Project Report on
MUTUAL FUNDS
Submitted by
NILESH CHIKANE 04
Project Coordinator
Date of Submission
DECLARATION
(SIGNATURE
SIGNATURE STUDENT)
Acknowledgement
INDEX
Introduction
There are some things in LIFE that GROW faster than your savings. Your
EXPENSES, for instance. In today’s world of inflation and spiraling costs, you need
to invest your savings wisely so that you get good returns consistently .your end
objective is to maximize returns while minimizing risk. A judicious mix of mutual
funds give you a short at growth in any market condition while reducing portfolio risk
through diversification .
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
Executive summary
The Market Trends in the Mutual Fund Industry has been described
followed by the recent trend in Mutual Fund. The Global Scenario and future
Scenario has been discussed. The impact of the Budget 2003-04 on Mutual Fund
has been explained followed by Impact of Budget 2002-03 and 2000-01.
The objective of the project is to understand mutual funds, its different schemes,
benefits offered to its investors and its overall functioning in India.
How does the market trend keep on changing and on what basis?
Methodology
The data collected for compiling the project are secondary data.
Mutual fund
Close-ended open-ended
own money in the fund. Say an investor buy 100shares of ITC Rs.1,
Rs.1 00,000. ITC
reports negative news and the share price 20%. You loose Rs.20,
Rs.20 000
Had you invested in a mutual fund which had ITC among other stocks, ITC’s fall
could have been managed by another share’s risk or at least the loss would not have
been as large .The flip side of course is that had the shares done well, the investor
would have gained handsomely whereas the gain would have been smaller for the
mutual fund. Mutual funds are managed by professional portfolio managers, who
have the education and experience (at least that’s what the investor expects) to
research and put investments with the best potential and those that meet the mutual
funds investment objectives. And for a busy person like many investors are, that
means less time researching individual shares and bonds or spending big bucks on
an investment advisor.
Unlike fixed deposits with banks or company deposits, mutual funds shares
/units can be sold back to the mutual fund and the investor can withdraw funds in
some cases by just making a phone-call. A note of caution though-a funds unit price
and return will vary and the investor may have a gain or loss on selling his mutual
fund units. The biggest advantage of mutual funds is that the investor doesn’t need
huge amounts to be invested in all his favorite stocks and bonds. Most mutual funds
have a minimum investment of rupees 5000. A mutual fund is the ideal investment
vehicle for today’s complex and modern financial scenario. Markets for equity
shares, bonds and other fixed income instruments, real estate, derivatives and 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.
The flow chart below describes broadly the working of a mutual fund:
Pool their
Invests in
For a specified or in
Period
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 in
granting approval to the fund for commencing operations.
Take into consideration the present needs and future financial goals and what
are the money requirements.
The fund category for investors will depend on two prime factors::
Most of the time the investor gets swayed with market trends and invest
their money in investments, which don’t match with either of the above parameters.
What may be suitable to one investor may not be suitable for another. Investments
must reflect investors risk personality and collectively perform to help them achieve
decent in equity based mutual funds depending on the investors risk personality .
Thus based on different goals and time horizon you can create a personalized
portfolio of different mutual fund schemes.
Once the investor knows the category of funds that suits him, the next step is to
start deciding specific schemes. This is a very crucial step because there are so
many schemes on offer. The points to be considered before deciding the scheme: -
Past track record - - past is no guarantee for future but analyzing the past thus gives
an investor enough information to make a wise decision. Based on this an investor
can take a call on how the fund has performed over various periods of market
fluctuation, and compare that with similar funds in the category. It will also give you
an idea of the volatility of the returns. Select funds, which are steady performers and
don’t show too much fluctuations in returns.
Fund house - - to look at the credit worthiness of the fund house. The quality of the
service offered is also important. Incase of a foreign fund house; assess how its
schemes have performed overseas.
Portfolio Quality - - the most important thing to analyze in any fund is its underlying
investments. These investments and their quality will determine the returns of the
Incase of debt funds investor needs to look at the credit quality of the
portfolio .A
A scheme with large proportion of low graded paper indicates higher risks
and is avoidable. Incase of equity – based funds you should look at how well the
portfolio is diversified across sectors and companies. At times the portfolios are
much skewed to certain well performing sectors that may perform for a small
proportion of time only. These schemes are avoidable .
Corpus size - - select a scheme with a decent corpus size. Small corpus sizes are a
problem when faced with redemption pressure in times of panic as these results in
distress sales where existing investors lose out. Incase of debt funds, subscription to
good corporate issues start at very high lot sizes, which again may be missed by
small funds due to liquidity problem.
Adherence to its objectives - - while analyzing the scheme past performance look
into how often it has moved away from its objective .it is very important for a scheme
to stick to its objectives . Like a debt fund can’t invest in equities when equities start
performing well .this is important to do because based on these objectives the
investor has to choose the goals.
Fund managers objectives - - look into the past track record of the fund managers
with whom an investor is trusting his hard earned money.
Once the investor has selected the scheme the next step is to decide whether
to invest in dividend option or growth .If an investor needs regular inflow of income
then he can opt for dividend option and if he is seeking wealth build up for the future
then select growth option.
Mutual funds offer one solution: When you put money into a fund, it's pooled with
money from other investors to create much greater buying power than you would
have investing on your own. Since a fund can own hundreds of different securities,
its success isn't dependent on how one or two holdings do. And the fund's
professional managers keep constant tabs on the markets, working to adjust the
portfolio for the strongest possible performance.
Income distributions are from the money the fund earns on its investments.
Capital gain distributions are the profits from selling investments. Different funds
CREATING A FUND
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
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.
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 Can bank 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.
One can say that the industry is moving from infancy to adolescence,
the industry is maturing and the investors and funds are frankly and openly
discussing difficulties opportunities and compulsions.
The mutual fund industry in India was started by the Unit Trust of India (UTI)in 1963
with the introduction of the unit scheme US-64.this scheme was a big success ,
which encourage UTI to introduce special schemes like the unit linked insurance
1987 saw the entry of public sector mutual funds into the market .m these were
mainly public sector banks and financial institution, which established their own
mutual funds. SBI mutual fund, Can Blankly mutual fund and Indian bank mutual
fund were among the first to be launched .1993 saw the entry of private sector
mutual funds . These were mainly foreign fund management companies entering
India through joint venture with Indian companies .Mutual funds have been
successful in garnering funds from individual investors under various schemes .With
the introduction of the SEBI in 1996 , the regulatory authority for mutual funds
,investor protection measures have been put in place giving individual investors
added confidence while putting there money with mutual funds . by October 1999 ,
mutual funds had garnered rupees 86.949 cores of which rupees 64,276 cores was
under the management of UTI .
The Indian mutual fund industry was 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 diagram below shows the three segments and a few of the players in each
segment.
I n d i a n M U T U A L F U N
U T PI U B L I C S E C T PO R R I V A T E S E
S B I LM I C F MG IF C S M U F B N I R LFA A L & L S IC P A U R N N U C L D E I FE
Mutual funds have a unique structure not shared with other entities
such as companies or firms. It is important for employees and agents to b aware of
the special nature of this structure, because it determines the rights and
responsibilities of the fund’s constituents viz sponsors trustees, custodians, transfer
agent, the fund and the asset management company.
Like other countries, India has a legal framework within which mutual
funds must be constituted. Unlike in the UK, where two distinct ‘ trust’ and ‘corporate’
structures are followed with separate regulations, in India, open and close end funds
Trustees
Bankers
7. Date of launching the scheme and the date upto which applications will be
received
Mutual funds invest the funds collected from the public according to
the investment objectives stated in the offer documents/ prospectus. Mutual funds
are allowed to invest in a wide range of securities in different industries with a view
to spreading the investment risk.
THE SIMPLE FORMULA THAT A NEW INVESTOR CAN USE TO FIND OUT HIS
EARNINGS IS:
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.
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.
Regulatory Aspects
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,-
(i) If the mutual fund fails to receive the minimum subscription amount referred to in
clause (a) of sub-regulation (1);
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
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.
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.
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.
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.
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.
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]
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.
Mutual fund schemes may be classified on the basis of its structure and its
investment objective.
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 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:
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.
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.
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:
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 and
54EB 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.
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 Sensex or the NSE 50
Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group
of industries or various segments such as ‘A’ Group shares or initial public offerings.
Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed
by a dedicated investment research team that analyses the performance and
prospects of companies and selects suitable investments to achieve the objectives
of the scheme.
Diversification
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems
such as bad deliveries, delayed payments and follow up with brokers and
companies. Mutual Funds save your time and make investing easy and convenient.
Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.
Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold
on a stock exchange at the prevailing market price or the investor can avail of the
facility of direct repurchase at NAV related prices by the Mutual Fund.
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.
Choice of Scheme
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 provisions of
strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI
It is 100% true that globally, most mutual fund managers underperform the asset
class that they are investing in .This under performance is largely the result of
limitations inherent in the concept of mutual funds. These limitations are as follows:
Mutual funds are a victim of their own success. When a large body like a fund
invests in shares, the concentrated buying or selling often results in adverse price
movements i.e. at the time of buying, the fund ends up paying a higher price and
while selling it realizes a lower price. This problem is especially severe in emerging
markets like India, where, excluding a few stocks, even the stocks in the Sensex are
not liquid, let alone stocks in the NSE 50 or the CRISIL 500.
It takes time for a mutual fund to invest money. Unfortunately, most mutual funds
receive money when markets are in a boom phase and investors are willing to try out
mutual funds. Since it is difficult to invest all funds in one day, there is some money
The costs of the fund management process are deducted from the fund. This
includes marketing and initial costs deducted at the time of entry itself, called “load”.
Then there is the annual asset management fee and expenses, together called the
expense ratio. Usually, the former is not counted while measuring performance,
while the latter is. A standard 2% expense ratio means that, everything else being
equal, the fund manager underperforms the benchmark index by an equal amount.
Cost of churn:
churn
The portfolio of a fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a
buy and hold type of manager or one who aggressively churns the fund. It is also
dependent on the volatility of the fund size i.e. whether the fund constantly receives
fresh subscriptions and redemptions. Such portfolio changes have associated costs
of brokerage, custody fees, registration fees etc. which lowers the portfolio return
commensurately.
World over, the indices keep changing to reflect changing market conditions. There
is an inherent survivorship bias in this process, with the bad stocks weeded out and
replaced by emerging blue chips. This is a severe problem in India with the Sensex
having been changed twice in the last 5 years, with each change being quite
substantial. Another reason for change index composition is Mergers & Acquisitions.
From the above points, it is quite clear that the only way a fund can beat the index is
through investment of some part of its portfolio in some shares where it gets
excellent returns, much more than the index. This will pull up the overall average
return. In order to obtain such exceptional returns, the fund manager has to take a
A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few income distributions, if any, are made. The investor thus
only realises capital appreciation on the investment. This plan appeals to investors in
the high income bracket. Under the dividend plan, income is distributed from time to
time. This plan is ideal to those investors requiring regular income.
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan
(SIP), the investor is given the option for investing in a specified frequency of months
in a specified scheme of the Mutual Fund for a constant sum of investment. AIP
allows the investors to plan their savings through a structured regular monthly
savings program.
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan
(SWP), a facility is provided to the investor to withdraw a pre-determined amount
from his fund at a pre-determined interval
The first thing that has to be kept in mind before investing is that
when you invest in mutual funds, there is no guarantee that the investor will end up
with more money when you withdraw your investment than what you started out
with. That is the potential of loss is always there. The loss of value in your
investment is what is considered risk in investing.
Even so, the opportunity for investment growth that is possible through
investments in mutual funds far exceeds that concern for most investors.
Different types of mutual funds have different levels of volatility or potential price
change, and those with the greater chance of losing value are also the funds that
can produce the greater returns for you over time. So risk has two sides: it causes
Risk
Benefits offered by
Tolerance/Return Focus Suitable Products
MFs
Expected
free dividends
Types of risks
ris
All investments involve some form of risk. These common types of risk need to
be considered and evaluated against potential rewards when an investor selects an
investment.
Market Risk
At times the prices or yields of all the securities in a particular market rise
or fall due to broad outside influences. When this happens, the stock prices of both
an outstanding, highly profitable company and a fledgling corporation may be
affected. This change in price is due to “market risk”. Also known as systematic risk.
Inflation Risk
Credit Risk
Changing interest rates affect both equities and bonds in many ways.
Investors are reminded that “predicting” which way rates will go is rarely successful.
A diversified portfolio can help in offsetting these changes.
Exchange risk
Investment Risks
An industries’ key asset is often the personnel who run the business
i.e. intellectual properties of the key employees of the respective companies. Given
the ever-changing complexion of few industries and the high obsolescence levels,
availability of qualified, trained and motivated personnel is very critical for the
success of industries in few sectors. It is, therefore, necessary to attract key
personnel and also to retain them to meet the changing environment and challenges
the sector offers. Failure or inability to attract/retain such qualified key personnel
may impact the prospects of the companies in the particular sector in which the fund
invests.
Alone UTI with just one scheme in 1964, now competes with as many
as 400 odd products and 34 players in the market. In spite of the stiff competition
and losing market share, UTI still remains a formidable force to reckon with.Last six
years have been the most turbulent as well as exiting ones for the industry. New
players have come in, while others have decided to close shop by either selling off or
merging with others. Product innovation is now passé with the game shifting to
performance delivery in fund management as well as service. Those directly
associated with the fund management industry like distributors, registrars and
transfer agents, and even the regulators have become more mature and
responsible.
Funds have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds performances are improving.
Funds collection, which averaged at less than Rs100bn per annum over five-year
period spanning 1993-98 doubled to Rs210bn in 1998-99. In the current year
mobilization till now have exceeded Rs300bn. Total collection for the current
financial year ending March 2000 is expected to reach Rs450bn.
Many nationalized banks got into the mutual fund business in the
early nineties and got off to a good start due to the stock market boom prevailing
then. These banks did not really understand the mutual fund business and they just
viewed it as another kind of 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 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
Global Scenario
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 are 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 277 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 base of mutual funds in the top 50-broking firms in the
U.S. are expected to trade on-line by 2003.
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.
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.
Here are some of the basic changes that have taken place since the advent of the
Net.
Lower Costs:
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:
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.
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. It 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.
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 it’s 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,
In developed countries like the U.S.A there are funds to satisfy everybody’s
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 functions.
Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35 % over the
next few years as investor’s shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close shop or
be taken over.
Out of ten public sector players five will sell out, close down or merge with stronger
players in three to four years. In the private sector this trend has already started with
two mergers and one takeover. Here too some of them will down their shutters in the
near future to come.
But this does not mean there is no room for other players. The market will witness a
flurry of new players entering the arena. There will be a large number of offers from
various asset management companies in the time to come. Some big names like
Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One
important reason for it is that most major players already have presence here and
hence these big names would hardly like to get left behind.
A perceptible change is sweeping across the mutual fund landscape in India. Factors
such as changing investors' needs and their appetite for risk, emergence of Internet
as a powerful service platform, and above all the growing commoditization of mutual
fund products are acting as major catalysts putting pressure on industry players to
formulate strategies to stay the course.
Increased deregulation of the financial markets in the country coupled with the
introduction of derivative products offers tremendous scope for the industry to design
and sell innovative schemes to suit individual customer needs. As it is being
MF Industry
The Budget 2003-04 has brought some cheers to the mutual fund industry. The
budget has following proposals for the MF investors:
Investors, once again, will get the tax-free dividends from MF units. Dividends from
Equity Funds will be tax free While Debt Mutual Funds have to pay distribution tax
amounting to 12.5 percent of the dividends declared.
Long-term capital gains tax on equity funds remains at 20 per cent with indexation,
or 10 per cent, whichever is lower. Investments made in listed equity shares, for one
year from April 2003, will be exempted from long-term capital gains tax.
Administered interest rates on PPF and small-savings have been reduced by 1 per
cent. Interest on Relief and Savings bonds will also be reset accordingly. This is
likely to give a boost to the debt market.
Personal Taxation
Exemption under Section 80L of the Income Tax Act increased to Rs 15,000, which
includes Rs 3000 exclusively for interest from Government securities.
Tax rebate for senior citizens u/s 88 hiked from Rs 15,000 to Rs 20,000.
In his maiden Budget today, the finance minister Jaswant Singh did not
disappoint the mutual fund (MF) industry as the announcements were in-line with the
industry`s expectations. Jaswant Singh said in his Budget speech, `We need to
promote investment in the industrial sector and improve the debt and equity markets.
We are also committed to bringing small investors back to the equity markets by
restoring their confidence.`
To ensure this, the Budget has proposed that dividends will be tax-free
in the hands of shareholders from April 1, 2003. Domestic companies will pay a
12.50 per cent dividend distribution tax. While mutual funds, including UTI-II,
renamed UTI Mutual Fund, will also pay dividend distribution tax, equity-oriented
schemes are proposed to be exempted from the purview of tax for one year. UTI-I,
however, will be exempt from dividend distribution tax.
The two initiatives were widely expected by the mutual fund industry.
But, one major thing which mutual funds were hoping for, was allowing asset
management companies to develop new pension products and participate in the
pensions activity because they believe funds have the expertise to manage people`s
money. They also wanted pension funds to be allowed to invest in mutual fund
income schemes or gilt schemes or invest through government approved pension
funds. The finance minister has made no announcements on this front.
Important Measures:
Abolition in the distribution tax of 10% on companies and mutual funds on the
dividends or income distributed by them. Such income will henceforth be taxed in the
hands of the recipients at the rates applicable to them, and will be subject to tax
deduction at source at the rate of 10%.
Continued support to the equity oriented funds of the UTI and other mutual funds.
The income received during the financial year 2002-2003 by unit holders of such
funds will be taxed only at 10% as at present.
Till year 2001-02 (u/s 88) a rebate of 20% was applicable for equity linked schemes
of MF. From year 2002-03, the rebate has been slashed down to 10% (subject to
maximum of Rs.10000) for investors whose income ranges between Rs. 150000 to
Rs. 500000.
Impact:
Till year 2001-02 a rebate of 20% was applicable for equity linked schemes of MF.
From year 2002-03, the rebate has been slashed down to 10%. As a result of this
decision the equity-linked scheme has lost out its charm and might loose a class of
investors (having income between Rs. 150000 to Rs. 500000) who largely invested
for the tax benefit.
Important measures
The above two sections provided relief from capital gains tax if investments were
made in specified securities and locked in for a period of 3 years in the case of 54EA
and 7 years in the case of 54EB. Mutual fund units were one of the specified
securities and this resulted in a lot of money realised as profit from sale of securities
being reinvested in the market through mutual funds.
With the withdrawal of the exemption to mutual funds, investors have lost out on a
very viable alternative for tax saving and funds also would be faced with the problem
of ‘hot money’ as there would no longer be any lock in period for investments. It is
estimated that 54EA investments formed approximately 15% of the corpus.
The existing dividend tax payable by debt schemes has been doubled to 20%. This
would lead to a reduction in returns available to investors by approximately 1.5%
Switch over from debt to equity schemes; since open ended equity schemes are free
from paying dividend tax, these schemes could attract some of the investment that is
pulled out from debt schemes.
Instead of taxing debt schemes so as to bring parity between the banks and mutual
funds, it is widely felt that the finance minister could have simply extended some of
the benefits enjoyed by mutual funds to banks and FIs. The experience with mutual
funds has in any case shown that turning dividends tax free in the hands of investors
has simply improved collections, widened the tax base and reduced procedural
delays.
Important tax provisions of the Union Budget 2001 for the mutual fund
industry are as follows:
A new provision has been introduced to bring into tax ambit the notional short term
capital loss booked by investors on mutual funds. As per this provision, any investor
who acquires mutual fund units before 3 months prior to the dividend record
/distribution date and sells or transfers these units within a period of three months
after the record date and obtains dividend income that is exempt from tax, then the
capital loss arising from the such purchase and sale will be ignored to the extent of
the amount received as tax free dividend.
This will help the interests of the long term investors in mutual fund units as it is
Decrease in dividend distribution tax to 10.2% from 22.4% for Debt/Income schemes
with effect from 1st June 2001
Dividend tax payable by Debt/Income mutual fund schemes has been reduced to an
effective rate of 10.2% from 22.4% inclusive of surcharge with effect from 1st June
2001.
This move is expected to lead to greater flows into dividend option of the income
schemes. This is because earlier long term capital gains tax rate was 11.2% (without
indexation). This lead to investors preferring growth option as effective tax was
lower. However as the difference in the net returns (adjusted for taxation) is now
marginal, investors will now move to dividend option.
The budget has removed the surcharge chargeable to income tax. Thus, Short tem
capital gains tax rate will now be 30.6% against 35.1% earlier.
Long term capital gains tax rate (with indexation benefits) will now be 20.4%
compared to 22.4% earlier.
Long term capital gains tax rate (without indexation benefits) will now be 10.2%
compared to 11.2% earlier.
Exemption from long term capital gains tax for investment in primary market
issues
The Budget has amended Section 10(33) of the IT Act whereby any income arising
from transfer of units of UTI or mutual fund by unit holders to persons other than UTI
or mutual fund will be taxed. This provisions are applicable with retrospective effect
from1s April,1999.
This clarificatory amendment has been introduced to avoid misuse of the Income tax
provisions whereby capital gains on transfer of mutual fund and UTI units in
secondary market was claimed as exemption by investors.
Deductions available for interest income under Section 80L maintained at Rs12000
of which Rs3000 will be exclusively available for interest received from government
securities.
TDS limit for interest income exceeding Rs5000 will now be applicable for all
categories of deposits (including deposits made with financial institutions)
Risk and investing go hand in hand. To know your funds performance, apart from
comparing the performance vi-a-vis the benchmarks, an investor should also make
use of certain statistical measures that make evaluation of a mutual fund even more
precise. Among the most commonly used ratios, there are six ratios, which we come
across very often but fail to understand their utility. They are Standard Deviation,
Beta, Sharpe, Alpha, Treynor and R-Squared.
Beta: Another way to assess the Fund’s up and down movement is its Beta
measure. Beta measures the volatility of a fund relative to a particular market
benchmark i.e. how sensitive the fund is to market movements. A Beta greater than
1 means that the fund is more volatile than the benchmark. A Beta less than 1
means that the fund is less volatile than the benchmark. For example, a Beta of 1.1
would indicate that if the market goes up 10%, the fund might rise 11% and vice
versa in a down market.
Sharpe: The most common measure that combines both risk and reward into a
single indicator is the Sharpe Ratio. A Sharpe Ratio is computed by dividing a fund’s
return in excess of a risk-free return (usually a 90-day Treasury Bill or SBI fixed
deposit rate) by its standard deviation. This measures the amount of return over and
above a risk-free rate against the amount of risk taken to achieve the return. So if a
fund produced a 20% return while the SBI fixed deposit rate returned 6.5% and its
standard deviation is 10%, its Sharpe Ratio would be
Generally, there is no right or wrong Sharpe Ratio. The measure is best used to
compare one fund’s ratio with another, or to its peer group average. For similar
funds, the higher the Sharpe Ratio, the better a fund’s historical risk-adjusted
performance.
Sharpe ratio = (Fund Average Return - Risk Free Return) / Standard Deviation Of
The Fund
Alpha: The Alpha measure is less about risk than it is about "value added." Alpha
represents the difference between the performance you would expect from a fund,
given its Beta, and the actual returns it generates. A high alpha (more than 1) means
that the fund has performed well. A negative alpha means the fund under performed.
Mathematically, Alpha= fund return - [Risk free rate + Beta of fund (Benchmark
return - Risk free return)]
Treynor: the Treynor ratio is similar to the Sharpe ratio. Instead of comparing the
fund’s risk adjusted performance to the risk free return, it compares the fund’s risk
adjusted performance of the relative index.
Change in NAV
Performances of a fund are measured by calculating the change in the value of the
NAV between the two dates in absolute and percentage terms.
(NAV at the end of the period) – ( NAV at the beginning of the period)
The Risk free rate is the risk free annualized return which is the average of 91 – day
T-bill of each month. The return on NAV is compared to Periodic Interest Rate. The
monthly return is compared with the Periodic interest rate. The difference between
them is the excess return . Geometric mean of the excess return is calculated.
Sharpe ratio:
2. A high Sharpe ratio means that the fund is able to deliver a lot of return for its level
of volatility.
Benchmark:
There are three types of benchmarks that can be used to evaluate a funds
performance, relative to the market as a whole, relative to other mutual funds and
.ANALYSIS
HDFC has acquired some schemes of Zurich and have renamed as under
Debit credit facility : unit holder can avail of direct credit of redemption
proceeds/dividend payments (if any declare by the trustee )with select banks.
• Consolidation of folios: in case you have more than one folio with the same
unit holding pattern and the same distributor , you can choose to consolidate
all the folios into one single folio for convenience in transacting .
HDFC children‘s guilt fund a unique scheme has been started where the
entry load for this scheme is 1%of applicable NAV having no exit load. This is both
debt and equity oriented. The NAV changes every business day.
Children the unit holder attains the age 18 years or until the completion of
3 years from date of allotment whichever is later. The redemption proceed is
normally dispatched within 3 business days
There are around 10-12 schemes offered by this organization .This is both debt
and equity oriented. The NAV changes every business day. Prudential ICICI
schemes have designed its portfolio turnover stating that it shall generally not
exceed 10 times once the entire corpus is invested and excluding the portfolio
turnover caused on account of fresh inflows into the scheme and money placed in
call deposits. The scheme to the customers is
o liquid plan
o income plan
o gilt fund
o balanced fund
o growth plan
o dynamic plan
There are 31 mutual fund houses in our country offering 459 open-ended schemes.
The total corpus of wealth under management with mutual funds (as on 31st August
2003)is Rs.1,19,548.50crores.
UTI mutual fund has the largest corpus under its management –at Rs.16,
( on 31st August2003)
708.33crores (as
Pru ICICI Mutual fund has the second largest corpus under its management –at
Rest.13,, 590.53 crores (as on 31stAugust2003) ,a good Rs.3,117.80 crores lesser
than UTI mutual fund.
UTI mutual fund has the largest number of equity schemes (17schemes),HDFC
mutual fund has the largest number of debt schemes (22 schemes)and templeton
India has the largest number of balanced schemes(11 schemes).
Funds are then ranked based on the number of points each funds get .
1. BIRLA
2. TEMPLETON
3. PRUDENTIAL (I)
4. DSP
5. KOTAK
6. ZURICH
7. ALLIANCE
8. HDFC
9. GRINDLAYS
10. IDBI
Top three mutual equity diversified funds based on return and risk
1 HDFC Prudence
2 Tata GSF
Bibliography
Web sites
www.amfiindia.com
www.myiris.com
www.icicidirect.com
www.navindia.com
www.rbi.com
www.crisil.com
www.valueresearchindia.com
www.mfea.com
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