Chapter 1
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1.0 Introduction
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 invested by the fund manager in different types of securities depending 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 appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them (pro rata). 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 portfolio at a relatively low cost. Anybody with an inventible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A Mutual Fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events 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. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A Mutual Fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the Mutual Fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. 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 Funds gained popularity 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 collectively manage 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 specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, 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. 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 third one 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 a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). 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 funds collected under the schemes.
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Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Affordability Investors individually may lack sufficient funds to invest in high-grade stock. A Mutual Fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. 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 strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
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1.2 Drawbacks of Investing In Mutual Fund Drawbacks of investing in Mutual Funds are given below: Potential loss Unlike a bank deposit, the investment in a Mutual Fund could fall in value, as the fund is nothing but a portfolio of different securities. Apart from a few assured returns schemes, the fund does not guarantee any minimum percentage of return. The Diversification Penalty While diversification reduces the risk of loss from holding a single security, it also limits the larger gains if a single security increases dramatically in value. Also, diversification does not protect the unit holders totally from an overall decline in the market. Risks and Costs Changing market conditions can create fluctuations in the value of a Mutual Fund investment. There are fees and expenses associated with investing in Mutual Funds that do not usually occur when purchasing individual securities directly. As with any type of investment, there are drawbacks associated with Mutual Funds. No Guarantees The value of your Mutual Fund investment, unlike a bank deposit, could fall and be worth less than the principle initially invested. And, while a money market fund seeks a stable share price, its yield fluctuates, unlike a certificate of deposit. In addition, Mutual Funds are not insured or guaranteed by an agency of the U.S. government. Bond funds, unlike purchasing a bond directly, will not re-pay the principle at a set point in time.
Costs In some cases, the efficiencies of fund ownership are offset by a combination of sales commissions, 12b-1 fees, redemption fees, and operating expenses. If the fund is purchased in a taxable account, taxes may have to be paid on capital gains. Keep track of the cost basis of your initial purchase and new shares that are acquired by reinvesting distributions. It's important to compare the costs of funds you are considering. Always look at "net" returns when comparing fund performances. Net return is the bottom line; an investment's true return after all costs is deducted.
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Prospectuses will not contain all the costs that affect the net return on your investment. This is why it is important to compare net returns whether or not the fund in a no-load or load fund. Expenses Because Mutual Funds are professionally managed investments, there are management fees and operating expenses associated with investing in a fund. These fees and expenses charged by the fund are passed onto shareholders and deducted from the fund's return. These expenses are typically expressed as the expense ratio - the percent of fund assets spent (annually) on day-to-day operations. Expense ratios can vary widely among funds. Expense ratios for Mutual Funds commonly range from 0.2% to 2.0%, depending on the fund. Consult the fund's prospectus to determine the expense ratio for a specific fund.
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1.3 Defining Mutual Fund Risk Different Mutual Fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their 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 returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuationsand have provided the highest long-term returns. Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid Mutual Fund. These funds can be very conservative or very aggressive. Asset allocation portfolios are Mutual Funds that invest in other Mutual Funds with different asset classes. At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions. Mutual Funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond 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 rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund. Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry 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 callits high-yielding bond before the bond's maturity date. Country Risk: The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's 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 a timely manner. Also called default risk. Currency Risk: The possibility that returns could be reduced for Americans investing in foreign 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 fund's dividends will decline as a result of falling overall interest rates. 7
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Industry Risk: The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk: The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk: The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk: The possibility that an actively managed Mutual Fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk: The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when 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.
may be prudent to look at the credit quality aspect very carefully before investing in an income Mutual Fund.
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in some of these funds points to it. While Alliance Equity Fund has a Standard Deviation of 2.53, Birla Advantage has its Standard Deviation at 2.57. ING Growth has a standard deviation of 3.3, which is relatively high due to its exposure to two volatile ICE scrip. Birla Advantage has reduced its exposures to Infosys drastically in the last two months and taken steps to contain volatility. Similar steps are being planned by SBI Mutual Fund that is recasting its equity portfolio to reduce risks as they can scare investors. It is unfortunate that the fund managers are not taking due care for minimizing the risk and are in a race to post higher and higher returns during the phase of bull-run. They should understand that the investors forget the high returns posted in any specific period very soon but they take hell lot of time to forget the burns they get during periods of losses. Hence for maintaining the confidence of the retail investors it is very important to control wild fluctuations in the NAVs. The basic technique of portfolio management thrusts on diversification, which preaches inclusion of negative beta, stocks in the portfolio so as to minimize the impact of fluctuation in the market. Diversification always has a cost and investors are willing to pay for it if it is properly done. The fund manager should disclose what they are doing at the hedging front. They should come up and tell their investors as to what they do at times of high fluctuations. Normally it has been seen that they outperform the broad market indices during the bull-runs and under-perform the indices during the bear-phases. The industry needs to revise their attitude and try to streamline their actions with their objectives. Some Mutual Fund houses are quite disciplined but every body should embrace the same spirit. There are some infrastructural problems but fund managers need to be more vigilant on the market movements. Mr. Bhupinder Sethi, Fund Manager - Dundee Mutual Fund said We are actively monitoring the market movements and taking calls accordingly. Though we are presently not using derivatives for hedging of risk because of lack of depth in the market for the product, but we go into cash when we see the expectations of huge corrections coming in. Poor performance, poor servicing to clients and failure of third party service providers, are the three major risk factors identified in the survey by PWC. These are also going to be crucial in a rapidly growing competitive scenario. Under this setting, it is not just growth that should be the focus area but also better management of all risks and hence, AMCs would do well to keep the investor and his interest in mind before taking any decision.
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1.4 Safety of Mutual Funds Any Mutual Fund is as safe or unsafe as the assets that it invests in. There are two basic categories of Mutual Funds with others being variations or mixtures of these. Firstly, there are those that invest purely in equity shares (called equity funds or "Growth funds") and secondly, there are those that invest purely in bonds, debentures and other interest bearing instruments called "income" or "debt" funds. The NAV of growth funds fluctuates in line with the fluctuation of the shares held by them. They can also witness face substantial erosion in value, which could be permanent in some cases. On the other hand, prices of debt instruments fluctuate to a much lesser degree and an income fund is extremely unlikely to face erosion in value especially of the permanent kind. Most Mutual Funds have qualified and experienced personnel, who understand the risks of investing. But, nobody is immune from making mistakes. However, funds diversify the investment portfolio substantially so that default in any single investment (in the case of an income fund) will not affect the overall performance of a fund in a significant manner. In the event of default of a part of the portfolio, an income fund is extremely unlikely to face erosion in face value. Generally, Mutual Funds are not guaranteed by anybody. However, in the Indian context, some of the Mutual Funds have floated "guaranteed" or "assured" return schemes, which guarantee a certain annual, return or guarantee a buyback at a specified price after some time. Examples of these include funds floated by the UTI, Canbank Mutual Fund, SBI Mutual Fund, LIC Mutual Fund etc. Many of these funds have not earned returns that they promised and the asset management companies of the respective Mutual Funds or their sponsors have made good their promises. The biggest case pertains to the US 64, which never guaranteed any returns but is being bailed out by the Government due to the millions of individuals who have invested in it.
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By Structure:
Open-ended Funds An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. 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 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 they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
By Investment Objective:Income Funds 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 and government securities. 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 schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.
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Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes 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 moderate income. 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 may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate 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 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.
Other Schemes:Tax saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA by investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000.
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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 and Pharmaceuticals etc. Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sense or the NSE 50 Sector Schemes Sector 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.
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1.6 Different styles of Mutual Funds Different Mutual Funds have very different investing styles. These styles are a function of the individuals managing the fund with the overall investment objectives and policies of the organization acting as a constraint. These are manifest in things like Portfolio turnover Buy and hold strategy versus frequent investment changes. Kind of investments made small versus large companies, multi baggers (investments which yield high gains) versus percentage players (investing in shares which will give small gains in line with the market), high quality low yield bonds versus low quality high yield bonds. Asset allocations Varying percentage of cash depending on aggressive views on markets The following examples serve to illustrate a few styles of equity fund managers: Some fund managers are passive value seekers and some are value creators . The former type buys undervalued assets and patiently waits for the market to discover the value. The latter aggressively promote the undervalued stocks that they have bought. Some fund managers restrict themselves to liquid stocks while some thrive on illiquid stocks, which offer themselves easily to large price changes. Some fund managers are masters of the momentum game and seek to buy stocks that are in market fancy. They attach lesser importance to fundamentals and believe that a rising stock price and favorable momentum indicators imply that fundamentals are changing. In effect, they are following the philosophy, "The trend is my friend". Other fund managers go more by deep fundamental analysis completely ignoring price movements. They do not mind price going down and are in fact happy to buy more. Some fund managers are growth investors i.e. they buy stocks with a high P/E using the forecasted growth to justify the high valuation. Others are value investors who buy shares with low P/E or P/BV multiples - typically companies rich with undervalued assets.
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In the above graph shows how Mutual Fund works and how investor earns money by investing in the Mutual Fund. Investors put their saving as an investment in Mutual Fund. The Fund Manager who is a person who takes the decisions where the money should be invested in securities according to the schemes objective. Securities include Equities, Debentures, Govt. Securities, Bonds, and Commercial Paper etc. These Securities generates returns to the Fund Manager. The Fund Manager passes back return to the investor.
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1.8 Net Asset Value (NAV) The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid Details on the above items For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded. For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation. Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.
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Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued". Expenses including management fees, custody charges etc. are calculated on a daily basis.
A. Residents Including:1. 2. 3. 4. 5. 6. 7. Resident Indian Individuals Indian Companies Indian Trusts / Charitable Institutions Banks Non-Banking Finance Companies Insurance Companies Provident Funds
C. Foreign Entities:1. Foreign Institutional Investors (FIIs) registered with SEBI Foreign citizens and other foreign entities are not allowed to invest in Mutual Funds in India.
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Chapter 2
2.1 Legal Structure of Mutual Fund 2.2 Role of AMC Behind Mutual Fund
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The Fund Sponsor: Sponsor is defined under SEBI regulations as any person who, acting alone or in combination with another body corporate, establishes a mutual fund. The sponsor of a fund is akin to the promote of a company as he gets the fund registered with SEBI. The sponsor will form a Trust and appoint a Board of Trustees. The sponsor will also generally appoint an Asset Management Company as fund managers. The sponsor, either directly or acting through the Trustees, will also appoint a Custodian to hold the fund assets. All these appointments are made in accordance with SEBI Regulations. As per the existing SEBI regulations, for a person to qualify as a sponsor, he must contribute as least 40% of the net worth of the AMC and possess a sound financial track record over five year prior to registration. Mutual Funds as Trusts: A mutual fund is India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. The Fund Sponsor acts as the Settler of the Trust, contributing to its initial capital and appoints a Trustee to hold the assets of the Trust for the benefit of the unit-holders, who are the beneficiaries of the Trust. The fund then invites investors to contribute their money in the common pool, by subscribing to units issued by various schemes established by the trust as evidence of their beneficial interest in the fund. Trustees: A Board of Trustees a body of individuals or a Trust Company - a corporate body, may manage the Trust -the mutual fund. Board of Trustees manages most of the funds in LJIMS 21
India. While the provisions of the Indian Trusts Act, will govern the Board of Trustees where the Trustee is a corporate body, it would also be required to comply with the provisions of the Companies Act, 1956. The Board of the Trustees does not directly manage the portfolio of securities. For this specialist function, they appoint an Asset Management Company. They ensure that the fund is managed by the AMC as per the defined objectives and in accordance with the Trust Deed and SEBI Regulations. The Asset Management Company: The role of an Asset Management Company (AMC) is to act as the investment manager of the Trust under the Board supervision and direction of the Trustees. The AMC is required to be approved and registered with SEBI as an AMC. The Trustees are empowered to terminate the appointment of the AMC and may appoint a new AMC with the prior approval of the Board and unit-holders. The sponsor, or Board of Trustees, if so authorized, appoints the Asset Management Company (AMC) which would, in the name of the Trust, float and then manage the different investment scheme as per SEBI Regulations and as per the AMC Agreement it signs with the Trustees. The AMC of a mutual fund must have a net worth of at least of Rs. 10 crores at all times. The AMC cannot act as a trustee of any other mutual fund. 2.2 Role of 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 of a 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 losses are much more than the capital requirements stipulated by SEBI. Hence, a sponsor who is financially weak or which cannot capital to the business either because of its inability or unwillingness will result in an unhealthy operation. 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 the investors. This is also a problem that has afflicted some of the AMCs floated by nationalized banks. In these organizations, the traditional thinking is prevalent which can be summarized, as "money is power". Since Mutual Fund business did not have access to too much money, a posting in the AMC became punishment postings for some personnel who were not doing well in the parent organization or who lost out in the organizational politics. The CEOs of the AMCs did not have any clue of the Mutual Fund business and neither were they interested in it the entire effort was spent in getting a posting 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 will no longer exist in a few years.
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Chapter 3
3.0 History 3.1 Mutual Fund Swelling Corpuses 3.2 Structure of Indian Mutual Fund Industry 3.3 Some Current AMCs 3.4 Recent Trends in Mutual Fund Industry 3.5 Market Trends 3.6 Investment Trends 3.7 Future Scenario 3.8 Performance of Mutual Fund 3.9 Global Scenario
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First Phase 1964-87 An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. UTI commenced its operations from July 1964. The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing companies found it difficult to raise fresh capital, as investors did not respond adequately to new issues. Earnest efforts were required to canalize savings of the community into productive 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 to any person or institution to purchase the units offered by the trust. However, this institution as we see it, is intended to cater to the needs of individual investors, and even among them as far as possible, to those whose means are small." His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors. UTI commenced its operations from July 1964 "with a view to encouraging savings and investment and participation in the income, profits and gains accruing to the Corporation
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from the acquisition, holding, management and disposal of securities." Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6700 Crores of assets under management. One thing is certain the fund industry is here to stay. The industry was one-entity show till 1986 when the UTI monopoly was broken when SBI and Canbank Mutual Fund entered the arena. This was followed by the entry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Starting with an asset base of Rs0.25bn in 1964 the industry has grown at a compounded average growth rate of 26.34% to its current size of Rs1130bn. Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector Mutual Funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its Mutual Fund in June 1989 while GIC had set up its Mutual Fund in December 1990. At the end of 1993, the Mutual Fund industry had assets under management of Rs. 47,004 crores. Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian Mutual Fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all Mutual Funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector Mutual Fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of Mutual Fund houses went on increasing, with many foreign Mutual Funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 Mutual Funds with total assets of Rs. 1,21,805 Crores. The Unit Trust of India with Rs. 44,541 Crores of assets under management was way ahead of other Mutual Funds.
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Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29,835 Crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the Mutual Fund industry has entered its current phase of consolidation and growth. As at the end of August 31, 2003, there were 31 funds, which manage assets of Rs. 1,21,040 Crores under 380 schemes. A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Respective Asset Management Company (AMC) manages each Mutual Fund with different type of schemes. An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. Fund manager in different types of suitable stock and securities, bonds and money market instruments then invests the invested money in a particular scheme of a Mutual Fund. Qualified professional man, who uses this money to create a portfolio, which includes stock and shares, bonds, gilt, money-market instruments or combination of all, manages each Mutual Fund. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money. Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian AMC is UTI while Alliance; Franklin Templeton etc are international AMC's. Mutual Funds offer several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a Mutual Fund.
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Before investing in a Mutual Fund an investor must identify his needs and preferences. While selecting a Mutual Fund's schemes he should consider the effect of inflation rate, diversification of investment, the time period of investment and the risk factors. (Source: AMFI)
3.2 Structure of the Indian Mutual Fund Industry The Indian Mutual Fund industry is dominated by the Unit Trust of India, which has a total corpus of Rs700bn, collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTI was floated by financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI is government owned and controlled, which, while legally incorrect, is true for all practical purposes. The second largest category of Mutual Funds is the ones floated by nationalized banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of funds managed by this category of AMCs is about Rs150bn. The third largest category of Mutual Funds is the ones floated by the private sector and by foreign asset management companies. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assets managed by this category of AMCs is in excess of Rs250bn.
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Name of the AMC Alliance Capital Asset Management (I) Private Limited Birla Sun Life Asset Management Company Limited Bank of Baroda Asset Management Company Limited Bank of India Asset Management Company Limited Canbank Investment Management Services Limited Cholamandalam Cazenove Asset Management Company Limited Dundee Asset Management Company Limited DSP Merrill Lynch Asset Management Company Limited Escorts Asset Management Limited First India Asset Management Limited GIC Asset Management Company Limited IDBI Investment Management Company Limited Indfund Management Limited
Nature of ownership Private foreign Private Indian Banks Banks Banks Private foreign
Private foreign Private foreign Private Indian Private Indian Institutions Institutions Banks
ING Investment Asset Management Company Private Limited Private foreign J M Capital Management Limited Jardine Fleming (I) Asset Management Limited Kotak Mahindra Asset Management Company Limited Kothari Pioneer Asset Management Company Limited Jeevan Bima Sahayog Asset Management Company Limited
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Morgan Stanley Asset Management Company Private Limited Private foreign Punjab National Bank Asset Management Company Limited Reliance Capital Asset Management Company Limited State Bank of India Funds Management Limited Shriram Asset Management Company Limited Sun F and C Asset Management (I) Private Limited Sundaram Newton Asset Management Company Limited Tata Asset Management Company Limited Credit Capital Asset Management Company Limited Templeton Asset Management (India) Private Limited Unit Trust of India Zurich Asset Management Company (I) Limited Banks Private Indian Banks Private Indian Private foreign Private foreign Private Indian Private Indian Private foreign Institutions Private foreign
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banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way. The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on. The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.
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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 generations 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. In India, Mutual Funds have shown continuous improvement in terms of the quantum under their management over the last couple of years. Total assets of the Mutual Funds have grown from Rs. 68193.08 cr. In 1998-99 to Rs. 121039.70 cr. As on August 31, 2003. Mutual Funds are now also competing with commercial banks in the race for retail investors savings and corporate float money. The power shift 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. 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%. This is forcing a large number of banks to adopt 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.
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EquityOriented -534 43
In last few years, the debt market has given excellent returns and debt funds will continue to serve as safer investment option for investors. The level of returns which one could expect from debt funds will now be much more moderate than what one has received in the last three years and there has been the tendency of the investors to shy away from the equity markets because of the kind of the loses they have suffered.
stock prices. Therefore it is not possible for anyone to beat the market on a consistent basis and hence there is no guarantee that the fund manager would perform well all the while. Benchmark performance of Mutual Funds All Mutual Funds have different objectives and therefore their performance would vary. A Mutual Funds performance should be benchmarked against Mutual Funds of similar type or India infoline Mutual Fund index for a particular type. E.g. equity fund index, income fund index or balanced fund index or liquid fund index. One can also benchmark the fund against the Sensex or any other broad based index for the particular asset class. One has to be very careful about choosing the comparison period. Ideally, one should compare the performance of equity or an index fund over a 1-2 year horizon. Any comparison over a shorter period would be distorted by short term, volatile price movements. Comparisons over a longer period need to be interpreted carefully by looking at other factors such as change in individuals managing the fund, one-time investment successes etc. Similarly, the ideal comparison period for a debt fund would be 6-12 months while that for a liquid/money market fund would be 1-3 months. Apart from the entire period, one should also compare the performance in smaller intervals within the same period say intervals of one month duration. To make comparison meaningful, one has to compare the average annual compounded rate of return. This adjusts for comparisons of differing period and also facilitates comparison across different classes. The return also incorporates dividend payouts. Thus, for example, one can say that ABC income fund has given a compounded annual growth rate (CAGR) of 13% p.a. including dividends in the last 2 years while XYZ income fund has given a CAGR of 13.2% p.a. over the last 3 years.
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Reason of Poor Performance of Mutual Funds in India (In Past) Most investors associate Mutual Funds with Mastergain, Monthly Equity Plans of SBI Mutual Fund, UTI and Canbank Mutual Fund and of course Morgan Stanley Growth Fund. This is so because these funds truly had participation from masses, with a fund like Morgan Stanley having more than 1 million investors. Investors feel that after 5 years, Morgan Stanley Growth Fund units still trade below the original IPO price of Rs 10. It is incorrect to think that all Mutual Funds have performed poorly. If one looks at some income funds, they have come with reasonable returns. It is only the performance of equity funds, which has been poor. Their poor performance has been amplified by the closed end discounts i.e. units of these funds quoting at sharp discounts to their NAV resulting in an even poorer return to the investor. One must remember that a Mutual Fund does not provide assured returns and neither can it "manufacture" returns out of thin air. Returns provided by Mutual Funds are a function of the returns in the underlying asset class in which the fund invests. Good funds can beat returns in their asset class to some extent but thats all. E.g. take the case of a sector specific fund like a Pharma fund, which invests only in shares of pharmaceutical companies. If the Govt. comes with new regulation that severely restricts the pricing freedom of these companies resulting in negative outlook for the sector, the prices of all stocks in the sector could fall substantially resulting in severe erosion in the NAV of the fund. No one can do anything about it. A good fund manager would probably sell part of the fund before prices fall too much and wait for an opportune time to reinvest at lower levels once the dust has settled. In that case, the NAV of the fund would fall to a lesser extent but fall it will. If the investor in the fund has invested in some stocks in the sector on his own, in all probability, his personal investments may have depreciated to a larger extent. Let us extend this example to an analysis of the investment climate in the last 7 years. The stock markets have done very badly in the last seven years. The BSE Sensex crossed 3000 for the first time in early 1992. Since then it has gone up and come down several times but has remained in the same range. Effectively, for a seven-year investment period, the total return has been almost zero. The prices of many leading stocks of yesteryear have fallen by more than 50% in these seven years. If one considers the fact that the Sensex has been changed several times, with all the weak stocks having been weeded out, the effective returns on the old Sensex, existing in 1992, have been substantially negative. Most Mutual Fund managers took some time to realize the changed circumstances wherein the open economy ushered in by the liberalization took the full impact of the global deflation in commodity prices. This problem was compounded further by the Asian crisis after which cheap imports from Asia caused severe pressure on profits. To add to this, most funds had invested some part of their portfolio in medium sized "growth" companies. Many of these companies have performed even worse than bigger ones and quite a few have seen share prices dip more than 90% from their 1994 highs. More important, funds could not sell these shares because of complete lack of liquidity with, at best, few hundred shares being traded every day.
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Meanwhile, shares of companies in sectors like consumer goods (FMCG) and software were showing good growth and they went up rapidly in price. Most fund managers were unwilling to sell shares of erstwhile "blue chips" at low prices and buy shares of emerging "blue chips" at high prices. This resulted in poor performance and negative returns. One more issue is that the fund managers in many funds were not "professionally qualified and experienced". This is especially true of some of the funds floated by nationalized banks. Some of these individuals were transferred from the parent organization and did not really know much about investment management. Lastly, investors would do well to have a look at the investments, which they made on their own. In most cases, they would have done much worse than the Mutual Funds.
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The money market Mutual Fund segment has a total corpus of $ 1.48 trillion in the U.S. against a corpus of $ 100 million in India. Out of the top 10 Mutual Funds worldwide, eight are bank- sponsored. Only Fidelity and Capital is non-bank Mutual Funds in this group. In the U.S. the total number of schemes is higher than that of the listed companies while in India we have just 400 schemes Internationally, Mutual Funds are allowed to go short. In India fund managers do not have such leeway. In the U.S. about 9.7 million households will manage their assets on-line by the year 2003, such a facility is not yet of avail in India. On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about 0.75 % of the total assets. 72% of the core customer bases of Mutual Funds in the top 50-broking firms in the U.S. are expected to trade on-line by 2003.
(Source: The Financial Express) Internationally, on- line investing continues its meteoric rise. Many have debated about the success of e- commerce and its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectors function. However, Mutual Funds cannot be left far behind. They have realized the potential of the Internet and are equipping themselves to perform better. In fact in advanced countries like the U.S.A, Mutual Funds buy- sell transactions have already begun on the net, while in India the Net is used as a source of Information. Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency that specializes in Internet technology estimates that over the next four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion to $ 1,227 billion; whereas equity assets traded on-line will increase during the period from $ 246 billion to $ 1,561 billion. This will increase the share of Mutual Funds from 34% to 40% during the period. Such increases in volumes are expected to bring about large changes in the way Mutual Funds conduct their business.
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Here are some of the basic changes that have taken place since the advent of the Net.
Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual Funds could bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI regulations, bond funds can charge a maximum of 2.25% and equity funds can charge 2.5% as administrative fees. Therefore if the administrative costs are low, the benefits are passed down and hence Mutual Funds are able to attract mire investors and increase their asset base. Better advice: Mutual Funds could provide better advice to their investors through the Net rather than through the traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with the fund could help the investor with their financial planning. In India, brokers could get more Net savvy than investors and could help the investors with the knowledge through get from the Net.
New investors would prefer online: Mutual Funds can target investors who are young individuals and who are Net savvy, since servicing them would be easier on the Net. India has around 1.6 million net users who are prime target for these funds and this could just be the beginning. The Internet users are going to increase dramatically and Mutual Funds are going to be the best beneficiary. With smaller administrative costs more funds would be mobilized .A fund manager must be ready to tackle the volatility and will have to maintain sufficient amount of investments which are high liquidity and low yielding investments to honor redemption.
Net based advertisements: There will be more sites involved in ads and promotion of Mutual Funds. In the U.S. sites like AOL offer detailed research and financial details about the functioning of different funds and their performance statistics. A is witnessing a genesis in this area. There are many sites such as indiainfoline.com and indiafn.com that are doing something similar and providing advice to investors regarding their investments. In the U.S. most Mutual Funds concentrate only on financial funds like equity and debt. Some like real estate funds and commodity funds also take an exposure to physical assets. The latter type of funds are preferred by corporate who want to hedge their exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an equivalent amount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around the world, short term and long-term U.S. treasuries etc. In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real estate funds (investing in real estate and other related assets as well.). In India, the Canada based Dundee Mutual Fund is planning to launch gold and a real estate fund before the year-end.
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In developed countries like the U.S.A there are funds to satisfy everybodys requirement, but in India only the tip of the iceberg has been explored. In the near future India too will concentrate on financial as well as physical funds. A Mutual Fund and the company that manages it are 2 entirely different companies. Legally speaking, a Mutual Fund is a trust formed and registered under the Indian Trust Act. The sponsor asset management company is formally appointed by the trustees of the trust to manage money on their behalf e.g. DSP Merrill Lynch equity fund is a mutual benefit trust registered under the Indian Trust Act. The trustees have appointed DSP Merrill Lynch Asset Management Company Pvt. Ltd. to manage the funds in the trust and the company cannot touch one rupee from the trust except to the extent of the fees that it receives for managing the funds. Repatriation of money outside India comes under the purview of the Foreign Exchange Regulation Act, 1973 which specifies the situations in which money can be remitted outside India. Under the act, banks that repatriate money on behalf of their clients have to ensure compliance with various legal formalities and ensure that the entity, which remits money, is entitled to do so. Any failure or violation leads to serious consequences for both the remitter and the bank. Money collected by a Mutual Fund domestically is not allowed to be remitted outside India. However, with the repeal of FERA, 1973, regulations are likely to be eased.
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Chapter 4
A Statistical Profile
4.0 Profile 4.1 Asset Under Management 4.2 Fund Mobilization 4.3 Mutual Fund Investment (Equity) India 4.4 Comparison Of Scheme 4.5Comparison Of Investment Product 4.6 Investment Pyramid
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The Indian Mutual Fund industry managed assets worth Rs 12010.40 billion as of Aug 31, 2003. There are currently 36 asset management companies operating in India.
Nine AMCs are majority owned by state-run banks or institutions. That nine includes the Unit Trust of India, which is the single-largest investor in the Indian markets with assets of Rs 576.84 billion under management. There are 13 AMCs majority owned by foreign or global investment houses, 10 privately run domestic asset management companies and 4 domestic/foreign joint ventures.
Funds by type
In all, investors have a choice of 397 funds to choose from covering the gamut of financial offerings. Types include income, growth, balanced, liquid or money market, gilt and equity linked tax savings schemes. Income funds constitute the largest category with assets under management of Rs 523 billion or 54 per cent. Balanced schemes account for Rs 195 billion or 20 per cent, and growth funds Rs 138 billion or 14 per cent. Liquid or money market funds account for 6 per cent or Rs 60 billion; gilt funds have AUM of Rs 29 billion or 3 per cent and equity-linked tax savings funds account for Rs 23 billion or 2.4 per cent of the industry's assets. Some Rs 642.6 billion or 66.4 per cent of the industry's assets are managed by openended funds; Rs 133.3 billion or 13.8 per cent by closed-end funds, or funds which will terminate at a particular date; and Rs 192 billion or 19.8 per cent is invested through schemes with assured returns.
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Between 1964 and 1987, the industry was a 'one-man show', with UTI being the only player in the market. In the following six years, the industry was opened up but limited to state-run players. Six state-run banks and two government insurance firms established asset management companies.
The industry remained a public-sector preserve till 1993, when the first private Mutual Fund - the Kothari Pioneer Mutual Fund -- launched one closed- and one open-ended fund.
Nevertheless, state-run AMCs and the remainder by privately run asset management companies manage about two-thirds of the industrys assets. UTI alone controls about 60 per cent of the industry's assets; 17.6 per cent is managed by AMCs that are largely foreign owned and 10.4 per cent by Indian-owned AMCs. Indian private Mutual Funds have 4.9 per cent of the industry's AUM; state-run institutions control 3.8 per cent and bank-sponsored AMCs have a 3.6 per cent share of the pie.
Performance data
The industry's equity assets are divided among diversified, tax planning, balanced, technology, pharmaceutical, consumer non-durable and specialty funds. Pharmaceutical funds provided a negative 4.65 per cent return for the past year to May. The other six categories posted double-digit percentage losses over the same time span.
By comparison the 30-issue Sensex declined 18 per cent in the year to May. Technology funds have been the worst performers, plunging 45.41 per cent -- against a 35.59 per cent drop by the Bombay Stock Exchange's infotech index. The average return of diversified equity funds was -20.69 percent for the past year to May. Tax planning schemes on average lost 23.08 per cent. Funds investing in the consumer non-durable sector posted an average return of -14.16 percent, slightly better than the 16.50 per cent fall in the BSE's sectoral index.
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Average returns for specialty funds were -10.96 percent and the balanced fund category posted a return of -9.84 per cent against the 0.41 per cent decline in its benchmark, the Value Research balanced index.
Debt funds have been a far better source of income in the past year to May posting average returns between 9.23 and 14.61 per cent.
4%
UTI M F Pru ICICI M F Franklin Templeton Investm ent HDFC M F Birla Sunlife M F Standard Chartered M F Reliance Capital M F SBI M F DSP M L M F Kotak M ahindra M F Others
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Mutual Funds in India are finally coming of age. Although UTI MF is still predominantly the leader, other private MFs are fast catching up. And it is clear from other Mutual Funds by asset under management (AUM) that private MFs are attacking aggressively by way of various innovative and investor-friendly schemes, plans and options. (Source: www.Mutualfundsindia.com)
Category
Sales-All Schemes
Redemption
3 3
247 247
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Rs. mn
Purchase Sales
Year
(Source: www.Indiainfoline.com) Interpretation: In Year 2000 there was a bull period in the stock market. While in the year 2001 trading has came down. The trading in the stock market has shown in the above table and chart respectively. Again there is bull market currently so the trading has big hype in equities.
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4.4 Comparison of the Scheme of Different Fund Open Ended - Equity: Index - one Year Return off
Fund UTI Master Index UTI Nifty Index FT India Index Fund Nifty Nifty Benchmark ETS IL&FS Index Fund Nifty Magnum Index Fund Prudential ICICI Index IL&FS Index Fund Sensex HDFC Index Nifty Birla Index (Source:www.valueresearchonline.com)
NAV 15.03 9.65 15.45 155.03 13.65 14.26 13.34 13.5 15.7 16.03
Return (%) 58.11 54.96 54.77 54.49 54.22 53.44 53.00 52.85 52.82 52.80
NAV Return(%)
Fund
Interpretation: From the above data we can say that the investor will prefer the fund, which gives higher return with lower NAV. In above table UTI gives higher return while NAV is low while Nifty Index gives low return with high NAV.
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NAV Return(%)
Fund
Interpretation: From the above table show that in Gilt Medium & Long terms the return is quite low. The average return in above scheme is around 3.5% but NAV is high compare to the return. We would like to suggest investing in BoB Income Fund for getting good return.
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NAV RETURN
Interpretation: In this Scheme, investor gets monthly income and Fund Manager invests Equity and Debt in both. We suggest that Invest in Magnum MIP-DQ for invest less money and get more return.
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Fund Sun F&C Res India Equity Alliance Basic Industries Reliance Growth Franklin India Prima Reliance Vision Sundaram Select Midcap HDFC Equity DSPML Opportunities DSPML Equity Tata Pure Equity (Source:www.valueresearchonline.com)
NAV 27.42 23.10 63.28 61.28 55.48 21.54 44.29 16.20 24.61 19.12
NAV Return(%)
Fund
Interpretation: The return of Equity diversification depends on the Fund Manager Ability and condition of stock market. Currently there is boom period in the stock market so there is wide scope of getting higher return is open, but all depend on the Mutual Fund company. We suggest that invest in DSPML Opportunities for invest.
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NAV Return(%)
F ir
Fund
Interpretation: The return in a Debt market is comparatively low as equity market, but it is also a less risky as compare to the equity market. We suggest that invest in First India short-term fund is good.
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M IT CG re C... ... tech ... ec h ... O I a g m er nf o dom kT S e eC nu FM ftw l IC m o h g n I e t ta E li S tia FS a C kl in Fre Ko row IL& M a nk TI en & n d r U ru la F G F n Fra ho G P u N C I S
40 30 20 10 0
NAV Return(%)
Fund
Interpretation: Indian economy is currently in growing phase. There are so many changes in technological environment of the country. There is good potential growth of Technological investment. The top equity technology return is shown in the above table. Kotak Tech is giving good return.
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NAV Return(%)
S UN
U T
Fund
Interpretation: This Scheme is Close Ended one cannot sell his unit before the end of maturity to the Mutual Fund company. The return in a Debt market is comparatively low as equity market, but it is also a less risky as compare to the equity market. We suggest that invest in SUN F&C Fixed Maturity Yearly Series 4 fund is good.
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Investors certainly look for the best returns on different options. However, to determine which option is better, the comparison should also be made in terms of other benefits that the investor ought to look for in any investment. Besides returns, other potential benefits of any investment also include the safety of the capital, the risk or the stability of returns, the liquidity of access to the funds when needed, and the convenience with which the investment can be managed. The table below compares the investment options discussed in the previous section under the broad heads viz. return, safety, volatility, liquidity and convenience. Return High Moderate Moderate Moderate Low Moderate Low Moderate High High Safety Low High Moderate Low Low High High High Moderate High Volatility High Moderate Moderate Low Low Low Low Moderate High Moderate Liquidity High/Low Moderate Low Low High Moderate Low Moderate Low High Convenience Moderate High Low Moderate High High Moderate Low Low High 52
Equity FI Bonds Corporate Debentures Company Fixed Deposits Bank Deposits PPF Life Insurance Gold Real Estate Mutual Funds
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Although the table provides a qualitative evaluation of various financial products, the comparison serves 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 give varied performance, one stock being more liquid than another or one stock giving lower return that another. For this reason, equity investing is fraught with risk and is not ideal for every individual investor. It is recommended only for investors who are willing to invest the time required for research in stock selection (or have access to sound financial advice) and possess the capacity to bear the inherent risk. Bonds issued by institutions are an attractive option, particularly now with the liquidity that accompanies their listing on stock exchanges. Bonds are a stable option in terms of fixed returns, and are recommended for the risk-averse investor. However, bonds can lose value when general interest rates go up. Bonds are also subject to credit risk or risk of default by the borrower. In indicated by the credit rating assigned to the bonds. In the absence of credit rating, it is extremely difficult for the investor to decide on the quality of the bonds or debentures. The secondary market in corporate bonds in 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 company and the deposits on offer are rated highly by credit rating agencies. The major advantage of bank deposits relative to other product is the liquidity they offer. Banks are usually willing to give loans against fixed deposits at a nominal charge over the interest rate applicable to the deposits. Deposit rates offered by banks vary as per RBI directives and the interest rate scenario in the economy. Bank deposits score high on safety, as the return of capital is guaranteed to the depositor by the bank. However, the financial soundness of the bank is important to look at. PPF combines stability with a respectable return. Its tax-exempt status makes it an attractive mechanism for the small investor to build his saving portfolio. However, the lock in period involved in PPF means that the investor loses out in terms of liquidity, particularly during the early years of the scheme. Being a government supported investment, PPF scores very high on safety, compared even to bank deposits. Insurance could become a serious investment vehicle once the insurance market in India is opened to private players. In todays scenario, the opportunity cost in terms of return is too high for insurance to be compared on even terms with the other options. Its liquidity is also extremely low, though safety is considered high at present for the governmentowned LIC as the only insurer.
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4.5.2
Besides the inherent advantages of investing through Mutual Funds, recent tax amendments have also helped to enhance the attractiveness of Mutual Funds. Dividends distributed by Mutual Funds are exempt from tax in the hands of the investor. Investments in recognized Mutual Funds also qualify for tax rebate under section 88 and as approved investments under Section 54EA/EB. Comparisons among different investment options are not valid for all time as the financial markets are now 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 the banks increase or reduce the deposit interest rates, the Mutual Funds performance may look better or worse. If the government changes the PPF interest rate, again there will be an impact on the comparative 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-tax return on different options. That is why; it is recommended that the specific comparisons of different investment options be made at a given point of time, using the then prevalent return data.
i.
Investors have the option to invest directly in equities through the stock market instead of investing through Mutual Funds. However, a practical evaluation reveals that Mutual Funds are indeed a more recommended option for the individual investor. Identifying stocks that have growth potential is difficult process involving detailed research and monitoring of the market. Mutual Funds specialize in this area and possess the requisite resources to carry out research and continuous market monitoring. This is clearly beyond the capability of most individual investors. Another critical element towards successful equity investing is diversification. A diversified portfolio serves to minimize risk by ensuring that a downtrend in some securities/sectors is offset by an upswing in the others. Clearly, diversification requires substantial investment that may be beyond the means of most individual investors. Mutual Funds pool the resources of many investors and thus have the funds necessary to build a diversified portfolio, and by investing even a small amount in a Mutual Fund, an investor can, through his proportionate share, reap the benefit of diversification. Mutual Funds specialize in the business of investment management, and therefore employ professional management for carrying out their activities. Professional management ensures that the best investment avenues are tapped with the aid of comprehensive information and detailed research. It also ensures that expenses are kept under tight control and market opportunities are fully utilized. An investor who opts for direct equity investing loses out on these 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 54
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investment objectives in line with his objectives. Therefore, funds provide the investor with a vehicle to attain his objectives in a planned manner. Mutual Funds offer liquidity through listing on stock exchanges (for closed-end funds) and repurchase options (for open-end funds). This is in contrast to direct equity investing where several 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 they enjoy. In terms of convenience, Mutual Funds score over direct equity investing. Funds serve investors not only through their investor services networks, but also through associates such as banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds. They also offer facilities such as check writing and accumulation plans. These benefits are not matched by direct equity investing.
The Investor Perspective: Funds Vs. Other Products Investment Risk Investment Objective Tolerance Horizon Capital Equity Appreciation High Long Term Medium to Long FI Bonds Income Low Term Corporate Debentures Income H-M-Low The Same Company Fixed Deposits Income The Same Medium Generally Flexible All Bank Deposits Income Low Terms PPF Income Low Long Term Life Insurance Risk Cover Low Long Term Gold Inflation Hedge Low Long Term Real Estate Inflation Hedge Low Long Term Capital Growth, Flexible All Mutual Funds Income H-M-Low Terms The comparison above highlights the flexibility offered by Mutual Funds from the investors perspective. An investors can choose from a wide variety of fund to suit his risk tolerance, investment horizon and investment objective. Bank Deposits offer similar flexibility in investment horizon and risk level, but only a fixed income. An investor looking for capital growth has to consider Mutual Fund, both equity and debt. Direct equity investment offers the capital growth potential, but a high risk and without benefits of diversification and professional management offered by Mutual Fund. Gold and 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.
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BANKS Returns Administrative exp. Risk Investment options Network Liquidity Quality of assets Interest calculation Low High Low Less High penetration At a cost Not transparent Minimum balance between 10th. & 30th. Of every month The Guarantee Maximum Rs.1 Lakh on deposits
MUTUAL FUNDS Better Low Moderate More Low but improving Better Transparent Everyday
None
From the above table we can say that in overall comparison Mutual Fund is becoming strong option as investment against the Banks. It can be seen that the Banks are not totally free from risk, while generally giving lower returns. Mutual Fund can give higher returns then a Bank, even if there is no contractually guarantee as in a Bank. Mutual Fund provides better investment options as well as high liquidity compare to Banks.
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Interpretation: The above investment pyramid shows the period for investment and the risk associated with the same. In Capital Growth, there is medium to high risk and the investment period is above the 5 years it includes the stocks and Growth fund. In Capital Growth & Current Income, which is, also known as balanced fund it is combination of Debt and Equity Fund and the time-period of holding investment is 3 to 5 Years. Income Fund includes Bonds and Debentures. It gives regular income to the investor and time-period is 1 to 3 years. In Capital Preservation includes money market, liquid funds, short-term deposits, Govt. paper. In this time period is less than 1 year and low risk it contain.
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Chapter 5
Industry Analysis
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Mutual Fund provides several types of equity Scheme that can easily track the equity investors perspective. It provides long term capital appreciation and as well as dividend. 6. Rapid growth in economy and saving: Indian economy is currently in growing level. In the past the country was in underdeveloped country while now it is a developing country. The GDP growth is round about 6 to 7%. Economy has got success in reducing the inflation rate, which is 4.4%. The effect of this kind of economy is that the people have more income, while low inflation rate tends to increase in saving. This is good opportunity for the Mutual Fund industry. It can attract the investors by showing them the emergence of fund or diversification. 7. Commodities Fund: With approval for the Real Estate Funds in place, there is a huge opportunity for Mutual Funds to explore values through investment in commodities, bullion, metal etc.
5.1.2 Threats:
1. Rules & Regulation: Mutual Fund has to work under rules and Regulation guided by SEBI, AMFI and RBI. It has some limitation under the law. Law board has given protection to the investor this is the threats for the industry. 2. Investors Awareness: Still investors are not aware of the Mutual Fund and its scheme. Investors have lower awareness regarding the companies concerning with Mutual Fund. Some investors fill difficulty in understanding Mutual Fund concept and its scheme objectives. This unawareness has proved to be failure aspect for the industry. Industry cannot cover potential market. 3. Reachness: Mutual Fund has failed to reach to the interior of the country. Currently major players have their market from metro and big cities. Still the way to the small towns and villages is open. Industry is in lack of Reachness.
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Threat of substitutes
1. Rivalry among competing sellers: A. Types of Schemes: All companies provide different types of schemes, which are best, suited to the investors objectives. Companies in the industry are more and more concern to the investors objective and try to give them same. B. Better Services: In the industry companies are trying to provide better services to the investors. Competitors are providing better communication facility as well as the guidelines. C. Switching Cost: Rivalry is strong because of cost of switching the scheme is low. Investors can easily switchover to another company or scheme. When investor feels
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better return or security then he will switchover to the other company or scheme. 2. The potential entry of new competitors: Until 1987, the UTI was the sole Mutual Fund in India. Then Banks, LIC and GIC floated Mutual Fund. In the past 1992 public and private financial institution with foreign collaboration came in the market. Thus we can see the entry of new competitors is high. Banking companies, NBFCs, Merchant Bankers, Insurances Companies are now entering into the Mutual Fund as the purpose of diversified business. New entrance increase in the competition and decline market share of exiting company. In the Mutual Fund industry the investors loyalty level is very low. So, the investors will switchover the new company, which gives him high returns. 3. Competitive Pressure from substitute products: Equity shares, Bank Deposits, Insurance etc. are substitute of the Mutual Fund. Currently there is boom period in the stock market, as investor prefers to invest directly to the stock market. Risk aversion people prefer the insurance or post office schemes. New insurance company gives the better product and security for the long term plan. 4. Suppliers (Investor) Bargaining Power: We can consider the investor investing in Mutual Funds is the supplier of the company. For bargaining power to suppliers provide different scheme to the investor, which is reach, the investor objective like High Liquidity, High Return, Low Risk, Safety against investment. Investors prefer those securities, which fulfill their investment objective. There are so many companies in the market, which give different kinds of schemes. Investor can choose the best scheme according to his objective and bargain for the same. Companies are facing threats from the bargain power of investors. Investor can easily switchover the scheme and cost of switching is also low. Investor fully utilizes their bargain skill while choosing the fund. 5. Bargaining Power of Customer (Listed Companies): We can consider the Listed Companies in Indian Stock market, Stock Market, Govt. Security, and Money Market etc. are the customers of the Mutual Fund. Blue chip companies attract the Mutual Fund companies to invest in their securities. Companies are more concentrate on Mutual Fund companies because of there is wide scope of investment in Mutual Fund.
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The Mutual Fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it. While this is a benefit to the fund, it is the indirect benefit of unit holders as well. Exemption on dividends for equity funds (Section 115R) A Mutual Fund has to pay a withholding tax of 10% on the dividends distributed by it under the provisions of the prevailing I.T. Act putting them on par with corporate. However, if a Mutual Fund has invested more than 50% of its assets into equity shares, then it is exempt from paying any tax on the dividend distributed by it, for a period of three years till the year 2001-02, by an overriding provision. Tax benefit under section 88 of Income-tax Act for investments in Mutual Funds. As per Income-tax Act, contributions made from taxable income in the specified investments qualify for a tax rebate @ 20% of the invested amount subject to a maximum investment ceiling of Rs.80, 000/- The rebate would be available in the year of investment. In case of Mutual Funds, the rebate under Section 88 can be availed of by investing in Equity linked saving schemes (ELSS). The basic features of ELSS schemes are: Any Mutual Fund can offer an open-ended ELSS. There is a 3-year lock-in period for the investment that is reckoned from the date of allotment Rebate can be claimed only up to a maximum investment of Rs.10, 000/- per financial year. Fund of Fund: SEBI has allowed investing in fund of fund. Now the companies concern in the Mutual Fund business it can invest its fund in the other Mutual Funds company fund or its own other fund. Commodities: SEBI has allowed funds to invest in commodities like Gold, Silver and Real Estate etc. Now companies have funds like Gold Fund, Silver Fund etc. FDI: Overseas investment liberalized and flexibility allowed to overseas investor for flow of FDI. Changes in overseas investment by Mutual Funds. At present Mutual Funds are allowed to invest in ADRs/GDRs of Indian companies and rated foreign debt instruments/equity within an overall capital of US $ 1.0 billion with permission of SEBI and RBI. In order to simplify the procedure and to facilitate expeditious processing of investment proposals general permission within the capital. Once SEBI approval has been obtained. This general permission will be available until further notice.
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Yields on government securities continued to maintain their downward trend. The yield on 7.4 percent 12-year government paper reached a low of 6.13 percent on December 31, 2002. In present time the interest rate is come done to 3 to 4% and people wants to wants to get more return for their investment and mutual fund gives good return of the investment. So if the interest rate comes done, which increase the good opportunity for the mutual fund industry for getting more investment.
Inflation:
The growth recovery was accompanied by continued macroeconomic stability in terms of low inflation, orderly currency market conditions and comfortable reserves. In the past, droughts, with their impact on price and availability of food grains, have been particularly harsh on the poor. In the current year, notwithstanding the deficient monsoon, there were no shortages in availability of essential commodities, or flare-ups in their prices. The 52-week average inflation rate based on the Wholesale Price Index (WPI) was only 2.6 percent in mid January 2003. Prices of primary products remained below 4 percent for the larger part of the year, while inflation in manufactured products was around 3 percent. The transition to a market-based pricing regime for petroleum products was also devoid of disruptions, with fuel group inflation barely touching 5 percent for much of the year. However, the latest Gulf-related uncertainty has caused fuel price inflation to touch 6.4 percent in mid-January, 2003. Inflation, as measured by the Consumer Price Index for industrial workers (CPI-IW) declined from 4.7 percent at the beginning of 2002-03 to 3.2 percent in December 2002. The abundant stocks of wheat (28.8 million tonnes on January 1, 2003) and rice (19.4 million tonnes on January 1, 2003) held by the Food Corporation of India (FCI), while complicating the task of agricultural diversification and fiscal consolidation, did however, help to quell inflationary pulls. Low inflation rate tends to higher savings and investment opportunities. In the current situation the rate is around 4%. Economy is trying to decrease the inflation rate as low as possible. Public Investment: Public investment has been partly constrained by increasing government consumption expenditure, which includes expenditure on wages and salaries, commodities, and services for current use. As a proportion of total expenditure of the Central Government, it increased from 22.8 percent in 1990-91 to 23.6 percent in 1997-98, in the aftermath of the increase in wages and salaries following the recommendations of the Fifth Central Pay Commission. Although the share of wages and salaries in total expenditure declined from 11.1 percent in 1998-99 to 10.1 percent in 2001-02 (RE), the share of consumption expenditure in total expenditure again shows a rising trend from 2000-01. The share of consumption expenditure in total central expenditure rose from 21.9 percent in 2000-01 to 22.9 percent in 2001-02, and is budgeted to increase further to 23.2 percent in 2002-03. This is primarily due to a rise in the expenditure on commodities and services for current use.
Savings:
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In 2001-02, gross and net domestic savings at current prices, grew by 11.8 percent and 13.3 percent respectively, to increase their share in GDP at market prices. Gross (net) domestic savings, as a proportion of GDP (NNP) at market prices, improved to 24.0 (16.0) percent in 2001-02, from 23.4 (15.4) percent in 2000-01 (Table 1.3). The household sector was once again the best performer, with the increase in its gross savings exceeding the total increase in gross domestic savings. Households increased the share of financial savings in their total savings from 48.0 percent in 2000-01 to 49.8 percent in 2001-02. Private corporate savings increased roughly at half the rate of increase of household savings. The public sector not only continued to be a net dis-saver, but it increased its dissavings by nearly Rs 10,000 crore. The departmental enterprises became net dis-savers in 2001-02. The increased net dissavings of government administration more than neutralized the increased savings by non-departmental enterprises.
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Trustees should (I) be discerning in the appointment of the directors on the Board of the AMC, (II) review the desirability /continuance of the AMC if substantial irregularities are observed in any scheme and not allow it to float new schemes, (III) ensure that the trust property is properly protected, held and administered by proper persons and by a proper number of such persons, (IV) ensure that all service providers are registered with SEBI/concerned regulatory authority, (V) arrange for test checks of service contracts and (VI) immediately report to SEBI of any special developments in the Mutual Fund. Specific Due Diligence: The trustees should: Obtain internal audit reports at regular intervals from independent auditors appointed by them; Obtain compliance certificates at regular intervals from the AMC; Hold meetings of trustees more frequently; Consider the reports of independent auditor and compliance reports of AMC at their meetings for appropriate action; Maintain records of decisions/minutes of their meeting; Prescribe and here to a code of ethics by the trustees/AMC and its personnel; and Communicate in writing to the AMC of the deficiencies and checking on the rectification of the deficiencies.
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Chapter 6
Regulatory Aspects
6.1 Regulatory Aspects 6.2 Tax Benefits of Mutual Fund 6.3 Role of Regulators in India
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The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every Mutual Fund shall along with the offer document of each scheme pay filing fees. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor a close-ended scheme shall be fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution". The Mutual Fund and asset management company shall be liable to refund the application money to the applicants, If the Mutual Fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1); (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1).
(i)
The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme.
The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false.
The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the Mutual Fund shall be made available to the investors.
General Obligations: Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its LJIMS 70
transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund and intimate to the Board the place where such books of accounts, records and documents are maintained. The financial year for all the schemes shall end as of March 31 of each year. Every Mutual Fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule. Every Mutual Fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company.
On and from the date of the suspension of the certificate or the approval, as the case may be, the Mutual Fund, trustees or asset management company, shall cease to carry on any activity as a Mutual Fund, trustee or asset management company, during the period of suspension, and shall be subject to the directions of the Board with regard to any records, documents, or securities that may be in its custody or control, relating to its activities as Mutual Fund, trustees or asset management company.
Restrictions on Investments:
A Mutual Fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. A Mutual Fund scheme shall not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of asset Management Company. No Mutual Fund under all its schemes should own more than ten per cent of any company's paid up capital carrying voting rights. Such transfers are done at the prevailing market price for quoted instruments on spot basis. The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made. A scheme may invest in another scheme under the same asset management company or any other Mutual Fund without charging any fees, provided that aggregate interscheme investment made by all schemes under the same management or in schemes under the management of any other asset Management Company shall not exceed 5% of the net asset value of the Mutual Fund. The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under that scheme. Every Mutual Fund shall buy and sell securities on the basis of deliveries and shall in all cases of purchases, take delivery of relative securities and in all cases of sale, deliver the securities and shall in no case put itself in a position whereby it has to make short sale or carry forward transaction or engage in badla finance.
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Every Mutual Fund shall, get the securities purchased or transferred in the name of the Mutual Fund on account of the concerned scheme, wherever investments are intended to be of long-term nature. Pending deployment of funds of a scheme in securities in terms of investment objectives of the scheme a Mutual Fund can invest the funds of the scheme in short term deposits of scheduled commercial banks. No Mutual Fund scheme shall make any investment in; ii. Any unlisted security of an associate or group company of the sponsor; or iii. Any security issued by way of private placement by an associate or group company of the sponsor; or
The listed securities of group companies of the sponsor, which is in excess of 30% of the net assets [of all the schemes of a Mutual Fund]
No Mutual Fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company. Provided that, the limit of 10 per cent shall not be applicable for investments in index fund or sector or industry specific scheme. A Mutual Fund scheme shall not invest more than 5% of its NAV in the equity shares or equity related investments in case of open-ended scheme and 10% of its NAV in case of close-ended scheme.
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Exemption on dividends for equity funds (Section 115R) A Mutual Fund has to pay a withholding tax of 10% on the dividends distributed by it under the provisions of the prevailing I.T. Act putting them on par with corporate. However, if a Mutual Fund has invested more than 50% of its assets into equity shares, then it is exempt from paying any tax on the dividend distributed by it, for a period of three years till the year 2001-02, by an overriding provision. Tax benefit under section 88 of Income-tax Act for investments in Mutual Funds. As per Income-tax Act, contributions made from taxable income in the specified investments qualify for a tax rebate @ 20% of the invested amount subject to a maximum investment ceiling of Rs.80, 000/- The rebate would be available in the year of investment. In case of Mutual Funds, the rebate under Section 88 can be availed of by investing in Equity linked saving schemes (ELSS). The basic features of ELSS schemes are: Any Mutual Fund can offer an open-ended ELSS. There is a 3-year lock-in period for the investment that is reckoned from the date of allotment Rebate can be claimed only up to a maximum investment of Rs.10, 000/- per financial year. Capital gain and how is it charged to tax in case of Mutual Funds. Capital Gains are profits or gains arising from the sale or transfer of a capital asset such as shares and securities, Mutual Funds, house, jewllery, etc. These gains are charged to Income tax under the head "Capital Gains" in the financial year in which the transfer of capital asset takes place. The profit/loss on sale of units of a Mutual Fund are charged to Capital Gains Tax as follows: In case the units are sold within 12 months of investment, the profit or loss on such sale is treated as short-term capital gain and charged to tax as normal income. In case the units are sold after 12 months of investment, the profit or loss on such sale is treated as short-term capital gain and charged to tax at a lower rate of:
20% of the difference between the transfer price and indexed cost of acquisition. 10% of the difference between transfers price and cost of acquisition securities until September 30, 2000 to avail of benefit under this section.
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Money Market Mutual Funds are regulated by RBI guidelines dated 23-111995 specially issued for the purpose. The following are the salient features of these guidelines: Banks, institutions and private sector are allowed to set up MMMFs. There are no restrictions on fund size. Private sector MMMFs must however obtain clearance from SEBI to ensure that they do not infringe SEBI Guidelines on money market investments. MMMFs can invest in treasury bills, government securities with an unexpired maturity up to one year, call and notice money, commercial bills accepted by banks and certificates of deposit. MMMFs can be set up as Money Market Deposit Accounts (MMDAs) or MMMFs. Units of MMMFs can only be issued to individuals. Resources raised under MMMFs set up by banks are not subject to reserve requirements. Setting up of MMMFs requires the prior approval of RBI.
Recently, it has been decided that MMMFs of registered Mutual Funds will be regulated by SEBI, and SEBI is to frame guidelines for such funds. Ministry of Finance: The Ministry of Finance, which is charged with implementing the government policies, ultimately supervises both the RBI and the SEBI. Besides being the ultimate policy making and supervising entity, the MOF has also been playing the role of an appellate authority for any major disputes over SEBI guidelines on certain specific capital market related guidelines- in particular any cases of insider trading or merger and acquisition. Company Law Board, Department of company affairs and register of companies: Mutual Fund Asset Management Companies corporate trustees are companies registered under companies act 1956 and therefore answerable to regulatory authority empowered by the companies act. The primary legal interface for all companies is the Registrar of companies (RoC). The department of company affairs in turn supervises rocs. The DCA forms part of the company law board, which is part of the Ministry of Law and Justice of the Govt. of India. The RoC ensures that the AM, or the trustee company as the case may be is in compliance with all companies act provisions. All AMC accounts and records are filled with the RoC, who may demand additional information and documents from the company. The RoC plays the role of a watchdog with respect to regulatory compliance by companies. The overall responsibility for formulating and modifying regulation relating to companies lies with the DCA. The DCA has legal power to prosecute company directors for failure
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to comply with any of companys law provisions as also for non repayment of deposits or frauds and other offences. The company law board (CLB) is the apex regulatory authority under the companies Act. While the CLB guides the DCA, another arm of the CLB called the company law bench is the appellate authority for corporate offences. The company Law Board is a body specially constituted by the central Government for carrying out judicial proceeding with respect to company affairs. Since Mutual Fund AMCs are companies, the CLBs role assumes importance. Member of a company who feel that the company is being managed in a manner which is oppressive to any member or which is against public interest or the companys interests can appeal to the CLB for redressal. The CLB, in such cases, may regulate the conduct of the companys affairs, have the shares of the aggrieved members purchased by other members and/or terminate/modify the companys arrangement with the managing director, other director(s) or senior officials. The CLB has the legal standing of a civil court, and may call for inspection of documents, enforce attendance and examine witness on oath and pass judgments in the same manner as a civil court. Any person aggrieved by a decision of the CLB may appeal to the High Court. As the members of AMC or Trustee companies will usually be the sponsors and their joint venture partners or associates, it is unlikely that Mutual Fund investors will have anything to do with any of these regulators. The authorities would generally regulate the AMCs whose shareholders may have recourse to them in specific cases.
Stock Exchanges
Stock Exchanges are self regulatory organization supervised by SEBI. Many closed-end schemes of Mutual Funds are listed on one or more stock exchanges. Such schemes are subject to regulation by the concerned stock exchanges through a listing agreement between the fund and the stock exchange. Exchange Rules and the companies Act provisions would generally decide on trading clearing, transfer and settlement of the buying and selling of Mutual Fund units on the markets. Funds or AMCs do not get directly involved with purchase and sales of units of such listed closed-end schemes, as the registrars handle all such transfers as in case of shares.
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Chapter 7
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whole. If two funds with the same investment objective have the same returns you may want to compare their betas. Standard Deviation - Measures the range of performance by a Mutual Fund. It shows how volatile the returns of a fund are over a 3-year (generally) period of time. Ninety-five percent of the time, a fund will perform within 2 standard deviations of its mean or average. This means that if a fund has a 10% return and a Standard Deviation of 5%, it has exhibited returns between 0% and 20%, ninety-five percent of the time. If you have to choose between two funds with the same average returns and you are more risk averse, you may want to consider the fund with the lower standard deviation. R-squared - Is the correlation (between 1 and 100) of the fund to the stock market as measured by an index, normally the S&P 500. For example, if a fund has an R-Squared of 90, 90 percent of the movement was due to the market; not to the actions of the fund manager. This number can help you decide whether or not the beta is relevant to the fund's performance. If the number is high, then the beta is a more relevant measure of fund risk compared to the R-squared correlation. If it is low, then the fund's beta is not as important a measure of its risk. Operations - Provides the basic information about the fund such as the address, phone number and Web site. Most importantly, it provides you with a profile of the fund manager. This is important because managers have individual styles and different track records. If a fund has a new manager, their investment pattern and track record could diverge dramatically from the past performance of the fund. Investment Objective and Graph - This is a description of how the fund views its investments. It tells you the categories of stocks it invests in and might tell you one of the rankings from a rating agency. It can also tell you the top holdings of the fund, which will give a clearer picture of the manager's philosophy. Historical Data - Shows the history of the fund, including total returns, which are the returns of the fund including all expenses incurred during the year. It also shows the best and worst returns for a period. There is a caveat in looking at historical data; one year will not necessarily be reflective of the next year. Conditions will vary from year to year, as will returns. Allocations - This table will allow you to evaluate a fund's risk and investment philosophy by looking at the types of assets in the portfolio, the sectors they invest in and their top 10 holdings. Over time, you can compare these numbers to get a feel for how long a fund holds investments or assets. This can be valuable information in deciding whether the fund's philosophy and risk matches your own.
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7.2.1 How to choose a Scheme Funds and more funds. There is no end to verbosity when educating on funds. But getting to actually choose a fund may not be eased with more funds. It often turns out, like with most ventures in life, that picking your fund is like crossing the saddle point the first time is always the most difficult. There are more than 350 schemes and choosing one of them is not an easy task. We will provide you an easy way to filter this huge number down to a more manageable size so that you can look spend more time looking at schemes in greater detail. What are you looking for when investing in Mutual Funds? What are your investment needs? The more well defined these answers are the easier it is to find schemes best for you. So how do you assess your needs? The answers obviously lie with you. But the questions investors ask to assess their needs are possibly the same. You might ask yourself: At my age what am I expecting out of investing? To assess the needs investors look at their lifestyles, financial independence, family commitments, and level of income and expenses among other things. The father of an aspiring engineer who would have to shell out the boy's institute fees soon enough, could reply: I want a fixed monthly income of about Rs.5000 per month. To the second query he might say: Yes, for the next four years. When asked, the just-out-ofB-school graduate planning for his new Zen could reply: I should make about Rs. 60,000 by the end of one year. Believe us, but getting the right answers to these questions does a lot to simply your fund picking exercise. Having defined the needs that direct you to invest, one can find a category of funds that come close to satisfy your needs with their objectives. While we are on the topic of what returns to expect, someone might as well wish for a fund that assures returns. Some of the Mutual Funds have floated "assured" return schemes that guarantee a certain annual return or guarantee a buyback at a specified price after a specified period. Examples of these include funds floated by the UTI, SBI Mutual Fund, etc. Many of these funds have not earned returns that they promised and the asset management companies of the respective Mutual Funds or their sponsors have made good their promises. Nowadays, there are very few funds that come out with such schemes as the funds have realized it is not viable to assure returns in a volatile market.
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7.2.2 Assess the risk one can take Contrary to the commonplace thinking, Mutual Funds do carry risks. And there are some that can become as risky as stocks. Given the almost diverse objectives with which schemes operate, there are some with more risks and some relatively safer. Ask yourself if you are ready for a scheme whose investment value might fluctuate every week or one that gives a minimum amount of risk? Or are you in for a short-term loss in order to achieve a long-term potential gain? At this point it is good to ask oneself how will you take it if your investment fails to deliver the returns you expected or makes losses. Knowing this will reduce your chances (or even temptation) to select a fund that doesnt come close to your objective. Evaluate a scheme by looking at how its NAV has behaved over the past. Do you see the scheme behaving rather erratically i.e., the NAV changes just too often? More the volatility more is the risks involved. Great returns are not the only thing to look for in a scheme. If you feel while researching a scheme, which we will do later, that its returns are modest and steady and good enough for your needs avoid other schemes that have recently delivered high returns. Because great returns in the past is no guarantee for the fabulous performance to continue in the future. Never forget one of the commonplace morals of investment: The schemes that are expected to give the highest returns have the greatest probability to fall flat! Investors comfortable with numerical recipes do a technical check of what the returns of a scheme would be in the worst case. They check is done with the Sharpe ratio. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance. 7.2.3 Ask: How long one can you park his/her cash? Is the cash you have earmarked for your investment meant to be spent for something else? Do you need a regular cash flow? Or you dont mind locking your cash in the scheme so that your assets can appreciate over time? Settle this question upfront on what your cash flow requirements will be till the time your money is invested in Mutual Funds. 7.2.4 Getting the right Fund The success of your investment depends in a large measure on the objective you define. Having defined that, choosing a fund isnt difficult. Through a search of schemes on our advanced search you can draw up a list of schemes that come close to the objectives you have set. Our search allows you to set criteria based on your objectives. The criteria you can set are:
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The schemes expense: All schemes have a minimum requirement for the total amount of money you can invest. Usually they begin from a minimum of Rs.5000. Do a check for the expense ratio and sales charges the fund has. The NAV is good enough to know what each unit of the scheme will cost you. But, remember a low NAV (sometimes even below the usual offer price of Rs.10) may make a scheme more affordable as you can acquire more units but chances are the scheme is not performing well. The schemes performance: Returns from schemes are calculated over various periods from a week to one year or more. For each time period specify the returns. While you enter returns figures the maximum, minimum and average returns for all schemes in the category you have chosen are also displayed. The schemes fund house: Over the years fund houses in India have established a name for themselves for their investment style and their performance. Hence, some investors usually try to satisfy their diverse investments through one fund house. If you have been recommended a fund house choose the fund to list all schemes under it. Investment mix: If you know of an industry that has been doing particularly well, you can select schemes that have invested in that industry. You can also select schemes that have invested in companies with a dazzling performance. 7.2.5 A mixed basket for diverse needs Once again, back to the basic question. You came here looking for schemes that can suffice your investment needs. You might be like many others who actually have multiple needs. Consider going for a combination of schemes. Yet another recap of the basics: one of the things that made these Mutual Funds great was diversification. While you might have selected a scheme that has a diversified portfolio, you can also go for more than one scheme to further diversify your investments. It is well possible that just by picking more than one scheme from one fund house you can achieve enough diversification. In fact many investors who have tried out a fund house for long and developed a trust with the fund, prefer to pick another scheme from the fund's basket for their new investment needs. But convenience sometimes leads to venerable prejudices that might deprive you of trying something new and better. There could be a better-managed scheme in a different fund house that you are missing out on if you decide to stick to your old fund house for convenience sake.
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7.3 Expenses
It's a trick company ads often do. A tempting offer is always accompanied with the fine print tucked in a corner at the bottom of the ad. And sometimes reading the applied conditions in the fine print might squeeze all the attractiveness out of a great sounding offer. Buying a scheme also requires that you give a careful look at the fine print. Look for one thing in the fine print: the scheme's expenses. One such expense is the bomb of a salary paid to the investment experts who manage the fund. Apart from management fee there is also the money the fund spends on advertising and marketing a scheme. There is a host of operating expenses from buying stationery to maintaining the fund house's staff. Should it matter to you if the fund house purchases a new computer? It does. In whatever way the fund spends the money; the net expenses are all billed in one way or the other to the unit holder. The expenses of a scheme do not include brokerage commissions. The part of Mutual Fund assets that gets removed each year for expenses expressed as a percentage is the expense ratio. It provides a quick check of efficiently the fund manager is handling the fund. The costs of the fund management process that includes marketing and initial costs are charged when you enter the scheme. These charges are termed the entry load; the additional charge you pay when you join a scheme and something everyone will tell you to watch out for. And if there is nothing to watch out for, i.e., the bold font in the new scheme's ad says `No entry load'. Will you jump for it? Come on, investment was all about smartness. No fund can do away with these charges unless, of course, a reformed Harshad Mehta decided he would help Indians make money without charging a rupee. What funds that come with such offers usually do is to include these charges not in the entry load but somewhere else. It could also be deducted from the returns that you get. Just like entry load some funds impose a fee when you leave the scheme, i.e., redeem your units, called the exit load. Loads are usually not flat amounts but have a structure. For example, for most schemes the entry load depends on the number of units of the scheme you buy. Similarly, exit load in most cases is based on the number of units you sell and also on the duration for which you held those units. As per SEBI regulations, the maximum exit load applicable is 7%. There is a further stipulation by SEBI that the entry load and exit load put together cannot exceed 7% of the sale price. Contingent Deferred Sales Load (CDSL) is a charge imposed when the units of a fund are redeemed during the first few years of ownership. Under the SEBI Regulations, a fund can charge CDSL to unit holders exiting from the scheme within the first four years of entry. Funds can change the load structure periodically. If you are a unit holder of a scheme that charges an exit load, and the scheme change its exit load structure, then you will get a prior notice of the change. The new structure will be applicable to you rather than the load structure you were informed about when you joined the scheme.
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Now don't get too hassled about loads. Best thing to do when a scheme imposes a new load, is not to invest more money if the load charged is unreasonable. Needless to say, loads if any are only applicable to open schemes. And not close-ended schemes because you can only buy such units from the fund only when the scheme is launched. So what's the smart tip? Any day, lower the expenses the better it is. Smart and wellmanaged funds keep their expenses low. Smarter funds know exactly how to make their offerings attractive by smartly tucking away expenses either in entry load or exit load or by cutting on returns. And smart investors always get to beat the funds by figuring out where all the expenses are included. Right? Looking at the past performance you cannot for sure predict what returns the fund will give in the future. However, by examining past performance you can get an almost certain idea of what the expenses for a scheme could be in the future. That's because the expenses don't depend on a scheme performance. It's dependent on the deftness of the fund manager. Badly managed funds that have schemes with consistently higher expenses compared to funds of the same category with lower expenses, find it tough to curb their expenses. Schemes with smaller assets to manage and particularly those that are not part of a large fund house will generally have higher expenses relative to schemes with larger assets. Fresh schemes generally take some time to overcome their expense burden.
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7.5 Risk & Return Graph As Per The Different Schemes Offered By The Mutual Fund Companies
7 6 5
Return
Investment Graph
Sectorfunds Growthfunds Balanced funds Debtfunds Liquidfunds Giltfunds
4 3 2 1 0
Risk
Return
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Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. The Sharpe Measure In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure. Jenson Model Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the Differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. The
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surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm - Rf) Where, Rm is average market return during the given period. After calculating it, alpha can be obtained by subtracting required return from the actual return of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive. Fama Model The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called net selectivity. The net selectivity represents the stock selection skill of the fund manager, as it is the excess returns over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Sm is standard deviation of market returns. The net selectivity is then calculated by subtracting this required return from the actual return of the fund. Among the above performance measures, two models namely, Treynor measure and Jenson model use systematic risk based on the premise that the unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors. However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversified. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite. Source: Mutualfundsindia Research Team CRISIL's composite performance ranking (CPR) measures the performance for each of the open-ended scheme of Mutual Fund. There are four parameters considered to measure
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the performance of a Mutual Fund such as Risk-adjusted returns of the scheme's NAV, Diversification of Portfolio, Liquidity and Asset Size.
This helps us to arrive at the average underperformance and how the fund has performed vis--vis its category average. The relative performance of the fund is expressed as a risk score.
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Equity
Invest predominantly in stocks. Provide returns by way of capital appreciation. More volatile, but better returns. Good for long-term investors. Typical returns over long term of 15-25% p.a. Equity schemes are of the type: Equity-Diversified Provide capital appreciation over a medium to long period (2 - 5 years). Invest in stocks from a diverse array of industries. Prevent adverse impact due to a downturn in one or two sectors. Less volatile to sectoral schemes. Typical returns between 15-25% p.a. Equity-ELSS Offer tax rebates under section 88 of the IT law. Diversify the equity risk by investing in a wider array of stocks across sectors. Variant of diversified equity. Typical returns between 15-20% p.a. Equity-Index Invest in stocks that make up a particular index. Investment in each stock is in proportion to the stock's weight in the index. Volatility in sync with the index. A bull market can get max returns of 40% p.a. Bad year can erode principal by 30%.
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Sectoral-Bank
Sectoral-Basic Invest only in stocks in the basic industry (core industries like petrochemicals, cement, steel, etc.) sector e.g., TISCO & Reliance. Least volatile to other sectoral schemes. Benefit in the medium term (2 years). Typical returns could be as high as 15%. Sectoral-FMCG Invest only in stocks in the fast moving consumer goods sector e.g., HLL & Cadbury's. Medium risk-reward ratio. Benefit in the short term (2 years). Typical returns could be as high as 25%. Sectoral-MNC Invest only in stocks of multi-national companies in various industries e.g., HLL & ABB. Medium risk-reward ratio. Benefit in the medium term (2 years). Typical returns could be as high as 25%. Sectoral-Pharma Invest only in stocks in the pharmaceutical sector e.g., Ranbaxy & Novartis. Medium risk-reward ratio. Benefit in the medium term (2 years). Typical returns could be as high as 25%. Sectoral-TMT Invest only in stocks in the technology, media & telecom sector e.g., Infosys & Zee Telefilms. High risk-reward ratio. Benefit in the short term (1 year). Typical returns could be as high as 50%.
Debt
Invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper & call money. Less volatile than equity schemes. Volatility depends on rupee depreciation, fiscal deficit, inflationary pressure etc. Returns depend on bond ratings. Typical returns between 7 to 12% p.a. Debt schemes are of the type:
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Gilt
Invest in government and money market securities or their combination. Tend to give higher returns than money market schemes. Good for parking short-term surplus funds. Easy entry & exit without load. Instant cash on redemption. Slightly volatile. Typical returns of 8.5-10% p.a.
Income
Slightly more overweighed on corporate bonds (50-60% of portfolio). Also invests in government securities and money market instruments. Ideally suited for investment beyond 1 year. Typical returns of 11-12% p.a.
Liquid
Invest in short-term debt instruments like T-bills, CDs, commercial papers & call money. Preserve the principal while yielding a modest return. Ideal for corporate investors. Good for parking short-term surplus funds. Easy entry & exit without load. Instant cash on redemption. Typical returns between 7-8% p.a.
MIP
Variant of income scheme. Provide option to get monthly returns in the form of dividends. Returns are however not assured (except UTI). Typical returns of 10.5 -11.5% p.a.
Balanced
Invest both in equity and income-bearing instruments. Reduce risks of investing in stocks by having a stake in both the equity and the debt markets. Flexibility in changing asset composition between equity and debt. Less risky than equity schemes, higher returns than debt schemes. Typical returns of 15-18% p.a.
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Chapter 8
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Customer Service
Customizatio n
Marketing Plan
Commodity Branding
Campaign Channels
Convenienc e
1. COMMODITY (SCHEME) PLANNING Mutual Fund commodity (scheme) is basically investment-oriented and the savings mobilized by the Mutual Fund are invariably invested in the instruments (shares, debentures) projected in the schemes. There is little scope for flexibility. Therefore, due care needs to be taken while designing particular commodity taking into account excepted changes in capital / stock market in view of future investment returns. The changing profile of customers (investors) must be taken into account in identifying the savings market. Different segments of the potential savings market have different expectations-long term growth, regular income, tax benefits, and so on. New commodities must be aimed at satisfying one or more objectives. Tax laws and other related regulations also play an important role in designing a new product because benefits can be offered to investors within the exiting framework of tax regulations. Most of the schemes launched in India are either income or income-cum-growth schemes; few are pure growth schemes. Investor's options have been restricted due to limited commodity range. This has probably happened on account of lack of experience and the risk-averse, conservative attitude of Mutual Fund managers.
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Like, commodity planning, commodity launching is a crucial element in marketing. Many Indian Mutual Funds have performed poorly due to wrong timing of launch. Market research can help to assess the needs of potential customers, availability of existing schemes and future growth in demand. Before formally launching a new commodity, test marketing can be conducted. 2. COST The cost of Mutual Fund products is inextricably linked with returns. Indian Mutual Funds follow the historic costing structure. The scheme may provide for the price (cost) at which the units may be subscribed or sold to the independent participants in the scheme. The scheme may also declare the price at which such units may at any time be purchased by the Mutual Fund. This repurchase price (cost) is based on the Net Asset Value (NAV). It signifies the realizable value that the investor will get for each unit that one is holding, if the scheme is liquidated on that date. It is computed by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing it by number of units outstanding. The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. Mutual Fund is also to publish the sale and repurchase prices at least once in a week. Mutual Fund Management should also ensure that the difference between the sale and repurchase price does not exceed 7% of the sale price. While deciding on the price, incentives, brokerage charges, and commissions are also to be decided in advance because the expenses towards these items will affect the ultimate returns to investors. 3. COMMODITY BRANDING An important function of scheme development is the selection of brand name and pricing of the scheme. Brand name highlights the market segments, inherent benefits and investment objectives, and ensures customer loyalty. Brand identity is an important marketing factor because it facilitates product identification at the market place. In India, most of the schemes are linked to the names of organizations: the "DHAN Series" is identified with LIC Mutual Fund, "Master Series" with Unit Trust of India and "Magnum" with SBI Mutual Funds. It can be said that Indian funds have been quite successful in brand policy and brand identification. 4. CONVENIENCE Better advice: Mutual Funds could provide better advice to their investors through the Net rather than through the traditional investment routes only, where there is an additional channel to deal with the Brokers. Direct dealing with the fund could help the investor with their financial planning. In India, brokers could get more Net savvy than investors and could help the investors with the knowledge they get from the Net. New investors would prefer online: Mutual Funds can target investors who are young individuals and who are Net savvy, since servicing them would be easier on the Net.
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India has around 1.6 million net users who are prime target for these funds and this could just be the beginning. The Internet users are going to increase dramatically and Mutual Funds are going to be the best beneficiary. With smaller administrative costs more funds would be mobilized. A fund manager must be ready to tackle the volatility and will have to maintain sufficient amount of investments, which are high liquidity, and low yielding investments to honor redemption. 5. CHANNEL A new Mutual Fund scheme may have all the qualities but that does not ensure its spontaneous acceptance by customers. Success would greatly depend on appropriate channel. The identification of appropriate market segment for the product, selection of channel and promotional aids are essential. Mutual Fund is mainly sold through marketing intermediaries whose job is really marketing of these types of financial services. Mutual Funds are also marketing of these types of financial services. Mutual Funds are also marketed through stockbrokers who are members of stock exchanges, institutional, merchant bankers, corporate agents etc. They are also marketed by distribution of application forms through a tie-up with newspapers. Public sector Mutual Funds like LIC MF, UTI have an edge over others due to their well-established agency network, Through the corporate offices formulated the overall marketing strategy and coordinate the activities relating to publicity and product distribution, local level activities are supervised and coordinated by the zonal and branch offices. In order to tap the savings tendency of the rural India, Mutual Fund are paying greater attention to rural marketing. Investors can also buy units through direct subscription. Some of the innovative distribution channels to attract prospective investors are:Direct sales: - In the case of direct sales funds are offered to investors directly at NAV and no sales load is charged. Sales through Underwriters: - Shares of open-ended Mutual Funds are available through distributors (also called brokers / dealers / sponsors) who act as underwriters. An underwriter purchases shares at NAV and sells them to the investing public. The commission of the underwriters depends on the spread of bid and offering price. Underwriters / distributors are prohibited from buying Mutual Funds shares for themselves unless it is for a bona fide investment account. Group selling: - many underwriters for maximum market penetration practice Group selling. The entire members get shares at reduced prices, which enable distributors to realize economies of scales. Automatic Monthly Investing: - This is a very convenient way to acquire Mutual Fund shares. Many companies operate this plan that allows shareholders to authorize a fund to debit their bank accounts monthly for the purchase of bank shares. Telephone or mail purchase: - Shares can be purchased over telephone or through mail by sending filled application forms along with cheques to the Mutual Fund.
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Share exchange plan: - Mutual Fund investor can exchange there existing investment in the Mutual Fund with another Mutual Fund of similar amount. 6. CAMPAIGN Scheme campaign / promotion in India has taken the usual routes of advertisement and publicity. Mutual Fund advertisements are regulated by SEBI, which prohibits material and contents of publicity, which may mislead the investing public. Advertisement campaigns mainly aims at creating awareness of the product, its comparative advantages and future potential, past performance of similar products and superiority of the fund in relation to others in terms of assets, management and performing servicing. Many incentives for early subscription; some Mutual Fund also offers insurance benefits to attract investors. 7. CUSTOMIZATION The financial goals will very, based on investor's age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step should be to assess your needs. One can being by defining the investment objectives, which could be regular income, buying a home or finance a wedding or educate your children or combination of all these needs. Also the risk appetite of the investor and his cash flow requirements need to be mentioned clearly. 8. CUSTOMER SERVICE The marketing of services is significantly influenced by the quality of service and the interpersonal relationship between customers and the service organization. Servicing has great significance in Mutual Funds, as in any other financial service industry. Prompt and timely service in issuing certificates / cheques and in attending to any customer problems would make a distinct difference. Expected return being more or less same for all the schemes, it is the quality of services which becomes the deciding factor. In India most Mutual Funds provide after-sales service through both external agencies and internal service department, although they rely on external agencies and internal agencies (transfer and registrar agents) that are specialized in these jobs. Mutual Fund does need to develop to in-house expertise to render after-sales service more promptly and cost effectively.
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newly distributors to pass the AMFI Certification test and has recommended the test for existing distributors. As financial markets, investment options and the variety of Mutual Funds gets more and more sophisticated, distributors need more and more information, knowledge and skills. That is why; the distributors in India will find that many Mutual Funds now prescribe minimum qualification that a person must possess to be its agent. These qualification may be in terms of education, experience or even registration on an exchange, For example, UTI requires its agents to have at least passed the level of matriculation and also to provide two references. Some private sector funds like to deal with only stockbrokers. Eventually, some funds may even require their distributors to pass this AMFI Testing Program. In the case of UTI, agents are provided with in house training and refresher courses. Agents meetings are also organized at periodic intervals. Once appointed, a UTI agent may sell any of its schemes. Agents performance is monitored and they receive commissions at a basic rate plus incentives depending on the volume of business generated by them. UTI has also evolved the concept of a Chief Representative for each district, who is assigned a target and has several agents reporting to him. UTi also has franchisee officers that function as small, decentralized distribution centres. In addition, agents are allowed privileges such as memberships to the Chairmans club, based on performance. Private Mutual Funds also rely on agents for distributing their schemes. However, for many of the relatively smaller funds, Interaction with a large force is both costly and difficult to administer. For this reason, the recent trend has been to shift to distribution companies as opposed to individual agents. Distribution Companies Availing of the services of established distribution companies is practice accepted by Mutual Funds internationally. This practice evolved with a view of circumvent the huge administrative required to support a large agent force. Instead of having to deal with several agents. A fund can interact with a distribution company, which has several employees or sub-brokers under it. A distribution company usually manages distribution for several funds simultaneously and receives commission for its services. Many private funds have preferred to adopt this practice because of its sophisticated nature and because they benefit from the specialist knowledge and established client contacts of these marketing firms. In India, there are about 10 major distribution companies in addition to a few hundred smaller ones. Names of most of the large distribution companies may be obtained from the AMC sales officers of some of the private funds. Banks and NBFCs In developed countries, banks are an important marketing vehicle for Mutual Funds, given the banks themselves have a large depositor/client base or their own. We can see the opening up of this new channel in India now. Several banks, particularly private and foreign banks are involved in fund distribution by providing services similar to those of
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distribution companies, on a commission basis, Some NBFCs are also providing such services. All funds do not yet use this channel. Nor all banks have yet taken up the fund distributor role. But increasing use of banks networks for Mutual Fund distribution almost a certain development. Direct Marketing Direct Marketing means that the Mutual Funds sell their own products without the use of any intermediaries, Usually, this takes the form of the sales officers and employees of the AMC who approach the investors and accept their contributors directly, However, In India, independent agents may really be treated as a direct marketing channel, in the sense that they do not form a well-knit, independent and organized single entity and act more like fund employees. Other channels like the distribution companies or banks or even stockbrokers are clearly distinct and independent intermediates. Direct marketing by the funds themselves accounts for a very small percentage of Mutual Fund sales. In the case of UTI, only 5-6% of total sales come through registered brokers and they do not accept direct subscriptions from investors. Mutual Funds often use their employees to mobilize funds from high net worth individuals and institutional investors. In case of short/medium term investment in liquid and/or income funds, targeted at companies funds often resort to direct marketing. Current Distribution Patterns In recent times, it has been observed that non-UTI funds rely less on individual agents primarily on the major distribution companies. A reasonable level of business is generated by smaller distribution the companies, which also act as financial planners/consultants. Banks have also been playing an increasing role as fund distributors. Newer private sector funds depend on 250 to 300 smaller distribution companies and banks across the country. The exact statistics are not yet available on which distribution channel accounts for how much of the fund collections, as emergence of channels other than individual agents is too recent a development. However, the figures of collections of five or six large private sector Mutual Funds would indicate the distribution companies and banks share put together, as these funds depend largely on these two channels. Much of this inflow would have come from the distribution companies and banks.
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Chapter 9
9.1 Problem faced by US64 9.2 Problem face by Morgan Stanley 9.3 Debt Mutual Funds: a paragon for VRS beneficiaries
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investment both from resident Indians, domestic Mutual Funds and from foreign institutional investors. At this time, the RBI commenced on its tight money policy in a bid to control inflation from raising its head. Money supply tightened and bond yields started increasing dramatically. High industrial growth and tight money created a shortage for credit and rates started going sky high. Many corporates and banks started redeeming their holdings in the Unit Trust of India and other Mutual Funds. This put major pressure on the market, which was already showing signs of weakness. What followed was the great crash. And in this crash, the biggest losers were the smaller capitalization stocks. Many of these stocks lost more than 90% of their peak prices. Morgan Stanley AMC restructured the funds portfolio at big losses. As the NAV went below par, investors confidence was shattered. Being a closed-ended scheme the Morgan Stanleys Mutual Fund unit is also listed on the stock markets. Crisis of confidence led to its price on the stock exchange crashing and it started quoting at a steep discount to its NAV. The fund started buying back units in order to reduce the discount and also to boost the NAV (buying back units at prices below the NAV results in a profit, which will reduce the NAV). Given its large corpus size no amount of buy back or otherwise support could help boost the investor confidence. Since then the equity markets have gone nowhere with the index still below the level at which the fund was invested. Most of the stocks in the Sensex have performed poorly with markets punishing commodity companies and companies with non-transparent Indian managements. To top it, many erstwhile bluechips have reported disastrous financial performances. Consequently, the NAV of MSGF mirrors this gory saga of the Indian markets. In fact, the fund invested considerable amount of money in FMCG, pharmaceutical and software companies at the right time, which improved the NAV from 1998 onwards.
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are trying to woo the VRS beneficiaries, they are not doing anything, which is against the investors interest. As an investment option, Mutual Funds have no match in terms of the benefits provided by them. They are tailored to match the requirements of the investors. The only problem the industry is facing in India is in terms of low level of awareness about the product among investors and their irrational expectations. For a VRS beneficiary regular returns and safety are the basic requirements apart from liquidity and tax efficiency. Banks can be one of the options for parking VRS money but the investor will have to compromise on the return front. The returns from bank deposits are very low implying a high premium for the level of safety provided by them. If the investor has the capability to understand his requirements, the best product for a VRS beneficiary can be Open Ended Debt funds. Open Ended Debt funds provide high quality customer service. As far as safety of the investments is concerned, Debt Funds are highly safe as they invest in very high quality debt instruments and that too after a rigorous research by a team of experts. The portfolio is disclosed regularly to imbibe confidence among the investors. The net asset value (NAV) is announced daily and sale / purchase of units is done on the NAV related prices on any working day. Above all, the dividends are taxfree in the hands of the investors. At redemption, the Long Term Capital Gains from Mutual Fund units are taxed at a maximum rate of 10 % whereas the maturity proceeds from a bank deposit are considered to be Short Term Capital Gains and are taxed at normal rates depending upon the tax slab of the investor and can go as high as 38.5%. In Mutual Funds, investors can ask for dividends at convenient frequency. The best part is that investors can do away with the interest rate risk that is attached to the bank deposits by investing in open-ended debt funds. The investor in a bank deposit at a particular rate can not get the gains of increase in market rate of interest but this element of risk is not there in Mutual Funds. The NAV of Mutual Fund schemes are marked to market regularly and the movements in the interest rate are adjusted on the daily basis. The only challenge before the industry in India is to juxtapose the right Mutual Fund schemes and the investors according to the investors risk profile. This is the only reason why our Mutual Fund industry is not as huge as that in the developed economies. As far as performances of the fund managers are concerned, we have world-class fund managers but we are unable to match the collection in the industry to that in banking industry because of lack of awareness among investors.
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Conclusion
Up till now sought after investment avenues like bank deposits, real estate, gold, provident fund etc. especially due to fall in interest rates coupled with the rising inflation, and Mutual Fund obviously become a viable alternative. Mutual Funds are in the business of managing trust. If Mutual Funds gain investors trust, money will follow. It is important to gain mind-share rather than wallet share of the investors. Currently industry is gradually growing phase and Indian Mutual Fund industry has been definitely maturing over the last few years and the level of awareness today is much more than what it was in the past. But the level of awareness has not yet reached the rural and other smaller towns and it is more of a smaller towns and it is more of an urban phenomenon. What is needed is the spread of awareness beyond regional limits. Mutual Fund as a concept is well known, but the target audience still needs to gain more awareness. The future is very bright. This industry is very important role to play in providing alternative avenues to the entire gamut of investors in a scientific and professional manner. Mutual Fund industry has been evolving very well for an important reason that, today we have the best system and procedure, good regulatory mechanism, use of technology, transparency and sharing of details and dissemination of information at an improved level.
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BIBLIOGRAPHY Books:
1. Bodie, Kane, Marcus Security Analysis and Portfolio Management, 5th edition Tata Mc Graw hill publications. 2. M.Y.Khan Indian Financial System, 2nd edition, Tata Mc Graw hill publications. 3. Mutual Fund testing program Book AMFI Publication. 4. Association of Mutual Fund in India work book.
Websites
www.amfi.com www.indiainfoline.com www.rbi.org.in www.valueresearchonline.com www.myiris.com www.google.com www.mutualfundresearchonline.com www.mutualfundsindia.com
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