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Study and Research on Mutual Fund

A Mutual fund is a trust that pools the savings of a number of investors who share a common financialgoal. The money thus collected is invested by the fund manager in different types of securitiesdepending upon the objective of the scheme. These could range from shares to debentures to money

market instruments. The income earned through these investments and the capital appreciationsrealized by the scheme are shared by its unit holders in proportion to the number of units owned by the(pro rata). Thus a Mutual fund is the most suitable investment for the common man as it offers anopportunity to invest in a diversified, professionally managed portfolio at a relatively low cost.Anybody with an inventible surplus of as a few thousand rupees can invest in Mutual Funds. EachMutual Fund scheme has a defined investment objective and strategy.

A mutual fund is the ideal investment vehicle for today's complex and modern financial scenario.Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and otherassets have become mature and information driven. Price changes in these assets are driven by globalevents occurring in faraway places. A typical individual is unlikely to have the knowledge, skills,

inclination and time to keep track of events, understand their implications and act speedily. Anindividual also finds it difficult to keep track of ownership of his assets, investments, brokerage duesand bank transactions etc.

A mutual fund is answer to all these situations. It appoints professionally qualified and experiencedstaff that manages each of these functions on a full time basis. The large pool of money collected inthe fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fundvehicle exploits economies of scale in all three areas - research, investments and transactionprocessing. While the concept of individuals coming together to invest money collectively is not new,the mutual fund in its present form is a 20th century phenomenon. In fact, mutual fund gainedpopularity only after the Second World War. Globally, there are thousands of firms offering tens of

thousands of mutual funds with different investment objectives. Today, mutual funds collectivelymanage almost as much as or more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifiesthe investment objectives of the fund, the risk associated, the costs involved in the process and thebroad rules for entry into and exit from the fund and other areas of operation. In India, as in mostcountries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India)in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval tothe fund for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the investment

objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a thirdone to handle registry work for the unit holders (subscribers) of the fund.

In the Indian context, the sponsors promote the Asset Management Company also, in which it holds amajority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company(AMC).

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E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.,which has floated different mutual funds schemes and also acts as an asset manager for the fundscollected under the schemes.

A mutual fund is a collective investment fund formed with the objective of raising money from a largenumber of investors and investing it in accordance with a specified objective to provide returns that

accrue pro rata to all the investors in proportion to their investment. The units held by an investorrepresent the stake of the investors in the fund. A professionally qualified and experienced teammanages the investments and all other functions. With the large pool of money, a mutual fund is ableto exploit economies of scale in the areas of research, investing, shuffling the investments andtransaction processing - it is able to hire professionals in these functions at a very low cost perinvestor.

As per SEBI regulations, mutual funds can offer guaranteed returns for a maximum period of one year.In case returns are guaranteed, the name of the guarantor and how the guarantee would be honored isrequired to be disclosed in the offer document.

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Mutual Fund in India (1964-2000)

The end of millennium marks 36 years of existence of mutual funds in this country. The ride throughthese 36 years is not been smooth. Investor opinion is still divided. While some are for mutual fundsothers are against it.

UTI commenced its operations from July 1964. The impetus for establishing a formal institution camefrom the desire to increase the propensity of the middle and lower groups to save and to invest. UTIcame into existence during a period marked by great political and economic uncertainty in India. Withwar on the borders and economic turmoil that depressed the financial market, entrepreneurs werehesitant to enter the capital market.

The already existing companies found it difficult to raise fresh capital, as investors did not respondadequately to new issues. Earnest efforts were required to canalize savings of the community intoproductive uses in order to speed up the process of industrial growth.

The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be "open toany person or institution to purchase the units offered by the trust. However, this institution as we seeit, is intended to cater to the needs of individual investors, and even among them as far as possible, tothose whose means are small"His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twinobjectives of mobilizing retail savings and investing those savings in the capital market and passing onthe benefits so accrued to the small investors.

UTI commenced its operations from July 1964 "with a view to encouraging savings and investmentand participation in the income, profits and gains accruing to the Corporation from the acquisition,holding, management and disposal of securities." Different provisions of the UTI Act laid down thestructure of management, scope of business, powers and functions of the Trust as well as accounting,disclosures and regulatory requirements for the Trust.

One thing is certain - the fund industry is here to stay. The industry was one-entity show till 1986when the UTI monopoly was broken when SBI and Canbank mutual fund entered the arena. This wasfollowed by the entry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Startingwith an asset base of Rs 0.25bn in 1964 the industry has grown at a compounded average growth rateof 26.34% to its current size of Rs 1130bn. The period 1986-1993 can be termed as the period ofpublic sector mutual funds (PMFs). From one player in 1985 the number increased to 8 in 1993. Theparty did not last long. When the private sector made its debate in 1993-94, the stock market wasbooming.

The opening up of the asset management business to private sector in 1993 saw international playerslike Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital International along withthe period of 1994-96 was one of the worst in the history of Indian Mutual Funds.

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1999-2000 year of the funds

Mutual funds have been around for a long period of time to be precise for 36 yrs but the year 1999saw3 immense future potential and developments in this sector. This year signaled the year ofresurgence of mutual funds and the regaining of investor confidence in these MF's. This time aroundall the participants are involved in the revival of the funds the AMC's, the unit holders, the other

related parties. However the sole factor that gave lift to the revival of the funds was the Union Budget.The budget brought about a large number of changes in one stroke. An insight of the Union Budget onmutual funds taxation benefits is provided later.

It provided center stage to the mutual funds, made them more attractive and provides acceptabilityamong the investors. The Union Budget exempted mutual fund dividend given out by equity-orientedschemes from tax, both at the hands of the investor as well as the mutual fund. No longer were themutual funds interested in selling the concept of mutual fund. No longer were the mutual fundsinterested in selling the concept of mutual funds they wanted to talk business, which would mean toincrease asset base, and to get asset base, and investor base they had to be fully armed with a whole lotof schemes for every investor. So new schemes for new IPO's were inevitable. The quest to attract

investors extended beyond just new schemes. The funds started to regulate themselves and were all outon winning the trust and confidence of the investors under the aegis of the Association of MutualFunds of India (AMFI)

One can say that the industry is moving from infancy to adolescence, the industry is maturing and theinvestors and funds are frankly and openly discussing difficulties opportunities and compulsions.

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund byUTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic improvements, both quality wiseas well as quantity wise. Before, the monopoly of the market had seen an ending phase; the AssetsUnder Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUMto Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn.

Four Phases of Mutual Fund in India

The mutual fund industry can be broadly put into four phases according to the development of thesector. Each phase is briefly described as under.

First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It

was set up by the Reserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over the regulatory and administrative control in place ofRBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBIMutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual

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Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda MutualFund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets undermanagement.

Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector fundsin 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider

choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came intobeing, under which all mutual funds, except UTI were to be registered and governed. The erstwhileKothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fundregistered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revisedMutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutualfunds setting up funds in India and also the industry has witnessed several mergers and acquisitions.As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. TheUnit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual

funds.

Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcatedinto two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM ofRs.29, 835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioningunder an administrator and under the rules framed by Government of India and does not come underthe purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored bySBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores ofAUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual FundRegulations, and with recent mergers taking place among different private sector funds, the mutual

fund industry has entered its current phase of consolidation and growth. As at the end of September,2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Fifth Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed severalmergers and acquisitions recently, examples of which are acquisition of schemes of Alliance MutualFund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund.Simultaneously, more international mutual fund players have entered India like Fidelity, FranklinTempleton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuingphase of growth of the industry through consolidation and entry of new international and private sectorplayers.

Growth in Assets under Management

If size is the measure of dominance, then the Indian mutual fund industry can now boast of that.. Withthe total Assets Under Management (AUM) increasing from Rs.1,01,565 cr in January 2000 to Rs.1,67,978 cr by May 2005, according to the Association of Mutual Funds in India (AMFI), theindustrys growth has been nothing but exceptional. It has indeed come a long way from being a singleplayer, single scheme (US-64) industry to having 30 players currently offering 460 schemes as on May31, 2005

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What has driven this growth? A slew of factors have contributed to the surge in the industrys growth.First and foremost, a buoyant domestic economy coupled with a booming stock market has been oneof the major drivers of growth in recent times, particularly in the last five years. Another significantfactor facilitating this growth has been a conducive regulatory regime, thanks to increased efforts bySEBI to improve market surveillance and protect investors interests. Further, incentives, such as

making dividends tax-free in the hands of investors and removal of long- term capital gains tax, havealso provided strong impetus to the growth. Increased focus on product and distribution innovations onpart of the industry players have also helped fuel the growth.

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A. Classification of Mutual FundMutual fund schemes may be classified on the basis of its structure and its investments.

By Structure:

Open-ended Funds

An open-end fund is one that is available for subscription all through the year. These do not have afixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") relatedprices. The key feature of open-end schemes is liquidity.

Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years.The fund is open for subscription only during a specified period. Investors can invest in thescheme at the time of the initial public issue and thereafter they can buy or sell the units of thescheme on the stock exchanges where they are listed. In order to provide an exit route to theinvestors, some close-ended funds give an option of selling back the units to the Mutual Fundthrough periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one ofthe two exit routes is provided to the investor.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They are open forsale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective

Income Funds

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The aim of income funds is to provide regular and steady income to investors. Such schemesgenerally invest in fixed income securities such as bonds, corporate debentures and governmentsecurities. Income Funds are ideal for capital stability and regular income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such schemesperiodically distribute a part of their earning and invest both in equities and fixed incomesecurities in the proportion indicated in their offer documents. In a rising stock market, the NAVof these schemes may not normally keep pace, or fall equally when the market falls. These areideal for investors looking for a combination of income and moderate growth.

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long-term. Suchschemes normally invest a majority of their corpus in equities. It has been proven that returnsfrom stocks, have outperformed most other kind of investments held over the long term. Growthschemes are ideal for investors having a long-term outlook seeking growth over a period of time.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderateincome. These schemes generally invest in safer short-term instruments such as treasury bills,certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes

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may fluctuate depending upon the interest rates prevailing in the market. These are ideal forCorporate and individual investors as a means to park their surplus funds for short periods.

Load Funds:

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sellunits 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 commissionis payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entirecorpus is put to work.

Other Schemes

Tax saving Schemes

Investors (individuals and Hindu Undivided Families (HUFs)) are being encouraged to invest inequity markets through Equity Linked Savings Scheme (ELSS) by offering them a tax rebate.Units purchased cannot be assigned / transferred/ pledged / redeemed / switched out untilcompletion of 3 years from the date of allotment of the respective Units.

The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations,1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs),Government of India regarding ELSS.

These schemes offer tax rebates to the investors under specific provisions of the Indian IncomeTax laws as the Government offers tax incentives for investment in specified avenues.Investments made in Equity Linked Savings Schemes (ELSS) and pension Schemes are allowedas deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investorsto save capital gains u/s 54EA by investing in Mutual Funds, provided the capital asset has beensold prior to April 1, 2000 and the amount is invested before September 30, 2000

Fixed- Income Funds

Fixed- Income Funds in India are also known as debt funds or income funds. Fixed- Income Fundsin India make investments in debt securities that have been issued either by the banks, governmentor companies. The debt securities in which Fixed- Income Funds in India makes investments arealso known as commercial papers of deposit or treasury bills if the duration is less than one yearand in case the duration is more than one year then the debt securities are known as bonds or

debentures. The issuer of the debt securities has the obligation to pay the interest and principal onthe time schedule that has been fixed.

Fixed- Income Funds in India have a face value and it is on this that the calculation of interest takesplace. Investors who are investing in Fixed- Income Funds in India are mainly concerned with thetime period, maturity value, rate of interest payment, rate of interest, and face value. Fixed- IncomeFunds in India are usually held till maturity.

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Mid-Cap Funds

Mid-cap funds are a special type of mutual fund wherein, the corpus accumulated is invested insmall or medium sized companies. In the absence of any standardized definition or definiteclassification of small or medium sized company, each mutual fund classifies small and mediumsized companies according to its own policies. In general, companies with a market capitalizationup to Rs 500 crores are regarded as small and companies with a market capitalization over Rs 500crores but below Rs 1,000 crores are defined as medium sized by the mutual fund industry. Mid-cap funds bear high risk factors and thus offer high returns in case of positive movements of theindexes

International Mutual Funds

International mutual funds are a very special type of mutual fund, wherein investments are beingmade in the non-domestic securities markets across the world. The popularity of the Internationalmutual funds has gone up in the recent years since it provides a high level of diversification of theportfolio. Further, the International mutual funds also help in capitalizing on some of the world'sbest opportunities. International mutual funds can offer its investors with high returns if chosenproperly. One of the significant features of the International mutual funds are that it accrues profitwhen some markets are rising and others are falling in the international market. A strict vigil on theforeign currencies and world markets is needed while investing in the International mutual funds.

Value Funds

Amongst the wide variety of mutual funds are available in India, value funds is a type of mutualfund wherein the main focus is on the safety of the investment and not on the growth of theinvestment made on such funds. Value funds represent stocks of mature companies, whose growthhas become stagnant. Further, these stocks of the value funds utilize their earnings to pay offdividends to the investors.

One of the typical characteristics of the value fund is that, they generate income from the dividendsand they also offer long term growth from capital appreciation. The returns on Value funds aremore conservative in nature. Another important feature of the value funds is that, they invest instocks of companies that have lesser appeal to the mainstream investors and the stocks have lost itssheen.

Sector Funds

The Sector Funds are those types of mutual funds which accumulate stocks of particular sector.In other words sector funds invest in a single type of industry, like Information Technology,Telecommunication, Pharmaceuticals, Infrastructure, etc. The Sector Funds are structured in thisparticular manner in order to take advantage of growth of particular type of industry. The Sector

Funds can offer tremendous profit to the investor if the funds are carefully chosen.

Fund of Funds

Amongst the wide variety of mutual funds are available in India, fund of funds is a type of mutualfund wherein, the corpus accumulated is invested in types of other mutual funds. Further, the mostsignificant feature of fund of funds is that it holds shares of a variety of mutual funds. Furthermore,Funds of funds are structured in such a way so as to attain a more diversified approach than whatthe other types of mutual funds offer. Generally, the Fund of Funds costs higher than any other type

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of mutual fund. This is due to the fact that the cost of Fund of Funds involves part of the expensefees charged by the component funds.

Sector- Specific Funds

Sector- Specific Funds in India are those funds that make investments only in those industries orsectors that have been specified in the prospectus of the funds. Sector- Specific Funds in Indiausually make investments in sectors such as power, pharmaceuticals, petroleum, and technology.The amount of returns that Sector- Specific Funds in India give depends totally on the performanceof the industries or sectors in which investments have been made. Sector- Specific Funds in Indiagive very high returns but at the same time they are also very risky in comparison to the funds thatare diversified. This is the reason that the investors that have invested in Sector- Specific Funds inIndia need to carefully watch the operation of those industries or sectors and then at the correct timemake an exit.

Large Cap Funds

Large Cap Funds in India are a kind of mutual fund that looks for appreciation of capital byinvesting mainly in the shares of companies that are big blue chip. The big blue chip companies inwhich Large Cap Funds in India make their investments have above- average potential for growthin earnings. The large cap companies in which Large Cap Funds in India makes investments areusually companies that have a market capitalization that is more than Rs. 1000 crores. The mainadvantage of Large Cap Funds in India is that they are considered to be of low return and low riskcategory. This ensures that the investments of the investors are relatively safe.

Exchange Traded Funds

Exchange traded funds popularly also known as ETFs, is a type of mutual fund wherein, the corpusis invested in a basket of securities, which is being traded on an exchange. Further, an Exchangetraded fund investments are being made either on all the securities or on a sample of the

representative securities that are being traded in the said index. The exchange traded funds employthe process of arbitration during trading, in order to keep its trading value in sync with the values ofthe underlying stocks, which makes up the portfolio

Regional Mutual Funds

The Regional Mutual Fund as the name suggests, is a special type of mutual fund, wherein theinvestment made in such funds are confined to the securities from a specified geography. In otherwords, the investments made in the Regional Mutual Fund are dependent on the geographical originof the fund. The most important feature of this fund is that it invests in portfolio of companiesoperating in a particular geographical area. The main objective of investing in the Regional MutualFunds is to take leverage of the geographical growth of that particular area. These funds are created

on regions which are supposed to undergo tremendous modernization. The Regional Mutual Fundspicks up securities that are not confined to geographical criteria.

Index Funds

The Index funds are those types of funds which accumulates stocks of each and every company thatmake up a particular index. The performance of the Index fund thus depends on the performance ofthat particular index. Investments in Index funds are cheaper and are regarded as passive form ofinvestments. Another advantage of investing in the Index funds is that their values are so high that

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most of the other funds fail to supersede the value of the Index funds. The most popular type ofIndex funds is the Standard & Poor's 500. Investments in index funds are subject to income taxexemptions

B. Banks v/s Mutual Funds

Banks Mutual Funds

Returns Low Better

Administrative exp. High Low

Risk Low Moderate

Investment options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of assets Not transparent Transparent

Interest calculation Minimum balance between 10th. & 30th. Ofevery month

Everyday

Guarantee Maximum Rs.1 lakhs on deposits None

From the above table we can say that in overall comparison Mutual Fund is becoming strong option asinvestment against the Banks. It can be seen that the Banks are not totally free from risk, whilegenerally giving lower returns. Mutual Fund can give higher returns then a Bank, even if there is nocontractually guarantee as in a Bank. Mutual Fund provides better investment options as well as highliquidity compare to Banks.

C. Choosing a Mutual Fund

Investors should note the following points while choosing a mutual fund:

(1) Investment objective The schemes offered by mutual funds should be chosen based on investmentobjectives such as:

Regular income Pure growth oriented Balanced fund Tax savings

Period of scheme Liquidity/Open-ended schemes/listing.

(2) Past performance The past performance of fund manager should be checked even though it doesnot: assure about or indicate the future performance. The risks are however lower if the fundmanagers capability is superior.

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(3) Equity research Equity research capability and other fund management techniques are importantfactors in deciding about a fund.

(4) Global linkages The fund managers understanding of Indian capital markets and the globallinkages is critical to the process of investment decision making.

(5) Transparency in fund accounting Choose a mutual fund which assures full transparency of theinvestments made and discloses NAV periodically to assist the investor in understanding the value ofinvestment, and the area where investments have been/are to be made.

(6) Investor service Funds which pay emphasis to investor servicing help in sorting out proceduralgrievances, if any.

D. Judged the Efficiency of Mutual Fund

The test of efficiency of a good mutual fund shall comprise of evaluation of mutual fund on the basisof its:

Stability whether a mutual fund is stable or not so far as its schemes are concerned.

Liquidity whether the schemes offer liquidity by way of their listing on stock exchange.

Growth whether the mutual funds are offering increase in net asset value, and there isconsistent growth in dividend and capital appreciation.

Credibility of issuer Previous track record of issuer should be checked.

Returns Assured or otherwise

Management approach Risk taking, portfolio, diversification, return maximization, bonus,etc.

E. Comparison of Investment Product

Investors tend to constantly compare one form of investment with another. However, suchcomparisons ought to be done carefully, comparing only options that are comparable.

Until 1980s, Indian investors had bank deposits as virtually the only investment option. The onlyMutual Fund scheme UTIs US-64 Scheme was perceived by investors and managed as a fixed returninvestment, as safe as banks, and paying out comparable though slightly higher dividends. Later, theinvestors were introduced to direct investing on the stock markets including direct purchases of capitalmarket securities in the primary markets. This form of high-risk investment was not perceived as suchbecause of the under-pricing of primary share issues. Only after the crises of 1992 and the introduction

of free market pricing of shares, the virtual guarantee of secondary market prices being higher thanissue prices ended. Faced with the risks of direct investing, the investors are now turning to indirectinvesting through Mutual Funds that provide the benefits of professional management and lower riskthrough diversification.

Comparison by Nature of Investment and By Performance

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There are tow kinds of comparisons possible among different investment options. First, one mustcompare the options by the nature of investments their characteristics, benefits and risks. From thiscomparison will emerge certain types of investment which may be considered superior to other types.Next, one needs to look at the specifics of each investment option in terms of its current performanceand its suitability for the investor in the light of the investors specific situation (taxability, age, etc.).From this comparison at a given point of time will emerge the options considered superior to others for

a given investor.

1) Comparison by Nature of Investment

Investors certainly look for the best returns on different options. However, to determine which optionis better, the comparison should also be made in terms of other benefits that the investor ought to lookfor in any investment. Besides returns, other potential benefits of any investment also include thesafety of the capital, the risk or the stability of returns, the liquidity of access to the funds whenneeded, and the convenience with which the investment can be managed. The table below comparesthe investment options discussed in the previous section under the broad heads viz. return, safety,volatility, liquidity and convenience.

Although the table provides a qualitative evaluation of various financial products, the comparisonserves as a useful guide toward determining the best option.

It is clear from the above that equity investing in general has good potential in terms of return,liquidity and convenience. However, as discussed in the previous section, individual stocks can givevaried performance, one stock being more liquid than another or one stock giving lower return thatanother. For this reason, equity investing is fraught with risk and is not ideal for every individualinvestor. It is recommended only for investors who are willing to invest the time required for researchin stock selection (or have access to sound financial advice) and possess the capacity to bear theinherent risk.

Bonds issued by institutions are an attractive option, particularly now with the liquidity thataccompanies their listing on stock exchanges. Bonds are a stable option in terms of fixed returns, andare recommended for the risk-averse investor. However, bonds can lose value when general interestrates go up. Bonds are also subject to credit risk or risk of default by the borrower. In indicated by thecredit rating assigned to the bonds. In the absence of credit rating, it is extremely difficult for theinvestor to decide on the quality of the bonds or debentures. The secondary market in corporate bondsin India is also very thin, leading to lack of liquidity for the investors who wish to sell.

Company fixed deposits fall short on several counts and recommended only if the issuing companyand the deposits on offer are rated highly by credit rating agencies.

The major advantage ofbank deposits relative to other product is the liquidity they offer. Banks areusually willing to give loans against fixed deposits at a nominal charge over the interest rate applicableto the deposits. Deposit rates offered by banks vary as per RBI directives and the interest rate scenarioin the economy. Bank deposits score high on safety, as the return of capital is guaranteed to thedepositor by the bank. However, the financial soundness of the bank is important to look at.

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PPF combines stability with a respectable return. Its tax-exempt status makes it an attractivemechanism for the small investor to build his saving portfolio. However, the lock in period involved inPPF means that the investor loses out in terms of liquidity, particularly during the early years of thescheme. Being a government supported investment, PPF scores very high on safety, compared even tobank deposits.

Insurance could become a serious investment vehicle once the insurance market in India is opened toprivate players. In todays scenario, the opportunity cost in terns of return is too high for insurance tobe compared on even terms with the other options. Its liquidity is also extremely low, though safety isconsidered high at present for the government-owned LIC as the only insurer.

2) Comparison by Current Performance

Besides the inherent advantages of investing through Mutual Funds, recent tax amendments have alsohelped to enhance the attractiveness of Mutual Funds. Dividends distributed by Mutual Funds areexempt from tax in the hands of the investor. Investments in recognized Mutual Funds also qualify fortax rebate under section 88 and as approved investments under Section 54EAJEB.

Comparisons among different investment options are not valid for all time as the financial markets arenow deregulated and dynamic, causing frequent changes in comparative returns form time to time.Each year, the Mutual Funds and other options may give different returns. For example, when thebanks increase or reduce the deposit interest rates, the Mutual Funds performance may look better orworse. If the government changes the PPF interest rate, again there will be an impact on thecomparative status of different options. Similarly, the individual taxpayers situation may change,whereby he may pay higher or lower tax on his income. That will make a difference in his after-taxreturn on different options. That is why; it is recommended that the specific comparisons of differentinvestment options be made at a given point of time, using the then prevalent return data.

Direct Equity Investment versus Mutual Fund Investing

Investors have the option to invest directly in equities through the stock market instead of investingthrough Mutual Funds. However, a practical evaluation reveals that Mutual Funds are indeed a morerecommended option for the individual investor.

Identifying stocks that have growth potential is difficult process involving detailed researchand monitoring of the market. Mutual Funds specialize in this area and possess the requisiteresources to carry out research and continuous market monitoring. This is clearly beyond thecapability of most individual investors.

Another critical element towards successful equity investing is diversification. A diversifiedportfolio serves to minimize risk by ensuring that a downtrend in some securities/sectors isoffset by an upswing in the others. Clearly, diversification requires substantial investment thatmay be beyond the means of most individual investors. Mutual Funds pool the resources ofmany investors and thus have the funds necessary to build a diversified portfolio, and byinvesting even a small amount in a Mutual Fund, an investor can, through his proportionateshare, reap the benefit of diversification.

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Mutual Funds specialize in the business of investment management, and therefore employprofessional management for carrying out their activities. Professional management ensuresthat the best investment avenues are tapped with the aid of comprehensive information anddetailed research. It also ensures that expenses are kept under tight control and marketopportunities are fully utilized. An investor who opts for direct equity investing loses out onthese benefits.

Mutual Funds focus their investment activities based on investment objectives such as income,growth or tax savings. An investor can choose a fund that has investment objectives in linewith his objectives. Therefore, funds provide the investor with a vehicle to attain his objectivesin a planned manner.

Mutual Funds offer liquidity through listing on stock exchanges (for closed- end funds) andrepurchase options (for open-end funds). This is in contrast to direct equity investing whereseveral stocks are often not traded for long periods.

Direct equity investing involves a high level of transaction costs per rupee invested in the form

of brokerage, commissions, stamp duty, etc. while Mutual Funds charge a management fee,they succeed in keeping transaction costs under control because of the economies of scale theyenjoy.

In terms of convenience, Mutual Funds score over direct equity investing. Funds serveinvestors not only through their investor services networks, but also through associates such asbanks and other distributors. Many funds allow investors the flexibility to switch betweenschemes within a family of funds. They also offer facilities such as check writing andaccumulation plans. These benefits are not matched by direct equity investing.

The Investor Perspective: Funds Vs. Other Products

Investment option Investment

Objective

Risk

Tolerance

Investment

Horizon

Equity Capital Appreciation High LongTermMedium to Long

Fl Bonds Income Low Term

Debentures Income H-M-Low The Same

Deposits Income The SameGenerally

MediumFlexible All

Bank Deposits Income Low Terms

PPF Income Low Long Term

Life Insurance Risk Cover Low Long Term

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Gold Inflation Hedge Low Long Term

Real Estate Inflation HedgeCapital Growth,

Low Long Term,Flexible All

Mutual Funds Income H-M-Low Short term, medium term and long term

The comparison above highlights the flexibility offered by Mutual Funds from the investorsperspective. An investors can choose from a wide variety of fund to suit his risk tolerance, investmenthorizon and investment objective. Bank Deposits offer similar flexibility in investment horizon andrisk level, but only a fixed income. An investor looking for capital growth has to consider MutualFund, both equity and debt. Direct equity investment offers the capital growth potential, but a high riskand without benefits of diversification and professional management offered by Mutual Fund. Goldand real Estate are attractive only in high inflation economies. Other options are largely for the risk-averse, income-oriented investor. Mutual Funds present the widest choice to the investors.

F. Advantages of Mutual Fund

Mutual funds serve as a link between the saving public and the capital markets. They mobilize savingsfrom the investors and bring them to borrowers in the capital markets. Today mutual funds are fastemerging as the favorite investment vehicle because of the many advantages they have over otherforms and avenues of investing. The major advantages offered by mutual funds to all investors are:

Professional Management

Mutual Funds provide the services of experienced and skilled professionals, backed by adedicated investment research team that analyses the performance and prospects of companies andselects suitable investments to achieve the objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a broad cross-section of industries andsectors. This diversification reduces the risk because seldom do all stocks decline at the same timeand in the same proportion. You achieve this diversification through a Mutual Fund with far lessmoney than you can do on your own.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as baddeliveries, delayed payments and follow up with brokers and companies. Mutual Funds save yourtime and make investing easy and convenient.

Return Potential

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as theyinvest in a diversified basket of selected securities.

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Low Cost

Mutual Finds are a relatively less expensive way to invest compared to directly investing in thecapital markets because the benefits of scale in brokerage, custodial and other fees translate intolower costs for investors.

Liquidity

In open-end schemes, the investor gets the money back promptly at net asset value related pricesfrom the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at theprevailing market price or the investor can avail of the facility of direct repurchase at NAV relatedprices by the Mutual Fund.

Transparency

You get regular information on the value of your investment in addition to disclosure on thespecific investments made by your scheme, the proportion invested in each class of assets and thefund manager's investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular withdrawal plans and dividendreinvestment plans, you can systematically invest or withdraw funds according to your needs andconvenience.

Affordability

Investors individually may lack sufficient funds to invest in high-grade stock. A mutual fundbecause of its large corpus allows even a small investor to take the benefit of its investmentstrategy.

Choice of schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the provision of strictregulations designed to protect the interests of investors. The operations of Mutual Funds areregularly monitored by SEBI.

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G. Drawbacks of Investing In Mutual Funds

Potential loss

Unlike a bank deposit, the investment in a mutual fund could fall in value, as the fund is nothingbur a portfolio of different securities. Apart from a few assured returns schemes, the fund does notguarantee any minimum percentage of return.

The Diversification Penalty

While diversification reduces the risk of loss from holding a single security, it also limits thelarger gains if a single security increases dramatically in value. Also, diversification does notprotect the unit holders totally from an overall decline in the market.

H. Shortcomings in Operation of Mutual Funds

The mutual funds have been operating for the last twelve years in India. Thus, it is too early toevaluate their operation. However, one should not lose sight of the fact that in the formal years of anyinstitution, evaluation is very important as this reveals the real character of the systems. Following aresome of the shortcomings in operation of mutual funds:

(1) The mutual funds are all externally managed. They do not have employees of their own. Alsothere is no specific law to supervise the mutual finds in India. There are multiple regulations whileUTI is governed by its own regulations; the banks are supervised by Reserve Bank of India and thecentral government. The insurance company mutual funds are regulated under the centralgovernment regulations.

(2) Many of the investors are not willing to invest in mutual funds unless there is a promise of aminimum return.

(3) Unrestrained fund raising by schemes without adequate supply of scripts creates severeimbalance in the market.

(4) Many small companies did very well but mutual funds cannot reap their benefits because they arenot allowed to invest in smaller companies. Not only this, mutual fund is allowed to hold only a fixedmaximum percentage of shares in a particular industry.

(5) The mutual funds in India are formed as trusts. As there is no distinction made between sponsors,trustee and fund managers, the trustees play the role of fund managers.

(6) The increase in the number of mutual funds under various schemes has increased competition. Asa result the funds lose their stabilizing factor in the markets.

(7) While UTI publishes details of accounts about their investments, mutual funds are still notpublishing the profit and loss accounts and balance sheets after their operation.

(8) The mutual funds have eroded the financial clout of the institutions in the stock market for whichcross transaction between mutual funds and financial institutions not only allow speculators tomanipulate price but also provide cash leading to the distortion in the balanced growth of the market.

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(9) Net asset value (NAV) is one of the important factors which decide the performances of a mutualfund scheme. Regulation 45 of SEBI states that every mutual fund shall follow a formula approvedby the SEBI for computing the NAV for each of the schemes. But till date no regulation specifies theformula to be used for computation of NAV.

(10) India is a vast country with a comprehensive demographic profile. But mutual funds are onlyconfined to urban and semi-urban markets. Moreover mutual funds till now, not have been able tointroduce the schemes suitable to the needs of farmers, small entrepreneurs, and merchants to tap therural savings.

(11) Investor relations play a vital role in mobilizing the resources. Most of the Indian companies andmutual funds have ignored this and failed to communicate to the investors about their organizationand operation.

(12) Unlike banks, mutual funds do not have a strong distribution network. Apart from few, mostMFs have to depend on the broker networks.

(13) Mutual funds have not yet developed product structuring to tap target customers.

(14) Most of the older schemes have been designed with complicated exit procedures. Further,investors are not adequately informed about the available exist options which creates a lot ofconfusion for the investors and they are compelled to liquidate their investments in the market at ahighly discounted price.

(15) Fund managers invest in unlisted securities, sometimes in private limited companies to get betterreturns which lead to new risk profile.

(16) Long-term capital gains have been reduced from 20% with indexation benefits to 10% withoutindexation. But this is available only to securities under section 112 of the Income Tax Act. Formutual funds, it is an edge for the listed funds.

(17) There is a restriction on corporate investments up to a maximum of 60% of net worth of mutualfunds. But there is no such stipulation for bank fixed deposits and gilt securities.

(18) There is a lack of access to call money market. As a result, redemption risk which is the secondmost important risk of open- ended schemes arises could not be mitigated.

(19) The cheque writing facility is available only to the money market mutual fund investors. So the

mutual funds cannot issue cheques on behalf of another bank.

(20) The high cost of fruitless search for good buys or undervalued securities reduces the fundsreturn to their shareholders to below what they could have expected if they had selected randomly.The cost factor is another problem facing the mutual fund industry.

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(21) The development of mutual fund industry depends upon the maturity of the merchant bankingindustry. But unfortunately, the merchant banking industry in the Indian capital market is notsufficiently matured.

(22) There is a lack of product conceptualization and innovation in mutual fund industry.

(23) The most important aspect for success of a mutual fund is the ability to outsource certain criticalactivities. This concept is already prevalent manufacturing but has not been introduced in fundmanagement.

(24) Lack of well-informed institutional market is the cause of market inefficiencies.(25) Perhaps mutual funds are the most misunderstood financial products in India. Neither theinvestor nor the corporate finance manager perceives the product in a proper perspective. Further,mutual funds are not making efforts in investor awareness programme which is the need of the day.

(26) The lack of proper marketing and distribution system is another problem facing the mutual fundindustry in India.

(27) Internet and thereby e-commerce which is inevitable now-a-days has not been introduced inmutual funds.

(28) The biggest problem the mutual funds face today in India is the lack of investors confidence.

(29) Few mutual funds have already shown full portfolio disclosures but most mutual fundshesitate to declare their portfolios.(30) The absence of proper benchmarks against which performance can be measured.Constitutes another big problem plaguing mutual fund research in India. Possible causes for non-

satisfactory performance of mutual fund

I. Importance of Mutual Funds

Owing to the size, operating economics and ability to commit large sums of money for long periods,the mutual funds enjoy ample resources at their disposal by mobilizing resources of the investors. Themutual funds with the expert and experienced management cadre can secure large varieties of highyielding Blue chip securities and show better results to the investing public. Therefore, the investorsnow prefer investing their resources in various mutual fund schemes, than managing themselves. Thefollowing reasons can be stated for the rising popularity of mutual funds:

(1) With an emphasis on increase in domestic savings and improvement in deployment ofinvestment through markets, the need and scope for mutual fund operation, has increasedtremendously. The basic purpose of reforms in the financial sector was to enhance the generation ofdomestic resources by reducing the dependence on outside funds. This calls for a market-basedinstitution which can tap the vast potential of domestic savings and channelize them for profitableinvestments. Mutual funds are not only best suited for this purpose but also capable of meeting thischallenge.

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(2) An ordinary investor who applies for share in a public issue of any company is not assured of anyfirm allotment. But mutual funds, those subscribe to the capital issue made by companies get firmallotment of shares. Mutual funds, later sell these shares in the share market and to the promoters ofthe company at a much higher price. Hence mutual funds help develop confidence among theinvestors.

(3) The psyche of the typical Indian investor has been summed up by Mr. S.A. Dave, formerchairman of UTI, in three wordsyield, liquidity, and security. The mutual funds, being set up in thepublic sector, have given the impression of being as safe a conduit for investment as bank deposits.Besides, the assured returns promised by them have been great for the typical Indian investors.

(4) As mutual funds are managed by professionals, they are considered to have a better knowledgeof market behavior. Besides, they bring a certain competence to their job. They also maximize gainsby proper selection and timing of investment.

(5)Another important thing is that the dividend and capital gains are reinvested automatically inmutual funds and hence are not fritted away. The automatic reinvestment nature of a mutual fund is a

form of forced saving and can make a big difference in the long run.

(6) The mutual fund operations provide a reasonable protection to the investors. Besides, presentlyall schemes of mutual funds provide tax relief under section 80L of the Income Tax Act and inaddition, some schemes provide tax relief under section 88 of the Income Tax Act which leads to thegrowth of mutual funds.(7) Mutual fund creates awareness among urban and rural middle class people about the benefits ofinvestment in capital market through profitable and safe avenues. Therefore, mutual fund could beable to mop up a large amount of the surplus funds available with these people.

(8) The mutual fund attracts foreign capital flow to the country and secures profitable investmentavenues abroad for domestic savings through the opening of offshore funds in various foreigncountries. In view of recent liberalized economic and industrial policies and concessions such asexcise and customs given in recent budget for the growth of industrial sector, the capital marketboth primary issue market and secondaryhave been witnessing unprecedented boom. Hencemutual funds have been able to speed their wings by spreading their funds in various industrialsectors.

(9) Risk of loss due to ill-informed and misinformed purchase/sales is reduced as the managers ofmutual funds have better access to information. Many investors have fell prey to misleading andmotivated headline leads and lips. This risk is reduced by diversification of portfolio in terms of

companies and industries. Even a small investor in mutual fund can get the benefit of diversification.

(10) Lastly, another notable thing is that mutual funds are controlled and regulated by SEBI andhence are considered safe. Due to all the benefits, the importance of mutual funds has beenincreasing.

J. Defining Mutual Fund Risk

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Different Mutual fund categories as previously defined have inherently different risk characteristicsand should not be compared side by side. A bond fund with below average risk. For example shouldnot be compared t a stock fund with below average risk. Even though both funds have low risk fortheir respective categories, stock funds overall have a higher risk/return potential than bond funds.

Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have

yielded the lowest long-term return. Bond typically experience mote short term price swings, and inturn have generated higher long term returns. However, stocks historically have been subject to thegreatest short term price fluctuations and have provided the highest long term returns. Investorslooking for a fund which incorporates ass asset classes may consider a balanced or hybrid mutualfund width different asset classes. At the discretion of the manager(s), securities are bought, sold andshifted between funds with different asset classes according to market conditions.

Mutual funds face risks based on the investments they hold. For example, a bonk fund faces interestrate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up,bonk values will go down and vice versa. Bond income is also affected by the change in interest rates.Bond yields are directly related to interest rates falling as interest rates fall and finding as interest rise.

Income risk is greater for a short term bond fund than for long term bond fund.

Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is atrisk that its price will decline due to developments in its industry. A stock fund that invests acrossmany industries is more sheltered from this risk.

Following is a glossary of some risks to consider when investing in Mutual Funds:

Call Risk: The possibility that falling interest rates will cause a bond issuer to redeem-or call-its high-yielding bond before the bonds maturity date.

Country Risk: The possibility that political events (a war, national elections), financialproblems (rising inflation, government default), or natural disasters (an earthquake, a poorharvest) will waken a countrys economy and cause investments in that country to decline.

Credit Risk: The possibility that a bond issuer will fail to repay interest and principal in atimely manner. Also called default risk.

Currency Risk: The possibility that returns could be reduced for Americans investing inforeign securities because of a rise in the value of the U.S. dollar against foreign currencies.Also called exchange-rate risk.

Income Risk: The possibility that a fixed-income funds dividends will decline as a result offalling overall interest rates.

Industry Risk: The possibility that a group of stocks in a single industry will decline in pricedue to developments in that industry.

Inflation Risk: The possibility that increases in the cost of living will reduce or eliminate afunds real inflation-adjusted returns.

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Interest Rate Risk: The possibility that a bond fund will decline in value because of anincrease in interest rates.

Manager Risk: The possibility that an actively managed Mutual Funds investment adviserwill fail to execute the funds investment strategy effectively resulting in the failure of stated

objectives.

Market Risk: The possibility that stock fund or bond fund prices overall will decline overshort or even extended periods. Stock and bond markets tend to move in cycles, with periodswhen prices rise and other periods when prices fall.

Principal Risk: The possibility that an investment will go down in value, or lose money,from the original or invested amount.

K. Net Assets Value (Nav)

The performance of a particular scheme of mutual fund is denoted by Net Assets Value (NAV).Mutualfund invest the money collected from the investors in securities markets. In simple word, Net AssetValue is the market value of the securities held by the scheme. Since market value of securitieschanges every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the marketvale of securities of a scheme divided buy the total no of units of the scheme o any particular date. Forexample if the market value if securities of a mutual fund scheme is Rs. 200 lakhs and mutual fund hasissue 10 lakhs units of Rs.10 each to the investors, then the NAV per unit of the fund is Rs. 20 . NAVis required to be disclosed by the mutual funds on a regular basis daily of weekly- depending on thetype of scheme.

The net assets value (NAV) is the actual value of one unit of a given scheme n any given business day.

The NAV reflect the liquidation value of the funds investments on that particular day after accountingfor all expenses. It is calculated by deducting all liabilities except unit capital of the fund from therealizable value of all assets and dividing it by number of units outstanding.

So NAV is equals to-

Market / fair value of schemes(+) Receivables(+) Accrued income(+) Other assets(-) Accrued expenses(-) Payables

(-) Other liability(/) Number of unit outstanding.

L. Measurements of Performance

1) Total return is generally regarded as the best measure of fund performance because it is the mostcomprehensive. Total return includes dividend and capital gains distributions along with any changes

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in the funds share price. A dividend distribution comes from the interest and dividends earned by thesecurities held by a fund; a capital gains distribution represents any net gains resulting from the sale ofthe securities held by a fund. Total return, expressed as a percentage of an initial investment in a fund,represents the change in that investments value over a given period, assuming any distributions werereinvested in the fund.

2) Yield is the measure of net income (dividends and interest less expenses) earned by the securities inthe funds portfolio during a specified period. Yield is expressed as a percentage of the funds NAV(including the highest applicable sales charge, if any). Yield does not include the change, if any, in theinvestments value over a given period.

M. Eligibility for Investing In Mutual Funds In India

Mutual funds have been emerging as big financial intermediary in India. In a vast country like India itis a challenge to market these funds. Fund distributors are a very important link between the fundmanagement industries and the investors. However, it is equally essential to know who can invest inMutual Funds in India. Mutual Funds in India are open to investment for.

1. Residents Including:

Resident Indian Individuals

Indian Companies

Indian Trusts / Charitable Institutions

Banks

Non-Banking Finance Companies

Insurance Companies

Provident Funds

2. Non Residents Including:

Non-Residents IncludesOther Corporate Bodies (OCBs)

3. Foreign Entities:

Foreign Institutional Investors (FIIs) registered with SEBI

Foreign citizens and other foreign entities are not allowed to invest in Mutual Funds India

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Classification of Indian Mutual Fund Industry

The private sector players, after an indifferent start in the early years, have made a strong impressionespecially in the larger cities, with a high quality of fund management, sales and customer service.This sector has dented UTI's dominance resulting in a falling market share towards the end of the lastmillennium.

UTI Mutual FundUTI was set up in 1964 by an act of parliament and commenced its operation from July 1964, with aview to encouraging saving and investment and participation in the income, profit and gain accruing tocorporation from the acquisition, holding, management and disposal of securities.

Unit trust of India (UTI) is the India's largest Mutual Fund organization. UTI manages funds over Rs.58,221 crore as on 30/6/2001 and over 41.80 million investors account under 85 schemes.

UTI is a trust without ownership capital and independent Board of trustees. The first scheme was Unitscheme 1964. The contributors of initial capital of Rs. 5 crore for US-64 scheme were RBI, LIC, SBIand some contributors of initial capital of Rs. 5 crore for US-64 scheme were RBI, LIC foreign banks.Under the provision of the act, the Government of India would appoint chairman of the board. Today ithas 54 branch offices, 266 chief representatives and about 67,000 agents. It provides complete rangeof services to its investors.

ICICI Prudential Mutual Fund

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The Industrial Credit and Investment Corporation of India Limited (ICICI) was founded by the WorldBank, the Government of India and representatives of private industry on January 5, 1995 toencourage and assist industrial development and investment in India.

The sponsors of the Fund are prudential plc of the United Kingdom (UK) and ICICI Limited.Prudential is one of the largest life insurance companies in the UK and one of the leading life

insurance companies in the world. It operates on over 15 countries and markets medium to long-termsavings product, including life insurance, pensions and unit trusts. It has a total of over 10 millioncustomers worldwide.

ICICI is a premier financial institution and its principal business is to provide medium and long-termproject financing/leasing, consumer finance and other types of financial services to industry andindividuals in India. The total financial assistance extended by ICICI since inception is Rs. 1,46,167crores as of March 31,2001.Prudential ICICI Asset Management Company Limited, the investmentManager to the Prudential ICICI Mutual Fund, manages assets over Rs.6242.07 crores as of July 31,2001 through 13 schemes.

IDBI Principal Mutual FundThe Mutual Fund is sponsored by two leading names in the financial services industry- IndustrialDevelopment Bank of India (IDBI) and Principal Financial Services Inc. IDBI is a premier financialinstitution of India and one of the largest development banks in the world. Principal Financial ServicesInc. is a member of the Principal Financial Group - a leading global provider of financial products andservices, including Retirement and Investment Services, Mutual Funds, Life and Health Insurance,Annuities and Mortgage Banking, to business and individuals.IDBI Mutual fund has been constitutedas a Trust in accordance with the provisions of the Indian trust Act,1882.The Mutual fund isregistered with SEBI under registrationno.MF/019/94/0 dated December 13, 1994.

The Fund was set up by Industrial Development Bank of India (IDBI) in 1994 by execution of a Trust

Deed dated November25, 1994 under which IDBI was the sole Sponsor, Settler and Principal Trustee.IDBI, as sponsor to the fund, has irrevocably settled a Sum of Rs. 25 crore as the Trust corpus, whichis held and managed as per the provisions of the Trust Deed. The Board of Trustees with IDBI asprincipal trustee discharges the Trusteeship functions of IDBI Mutual fund. The trustee had appointedIDBI mutual fund, since inception. IIMCO was a wholly owned subsidiary of IDBI and is registeredunder the Companies Act, 1956.

Since March 31, 2000, the principal Financial Services Inc. has acquired 50% stake in the paid upequity capital of IIMCO through its subsidiary, Principal Financial Group (Maturities) Limited. Withthis move, the name has been changed to IDBI-PRINCIPAL Asset Management Company Limited(IDBI-PRINCIPAL) to reflect the change in ownership.

IDBI was established in 1964 by the Government of India under IDBI Act. It is the premierdevelopment financial institution in the country and one of the largest development banks in the worldwith an asset base of over Rs 72,000 crore (US$ 16 billion) and net worth of over Rs 9,000 crore (US$2 billion). It currently has an investor base of 3.3 million. It has played a major role in institutionbuilding by setting up various specialized institutions to cater to the changing needs of Indian industryand capital market.

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Birla Sun Life Mutual FundThe sponsor of Birla Mutual Fund is Birla Global Finance Ltd. (BGFL) is an Aditya Birla Co. engagedin asset based financing, corporate finance, trade finance, treasury and capital market operations. TheBirla Global Finance Ltd. Was responsible for setting up and establishing the Mutual Fund to be calledBirla Mutual Fund.

Birla Mutual Fund has been constituted as a trust under the provisions of the Indian Trust Act, 1982with SEBI. The objective of the Mutual fund is to offer to the public and other eligible investors unitsin one or more schemes in the Mutual Fund for making group or collective investments primarily inIndian securities in accordance with and as permitted under the directions and guidelines issued fromtime to time by SEBI.

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

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

HDFC Mutual FundHDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing DevelopmentFinance Corporation Limited and Standard Life Investments Limited.

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

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

Sahara Mutual FundSahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as thesponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works

as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

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

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

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

Reliance Mutual FundReliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor ofRMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was

registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004.Reliance Mutual Fund was formed for launching of various schemes under which units are issued tothe Public with a view to contribute to the capital market and to provide investors the opportunities tomake investments in diversified securities.

Standard Chartered Mutual FundStandard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard CharteredBank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered AssetManagement Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December20,1999.

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

Morgan Stanley Mutual Fund IndiaMorgan Stanley is a worldwide financial services company and its leading in the market in securities,investmenty management and credit services. Morgan Stanley Investment Management (MISM) wasestablished in the year 1975. It provides customized asset management services and products togovernments, corporations, pension funds and non-profit organisations. Its services are also extendedto high net worth individuals and retail investors. In India it is known as Morgan Stanley InvestmentManagement Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF).This is the first close end diversified equity scheme serving the needs of Indian retail investorsfocussing on a long-term capital appreciation.

Escorts Mutual Fund

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

Alliance Capital Mutual FundAlliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management

Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, theAlliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

Benchmark Mutual FundBenchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as thesponsored and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated onOctober 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. isthe AMC.

Canbank Mutual FundCanbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor.

Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. TheCorporate Office of the AMC is in Mumbai.

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

LIC Mutual FundLife Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordancewith the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset ManagementCompany Ltd as the Investment Managers for LIC Mutual Fund.

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

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There was no uniform regulation of the mutual funds industry till a few years ago. The UTI wasregulated by a special Act of Parliament while funds promoted by public sector banks were subject to

RBI Guidelines of July 1989. The Securities & Exchange Board of India (SEBI) was formed in 1993as a capital market regulator. One of its responsibilities was to regulate the mutual fund industry and itcame up with comprehensive regulations for the industry in 1993. The rules for the formation,administration and management of mutual funds in India were clearly laid down. Regulations alsoprescribed disclosure requirements.

The regulations were thoroughly reviewed and re-notified in December 1996. The revised guidelinestighten the accounting and disclosure requirements in line with recommendations of The ExpertCommittee on Accounting Policies, Net Asset Values and Pricing of Mutual Funds. The SEBI (MutualFunds) Regulations, 1996 have been further amended in 1997, 1998 and 1999. Today, all mutual fundsare regulated by SEBI. Efforts have been made to bring UTI schemes under SEBI's ambit with the

result that all schemes, with the exception of Unit 64, are now regulated by the capital marketregulator.

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC's are in the que 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 mutualfunds sector is required.

We have approximately 30 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 onthe '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 limitedproducts.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Mutual Funds Organization

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There are many entities involved and the diagram below illustrates the organizational set up of amutual fund:

How important is an AMC (Asset Management Company) behind a mutual fund?

AMC controls the operations and functioning of a mutual fund. It is very critical to the performance ofa mutual fund as it decides on the style of functioning, people who are going to manage the funds, the

commitment to service quality and overall supervision.

The financial strength and the commitment of the AMC sponsors to the business are very key issues.This is because most AMCs lose money in the first few years of operations. In most cases, these lossesare much more than the capital requirements stipulated by SEBI. Hence, a sponsor which is financiallyweak or which cannot capital to the business either because of its inability or unwillingness will resultin an unhealthy operation. There will be a tendency to cut corners and unwillingness to spend moneyto expand operations. This is the last place where high quality persons would want to remain and

work. The AMC then remains stunted and the sponsors lose interest. The worst affected are theinvestors. This is exactly what has happened with some AMCs promoted by Indian businesshouses.This is also a problem that has afflicted some of the AMCs floated by nationalized banks. Inthese organizations, the traditional thinking is prevalent which can be summarized as "money ispower". Since mutual fund business did not have access to too much money, a posting in the AMCbecame punishment postings for some personnel who were not doing well in the parent organization orwho lost out in the organizational politics. The management of the banks also did not allow theseAMCs to become independent viable businesses. The CEOs of the AMCs did not have any clue of themutual fund business and neither were they interested in it the entire effort was spent in getting aposting back in the parent. The fund managers had no experience in the activity making a mockery of"professional management". The sad results are there to see. Some of the parents had to provide funds

to bridge the gap in "assured return schemes". It looks extremely likely that some of these AMCs willno longer exist in a few years.

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Organization structure of a Mutual Fund

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Steps for Investing In Mutual Fund

Step one - Identify your Investment needs

Your financial goals will vary, based on your age, lifestyle, financial independence, familycommitments, and level of income and expenses among many other factors. Therefore, the first step isto assess your needs. You can begin by defining your investment objectives and needs which could be

regular income, buying a home or finance a wedding or educate your children or a combination of allthese needs, the quantum of risk you are willing to take and your cash flow requirements.

Step Two - Choose the right Mutual Fund

The important thing is to choose the right mutual fund scheme which suits your requirements. Theoffer document of the scheme tells you its objectives and provides supplementary details like the trackrecord of other schemes managed by the same Fund Manager. Some factors to evaluate beforechoosing a particular Mutual Fund are the track record of the performance of the fund over the last fewyears in relation to the appropriate yardstick and similar funds in the same category. Other factorscould be the portfolio allocation, the dividend yield and the degree of transparency as reflected in thefrequency and quality of their communications. For selecting the right scheme as per your specific

requirements.

Step Three - Select the ideal mix of Schemes

Investing in just one Mutual Fund scheme may not meet all your investment needs. You may considerinvesting in a combination of schemes to achieve your specific goals.

Step four - Invest regularly

The best approach is to invest a fixed amount at specific intervals, say every month. By investing afixed sum each month, you buy fewer units when the price is higher and more units when the price islow, thus bringing down your average cost per unit. This is called rupee cost averaging and is adisciplined investment strategy followed by investors all over the world. You can also avail thesystematic investment plan facility offered by many open end funds.

Step Five- Start early

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It is desirable to start investing early and stick to a regular investment plan. If you start now, you willmake more than if you wait and invest later. The power of compounding lets you earn income onincome and your money multiplies at a compounded rate of return.

Step Six - The final step

All you need to do now is to Click here for online application forms of various mutual fund schemes

and start investing. You may reap the rewards in the years to come. Mutual Funds are suitable forevery kind of investor - whether starting a career or retiring, conservative or risk taking, growthoriented or income seeking.

Rights of a Mutual Fund Unit holder

A unit holder in a Mutual Fund scheme governed by the SEBI (Mutual Funds) Regulations is entitledto:

1. Receive unit certificates or statements of accounts confirming the title within 6 weeks from thedate of closure of the subscription or within 6 weeks from the date of request for a unit

certificate is received by the Mutual Fund.2. Receive information about the investment policies, investment objectives, financial position

and general affairs of the scheme.3. Receive dividend within 42 days of their declaration and receive the redemption or repurchase

proceeds within 10 days from the date of redemption or repurchase.4. Vote in accordance with the Regulations to:-

a. Approve or disapprove any change in the fundamental investment policies of thescheme, whi

mf submission final

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