make short sales or engage in carry forward transactions.
A scheme shall not make any investment in
a. Any unlisted security of an associates or group company of the sponsor .
b. Any security issued by way of private placement by an associate or group
company of the sponsor
c. The listed securities of group companies of the sponsor in exess of 25% of the
net assets.
The investment manager may invest in a scheme from time to time. The percentage of
such investments to the total net assets may vary from time to time and can be upto
100% of the net assets of the schemes.
A scheme shall not invest more than 10% of its NAV in the equity shares or equity
related instruments of any one company.
A scheme may invest in ADRs/GDRs of Indian companies listed on overseas stock
exchanges to the extent and in a manner approved by RBI .
A scheme shall not invest more than 5% of its NAV in unlisted euity shares or equity
related instruments in case of an open ended schemes and 10% of its NAV in case a of
closed ended scheme.
1.1.8 TAX SAVING ON MUTUAL FUND:
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A. There are two types of tax-saving funds, equity-linked savings schemes (ELSS) and
pension funds. ELSS schemes are basically diversified equity schemes, which have a
three-year lock-in. Investments heresubject to a maximum of Rs 10,000receive a
tax rebate of 0 to 20 per cent depending on the income slab. As these are equity
instruments they have the maximum risk-return potential among all asset classes. What
this means is that return has a propensity to vary with great intensity. Although an
average tax-saving mutual fund delivered 16.36 per cent in 2002, the range of returns was
extreme. Thus, in that year, the best tax-saving fund delivered 42.61 per cent and the
worst was down 3.16 per cent. The best way to overcome the vagaries of stock markets is
to diversify. Diversification can be across funds and, more importantly, across timeperiods. By investing regularly every year in these funds one can set up a long-term
systematic investment plan.
The other route for saving taxes is pension funds, even though there are currently only
two such funds in operation, Franklin Templeton's Templeton India Pension Fund and
UTI's Retirement Benefit Plan. Introduced for the first time in 1997, pension funds are
hybrid schemes, which have a debt orientation, and carry the same tax benefit as ELSS.
From the taxpoint of view, bonus units are conceptually similar to dividend stripping,
but somewhat more complex. Bonus units that a fund issue is deemed to have been
acquired at zero cost. Thus, whenever they are sold, the entire sale price is treated as
capital gains. However, at the time of issue of bonus, the NAV of the fund drops in a
proportion that is identical to the ratio at which bonus funds are issued. This fall in the
NAV is a capital loss as far as the original units are concerned and it is here that tax
benefits can be realised. The original units can be sold off with a capital loss, which can
be used to set off other capital gains. The bonus units carry a high tax liability though
since you will pay taxes on the entire sale price.
Here's an example. Suppose you hold 10,000 units of a fund whose NAV is Rs 15. You
made the purchase less than a year ago at an NAV of Rs 12. If today you decide to sell
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these units, you will fetch Rs 1.5 lakh, out of which Rs 30,000 will be short-term capital
gain. On this, you are likely to pay a tax of Rs 9,00030 per cent of gains.
1.1.9 ROLE OF MUTUAL FUND IN STOCK EXCHANGE:
Mutual funds are an ideal vehicle for investment by retail investors in the stock market
for several reasons.
i. It pools investments of small investors together increasingly thereby the participation
in the stock market.
ii. Mutual funds being institutional investors, can invest in market analysis generally not
available or accessible to individual investors, providing therefore informed decisions
to small investors.
iii. Mutual fund can diversify the portfolio in better way as compared with individual
investors due to the expertise and availability of funds.
Mutual funds in india, because of their mall size and slower growth in the recent past,
have tended to play only a limited role in the stock market.the share of mutual funds in
total turnover of the stock market (BSE+NSE), which was 4.9% in January 2000,
declined to 3.6% by January 2003.
1.1.10 Mutual Funds FAQs:
(NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The
per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.
Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include
a sales load.
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Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a
back-end load. This is also called Bid Price.
Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are NAV related.
Sales Load
Is a charge collected by a scheme when it sells the units. Also called, Front-end load.
Schemes that do not charge a load are called No Load schemes.
Repurchase or Back-end Load
Is a charge collected by a scheme when it buys back the units from the unit holders.
1.1.11 COST INVOLVED IN MUTUAL FUNDS:
An investor must know that there are certain costs involved while investing in mutual
funds.
OPERATING EXPENSES:
These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment
managers, audit fees to charted accountant, custodial fees, register and transfer agent fees,
trustee fees, agent commission. Operating expenses also known as expenses ratio which
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is annual expenses expressed as a percentage of these expenses is required to be reported
in the schemes offer document or prospectus.
Expenses ratio=
For instant, if funds Rs. 100 crores and expenses Rs. 20 lakhs. Then expenses ratio is 2%
expenses ratio is available in the offer document and fro historical per unit statistics
included in the financial results of the fund which are published by annually, un audited
for the half year ending September 30th and audited for the physically year end 1st March
30th .
Depending upon scheme and net asset, operating expenses are determined by limits
mandated by SEBI mutual funds regulation act. Any excess over specified limits as to
born by Management Company, the trustees or sponsors.
SALES CHARGES:
These are known commonly sale loads, these are charged directly to investor. Sales loads
are used by mutual fund for the payment of agents commission, distribution and
marketing expenses. These charges have no effect on the performance of the scheme.
Sales loads are usually expression percentage and or of two types front-end and back-end.
FRONT-END LOAD:
It is a one time fixed fee paid by an investor when buying a Mutual funds scheme. It
determines public offer price which intern decides how much of your initial investment
actually get invested the standard practice of arriving a public offer price is as follows.
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Operating expenses
Average net assets
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Public offer price=
Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end
load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.
10,20. So only 980 units are allowed to the investor.
Number of units allotted=
10,000/10,20= 980 units at a NAV of Rs. 10.
This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end
loads tend to decrease as initial investment amount increase.
BACK END LOAD:
2
Net asset value
(1-front end load)
Amount invested
Public offer price
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May be fixed fee redemption or a contingent differed sales charged a redemption so load
continues so long as the redeeming or selling of the units of a fund does not take place in
the event of a back end load is applied. The redemption price is arrive or using following
formula.
Redemption price =
Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a
2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price 10/
(1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).
CONTINGENT DEFERRED SALES CHARGES (CDSC):
Contingent differed sales charges of a structured back end load. It is paid when the units
are reading during the initial years of ownership. It is for a predetermined period only
and reduced over the time you invested for a fund. The longer remains in a fund the
lower the CDSC.
The SEBI stipulate the a CDSC may be charge only for first four years after purchase of
units and also stipulate the maximum CDSC that can we charge every year. This is the
SEBI mutual funds regulations 1996 do not allow either the front end load or back end
load to any combination is higher than 7%.
TRANSACTION COST:
Some funds may also impose a switch over fee which is charge on transfer of investment
from one scheme to another within a same mutual funds family and also to switch from
one plan to another within same scheme.The real estate mutual funds sector is now being
considered as the engine of economic growth.
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Net asset value
(1+back end load)
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1.1.12 The objectives of Association of Mutual Funds in India:
The Association of Mutual Funds of India works with 30 registered AMCs of the
country. It has certain defined objectives which juxtaposes the guidelines of its Board of
Directors. The objectives are as follows:
This mutual fund association of India maintains a high professional and ethical
standards in all areas of operation of the industry.
It also recommends and promotes the top class business practices and code of
conduct which is followed by members and related people engaged in the
activities of mutual fund and asset management. The agencies who are by any
means connected or involved in the field of capital markets and financial services
also involved in this code of conduct of the association.
AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual
fund industry.
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 inorder to promote
proper understanding of the concept and working of mutual funds.
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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.
1.1.13 The sponsorers of Association of Mutual Funds in India:
Bank Sponsored :
SBI Fund Management Ltd.
BOB Asset Management Co. Ltd.
Canbank Investment Management Services Ltd.
UTI Asset Management Company Pvt. Ltd.
Institutions:
GIC Asset Management Co. Ltd.
Jeevan Bima Sahayog Asset Management Co. Ltd.
Private Sector:
Indian:-
BenchMark Asset Management Co. Pvt. Ltd.
Cholamandalam Asset Management Co. Ltd.
Credit Capital Asset Management Co. Ltd.
Escorts Asset Management Ltd.
JM Financial Mutual Fund
Kotak Mahindra Asset Management Co. Ltd.
Reliance Capital Asset Management Ltd.
Sahara Asset Management Co. Pvt. Ltd
Sundaram Asset Management Company Ltd.
Tata Asset Management Private Ltd.
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Predominantly India Joint Ventures:-
Birla Sun Life Asset Management Co. Ltd.
DSP Merrill Lynch Fund Managers Limited
HDFC Asset Management Company Ltd.
Predominantly Foreign Joint Ventures:-
ABN AMRO Asset Management (I) Ltd.
Alliance Capital Asset Management (India) Pvt. Ltd.
Deutsche Asset Management (India) Pvt. Ltd.
Fidelity Fund Management Private Limited
Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.
HSBC Asset Management (India) Private Ltd.
ING Investment Management (India) Pvt. Ltd.
Morgan Stanley Investment Management Pvt. Ltd.
Principal Asset Management Co. Pvt. Ltd.
Prudential ICICI Asset Management Co. Ltd.
Standard Chartered Asset Mgmt Co. Pvt. Ltd.
1.1.14 Performance of Mutual Funds in India:
Let us start the discussion of the performance of mutual funds in India from the day the
concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited
investors or rather to those who believed in savings, to park their money in UTI Mutual
Fund. For 30 years it goaled without a single second player. Though the 1988 year saw
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some new mutual fund companies, but UTI remained in a monopoly position.
The performance of mutual funds in India in the initial phase was not even closer to
satisfactory level. People rarely understood, and of course investing was out of question.
But yes, some 24 million shareholders was accustomed with guaranteed high returns by
the begining of liberalization of the industry in 1992. This good record of UTI became
marketing tool for new entrants. The expectations of investors touched the sky in
profitability factor. However, people were miles away from the praparedness of risks
factor after the liberalization.
The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me
concentrate about the performance of mutual funds in India through figures. From Rs.
67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure
had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.
.The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in thewhereabout rocked confidence among the investors. Partly owing to a relatively weak
stock market performance, mutual funds have not yet recovered, with funds trading at an
average discount of 1020 percent of their net asset value.
At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to
invest until and unless they are fully educated with the dos and donts of mutual fund.
GROSS FUND MOBILISATION (RS. CRORES)
FROM T U PUB PRIV TOT
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OT
I
LIC
SEC
TOR
ATE
SECT
OR
AL
01-
April-
98
31
-
M
ar
ch
-99
1
1,
6
7
9
1,73
27,966
21,37
7
01-
April-
99
31
-
M
ar
ch
-
00
1
3,
5
3
6
4,03
9
42,17
3
59,74
8
01-
April-
00
31
-
M
ar
ch
-
01
1
2,
4
1
3
6,19
2
74,35
2
92,95
7
01- 31
-
4,
6
13,6
13
1,46,2
67
1,64,
523
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April-
01
M
ar
ch
-
02
4
3
01-
April-
02
31
-
Ja
n-
03
5,
50
5
22,923
2,20,551
2,48,979
01-
Feb.-
03
31
-
M
ar
ch
-
03
*7,25
9*
58,43
5
65,69
4
01-
April-03
31
-
M
arch
-
04
-
68,5
58
5,21,6
32
5,90,
190
01- 31 - 1,03, 7,36,4 8,39,
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April-
04
-
M
ar
ch
-
05
246 16 662
01-
April-
05
31-
M
ar
ch
-
06
-1,83,
446
9,14,7
12
10,98
,158
1.1.15 MARKET TREND:
A lone UTI with just one scheme in 1964, now competes with as many as 400 odd
products and 34 players in the market. In spite of the stiff competition and losing market
share, UTI still remains a formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for the industry. New
players have come in, while others have decided to close shop by either selling off or
merging with others. Product innovation is now pass with the game shifting to
performance delivery in fund management as well as service. Those directly associated
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with the fund management industry like distributors, registrars and transfer agents, and
even the regulators have become more mature and responsible.
The industry is also having a profound impact on financial markets. While UTI has
always been a dominant player on the bourses as well as the debt markets, the new
generation of private funds which have gained substantial mass are now seen flexing their
muscles. Fund managers, by their selection criteria for stocks have forced corporate
governance on the industry. By rewarding honest and transparent management with
higher valuations, a system of risk-reward has been created where the corporate sector is
more transparent then before.
Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG
and technology sector. Funds performances are improving. Funds collection, which
averaged at less than Rs.100bn per annum over five-year period spanning 1993-98
doubled to Rs.210bn in 1998-99. In the current year mobilization till now have exceeded
Rs.300bn. Total collection for the current financial year ending March 2000 is expected
to reach Rs.450bn.
towards mutual funds has become obvious. The coming few years will show that the
traditional saving avenues are losing out in the current scenario. Many investors are
realizing that investments in savings accounts are as good as locking up their deposits in
a closet. The fund mobilization trend by mutual funds in the current year indicates that
money is going to mutual funds in a big way. The collection in the first half of the
financial year 1999-2000 matches the whole of 1998-99.
India is at the first stage of a revolution that has already peaked in the U.S. The U.S.boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund
assets are not even 10% of the bank deposits, but this trend is beginning to change.
Recent figures indicate that in the first quarter of the current fiscal year mutual fund
assets went up by 115% whereas bank deposits rose by only 17%. (Source: Thinktank,
The Financial Express September, 99) This is forcing a large number of banks to adopt
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the concept of narrow banking wherein the deposits are kept in Gilts and some other
assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be
ignored and they will not close down completely. Their role as intermediaries cannot be
ignored. It is just that Mutual Funds are going to change the way banks do business in the
future.
PARTICULAR BANKS MUTUAL FUND
RETURN LOW BETTER
RISK HIGH LOW
INVESTMENTOPTION LESS MORE
NETWORK HIGHPENETRATION LOWBUTIMPROVING
LIQUIDITY ATACOST BETTERQUALITYOFASSETS NOTTRANSPARENT TRANSPARENT
INTERESTCALCULATION MINIMUM BALANCE BETWEEN
10TH AND 30TH OF EVERY
MONTH.
EVERYDAY
ADMINISTRATIONEXPENSES HIGH LOW
GUARANTEE MAX. RS 1LACKONDEPOSIT NONE
Table 1.1
1.1.16 FUTURE OF MUTUAL FUND:
Indian mutual fund industry reached Rs 1,50,537 crore by March 2004. It is estimated
that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs
40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest
of the decade. In the last 5 years there is an annual growth rate of 9%. According to the
current growth rate, by year 2010,
Mutual fund India assets will be double.
100% growth in the last 6 years.
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Number of foreign AMC's are in the queue to enter the Indian markets like
Fidelity Investments, US based, with over US$1trillion assets under management
worldwide
Our saving rate is over 23%, highest in the world. Only channelizing these
savings in mutual funds sector is required.
We have approximately 29 mutual funds, which is much less than US having
more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing
cities. Mutual fund can penetrate rurals like the Indian insurance industry with simple
and limited products.
SEBI allowing the MF's to launch commodity mutual funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next
few years as investors shift their assets from banks and other traditional avenues. Some
of the older public and private sector players will either close shop or be taken over.
1.2) ABOUT SPECIFIC AREA OF THE TOPIC CHOOSEN:
1.2.1 Investment management :
Is the professional management of various securities (shares, bonds etc) assets (e.g. real
estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private
investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds) .
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The term asset management is often used to refer to the investment management of
collective investments, whilst the more generic fund management may refer to all forms
of institutional investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary management on behalf
of (normally wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-called "private
banking".
The provision of 'investment management services' includes elements of financial
analysis, asset selection, stock selection, plan implementation and ongoing monitoring of
investments. Investment management is a large and important global industry in its own
right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming
under the remit of financial services many of the world's largest companies are at least in
part investment managers and employ millions of staff and create billions in revenue.
1.2.2 Investment managers and portfolio structures:
At the heart of the investment management industry are the managers who invest and
divest client investments.
A certified company investment advisor should conduct an assessment of each client's
individual needs and risk profile. The advisor then recommends appropriate investments.
ASSET ALLOCATION:
The different asset classes and the exercise of allocating funds among these assets (and
among individual securities within each asset class) is what investment managementfirms are paid for. Asset classes exhibit different market dynamics, and different
interaction effects; thus, the allocation of monies among asset classes will have a
significant effect on the performance of the fund. Some research suggests that allocation
among asset classes has more predictive power than the choice of individual holdings in
determining portfolio return. Arguably, the skill of a successful investment manager
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resides in constructing the asset allocation, and separately the individual holdings, so as
to outperform certain benchmarks (e.g., the peer group of competing funds, bond and
stock indices).
LONG TERM RETURN:
It is important to look at the evidence on the long-term returns to different assets,
and to holding period returns (the returns that accrue on average over different lengths of
investment). For example, over very long holding periods (eg. 10+ years) in most
countries, equities have generated higher returns than bonds, and bonds have generated
higher returns than cash. According to financial theory, this is because equities are riskier
(more volatile) than bonds which are themselves more risky than cash.
DIVERSIFICATION:
Against the background of the asset allocation, fund managers consider the degree of
diversification that makes sense for a given client (given its risk preferences) and
construct a list of planned holdings accordingly. The list will indicate what percentage of
the fund should be invested in each particular stock or bond. The theory of portfolio
diversification was originated by Markowitz and effective diversification requires
management of the correlation between the asset returns and the liability returns, issues
internal to the portfolio (individual holdings volatility), and cross-correlations between
the returns.
1.2.3 Performance measurement:
Fund performance is the acid test of fund management, and in the institutionalcontext accurate measurement is a necessity. For that purpose, institutions measure the
performance of each fund (and usually for internal purposes components of each fund)
under their management, and performance is also measured by external firms that
specialize in performance measurement. The leading performance measurement firms
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(e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing how funds
in general performed against given indices and peer groups over various time periods.
In a typical case (let us say an equity fund), then the calculation would be made (as far as
the client is concerned) every quarter and would show a percentage change compared
with the prior quarter (e.g., +4.3% total return in US dollars)..
Generally speaking, it is probably appropriate for an investment firm to persuade its
clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very
short term fluctuations in performance and the influence of the business cycle.
An enduring problem is whether to measure before-tax or after-tax performance. After-
tax measurement represents the benefit to the investor, but investors' tax positions may
vary.
RISK ADJUSTED PERFORMANCE:
Performance measurement should not be reduced to the evaluation of fund returns alone,
but must also integrate other fund elements that would be of interest to investors, such as
the measure of risk taken. Several other aspects are also part of performance
measurement: The need to answer all these questions has led to the development of more
sophisticated performance measures, many of which originate in modern portfolio theory.
Modern portfolio theory established the quantitative link that exists between portfolio
risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964)
highlighted the notion of rewarding risk and produced the first performance indicators, be
they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared
to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance
measure. It measures the return of a portfolio in excess of the risk-free rate, compared to
the total risk of the portfolio. This measure is said to be absolute, as it does not refer to
any benchmark, avoiding drawbacks related to a poor choice of benchmark.
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.Portfolio normal return may be evaluated using factor models. The first model, proposed
by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the
market index as the only factor. It quickly becomes clear, however, that one factor is not
enough to explain the returns and that other factors have to be considered.
1.3) ABOUT THE TOPIC:
1.3.1 MEANING:
A mutual fund is a professionally-managed firm of collective investments that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments, and/or other securities. In a mutual fund, the fund manager, who is also
known as the portfolio manager, trades the fund's underlying securities, realizing capital
gains or losses, and collects the dividend orinterestincome. The investment proceeds are
then passed along to the individual investors. The value of a share of the mutual fund,
known as the net asset valueper share (NAV), is calculated daily based on the total value
of the fund divided by the number of shares currently issued and outstanding
1.3.2 DEFINITION:
The SEBI regulations, 1993 defines a mutual fund as a fund in the form of a trust by a
sponsor, to raise money by the trustees trough the sale of units to the public, under one or
more schemes, for investing in securities in accordance with these regulations
1.3.3 CONCEPT OF MUTUAL FUND:
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A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realised are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow
chart below describes broadly the working of a mutual fund.
Mutual Fund Operation Flow Chart:
Figure1.1
1.3.4 ENTITIES IN MUTUAL FUND OPERATIONS:
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In India, the following are involved in a mutual fund operations: the sponsor, the mutual
fund, the trustees, the asset management company, the custodian, and the registrars and
transfer agents.
Sponsor:
The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a
bank, a financial institution, or a financial service company. It may be indian or foreign.
The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is
the settler of the mutual fund trust. The sponsor delegates the trustee fuction to the
trustees.
Mutual fund :
The mutual funds constitued as a trust under the Indian trust act, 1881, and registered
with SEBI.
Trustees:
A trust is a notional entity that cannot contract in its own name. so, the trust enters into
contracts in the name of the trustees. Appointment by the sponsor, the trustees can be
either individuals or a corporate body. Typically it is the latter. The trusees appoint the
asset management company(AMC), secure necessary approval, periodically monitor how
the AMC fuctions, and hold the properties of the various schemes in trust for the benefits
of investors.
Asset Management Company:
It also reffered to as the investment manager, is a separate company appointed by the
trustees to run the mutual fund. The AMC should have a certificate from sebi to act as
portfolio manager under SEBI rules and regulations, 1993.
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Custodian:
The custodian handles the investment back office operations of a mutual fund. It looks
after the receipt and delivery of securities, collection of income, distribution of dividends,
andsegregation of assets between schemes. The sponsor of a mutual fund cannot act as its
custodian.
Registrars and transfer agents:
The registrars and transfer agents handle investor related services such as issuing units,
redeeming units, sending fact sheets and annual reports, and so on. Some funds handle
such fuctions in house, while others outsource it tobSEBI approved registrars and transfer
agents like karvy and CAMS.The legal structure and organization of mutual funds as laid
down by SEBI guidelines is as follows.
ORGANISATION OF MUTUAL FUND:
2
SPONCER OF MUTUAL FUND-
(COMPANY ,BANK)
BORD OF
TRUSEE
POLICY MAKING BODY FOR FUND
RAISING.
ACTUAL IMPLIMENTATION OF THE POLICY
AND INVESTMENT OPERATIONS.
ASSET MANAGEMENT
COMPANY
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Figure 1.2
1.3.5 Schemes of Mutual funds :
Types of mutual fund scheme:
Operational classification portfolio classification
Open ended Return based:
close ended (income,growth, &income and growth fund)
Investment based
(equity, liquid, balanced funds)
2
CUSTODIAN
INVESTOR
ACTING AS REGISTRAR, TRANSFER AGENT AND
RELATED SERVICE FOR MUTUAL FUND.
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Sector based
(real estate, special, index-linked funds)
Leverage based
Others
Figure 1.3 (hedge and offshore funds)
1.3.5 Schemes according to Maturity Period OR by structure:
A mutual fund scheme can be classified into open-ended scheme or close-ended
scheme depending on its maturity period.
Open-ended 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 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,
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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.
1.3.6 Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme:
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such funds
have comparatively high risks. These schemes provide different options to the investors
like dividend option, capital appreciation, etc. and the investors may choose an option
depending on their preferences.
Income / Debt Oriented Scheme:
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of fluctuations in
equity markets.
Balanced Scheme:
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their
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offer documents. These are appropriate for investors looking for moderate growth. They
generally invest 40-60% in equity and debt instruments. These funds are also affected
because of fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund:
These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and inter-
bank call money, government securities, etc. Returns on these schemes fluctuate much
less compared to other funds. These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short periods.
Gilt Fund:
These funds invest exclusively in government securities. Government securities have no
default risk. NAVs of these schemes also fluctuate due to change in interest rates andother economic factors as is the case with income or debt oriented schemes.
Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,
S&P NSE 50 index (Nifty), etc, these schemes invest in the securities in the same
weightage comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms. Necessary disclosures
in this regard are made in the offer document of the mutual fund scheme.
Load Funds
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A Load Fund is one that charges a commission for entry or exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry and exit loads
range from 1% to 2%. It could be worth paying the load, if the fund has a good
performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no
load fund is that the entire corpus is put to work.
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1.3.7 Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries
as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer
Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the
performance of the respective sectors/industries.
Special Schemes
Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer document. The
investment of these funds is limited to specific industries like InfoTech, FMCG,
Pharmaceuticals etc.
Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE 50
Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as 'A' Group shares or initial public offerings
Tax Saving Schemes:
These schemes offer tax rebates to the investors under specific provisions of the Income Tax
Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g.
Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also
offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities.
Their growth opportunities and risks associated are like any equity-oriented scheme.
1.3.8 IMPORTANCE OR BENEFITS OF MUTUAL FUND:
The mutual fund industry has grown at a phenomenal rate in the recent past. The following
are some of the important advantages of mutual funds.
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Channelizing savings for investment:
A number of schemes are being offered by MFs so as to meet the varied requirements
of the peoples and savings are directed towards capital investments directly. In the
absence of MFs these savings would have remained idle.
Offering wide portfolio investment:
Now the investors can enjoy the wide portfolio investment held by the mutual fund.
The fund diversifies its risks by investing in large varieties of shares and bonds which
cannot be done by small and medium investor. This is investors.This is in accordance
with the maximum not to lay all eggs in one basket
Providing better yields:
Due to the large funds. Mutual funds are able buy cheaper and sell dearer than the
small and medium investors. Thus they are able to the command better market rates
and lower rates of brokerage. So they provide better yield to their customers .they also
enjoy the economics of large scale and can reduce the cost of capital market
participation
Redering expertise investment service at low cost:
The management of the fund is generally assigned to professionals who are well
trained and have adequate experience in the field of investment. Thus, investor are
assured of quality services in there best interest. The intermediation fee is the lowest
being 1% in the case of a mutual fund.
Providing research services:
Each fund maintains large research team, which constantly analyses the companies
and the industries and recommends the fund to buy or sell a particular share. Thus
investment are made purely on the basis of a thorough research.
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Offering tax benefits:
Certain funds offer tax benefits to its customers. Thus, apart from dividend, interest
and capital appreciation, investors also stand to get the benefit of tax concession.
Under the wealth tax act, investments in MFs are exempted up to Rs. 5 lakhs.
Introducing flexible investment schedule:
Some mutual funds are permitted the investor exchange their units from one schemes
to another and this flexibility is a great boon to investors.
Providing greater affordability and liquidity:
Even a very small investor can afford to invest in mutual funds. They provide an
attractive and cost effective alternative to direct purchase of shares. Again there is
greater liquidity. Units can be sold to the fund at any time at the net asset value and
thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank
are always ready to provide loan facility against the unit certificates.
Simplified record keeping:
The investor has to keep a record of only one deal with the mutual fund. Even if he
does not keep a record, the MF sends statements very often to the investors.
Supporting capital market:
The savings of the people are directed towards investments in capital market through
these mutual funds. Mutual funds also provide a valuable liquidity to the capitalmarket, and thus the market is made very active and stable.
Promoting industrial development:
All industrial units have to raise their funds by resorting to the capital market by the
issue of shares and debentures. The mutual funds not only create a demand for these
capital market instruments but also supply a large source of funds to the market.
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Diversification: The best mutual funds design their portfolios so individual
investments will react differently to the same economic conditions. For example,
economic conditions like a rise in interest rates may cause certain securities in a
diversified portfolio to decrease in value. Other securities in the portfolio will respond
to the same economic conditions by increasing in value. When a portfolio is balanced
in this way, the value of the overall portfolio should gradually increase over time,
even if some securities lose value.
1.3.8 Drawbacks of Mutual Funds:
Mutual funds have their drawbacks and may not be for everyone:
No Guarantees: No investment is risk free. If the entire stock market declines in
value, the value of mutual fund shares will go down as well, no matter how balanced
the portfolio. Investors encounter fewer risks when they invest in mutual funds than
when they buy and sell stocks on their own. However, anyone who invests through a
mutual fund runs the risk of losing money.
Fees and commissions: All funds charge administrative fees to cover their day-to-
day expenses. Some funds also charge sales commissions or "loads" to compensate
brokers, financial consultants, or financial planners. Even if you don't use a broker or
other financial adviser, you will pay a sales commission if you buy shares in a Load
Fund.
Taxes: During a typical year, most actively managed mutual funds sell anywhere
from 20 to 70 percent of the securities in their portfolios. If your fund makes a profiton its sales, you will pay taxes on the income you receive, even if you reinvest the
money you made.
Management risk: When you invest in a mutual fund, you depend on the fund's
manager to make the right decisions regarding the fund's portfolio. If the manager
does not perform as well as you had hoped, you might not make as much money on
your investment as you expected. Of course, if you invest in Index Funds, you forego
management risk, because these funds do not employ managers.
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1.3.9 OPTIONS AND VALUE-ADDED SERVICES:
Thanks to the heightened competition in the mutual fund industry, mutual funds now offer
various options and value-added services to attract and retain customers.
Options:
With respect to a number of schemes, mutual funds offer the following: dividend and growth
options, systematic investment plan, and systematic withdrawal plan.
i. Dividend and growth options When you join a scheme, you can shoose the dividend
option or the growth option. Under the dividend option, the gains of the scheme are paid
out at regular intervals in the form of dividends. Funds may offer daily, weekly,
monthly, quarterly, half-yearly, and annual dividend options.
ii. Under the growth option, investment gains are ploughed back into the scheme and no
dividends are declared. Though the returns from both the dividend and growth options
will be the same, the tax implications may be different.
iii. Systematic investment plan Under the systematic investment plan (SIP), the investor can
invest regular sums of money every month to buy units of a mutual fund scheme. As theinvestment is made regularly, the investor buys more units when the price is low and
fewer units when the price is high.
iv. Systematic withdrawal plan A systematic withdrawal plan (SWP) works like a
systematic investment plan in the opposite direction. The SWP allows the investor to
withdraw a fixed amount every month.
8.2 Value-added services :
Mutual funds offer value-added services like redemption over phone, triggers and alerts,
cheque book facility, and new points of purchase.
i. Redemption over phone Prudential ICICI for example offers investors the facility of
making a redemption request or switch between schemes over the phone.
ii. Cheque book facility Fund houses take few days to process a redemption request and
then further time is lost when the redemption cheque is in transit. To cut down this
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delay, some fund houses give investors in certain schemes (typically debt scemes), the
some limit, at the time of investment itself. Encashment of the cheque is deemed as
withdrawal, at the schemes NAV on the day the cheque is deposited.
1.3.9HOW TO PICK UP CHOOSEN ONE:
There are few tips which helps the investors to choose right fund.
The fund offering:
Investors having wide range of offering to choose from different fund each fund is
a distinct offering, pick the one that suits your risk appetite and profile the best.
The funds performance:
The return clocked by a fund are an important parameter to judge its worth as an
investment avenue, while the funds return are historical in nature. It serves as an
indicator of what the fund is capable of performing.
The fund manager/management style:
The fund manager and his approach to fund management play a vital role in
determining the funds success or otherwise. Evaluate the fund managers past track
record in the schemes he manages.
Portfolio management:
The funds portfolio can reveal a lot about the fund. Ideally a fund should display a high
degree of consistency in its holdings; similarly the portfolio should be a well-spread one.
Risk-adjusted return and volatility:
We havw discussed about importance of a funds performance i.e. the return it has
delivered; however, the fund showing on the risk-adjusted return front is vital as well. A
higher sharp ratio is indicative of the fact that the fund has adequately compensated itsinvestors for risk borne.
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Expense ratio and load:
Expenses incuured by the fund have a significant impact on its performance. The
expenses are incurred for a variety of reasons ranging from management fees to
marketing and selling expenses. Similarly entry/exit load are vital too. An entry load
reduces the amount invested proportionately and only the balance is utilized for
generating returns.
The fund house:
The fund house is an important entity and due attention must be to it as well. Investors
comfort levels would surely be higher if the fund house is a reputed one has a history
of producing funds that have superior returns.
Seek advice:
Utilize the services of a financial planner before making investments in mutual funds.
A financial planner will help you create a portfolio comprising of schemes that are
right for you.
The PMS option:
Investors who have a large investible surplus can explore the option of utilizing a
portfolio performance management services (PMS) can be explored. The right
investment plan an important role in enabling you to achieve you financial goals andobjectives.
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CHAPTER TWO:
RESEARCH DESIGN:
2.1. Introduction:
Research refers to a search for knowledge. The advanced learners dictionary of current
english lays down the meaning of research as a careful investigation or enquiry specially
through search for new facts in any branch of knowledge.
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. In it we study the
various steps that are generally adopted by a research in studying his research problem along
with the logic behind them. It is necessary for the researcher to know how to develop certain
indices or tests, how to calculate the mean, the mode, the median or the standard deviation or
chi-suare, how to apply particular research technique, but they also need to know which of
these methods or techniques, are relevant and which are not, and what would they mean and
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indicate and why. Researchers also by which they can decide that certain techniques and
procedures will be applicable to certain problems and other will not. All this means that it is
necessary for the researcher to design his methodology.
The research methodology has wider dimension and wider scope than that of research
methods. Thus, when we talk of research methodology we not only talk of research methods
but also consider the logic behind the methods we use in the context of our research methods
but also consider the logic behind the methods we use in the context of our research study
and explain why we are using a particular method or technique and why we are not using
other so that research results are capable of being evaluated either by the researcher himself
or by others.
2.2 Review of literature:
A research should be preliminary orientation and background knowledge about the topic and
he should collect the basic concept and information regarding the final in which the topic
includes due to this reasons review of the literature has an important role in research study.
Considering the importance of mutual funds, several academicians have tried to study the
performance of various funds. Initially, their studies have focused on timing and investment
abilities of fund managers. Later, several researchers have tried to study the various factors
and their impact on fund performance. These factors include potential measurement errors
from survivorship bias and misspecification of the benchmark, the impact of fund expenses
and economies of scale, to the personal characteristics of fund managers. Various studies that
focused on factors such as the ability of fund managers to consistently outperform the market
and the fund specific organizational and managerial aspects, came out with contradictory
conclusions.
Jensons (1968) study on mutual fund performance of 115 funds over a period spanning from
1945 60 1964, confirmed the efficient market hypothesis. His analysis has shown that the
performance of expense-adjusted fund returns was markedly lower than those randomly
chosen portfolios of a similar risk category. These results were in sync with the findings of
Treynor 91965) and Sharpe (1966). Performance of professionally managed funds also was
not any better than the performance of risk-adjusted index portfolio, which also indicated that
managers of these funds did not appear to possess private information. Thus, the results of
the early studies prevailed as general conclusions in the erstwhile literature.
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However, a number of later studies on the topic, nonetheless, go against the early findings.
For instance, a study by Ippolity (1993) found mutual fund returns after expenses (before
loads) to be superior than the returns offered by risk-adjusted market indices, which indicated
that mutual fund managers may have access to the useful private information. Thus, the
mutual fund managers may produce such excess returns that can offset the expenses of the
fund.
Further studies by Grinblatt and Titman (1992), Hendricks, Patel and Zeckhauser (1993),
Goetzmann and Ibbotson (1994), and Volkman and Wohar (1995) were in support of market
efficiency as they discovered instances of repeated winners amongst fund managers.
Recently, Wermers (2000) decomposed mutual fund returns into a stock picking talent;
features of stockholding and trading costs and expenses. The decomposition helped him
show that stock picking of funds, in fact, enabled the managers to cover their costs. Other
studies by Elton, Gruber, Das and Hlavka (1993), Malkiel (1995) and Carhart (1997)
reinforce the early conclusion of Jensen (1968). While doing away with survivorship bias,
carhart (1997) has shown that the common factors that drive stock returns are responsible for
consistency in mutual fund performance.
On the other hand the Malkiel (1995) study considers both benchmark errors and
survivorship bias and concludes that the previous results indicating market inefficiency were
affected by these factors.
2.3 Statement of the problem:
A study on Analysis of the performance of mutual fund with reference to mutual fund
industry.
2.4. Scope of the study:
The study of mutual fund has the wider scope. Mutual fund is a professionally managed form
of collective investment that pools money from many investors and invest it in stocks, bonds,
short-term money market instruments and other securities. Mutual fund distributors of tax
free municipal bonds income are also tax free to the share holders. Taxable distribution can
be either ordinary income or capital schems which are equity schemes , debt and hybrid
schems.
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The present study includes five-year return of the mutual fund companies and funds in
India. Out of all mutual fund companies we have selected only two companies those are ING
mutual fund and HDFC mutual fund, and only those schemes and funds are included in this
study, which are performed well during from last few years. The schemes covered under the
study are:
i. ING domestic opportunities fund.
ii. ING selected stock fund.
iii. INg dividend yield fund.
iv. ING nifty plus fund.
v. ING L.I.O.N fund .
vi. ING Tax saving fund.
vii. HDFC Growth fund.
viii. HDFC Equity fund.
ix. HDFC top 200 fund.
x. HDFC Capital builder fund.
xi. HDFC index fund(Sensex plan).
xii. HDFC Index fund(Nifty plan).
To evaluate the performance of schemes and funds, the researcher applied Sharpe Index,
Treynor Index and Jensens Alpha measure.
2.5. Objectives of the problem:
The major objectives of study are as follows.
To evaluate investment performance of mutual funds in terms of risk and return.
To examine the funds sensitivity to the market fluctuations in terms of beta.
To find out the financial performance of mutual fund schemes.
To appraise investment performance of mutual funds with risk adjustment, the
theoretical parameters as suggested by Sharpe, Treynor and Jensen.
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To analyze the performance of various schemes of mutual funds.
To identify the sector where the mutual fund and how invested.
To provide valuable suggestions and recommendations.
2.6. Methodology:
Methodology is a way to systematically solve the research problem. It may be understood as
a science of studying how research is done scientifically. In it we study the various steps that
are generally adopted by a research in studying his research problem along with the logic
behind them. Methodology refers to methods adopted to carry out the research and steps
adopted to solve the problem finding solution
2.6.1 Type of the study:
Descriptive study:
The type of the study or research used in this project is a descriptive research design. It
mainly involves surveys and facts findings enquiries of different kinds. The main objective of
descriptive research is to describe the state of affairs as it exists at present. The major purpose
of descriptive research is a description of the state of the affairs, as it exists at present. Thus a
descriptive study is a fact finding investigation with adequate interpretation. It is the simplest
type of research. It focuses on particular aspects or dimensions of the problem studied. It is
designed that it gathers descriptive information and provides information for formulating
more sophisticated studies. There is a cause effective relationship.
The criteria for selecting this particular design are that, the problem of the project must be
described and not arguable. The data collected is amenable to statistical analysis and has
accuracy and significance. It is possible to develop to valid standards of comparison. It tends
itself to the verifiable procedure of collection and analysis of data.
Descriptive study objective aim at identifying the various characteristics of a company
problem under study. It can reveal potential relationships between variables with exploratory
research.
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2.6.2 Type of data:
Secondary data:
The data which is used for the research is secondary data. The secondary data is the
data which is duplicate of primary data. The data (published or unpublished) which
have already been collected and processed by some agency or person and taken over
from there and used by any other agency for their statistical work are termed as
person and taken over from there and used by any other agency for their statistical
work are termed as secondary data as far as second agency is concerned. The second
agency if and when it publishes and files such data becomes the secondary source to
anyone who later uses these data.
In other words secondary source is the agency who publishes for use by others the
data which was not originally collected and processed by it.
2.6.3 Sources of data:
Unpublished sources:
i. The data can be governments or private offices can be collected from these are
unpublished data.
ii. The research work, the secret documents.
Published sources:
i. Central and state government publication publishes the various statistics like crop
production, population, statistic, wages expenses.
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ii. The commerce association, commerce and trade association, Indian chamber of
commerce federation are publishes several data.
iii. News paper, journals, periodicals etc. publishes the several data.
iv. Some private organization, research berceuse, universities publishes several datas.
Periodicals: ICFAI journals
Internet: google.com
Value research online.com
Nytimes.com
AMFI.com
News papers: financial express
Company journals: Factsheets of ING investment and HDFC.
2.7 Tools for analysis:
2.7.1 Standard deviation:
It is used to measure the variation in individual returns from the average expected return over
a certain period. Standard deviation is used in the concept of risk of a portfolio of
investments; higher standard deviation means a greater fluctuation in expected return.
2.7.2 Beta:
Beta measures the systematic risk and shows how prices of securities respond to the market
forces. It is calculated by relating the return on a security with return for the market. By
convention, market will have beta 1.0 Mutual fund is said to be volatile, more volatile or less
volatile. If beta is greater than 1 the stock is said to be riskier than mark
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